N-30D 1 dn30d.txt S/B INVESTMENT SERIES -------------------------------------------------------------------------------- SMITH BARNEY INTERNATIONAL AGGRESSIVE GROWTH FUND -------------------------------------------------------------------------------- CLASSIC SERIES | ANNUAL REPORT | OCTOBER 31, 2002 [LOGO] Smith Barney Mutual Funds Your Serious Money. Professionally Managed. /SM/ --------------------------------------------------------------- NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE --------------------------------------------------------------- [PHOTO] Jeffrey J. Russell JEFFREY J. RUSSELL, PORTFOLIO MANAGER Classic Series [GRAPHIC] Annual Report . October 31, 2002 SMITH BARNEY INTERNATIONAL AGGRESSIVE GROWTH FUND JEFFREY J. RUSSELL, CFA Jeffrey J. Russell, CFA, has more than 20 years of securities business experience and has been managing the Fund since its inception. Education: BS from the Massachusetts Institute of Technology, MBA from the University of Pennsylvania's Wharton School of Finance. FUND OBJECTIVE The Fund seeks total return on its assets from growth of capital and income. It aims to achieve this objective by investing principally in a portfolio of equity securities of established non-U.S. issuers. FUND FACTS FUND INCEPTION ----------------- February 21, 1995 MANAGER INVESTMENT INDUSTRY EXPERIENCE ----------------- 20 Years CLASS 1 CLASS A CLASS B CLASS L ---------------------------------------------------- NASDAQ CSQIX CSQAX CSQBX N/A ---------------------------------------------------- INCEPTION 8/8/96 2/21/95 2/21/95 9/13/00 ---------------------------------------------------- Average Annual Total Returns as of October 31, 2002*
Without Sales Charges/(1)/ Class 1 Class A/(2)/ Class B/(2)/ Class L ------------------------------------------------------------ One-Year (27.94)% (28.44)% (29.09)% (28.37)% ------------------------------------------------------------ Five-Year (3.67) (4.18) (4.94) N/A ------------------------------------------------------------ Since Inception+ (0.96) 2.74 1.96 (42.05) ------------------------------------------------------------ With Sales Charges/(3)/ Class 1 Class A/(2)/ Class B/(2)/ Class L ------------------------------------------------------------ One-Year (34.06)% (32.01)% (32.64)% (29.78)% ------------------------------------------------------------ Five-Year (5.37) (5.16) (5.13) N/A ------------------------------------------------------------ Since Inception+ (2.37) 2.05 1.96 (42.32) ------------------------------------------------------------
/(1)/ Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value and does not reflect the deduction of all applicable sales charges with respect to Class 1, A and L shares or the applicable contingent deferred sales charges ("CDSC") with respect to Class B and L shares. /(2)/ For the purpose of calculating performance, the Fund's inception date is March 17, 1995 (date the Fund's investment strategy was implemented). /(3)/ Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value. In addition, Class 1, A and L shares reflect the deduction of the maximum sales charges of 8.50%, 5.00% and 1.00%, respectively; 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 a 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. The performance data represents past performance, including the investment return and principal value of an investment, which will fluctuate so that 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. + Inception date for Class 1 shares is August 8, 1996. Inception date for Class A and B shares is February 21, 1995. Inception date for Class L shares is September 13, 2000. What's Inside Your Investment in the Smith Barney International Aggressive Growth Fund.......................................................1 Letter to Our Shareholders.....................................................2 Historical Performance ........................................................6 Fund at a Glance...............................................................8 Schedule of Investments........................................................9 Statement of Assets and Liabilities ..........................................12 Statement of Operations.......................................................13 Statements of Changes in Net Assets ..........................................14 Notes to Financial Statements.................................................15 Financial Highlights..........................................................22 Independent Auditors' Report..................................................25 Additional Information....................................................... 26 [LOGO] Smith Barney Mutual Funds Your Serious Money. Professionally Managed./SM/ Investment Products: Not FDIC Insured . Not Bank Guaranteed . May Lose Value YOUR INVESTMENT IN THE SMITH BARNEY INTERNATIONAL AGGRESSIVE GROWTH FUND A Pure Investment in the Overseas Markets [GRAPHIC] Jeff is a firm believer that a world of opportunity exists beyond the United States*. While some global mutual funds may allocate more of their assets to the U.S. markets, the Fund invests principally in non-U.S. issuers. Portfolio Manager-Driven Funds -- The Classic Series [GRAPHIC] The Classic Series is a selection of Smith Barney Mutual Funds that invest across asset classes and sectors, utilizing a range of strategies in order to achieve their objectives. The Classic Series Funds enable investors to participate in a mutual fund where investment decisions are determined by portfolio managers, based on each fund's investment objectives and guidelines. A Distinguished History of Managing Your Serious Money [GRAPHIC] Founded in 1873 and 1892, respectively, the firms of Charles D. Barney and Edward B. Smith were among the earliest providers of securities information, research and transactions. Merged in 1937, Smith Barney & Co. offered its clients a powerful, blue-chip investment capability able to provide timely information, advice and insightful asset management. Today, Citigroup Asset Management unites the distinguished history of Smith Barney with the unparalleled global reach of its parent, Citigroup. At Citigroup Asset Management, you gain access to blue-chip management delivered professionally. We are proud to offer you, the serious investor, a variety of managed solutions. -------- * Please note that investment in foreign securities involves greater risk than U.S. investments and the risk of investing in foreign securities is greater for emerging markets. Also, securities of smaller, lesser well-known companies may be more volatile than those of larger companies. 1 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders Dear Shareholder, We are pleased to provide the annual report for the Smith Barney International Aggressive Growth Fund ("Fund") for the Fund's 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: Please note 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. Please note that in May, James B. Conheady retired as a co-portfolio manager of the Fund. The Fund will continue to be managed by Jeffrey J. Russell. Performance Overview For the year ended October 31, 2002, the Fund's Class A shares, without sales charges, returned negative 28.44%. In comparison, the MSCI EAFE Index ("MSCI EAFE")/1/ returned negative 13.21% for the same period. Investment Strategy The Fund seeks total return on its assets from growth of capital and income. The Fund invests principally in a diversified portfolio of equity securities of established non-U.S. issuers./2/ By spreading the Fund's investments across many international markets,/3/ the manager seeks to reduce volatility compared to investing in a single region. Unlike global mutual funds, which may allocate a substantial portion of assets to the U.S. markets, the Fund invests primarily in countries outside of the U.S. Portfolio Manager Market Overview For the second consecutive fiscal year, the price of the Fund's shares fell significantly. In our view, equity investors have recently experienced one of the worst bear markets within the past quarter century, as economic-related pressures compounded by the uncertainties of terrorism and military intervention have challenged the stock markets. Given problems in certain geographic locations such as Latin America and Japan, and the rising correlation of many non-U.S. stock markets with U.S. equity markets, international diversification provided little refuge to investors. Specifically, the default on debt obligations of the Argentine government during the period and significant deterioration of that economy, and the election of leftist leadership in Brazil have called into question the value of the Latin operations of many multinational companies. The trading value of the euro began to move toward parity with the U.S. dollar. Needless to say, during this period we were dissatisfied with the Fund's performance, during which time we feel investors were justifiably anxious and concerned about the equity markets. -------- 1The MSCI EAFE is an unmanaged index of common stocks of companies located in Europe, Australasia and the Far East. Please note that an investor cannot invest directly in an index. 2Foreign stocks are subject to certain risks of overseas investing including currency fluctuations and changes in political and economic conditions, which could result in significant market fluctuations. The risks of investing in foreign securities are greater for emerging markets. 3Diversification does not assure against market loss. 2 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders The global economic upturn, in our opinion, unfortunately appeared to have hit a plateau in many foreign economies. Global policymakers, recognizing the importance of providing supportive economic conditions, responded with a policy of low short-term interest rates; this scenario was particularly evident in the U.S., where the federal funds rate ("fed funds rate")/4/ was at a 40-year low of 1.75% during the reporting period. After the period ended, the fed funds rate was further reduced to 1.25%. Corporate profits, which are dependent upon global growth, nonetheless proved disappointing across a broad array of industries, versus many expectations held earlier this year. Capital spending has yet to provide the economic lift that some market pundits reportedly had been hoping for at this stage of the recovery process. Candidly, we underestimated the erosion of both investor confidence and demand that ensued following the collapse of several visible companies. Reported fraudulent accounting practices and misstatements by companies' exacerbated financial losses. Declining asset values further pressured the valuations of public companies, as those businesses characterized as having "decent" assets but "overbearing" debts were forced to divest divisions during a "buyer's market." Pricing in many industries exhibited pressure on companies, and financial services firms abroad, particularly those exposed to the capital markets, suffered debilitating losses of assets and earnings power. During the reporting period, investor appetite shifted to defensive sectors (where the Fund was underweighted versus the MSCI EAFE). Defensive stocks have been among the best performing equities over the past year. In our view, those companies with clarity, transparency and steady demand for products or services have been favored. Sectors that we favored in the past, such as the telecommunications sector and segments of technology, have remained under pressure as business capital investment has shown continued signs of restraint. Portfolio Manager Fund Overview During the period, we significantly reduced the Fund's exposure to technology stocks in consideration of the continued sluggish end markets for many technology companies. Although the Fund had previously avoided significant exposure to the energy sector, in consideration of the stronger growth profiles of other equity sectors in the mid-to-late 1990s, we boosted the Fund's exposure to this sector during the second half of the reporting period through the addition of stocks, such as BP PLC and Royal Dutch Petroleum Co. Conversely, for many years we had maintained significant exposure to the broadly defined business services sector (including government- and business-outsourcing investments). However, we trimmed those positions during recent months to invest in other sectors. The composition of the Fund shifted over the past year, primarily due to the Fund's increased weightings in Japan and reduced weightings in Europe. As of the close of this period, the top holdings in the Fund reflected an eclectic mix of investment themes and portfolio emphasis. These holdings are illustrative of our growth-oriented stock selection criteria, which include seeking companies that we believe have strong financial structures, large business opportunities and stable, visionary managements. Top Holdings . Groupe Danone of France produces global branded consumer products. The company's offerings include dairy products (Dannon yogurt), bottled water (Evian) and baked goods. -------- 4The 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. The fed funds rate often points to the direction of U.S. interest rates. 3 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders . Teva Pharmaceuticals Industries Ltd. of Israel is a global leader in the generic pharmaceuticals industry. The company is a major force in the U.S. market. . Novo Nordisk A/S of Denmark is one of the biggest European forces in diabetes care through the production of insulin and a range of application products. Novo also has an innovative therapeutic agent for treatment of selected blood disorders. . Mettler-Toledo International Inc. of Switzerland manufactures precision weighing and measurement instruments. A diverse customer base in the laboratory, retail and industrial sectors increasingly demand Mettler's highly sophisticated instruments and information management solutions. . Tomra Systems ASA of Norway manufactures reverse vending machinery for global beverage containers. The trend toward increased consumer deposit legislation, especially in Germany, benefits deployment of Tomra's products and materials recycling processes. . Nokia Oyj is Finland's leading exporter, with a world-class position in wireless infrastructure and mobile handsets. Nokia's technology visionaries continue to shape the wireless communications industry. . Patheon, Inc. of Canada is a leader in pharmaceuticals manufacturing outsourcing. . Hutchison Whampoa Ltd. of Hong Kong is a conglomerate with especial strengths in telecommunications, property development and port operation. We think management has an uncanny ability to opportunistically capture value in a diverse host of business sectors. . Axa of France is a diversified financial services leader, with strong product positions in the U.S. and Europe. Portfolio Manager Market Outlook The move by many investors from equities into cash, government bonds and alternative investments, in our opinion, has led to the emergence of strong absolute valuation in equities. We believe that many stocks now offer reasonable dividend yields and absolute values, and also offer more potential for long-term price appreciation versus fixed-income securities alternatives. In our view, the monetary policy environment remains supportive in many economies. Many companies are responding to the more constrained financing environment with capital rationing, enhanced cost discipline and a renewed mandate to return cash to shareholders through dividends and share repurchases. We believe the rise in energy prices in 2002 provided strong headwinds to the nascent global economic recovery. While energy prices began to decline near the conclusion of the Fund's reporting period, we believe that the potential for a military-induced production disruption must be kept in mind. The past fiscal year of the Fund has been marked by exceptional investment challenges, ranging from a combination of the slowing global economy, the surge of corporate malfeasance and the sharp swings of investor sentiment. We have attempted to position the Fund to participate in future upswings in the financial markets and to reduce the potential for extreme downside volatility. 4 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders Thank you for your investment in the Smith Barney International Aggressive Growth Fund. We look forward to continuing to help you meet your investment objectives. Sincerely, /s/ R Jay Gerken /s/ Jeffrey J. Russell R. Jay Gerken Jeffrey J. Russell, CFA Chairman Vice President and Investment Officer November 7, 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 9 through 11 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. 5 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders HISTORICAL PERFORMANCE -- CLASS 1 SHARES
Net Asset Value ----------------- Beginning End Income Capital Gain Total Year Ended of Year of Year Dividends Distributions Returns/(1)+/ ---------------------------------------------------------------------------------- 10/31/02 $20.58 $14.83 $0.00 $0.00 (27.94)% ---------------------------------------------------------------------------------- 10/31/01 42.17 20.58 0.00 0.00 (51.20) ---------------------------------------------------------------------------------- 10/31/00 32.57 42.17 0.00 0.74 31.53 ---------------------------------------------------------------------------------- 10/31/99 19.06 32.57 0.00 0.00 70.88 ---------------------------------------------------------------------------------- 10/31/98 18.16 19.06 0.00 0.00 4.96 ---------------------------------------------------------------------------------- 10/31/97 16.52 18.16 0.00 0.00 9.99 ---------------------------------------------------------------------------------- Inception* -- 10/31/96 16.00 16.52 0.00 0.00 3.25++ ---------------------------------------------------------------------------------- Total $0.00 $0.74 ---------------------------------------------------------------------------------- HISTORICAL PERFORMANCE -- CLASS A SHARES Net Asset Value ----------------- Beginning End Income Capital Gain Total Year Ended of Year of Year Dividends Distributions Returns/(1)+/ ---------------------------------------------------------------------------------- 10/31/02 $20.15 $14.42 $0.00 $0.00 (28.44)% ---------------------------------------------------------------------------------- 10/31/01 41.57 20.15 0.00 0.00 (51.53) ---------------------------------------------------------------------------------- 10/31/00 32.24 41.57 0.00 0.74 31.00 ---------------------------------------------------------------------------------- 10/31/99 18.94 32.24 0.00 0.00 70.22 ---------------------------------------------------------------------------------- 10/31/98 18.14 18.94 0.00 0.00 4.41 ---------------------------------------------------------------------------------- 10/31/97 16.54 18.14 0.00 0.00 9.74 ---------------------------------------------------------------------------------- 10/31/96 13.86 16.54 0.00 0.00 19.34 ---------------------------------------------------------------------------------- Inception* -- 10/31/95 11.81 13.86 0.00 0.00 16.28/(2)++/ ---------------------------------------------------------------------------------- Total $0.00 $0.74 ---------------------------------------------------------------------------------- HISTORICAL PERFORMANCE -- CLASS B SHARES Net Asset Value ----------------- Beginning End Income Capital Gain Total Year Ended of Year of Year Dividends Distributions Returns/(1)+/ ---------------------------------------------------------------------------------- 10/31/02 $19.18 $13.60 $0.00 $0.00 (29.09)% ---------------------------------------------------------------------------------- 10/31/01 39.86 19.18 0.00 0.00 (51.88) ---------------------------------------------------------------------------------- 10/31/00 31.16 39.86 0.00 0.74 30.04 ---------------------------------------------------------------------------------- 10/31/99 18.44 31.16 0.00 0.00 68.98 ---------------------------------------------------------------------------------- 10/31/98 17.81 18.44 0.00 0.00 3.54 ---------------------------------------------------------------------------------- 10/31/97 16.36 17.81 0.00 0.00 8.93 ---------------------------------------------------------------------------------- 10/31/96 13.79 16.36 0.00 0.00 18.64 ---------------------------------------------------------------------------------- Inception* -- 10/31/95 11.81 13.79 0.00 0.00 15.69/(2)++/ ---------------------------------------------------------------------------------- Total $0.00 $0.74 ----------------------------------------------------------------------------------
6 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders HISTORICAL PERFORMANCE -- CLASS L SHARES
Net Asset Value ----------------- Beginning End Income Capital Gain Total Year Ended of Year of Year Dividends Distributions Returns/(1)+/ ------------------------------------------------------------------------------- 10/31/02 $20.13 $14.42 $0.00 $0.00 (28.37)% ------------------------------------------------------------------------------- 10/31/01 41.61 20.13 0.00 0.00 (51.62) ------------------------------------------------------------------------------- Inception* -- 10/31/00 46.13 41.61 0.00 0.00 (9.80)++ ------------------------------------------------------------------------------- Total $0.00 $0.00 -------------------------------------------------------------------------------
It is the Fund's policy to distribute dividends and capital gains, if any, annually. AVERAGE ANNUAL TOTAL RETURNS+
Without Sales Charges/(1)/ ----------------------------------------- Class 1 Class A/(2)/ Class B/(2)/ Class L ------------------------------------------------------------------------------- Year Ended 10/31/02 (27.94)% (28.44)% (29.09)% (28.37)% ------------------------------------------------------------------------------- Five Years Ended 10/31/02 (3.67) (4.18) (4.94) N/A ------------------------------------------------------------------------------- Inception* through 10/31/02 (0.96) 2.74 1.96 (42.05) ------------------------------------------------------------------------------- With Sales Charges/(3)/ ----------------------------------------- Class 1 Class A/(2)/ Class B/(2)/ Class L ------------------------------------------------------------------------------- Year Ended 10/31/02 (34.06)% (32.01)% (32.64)% (29.78)% ------------------------------------------------------------------------------- Five Years Ended 10/31/02 (5.37) (5.16) (5.13) N/A ------------------------------------------------------------------------------- Inception* through 10/31/02 (2.37) 2.05 1.96 (42.32) -------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS+
Without Sales Charges/(1)/ ------------------------------------------------------------------------------- Class 1 (Inception* through 10/31/02) (5.84)% ------------------------------------------------------------------------------- Class A (Inception* through 10/31/02)/(2)/ 22.91 ------------------------------------------------------------------------------- Class B (Inception* through 10/31/02)/(2)/ 15.99 ------------------------------------------------------------------------------- Class L (Inception* through 10/31/02) (68.74) -------------------------------------------------------------------------------
(1)Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value and does not reflect deduction of the applicable sales charges with respect to Class 1, A and L shares or the applicable contingent deferred sales charges ("CDSC") with respect to Class B and L shares. (2)For the purpose of calculating performance, the Fund's inception date is March 17, 1995 (date the Fund's investment strategy was implemented). (3)Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value. In addition, Class 1, A and L shares reflect the deduction of the current maximum sales charges of 8.50%, 5.00% and 1.00%, respectively; Class B shares reflect the deduction of a 5.00% CDSC, which applies if shares are redeemed within one year from purchase. This CDSC declines by 1.00% per year until no CDSC is incurred. Class L shares also reflect the deduction of a 1.00% CDSC, which applies if shares are redeemed within one year. + 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 return is not annualized, as it may not be representative of the total return for the year. * Inception date for Class 1 shares is August 8, 1996. Inception date for Class A and B shares is February 21, 1995. Inception date for Class L shares is September 13, 2000. 7 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders SMITH BARNEY INTERNATIONAL AGGRESSIVE GROWTH FUND AT A GLANCE (UNAUDITED) Value of $10,000 Invested in Class A and B Shares of the Smith Barney International Aggressive Growth Fund vs. MSCI EAFE Index+ -------------------------------------------------------------------------------- March 1995 -- October 31, 2002 [CHART] Smith Barney Smith Barney International International Aggressive Aggressive Growth Fund-Class A Growth Fund-Class B MSCI EAFE Index ------------------- ------------------- --------------- 3/17/1995 9,498 10,000 10,000 10/1995 11,044 11,569 9,993 10/1996 13,171 13,716 11,073 10/1997 14,454 14,941 11,618 10/1998 15,092 15,470 12,755 10/1999 25,689 26,141 15,694 10/2000 33,654 33,995 16,281 10/2001 16,313 16,358 12,209 10/31/2002 11,674 11,599 10,596 +Hypothetical illustration of $10,000 invested in Class A and B shares at inception on March 17, 1995 (date the Fund's investment strategy was implemented), assuming deduction of the maximum 5.00% sales charge at the time of investment for Class A shares and the deduction of the maximum 5.00% CDSC for Class B shares. It also assumes reinvestment of dividends and capital gains, if any, at net asset value through October 31, 2002. The Morgan Stanley Capital International EAFE ("MSCI EAFE") Index is a composite portfolio consisting of equity total returns for the countries of Europe, Australasia and the Far East. The Index is unmanaged and is not subject to the same management and trading expenses of a mutual fund. The performance of the Fund's other classes may be greater or less than the performance of Class A and B shares as indicated on this chart, depending on whether greater or lesser sales charges and fees were incurred by shareholders investing in the other classes. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. All figures represent past performance and are not a guarantee of future results. The performance data represents past performance, including the investment return and principal value of an investment, which will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. DIVERSIFICATION BY COUNTRY*++ [CHART] Canada 4.1% Denmark 6.6% France 9.3% Hong Kong 8.3% Israel 5.2% Japan 14.4% Netherlands 5.6% Sweden 4.5% Switzerland 6.2% United Kingdom 17.3% Other 18.5% INVESTMENT ALLOCATION*# [CHART] Preferred Stock 4.4% Repurchase Agreement 11.0% Common Stock 84.6% * All information is as of October 31, 2002. Please note that Fund holdings are subject to change. ++ As a percentage of total common stock. # As a percentage of total investments. 8 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders SCHEDULE OF INVESTMENTS OCTOBER 31, 2002
SHARES SECURITY VALUE ------------------------------------------------------------------------ COMMON STOCK -- 84.6% Canada -- 3.4% 40,000 Celestica Inc.* $ 552,016 275,000 Patheon, Inc.* 2,510,096 ------------------------------------------------------------------------ 3,062,112 ------------------------------------------------------------------------ Denmark -- 5.6% 110,000 Novo Nordisk A/S, Class B Shares 3,025,934 100,000 William Demant Holding A/S*+ 1,940,212 ------------------------------------------------------------------------ 4,966,146 ------------------------------------------------------------------------ Finland -- 3.0% 135,000 Nokia Oyj 2,239,168 25,000 Nokia Oyj, Sponsored ADR+ 415,500 ------------------------------------------------------------------------ 2,654,668 ------------------------------------------------------------------------ France -- 7.9% 140,000 Axa 2,085,114 30,000 Groupe Danone 3,884,017 10,000 Pernod Ricard SA+ 1,011,030 ------------------------------------------------------------------------ 6,980,161 ------------------------------------------------------------------------ Germany -- 1.4% 12,000 Allianz AG 1,258,066 ------------------------------------------------------------------------ Hong Kong -- 7.0% 10,000 China Mobile Ltd.* 24,617 61,480 China Mobile Ltd., Sponsored ADR*+ 753,130 600,000 China Unicom Ltd.*+ 373,108 1,000,000 Computer & Technologies Holdings Ltd.* 157,705 95,328 HSBC Holdings PLC+ 1,041,973 362,000 Hutchison Whampoa Ltd. 2,227,878 1,700,000 Li & Fung Ltd. 1,678,345 ------------------------------------------------------------------------ 6,256,756 ------------------------------------------------------------------------ Ireland -- 1.6% 87,700 Bank of Ireland 970,747 75,685 Irish Continental Group PLC 486,196 ------------------------------------------------------------------------ 1,456,943 ------------------------------------------------------------------------ Israel -- 4.4% 50,000 Teva Pharmaceutical Industries Ltd., Sponsored ADR+ 3,871,500 ------------------------------------------------------------------------ Japan -- 12.2% 360,000 The Bank of Yokohama, Ltd.+ 1,504,338 105,000 DOWA MINING CO., LTD. 439,620 120 East Japan Railway Co. 545,432 28,100 FANUC LTD. 1,110,129 35,000 ITO-YOKADO CO., LTD. 1,089,073 13,000 MABUCHI MOTOR CO., LTD. 1,152,120 90,000 Nomura Holdings, Inc. 1,033,682
See Notes to Financial Statements. 9 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
SHARES SECURITY VALUE ------------------------------------------------------------------------------ Japan -- 12.2% (continued) 300 NTT DoCoMo, Inc. $ 552,275 60,000 PIONEER CORP. 1,021,464 12,000 SEVEN-ELEVEN JAPAN CO., LTD. 338,207 26,000 Takeda Chemical Industries, Ltd. 1,077,995 6,600 TAKEFUJI CORP. 276,333 17,000 Tokyo Electron Ltd. 684,071 ----------------------------------------------------------------------------- 10,824,739 ----------------------------------------------------------------------------- Mexico -- 1.7% 25,000 Grupo Televisa S.A., Sponsored ADR*+ 702,500 4,133 Wal-Mart de Mexico SA de CV, Series C Shares 8,895 310,000 Wal-Mart de Mexico SA de CV, Series V Shares 774,084 ----------------------------------------------------------------------------- 1,485,479 ----------------------------------------------------------------------------- Netherlands -- 4.8% 100,000 Airspray N.V.+ 1,546,689 20,465 IHC Caland N.V. 906,105 20,000 Royal Dutch Petroleum Co.+ 863,379 152,500 Vedior N.V. 926,901 ----------------------------------------------------------------------------- 4,243,074 ----------------------------------------------------------------------------- Norway -- 3.3% 100,000 Fast Search & Transfer ASA* 50,296 400,000 Tomra Systems ASA 2,923,898 ----------------------------------------------------------------------------- 2,974,194 ----------------------------------------------------------------------------- Singapore -- 1.3% 150,000 Venture Corp. Ltd. 1,120,638 ----------------------------------------------------------------------------- Spain -- 3.3% 275,000 Indra Sistemas, S.A. 1,910,630 34,999 Telefonica, S.A.*+ 988,722 ----------------------------------------------------------------------------- 2,899,352 ----------------------------------------------------------------------------- Sweden -- 3.8% 200,000 Assa Abloy AB, Class B Shares 1,970,497 90,000 Securitas AB, Class B Shares 1,249,252 52,325 Teleca AB, Class B Shares 180,009 ----------------------------------------------------------------------------- 3,399,758 ----------------------------------------------------------------------------- Switzerland -- 5.3% 75,000 Fantastic Corp.* 24,460 6,000 Geberit AG* 1,656,193 100,000 Mettler-Toledo International Inc.* 2,995,000 ----------------------------------------------------------------------------- 4,675,653 -----------------------------------------------------------------------------
See Notes to Financial Statements. 10 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
SHARES SECURITY VALUE ------------------------------------------------------------------------------ United Kingdom -- 14.6% 67,000 BOC Group PLC $ 941,653 187,000 BP PLC 1,198,621 200,729 Cadbury Schweppes PLC 1,305,448 500,000 Capita Group PLC 1,750,952 260,000 Galen Holdings PLC 1,597,431 108,000 Lloyds TSB Group PLC 928,630 892,446 Serco Group PLC 2,085,832 267,000 Taylor Nelson Sofres PLC 584,380 325,000 Tesco PLC 1,007,286 711,039 Vodafone Group PLC 1,142,172 30,000 Vodafone Group PLC, Sponsored ADR+ 477,600 ----------------------------------------------------------------------------- 13,020,005 ----------------------------------------------------------------------------- TOTAL COMMON STOCK (Cost -- $111,727,438) 75,149,244 ----------------------------------------------------------------------------- ------------------------------------------------------------------------------ PREFERRED STOCK -- 4.4% Germany -- 4.4% 75,000 Wella AG (Cost -- $3,257,953) 3,943,315 ----------------------------------------------------------------------------- ------------------------------------------------------------------------------ SUB-TOTAL INVESTMENTS (Cost -- $114,985,391) 79,092,559 ----------------------------------------------------------------------------- ------------------------------------------------------------------------------ REPURCHASE AGREEMENT -- 11.0% $9,732,000 Merrill Lynch & Co., Inc., 1.850% due 11/1/02; Proceeds at maturity -- $9,732,500; (Fully collateralized by Federal Home Loan Mortgage Corp. Discount Notes, and Federal National Mortgage Association Discount Notes due 1/29/03 to 4/30/03; Market value -- $9,926,642) (Cost -- $9,732,000) 9,732,000 ----------------------------------------------------------------------------- ------------------------------------------------------------------------------ TOTAL INVESTMENTS -- 100% (Cost -- $124,717,391**) $88,824,559 ----------------------------------------------------------------------------- ------------------------------------------------------------------------------
*Non-income producing security. +All or a portion of this security is on loan (Note 11). **Aggregate cost for Federal income tax purposes is substantially the same. See Notes to Financial Statements. 11 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2002 ASSETS: Investments, at value (Cost -- $114,985,391) $ 79,092,559 Repurchase agreements, at value (Cost -- $9,732,000) 9,732,000 Cash 691 Collateral for securities on loan (Note 11) 12,105,940 Dividends and interest receivable 137,237 Receivable for securities sold 89,574 Receivable for Fund shares sold 79,834 Receivable for open forward contracts (Note 9) 99 ------------------------------------------------------------------------------------------------ Total Assets 101,237,934 ------------------------------------------------------------------------------------------------ LIABILITIES: Payable for securities on loan (Note 11) 12,105,940 Payable for Fund shares purchased 361,067 Management fee payable 85,479 Trustees' retirement plan 38,965 Service plan fees payable 30,089 Accrued expenses 232,081 ------------------------------------------------------------------------------------------------ Total Liabilities 12,853,621 ------------------------------------------------------------------------------------------------ Total Net Assets $ 88,384,313 ------------------------------------------------------------------------------------------------ NET ASSETS: Par value of shares of beneficial interest $ 63 Capital paid in excess of par value 205,680,547 Accumulated net realized loss from security transactions and foreign currencies (81,411,597) Net unrealized depreciation of investments and foreign currencies (35,884,700) ------------------------------------------------------------------------------------------------ Total Net Assets $ 88,384,313 ------------------------------------------------------------------------------------------------ Shares Outstanding: Class 1 191,145 ------------------------------------------------------------------------------------------- Class A 2,786,333 ------------------------------------------------------------------------------------------- Class B 3,161,078 ------------------------------------------------------------------------------------------- Class L 163,487 ------------------------------------------------------------------------------------------- Net Asset Value: Class 1 (and redemption value) $14.83 ------------------------------------------------------------------------------------------- Class A (and redemption value) $14.42 ------------------------------------------------------------------------------------------- Class B * $13.60 ------------------------------------------------------------------------------------------- Class L ** $14.42 ------------------------------------------------------------------------------------------- Maximum Public Offering Price Per Share: Class 1 (net asset value plus 9.29% of net asset value per share) $16.21 ------------------------------------------------------------------------------------------- Class A (net asset value plus 5.26% of net asset value per share) $15.18 ------------------------------------------------------------------------------------------- Class L (net asset value plus 1.01% of net asset value per share) $14.57 ------------------------------------------------------------------------------------------------
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares are redeemed within one year from initial purchase (See Note 2). ** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if shares are redeemed within the first year of purchase. See Notes to Financial Statements. 12 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2002 INVESTMENT INCOME: Dividends $ 1,216,624 Interest 63,842 Less: Foreign withholding tax (117,389) -------------------------------------------------------------------------- Total Investment Income 1,163,077 -------------------------------------------------------------------------- EXPENSES: Management fee (Note 2) 1,130,787 Shareholder and system servicing fees 1,203,343 Service plan fees (Note 2) 723,210 Audit and Legal 154,769 Shareholder communications 140,954 Custody 84,830 Registration fees 41,214 Trustees' fees 24,702 Other 31,403 -------------------------------------------------------------------------- Total Expenses 3,535,212 -------------------------------------------------------------------------- Net Investment Loss (2,372,135) -------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCIES (NOTES 3 AND 9): Realized Gain (Loss) From: Security transactions (excluding short-term securities) (43,175,420) Foreign currency transactions 41,311 -------------------------------------------------------------------------- Net Realized Loss (43,134,109) -------------------------------------------------------------------------- Change in Net Unrealized Depreciation From: Security transactions 9,366,838 Foreign currency transactions 6,491 -------------------------------------------------------------------------- Decrease in Net Unrealized Depreciation 9,373,329 -------------------------------------------------------------------------- Net Loss on Investments and Foreign Currencies (33,760,780) -------------------------------------------------------------------------- Decrease in Net Assets From Operations $(36,132,915) --------------------------------------------------------------------------
See Notes to Financial Statements. 13 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31,
2002 2001 ------------------------------------------------------------------------------- OPERATIONS: Net investment loss $ (2,372,135) $ (3,061,257) Net realized loss (43,134,109) (29,691,563) (Increase) decrease in net unrealized depreciation 9,373,329 (93,814,705) ------------------------------------------------------------------------------- Decrease in Net Assets From Operations (36,132,915) (126,567,525) ------------------------------------------------------------------------------- FUND SHARE TRANSACTIONS (NOTE 16): Net proceeds from sale of shares 49,624,611 101,105,784 Net asset value of the shares issued in connection with the transfer of Smith Barney World Funds, Inc. -- Emerging Markets Portfolio and Smith Barney World Funds, Inc. -- Pacific Portfolio's net assets (Note 15) -- 15,874,190 Cost of shares reacquired (51,477,198) (82,714,525) ------------------------------------------------------------------------------- Increase (Decrease) in Net Assets From Fund Share Transactions (1,852,587) 34,265,449 ------------------------------------------------------------------------------- Decrease in Net Assets (37,985,502) (92,302,076) NET ASSETS: Beginning of year 126,369,815 218,671,891 ------------------------------------------------------------------------------- End of year $ 88,384,313 $ 126,369,815 -------------------------------------------------------------------------------
See Notes to Financial Statements. 14 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies The Smith Barney International Aggressive Growth Fund ("Fund"), is a separate portfolio of the Smith Barney Investment Series ("Series"). The Series, a Massachusetts business trust, is registered under the Investment Company Act of 1940 ("1940 Act"), as amended, as a diversified open-end management investment company and consists of this Fund and six other separate investment portfolios: Smith Barney Large Cap Core Fund, Smith Barney Growth and Income Fund, Smith Barney Large Cap Core Portfolio, Smith Barney Premier Selections All Cap Growth Portfolio, Smith Barney Growth and Income Portfolio and Smith Barney Government Portfolio. The financial statements and financial highlights for the other portfolios are presented in separate shareholder reports. The significant accounting policies consistently followed by the Fund are: (a) security transactions are accounted for on trade date; (b) securities traded on national securities markets are valued at the closing prices on such markets or, if there were no sales during the day, at the current quoted bid price; securities primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, except that when a significant occurrence, subsequent to the time a value was so established, is likely to have significantly changed the value, then the fair value of those securities will be determined by consideration of other factors by or under the direction of the Board of Trustees or its delegates; over-the-counter securities are valued on the basis of the bid price at the close of business on each day; U.S. government and agency obligations are valued at the average between bid and ask prices in the over-the-counter market; (c) securities maturing within 60 days are valued at cost plus accreted discount or minus amortized premium, which approximates value; (d) securities for which market quotations are not available will be valued in good faith at fair value by or under the direction of the Board of Trustees; (e) interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis; (f) 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; (g) gains or losses on the sale of securities are calculated by using the specific identification method; (h) direct expenses are charged to each class; management fee and general Fund expenses are allocated on the basis of relative net assets by class; (i) dividends and distributions to shareholders are recorded by the Fund on the ex-dividend date; (j) the accounting records of the Fund 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. 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. Differences between income and expense amounts recorded and collected or paid are adjusted when reported by the custodian bank; (k) realized gain and loss on foreign currency includes the net realized amount from the sale of currency and the amount realized between trade date and settlement date on security transactions; (l) the character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. At October 31, 2002, 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. Accordingly, a portion of accumulated net investment loss and accumulated realized loss amounting to $2,330,824 and $165,409 were reclassified to paid-in capital; (m) the Fund intends to comply with the requirements 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 tax; and (n) 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. Also, the Fund may enter into forward foreign exchange contracts in order to hedge against foreign currency risk. These contracts are marked-to-market daily, by recognizing the difference between the contract exchange rate and the current market rate as an unrealized gain or loss. Realized gains or losses are recognized when contracts are settled. 15 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. Management 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 the investment manager to the Fund. The Fund pays SBFM a management fee calculated at an annual rate of 1.00% of the average daily net assets. The fee is calculated daily and paid monthly. Citicorp Trust Bank, fsb. ("CTB"), formerly known as Travelers Bank & Trust, fsb., another subsidiary of Citigroup, acts as the Fund's transfer agent. PFPC Global Fund Services ("PFPC") and Primerica Shareholder Services ("PSS") act as the Fund's sub-transfer agents. CTB receives account fees and asset-based fees that vary according to the size and type of account. For the year ended October 31, 2002, the Fund paid transfer agent fees of $95,239 to CTB. Salomon Smith Barney Inc. ("SSB") and PFS Distributors, Inc. ("PFSD"), both of which are subsidiaries of Citigroup, act as the Fund's distributors. In addition, SSB, PFSD and certain other broker-dealers continue to sell Fund shares to the public as members of the selling group. For the year ended October 31, 2002, SSB and its affiliates received brokerage commissions of $8,876 for the Fund's portfolio agency transactions. There are maximum initial sales charges of 8.50%, 5.00% and 1.00% for Class 1, 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 of purchase and declines 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. For the year ended October 31, 2002, SSB and its affiliates received sales charges of approximately $23,000, $672,000 and $4,000 on the sale of the Fund's Class 1, A and L shares, respectively. In addition, CDSCs paid to SSB and its affiliates for the year ended October 31, 2002 were approximately:
Class B Class L -------------------------------------------------------------- CDSCs $178,000 $5,000 -------------------------------------------------------------
Pursuant to Service Plans, the Fund pays a distribution/service fee with respect to its Class A, B and L shares calculated at an annual rate not to exceed 0.25% of the average daily net assets with respect to Class A shares and at the annual rate of 1.00% of the respective average daily net assets of Class B and L shares. At a shareholder meeting held on February 1, 2002, the shareholders approved these Service Plans, which replaced Distribution Plans then in effect. For the year ended October 31, 2002, total Service Plan fees incurred were: Class A Class B Class L ------------------------------------------------------------ Service Plan Fees $123,208 $566,405 $33,597 ------------------------------------------------------------ All officers and one Trustee of the Series are employees of Citigroup or its affiliates. The Trustees of the Funds have adopted a Retirement Plan ("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. Two former Trustees are currently receiving payments under the Plan. The amount of benefits to be paid under the Plan cannot currently be determined for current Trustees. 16 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) Messrs. Carlton, Cocanougher, Gross, Merten and Pettit also are covered by a prior retirement plan. Under the prior plan, retirement benefits are payable for a ten-year period following retirement, with the annual payment to be based upon the Trustee's compensation from the Trust during calendar year 2000. Trustees with more than five but less than ten years of service at retirement will receive a prorated benefit. In order to receive benefits under the current Plan, a Trustee must waive all rights under the prior plan prior to receiving payment under either plan. Total aggregate retirement benefits accrued under the prior plan for the 2002 fiscal year were $2,702. The amount of benefits to be paid under the prior plan cannot currently be determined for these. 3. Investments During the year 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 $26,579,142 -------------------------------------------------------- Sales 37,186,134 -------------------------------------------------------- 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 $ 2,211,747 Gross unrealized depreciation (38,104,579) --------------------------------------------------------- Net unrealized depreciation $(35,892,832) --------------------------------------------------------- 4. 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. 5. Reverse Repurchase Agreements The Fund may enter into reverse repurchase agreement transactions for leveraging purposes. A reverse repurchase agreement involves a sale by the Fund of securities that it holds with an agreement by the Fund to repurchase the same securities at an agreed upon price and date. A reverse repurchase agreement involves the risk that the market value of the securities sold by the Fund may decline below the repurchase price of the securities. The Fund will establish a segregated account with its custodian, in which the Fund will maintain cash, U.S. government securities or other liquid high grade debt obligations equal in value to its obligations with respect to reverse repurchase agreements. During the year ended October 31, 2002, the Fund did not enter into any reverse repurchase agreement transactions. 6. Futures Contracts Initial margin deposits made upon entering into futures contracts are recognized as assets. The initial margin is segregated by the custodian as is noted in the schedule of investments. 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 each day's trading. Variation margin payments are made or received 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 (and cost of) the closing transaction and the Fund's basis in the contract. The Fund enters into such contracts to hedge a portion of its 17 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 counter-party fail to perform under such contracts. At October 31, 2002, the Fund did not hold any futures contracts. 7. Option Contracts Upon the purchase of a put option or a call option by the Fund, the premium paid is recorded as an investment, the value of which is marked to market daily. When a purchased option expires, the Fund will realize a loss in the amount of the cost of the option. When the Fund enters into a closing sales transaction, the Fund will realize a gain or loss depending on whether the sales proceeds from the closing sales transaction are greater or less than the cost of 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 did not hold any purchased call or put option contracts. When a Fund writes a covered 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. 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 cost of the security sold will be decreased by the premium originally received. When a put option is exercised, the amount of the premium originally received will reduce the cost of the security which the Fund purchased 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 a loss if the market price of the underlying security declines. During the year ended October 31, 2002, the Fund did not enter into any written covered call or put option contracts. 8. Foreign Securities Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in U.S. companies and the U.S. government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of many foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. companies and the U.S. government. 9. Forward Foreign Currency Contracts At October 31, 2002, the Fund had open forward foreign currency contracts as described below. The Fund bears the market risk that arises from changes in foreign currency exchange rates. The unrealized gain on the contracts reflected in the accompanying financial statements were as follows:
Local Market Settlement Unrealized Foreign Currency Currency Value Date Gain --------------------------------------------------------------------- To Sell: Japanese Yen 10,996,516 $89,672 11/6/02 $99 --------------------------------------------------------------------- Total Unrealized Gain on Forward Foreign Currency Contracts $99 ---------------------------------------------------------------------
18 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10.Short Sales of Securities A short sale is a transaction in which the Fund sells securities it does not own (but has borrowed) in anticipation of a decline in the market price of the securities. To complete a short sale, the Fund may arrange through a broker to borrow the securities to be delivered to the buyer. The proceeds received by the Fund for the short sale are retained by the broker until the Fund replaces the borrowed securities. In borrowing the securities to be delivered to the buyer, the Fund becomes obligated to replace the securities borrowed at their market price at the time of replacement, whatever the price may be. At October 31, 2002, the Fund did not have any open short sale transactions. 11.Securities Lending The Fund has an agreement with its custodian whereby the custodian may lend securities owned by the Fund to brokers, dealers and other financial organizations. Fees earned by the Fund on securities lending are recorded in interest income. Loans of securities by the Fund are collateralized by cash, U.S. government securities or high quality money market instruments that are maintained at all times in an amount at least equal to the current market value of the loaned securities, plus a margin which may vary depending on the type of securities loaned. The custodian establishes and maintains the collateral in a segregated account. At October 31, 2002, the Fund loaned common stocks having a market value of $11,985,793. The Fund received cash collateral amounting to $11,506,847 which was invested in the State Street Navigator Securities Lending Trust Prime Portfolio. In addition, the Fund received securities collateral amounting to $599,093. Interest income earned by the Fund from securities lending for the year ended October 31, 2002 was $6,633. 12.Securities Traded on a When-Issued Basis The Fund may purchase or sell securities on a when-issued basis. When-issued transactions arise when securities are purchased or sold by the Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of entering into the transaction. Beginning on the date the Fund enters into a when-issued transaction, cash or other liquid securities are segregated in the amount of the when-issued transaction. These transactions are subject to market fluctuations and their current value is determined in the same manner as for other securities. 13.Capital Loss Carryforward At October 31, 2002, the Fund had, for Federal income tax purposes, a capital loss carryforward of approximately $81,411,000, available to offset future capital gains through October 31, 2010. To the extent that these carryforward losses are used to offset capital gains, it is probable that the gains so offset will not be distributed. The amount and expiration of the carryforwards are indicated below. Expiration occurs on October 31 of the year indicated:
2003 2004 2005 2006 2008 2009 2010 --------------------------------------------------------------------------------------------------- Capital Loss Carryforwards $246,000 $515,000 $3,257,000 $570,000 $4,017,000 $29,633,000 $43,173,000 ---------------------------------------------------------------------------------------------------
19 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 14.Income Tax Information and Distributions to Shareholders At October 31, 2002 the tax basis components of distributable earnings were: ------------------------------------------- Undistributed ordinary income -- ------------------------------------------- Accumulated capital losses $(81,411,498) ------------------------------------------- Unrealized depreciation (35,884,799) -------------------------------------------
The difference between book basis and tax basis unrealized appreciation and depreciation is attributable primarily to various mark to market adjustments on receivables. 15. Transfer of Net Assets On December 8, 2000 the Fund acquired the assets and liabilities of Smith Barney World Funds, Inc. - Emerging Markets Portfolio ("Emerging Markets Portfolio"), pursuant to a plan of reorganization approved by Emerging Markets Portfolio shareholders on December 1, 2000. Total shares issued by the Fund, the total net assets of the Emerging Markets Portfolio and total net assets of the Fund on the date of the transfer were as follows:
Total Net Assets Shares Issued of the Emerging Total Net Assets Acquired Portfolio by the Fund Markets Portfolio of the Fund ------------------------------------------------------------------------------- Emerging Markets Portfolio 286,834 $10,574,769 $200,979,692 ------------------------------------------------------------------------------
The total net assets of the Emerging Markets Portfolio before acquisition included unrealized appreciation of $663,426, accumulated net realized loss of $9,342,292 and undistributed net investment loss of $274,688. Total net assets of the Fund immediately after the transfer were $211,554,461. This transaction was structured to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended. On December 15, 2000, the Fund acquired the assets and liabilities of Smith Barney World Funds, Inc. - Pacific Portfolio ("Pacific Portfolio"), pursuant to a plan of reorganization approved by Pacific Portfolio shareholders on December 1, 2000. Total shares issued by the Fund, the total net assets of the Pacific Portfolio and total net assets of the Fund on the date of the transfer were as follows:
Acquired Shares Issued Total Net Assets Total Net Assets Portfolio by the Fund of the Pacific Portfolio of the Fund -------------------------------------------------------------------------------------- Pacific Portfolio 148,303 $5,299,421 $202,867,651 --------------------------------------------------------------------------------------
The total net assets of the Pacific Portfolio before acquisition include unrealized appreciation of $214,496, accumulated net realized loss of $2,807,224 and undistributed net investment income of $402,601. Total net assets of the Fund immediately after the transfer were $208,167,072. This transaction was structured to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended. 20 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 16. Shares of Beneficial Interest The Fund has five classes of beneficial interest, Classes 1, A, B, L and Y, of which four are outstanding, each with a par value of $0.00001 per share. There are an unlimited number of shares authorized. Transactions in shares of each class were as follows:
Year Ended Year Ended October 31, 2002 October 31, 2001 ------------------------ ------------------------ Shares Amount Shares Amount --------------------------------------------------------------------------------------------------------------------- Class 1 Shares sold 17,225 $ 325,885 37,988 $ 1,167,395 Shares reacquired (44,677) (839,429) (31,113) (874,056) ------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) (27,452) $ (513,544) 6,875 $ 293,339 ------------------------------------------------------------------------------------------------------------------- Class A Shares sold 1,184,030 $ 21,598,717 1,963,610 $ 59,898,181 Net asset value of the shares issued in connection with the transfer of Smith Barney World Funds, Inc. -- Emerging Markets Portfolio and Pacific Portfolio's net assets (Note 15) -- -- 141,458 5,238,391 Shares reacquired (1,016,901) (18,409,599) (1,584,378) (49,400,950) ------------------------------------------------------------------------------------------------------------------- Net Increase 167,129 $ 3,189,118 520,690 $ 15,735,622 ------------------------------------------------------------------------------------------------------------------- Class B Shares sold 788,931 $ 13,629,840 952,741 $ 26,025,909 Net asset value of the shares issued in connection with the transfer of Smith Barney World Funds, Inc. -- Emerging Markets Portfolio and Pacific Portfolio's net assets (Note 15) -- -- 164,952 5,867,919 Shares reacquired (1,015,017) (17,339,606) (796,986) (20,397,828) ------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) (226,086) $ (3,709,766) 320,707 $ 11,496,000 ------------------------------------------------------------------------------------------------------------------- Class L Shares sold 747,701 $ 14,070,169 576,157 $ 14,014,299 Net asset value of the shares issued in connection with the transfer of Smith Barney World Funds, Inc. -- Emerging Markets Portfolio and Pacific Portfolio's net assets (Note 15) -- -- 87,075 3,206,143 Shares reacquired (788,990) (14,888,564) (465,357) (10,658,445) ------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) (41,289) $ (818,395) 197,875 $ 6,561,997 ------------------------------------------------------------------------------------------------------------------- Class Y+ Net asset value of the shares issued in connection with the transfer of Smith Barney World Funds, Inc. -- Emerging Markets Portfolio's net assets (Note 15) -- -- 41,652 $ 1,561,737 Shares reacquired -- -- (41,652) (1,383,246) ------------------------------------------------------------------------------------------------------------------- Net Increase -- -- -- $ 178,491 -------------------------------------------------------------------------------------------------------------------
+ As of December 12, 2000, Class Y shares were fully redeemed. 21 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders FINANCIAL HIGHLIGHTS For a share of each class of beneficial interest outstanding throughout each year ended October 31, unless otherwise noted:
Class 1 Shares 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/ 1998 ------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Year $ 20.58 $42.17 $32.57 $19.06 $18.16 --------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment loss (0.19) (0.24) (0.45) (0.28) (0.21) Net realized and unrealized gain (loss) (5.56) (21.35) 10.79 13.79 1.11 --------------------------------------------------------------------------------------- Total Income (Loss) From Operations (5.75) (21.59) 10.34 13.51 0.90 --------------------------------------------------------------------------------------- Less Distributions From: Net realized gains -- -- (0.74) -- -- Capital -- -- (0.00)* -- -- --------------------------------------------------------------------------------------- Total Distributions -- -- (0.74) -- -- --------------------------------------------------------------------------------------- Net Asset Value, End of Year $ 14.83 $20.58 $42.17 $32.57 $19.06 --------------------------------------------------------------------------------------- Total Return (27.94)% (51.20)% 31.53% 70.88% 4.96% --------------------------------------------------------------------------------------- Net Assets, End of Year (millions) $3 $4 $9 $4 $2 --------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 2.02% 1.54% 1.42% 1.68% 1.79% Net investment loss (1.00) (0.82) (0.94) (1.12) (0.99) --------------------------------------------------------------------------------------- Portfolio Turnover Rate 24% 24% 27% 50% 63% --------------------------------------------------------------------------------------- Class A Shares 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/ 1998 ------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Year $ 20.15 $41.57 $32.24 $18.94 $18.14 --------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment loss (0.30) (0.40) (0.64) (0.37) (0.27) Net realized and unrealized gain (loss) (5.43) (21.02) 10.71 13.67 1.07 --------------------------------------------------------------------------------------- Total Income (Loss) From Operations (5.73) (21.42) 10.07 13.30 0.80 --------------------------------------------------------------------------------------- Less Distributions From: Net realized gains -- -- (0.74) -- -- Capital -- -- (0.00)* -- -- --------------------------------------------------------------------------------------- Total Distributions -- -- (0.74) -- -- --------------------------------------------------------------------------------------- Net Asset Value, End of Year $ 14.42 $20.15 $41.57 $32.24 $18.94 --------------------------------------------------------------------------------------- Total Return (28.44)% (51.53)% 31.00% 70.22% 4.41% --------------------------------------------------------------------------------------- Net Assets, End of Year (millions) $40 $53 $87 $38 $20 --------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 2.72% 2.17% 1.82% 2.08% 2.25% Net investment loss (1.67) (1.44) (1.36) (1.53) (1.46) --------------------------------------------------------------------------------------- Portfolio Turnover Rate 24% 24% 27% 50% 63% ---------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares method. * Amount represents less than $0.01 per share. 22 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders FINANCIAL HIGHLIGHTS (CONTINUED) For a share of each class of beneficial interest outstanding throughout each year ended October 31, unless otherwise noted:
Class B Shares 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/ 1998 --------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Year $19.18 $39.86 $31.16 $18.44 $17.81 ----------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment loss (0.44) (0.59) (0.94) (0.53) (0.39) Net realized and unrealized gain (loss) (5.14) (20.09) 10.38 13.25 1.02 ----------------------------------------------------------------------------------------- Total Income (Loss) From Operations (5.58) (20.68) 9.44 12.72 0.63 ----------------------------------------------------------------------------------------- Less Distributions From: Net realized gains -- -- (0.74) -- -- Capital -- -- (0.00)* -- -- ----------------------------------------------------------------------------------------- Total Distributions -- -- (0.74) -- -- ----------------------------------------------------------------------------------------- Net Asset Value, End of Year $13.60 $19.18 $39.86 $31.16 $18.44 ----------------------------------------------------------------------------------------- Total Return (29.09)% (51.88)% 30.04% 68.98% 3.54% ----------------------------------------------------------------------------------------- Net Assets, End of Year (millions) $43 $65 $123 $41 $18 ----------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses// 3.60% 2.90% 2.53% 2.79% 3.11% Net investment loss// (2.57) (2.18) (2.07) (2.26) (2.32) ----------------------------------------------------------------------------------------- Portfolio Turnover Rate 24% 24% 27% 50% 63% -----------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares method. * Amount represents less than $0.01 per share. 23 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders FINANCIAL HIGHLIGHTS (CONTINUED) For a share of each class of beneficial interest outstanding throughout the period ended October 31, unless otherwise noted:
Class L Shares 2002/(1)/ 2001/(1)/ 2000/(1)(2)/ ------------------------------------------------------------------------------ Net Asset Value, Beginning of Year $20.13 $41.61 $46.13 ----------------------------------------------------------------------------- Loss From Operations: Net investment loss (0.30) (0.43) (0.11) Net realized and unrealized loss (5.41) (21.05) (4.41) ----------------------------------------------------------------------------- Total Loss From Operations (5.71) (21.48) (4.52) ----------------------------------------------------------------------------- Less Distributions From: Net realized gains -- -- -- Capital -- -- (0.00)* ----------------------------------------------------------------------------- Total Distributions -- -- (0.00)* ----------------------------------------------------------------------------- Net Asset Value, End of Year $14.42 $20.13 $41.61 ----------------------------------------------------------------------------- Total Return (28.37)% (51.62)% (9.80)%++ ----------------------------------------------------------------------------- Net Assets, End of Year (000s) $2,358 $4,123 $287 ----------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 2.63% 2.49% 2.25%+ Net investment loss (1.65) (1.60) (2.06)+ ----------------------------------------------------------------------------- Portfolio Turnover Rate 24% 24% 27% -----------------------------------------------------------------------------
(1)Per share amounts have been calculated using the monthly average shares method. (2)For the period from September 13, 2000 (inception date) to October 31, 2000. * Amount represents less than $0.01 per share. ++Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. 24 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders INDEPENDENT AUDITORS' REPORT To the Board of Trustees and Shareholders of Smith Barney Investment Series: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of the Smith Barney International Aggressive Growth Fund of Smith Barney Investment Series ("Fund") as of October 31, 2002, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the three-year period then ended. 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 audits. The financial highlights for each of the years in the two-year period ended October 31, 1999 were audited by other auditors whose report thereon, dated December 15, 1999, expressed an unqualified opinion on the financial highlights. We conducted our audits 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. As to securities purchased but yet received, we performed other appropriate auditing procedures. 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of October 31, 2002, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and financial highlights for each of the years in the three-year period then ended in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP New York, New York December 11, 2002 25 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders ADDITIONAL INFORMATION (UNAUDITED) Information about Trustees and Officers The business and affairs of the Smith Barney International Aggressive Growth Fund ("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's Trustees and is available, without charge, upon request by calling Citicorp Trust Bank, fsb. 1-800-451-2010 or Primerica Shareholder Services at 1-800-544-5445.
Number of Portfolios in Fund Position(s) Length Principal Complex Held with of Time Occupation(s) During Overseen by Name, Address and Age Fund Served Past Five Years Trustee -------------------------------------------------------------------------------------------------------------- NON-INTERESTED TRUSTEES: Elliott J. Berv Trustee Since President and Chief Operations 35 c/o R. Jay Gerken 2001 Officer, Landmark City (Real Estate Salomon Smith Barney Inc. ("SSB") Development) (since 2002); Executive 399 Park Avenue Vice President and Chief Operations New York, NY 10022 Officer, DigiGym Systems (On-line Age 59 Personal Training Systems) (since 2001); Chief Executive Officer, Rocket City Enterprises (Internet Service Company) (since 2000); President, Catalyst (Consulting) (Since 1984). Donald M. Carlton Trustee Since Consultant, URS Corporation 30 c/o R. Jay 1997 (Engineering) (since 1999); former Gerken SSB Chief Executive Officer, Radian 399 Park Avenue International L.L.C. (Engineering) New York, NY 10022 (from 1996 to 1998), Member of Age 65 Management Committee, Signature Science (Research and Development) (since 2000). A. Benton Cocanougher Trustee Since Dean Emeritus and Wiley Professor, 30 c/o R. Jay 1991 Texas A&M University (since 2001); Gerken SSB former Dean and Professor of 399 Park Avenue Marketing, College and Graduate New York, NY 10022 School of Business of Texas A&M Age 64 University (from 1987 to 2001). Mark T. Finn Trustee Since Chairman and Owner, Vantage 35 c/o R. Jay 2001 Consulting Group, Inc. (Investment Gerken SSB Advisory and Consulting Firm) (since 399 Park Avenue 1988); former Vice Chairman and New York, NY 10022 Chief Operating Officer, Lindner Age 59 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).
Other Board Memberships Held by Trustee During Name, Address and Age Past Five Years ------------------------------------------------------------------------ NON-INTERESTED TRUSTEES: Elliott J. Berv Board Member, American Identity c/o R. Jay Gerken Corp. (doing business as Morpheus Salomon Smith Barney Inc. ("SSB") Technologies) (Biometric information 399 Park Avenue Management) (since 2002; consultant New York, NY 10022 since 1999); Director, Lapoint Age 59 Industries (Industrial Filter Company) (since 2002); Director. Alzheimer's Association (New England Chapter) (since 1998). Donald M. Carlton Director, American Electric Power c/o R. Jay (Electric Utility) (since 1999); Gerken SSB Director, Valero Energy (Petroleum 399 Park Avenue Refining) (since 1999); Director, New York, NY 10022 National Instruments Corp. Age 65 Technology) (since 1994). A. Benton Cocanougher Former Director, Randall's Food c/o R. Jay Markets, Inc. (from 1990 to 1999); Gerken SSB former Director, First American Bank 399 Park Avenue and First American Savings Bank New York, NY 10022 (from 1994 to 1999). Age 64 Mark T. Finn Former President and Director, Delta c/o R. Jay Financial, Inc. (Investment Advisory Gerken SSB Firm) (from 1983 to 1999). 399 Park Avenue New York, NY 10022 Age 59
26 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of Portfolios in Fund Position(s) Length Principal Complex Held with of Time Occupation(s) During Overseen by Name, Address and Age Fund Served Past Five Years Trustee --------------------------------------------------------------------------------------------------- Stephen R. Gross Trustee Since Partner, Capital Investment Advisory 30 c/o R. Jay 1986 Partners (Consulting) (since January Gerken SSB 2000); Managing Director, 399 Park Avenue Fountainhead Ventures, Ltd. New York, NY 10022 (Consulting) (from 1998 to 2002); Age 54 Secretary, Carint of 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). Diana R. Harrington Trustee Since Professor, Babson College 35 c/o R. Jay 2001 (since 1992). Gerken SSB 399 Park Avenue New York, NY 10022 Age 62 Susan B. Kerley Trustee Since Consultant, Strategic 35 c/o R. Jay 2001 Management Advisors, LLC Gerken SSB 399 Park Global Research Associates, Inc. Avenue New York, NY (Investment Consulting) 10022 (since 1990). Age 51 Alan G. Merten Trustee Since President, George Mason 30 c/o R. Jay 1990 University (since 1996). Gerken SSB 399 Park Avenue New York, NY 10022 Age 60 C. Oscar Morong, Jr. Trustee Since Managing Director, Morong 35 c/o R. Jay 2001 Capital Management Gerken SSB 399 Park (since 1993). Avenue New York, NY 10022 Age 67 R. Richardson Pettit Trustee Since Professor of Finance, 30 c/o R. Jay 1990 University of Houston Gerken SSB 399 Park (since 1977); Avenue Independent Consultant New York, NY 10022 (since 1984). Age 60 Walter E. Robb, III Trustee Since President, Benchmark Consulting 35 c/o R. Jay 2001 Group, Inc. (Service Company) (since Gerken SSB 399 Park 1991); Sole Proprietor, Robb Avenue Associates (Consulting) (since 1978); New York, NY 10022 Co-Owner, Kedron Design (Gifts) Age 75 (since 1978); former President and Treasurer, Benchmark Advisors, Inc. (Financial) (from 1989 to 2000).
Other Board Memberships Held by Trustee During Name, Address and Age Past Five Years ------------------------------------------------------------ Stephen R. Gross Director, United Telesis, Inc. c/o R. Jay (Telecommunications) (since 1997); Gerken SSB Director, eBank.com, Inc. (since 399 Park Avenue 1997); Director, Andersen Calhoun, New York, NY 10022 Inc. (Assisted Living) (since 1987); Age 54 former Director, Charter Bank, Inc, 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). Diana R. Harrington Former Trustee, The Highland c/o R. Jay Family of Funds (Investment Gerken SSB 399 Park Company) (from March 1997 Avenue to March 1998) (since 1990). New York, NY 10022 Age 62 Susan B. Kerley Director, Eclipse Funds c/o R. Jay (currently supervises 17 Gerken SSB 399 Park investment companies in Avenue New York, NY fund complex). 10022 Age 51 Alan G. Merten Director, Comshare, Inc. c/o R. Jay (Information Technology) Gerken SSB 399 Park (since 1985); former Director, Avenue Indus (Information Technology) New York, NY 10022 (from 1995 to 1999). Age 60 C. Oscar Morong, Jr. Former Director, Indonesia c/o R. Jay Fund (Closed End Fund) Gerken SSB 399 Park (from 1990 to 1999); Avenue New York, NY Trustee, Morgan Stanley 10022 Institutional Fund Age 67 (currently supervises 75 investment companies) (since 1993). R. Richardson Pettit None c/o R. Jay Gerken SSB 399 Park Avenue New York, NY 10022 Age 60 Walter E. Robb, III Director, John Boyle & Co., Inc. c/o R. Jay (Textiles) (since 1999); Director, Gerken SSB 399 Park Harbor Sweets, Inc. (Candy) (since Avenue 1990); Director, W.A. Wilde Co. New York, NY 10022 (Direct Media) (since 1982); Director, Age 75 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).
27 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of Portfolios in Fund Position(s) Length Principal Complex Other Board Memberships Held with of Time Occupation(s) During Overseen by Held by Trustee During Name, Address and Age Fund Served Past Five Years Trustee Past Five Years ------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEE: R. Jay Gerken* SSB Chairman, Since President since 2002; Managing Chairman of the N/A 399 Park Avenue President and 2002 Director, SSB (since 1996). Board, Trustee or New York, NY 10022 Chief Director of 226 Age 51 Executive Officer OFFICERS: Lewis E. Daidone Senior Vice Since Managing Director, SSB (since 1990); N/A N/A SSB President 2000 Chief Financial Officer, Smith Barney 125 Broad and Chief Mutual Funds; Director and Senior Street, 11th Floor Administrative Vice President, SBFM and Travelers New York, NY 10004 Officer Investment Adviser ("TIA"). Age 45 Richard L. Peteka Chief Financial Since Director and Head of Internal Control N/A N/A SSB Officer and 2002 for Citigroup Asset Management U.S. 125 Broad Treasurer Mutual Fund Administration from Street, 11th Floor 1999-2002; Vice President, Head of New York, NY 10004 Mutual Fund Administration and Age 41 Treasurer at Oppenheimer Capital from 1996-1999 Jeffrey J. Russell, Vice President Since Managing Director of SSB and N/A N/A CFA and Investment 1997 Investment Officer of SBFM SSB Officer 399 Park Avenue New York, NY 10022 Age 49 Kaprel Ozsolak Controller Since Vice President of SSB N/A N/A SSB 2002 125 Broad Street, 11th Floor New York, NY 10004 Age 37 Robert I. Frenkel Secretary Since Managing Director and N/A N/A SSB 2000 General Counsel, Global 300 First Stamford Mutual Funds for Citigroup Place Asset Management (since 1994) 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 ("SBFM") or its affiliates. 28 Smith Barney International Aggressive Growth Fund | 2002 Annual Report to Shareholders SMITH BARNEY INTERNATIONAL AGGRESSIVE GROWTH FUND TRUSTEES INVESTMENT MANAGER Elliott J. Berv Smith Barney Fund Management LLC Donald M. Carlton A. Benton Cocanougher DISTRIBUTORS Mark T. Finn Salomon Smith Barney Inc. R. Jay Gerken, Chairman PFS Distributors, Inc. Stephen R. Gross Diana R. Harrington CUSTODIAN Susan B. Kerley State Street Bank and 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 OFFICERS New York, New York 10004 R. Jay Gerken President and SUB-TRANSFER AGENTS Chief Executive Officer PFPC Global Fund Services P.O. Box 9699 Lewis E. Daidone Providence, Rhode Island Senior Vice President and 02940-9699 Chief Administrative Officer Primerica Shareholder Services Richard L. Peteka P.O. Box 9662 Chief Financial Officer Providence, Rhode Island and Treasurer 02940-9662 Jeffrey J. Russell, CFA Vice President and Investment Officer Kaprel Ozsolak Controller Robert I. Frenkel Secretary Smith Barney International Aggressive Growth Fund This report is submitted for the general information of shareholders of Smith Barney Investment Series --Smith Barney International Aggressive 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 INTERNATIONAL AGGRESSIVE GROWTH FUND Smith Barney Mutual Funds 3120 Breckinridge Boulevard Duluth, Georgia 30099-0001 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 SalomonSmithBarney A member of citigroup [LOGO] Salomon Smith Barney is a service mark of Salomon Smith Barney Inc. FD03103 12/02 02-4135 -------------------------------------------------------------------------------- SMITH BARNEY LARGE CAP CORE FUND -------------------------------------------------------------------------------- STYLE PURE SERIES | ANNUAL REPORT | OCTOBER 31, 2002 [LOGO] Smith Barney Mutual Funds Your Serious Money. Professionally Managed./sm/ ----------------------------------------------------------------- NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE ----------------------------------------------------------------- [PHOTO] LARRY WEISSMAN Portfolio Manager [GRAPHIC] Style Pure Series Annual Report . October 31, 2002 SMITH BARNEY LARGE CAP CORE FUND LARRY WEISSMAN, CFA Larry Weissman, CFA, has more than 17 years of securities business experience. Education: BS in Economics from Cornell University, MBA in Finance from Columbia University. FUND OBJECTIVE The Fund seeks capital appreciation. It aims to achieve this objective by investing at least 80% of its net assets in the equity securities of U.S. large cap issuers and related investments. FUND FACTS FUND INCEPTION --------------------------------------------- April 14, 1987 MANAGER'S INVESTMENT INDUSTRY EXPERIENCE --------------------------------------------- 17 Years CLASS 1 CLASS A CLASS B CLASS L -------------------------------------------------------------------------- NASDAQ CSGWX GROAX GROBX SCPLX -------------------------------------------------------------------------- INCEPTION 4/14/87 8/18/96 8/18/96 9/19/00 --------------------------------------------------------------------------
Average Annual Total Returns as of October 31, 2002*
Without Sales Charges/(1)/ Class 1 Class A Class B Class L ---------------------------------------------------------------------------- One-Year (19.20)% (19.94)% (20.59)% (20.05)% ---------------------------------------------------------------------------- Five-Year 0.98 0.50 (0.25) N/A ---------------------------------------------------------------------------- Ten-Year 8.74 N/A N/A N/A ---------------------------------------------------------------------------- Since Inception+ 8.97 5.74 4.94 (23.88) ---------------------------------------------------------------------------- With Sales Charges/(2)/ Class 1 Class A Class B Class L ---------------------------------------------------------------------------- One-Year (26.07)% (23.96)% (24.56)% (21.66)% ---------------------------------------------------------------------------- Five-Year (0.80) (0.53) (0.38) N/A ---------------------------------------------------------------------------- Ten-Year 7.77 N/A N/A N/A ---------------------------------------------------------------------------- Since Inception+ 8.35 4.86 4.94 (24.25) ----------------------------------------------------------------------------
/(1)/ Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value and does not reflect the deduction of the applicable sales charges with respect to Class 1, 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 1, A and L shares reflect the deduction of the maximum initial sales charges of 8.50%, 5.00% and 1.00%, respectively; 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 a 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. The performance data represents past performance, including the investment return and principal value of an investment, which will fluctuate so that 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. + Inception date for Class 1 shares is April 14, 1987. Inception date for Class A and B shares is August 18, 1996. Inception date for Class L shares is September 19, 2000.
What's Inside Your Investment in the Smith Barney Large Cap Core Fund 1 Letter to Our Shareholders............................. 2 Fund at a Glance....................................... 5 Historical Performance................................. 6 Value of $10,000....................................... 8 Schedule of Investments................................ 9 Statement of Assets and Liabilities.................... 13 Statement of Operations................................ 14 Statements of Changes in Net Assets.................... 15 Notes to Financial Statements.......................... 16 Financial Highlights................................... 22 Independent Auditors' Report........................... 25 Additional Information................................. 26 Tax Information........................................ 28
[LOGO] Smith Barney Mutual Funds Your Serious Money. Professionally Managed./SM/ Investment Products: Not FDIC Insured . Not Bank Guaranteed . May Lose Value YOUR INVESTMENT IN THE SMITH BARNEY LARGE CAP CORE FUND Portfolio manager Larry Weissman puts his 17 years of securities business experience to good use in seeking capital appreciation by investing in companies with both growth and value characteristics in the large cap stock universe. [GRAPHIC] Looking to Capture Growth at a Reasonable Price Larry generally uses a "bottom-up" strategy to manage the Fund, focusing more on individual security selection, with less emphasis on industry and sector allocation. Larry uses exhaustive fundamental research to identify stocks that he thinks have strong growth potential. He then uses quantitative analysis to determine whether these stocks are relatively undervalued or overvalued compared to stocks with similar fundamental characteristics. [GRAPHIC] The Smith Barney Solution to Funds that Stray -- The Style Pure Series The Style Pure Series is a selection of Smith Barney Mutual Funds that are the basic building blocks of asset allocation. Each Fund typically invests a substantial portion of its assets within its respective asset class and investment style, enabling you to make asset allocation decisions in conjunction with your financial professional. [GRAPHIC] Core Companies with Growth Potential We employ a core strategy which is to say we look to invest in leading companies across the spectrum of industries and sectors, both in sectors traditionally thought of as value sectors (sectors that generally have lower price to earnings ratios and other statistics indicating that a security is undervalued) as well as growth sectors (those companies that generally have high historic growth rates and high relative growth compared with companies in the same industry or sector). We believe a "core" investment approach may be a prudent way to achieve your investment goals. 1 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders Dear Shareholder, Enclosed herein is the annual report for the Smith Barney Large Cap Core 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 useful and informative. Special Notice 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. Performance Review For the year ended October 31, 2002, the Fund's Class A shares, without sales charges, returned negative 19.94%. In comparison, the S&P 500 Index/1/ returned negative 15.10% for the same period. As we reported to you last period, we believe the Fund's underperformance versus the S&P 500 Index continues to be due primarily to our growth orientation and to our investing in companies with a higher average market capitalization than that of the S&P 500 Index. However, over the past six months ended October 31, 2002, the Fund has outperformed the S&P 500 Index as fundamentals for growth stocks have improved and the sector seems to have regained some of its market leadership. Our investment philosophy continues to focus on strong growth stocks, which we believe will reflect their favorable fundamentals over time by outperforming the market. During the period, we maintained a stock selection strategy of buying companies that we believe exhibit strong fundamentals, including predictable and consistent growth, strong balance sheets, low debt-to-equity ratios and shareholder-oriented management teams. Portfolio Manager Market Overview and Outlook We continue to believe that the fundamental backdrop for the market is improving. Our recent observations suggest that earnings estimates have been brought down to achievable levels and the economy has begun to slowly pick up momentum. The third quarter was the first quarter in quite a while for which many companies reported earnings exceeding expectations. In addition, the number of companies revising earnings lower was significantly lower than we have seen in prior periods. During October, orders for durable goods rose nearly twice as much as was expected and unemployment claims were the lowest in almost two years. We believe corporate earnings and earnings momentum are improving. According to The Leuthold Group, the strongest year over year earnings momentum has been in the financial, consumer discretionary and technology sectors. The only sectors with negative year over year comparisons have been in energy and telecommunications. But the investment world remains skittish and skeptical. We expect to see continued volatility and a very different kind of market leadership from what we've seen over the past few years. With concerns about economic and competitive pressures, accounting issues and corporate responsibility, and the possibility of war, we anticipate the markets will return to a more -------- 1The 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. 2 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders basic focus on the fundamentals of cash flows and balance sheets. Our strategy has been to focus on companies with strong franchise positions that have the potential to grow in what we expect to be a relatively modest recovery. We believe companies with strong balance sheets and consistent cash flows should be in a position to drive shareholder value through investment, acquisitions, share buybacks or even dividends. By focusing on what we perceive to be the higher quality end of the large cap sector, we feel investors can participate in the potential growth and revaluation of the companies that have a chance to benefit from an economic recovery. With interest rates at extraordinarily low levels and potential growth deeply discounted due to investors' near-term concerns, we believe sound growth companies that are competitively well-positioned and conservatively financed offer a compelling investment opportunity. We believe employing a core strategy with a bias towards growth allows us to take advantage of the attractive relative price of long-term growth in this type of market. We have positioned the Fund to attempt to benefit from an anticipated change in investor perception; our bias has become more positive and we have begun to slowly and measurably increase the Fund's exposure to growth. Portfolio Manager Fund Overview and Outlook The Fund invests in the shares of companies that we believe are well-positioned for growth and trading at reasonable valuations. We employ a ''core'' strategy, which is based on investing in companies, that we believe have more consistent and stable growth. We believe these companies can be found in a variety of sectors, including sectors that might not be traditionally associated with growth investing. The Fund continues to be diversified across sectors as well as individual companies. Its 10 largest positions comprised only 31% of the portfolio at the end of the reporting period. While under normal market conditions the Fund invests at least 80% of its net assets in equity securities of large cap issuers, the Fund invests in a complement of medium-sized companies that we believe are well-positioned for future growth. Although the Fund remains substantially invested, we feel that we have reacted quickly to the changing market environment. Currently, the Fund's largest sector concentrations are in finance, technology and healthcare. Through the end of September 2002, we reduced the Fund's weightings in technology in favor of the healthcare sector and increased its exposure to financials based on fundamental trends and valuation. In early October 2002, we began to take some profits in the healthcare sector, which dramatically outperformed the S&P 500 Index off the July 2002 market lows, while increasing the Fund's exposure to technology. We also took some profits in the financials and consumer non-durables industries. While the Fund's largest holdings are in a variety of different industries, we believe that they possess inherent competitive advantages that we expect will result in more stable and consistent growth. For example, American International Group Inc., Wells Fargo & Co., and Bank of America Corp. are financial leaders. Pfizer Inc., Johnson & Johnson and Wyeth are leaders in new drug development. Wal-Mart Stores Inc. is the world's largest retailer operating over 4,000 domestic stores. Microsoft Corp. is the world's largest independent software company and Dell Computer Corp. is a leading direct marketer of personal computers, notebook computers and servers. Also included in our holdings are several medium-sized companies, such as Ambac Financial Group, Inc., TJX Cos., Inc. and IndyMac Bancorp, Inc., all of which we feel are well-positioned for future growth. We have built a portfolio that follows a growth-oriented strategy by owning some of the classic blue-chip companies as well as companies that we believe have the potential to become the blue-chips of tomorrow. We believe this strategy will provide attractive risk-adjusted returns over the long-term. 3 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders Thank you for your investment in the Smith Barney Large Cap Core Fund. We recognize that you have many investment choices and we appreciate your trust and support. Sincerely, /s/ R Jay Gerken /s/ Lawrence Weissman R. Jay Gerken Lawrence B. Weissman, CFA Chairman Vice President and Investment Officer December 2, 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 9 through 12 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. 4 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders SMITH BARNEY LARGE CAP CORE FUND at a Glance (unaudited) TOP TEN HOLDINGS*+ 1. Microsoft Corp.................................................... 4.6% 2. American International Group Inc.................................. 3.7 3. Exxon Mobil Corp.................................................. 3.3 4. Pfizer Inc........................................................ 3.1 5. Ambac Financial Group, Inc........................................ 3.0 6. Wal-Mart Stores Inc............................................... 2.9 7. Verizon Communications Inc........................................ 2.8 8. General Electric Co............................................... 2.6 9. Wells Fargo & Co.................................................. 2.6 10. Johnson & Johnson................................................. 2.5
INDUSTRY DIVERSIFICATION*+ [CHART] Consumer Non-Durables 9.5% Consumer Services 4.4% Energy 5.7% Finance 22.0% Healthcare 14.9% Process Industries 1.6% Producer Manufacturing 5.7% Retail 7.4% Technology 16.1% Telecommunication 4.4% Other 8.3% INVESTMENT BREAKDOWN*++ [CHART] U.S. Government Obligation 0.5% Repurchase Agreement 1.4% Common Stock 98.1% * All information is as of October 31, 2002. Please note that Fund holdings are subject to change. + As a percentage of total common stock. ++ As a percentage of total investments. 5 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders HISTORICAL PERFORMANCE -- CLASS 1 SHARES
Net Asset Value ----------------- Beginning End Income Capital Gain Return Total Year Ended of Year of Year Dividends Distributions of Capital Returns/(1)+/ ------------------------------------------------------------------------------------------ 10/31/02 $17.55 $14.10 $0.09 $ 0.01 $0.01 (19.20)% ------------------------------------------------------------------------------------------ 10/31/01 26.52 17.55 0.06 2.32 0.00 (26.67) ------------------------------------------------------------------------------------------ 10/31/00 24.36 26.52 0.07 1.58 0.00 16.12 ------------------------------------------------------------------------------------------ 10/31/99 19.59 24.36 0.11 1.82 0.00 35.60 ------------------------------------------------------------------------------------------ 10/31/98 20.94 19.59 0.17 3.41 0.00 12.54 ------------------------------------------------------------------------------------------ 10/31/97 17.98 20.94 0.18 1.36 0.00 26.93 ------------------------------------------------------------------------------------------ 10/31/96 17.46 17.98 0.18 2.40 0.00 19.94 ------------------------------------------------------------------------------------------ 10/31/95 15.31 17.46 0.16 1.03 0.00 24.01 ------------------------------------------------------------------------------------------ 10/31/94 16.26 15.31 0.11 1.18 0.00 2.04 ------------------------------------------------------------------------------------------ 10/31/93 16.02 16.26 0.12 1.77 0.00 14.27 ------------------------------------------------------------------------------------------ Total $1.25 $16.88 $0.01 ------------------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS A SHARES Net Asset Value ----------------- Beginning End Income Capital Gain Return Total Year Ended of Year of Year Dividends Distributions of Capital Returns/(1)+/ ------------------------------------------------------------------------------------------ 10/31/02 $17.41 $13.93 $0.00 $ 0.01 $0.00 (19.94)% ------------------------------------------------------------------------------------------ 10/31/01 26.41 17.41 0.00 2.32 0.00 (27.12) ------------------------------------------------------------------------------------------ 10/31/00 24.29 26.41 0.01 1.58 0.00 15.69 ------------------------------------------------------------------------------------------ 10/31/99 19.54 24.29 0.05 1.82 0.00 35.24 ------------------------------------------------------------------------------------------ 10/31/98 20.89 19.54 0.12 3.41 0.00 12.27 ------------------------------------------------------------------------------------------ 10/31/97 17.96 20.89 0.16 1.36 0.00 26.65 ------------------------------------------------------------------------------------------ Inception* -- 10/31/96 16.63 17.96 0.00 0.00 0.00 8.00++ ------------------------------------------------------------------------------------------ Total $0.34 $10.50 $0.00 ------------------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS B SHARES Net Asset Value ----------------- Beginning End Income Capital Gain Return Total Year Ended of Year of Year Dividends Distributions of Capital Returns/(1)+/ ------------------------------------------------------------------------------------------ 10/31/02 $16.86 $13.38 $0.00 $ 0.01 $0.00 (20.59)% ------------------------------------------------------------------------------------------ 10/31/01 25.81 16.86 0.00 2.32 0.00 (27.59) ------------------------------------------------------------------------------------------ 10/31/00 23.95 25.81 0.00 1.58 0.00 14.76 ------------------------------------------------------------------------------------------ 10/31/99 19.37 23.95 0.00 1.82 0.00 34.31 ------------------------------------------------------------------------------------------ 10/31/98 20.75 19.37 0.00 3.41 0.00 11.43 ------------------------------------------------------------------------------------------ 10/31/97 17.93 20.75 0.11 1.36 0.00 25.66 ------------------------------------------------------------------------------------------ Inception* -- 10/31/96 16.63 17.93 0.00 0.00 0.00 7.82++ ------------------------------------------------------------------------------------------ Total $0.11 $10.50 $0.00 ------------------------------------------------------------------------------------------
6 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders HISTORICAL PERFORMANCE -- CLASS L SHARES
Net Asset Value ----------------- Beginning End Income Capital Gain Return Total Year Ended of Year of Year Dividends Distributions of Capital Returns/(1)+/ ------------------------------------------------------------------------------------------ 10/31/02 $17.36 $13.87 $0.00 $0.01 $0.00 (20.05)% ------------------------------------------------------------------------------------------ 10/31/01 26.41 17.36 0.00 2.32 0.00 (27.32) ------------------------------------------------------------------------------------------ Inception* -- 10/31/00 27.33 26.41 0.00 0.00 0.00 (3.37)++ ------------------------------------------------------------------------------------------ Total $0.00 $2.33 $0.00 ------------------------------------------------------------------------------------------
It is the Fund's policy to distribute dividends and capital gains, if any, annually. AVERAGE ANNUAL TOTAL RETURNS+
Without Sales Charges/(1)/ ----------------------------------- Class 1 Class A Class B Class L ------------------------------------------------------------------------------- Year Ended 10/31/02 (19.20)% (19.94)% (20.59)% (20.05)% ------------------------------------------------------------------------------- Five Years Ended 10/31/02 0.98 0.50 (0.25) N/A ------------------------------------------------------------------------------- Ten Years Ended 10/31/02 8.74 N/A N/A N/A ------------------------------------------------------------------------------- Inception* through 10/31/02 8.97 5.74 4.94 (23.88) ------------------------------------------------------------------------------- With Sales Charges/(2)/ ----------------------------------- Class 1 Class A Class B Class L ------------------------------------------------------------------------------- Year Ended 10/31/02 (26.07)% (23.96)% (24.56)% (21.66)% ------------------------------------------------------------------------------- Five Years Ended 10/31/02 (0.80) (0.53) (0.38) N/A ------------------------------------------------------------------------------- Ten Years Ended 10/31/02 7.77 N/A N/A N/A ------------------------------------------------------------------------------- Inception* through 10/31/02 8.35 4.86 4.94 (24.25) -------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS+ Without Sales Charges/(1)/ ----------------------------------------------------------------------------- Class 1 (10/31/92 through 10/31/02) 131.11% ----------------------------------------------------------------------------- Class A (Inception* through 10/31/02) 41.34 ----------------------------------------------------------------------------- Class B (Inception* through 10/31/02) 34.90 ----------------------------------------------------------------------------- Class L (Inception* through 10/31/02) (43.85) -----------------------------------------------------------------------------
(1) Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value and does not reflect the deduction of the applicable sales charges with respect to Class 1, 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 1, A and L shares reflect the deduction of the maximum initial sales charges of 8.50%, 5.00% and 1.00%, respectively; Class B shares reflect the deduction of a 5.00% CDSC 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 a 1.00% CDSC, which applies if shares are redeemed within the first year of purchase. + 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 return is not annualized, as it may not be representative of the total return for the year. * Inception date for Class 1 shares is April 14, 1987. Inception date for Class A and B shares is August 18, 1996. Inception date for Class L shares is September 19, 2000. 7 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders HISTORICAL PERFORMANCE (UNAUDITED) Value of $10,000 Invested in Class 1 Shares of the Smith Barney Large Cap Core Fund vs. S&P 500 Index+ -------------------------------------------------------------------------------- October 1992 -- October 2002 [CHART] Smith Barney Large S&P Cap Core Fund-Class 1 Shares 500 Index ---------------------------- --------- 10/1992 $9,149 $10,000 10/1993 10,447 11,490 10/1994 10,667 11,934 10/1995 13,228 15,086 10/1996 15,865 18,721 10/1997 20,138 24,730 10/1998 22,663 30,173 10/1999 30,731 37,916 10/2000 35,685 40,219 10/2001 26,169 30,209 10/2002 21,143 25,649 +Hypothetical illustration of $10,000 invested in Class 1 shares on October 31, 1992, assuming deduction of the maximum initial 8.50% sales charge at the time of investment for Class 1 shares. It also assumes reinvestment of dividends and capital gains, if any, at net asset value through October 31, 2002. The S&P 500 Index is an index of widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and over-the-counter markets. Figures for the Index include reinvestment of dividends. The Index is unmanaged and is not subject to the same management and trading expenses of a mutual fund. Please note that an investor cannot invest directly in an index. The performance of the Fund's other classes may be greater or less than the Class 1 shares' performance indicated on this chart, depending on whether greater or lesser sales charges and fees were incurred by shareholders investing in other classes. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. All figures represent past performance and are not a guarantee of future results. The performance data represents past performance, including the investment return and principal value of an investment, which will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. 8 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders SCHEDULE OF INVESTMENTS OCTOBER 31, 2002
SHARES SECURITY VALUE --------------------------------------------------------------------- COMMON STOCK -- 98.1% Aerospace/Defense -- 1.3% 315,450 Lockheed Martin Corp. $ 18,264,555 352,750 United Technologies Corp. 21,754,093 --------------------------------------------------------------------- 40,018,648 --------------------------------------------------------------------- Commercial Services -- 0.4% 399,450 Paycheck, Inc. 11,512,149 --------------------------------------------------------------------- Consumer Durables -- 1.3% 412,060 Electronic Arts Inc.* 26,833,347 249,750 Harley-Davidson, Inc. 13,061,925 --------------------------------------------------------------------- 39,895,272 --------------------------------------------------------------------- Consumer Non-Durables -- 9.3% 889,400 The Coca-Cola Co. 41,339,312 311,950 The Estee Lauder Cos. Inc., Class A Shares 9,083,984 601,800 The Gillette Co. 17,981,784 780,900 Kimberly-Clark Corp. 40,216,350 1,361,325 Kraft Foods Inc. 53,772,338 986,750 PepsiCo, Inc. 43,515,675 474,000 The Procter & Gamble Co. 41,925,300 328,950 Sara Lee Corp. 7,509,929 324,050 Unilever N.V., NY Shares 20,742,441 --------------------------------------------------------------------- 276,087,113 --------------------------------------------------------------------- Consumer Services -- 4.4% 1,141,150 AOL Time Warner, Inc.* 16,831,962 1,018,185 Cox Communications, Inc. 27,898,269 100,150 Gannett Co., Inc. 7,604,389 160,700 Tribune Corp. 7,721,635 242,450 Univision Communications Inc.* 6,281,880 1,098,776 Viacom Inc., Class B Shares* 49,016,397 831,850 The Walt Disney Co. 13,891,895 --------------------------------------------------------------------- 129,246,427 --------------------------------------------------------------------- Energy -- 5.6% 421,200 BP PLC, Sponsored ADR 16,195,140 613,395 Encana Corp. 17,849,794 2,855,110 Exxon Mobil Corp. 96,103,003 510,300 Total Fina Elf SA, Sponsored ADR 34,710,606 --------------------------------------------------------------------- 164,858,543 --------------------------------------------------------------------- Finance -- 21.6% 1,392,700 Ambac Financial Group, Inc. 86,068,860 1,739,525 American International Group Inc. 108,807,289 854,700 Bank of America Corp. 59,658,060 265,200 The Bank of New York Co., Inc. 6,895,200 262 Berkshire Hathaway Inc., Class A Shares* 19,437,780 1,126,350 Capital One Financial Corp. 34,319,884 579,300 Fannie Mae 38,731,998 719,300 Freddie Mac 44,294,494
See Notes to Financial Statements. 9 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
SHARES SECURITY VALUE --------------------------------------------------------------------------------- Finance -- 21.6% (continued) 1,097,140 IndyMac Bancorp, Inc.* $ 20,450,690 726,550 J.P. Morgan Chase & Co. 15,075,912 712,400 Lehman Brothers Holdings Inc. 37,949,548 953,550 Morgan Stanley 37,112,166 763,050 The St. Paul Cos. 25,028,040 504,000 SunTrust Banks, Inc. 30,663,360 1,476,300 Wells Fargo & Co. 74,508,861 ------------------------------------------------------------------------------ 639,002,142 ------------------------------------------------------------------------------ Healthcare -- 14.6% 931,755 Alcon, Inc.* 38,220,590 612,640 Amgen Inc.* 28,524,518 326,250 Eli Lilly & Co. 18,106,875 742,350 HCA Inc. 32,284,801 1,254,050 Johnson & Johnson 73,675,438 443,300 Medtronic, Inc. 19,859,840 266,950 Merck & Co. Inc. 14,479,368 2,803,000 Pfizer Inc. 89,051,310 918,750 Pharmacia Corp. 39,506,250 349,850 Schering-Plough Corp. 7,469,298 255,450 Teva Pharmaceutical Industries Ltd., Sponsored ADR 19,779,494 175,384 WellPoint Health Networks Inc.* 13,190,631 1,138,050 Wyeth 38,124,675 ------------------------------------------------------------------------------ 432,273,088 ------------------------------------------------------------------------------ Industrial Services -- 1.3% 498,150 Noble Corp.* 16,100,208 554,610 Weatherford International, Inc.* 22,206,584 ------------------------------------------------------------------------------ 38,306,792 ------------------------------------------------------------------------------ Miscellaneous -- 0.5% 147,350 iShares Nasdaq Biotechnology Index* 7,529,585 314,250 Nasdaq-100 Index Tracking Stock* 7,714,838 ------------------------------------------------------------------------------ 15,244,423 ------------------------------------------------------------------------------ Non-Energy Minerals -- 1.4% 516,650 Alcan Inc. 14,543,697 1,177,200 Alcoa Inc. 25,969,032 ------------------------------------------------------------------------------ 40,512,729 ------------------------------------------------------------------------------ Process Industries -- 1.6% 330,900 E.I. du Pont de Nemours & Co. 13,649,625 604,755 Praxair, Inc. 32,959,148 ------------------------------------------------------------------------------ 46,608,773 ------------------------------------------------------------------------------ Producer Manufacturing -- 5.6% 190,000 3M Co. 24,118,600 131,300 Danaher Corp. 7,595,705 3,016,770 General Electric Co. 76,173,442 929,850 Honeywell International Inc. 22,260,609
See Notes to Financial Statements. 10 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
SHARES SECURITY VALUE ----------------------------------------------------------------------------------------------- Producer Manufacturing -- 5.6% (continued) 506,400 SPX Corp.* $ 21,273,864 1,038,050 Tyco International Ltd. 15,010,203 ------------------------------------------------------------------------------------------- 166,432,423 ------------------------------------------------------------------------------------------- Retail -- 7.3% 700,750 Costco Wholesale Corp.* 23,776,447 568,174 The Home Depot, Inc. 16,408,865 654,600 Lowe's Cos., Inc. 27,316,458 298,450 Safeway Inc.* 6,894,195 419,650 Target Corp. 12,639,858 2,175,550 TJX Cos., Inc. 44,642,286 1,574,750 Wal-Mart Stores Inc. 84,327,863 ------------------------------------------------------------------------------------------- 216,005,972 ------------------------------------------------------------------------------------------- Technology -- 15.8% 982,500 BEA Systems, Inc.* 7,947,442 2,503,800 Cisco Systems, Inc.* 27,992,484 1,399,200 Dell Computer Corp.* 40,031,112 869,850 EMC Corp.* 4,444,933 846,350 Hewlett-Packard Co. 13,372,330 2,496,282 Intel Corp. 43,185,679 313,900 International Business Machines Corp. 24,779,266 334,550 Intuit Inc.* 17,369,836 285,200 Lexmark International, Inc.* 16,946,584 1,688,800 Lucent Technologies Inc.* 2,077,224 641,004 Maxim Integrated Products, Inc.* 20,409,567 2,523,170 Microsoft Corp.* 134,913,900 1,282,500 Motorola, Inc. 11,760,525 1,148,850 Nokia Oyj, Sponsored ADR 19,093,887 3,015,925 Oracle Corp.* 30,732,276 759,650 SAP AG, Sponsored ADR 14,539,701 4,089,650 Sun Microsystems, Inc.* 12,109,454 761,400 Texas Instruments Inc. 12,075,804 904,848 VERITAS Software Corp.* 13,798,932 ------------------------------------------------------------------------------------------- 467,580,936 ------------------------------------------------------------------------------------------- Telecommunication -- 4.3% 2,768,905 AT&T Corp. 36,106,520 1,612,934 AT&T Wireless Services Inc.* 11,080,857 2,137,210 Verizon Communications Inc. 80,701,050 ------------------------------------------------------------------------------------------- 127,888,427 ------------------------------------------------------------------------------------------- Transportation -- 0.8% 407,200 United Parcel Service, Inc., Class B Shares 24,436,072 ------------------------------------------------------------------------------------------- Utilities -- 1.0% 183,900 Exelon Corp. 9,268,560 819,600 Mirant Corp.* 1,753,944 598,050 Southern Co. 17,762,085 ------------------------------------------------------------------------------------------- 28,784,589 ------------------------------------------------------------------------------------------- TOTAL COMMON STOCK (Cost -- $2,756,636,696) 2,904,694,518 -------------------------------------------------------------------------------------------
See Notes to Financial Statements. 11 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
FACE AMOUNT SECURITY VALUE ----------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATION -- 0.5% $10,324,000 U.S. Treasury Bonds, 8.750% due 5/15/17 (Cost -- $11,943,729) $ 14,701,221 ----------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 1.4% 42,700,000 Merrill Lynch & Co., Inc., 1.850% due 11/1/02; Proceeds at maturity -- $42,702,194; (Fully collateralized by Federal Home Loan Mortgage Corp. Discount Notes and Federal National Mortgage Association Discount Notes, 0.000% due 1/29/03 to 4/30/03; Market value -- $43,554,011) (Cost -- $42,700,000) 42,700,000 ----------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100% (Cost -- $2,811,280,425**) $2,962,095,739 -----------------------------------------------------------------------------------------------------------------
*Non-income producing security. **Aggregate cost for Federal income tax purposes is substantially the same. See Notes to Financial Statements. 12 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2002 ASSETS: Investments, at value (Cost -- $2,811,280,425) $2,962,095,739 Cash 967 Receivable for securities sold 37,192,216 Dividends and interest receivable 2,474,871 Receivable for Fund shares sold 332,699 --------------------------------------------------------------------------- Total Assets 3,002,096,492 --------------------------------------------------------------------------- LIABILITIES: Payable for securities purchased 45,070,826 Payable for Fund shares purchased 2,652,333 Management fee payable 1,524,815 Trustees' retirement plan 331,079 Service plan fees payable 146,806 Accrued expenses 2,027,170 --------------------------------------------------------------------------- Total Liabilities 51,753,029 --------------------------------------------------------------------------- Total Net Assets $2,950,343,463 --------------------------------------------------------------------------- NET ASSETS: Par value of shares of beneficial interest $ 2,106 Capital paid in excess of par value 3,080,714,292 Overdistributed net investment income (93,319) Accumulated net realized loss from security transactions and futures contracts (281,094,930) Net unrealized appreciation of investments 150,815,314 --------------------------------------------------------------------------- Total Net Assets $2,950,343,463 --------------------------------------------------------------------------- Shares Outstanding: Class 1 163,323,627 -------------------------------------------------------- -------------- Class A 25,286,689 -------------------------------------------------------- -------------- Class B 21,685,507 -------------------------------------------------------- -------------- Class L 335,929 -------------------------------------------------------- -------------- Net Asset Value: Class 1 (and redemption price) $14.10 -------------------------------------------------------- -------------- Class A (and redemption price) $13.93 -------------------------------------------------------- -------------- Class B * $13.38 -------------------------------------------------------- -------------- Class L ** $13.87 -------------------------------------------------------- -------------- Maximum Public Offering Price Per Share: Class 1 (net asset value plus 9.29% of net asset value per share) $15.41 -------------------------------------------------------- -------------- Class A (net asset value plus 5.26% of net asset value per share) $14.66 -------------------------------------------------------- -------------- Class L (net asset value plus 1.01% of net asset value per share) $14.01 --------------------------------------------------------------------------- *Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares are redeemed within one year from purchase (See Note 2). **Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if shares are redeemed within one year from initial purchase. See Notes to Financial Statements. 13 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2002 INVESTMENT INCOME: Dividends $ 40,473,839 Interest 3,469,016 Less: Foreign withholding tax (250,385) ---------------------------------------------------------------------------- Total Investment Income 43,692,470 ---------------------------------------------------------------------------- EXPENSES: Management fee (Note 2) 21,155,745 Shareholder and system servicing fees 13,437,060 Service plan fees (Note 2) 4,673,299 Shareholder communications 2,342,782 Audit and legal 226,206 Trustees' fees 183,806 Custody 180,713 Registration fees 174,795 Other 57,867 ---------------------------------------------------------------------------- Total Expenses 42,432,273 ---------------------------------------------------------------------------- Net Investment Income 1,260,197 ---------------------------------------------------------------------------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND FUTURES CONTRACTS (NOTES 3 AND 5): Realized Loss From: Security transactions (excluding short-term securities) (227,679,510) Futures contracts (19,936,994) ---------------------------------------------------------------------------- Net Realized Loss (247,616,504) ---------------------------------------------------------------------------- Change in Net Unrealized Appreciation of Investments: Beginning of year 648,772,032 End of year 150,815,314 ---------------------------------------------------------------------------- Decrease in Net Unrealized Appreciation (497,956,718) ---------------------------------------------------------------------------- Net Loss on Investments and Futures Contracts (745,573,222) ---------------------------------------------------------------------------- Decrease in Net Assets From Operations $(744,313,025) ---------------------------------------------------------------------------- See Notes to Financial Statements. 14 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31,
2002 2001 -------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 1,260,197 $ 17,555,043 Net realized loss (247,616,504) (9,338,240) Decrease in net unrealized appreciation (497,956,718) (1,518,400,874) -------------------------------------------------------------------------------------------------------- Decrease in Net Assets From Operations (744,313,025) (1,510,184,071) -------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (15,313,890) (10,720,642) Net realized gains (1,906,977) (500,813,021) Capital (1,694,562) -- -------------------------------------------------------------------------------------------------------- Decrease in Net Assets From Distributions to Shareholders (18,915,429) (511,533,663) -------------------------------------------------------------------------------------------------------- FUND SHARE TRANSACTIONS (NOTE 12): Net proceeds from sale of shares 258,182,747 387,642,676 Net asset value of shares issued for reinvestment of dividends 18,912,891 511,051,070 Cost of shares reacquired (563,945,773) (601,327,946) -------------------------------------------------------------------------------------------------------- Increase (Decrease) in Net Assets From Fund Share Transactions (286,850,135) 297,365,800 -------------------------------------------------------------------------------------------------------- Decrease in Net Assets (1,050,078,589) (1,724,351,934) NET ASSETS: Beginning of year 4,000,422,052 5,724,773,986 -------------------------------------------------------------------------------------------------------- End of year* $ 2,950,343,463 $ 4,000,422,052 -------------------------------------------------------------------------------------------------------- * Includes undistributed (overdistributed) net investment income of: $(93,319) $14,010,536 --------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 15 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies The Smith Barney Large Cap Core Fund ("Fund") is a separate portfolio of the Smith Barney Investment Series ("Series"). The Series, a Massachusetts business trust, is registered under the Investment Company Act of 1940 ("1940 Act"), as amended, as a diversified open-end management investment company and consists of this Fund and six other separate investment portfolios: Smith Barney International Aggressive Growth Fund, Smith Barney Growth and Income Fund, Smith Barney Large Cap Core Portfolio, Smith Barney Premier Selections All Cap Growth Portfolio, Smith Barney Growth and Income Portfolio and Smith Barney Government Portfolio. The financial statements and financial highlights for the other portfolios are presented in separate shareholder reports. The significant accounting policies consistently followed by the Fund are: (a) security transactions are accounted for on trade date; (b) securities traded on national securities markets are valued at the closing prices on such markets or, if there were no sales during the day, at the current quoted bid price; securities primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, except that when a significant occurrence, subsequent to the time a value was so established, is likely to have significantly changed the value, then the fair value of those securities will be determined by consideration of other factors by or under the direction of the Board of Trustees or its delegates; over-the-counter securities are valued on the basis of the bid price at the close of business on each day; U.S. government and agency obligations are valued at the average between bid and ask prices in the over-the-counter market; (c) securities maturing within 60 days are valued at cost plus accreted discount or minus amortized premium, which approximates value; (d) securities for which market quotations are not available will be valued in good faith at fair value by or under the direction of the Board of Trustees; (e) interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis; ( f ) 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 Funds determine the existence of a dividend declaration after exercising reasonable due diligence; (g) gains or losses on the sale of securities are calculated by using the specific identification method; (h) dividends and distributions to shareholders are recorded by the Fund on the ex-dividend date; (i) the accounting records of the Fund 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. 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. Differences between income and expense amounts recorded and collected or paid are adjusted when reported by the custodian bank; ( j) realized gain and loss on foreign currency includes the net realized amount from the sale of currency and the amount realized between trade date and settlement date on security transactions; (k) the character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. At October 31, 2002, reclassifications were made to the capital accounts of the Fund to reflect permanent book/tax differences and income and gains available for distributions under income tax regulations. Accordingly, a portion of accumulated net realized loss of $2,489 was reclassified to paid-in capital. Net investment income, net realized gains and net assets were not affected by this change; (l) the Fund intends to comply with the requirements 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 tax; and (m) 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. Also, the Fund may enter into forward foreign exchange contracts in order to hedge against foreign currency risk. These contracts are marked-to-market daily, by recognizing the difference between the contract exchange rate and the current market rate as an unrealized gain or loss. Realized gains or losses are recognized when contracts are settled. 16 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. Management 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 the investment manager to the Fund. The Fund pays SBFM a management fee calculated at an annual rate of the Fund's average daily net assets as follows:
Average Daily Net Assets Annual Rate ----------------------------------------------------------------------------- First $1 billion 0.65% ---------------------------------------------------------------------------- Next $1 billion 0.60 ---------------------------------------------------------------------------- Next $1 billion 0.55 ---------------------------------------------------------------------------- Next $1 billion 0.50 ---------------------------------------------------------------------------- Over $4 billion 0.45 ----------------------------------------------------------------------------
Citicorp Trust Bank, fsb. ("CTB"), formerly known as Travelers Bank & Trust, fsb., another subsidiary of Citigroup, acts as the Fund's transfer agent. CTB receives account fees and asset-based fees that vary according to the size and type of account. For the year ended October 31, 2002, the Fund paid transfer agent fees of $76,018 to CTB. Salomon Smith Barney Inc. ("SSB") and PFS Distributors, Inc. ("PFSD"), both of which are subsidiaries of Citigroup, act as the Fund's distributors. In addition, SSB, PFSD and certain other broker-dealers continue to sell Fund shares to the public as members of the selling group. For the year ended October 31, 2002, SSB and its affiliates received brokerage commissions of $139,294. There are maximum initial sales charges of 8.50%, 5.00% and 1.00% for Class 1, 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. This CDSC 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 certain cases, 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. These purchases do not incur an initial sales charge. For the year ended October 31, 2002, SSB and its affiliates received sales charges of approximately $10,913,000, $5,007,000 and $22,000 on sales of the Fund's Class 1, A and L shares, respectively. In addition, CDSCs paid to SSB and its affiliates for the year ended October 31, 2002 were approximately:
Class B Class L ------------------------------------------------------------------------------- CDSCs $1,194,000 $3,000 ------------------------------------------------------------------------------
Pursuant to Service Plans, the Fund pays a distribution/service fee with respect to its Class A, B and L shares calculated at an annual rate of 0.25% of the average daily net assets with respect to Class A shares calculated at the annual rate of 1.00% of the average daily net assets of Class B and L shares. At a shareholder meeting held on February 1, 2002, the shareholders approved these Service Plans which replaced Distribution Plans then in effect. For the year ended October 31, 2002, total Service Plan fees incurred were as follows:
Class A Class B Class L -------------------------------------------------------------------------------- Service Plan Fees $1,030,782 $3,586,951 $55,566 -------------------------------------------------------------------------------
All officers and one Trustee of the Series are employees of Citigroup or its affiliates. The Trustees of the Funds have adopted a Retirement Plan ("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 17 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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. Two former Trustees are currently receiving payments under the Retirement Plan. The amount of benefits to be paid under the Retirement Plan cannot currently be determined for current Trustees. Messrs. Carlton, Cocanougher, Gross, Merten and Pettit also are covered by a prior retirement plan. Under the prior plan, retirement benefits are payable for a ten-year period following retirement, with the annual payment to be based upon the Trustee's compensation from the Trust during calendar year 2000. Trustees with more than five but less than ten years of service at retirement will receive a prorated benefit. In order to receive benefits under the current Retirement Plan, a Trustee must waive all rights under the prior plan prior to receiving payment under either plan. Total aggregate retirement benefits accrued under the prior plan for the 2002 fiscal year were $85,526. The amount of benefits to be paid under the prior plan cannot currently be determined for these Trustees. 3. Investments During the year 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 $1,361,858,972 -------------------------------------------------------------------------- Sales 1,709,083,027 --------------------------------------------------------------------------
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 $ 469,838,423 Gross unrealized depreciation (355,515,829) -------------------------------------------------------------------------- Net unrealized appreciation $ 114,322,594 --------------------------------------------------------------------------
4. 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. 5. Futures Contracts Initial margin deposits made upon entering into futures contracts are recognized as assets. The initial margin is segregated by the custodian as is noted in the schedule of investments. 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 each day's trading. Variation margin payments are made or received 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 (and cost of ) the closing transaction and the Fund's basis in the contract. The Fund enters into such contracts to hedge a portion of its 18 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 did not hold any futures contracts. 6. Option Contracts Upon the purchase of a put option or a call option by the Fund, the premium paid is recorded as an investment, the value of which is marked to market daily. When a purchased option expires, the Fund will realize a loss in the amount of the cost of the option. When the Fund enters into a closing sales transaction, the Fund will realize a gain or loss depending on whether the sales proceeds from the closing sales transaction are greater or less than the cost of 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 did not hold any purchased call or put option contracts. When a Fund writes a covered 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. 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 cost of the security sold will be decreased by the premium originally received. When a put option is exercised, the amount of the premium originally received will reduce the cost of the security which the Fund purchased 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 a loss if the market price of the underlying security declines. During the year ended October 31, 2002, the Fund did not enter into any written covered call or put option contracts. 7. Foreign Securities Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in U.S. companies and the U.S. government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of many foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. companies and the U.S. government. 8. Short Sales of Securities A short sale is a transaction in which the Fund sells securities it does not own (but has borrowed) in anticipation of a decline in the market price of the securities. To complete a short sale, the Fund may arrange through a broker to borrow the securities to be delivered to the buyer. The proceeds received by the Fund for the short sale are retained by the broker until the Fund replaces the borrowed securities. In borrowing the securities to be delivered to the buyer, the Fund becomes obligated to replace the securities borrowed at their market price at the time of replacement, whatever the price may be. At October 31, 2002, the Fund did not have any open short sale transactions. 19 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. Securities Lending The Fund has an agreement with its custodian whereby the custodian may lend securities owned by the Fund to brokers, dealers and other financial organizations. Fees earned by the Fund on securities lending are recorded in interest income. Loans of securities by the Fund are collateralized by cash, U.S. government securities or high quality money market instruments that are maintained at all times in an amount at least equal to the current market value of the loaned securities, plus a margin which may vary depending on the type of securities loaned. The custodian establishes and maintains the collateral in a segregated account. At October 31, 2002, the Fund did not have any securities on loan. 10.Capital Loss Carryforward At October 31, 2002, the Portfolio had, for Federal income tax purposes, approximately $244,521,000 of capital loss carryforwards available to offset future capital gains, expiring in 2010. To the extent that these capital carryforward losses are used to offset capital gains, it is probable that the gains so offset will not be distributed. 11.Income Tax Information and Distributions to Shareholders At October 31, 2002 the tax basis components of distributable earnings were: ------------------------------------------------------ Undistributed ordinary income -- ------------------------------------------------------ Accumulated capital losses $(244,521,132) ------------------------------------------------------ Unrealized appreciation 114,148,197 ------------------------------------------------------
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 ended October 31, 2002 was: --------------------------------------------------- Ordinary income $15,313,890 Long-term capital gains 1,906,977 Return of capital 1,694,562 --------------------------------------------------- Total $18,915,429 ---------------------------------------------------
20 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. Shares of Beneficial Interest The Fund has five classes of beneficial interest, 1, A, B, L and Y, of which four classes are outstanding, each with a par value of $0.00001 per share. There are an unlimited number of shares authorized. Transactions in shares of each class were as follows:
Year Ended Year Ended October 31, 2002 October 31, 2001 -------------------------- -------------------------- Shares Amount Shares Amount ----------------------------------------------------------------------------------------- Class 1 Shares sold 5,514,504 $ 90,519,719 5,987,020 $ 122,291,487 Shares issued on reinvestment 1,001,831 18,490,718 18,971,369 417,939,268 Shares reacquired (24,219,440) (389,744,381) (20,802,510) (424,689,518) ------------------------------------------------------------------------------------- Net Increase (Decrease) (17,703,105) $(280,733,944) 4,155,879 $ 115,541,237 ------------------------------------------------------------------------------------- Class A Shares sold 5,825,048 $ 96,435,608 7,258,011 $ 148,273,662 Shares issued on reinvestment 15,797 225,263 2,082,304 45,769,051 Shares reacquired (4,989,579) (79,284,641) (4,210,197) (84,594,882) ------------------------------------------------------------------------------------- Net Increase 851,266 $ 17,376,230 5,130,118 $ 109,447,831 ------------------------------------------------------------------------------------- Class B Shares sold 4,315,346 $ 68,774,689 5,545,675 $ 110,343,097 Shares issued on reinvestment 14,163 194,179 2,208,630 47,286,768 Shares reacquired (5,960,574) (93,075,362) (4,723,313) (91,537,341) ------------------------------------------------------------------------------------- Net Increase (Decrease) (1,631,065) $ (24,106,494) 3,030,992 $ 66,092,524 ------------------------------------------------------------------------------------- Class L Shares sold 144,571 $ 2,452,731 323,820 $ 6,734,430 Shares issued on reinvestment 192 2,731 2,548 55,983 Shares reacquired (115,607) (1,841,389) (26,414) (506,205) ------------------------------------------------------------------------------------- Net Increase 29,156 $ 614,073 299,954 $ 6,284,208 -------------------------------------------------------------------------------------
21 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders FINANCIAL HIGHLIGHTS For a share of each class of beneficial interest outstanding throughout each year ended October 31, unless otherwise noted:
Class 1 Shares 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/ 1998 ----------------------------------------------------------------------------------------- Net Asset Value, Beginning of Year $17.55 $26.52 $24.36 $19.59 $20.94 ----------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income 0.05 0.11 0.07 0.08 0.13 Net realized and unrealized gain (loss) (3.39) (6.70) 3.74 6.62 2.10 ----------------------------------------------------------------------------------------- Total Income (Loss) From Operations (3.34) (6.59) 3.81 6.70 2.23 ----------------------------------------------------------------------------------------- Less Distributions From: Net investment income (0.09) (0.06) (0.07) (0.11) (0.17) Net realized gains (0.01) (2.32) (1.58) (1.82) (3.41) Capital (0.01) -- -- -- -- ----------------------------------------------------------------------------------------- Total Distributions (0.11) (2.38) (1.65) (1.93) (3.58) ----------------------------------------------------------------------------------------- Net Asset Value, End of Year $14.10 $17.55 $26.52 $24.36 $19.59 ----------------------------------------------------------------------------------------- Total Return (19.20)% (26.67)% 16.12% 35.60% 12.54% ----------------------------------------------------------------------------------------- Net Assets, End of Year (millions) $2,303 $3,177 $4,691 $4,475 $3,657 ----------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 0.90% 0.73% 0.70% 0.76% 0.78% Net investment income 0.31 0.55 0.26 0.34 0.63 ----------------------------------------------------------------------------------------- Portfolio Turnover Rate 38% 27% 34% 37% 113% ----------------------------------------------------------------------------------------- Class A Shares 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/ 1998 ----------------------------------------------------------------------------------------- Net Asset Value, Beginning of Year $17.41 $26.41 $24.29 $19.54 $20.89 ----------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income (loss) (0.10) (0.01) (0.02) 0.02 0.05 Net realized and unrealized gain (loss) (3.37) (6.67) 3.73 6.60 2.13 ----------------------------------------------------------------------------------------- Total Income (Loss) From Operations (3.47) (6.68) 3.71 6.62 2.18 ----------------------------------------------------------------------------------------- Less Distributions From: Net investment income -- -- (0.01) (0.05) (0.12) Net realized gains (0.01) (2.32) (1.58) (1.82) (3.41) Capital -- -- -- -- -- ----------------------------------------------------------------------------------------- Total Distributions (0.01) (2.32) (1.59) (1.87) (3.53) ----------------------------------------------------------------------------------------- Net Asset Value, End of Year $13.93 $17.41 $26.41 $24.29 $19.54 ----------------------------------------------------------------------------------------- Total Return (19.94)% (27.12)% 15.69% 35.24% 12.27% ----------------------------------------------------------------------------------------- Net Assets, End of Year (millions) $352 $425 $510 $344 $180 ----------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 1.80% 1.34% 1.04% 1.01% 1.02% Net investment income (loss) (0.59) (0.06) (0.07) 0.09 0.38 ----------------------------------------------------------------------------------------- Portfolio Turnover Rate 38% 27% 34% 37% 113% -----------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares method. 22 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders FINANCIAL HIGHLIGHTS (CONTINUED) For a share of each class of beneficial interest outstanding throughout each year ended October 31, unless otherwise noted:
Class B Shares 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/ 1998 ---------------------------------------------------------------------------------------- Net Asset Value, Beginning of Year $16.86 $25.81 $23.95 $19.37 $20.75 ---------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment loss (0.22) (0.15) (0.23) (0.14) (0.11) Net realized and unrealized gain (loss) (3.25) (6.48) 3.67 6.54 2.14 ---------------------------------------------------------------------------------------- Total Income (Loss) From Operations (3.47) (6.63) 3.44 6.40 2.03 ---------------------------------------------------------------------------------------- Less Distributions From: Net investment income -- -- -- -- -- Net realized gains (0.01) (2.32) (1.58) (1.82) (3.41) Capital -- -- -- -- -- ---------------------------------------------------------------------------------------- Total Distributions (0.01) (2.32) (1.58) (1.82) (3.41) ---------------------------------------------------------------------------------------- Net Asset Value, End of Year $13.38 $16.86 $25.81 $23.95 $19.37 ---------------------------------------------------------------------------------------- Total Return (20.59)% (27.59)% 14.76% 34.31% 11.43% ---------------------------------------------------------------------------------------- Net Assets, End of Year (millions) $290 $393 $524 $357 $182 ---------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 2.59% 2.01% 1.83% 1.76% 1.75% Net investment loss (1.39) (0.73) (0.86) (0.65) (0.35) ---------------------------------------------------------------------------------------- Portfolio Turnover Rate 38% 27% 34% 37% 113% ----------------------------------------------------------------------------------------
(1)Per share amounts have been calculated using the monthly average shares method. 23 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders FINANCIAL HIGHLIGHTS (CONTINUED) For a share of each class of beneficial interest outstanding throughout each year ended October 31, unless otherwise noted:
Class L Shares 2002/(1)/ 2001/(1)/ 2000/(1)(2)/ ------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Year $17.36 $26.41 $27.33 ------------------------------------------------------------------------------------------ Loss From Operations: Net investment loss (0.13) (0.07) (0.01) Net realized and unrealized loss (3.35) (6.66) (0.91) ------------------------------------------------------------------------------------------ Total Loss From Operations (3.48) (6.73) (0.92) ------------------------------------------------------------------------------------------ Less Distributions From: Net investment income -- -- -- Net realized gains (0.01) (2.32) -- Capital -- -- -- ------------------------------------------------------------------------------------------ Total Distributions (0.01) (2.32) -- ------------------------------------------------------------------------------------------ Net Asset Value, End of Year $13.87 $17.36 $26.41 ------------------------------------------------------------------------------------------ Total Return (20.05)% (27.32)% (3.37)%++ ------------------------------------------------------------------------------------------ Net Assets, End of Year (000s) $4,659 $5,326 $180 ------------------------------------------------------------------------------------------ Ratios to Average Net Assets: Expenses 2.00% 1.65% 1.54%+ Net investment loss (0.80) (0.37) (0.46)+ ------------------------------------------------------------------------------------------ Portfolio Turnover Rate 38% 27 % 34% ------------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares method. (2) For the period from September 19, 2000 (inception date) to October 31, 2000. ++ Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. 24 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders INDEPENDENT AUDITORS' REPORT The Board of Trustees and Shareholders of Smith Barney Investment Series We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Smith Barney Large Cap Core Fund of the Smith Barney Investment Series ("Fund") as of October 31, 2002, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the three-year period then ended. 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 audits. The financial highlights for each of the years in the two-year period ended October 31, 1999 were audited by other auditors whose report thereon, dated December 15, 1999, expressed an unqualified opinion on those financial highlights. We conducted our audits 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. As to securities purchased or sold but not received or delivered, we performed other appropriate auditing procedures. 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of October 31, 2002, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and financial highlights for each of the years in the three-year period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP New York, New York December 11, 2002 25 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders ADDITIONAL INFORMATION (UNAUDITED) Information about Trustees and Officers The business and affairs of the Smith Barney Large Cap Core ("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 Portfolios in Fund Position(s) Length Principal Complex Held with of Time Occupation(s) During Overseen by Name, Address and Age Fund Served Past Five Years Trustee ------------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED TRUSTEES: Elliott J. Berv Trustee Since President and Chief Operations Officer, 35 c/o R. Jay Gerken 2001 Landmark City (Real Estate Development) Salomon Smith Barney Inc. ("SSB") (since 2002); Executive Vice President and 399 Park Avenue Chief Operations Officer, DigiGym Systems New York, NY 10022 (On-line Personal Training Systems) (since Age 59 2001); Chief Executive Officer, Rocket City Enterprises (Internet Service Company) (since 2000); President, Catalyst (Consulting) (since 1984) Donald M. Carlton Trustee Since Consultant, URS Corporation 30 c/o R. Jay Gerken 1997 (Engineering) (since 1999); former Chief SSB Executive Officer, Radian International 399 Park Avenue L.L.C. (Engineering) (from 1996 to 1998), New York, NY 10022 Member of Management Committee, Age 65 Signature Science (Research and Development) (since 2000) A. Benton Cocanougher Trustee Since Dean Emeritus and Wiley Professor, Texas 30 c/o R. Jay Gerken 1991 A&M University (since 2001); former Dean SSB and Professor of Marketing, College and 399 Park Avenue Graduate School of Business of Texas New York, NY 10022 A&M University (from 1987 to 2001) Age 64 Mark T. Finn Trustee Since Chairman and Owner, Vantage Consulting 35 c/o R. Jay Gerken 2001 Group, Inc. (Investment Advisory and SSB Consulting Firm) (since 1988); former Vice 399 Park Avenue Chairman and Chief Operating Officer, New York, NY 10022 Lindner Asset Management Company Age 59 (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)
Other Board Memberships Held by Trustees During Name, Address and Age Past Five Years --------------------------------------------------------------------------------------------- NON-INTERESTED TRUSTEES: Elliott J. Berv Board Member, American Identity Corp. c/o R. Jay Gerken (doing business a Morpheus Salomon Smith Barney Inc. ("SSB") Technologies) (biometric information 399 Park Avenue management) (since 2001; Consultant New York, NY 10022 since 1999); Director, Lapoint Industries Age 59 (Industrial Filter Company) (since 2002); Director, Alzheimer's Association (New England Chapter) (since 1998) Donald M. Carlton Director, American Electric Power c/o R. Jay Gerken (Electric Utility) (since 1999); Director, SSB Valero Energy (Petroleum Refining) 399 Park Avenue (since 1999); Director, National New York, NY 10022 Instruments Corp. Technology) (since Age 65 1994) A. Benton Cocanougher Former Director, Randall's Food Markets, c/o R. Jay Gerken Inc. (from 1990 to 1999); former SSB Director, First American Bank and First 399 Park Avenue American Savings Bank (from 1994 to New York, NY 10022 1999) Age 64 Mark T. Finn Former President and Director, Delta c/o R. Jay Gerken Financial, Inc. (Investment Advisory Firm) SSB (from 1983 to 1999) 399 Park Avenue New York, NY 10022 Age 59
26 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of Portfolios in Fund Position(s) Length Principal Complex Held with of Time Occupation(s) During Overseen by Name, Address and Age Fund Served Past Five Years Trustee ------------------------------------------------------------------------------------------------------------------------------ Stephen Randolph Gross Trustee Since Partner, Capital Investment Advisory 30 c/o R. Jay Gerken 1986 Partners (Consulting) (since January SSB 2000); Managing Director, Fountainhead 399 Park Avenue Ventures, LLC (Consulting) (from 1998 to New York, NY 10022 2002); Secretary, Carint of N.A. Age 54 (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) Diana R. Harrington Trustee Since Professor, Babson College 35 c/o R. Jay Gerken 2001 (since 1992) SSB 399 Park Avenue New York, NY 10022 Age 62 Susan B. Kerley Trustee Since Consultant, Strategic 35 c/o R. Jay Gerken 2001 Management Advisors, LLC SSB Global Research Associates, Inc. 399 Park Avenue (Investment Consulting) (since 1990) New York, NY 10022 Age 51 Alan G. Merten Trustee Since President, George Mason 30 c/o R. Jay Gerken 1990 University (since 1996) SSB 399 Park Avenue New York, NY 10022 Age 60 C. Oscar Morong, Jr. Trustee Since Managing Director, Morong 35 c/o R. Jay Gerken 2001 Capital Management SSB (since 1993) 399 Park Avenue New York, NY 10022 Age 67 R. Richardson Pettit Trustee Since Professor of Finance, 30 c/o R. Jay Gerken 1990 University of Houston SSB (since 1977); 399 Park Avenue Independent Consultant New York, NY 10022 (since 1984) Age 60 Walter E. Robb, III Trustee Since President, Benchmark Consulting Group, 35 c/o R. Jay Gerken 1985 Inc. (Service Company) (since 1991); Sole SSB Proprietor, Robb Associates (Consulting) 399 Park Avenue (since 1978); Co-Owner, Kedron Design New York, NY 10022 (Gifts) (since 1978); former President and Age 75 Treasurer, Benchmark Advisors, Inc. (Financial) (from 1989 to 2000)
Other Board Memberships Held by Trustees During Name, Address and Age Past Five Years ---------------------------------------------------------------------------------------------- Stephen Randolph Gross Director, United Telesis, Inc. c/o R. Jay Gerken (Telecommunications) (since 1997); SSB Director, eBank.com, Inc. (since 1997); 399 Park Avenue Director, Andersen Calhoun, Inc. New York, NY 10022 (Assisted Living) (since 1987); former Age 54 Director, Charter Bank, Inc, 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) Diana R. Harrington Former Trustee, The Highland c/o R. Jay Gerken Family of Funds (Investment Company) SSB (from March 1997 to March 1998) 399 Park Avenue New York, NY 10022 Age 62 Susan B. Kerley Director, Eclipse Funds c/o R. Jay Gerken (currently supervises 17 SSB investment companies in 399 Park Avenue fund complex) (since 1990) New York, NY 10022 Age 51 Alan G. Merten Director, Comshare, Inc. c/o R. Jay Gerken (Information Technology) SSB (since 1985); former Director, 399 Park Avenue Indus (Information Technology) New York, NY 10022 (from 1995 to 1999) Age 60 C. Oscar Morong, Jr. Former Director, Indonesia c/o R. Jay Gerken Fund (Closed-End Fund) SSB (from 1990 to 1999); 399 Park Avenue Trustee, Morgan Stanley New York, NY 10022 Institutional Fund Age 67 (currently supervises 75 investment companies) (since 1993) R. Richardson Pettit None c/o R. Jay Gerken SSB 399 Park Avenue New York, NY 10022 Age 60 Walter E. Robb, III Director, John Boyle & Co., Inc. (Textiles) c/o R. Jay Gerken (since 1999); Director, Harbor Sweets, SSB Inc. (Candy) (since 1990); Director, W.A. 399 Park Avenue Wilde Co. (Direct Media) (since 1982); New York, NY 10022 Director, Alpha Grainger Manufacturing Age 75 Inc. (Electronics) (since 1983); former Trustee, MFS Family of Funds (Investment Company) (from 1985 to 2001); Harvard Club of Boston (Audit Committee) (since 2001)
27 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of Portfolios in Fund Position(s) Length Principal Complex Held with of Time Occupation(s) During Overseen by Name, Address and Age Fund Served Past Five Years Trustee ---------------------------------------------------------------------------------------------------------------------------------- INTERESTED TRUSTEE: R. Jay Gerken* Chairman, Since Managing Director of SSB (since 1996); 226 SSB President 2002 Chief Administrative Officer and Treasurer 399 Park Avenue, 4th Floor and of mutual funds affiliated with New York, NY 10022 Chief Citigroup Inc. Age 51 Executive Officer OFFICERS: Lewis E. Daidone SSB Senior Vice Since Managing Director of SSB (since 1990); N/A 125 Broad Street, 11th Floor President 2000 Chief Financial Officer, Smith Barney New York, NY 10004 and Chief Mutual Funds; Director and Senior Vice Age 45 Administrative President, SBFM and Travelers Investment Officer Adviser, Inc. Richard L. Peteka Chief Financial Since Director and Head of Internal Control for N/A SSB Officer and 2002 Citigroup Asset Management U.S. Mutual 125 Broad Street, 11th Floor Treasurer Fund Administration from 1999-2002; New York, NY 10004 Vice President, Head of Mutual Fund Age 41 Administration and Treasurer at Oppenheimer Capital from 1996-1999 Lawrence B. Weissman, CFA Vice President Since Managing Director of SSB N/A SSB and Investment 1999 300 First Stamford Place Officer Stamford, CT 06902 Age 41 Kaprel Ozsolak Controller Since Vice President of SSB N/A SSB 2002 125 Broad Street, 11th Floor New York, NY 10004 Age 37 Robert I. Frenkel Secretary Since Managing Director and N/A SSB 2000 General Counsel of Global 300 First Stamford Place Mutual Funds for Citigroup Stamford, CT 06902 Asset Management (since 1994) Age 48
Other Board Memberships Held by Trustees During Name, Address and Age Past Five Years -------------------------------------------------------------------------- INTERESTED TRUSTEE: R. Jay Gerken* N/A SSB 399 Park Avenue, 4th Floor New York, NY 10022 Age 51 OFFICERS: Lewis E. Daidone SSB N/A 125 Broad Street, 11th Floor New York, NY 10004 Age 45 Richard L. Peteka N/A SSB 125 Broad Street, 11th Floor New York, NY 10004 Age 41 Lawrence B. Weissman, CFA N/A SSB 300 First Stamford Place Stamford, CT 06902 Age 41 Kaprel Ozsolak N/A SSB 125 Broad Street, 11th Floor New York, NY 10004 Age 37 Robert I. Frenkel 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 ("SBFM") and certain of its affiliates. TAX INFORMATION (UNAUDITED) For Federal tax purposes the Fund hereby designated for the fiscal year ended October 31, 2002: . A corporate dividends received deduction of 100.00%. . Total long-term capital gain distributions paid of $1,906,977. A total of 3.73% 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. 28 Smith Barney Large Cap Core Fund | 2002 Annual Report to Shareholders SMITH BARNEY LARGE CAP CORE FUND TRUSTEES INVESTMENT MANAGER Elliot J. Berv Smith Barney Fund Management LLC Donald M. Carlton A. Benton Cocanougher DISTRIBUTORS 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 and 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 OFFICERS New York, New York 10004 R. Jay Gerken President and SUB-TRANSFER AGENTS Chief Executive Officer PFPC Global Fund Services P.O. Box 9699 Lewis E. Daidone Providence, Rhode Island Senior Vice President and 02940-9699 Chief Administrative Officer Primerica Shareholder Services Richard L. Peteka P.O. Box 9662 Chief Financial Officer Providence, Rhode Island and Treasurer 02940-9662 Lawrence B. Weissman, CFA Vice President and Investment Officer Kaprel Ozsolak Controller Robert I. Frenkel Secretary Smith Barney Large Cap Core Fund This report is submitted for the general information of shareholders of the Smith Barney Investment Series -- Smith Barney Large Cap Core 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 LARGE CAP CORE FUND Smith Barney Mutual Funds 3120 Breckinridge Boulevard Duluth, Georgia 30099-0001 For complete information on any Smith Barney Mutual Funds, including management fees and expenses, call or write your financial professional for a free prospec-tus. Read it carefully before you invest or send money. www.smithbarney.com/mutualfunds [LOGO] SalomonSmithBarney A member of citigroup Salomon Smith Barney is a service mark of Salomon Smith Barney Inc. FD02102 12/02 02-4170 -------------------------------------------------------------------------------- SMITH BARNEY GROWTH AND INCOME FUND -------------------------------------------------------------------------------- CLASSIC SERIES | ANNUAL REPORT | OCTOBER 31, 2002 [LOGO] Smith Barney Mutual Funds Your Serious Money. Professionally Managed./SM/ --------------------------------------------------------------- NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE --------------------------------------------------------------- [PHOTO] MICHAEL KAGAN PORTFOLIO MANAGER [LOGO] Classic Series Annual Report . October 31, 2002 SMITH BARNEY GROWTH AND INCOME FUND MICHAEL KAGAN Michael Kagan has more than 17 years of securities business experience and has been managing the Fund since August 14, 2000. Education: BA in Economics, Harvard University. Attended the Massachusetts Institute of Technology's Sloan School of Management. FUND OBJECTIVE The Fund seeks reasonable growth and income. It invests in a portfolio consisting principally of equity securities, including convertible securities, that provide dividend or interest income. FUND FACTS FUND INCEPTION ----------------- April 14, 1987 MANAGER'S INVESTMENT INDUSTRY EXPERIENCE ----------------- 17 Years INCEPTION NASDAQ ------------------------------------- Class 1 4/14/87 CGINX ------------------------------------- Class A 8/18/96 GRIAX ------------------------------------- Class B 8/18/96 GRIBX ------------------------------------- Class L 10/9/00 SGAIX ------------------------------------- Class O 12/8/00 SPGOX ------------------------------------- Class P 12/8/00 SBOPX ------------------------------------- Average Annual Total Returns as of October 31, 2002*
Without Sales Charges/(1)/ Class 1 Class A Class B Class L Class O Class P -------------------------------------------------------------------------- One-Year (15.13)% (15.29)% (16.26)% (15.85)% (15.87)% (15.64)% -------------------------------------------------------------------------- Five-Year (2.25) (2.52) (3.33) N/A N/A N/A -------------------------------------------------------------------------- Ten-Year 6.77 N/A N/A N/A N/A N/A -------------------------------------------------------------------------- Since Inception+ 7.44 3.13 2.28 (19.33) (19.50) (19.38) -------------------------------------------------------------------------- With Sales Charges/(2)/ Class 1 Class A Class B Class L Class O Class P -------------------------------------------------------------------------- One-Year (22.37)% (19.54)% (20.45)% (17.51)% (16.72)% (19.86)% -------------------------------------------------------------------------- Five-Year (3.97) (3.51) (3.45) N/A N/A N/A -------------------------------------------------------------------------- Ten-Year 5.83 N/A N/A N/A N/A N/A -------------------------------------------------------------------------- Since Inception+ 6.83 2.28 2.28 (19.72) (19.50) (21.10) --------------------------------------------------------------------------
/(1)/ Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value and does not reflect the deduction of the applicable sales charges with respect to Class 1, A, L and O shares or the applicable contingent deferred sales charges ("CDSC") with respect to Class B, L, O and P shares. /(2)/ Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value. In addition, Class 1, A, L and O shares reflect the deduction of the maximum initial sales charges of 8.50%, 5.00%, 1.00% and 1.00%, respectively; Class B and P 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 a 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. The performance data represents past performance, including the investment return and principal value of an investment, which will fluctuate so that 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. + Inception date for Class 1 shares is April 14, 1987. Inception date for Class A and B shares is August 18, 1996, and for Class L shares is October 9, 2000. Inception date for Class O and P shares is December 8, 2000. What's Inside Your Investment in the Smith Barney Growth and Income Fund..1 Letter to Our Shareholders..................................2 Fund at a Glance............................................5 Historical Performance......................................6 Value of $10,000............................................9 Schedule of Investments....................................10 Statement of Assets and Liabilities........................15 Statement of Operations....................................16 Statements of Changes in Net Assets........................17 Notes to Financial Statements..............................18 Financial Highlights.......................................25 Independent Auditor's Report...............................29 Additional Information.................................... 30 Tax Information........................................... 32 [LOGO] Smith Barney Mutual Funds Your Serious Money. Professionally Managed/SM/ Investment Products: Not FDIC Insured . Not Bank Guaranteed . May Lose Value YOUR INVESTMENT IN THE SMITH BARNEY GROWTH AND INCOME FUND Seasoned portfolio manager Michael Kagan and his investment team use a bottom-up/1/ selection process to identify stocks they believe have strong growth potential and are undervalued. Their goal: To create a portfolio that offers investors "growth at a reasonable price." [LOGO] A Stock Selection Focus/2/ Michael and his team use quantitative analysis to identify stocks with promising growth potential, and to determine whether stocks are undervalued or overvalued relative to the overall market. Through this analysis, they are able to uncover companies that they believe have competitive positions within their respective industries, have well-established management teams, and that may stand to benefit from positive changes to their corporate strategy. [LOGO] An Exhaustive Security Selection Process Michael relies on a team of 12 experienced analysts to help him identify companies that may represent some of the most attractive opportunities in the market. All members of the research team are specialists within their given industries. Michael uses their recommendations as a foundation for building the Fund's portfolio. [LOGO] Portfolio Manager-Driven Funds -- The Classic Series The Classic Series is a selection of Smith Barney Mutual Funds that invest across asset classes and sectors, utilizing a range of strategies in order to achieve their objectives. This series of funds lets investors participate in mutual funds whose investment decisions are determined by portfolio managers, based on each fund's investment objectives and guidelines.
-------- 1 Bottom-up investing is a search for outstanding performance of individual stocks before considering the impact of economic trends. 2 Please note that these quantitative and qualitative factors, as well as expected dividends and income, influence the Fund's purchases and sales of securities. 1 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders Dear Shareholder, Enclosed herein is the annual report for the Smith Barney Growth and Income 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. Special Notice to Shareholders We are pleased to report that in 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. Performance Review For the year ended October 31, 2002, the Fund's Class A shares, without sales charges, returned negative 15.29%. In comparison, the S&P 500 Index/1/ returned negative 15.10% for the same period. Portfolio Manager Market Overview The stock market was terrible during the past year. Returns for the third calendar quarter of 2002 were the worst since 1987, and the fall from the peak in March 2000 to the trough in October 2002 was the worst decline since the Great Depression. Historically, dramatic moves in the market have reflected inflection points in major economic variables. What do the negative returns of the past three years tell us? We do not believe that they forecast dire economic conditions. We feel that the early, aggressive response by the U.S. Federal Reserve Board ("Fed") and the resilience of the American consumer led the U.S. economy out of recession in the first calendar quarter of 2002 and has kept it growing since. Unemployment, which we believe is the single best indicator of the economy's health, peaked in the spring of 2002 and has since declined slowly. Instead, we believe that the market is indicating that several favorable trends that powered the great bull market of 1982-2000 have come to an end, and that economic growth will be slower during the coming decade than it was during the 1990s. We believe that the 1990s economic boom was boosted by successive waves of mortgage refinancing, which consumers used to fuel their consumption. We feel that the next decade will have no such aid. Generally, we believe that the consumer's balance sheet is stretched and needs to be rebuilt. These factors do not make our outlook for the economy negative, but they do temper our view on how robust any future recovery will be. Another significant change is the emergence of China as a world economic power. China is now the U.S.'s largest economic partner, having eclipsed Mexico earlier this year. The growth in Chinese manufacturing capacity and the expansion in Chinese exports has pressured pricing. In industries that the U.S. has long dominated, such as chemicals, U.S. manufacturers are losing market share to the Chinese. We believe that other industries may also benefit from growth of the Chinese manufacturing industry. China lacks an indigenous source of copper, and its alumina (aluminum oxide, the key raw material for aluminum) reserves are inferior. We are positioning the Fund to reflect what we view as the risks and opportunities that China's continued economic growth may provide. -------- 1The 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. 2 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders Portfolio Manager Fund Overview The Fund continues to be highly diversified, with holdings in many major sectors of the market. The market leaders during the past year were many consumer stocks. Despite a strong performance in the fourth calendar quarter of 2001, technology stocks performed poorly for the whole of the last year. Telecommunications stocks were the worst performing group in the market. The Fund's performance was helped by positions in Teva Pharmaceutical Industries Ltd. ADR and Canadian National Railway Co. Positions in Federated Department Stores, Inc., AT&T Wireless Services Inc., Sun Microsystems, Inc. and OM Group, Inc. hurt the portfolio's performance. Portfolio Manager Market and Fund Outlook Despite recent economic data, we believe that the U.S. economy will slowly recover in 2002 and 2003. We are attempting to "barbell" the Fund's holdings, overweighting versus the S&P 500 Index defensive stocks such as regulated utilities, healthcare companies, basic materials and technology stocks. We believe that dividend yields will constitute a greater portion of stock returns over the next decade. It also looks likely to us that the Federal government will reduce or eliminate the double taxation of dividends in 2003. In keeping with the Fund's growth and income objectives, we favorably view those companies with above-average dividend yields. The Fund generally has maintained a defensive posture towards technology stocks during the past two years. The Fund was, in general, underweight in the sector versus the S&P 500 Index, favoring stocks we deemed less volatile in other industries. However, because of the enormous decline in valuations in the sector over the past two years, and because sentiment about the sector was so poor, we initiated many positions in the technology sector during the third quarter of 2002. We saw opportunities in companies that were trading at low multiples of cash, or in the case of Comverse Technology, Inc., below net cash. These stocks have experienced significant price appreciation since early October 2002, so we are paring back a bit. Because we feel that the fundamentals for the sector seem to be bottoming, we may hold a more aggressive position in technology stocks going forward than we did over the past two years. Basic materials stocks have historically been strong performers coming out of recessions. The Fund is overweight aluminum companies and we are avoiding the large commodity chemicals companies. Agricultural equipment and heavy trucks are two areas in the capital goods sector that we feel may offer unusually good investment opportunities. We like the valuations and high dividend yields of the international oil companies. We feel these stocks are reflecting oil prices of only $18-20 per barrel, compared to oil prices of about $26 per barrel as of the date of this letter. By contrast, we believe the supply-demand fundamentals are poor for the natural gas market, where inventories are at historical highs. The Fund is overweight in the international oil sector, but it has no exploration and production (natural gas) sector exposure at the end of the reporting period. We feel regulated utility companies such as Consolidated Edison, Inc. and The Southern Co. should offer dividends of over 5% and modest growth, of 2-3% even in a recession. We continue to avoid investments in utilities with large unregulated businesses because we are concerned about the prospects for returns in those businesses. The Fund is overweight stocks of utility sector issuers versus the S&P 500 Index. We believe rising healthcare costs make HMO's and ethical pharmaceutical companies unattractive investments. We cut in half the Fund's position in HCA Inc., as we feel the hospital cycle is aging and its valuation is no longer compelling. The Fund is significantly underweight in ethical drug companies, but it owns a large position in Teva Pharmaceutical Industries Ltd. ADR, the largest and, in our opinion, highest quality generic drug company. We believe that pricing in the ethical drug industry will be pressured by recently enacted state laws reducing Medicaid reimbursement. There is also patent litigation about to go before the U.S. Supreme Court that could damage the business models of the ethical pharmaceutical companies. 3 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders Thank you for your investment in the Smith Barney Growth and Income Fund. We look forward to continuing to help you meet your investment objectives. Sincerely, /s/ R Jay Gerken /s/ Michael Kagan R. Jay Gerken Michael Kagan Chairman Vice President and Investment Officer December 2, 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 10 through 14 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. 4 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders SMITH BARNEY GROWTH AND INCOME FUND at a Glance (unaudited) TOP TEN HOLDINGS*+ 1. Microsoft Corp.......................................... 4.1% 2. American International Group, Inc....................... 3.8 3. Exxon Mobil Corp........................................ 3.2 4. Teva Pharmaceutical Industries Ltd. ADR................. 2.9 5. Verizon Communications Inc.............................. 2.8 6. Pfizer Inc.............................................. 2.8 7. Costco Wholesale Corp................................... 2.7 8. The News Corp. Ltd. ADR................................. 2.5 9. PepsiCo, Inc............................................ 2.2 10. Wells Fargo & Co........................................ 2.2 INDUSTRY DIVERSIFICATION*+ [CHART] Banks 9.2% Communications Equipment 4.0% Diversified Telecommunications 3.7% Electric Utilities 4.8% Insurance 5.9% Media 3.8% Multi-Line Retail 4.5% Oil and Gas 5.4% Pharmaceuticals 11.6% Software 6.7% Other 40.4% INVESTMENT ALLOCATIONS*++ [CHART] Common Stock 98.1% Convertible Corporate Bonds 1.6% Repurchase Agreement 0.3% * All information is as of October 31, 2002. Please note that Fund holdings are subject to change. + As a percentage of total common stock. ++As a percentage of total investments. 5 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders HISTORICAL PERFORMANCE -- CLASS 1 SHARES
Net Asset Value ----------------- ------------- Beginning End Income Capital Gain Return Total Year Ended of Year of Year Dividends Distributions of Capital Returns/(1)+/ ---------------------------------------------------------------------------------------- 10/31/02 $13.08 $11.05 $0.05 $ 0.00 $0.01 (15.13)% ---------------------------------------------------------------------------------------- 10/31/01 19.03 13.08 0.06 1.37 0.00 (25.18) ---------------------------------------------------------------------------------------- 10/31/00 21.36 19.03 0.07 3.45 0.00 5.39 ---------------------------------------------------------------------------------------- 10/31/99 18.53 21.36 0.08 0.78 0.00 20.27 ---------------------------------------------------------------------------------------- 10/31/98 20.10 18.53 0.20 3.25 0.00 10.90 ---------------------------------------------------------------------------------------- 10/31/97 18.11 20.10 0.30 2.18 0.00 27.35 ---------------------------------------------------------------------------------------- 10/31/96 16.95 18.11 0.34 1.75 0.00 20.58 ---------------------------------------------------------------------------------------- 10/31/95 15.77 16.95 0.30 1.60 0.00 22.45 ---------------------------------------------------------------------------------------- 10/31/94 17.13 15.77 0.28 1.16 0.00 0.51 ---------------------------------------------------------------------------------------- 10/31/93 15.54 17.13 0.28 0.30 0.00 14.13 ---------------------------------------------------------------------------------------- Total $1.96 $15.84 $0.01 ----------------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS A SHARES
Net Asset Value ----------------- Beginning End Income Capital Gain Return Total Year Ended of Year of Year Dividends Distributions of Capital Returns/(1)+/ ------------------------------------------------------------------------------------------ 10/31/02 $13.07 $11.06 $0.00 $ 0.00 $0.01 (15.29)% ------------------------------------------------------------------------------------------ 10/31/01 19.03 13.07 0.01 1.37 0.00 (25.51) ------------------------------------------------------------------------------------------ 10/31/00 21.35 19.03 0.02 3.45 0.00 5.14 ------------------------------------------------------------------------------------------ 10/31/99 18.53 21.35 0.03 0.78 0.00 19.93 ------------------------------------------------------------------------------------------ 10/31/98 20.10 18.53 0.15 3.25 0.00 10.63 ------------------------------------------------------------------------------------------ 10/31/97 18.11 20.10 0.25 2.18 0.00 27.04 ------------------------------------------------------------------------------------------ Inception* -- 10/31/96 17.19 18.11 0.06 0.00 0.00 5.72++ ------------------------------------------------------------------------------------------ Total $0.52 $11.03 $0.01 ------------------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS B SHARES
Net Asset Value ----------------- Beginning End Income Capital Gain Return Total Year Ended of Year of Year Dividends Distributions of Capital Returns/(1)+/ ------------------------------------------------------------------------------------------ 10/31/02 $12.73 $10.66 $0.00 $ 0.00 $0.00 (16.26)% ------------------------------------------------------------------------------------------ 10/31/01 18.70 12.73 0.00 1.37 0.00 (26.10) ------------------------------------------------------------------------------------------ 10/31/00 21.16 18.70 0.00 3.45 0.00 4.36 ------------------------------------------------------------------------------------------ 10/31/99 18.48 21.16 0.00 0.78 0.00 19.03 ------------------------------------------------------------------------------------------ 10/31/98 20.07 18.48 0.04 3.25 0.00 9.85 ------------------------------------------------------------------------------------------ 10/31/97 18.09 20.07 0.12 2.18 0.00 26.08 ------------------------------------------------------------------------------------------ Inception* -- 10/31/96 17.19 18.09 0.04 0.00 0.00 5.49++ ------------------------------------------------------------------------------------------ Total $0.20 $11.03 $0.00 ------------------------------------------------------------------------------------------
6 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders HISTORICAL PERFORMANCE -- CLASS L SHARES
Net Asset Value ----------------- Beginning End Income Capital Gain Return Total Year Ended of Year of Year Dividends Distributions of Capital Returns/(1)+/ ------------------------------------------------------------------------------------------ 10/31/02 $13.00 $10.94 $0.00 $0.00 $0.00 (15.85)% ------------------------------------------------------------------------------------------ 10/31/01 19.04 13.00 0.00 1.37 0.00 (25.99) ------------------------------------------------------------------------------------------ Inception* -- 10/31/00 18.49 19.04 0.00 0.00 0.00 2.97++ ------------------------------------------------------------------------------------------ Total $0.00 $1.37 $0.00 ------------------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS O SHARES
Net Asset Value ----------------- Beginning End Income Capital Gain Return Total Year Ended of Year of Year Dividends Distributions of Capital Returns/(1)+/ ------------------------------------------ - - 10/31/02 $13.04 $10.97 $0.00 $0.00 $0.00 (15.87)% ------------------------------------------------------------------------------------------ Inception* -- 10/31/01 16.55 13.04 0.00 0.00 0.00 (21.21)++ ------------------------------------------------------------------------------------------ Total $0.00 $0.00 $0.00 ------------------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS P SHARES
Net Asset Value ----------------- Beginning End Income Capital Gain Return Total Year Ended of Year of Year Dividends Distributions of Capital Returns/(1)+/ ------------------------------------------ - - 10/31/02 $13.04 $11.00 $0.00 $0.00 $0.00 (15.64)% ------------------------------------------------------------------------------------------ Inception* -- 10/31/01 16.55 13.04 0.00 0.00 0.00 (21.21)++ ------------------------------------------------------------------------------------------ Total $0.00 $0.00 $0.00 ------------------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS Y SHARES
Net Asset Value ----------------- Beginning End Income Capital Gain Return Total Year Ended of Year of Year Dividends Distributions of Capital Returns/(1)+/ ------------------------------------------ - - 10/31/02 $13.08 $11.08 $0.07 $0.00 $0.01 (14.77)% ------------------------------------------------------------------------------------------ Inception* -- 10/31/01 16.55 13.08 0.06 0.00 0.00 (20.65)++ ------------------------------------------------------------------------------------------ Total $0.13 $0.00 $0.01 ------------------------------------------------------------------------------------------
It is the Fund's policy to distribute dividends quarterly and capital gains, if any, annually. 7 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders AVERAGE ANNUAL TOTAL RETURNS+
Without Sales Charges/(1)/ ------------------------------------------------------------ Class 1 Class A Class B Class L Class O Class P Class Y ------------------------------------------------------------------------------------------ Year Ended 10/31/02 (15.13)% (15.29)% (16.26)% (15.85)% (15.87%) (15.64)% (14.77)% ------------------------------------------------------------------------------------------ Five Years Ended 10/31/02 (2.25) (2.52) (3.33) N/A N/A N/A N/A ------------------------------------------------------------------------------------------ Ten Years Ended 10/31/02 6.77 N/A N/A N/A N/A N/A N/A ------------------------------------------------------------------------------------------ Inception* through 10/31/02 7.44 3.13 2.28 (19.33) (19.50) (19.38) (18.64) ------------------------------------------------------------------------------------------ With Sales Charges/(2)/ ------------------------------------------------------------ Class 1 Class A Class B Class L Class O Class P Class Y ------------------------------------------------------------------------------------------ Year Ended 10/31/02 (22.37)% (19.54)% (20.45)% (17.51)% (16.72)% (19.86)% (14.77)% ------------------------------------------------------------------------------------------ Five Years Ended 10/31/02 (3.97) (3.51) (3.45) N/A N/A N/A N/A ------------------------------------------------------------------------------------------ Ten Years Ended 10/31/02 5.83 N/A N/A N/A N/A N/A N/A ------------------------------------------------------------------------------------------ Inception* through 10/31/02 6.83 2.28 2.28 (19.72) (19.50) (21.10) (18.64) ------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS+
Without Sales Charges/(1)/ ---------------------------------------------------------------------------- Class 1 (10/31/92 through 10/31/02) 92.51% ---------------------------------------------------------------------------- Class A (Inception* through 10/31/02) 21.06 ---------------------------------------------------------------------------- Class B (Inception* through 10/31/02) 15.02 ---------------------------------------------------------------------------- Class L (Inception* through 10/31/02) (35.87) ---------------------------------------------------------------------------- Class O (Inception* through 10/31/02) (33.72) ---------------------------------------------------------------------------- Class P (Inception* through 10/31/02) (33.53) ---------------------------------------------------------------------------- Class Y (Inception* through 10/31/02) (32.37) ----------------------------------------------------------------------------
(1) Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value and does not reflect deduction of the applicable sales charges with respect to Class 1, A and L shares or the applicable contingent deferred sales charges ("CDSC") with respect to Class B, L, O and P shares. (2) Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value. In addition, Class 1, A, L and O shares reflect the deduction of the maximum initial sales charges of 8.50%, 5.00%, 1.00% and 1.00%, respectively; Class B and P shares reflect the deduction of a 5.00% CDSC, which applies if shares are redeemed within one year from initial purchase. This CDSC declines by 1.00% per year until no CDSC is incurred. Class L and O shares also reflect the deduction of a 1.00% CDSC, which applies if shares are redeemed within one year of purchase. * Inception date for Class 1 shares is April 14, 1987. Inception date for Class A and B shares is August 18, 1996. Inception date for Class L shares is October 9, 2000. Inception date for Class O, P and Y shares is December 8, 2000. + 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 return is not annualized, as it may not be representative of the total return for the year. 8 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders HISTORICAL PERFORMANCE (UNAUDITED) Value of $10,000 Invested in Class 1 Shares of the Smith Barney Growth and Income Fund vs. S&P 500 Index+ -------------------------------------------------------------------------------- October 1992 -- October 2002 [CHART] Smith Barney Growth and Income Fund -- S&P Class 1 Shares 500 Index -------------------------- ----------------- 10/92 9,152 10,000 10/93 10,446 11,490 10/94 10,499 11,934 10/95 12,856 15,086 10/96 15,502 18,721 10/97 19,741 24,730 10/98 21,893 30,173 10/99 26,330 37,916 10/00 27,749 40,219 10/01 20,760 30,209 10/02 17,619 25,649 +Hypothetical illustration of $10,000 invested in Class 1 shares on October 31, 1992, assuming deduction of the 8.50% maximum initial sales charge at the time of investment and the reinvestment of dividends and capital gains, if any, at net asset value through October 31, 2002. The S&P 500 Index is an index of widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and over-the-counter markets. Figures for the Index include reinvestment of dividends. The Index is unmanaged and is not subject to the same management and trading expenses of a mutual fund. Please note that an investor cannot invest directly in an index. The performance of the Fund's other classes may be greater or less than the performance of Class 1 shares' performance indicated on this chart, depending on whether greater or lesser sales charges and fees were incurred by shareholder investing in other classes. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. All figures represent past performance and are not a guarantee of future results. The performance data represents past performance, including the investment return and principal value of an investment, which will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. 9 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders SCHEDULE OF INVESTMENTS OCTOBER 31, 2002
SHARES SECURITY VALUE --------------------------------------------------------- COMMON STOCK -- 98.1% Aerospace and Defense -- 1.1% 74,200 The Boeing Co. $ 2,207,450 28,600 General Dynamics Corp. 2,263,118 109,800 United Technologies Corp. 6,771,366 --------------------------------------------------------- 11,241,934 --------------------------------------------------------- Automobiles -- 0.2% 93,400 Navistar International Corp.* 2,094,028 --------------------------------------------------------- Banks -- 9.0% 253,100 Bank of America Corp. 17,666,380 691,000 The Bank of New York Co., Inc. 17,966,000 309,900 Bank One Corp. 11,952,843 59,900 Comerica Inc. 2,615,234 329,390 FleetBoston Financial Corp. 7,704,432 89,300 J.P. Morgan Chase & Co. 1,852,975 209,500 Wachovia Corp. 7,288,505 51,950 Washington Mutual, Inc. 1,857,732 421,400 Wells Fargo & Co. 21,268,058 --------------------------------------------------------- 90,172,159 --------------------------------------------------------- Beverages -- 2.2% 496,200 PepsiCo, Inc. 21,882,420 --------------------------------------------------------- Biotechnology -- 1.3% 278,704 Amgen Inc.* 12,976,458 --------------------------------------------------------- Brokers and Investment Management -- 2.9% 150,100 The Goldman Sachs Group, Inc. 10,747,160 289,400 Merrill Lynch & Co., Inc. 10,982,730 181,200 Morgan Stanley 7,052,304 --------------------------------------------------------- 28,782,194 --------------------------------------------------------- Chemicals -- 0.5% 72,600 OM Group, Inc.+ 471,174 505,000 PolyOne Corp. 4,040,000 --------------------------------------------------------- 4,511,174 --------------------------------------------------------- Commercial Services -- 2.3% 191,000 Ecolab Inc.+ 9,215,750 60,400 First Data Corp. 2,110,376 395,200 Paychex, Inc. 11,389,664 --------------------------------------------------------- 22,715,790 --------------------------------------------------------- Communications Equipment -- 3.9% 1,524,200 ADC Telecommunications, Inc.* 2,408,236 537,400 CIENA Corp.* 1,977,632 906,900 Cisco Systems, Inc.* 10,139,142 773,900 Comverse Technology, Inc.* 5,641,731 1,137,600 Nokia Oyj ADR 18,906,912 --------------------------------------------------------- 39,073,653 ---------------------------------------------------------
See Notes to Financial Statements. 10 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
SHARES SECURITY VALUE ---------------------------------------------------------------------------------- Computers and Peripherals -- 2.7% 147,300 Brocade Communications Systems, Inc.* $ 1,011,951 614,700 Dell Computer Corp.* 17,586,567 2,758,200 Sun Microsystems, Inc.* 8,167,030 --------------------------------------------------------------------------------- 26,765,548 --------------------------------------------------------------------------------- Diversified Financials -- 0.3% 89,100 American Express Co. 3,240,567 --------------------------------------------------------------------------------- Diversified Manufacturing -- 0.7% 517,300 Tyco International Ltd. 7,480,158 --------------------------------------------------------------------------------- Diversified Telecommunications -- 3.6% 607,800 AT&T Corp. 7,925,712 300,600 UnitedGlobalCom, Inc., Class A Shares*+ 568,134 736,200 Verizon Communications Inc. 27,798,912 --------------------------------------------------------------------------------- 36,292,758 --------------------------------------------------------------------------------- Electric Utilities -- 4.8% 505,700 American Electric Power Co., Inc.+ 12,966,148 186,200 Consolidated Edison, Inc.+ 7,926,534 133,600 Duke Energy Corp. 2,737,464 160,800 Exelon Corp. 8,104,320 536,800 The Southern Co.+ 15,942,960 --------------------------------------------------------------------------------- 47,677,426 --------------------------------------------------------------------------------- Electronic Equipment -- 0.3% 236,100 Celestica Inc.* 3,258,180 --------------------------------------------------------------------------------- Food and Drug Retailing -- 1.8% 124,900 The Kroger Co. 1,853,516 720,200 Safeway Inc.* 16,636,620 --------------------------------------------------------------------------------- 18,490,136 --------------------------------------------------------------------------------- Food Products -- 1.8% 195,900 General Mills, Inc. 8,094,588 72,100 Kraft Foods Inc., Class A Shares 2,847,950 117,900 Unilever NV 7,546,779 --------------------------------------------------------------------------------- 18,489,317 --------------------------------------------------------------------------------- Government Sponsored Enterprises -- 1.4% 235,100 Freddie Mac 14,477,458 --------------------------------------------------------------------------------- Healthcare Equipment -- 1.0% 297,100 Applera Corp. -- Applied Biosystems Group 6,010,333 122,400 St. Jude Medical, Inc.* 4,358,664 --------------------------------------------------------------------------------- 10,368,997 --------------------------------------------------------------------------------- Healthcare Providers -- 1.2% 272,700 HCA Inc. 11,859,723 --------------------------------------------------------------------------------- Hotels and Restaurants -- 1.3% 419,000 MGM MIRAGE*+ 13,030,900 --------------------------------------------------------------------------------- Household Products -- 1.4% 266,900 Kimberly-Clark Corp. 13,745,350 ---------------------------------------------------------------------------------
See Notes to Financial Statements. 11 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
SHARES SECURITY VALUE ---------------------------------------------------------------------- Industrial Conglomerates -- 2.5% 661,200 General Electric Co. $ 16,695,300 205,000 SPX Corp. 8,612,050 ---------------------------------------------------------------------- 25,307,350 ---------------------------------------------------------------------- Insurance -- 5.7% 603,461 American International Group, Inc. 37,746,486 47 Berkshire Hathaway Inc., Class A Shares* 3,486,930 165,700 The Hartford Financial Services Group, Inc. 6,545,150 133,300 Marsh & McLennan Cos., Inc. 6,226,443 47,900 XL Capital Ltd., Class A Shares 3,647,585 ---------------------------------------------------------------------- 57,652,594 ---------------------------------------------------------------------- Machinery -- 2.4% 106,200 Cummins Inc.+ 2,544,552 79,600 Danaher Corp. 4,604,860 242,200 Deere & Co. 11,235,658 133,000 PACCAR Inc.+ 5,867,960 ---------------------------------------------------------------------- 24,253,030 ---------------------------------------------------------------------- Media -- 3.7% 209,400 Comcast Corp., Class A Shares* 4,818,294 911,800 Liberty Media Corp., Class A Shares* 7,540,586 1,243,200 The News Corp. Ltd. ADR 24,578,064 ---------------------------------------------------------------------- 36,936,944 ---------------------------------------------------------------------- Metals and Mining -- 2.0% 177,200 Alcan Inc. 4,988,180 564,900 Alcoa Inc. 12,461,694 148,600 Barrick Gold Corp.+ 2,239,402 ---------------------------------------------------------------------- 19,689,276 ---------------------------------------------------------------------- Multi-Line Retail -- 4.4% 793,400 Costco Wholesale Corp.* 26,920,062 573,000 Federated Department Stores, Inc.* 17,591,100 ---------------------------------------------------------------------- 44,511,162 ---------------------------------------------------------------------- Oil and Gas -- 5.3% 61,200 El Paso Corp. 474,300 931,100 Exxon Mobil Corp. 31,340,826 42,600 Royal Dutch Petroleum Co. ADR 1,822,428 226,400 TotalFinaElf S.A. ADR 15,399,728 206,200 Transocean Inc. 4,532,276 ---------------------------------------------------------------------- 53,569,558 ---------------------------------------------------------------------- Paper and Forest Products -- 0.6% 222,900 Smurfit-Stone Container Corp.*+ 2,899,929 82,700 UPM-Kymmene Oyj ADR 2,703,463 ---------------------------------------------------------------------- 5,603,392 ---------------------------------------------------------------------- Personal Products -- 1.0% 49,300 Avon Products, Inc. 2,390,557 264,900 The Estee Lauder Cos. Inc., Class A Shares 7,713,888 ---------------------------------------------------------------------- 10,104,445 ----------------------------------------------------------------------
See Notes to Financial Statements. 12 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
SHARES SECURITY VALUE ------------------------------------------------------------------- Pharmaceuticals -- 11.4% 173,200 Cephalon, Inc.*+ $ 8,706,764 198,600 Eli Lilly & Co. 11,022,300 128,000 Johnson & Johnson 7,520,000 160,600 Novartis AG ADR 6,093,164 856,100 Pfizer Inc. 27,198,297 313,200 Pharmacia Corp. 13,467,600 451,500 Schering-Plough Corp. 9,639,525 374,300 Teva Pharmaceutical Industries Ltd. ADR+ 28,982,049 56,600 Wyeth 1,896,100 ------------------------------------------------------------------- 114,525,799 ------------------------------------------------------------------- Railroads -- 0.8% 176,500 Canadian National Railway Co. 7,531,255 ------------------------------------------------------------------- Real Estate Investment Trust -- 0.5% 211,600 CarrAmerica Realty Corp. 5,023,384 ------------------------------------------------------------------- Semiconductors and Equipment -- 2.2% 146,500 Applied Materials, Inc.* 2,201,895 407,900 Intel Corp. 7,056,670 95,600 Linear Technology Corp. 2,642,384 220,500 Micron Technology, Inc.* 3,528,000 173,500 STMicroelectronics N.V.+ 3,412,745 162,100 Teradyne, Inc.* 1,963,031 53,100 Texas Instruments Inc. 842,166 ------------------------------------------------------------------- 21,646,891 ------------------------------------------------------------------- Software -- 6.5% 447,600 BEA Systems, Inc.* 3,620,636 854,500 BMC Software, Inc.* 13,620,730 416,000 EMC Corp. 2,125,760 753,800 Microsoft Corp.* 40,305,686 460,800 Oracle Corp.* 4,695,552 81,075 VERITAS Software Corp.* 1,236,394 ------------------------------------------------------------------- 65,604,758 ------------------------------------------------------------------- Specialty Retail -- 1.9% 567,800 The Home Depot, Inc. 16,398,064 170,000 Staples, Inc.* 2,621,400 ------------------------------------------------------------------- 19,019,464 ------------------------------------------------------------------- Wireless Telecommunications -- 1.5% 2,131,196 AT&T Wireless Services Inc.* 14,641,317 ------------------------------------------------------------------- TOTAL COMMON STOCK (Cost -- $1,155,781,124) 984,246,947 -------------------------------------------------------------------
See Notes to Financial Statements. 13 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
FACE AMOUNT SECURITY VALUE ------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE CORPORATE BONDS -- 1.6% Diversified Telecommunications -- 1.1% $9,682,000 Bell Atlantic Financial Services, Inc., Sr. Notes, 5.750% due 4/1/03 $ 9,778,820 7,225,000 NTL (Delaware) Inc., Sub. Notes, 5.750% due 12/15/09++ 794,750 3,690,000 NTL Communications Corp., Sr. Notes, 6.750% due 5/15/08++ 442,800 ------------------------------------------------------------------------------------------------------------------------- 11,016,370 ------------------------------------------------------------------------------------------------------------------------- Semiconductors and Equipment -- 0.5% 5,734,000 Teradyne, Inc., Sr. Notes, 3.750% due 10/15/06@ 4,945,575 ------------------------------------------------------------------------------------------------------------------------- TOTAL CONVERTIBLE CORPORATE BONDS (Cost -- $22,215,871) 15,961,945 ------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 0.3% 3,041,000 State Street Bank and Trust Co., 1.800% due 11/1/02; Proceeds at maturity -- $3,041,152; (Fully collateralized by U.S. Treasury Notes, 3.250% due 5/31/04; Market value -- $3,105,474) (Cost -- $3,041,000) 3,041,000 ------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100% (Cost -- $1,181,037,995**) $1,003,249,892 -------------------------------------------------------------------------------------------------------------------------
* Non-income producing security. + All or a portion of this security is on loan (See Note 10). ++Security is in default. @ Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration normally to qualified institutional buyers. **Aggregate cost for Federal income tax purposes is substantially the same. See Notes to Financial Statements. 14 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2002 ASSETS: Investments, at value (Cost -- $1,181,037,995) $1,003,249,892 Cash 279 Collateral for securities on loan (Note 9) 69,666,151 Receivable for securities sold 7,014,816 Dividends and interest receivable 1,044,078 Receivable for Fund shares sold ` 232,274 --------------------------------------------------------------------------- Total Assets 1,081,207,490 --------------------------------------------------------------------------- LIABILITIES: Payable for securities on loan (Note 9) 69,666,151 Payable for securities purchased 1,951,504 Payable for Fund shares purchased 1,118,466 Management fee payable 549,790 Trustees' retirement plan 312,554 Service plan fees payable 283,761 Accrued expenses 721,650 --------------------------------------------------------------------------- Total Liabilities 74,603,876 --------------------------------------------------------------------------- Total Net Assets $1,006,603,614 --------------------------------------------------------------------------- NET ASSETS: Par value of shares of beneficial interest $ 914 Capital paid in excess of par value 1,304,453,790 Overdistributed net investment income (58,299) Accumulated net realized loss from security transactions and foreign currencies (120,004,688) Net unrealized depreciation on investments (177,788,103) --------------------------------------------------------------------------- Total Net Assets $1,006,603,614 --------------------------------------------------------------------------- Shares Outstanding: Class 1 44,716,481 -------------------------------------------------------- Class A 21,034,105 -------------------------------------------------------- Class B 10,438,465 -------------------------------------------------------- Class L 412,691 -------------------------------------------------------- Class O 145,372 -------------------------------------------------------- Class P 2,391,777 -------------------------------------------------------- Class Y 12,269,525 -------------------------------------------------------- Net Asset Value: Class 1 (and redemption price) $11.05 -------------------------------------------------------- Class A (and redemption price) $11.06 -------------------------------------------------------- Class B * $10.66 -------------------------------------------------------- Class L ** $10.94 -------------------------------------------------------- Class O ** $10.97 -------------------------------------------------------- Class P * $11.00 -------------------------------------------------------- Class Y (and redemption price) $11.08 -------------------------------------------------------- Maximum Public Offering Price Per Share: Class 1 (net asset value plus 9.29% of net asset value per share) $12.08 -------------------------------------------------------- Class A (net asset value plus 5.26% of net asset value per share) $11.64 -------------------------------------------------------- Class L (net asset value plus 1.01% of net asset value per share) $11.05 -------------------------------------------------------- Class O (net asset value plus 1.01% of net asset value per share) $11.08 --------------------------------------------------------------------------- *Redemption price is NAV of Class B and P shares reduced by a 5.00% CDSC if shares are redeemed within one year from purchase (See Note 2). **Redemption price is NAV of Class L and O shares reduced by a 1.00% CDSC if shares are redeemed within one year from initial purchase. See Notes to Financial Statements. 15 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2002 INVESTMENT INCOME: Dividends $ 16,108,125 Interest 1,585,255 Less: Foreign withholding tax (248,765) --------------------------------------------------------------------------- Total Investment Income 17,444,615 --------------------------------------------------------------------------- EXPENSES: Management fee (Note 2) 8,114,883 Service plan fees (Note 2) 2,532,030 Shareholder and system servicing fees 3,530,311 Shareholder communications 448,449 Audit and legal 124,664 Registration fees 108,431 Custody 92,283 Trustees' fees 61,211 Other 5,511 --------------------------------------------------------------------------- Total Expenses 15,017,773 --------------------------------------------------------------------------- Net Investment Income 2,426,842 --------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCIES (NOTE 3): Realized Gain (Loss) From: Security transactions (excluding short-term securities) (105,240,699) Foreign currency transactions 4,793 --------------------------------------------------------------------------- Net Realized Loss (105,235,906) --------------------------------------------------------------------------- Change in Net Unrealized Depreciation of Investments: Beginning of year (92,750,493) End of year (177,788,103) --------------------------------------------------------------------------- Increase in Net Unrealized Depreciation (85,037,610) --------------------------------------------------------------------------- Net Loss on Investments (190,273,516) --------------------------------------------------------------------------- Decrease in Net Assets From Operations $(187,846,674) ---------------------------------------------------------------------------
See Notes to Financial Statements. 16 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, See Notes to Financial Statements.
2002 2001 ----------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 2,426,842 $ 5,445,970 Net realized loss (105,235,906) (14,404,035) Increase in net unrealized depreciation (85,037,610) (445,215,862) ----------------------------------------------------------------------------------------------------------------- Decrease in Net Assets From Operations (187,846,674) (454,173,927) ----------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (3,410,246) (4,274,339) Net realized gains -- (104,785,176) Capital (832,371) -- ----------------------------------------------------------------------------------------------------------------- Decrease in Net Assets From Distributions to Shareholders (4,242,617) (109,059,515) ----------------------------------------------------------------------------------------------------------------- FUND SHARE TRANSACTIONS (NOTE 12): Net proceeds from sale of shares 96,525,033 154,291,788 Net asset value of shares in connection with the transfer of the Smith Barney Large Cap Blend Fund's net assets (Note 13) -- 462,409,513 Net asset value of shares issued for reinvestment of dividends 3,257,499 108,266,197 Cost of shares reacquired (250,790,369) (276,604,347) ----------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Net Assets From Fund Share Transactions (151,007,837) 448,363,151 ----------------------------------------------------------------------------------------------------------------- Decrease in Net Assets (343,097,128) (114,870,291) NET ASSETS: Beginning of year 1,349,700,742 1,464,571,033 ----------------------------------------------------------------------------------------------------------------- End of year* $1,006,603,614 $1,349,700,742 ----------------------------------------------------------------------------------------------------------------- * Includes undistributed (overdistributed) net investment income of: $(58,299) $1,068,584 -----------------------------------------------------------------------------------------------------------------
17 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies The Smith Barney Growth and Income Fund ("Fund") is a separate portfolio of the Smith Barney Investment Series ("Series"). The Series, a Massachusetts business trust, is registered under the Investment Company Act of 1940, as amended, as a diversified open-end management investment company and consists of this Fund and six other separate investment portfolios: Smith Barney International Aggressive Growth Fund, Smith Barney Large Cap Core Fund, Smith Barney Large Cap Core Portfolio, Smith Barney Premier Selections All Cap Growth Portfolio, Smith Barney Growth and Income Portfolio and Smith Barney Government Portfolio. The financial statements and financial highlights for the other portfolios are presented in separate shareholder reports. The significant accounting policies consistently followed by the Fund are: (a) security transactions are accounted for on trade date; (b) securities traded on national securities markets are valued at the closing prices on such markets or, if there were no sales during the day, at the current quoted bid price; securities primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, except that when a significant occurrence, subsequent to the time a value was so established, is likely to have significantly changed the value, then the fair value of those securities will be determined by consideration of other factors by or under the direction of the Board of Trustees or its delegates; over-the-counter securities are valued on the basis of the bid price at the close of business on each day; U.S. government and agency obligations are valued at the average between bid and ask prices in the over-the-counter market; (c) securities maturing within 60 days are valued at cost plus accreted discount or minus amortized premium, which approximates value; (d) securities for which market quotations are not available will be valued in good faith at fair value by or under the direction of the Board of Trustees; (e) interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis; (f ) 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 determine the existence of a dividend declaration after exercising reasonable due diligence; (g) gains or losses on the sale of securities are calculated by using the specific identification method; (h) dividends and distributions to shareholders are recorded by the Fund on the ex-dividend date; (i) the accounting records of the Fund 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. 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. Differences between income and expense amounts recorded and collected or paid are adjusted when reported by the custodian bank; (j) realized gain and loss on foreign currency includes the net realized amount from the sale of currency and the amount realized between trade date and settlement date on security transactions; (k) the character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. At October 31, 2002, reclassifications were made to the capital accounts of the Fund to reflect permanent book/tax differences and income and gains available for distributions under income tax regulations. Net investment income, net realized gains and net assets were not affected by this change; (l) the Fund intends to comply with the requirements 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 tax; and (m) 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. Also, the Fund may enter into forward foreign exchange contracts in order to hedge against foreign currency risk. These contracts are marked-to-market daily, by recognizing the difference between the contract exchange rate and the current market rate as an unrealized gain or loss. Realized gains or losses are recognized when contracts are settled. 18 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. Management 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 the investment manager to the Fund. The Fund pays SBFM a management fee calculated at an annual rate of the Fund's average daily net assets as follows: Average Daily Net Assets Annual Rate ------------------------------------------------------------------------------- First $1 billion 0.65% ------------------------------------------------------------------------------ Next $1 billion 0.60 ------------------------------------------------------------------------------ Next $1 billion 0.55 ------------------------------------------------------------------------------ Next $1 billion 0.50 ------------------------------------------------------------------------------ Over $4 billion 0.45 ------------------------------------------------------------------------------ Citicorp Trust Bank, fsb. ("CTB"), formerly known as Travelers Bank & Trust, fsb., another subsidiary of Citigroup, acts as the Fund's transfer agent. PFPC Global Fund Services ("PFPC") and Primerica Shareholder Services ("PSS") act as the Fund's sub-transfer agents. CTB receives account fees and asset-based fees that vary according to the size and type of account. PFPC and PSS are 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 $144,256 to CTB. Salomon Smith Barney Inc. ("SSB") and PFS Distributors, Inc. ("PFSD"), both of which are subsidiaries of Citigroup, act as the Fund's distributors. In addition, SSB, PFSD and certain other broker-dealers continue to sell Fund shares to the public as members of the selling group. For the year ended October 31, 2002, SSB and its affiliates received $48,378 in brokerage commissions for the Fund's portfolio agency transactions. There are maximum initial sales charges of 8.50%, 5.00%, 1.00% and 1.00% for Class 1, A, L and O shares, respectively. There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B and P shares, which applies if redemption occurs within one year from purchase. This CDSC declines thereafter by 1.00% per year until no CDSC is incurred. Class L and O shares also have a 1.00% CDSC, which applies if redemption occurs within the first year of purchase. In certain cases, 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. These purchases do not incur an initial sales charge. For the year ended October 31, 2002, SSB and its affiliates received sales charges of approximately $1,178,000, $1,476,000 and $3,000 on sales of the Fund's Class 1, A and L shares, respectively. In addition, CDSCs paid to SSB and its affiliates for the year ended October 31, 2002 were approximately: Class B Class P --------------------------------------------------------- CDSCs $475,000 $31,000 --------------------------------------------------------- Pursuant to Service Plans, the Fund pays a distribution/service fee with respect to its Class A, B, L, O and P shares calculated at an annual rate not to exceed 0.25%, 1.00%, 1.00%, 0.70% and 0.75% of the average daily net assets of each class, respectively. At a shareholder meeting held on February 1, 2002, the shareholders approved these Service Plans which replaced Distribution Plans then in effect. For the year ended October 31, 2002, total Service Plan fees incurred were:
Class A Class B Class L Class O Class P --------------------------------------------------------------------------------- Service Plan Fees $716,733 $1,455,266 $55,812 $14,945 $289,274 ---------------------------------------------------------------------------------
19 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) All officers and one Trustee of the Series are employees of Citigroup or its affiliates. The Trustees of the Funds 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. Two former Trustees are currently receiving payments under the Retirement Plan. The amount of benefits to be paid under the Retirement Plan cannot currently be determined for current Trustees. Messrs. Carlton, Cocanougher, Gross, Merten and Pettit also are covered by a prior retirement plan. Under the prior plan, retirement benefits are payable for a ten-year period following retirement, with the annual payment to be based upon the Trustee's compensation from the Trust during calendar year 2000. Trustees with more than five but less than ten years of service at retirement will receive a prorated benefit. In order to receive benefits under the current Retirement Plan, a Trustee must waive all rights under the prior plan prior to receiving payment under either plan. Total aggregate retirement benefits accrued under the prior plan for the 2002 fiscal year were $28,856. The amount of benefits to be paid under the prior plan cannot currently be determined for these 3. Investments During the year 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 $555,862,795 ------------------------------------------------------------------------------ Sales 716,023,467 ------------------------------------------------------------------------------ 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 $ 57,569,344 Gross unrealized depreciation (243,340,899) ------------------------------------------------------------------------------ Net unrealized depreciation $(185,771,555) ------------------------------------------------------------------------------ 4. 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. 5. Futures Contracts Initial margin deposits made upon entering into futures contracts are recognized as assets. The initial margin is segregated by the custodian as is noted in the schedule of investments. 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 20 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) market value of the contract at the end of each day's trading. Variation margin payments are made or received 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 (and cost of) the closing transaction 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). At October 31, 2002, the Fund did not hold any futures contracts. 6. Option Contracts Upon the purchase of a put option or a call option by the Fund, the premium paid is recorded as an investment, the value of which is marked to market daily. When a purchased option expires, the Fund will realize a loss in the amount of the cost of the option. When the Fund enters into a closing sales transaction, the Fund will realize a gain or loss depending on whether the sales proceeds from the closing sales transaction are greater or less than the cost of 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 did not hold any call or put option contracts. When the Fund writes a covered 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. 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 cost of the security sold will be decreased by the premium originally received. When a put option is exercised, the amount of the premium originally received will reduce the cost of the security which the Fund purchased 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 a loss if the market price of the underlying security declines. During the year ended October 31, 2002, the Fund did not enter into any written covered call or put option contracts. 7. Foreign Securities Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in U.S. companies and the U.S. government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of many foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. companies and the U.S. government. 21 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. Short Sales of Securities A short sale is a transaction in which the Fund sells securities it does not own (but has borrowed) in anticipation of a decline in the market price of the securities.To complete a short sale, the Fund may arrange through a broker to borrow the securities to be delivered to the buyer.The proceeds received by the Fund for the short sale are retained by the broker until the Fund replaces the borrowed securities. In borrowing the securities to be delivered to the buyer, the Fund becomes obligated to replace the securities borrowed at their market price at the time of replacement, whatever the price may be. At October 31, 2002, the Fund did not have any open short sale transactions. 9. Securities Lending The Fund has an agreement with its custodian whereby the custodian may lend securities owned by the Fund to brokers, dealers and other financial organizations. Fees earned by the Fund on securities lending are recorded in interest income. Loans of securities by the Fund are collateralized by cash, U.S. government securities or high quality money market instruments that are maintained at all times in an amount at least equal to the current market value of the loaned securities, plus a margin which may vary depending on the type of securities loaned. The custodian establishes and maintains the collateral in a segregated account. At October 31, 2002, the Fund loaned stocks having a market value of $67,146,643. The Fund received cash collateral amounting to $69,666,151 which was invested into the State Street Navigator Securities Lending Trust Prime Portfolio. Interest income earned by the Fund from securities lending for the year ended October 31, 2002 was $168,040. 10.Capital Loss Carryforward At October 31, 2002, the Fund had, for Federal income tax purposes, approximately $112,079,000 of unused capital loss carryforwards available to offset future capital gains through October 31, 2010. To the extent that these carryforward losses are used to offset capital gains, it is possible that the gains so offset will not be distributed. The amount and expiration of the carryforwards are indicated below. Expiration occurs on October 31 of the year indicated:
2009 2010 ------------------------------------------------ Capital Loss Carryforwards 13,844,000 98,235,000 ------------------------------------------------
11.Income Tax Information and Distributions to Shareholders At October 31, 2002 the tax basis components of distributable earnings were: -------------------------------------------- Undistributed ordinary income -- -------------------------------------------- Accumulated capital loss $(112,079,535) -------------------------------------------- Unrealized depreciation (185,771,555) --------------------------------------------
The tax character of distributions paid during the year ended October 31, 2002 was: ---------------------------- Ordinary income $3,410,246 Return of capital 832,371 ---------------------------- Total $4,242,617 ----------------------------
The difference between book basis and tax basis unrealized appreciation and depreciation is attributable primarily to wash sale loss deferrals. 22 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12.Shares of Beneficial Interest The Fund has seven classes of beneficial interest, Classes 1, A, B, L, O, P and Y, each with a par value of $0.00001 per share. There are an unlimited number of shares authorized. Transactions in shares of each class were as follows:
Year Ended Year Ended October 31, 2002 October 31, 2001* ------------------------- ------------------------- Shares Amount Shares Amount ---------------------------------------------------------------------------------------------------------------------- Class 1 Shares sold 1,459,600 $ 18,817,820 1,759,454 $ 26,624,646 Shares issued on reinvestment 224,707 2,979,158 4,669,006 75,636,850 Shares reacquired (8,730,622) (109,850,857) (8,136,111) (123,252,825) ---------------------------------------------------------------------------------------------------------------------- Net Decrease (7,046,315) $ (88,053,879) (1,707,651) $ (20,991,329) ---------------------------------------------------------------------------------------------------------------------- Class A Shares sold 3,843,001 $ 50,293,317 4,681,033 $ 71,193,842 Net asset value of shares in connection with the transfer of the Smith Barney Large Cap Blend Fund's net assets (Note 13) 10,250,818 169,671,302 Shares issued on reinvestment 21,569 278,341 966,570 15,709,256 Shares reacquired (5,426,592) (68,871,412) (4,575,942) (68,768,969) ---------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) (1,562,022) $ (18,299,754) 11,322,479 $ 187,805,431 ---------------------------------------------------------------------------------------------------------------------- Class B Shares sold 1,880,555 $ 23,614,456 2,285,410 $ 33,948,607 Shares issued on reinvestment -- -- 1,058,504 16,893,717 Shares reacquired (4,007,351) (49,879,341) (3,210,419) (46,814,878) ---------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) (2,126,796) $ (26,264,885) 133,495 $ 4,027,446 ---------------------------------------------------------------------------------------------------------------------- Class L Shares sold 80,882 $ 1,057,782 67,112 $ 1,029,956 Net asset value of shares in connection with the transfer of the Smith Barney Large Cap Blend Fund's net assets (Note 13) -- -- 459,489 7,605,569 Shares issued on reinvestment -- -- 1,619 26,373 Shares reacquired (112,274) (1,430,039) (94,946) (1,437,409) ---------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) (31,392) $ (372,257) 433,274 $ 7,224,489 ---------------------------------------------------------------------------------------------------------------------- Class O Shares sold 1,143 $ 15,732 1,499 $ 23,047 Net asset value of shares in connection with the transfer of the Smith Barney Large Cap Blend Fund's net assets (Note 13) -- -- 220,643 3,652,582 Shares issued on reinvestment -- -- -- -- Shares reacquired (43,921) (552,644) (33,992) (524,333) ---------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) (42,778) $ (536,912) 188,150 $ 3,151,296 ---------------------------------------------------------------------------------------------------------------------- Class P Shares sold 30,626 $ 410,789 87,128 $ 1,330,438 Net asset value of shares in connection with the transfer of the Smith Barney Large Cap Blend Fund's net assets (Note 13) -- -- 5,896,370 97,587,289 Shares issued on reinvestment -- -- -- -- Shares reacquired (1,299,417) (16,860,835) (2,322,930) (35,281,135) ---------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) (1,268,791) $ (16,450,046) 3,660,568 $ 63,636,592 ---------------------------------------------------------------------------------------------------------------------- Class Y Shares sold 218,170 $ 2,315,137 1,263,870 $ 20,141,252 Net asset value of shares in connection with the transfer of the Smith Barney Large Cap Blend Fund's net assets (Note 13) -- -- 11,111,650 183,892,770 Shares issued on reinvestment -- -- -- -- Shares reacquired (286,176) (3,345,241) (37,989) (521,796) ---------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) (68,006) $ (1,030,104) 12,337,531 $ 203,512,226 ----------------------------------------------------------------------------------------------------------------------
* For Class O, P and Y shares, transactions are for the period from December 8, 2000 (inception date) to October 31, 2001. 23 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13.Transfers of Net Assets On December 8, 2000, the Fund acquired the assets and certain liabilities of the Smith Barney Large Cap Blend Fund ("Large Cap Blend Fund") pursuant to a plan of reorganization. Total shares issued by the Fund and the total net assets of the Large Cap Blend Fund and the Fund on the date of the transfer were as follows:
Total Net Assets Shares Issued of the Total Net Assets Acquired Fund by the Fund Large Cap Blend Fund of the Fund ------------------------------------------------------------------------ Large Cap Blend Fund 27,938,970 $462,409,513 $1,370,867,484 ------------------------------------------------------------------------
The total net assets of the Large Cap Blend Fund before acquisition included unrealized appreciation of $85,097,107. Total net assets of the Fund immediately after the transfer were $1,833,276,997. The transaction was structured to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended. 24 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders FINANCIAL HIGHLIGHTS For a share of each class of beneficial interest outstanding throughout each year ended October 31, unless otherwise noted:
Class 1 Shares 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/ 1998 ------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Year $13.08 $19.03 $21.36 $18.53 $20.10 ------------------------------------------------------------------------------------------ Income (Loss) From Operations: Net investment income 0.05 0.10 0.08 0.09 0.18 Net realized and unrealized gain (loss) (2.02) (4.62) 1.11 3.60 1.70 ------------------------------------------------------------------------------------------ Total Income (Loss) From Operations (1.97) (4.52) 1.19 3.69 1.88 ------------------------------------------------------------------------------------------ Less Distributions From: Net investment income (0.05) (0.06) (0.07) (0.08) (0.20) Net realized gains -- (1.37) (3.45) (0.78) (3.25) Capital (0.01) -- -- -- -- ------------------------------------------------------------------------------------------ Total Distributions (0.06) (1.43) (3.52) (0.86) (3.45) ------------------------------------------------------------------------------------------ Net Asset Value, End of Year $11.05 $13.08 $19.03 $21.36 $18.53 ------------------------------------------------------------------------------------------ Total Return (15.13)% (25.18)% 5.39% 20.27% 10.90% ------------------------------------------------------------------------------------------ Net Assets, End of Year (millions) $494 $678 $1,017 $1,122 $1,079 ------------------------------------------------------------------------------------------ Ratios to Average Net Assets: Expenses 0.99% 0.73% 0.85% 0.84% 0.83% Net investment income 0.38 0.62 0.43 0.43 0.90 ------------------------------------------------------------------------------------------ Portfolio Turnover Rate 44% 69% 63% 53% 34% ------------------------------------------------------------------------------------------ Class A Shares 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/ 1998 ------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Year $13.07 $19.03 $21.35 $18.53 $20.10 ------------------------------------------------------------------------------------------ Income (Loss) From Operations: Net investment income (loss) 0.02 0.03 0.04 0.03 (0.02) Net realized and unrealized gain (loss) (2.02) (4.61) 1.11 3.60 1.85 ------------------------------------------------------------------------------------------ Total Income (Loss) From Operations (2.00) (4.58) 1.15 3.63 1.83 ------------------------------------------------------------------------------------------ Less Distributions From: Net investment income (0.00)* (0.01) (0.02) (0.03) (0.15) Net realized gains -- (1.37) (3.45) (0.78) (3.25) Capital (0.01) -- -- -- -- ------------------------------------------------------------------------------------------ Total Distributions (0.01) (1.38) (3.47) (0.81) (3.40) ------------------------------------------------------------------------------------------ Net Asset Value, End of Year $11.06 $13.07 $19.03 $21.35 $18.53 ------------------------------------------------------------------------------------------ Total Return (15.29)% (25.51)% 5.14% 19.93% 10.63% ------------------------------------------------------------------------------------------ Net Assets, End of Year (millions) $233 $295 $215 $181 $124 ------------------------------------------------------------------------------------------ Ratios to Average Net Assets: Expenses 1.25% 1.17% 1.06% 1.12% 1.07% Net investment income 0.12 0.19 0.21 0.15 0.63 ------------------------------------------------------------------------------------------ Portfolio Turnover Rate 44% 69% 63% 53% 34% ------------------------------------------------------------------------------------------
(1)Per share amounts have been calculated using the monthly average shares method. * Amount represents less than $0.01 per share. 25 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders FINANCIAL HIGHLIGHTS (CONTINUED) For a share of each class of beneficial interest outstanding throughout each year ended October 31, unless otherwise noted:
Class B Shares 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/ 1998 ------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Year $12.73 $18.70 $21.16 $18.48 $20.07 ------------------------------------------------------------------------------------------------ Income (Loss) From Operations: Net investment loss (0.11) (0.10) (0.10) (0.12) (0.01) Net realized and unrealized gain (loss) (1.96) (4.50) 1.09 3.58 1.71 ------------------------------------------------------------------------------------------------ Total Income (Loss) From Operations (2.07) (4.60) 0.99 3.46 1.70 ------------------------------------------------------------------------------------------------ Less Distributions From: Net investment income -- -- -- -- (0.04) Net realized gains -- (1.37) (3.45) (0.78) (3.25) ------------------------------------------------------------------------------------------------ Total Distributions -- (1.37) (3.45) (0.78) (3.29) ------------------------------------------------------------------------------------------------ Net Asset Value, End of Year $10.66 $12.73 $18.70 $21.16 $18.48 ------------------------------------------------------------------------------------------------ Total Return (16.26)% (26.10)% 4.36% 19.03% 9.85% ------------------------------------------------------------------------------------------------ Net Assets, End of Year (millions) $111 $160 $232 $208 $137 ------------------------------------------------------------------------------------------------ Ratios to Average Net Assets: Expenses 2.28% 2.00% 1.81% 1.87% 1.81% Net investment loss (0.91) (0.65) (0.54) (0.60) (0.09) ------------------------------------------------------------------------------------------------ Portfolio Turnover Rate 44% 69% 63% 53% 34% ------------------------------------------------------------------------------------------------ Class L Shares 2002/(1)/ 2001/(1)/ 2000/(1)(2)/ ------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Year $13.00 $19.04 $18.49 ------------------------------------------------------------------------------------------------ Income (Loss) From Operations: Net investment loss (0.07) (0.08) (0.02) Net realized and unrealized gain (loss) (1.99) (4.59) 0.57 ------------------------------------------------------------------------------------------------ Total Income (Loss) From Operations (2.06) (4.67) 0.55 ------------------------------------------------------------------------------------------------ Less Distributions From: Net investment income -- -- -- Net realized gains -- (1.37) -- ------------------------------------------------------------------------------------------------ Total Distributions -- (1.37) -- ------------------------------------------------------------------------------------------------ Net Asset Value, End of Year $10.94 $13.00 $19.04 ------------------------------------------------------------------------------------------------ Total Return (15.85)% (25.99)% 2.97%++ ------------------------------------------------------------------------------------------------ Net Assets, End of Year (000s) $4,516 $5,774 $205 ------------------------------------------------------------------------------------------------ Ratios to Average Net Assets: Expenses 1.89% 1.85% 1.71%+ Net investment loss (0.52) (0.49) (1.23)+ ------------------------------------------------------------------------------------------------ Portfolio Turnover Rate 44% 69% 63% ------------------------------------------------------------------------------------------------
(1)Per share amounts have been calculated using the monthly average shares method. (2)For the period from October 9, 2000 (inception date) to October 31, 2000. ++Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. 26 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders FINANCIAL HIGHLIGHTS (CONTINUED) For a share of each class of beneficial interest outstanding throughout each period:
Class O Shares 2002/(1)/ 2001/(1)(2)/ ---------------------------------------------------------- Net Asset Value, Beginning of Year $13.04 $16.55 ---------------------------------------------------------- Loss From Operations: Net investment loss (0.06) (0.03) Net realized and unrealized loss (2.01) (3.48) ---------------------------------------------------------- Total Loss From Operations (2.07) (3.51) ---------------------------------------------------------- Less Distributions From: Net investment income -- -- ---------------------------------------------------------- Total Distributions -- -- ---------------------------------------------------------- Net Asset Value, End of Year $10.97 $13.04 ---------------------------------------------------------- Total Return (15.87)% (21.21)%++ ---------------------------------------------------------- Net Assets, End of Year (000s) $1,595 $2,453 ---------------------------------------------------------- Ratios to Average Net Assets: Expenses 1.82% 1.53%+ Net investment loss (0.45) (0.18)+ ---------------------------------------------------------- Portfolio Turnover Rate 44% 69% ---------------------------------------------------------- Class P Shares 2002/(1)/ 2001/(1)(2)/ ---------------------------------------------------------- Net Asset Value, Beginning of Year $13.04 $16.55 ---------------------------------------------------------- Loss From Operations: Net investment loss (0.03) (0.03) Net realized and unrealized loss (2.01) (3.48) ---------------------------------------------------------- Total Loss From Operations (2.04) (3.51) ---------------------------------------------------------- Less Distributions From: Net investment income -- -- ---------------------------------------------------------- Total Distributions -- -- ---------------------------------------------------------- Net Asset Value, End of Year $11.00 $13.04 ---------------------------------------------------------- Total Return (15.64)% (21.21)%++ ---------------------------------------------------------- Net Assets, End of Year (000s) $26,301 $47,719 ---------------------------------------------------------- Ratios to Average Net Assets: Expenses 1.61% 1.53%+ Net investment loss (0.23) (0.20)+ ---------------------------------------------------------- Portfolio Turnover Rate 44% 69% ----------------------------------------------------------
(1)Per share amounts have been calculated using the average shares method. (2)For the period from December 8, 2000 (inception date) to October 31, 2001. ++Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. 27 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders FINANCIAL HIGHLIGHTS (CONTINUED) For a share of each class of beneficial interest outstanding throughout each period:
Class Y Shares 2002/(1)/ 2001/(1)(2)/ ------------------------------------------------------------- Net Asset Value, Beginning of Year $13.08 $16.55 ------------------------------------------------------------- Income (Loss) From Operations: Net investment income 0.09 0.10 Net realized and unrealized loss (2.01) (3.51) ------------------------------------------------------------- Total Loss From Operations (1.92) (3.41) ------------------------------------------------------------- Less Distributions From: Net investment income (0.07) (0.06) Capital (0.01) -- ------------------------------------------------------------- Total Distributions (0.08) (0.06) ------------------------------------------------------------- Net Asset Value, End of Year $11.08 $13.08 ------------------------------------------------------------- Total Return (14.77)% (20.65)%++ ------------------------------------------------------------- Net Assets, End of Year (000s) $135,915 $161,405 ------------------------------------------------------------- Ratios to Average Net Assets: Expenses 0.67% 0.67%+ Net investment income 0.70 0.68+ ------------------------------------------------------------- Portfolio Turnover Rate 44% 69% -------------------------------------------------------------
(1)Per share amounts have been calculated using the average shares method. (2)For the period from December 8, 2000 (inception date) to October 31, 2001. ++Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. 28 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders INDEPENDENT AUDITORS' REPORT The Board of Trustees and Shareholders of the Smith Barney Investment Series: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of the Smith Barney Growth and Income Fund of the Smith Barney Investment Series ("Fund") as of October 31, 2002, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the three-year period then ended. 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 audits. The financial highlights for each of the years in the two-year period ended October 31, 1999 were audited by other auditors whose report thereon, dated December 15, 1999, expressed an unqualified opinion on those financial highlights. We conducted our audits 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. As to securities purchased or sold but not yet received or delivered, we performed other appropriate auditing procedures. 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of October 31, 2002, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and financial highlights for each of the years in the three-year period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP New York, New York December 11, 2002 29 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders ADDITIONAL INFORMATION (UNAUDITED) Information about Trustees and Officers The business and affairs of the Smith Barney Growth and Income Fund ("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's 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 Portfolios in Fund Position(s) Length Principal Complex Name, Address and Held with of Time Occupation(s) During Overseen by Age Fund Served Past Five Years Trustee --------------------------------------------------------------------------------------------------------- NON-INTERESTED TRUSTEES: Elliott J. Berv Trustee Since President and Chief Operations Officer, 35 c/o R. Jay Gerken 2001 Landmark City (Real Estate Development) Salomon Smith (since 2002); Executive Vice President and Barney Inc. ("SSB") Chief Operations Officer, DigiGym Systems 399 Park Avenue (On-line Personal Training Systems) (since New York, NY 10022 2001); Chief Executive Officer, Rocket City Age 59 Enterprises (Internet Service Company) (since 2000); President, Catalyst (Consulting) (since 1984). Donald M. Carlton Trustee Since Consultant, URS Corporation 30 c/o R. Jay Gerken 1997 (Engineering) (since 1999); former Chief SSB Executive Officer, Radian International 399 Park Avenue L.L.C. (Engineering) (from 1996 to 1998), New York, NY 10022 Member of Management Committee, Age 65 Signature Science (Research and Development) (since 2000). A. Benton Cocanougher Trustee Since Dean Emeritus and Wiley Professor, Texas 30 c/o R. Jay Gerken 1991 A&M University (since 2001); former Dean SSB and Professor of Marketing, College and 399 Park Avenue Graduate School of Business of Texas New York, NY 10022 A&M University (from 1987 to 2001). Age 64 Mark T. Finn Trustee Since Chairman and Owner, Vantage Consulting 35 c/o R. Jay Gerken 2001 Group, Inc. (Investment Advisory and SSB Consulting Firm) (since 1988); former Vice 399 Park Avenue Chairman and Chief Operating Officer, New York, NY 10022 Lindner Asset Management Company Age 59 (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 Trustee Since Partner, Capital Investment Advisory 30 Gross 1986 Partners (Consulting) (since January c/o R. Jay Gerken 2000); Managing Director, Fountainhead SSB Ventures, LLC (Consulting) (from 1998 to 399 Park Avenue 2002); Secretary, Carint of N.A. New York, NY 10022 (Manufacturing) (since 1988); former Age 54 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).
Other Board Memberships Name, Address and Held by Trustees During Age Past Five Years ---------------------------------------------------------------- NON-INTERESTED TRUSTEES: Elliott J. Berv Board Member, American Identity Corp. c/o R. Jay Gerken (doing business as Morpheus Salomon Smith Technologies) (Biometric information Barney Inc. ("SSB") management) (since 2001; Consultant 399 Park Avenue since 1999); Director, Lapoint Industries New York, NY 10022 (Industrial Filter Company) (since 2002); Age 59 Director. Alzheimer's Association (New England Chapter) (since 1998). Donald M. Carlton Director, American Electric Power c/o R. Jay Gerken (Electric Utility) (since 1999); Director, SSB Valero Energy (Petroleum Refining) 399 Park Avenue (since 1999); Director, National New York, NY 10022 Instruments Corp. Technology) (since Age 65 1994). A. Benton Cocanougher Former Director, Randall's Food Markets, c/o R. Jay Gerken Inc. (from 1990 to 1999); former SSB Director, First American Bank and First 399 Park Avenue American Savings Bank (from 1994 to New York, NY 10022 1999). Age 64 Mark T. Finn Former President and Director, Delta c/o R. Jay Gerken Financial, Inc. (Investment Advisory Firm) SSB (from 1983 to 1999). 399 Park Avenue New York, NY 10022 Age 59 Stephen Randolph Director, United Telesis, Inc. Gross (Telecommunications) (since 1997); c/o R. Jay Gerken Director, eBank.com, Inc. (since 1997); SSB Director, Andersen Calhoun, Inc. 399 Park Avenue (Assisted Living) (since 1987); former New York, NY 10022 Director, Charter Bank, Inc, Inc. (from Age 54 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).
30 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of Portfolios in Fund Position(s) Length Principal Complex Name, Address and Held with of Time Occupation(s) During Overseen by Age Fund Served Past Five Years Trustee ----------------------------------------------------------------------------------------------------------- Diana R. Harrington Trustee Since Professor, Babson College 35 c/o R. Jay Gerken 2001 (since 1992). SSB 399 Park Avenue New York, NY 10022 Age 62 Susan B. Kerley Trustee Since Consultant, Strategic 35 c/o R. Jay Gerken 2001 Management Advisors, LLC SSB Global Research Associates, Inc. 399 Park Avenue (Investment Consulting) (since 1990). New York, NY 10022 Age 51 Alan G. Merten Trustee Since President, George Mason 30 c/o R. Jay Gerken 1990 University (since 1996). SSB 399 Park Avenue New York, NY 10022 Age 60 C. Oscar Morong, Jr. Trustee Since Managing Director, Morong 35 c/o R. Jay Gerken 2001 Capital Management SSB (since 1993). 399 Park Avenue New York, NY 10022 Age 67 R. Richardson Pettit Trustee Since Professor of Finance, 30 c/o R. Jay Gerken 1990 University of Houston SSB (since 1977); 399 Park Avenue Independent Consultant New York, NY 10022 (since 1984). Age 60 Walter E. Robb, III Trustee Since President, Benchmark Consulting Group, 35 c/o R. Jay Gerken 1985 Inc. (Service Company) (since 1991); Sole SSB Proprietor, Robb Associates (Consulting) 399 Park Avenue (since 1978); Co-Owner, Kedron Design New York, NY 10022 (Gifts) (since 1978); former President and Age 75 Treasurer, Benchmark Advisors, Inc. (Financial) (from 1989 to 2000). INTERESTED TRUSTEE: R. Jay Gerken* SSB Chairman, Since Managing Director of SSB (since 1996). 226 399 Park Avenue President and 2002 New York, NY 10022 Chief Executive Age 51 Officer
Other Board Memberships Name, Address and Held by Trustees During Age Past Five Years ---------------------------------------------------------------- Diana R. Harrington Former Trustee, The Highland c/o R. Jay Gerken Family of Funds (Investment Company) SSB (from March 1997 to March 1998). 399 Park Avenue New York, NY 10022 Age 62 Susan B. Kerley Director, Eclipse Funds c/o R. Jay Gerken (currently supervises 17 SSB investment companies in 399 Park Avenue fund complex) (since 1990). New York, NY 10022 Age 51 Alan G. Merten Director, Comshare, Inc. c/o R. Jay Gerken (Information Technology) SSB (since 1985); former Director, 399 Park Avenue Indus (Information Technology) New York, NY 10022 (from 1995 to 1999). Age 60 C. Oscar Morong, Jr. Former Director, Indonesia c/o R. Jay Gerken Fund (Closed End Fund) SSB (from 1990 to 1999); 399 Park Avenue Trustee, Morgan Stanley New York, NY 10022 Institutional Fund Age 67 (currently supervises 75 investment companies) (since 1993). R. Richardson Pettit None c/o R. Jay Gerken SSB 399 Park Avenue New York, NY 10022 Age 60 Walter E. Robb, III Director, John Boyle & Co., Inc. (Textiles) c/o R. Jay Gerken (since 1999); Director, Harbor Sweets, SSB Inc. (Candy) (since 1990); Director, W.A. 399 Park Avenue Wilde Co. (Direct Media) (since 1982); New York, NY 10022 Director, Alpha Grainger Manufacturing Age 75 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* SSB N/A 399 Park Avenue New York, NY 10022 Age 51
31 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of Portfolios in Fund Position(s) Length Principal Complex Name, Address and Held with of Time Occupation(s) During Overseen by Age Fund Served Past Five Years Trustee ------------------------------------------------------------------------------------------------------------------ OFFICERS: Lewis E. Daidone SSB Senior Vice Since Managing Director of SSB (since 1990); N/A 125 Broad Street, 11th Floor President 2000 Chief Financial Officer, Smith Barney New York, NY 10004 and Chief Mutual Funds; Director and Senior Vice Age 45 Administrative President, SBFM and Travelers Investment Officer Adviser, Inc. ("TIA") Richard L. Peteka Chief Financial Since Director and Head of Internal Control for N/A SSB Officer and 2002 Citigroup Asset Management U.S. Mutual 125 Broad Street, Treasurer Fund Administration from 1999-2002; 11th Floor Vice President, Head of Mutual Fund New York, NY 10004 Administration and Treasurer at Age 41 Oppenheimer Capital from 1996-1999 Michael Kagan Vice President Since Managing Director of SSB N/A SSB and Investment 2000 399 Park Avenue Officer New York, NY 10022 Age 43 Kaprel Ozsolak Controller Since Vice President of SSB N/A SSB 2002 125 Board Street, 11th Floor New York, NY 10004 Age 37 Robert I. Frenkel Secretary Since Managing Director and N/A SSB 2000 General Counsel of Global 300 First Stamford Mutual Funds for Citigroup Place Asset Management (since 1994) Stamford, CT 06902 Age 48
Other Board Memberships Name, Address and Held by Trustees During Age Past Five Years ---------------------------------------------------- OFFICERS: Lewis E. Daidone SSB N/A 125 Broad Street, 11th Floor New York, NY 10004 Age 45 Richard L. Peteka N/A SSB 125 Broad Street, 11th Floor New York, NY 10004 Age 41 Michael Kagan N/A SSB 399 Park Avenue New York, NY 10022 Age 43 Kaprel Ozsolak N/A SSB 125 Board Street, 11th Floor New York, NY 10004 Age 37 Robert I. Frenkel 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 ("SBFM") and certain of its affiliates. 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 100%. 32 Smith Barney Growth and Income Fund | 2002 Annual Report to Shareholders SMITH BARNEY GROWTH AND INCOME FUND TRUSTEES INVESTMENT MANAGER Elliott J. Berv Smith Barney Fund Management LLC Donald M. Carlton A. Benton Cocanougher DISTRIBUTORS 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 and 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 OFFICERS New York, New York 10004 R. Jay Gerken President and SUB-TRANSFER AGENTS Chief Executive Officer PFPC Global Fund Services P.O. Box 9699 Lewis E. Daidone Providence, Rhode Island Senior Vice President and 02940-9699 Chief Administrative Officer Primerica Shareholder Services Richard L. Peteka P.O. Box 9662 Chief Financial Officer Providence, Rhode Island and Treasurer 02940-9662 Michael Kagan Vice President and Investment Officer Kaprel Ozsolak Controller Robert I. Frenkel Secretary Smith Barney Growth and Income Fund This report is submitted for the general information of the shareholders of Smith Barney Investment Series --Smith Barney Growth and Income Fund. It is not authorized for distribution to prospective investors unless accompanied or preceded by a current Prospectus for the Series, 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 GROWTH AND INCOME FUND Smith Barney Mutual Funds 3120 Breckinridge Boulevard Duluth, Georgia 30099-0001 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 SalomonSmithBarney --------------------------- A member of citigroup[LOGO] Salomon Smith Barney is a service mark of Salomon Smith Barney Inc. FD02101 12/02 02-4177 -------------------------------------------------------------------------------- SMITH BARNEY INVESTMENT SERIES -------------------------------------------------------------------------------- ANNUAL REPORT | OCTOBER 31, 2002 Smith Barney Premier Selections All Cap Growth Portfolio Smith Barney Large Cap Core Portfolio Smith Barney Growth and Income Portfolio Smith Barney Government Portfolio [LOGO] Smith Barney Mutual Funds Your Serious Money. Professionally Managed./SM/ ---------------------------------------------------------------- NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE ---------------------------------------------------------------- TABLE OF CONTENTS Letter to Our Shareholders.................................... 1 Smith Barney Investment Series Smith Barney Premier Selections All Cap Growth Portfolio.. 3 Smith Barney Large Cap Core Portfolio..................... 8 Smith Barney Growth and Income Portfolio.................. 12 Smith Barney Government Portfolio......................... 16 Schedules of Investments...................................... 20 Statements of Assets and Liabilities.......................... 34 Statements of Operations...................................... 35 Statements of Changes in Net Assets........................... 36 Notes to Financial Statements................................. 38 Financial Highlights.......................................... 45 Independent Auditors' Report.................................. 49 Additional Information........................................ 50 Tax Information............................................... 54 Management of the Series...................................... IBC
[PHOTO] R. JAY GERKEN Chairman Dear Shareholder, Enclosed herein is the annual report for the Smith Barney Investment Series: Smith Barney Premier Selections All Cap Growth Portfolio, Smith Barney Large Cap Core Portfolio, Smith Barney Growth and Income Portfolio and Smith Barney Government Portfolio ("Portfolio(s)") for the year ended October 31, 2002./1/ 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 each Portfolio's performance can be found in the appropriate sections that follow. We hope you find this report to be useful and informative. Special Notice to Shareholders We are pleased to report that in 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 Portfolios 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. Performance of the Smith Barney Investment Series for the Year Ended October 31, 2002/2/ -------------------------------------------------------------------------------- Smith Barney Premier Selections All Cap Growth Portfolio (16.44)% Smith Barney Large Cap Core Portfolio (18.94)% Smith Barney Growth and Income Portfolio (14.47)% Smith Barney Government Portfolio 4.20%
Market Overview and Outlook This has been a very difficult year for the equity markets, as 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 we now believe the current period has eclipsed this earlier one in terms of length and severity. Looking back, we believe the late 1990's was a period of excess, but in ways that transcended valuation alone. Corporate governance, a term rarely heard until recently, came to refer to many things including liberal and misleading accounting. Some high- profile corporations actually crossed the line into fraudulent behavior. We feel many chief executive officers hired between 1995 and 2000 were more attuned to their stock options and techniques to elevate their share prices than to understanding their companies' business plans. Some of these executives were poorly prepared for an economic environment radically different than the one in existence when they were hired. 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 FOMC decided to leave the federal funds rate ("fed funds rate")/4/ 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 -------- 1The Portfolios are underlying investment options of various variable annuity products. A variable annuity product is a contract issued by an insurance company where the annuity premium (a set amount of dollars) is immediately turned into units of a portfolio of securities. Upon retirement, the policy holder is paid according to accumulated units whose dollar value varies according to the performance of the securities within the sub-accounts. Its objective is to preserve, through investment, the purchasing value of the annuity which otherwise is subject to erosion through inflation. The performance returns for these Portfolios do not reflect expenses imposed in connection with investing in variable annuity contracts such as administrative fees, account charges and surrender charges, which if reflected, would reduce the performance of the Portfolios. Past performance is not indicative of future results. -------- 2The performance returns set for above do not reflect the reduction of initial charges and expenses imposed in connection with investing in variable annuity contracts such as administrative fees, account charges and surrender charges, which if reflected, would reduce the performance of the Portfolios. 3The 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. 4The 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. The fed funds rate often points to the direction of U.S. interest rates. 1 Smith Barney Investment Series | 2002 Annual Report to Shareholders rate an additional 50 basis points/5/ on November 6, 2002 to 1.25%, the lowest level since April of 1958 when the target was 1.00%). Thank you for your investment in the Smith Barney Investment Series: Smith Barney Premier Selections All Cap Growth Portfolio, Smith Barney Large Cap Core Portfolio, Smith Barney Growth and Income Portfolio and Smith Barney Government Portfolio. We look forward to continuing to help you meet your investment objectives. Sincerely, /s/ R Jay Gerken R. Jay Gerken Chairman Smith Barney Investment Series November 22, 2002 The information provided in the following commentaries 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 Portfolios or that the percentage of the Portfolios' assets in various sectors will remain the same. Please refer to pages 20 through 33 for a list and percentage breakdown of each Portfolio's holdings. Also, please note that any discussion of the Portfolios' holdings, the Portfolios' performance, and the portfolio managers' views are as of October 31, 2002 and are subject to change. -------- 5A basis point is one one-hundredth (1/100 or 0.01) of one percent. 2 Smith Barney Investment Series | 2002 Annual Report to Shareholders SMITH BARNEY PREMIER SELECTIONS ALL CAP GROWTH PORTFOLIO Investment Strategy The Smith Barney Premier Selections All Cap Growth Portfolio ("Portfolio") seeks long-term capital growth. Its investment portfolio consists of a large cap growth, mid cap growth and small cap growth segment. PORTFOLIO MANAGERS: Alan J. Blake [PHOTO] ASSUMED MANAGEMENT: May 1, 2001 INVESTMENT EXPERIENCE: More than 25 years BACKGROUND: Alan J. Blake joined Smith Barney Asset Management's predecessor, Shearson Asset Management, in 1991. Since that time, he has managed large capitalization growth portfolios for institutional and private clients, in addition to mutual funds. Before joining Shearson Asset Management, Alan was a portfolio manager for Brown Brothers Harriman. EDUCATION: B.S., Florida A&M; M.B.A., Pennsylvania's Wharton School of Business Lawrence B. Weissman, CFA [PHOTO] ASSUMED MANAGEMENT: September 15, 1999 INVESTMENT EXPERIENCE: More than 17 years BACKGROUND: Joined Smith Barney Asset Management in 1997. Previously with Neuberger & Berman and TIAA-CREF. EDUCATION: B.S., Cornell University; M.B.A., Columbia University Tim Woods, CFA [PHOTO] ASSUMED MANAGEMENT: May 1, 2001 INVESTMENT EXPERIENCE: More than 20 years BACKGROUND: Before joining Smith Barney Asset Management, Tim was with Bankers Trust, where he co-managed more than $1 billion in small and mid-cap assets. Prior to that, he was an energy analyst with Prudential Securities. Before that, Tim was a small-cap analyst with the Bank of Boston. EDUCATION: B.S., Florida A&M; M.B.A., University of Pennsylvania's Wharton School of Business Smith Barney Premier Selections All Cap Growth Portfolio Performance Update/1/ For the year ended October 31, 2002, the Portfolio returned negative 16.44%. In comparison, the Russell 1000 Growth Index ("Russell 1000 Growth"),/2/ the S&P 400 MidCap Index ("S&P MidCap")/3/ and the Russell 2000 Growth Index ("Russell 2000 Growth")/4/ returned negative 19.62%, negative 4.78% and negative 21.57%, respectively, for the same period. Portfolio Manager Overview and Outlook for the Market and the Portfolio's Large Cap Growth Segment The recently ended third quarter of 2002 was the worst three-month period for equity markets, as represented by the S&P 500 Index/5/, since the bear market began in March 2000. We believe, however, it may mark the end of this phase of the bear market. If -------- 1The performance returns set for above do not reflect the reduction of initial charges and expenses imposed in connection with investing in variable annuity contracts such as administrative fees, account charges and surrender charges, which if reflected, would reduce the performance of the Portfolio. 2The Russell 1000 Growth measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Please note that an investor cannot invest directly in an index. 3The S&P 400 MidCap is a market-value weighted index consists of 400 domestic stocks chosen for market size, liquidity, and industry group representation. Please note that an investor cannot invest directly in an index. -------- 4The Russell 2000 Growth measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. Please note that an investor cannot invest directly in an index. 5The 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 Smith Barney Investment Series | 2002 Annual Report to Shareholders the late 1990s marked a period of irrational exuberance, where stocks detached from underlying fundamentals on the upside, we are now witnessing the mirror image of this emotional behavior on the part of market participants, with the valuation of securities disconnecting from fundamentals on the downside. When sentiment becomes this negative, equity liquidations peak, and the market appears to be falling across the board, we believe history would indicate that we are close to the end of a decline. We believe the U.S. economy will strengthen in the fourth quarter -- monetary policy is extremely accommodative, mortgage refinancings are at record levels, and interest rates and inflation both remain low. Yet as bad as the news appears, we do not feel that corporate earnings are falling off a cliff. Yes, difficulties remain in certain areas (technology and telecommunications, most prominently), but we believe the majority of businesses are slowly recovering. The wild card is consumer confidence, which is influenced by the daily headlines regarding corporate integrity and geopolitical issues centered in the Middle East. It is our opinion that these concerns will slowly move to the back burner as they approach resolution and have a decreased effect on valuation. In our opinion, this has been a very painful decline, on par with that of 1973-1974. However, it is creating values that have not been available in some time. A number of the world-class franchise companies that we typically invest in are now trading at levels we have not seen in over ten years. We remain convinced that a portfolio of leadership position companies, with balance sheet strength and strong managements should be a rewarding investment over the next cycle. Portfolio Manager Overview and Outlook for the Market and the Portfolio's Mid Cap Growth Segment We continue to believe that the fundamental backdrop for the market is improving. Recent evidence suggests that earnings estimates have been brought down to achievable levels and the economy has begun to slowly pick up momentum. The third quarter was the first quarter in quite a while for which most companies reported earnings that exceeded expectations. But the investment world remains skittish and skeptical. We expect to see continued volatility and a very different kind of market leadership from what we've seen over the past few years. With concerns about economic and competitive pressures, accounting issues and corporate responsibility, we look for the markets to return to a more basic focus on the fundamentals of cash flows and balance sheets. Our strategy has been to focus on companies with strong franchise positions that have the potential to grow in what we expect to be a relatively modest recovery. In our opinion, companies with strong balance sheets and consistent cash flows should be in a position to drive shareholder value through investment, acquisitions, share buybacks or even dividends. By focusing on companies in the mid cap sector, investors can participate in the potential growth and revaluation of the companies that we believe have a chance to become future blue chip companies. With interest rates at extraordinarily low levels and potential growth deeply discounted due to investors near-term concerns, we believe strong mid cap companies that are competitively well-positioned and conservatively financed offer a compelling investment opportunity as a part of an investor's diversified investment portfolio. Portfolio Manager Overview and Outlook for the Market and the Portfolio's Small Cap Growth Segment This has been a very difficult year for the stock markets, as virtually all major equity indices dropped to their lowest levels in several years. Unless the stock markets dramatically rally 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. During the reporting period, the stock markets continued to be pressured by slow earnings growth and negative earnings surprises. Traditional growth stocks/6/ were particularly affected, -------- 6The performance of growth stocks in this reference is based on the performance of the Russell 2000 Growth Index, which returned negative 35.13 % on a year-to-date basis ending as of the close of the reporting period. Growth stocks are shares of companies believed to exhibit the potential for faster-than-average -------- growth within their industries.Growth stocks generally provide an opportunity for more capital appreciation than fixed income investments but are subject to greater market fluctuations. 4 Smith Barney Investment Series | 2002 Annual Report to Shareholders especially many stocks in the technology sector. Even those segments of the market that held up relatively well over recent years such as value stocks/7/ (e.g., particularly those classified as cyclicals, examples being equities within the housing and financials sectors), recently generated relatively weak performances. The view of consensus estimates thus far is that a meaningful turnaround in corporate profits (particularly in the technology sector) may not occur until early next year. Given the concerns challenging the markets (i.e., issues regarding terrorist attacks, corporate accounting/financial reporting scandals, questions regarding the authenticity of accounting standards, the decline in the U.S. dollar and stock market losses), market sentiment recently has been very negative. While the equity markets have been plagued by problems, we believe there are some positive points to consider, which we believe investors are currently disregarding or overlooking. . Key short-term interest rates are at their lowest levels since 1962. Although past performance does not assure future performance, it has been our experience based upon our research that small-cap stocks have had a tendency to perform well in favorable rate environments. . The strength in the housing market has been virtually unprecedented amid a record level of refinancings, which has resulted in continued strength in consumer spending. . Based upon our opinion of statistics in reports of Gross Domestic Product ("GDP")/8/ data released during the period, we believe that the U.S. economy continues to show some strength. In our view, valuations in the small-cap market are the most compelling that we have seen in years. It is important to note that the small-cap market is divided into two major categories: value (where recently the majority of stocks typically have tended to be financial, cyclical or industrial stocks) and growth (where recently the majority of the stocks generally have tended to be technology, healthcare and consumer stocks). Over the past two years, small-cap value in general has very dramatically outperformed small-cap growth. However, these dramatic performance differences have resulted in some of the lowest valuations within the small-cap growth sector that we have seen in years. Going forward, as we enter the final calendar quarter of 2002, we anticipate that the outcome of fourth quarter earnings comparisons between 2003 and 2002 will be more favorable for companies in the Portfolio's universe than fourth quarter comparisons between 2002 and 2001. Furthermore, based upon what we deem to be today's relatively weak earnings environment, we are anticipating a general improvement in these companies' growth prospects in the future. We are hopeful that the market will recognize these positive comparisons next year. Of course, there is no guarantee that our expectations will be realized. For a meaningful turn in the equity markets to occur, we believe there will have to be a pickup in corporate earnings and some resolutions that will make the investing public more comfortable with corporate management and financial statements in general. We have not changed our investment approach. The small cap growth segment of the Portfolio is actively managed and our investment decisions are based upon comprehensive research findings. Because of the inherent volatility in the small-cap growth area, we think it is just as important to be disciplined in our approach to selling as it is to buying, and the process in which we buy and sell stocks remains consistent. It has been a difficult period for the Portfolio as well as for the stock markets in general, and although we expect volatility to continue along the way, we maintain a consistent approach toward investing for the long term. Thank you for your investment in the Smith Barney Investment Series Premier Selections All Cap Growth Portfolio. We look forward to continuing to help you meet your investment objectives. -------- 7The performance of value stocks in this reference is based on the performance of the Russell 2000 Value Index, which returned negative 15.58 % on a year-to-date basis ending as of the close of the reporting period. The Russell 2000 Value Index measures the performance of those Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth values. Value stocks are shares that are considered to be inexpensive relative to their asset values or earning power. Please note that an investor cannot invest directly in an index. -------- 8GDP is a market value of goods and services produced by labor and property in the U.S. 5 Smith Barney Investment Series | 2002 Annual Report to Shareholders SMITH BARNEY PREMIER SELECTIONS ALL CAP GROWTH PORTFOLIO* HISTORICAL PERFORMANCE
Net Asset Value ----------------- Beginning End Income Capital Gain Total Year Ended of Year of Year Dividends Distributions Returns+ ------------------------------------------------------------------------------ 10/31/02 $10.73 $ 8.96 $0.01 $0.00 (16.44)% ----------------------------------------------------------------------------- 10/31/01 14.48 10.73 0.04 0.04 (25.45) ----------------------------------------------------------------------------- 10/31/00 10.11 14.48 0.02 0.00 43.43 ----------------------------------------------------------------------------- 9/15/99** -- 10/31/99 10.00 10.11 0.00 0.00 1.10++ ----------------------------------------------------------------------------- Total $0.07 $0.04 -----------------------------------------------------------------------------
It is the Portfolio's policy to distribute dividends and capital gains, if any, annually. AVERAGE ANNUAL TOTAL RETURNS+ Year Ended 10/31/02 (16.44)% ----------------------------------------------------------------------------- 9/15/99** through 10/31/02 (3.20) -----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN+ 9/15/99** through 10/31/02 (9.68)% -------------------------------------------------------------------------------
*Before May 1, 2001, the Portfolio was known as Select Mid Cap Portfolio and had a different investment style. * *Commencement of operations. + Assumes reinvestment of all dividends and capital gain distributions. ++Total return is not annualized, as it may not be representative of the total return for the year. 6 Smith Barney Investment Series | 2002 Annual Report to Shareholders SMITH BARNEY PREMIER SELECTIONS ALL CAP GROWTH PORTFOLIO AT A GLANCE (UNAUDITED) Value of $10,000 Invested in the Smith Barney Premier Selections All Cap Growth Portfolio vs. S&P MidCap 400 Index, Russell 1000 Growth Index and Russell 2000 Growth Index+ -------------------------------------------------------------------------------- September 1999 -- October 2002 [CHART] Smith Barney Premier Selections All Cap Russell 1000 Russell 2000 S&P MidCap Growth Portfolio Growth Index Growth Index 400 Index ------------------- ------------ ------------ ---------- 9/15/99 10,000 10,000 10,000 10,000 10/99 10,110 10,755 10,256 9,975 10/00 14,501 11,758 11,914 13,132 10/01 10,810 7,062 8,160 11,496 10/31/02 9,032 5,676 6,401 10,949 +Hypothetical illustration of $10,000 invested on September 15, 1999 (commencement of operations), assuming the reinvestment of dividends and capital gains, if any, at net asset value through October 31, 2002. Before May 1, 2001, the Portfolio was known as the Select Mid Cap Portfolio and had a different investment style. The S&P MidCap 400 Index is a widely recognized index of 400 medium-capitalization stocks. Figures for the S&P MidCap 400 Index include reinvestment of dividends. The Russell 1000 Growth Index ("Russell 1000 Growth") measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. (A price-to-book ratio is the price of a stock compared to the difference between a company's assets and liabilities. The Russell 2000 Growth Index ("Russell 2000 Growth") measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. (A price-to-book ratio is the price of a stock compared to the difference between a company's assets and liabilities.) The Indices are unmanaged and are not subject to the same management and trading expenses of a mutual fund. Please note that an investor cannot invest directly in an index. All figures represent past performance and are not a guarantee of future results. The performance data represents past performance including the investment return and principal value of an investment, which will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. INDUSTRY DIVERSIFICATION++* [CHART] Consumer Non-Durables 3.8% Consumer Services 3.6% Electronic Components 4.0% Finance 11.9% Healthcare - Drugs 7.9% Healthcare - Services 10.7% Industrial Services 3.8% Producer Manufacturing 7.0% Retail 10.9% Technology 7.0% Other 29.4% INVESTMENT BREAKDOWN++** [CHART] Common Stock 96.1% Repurchase Agreement 3.9% ++ All information is as of October 31, 2002. Please note that the Portfolio's holdings are subject to change. * As a percentage of total common stock. ** As a percentage of total investments. 7 Smith Barney Investment Series | 2002 Annual Report to Shareholders SMITH BARNEY LARGE CAP CORE PORTFOLIO Investment Strategy The Smith Barney Large Cap Core Portfolio ("Portfolio") seeks capital appreciation. Under normal market conditions, the Portfolio 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. PORTFOLIO MANAGER: Lawrence B. Weissman, CFA [PHOTO] ASSUMED MANAGEMENT: Lawrence B. WeissmaSne,ptCeFmAber 15, 1999 INVESTMENT EXPERIENCE: More than 17 years BACKGROUND: Joined Smith Barney Asset Management in 1997. Previously with Neuberger & Berman and TIAA-CREF. EDUCATION: B.S., Cornell University; M.B.A., Columbia University Performance Update/1 / For the year ended October 31, 2002, the Portfolio returned negative 18.94%. In comparison, the S&P 500 Index/2/ returned negative 15.10% for the same period. As we reported to you last period, the Portfolio's underperformance versus the S&P 500 Index continues to be due to our growth orientation and to our investing in companies with a higher average market capitalization than that of the S&P 500 Index. However, over the past six months, the Portfolio has outperformed the S&P 500 Index as fundamentals for growth stocks have improved and the sector seems to have regained some of its market leadership. Our investment philosophy continues to focus on strong growth stocks, which we believe will reflect their favorable fundamentals over time by outperforming the market. During the period, we maintained a stock selection strategy of buying companies that we believe exhibit strong fundamentals, including predictable and consistent growth, strong balance sheets, low debt-to-equity ratios and shareholder-oriented management teams. Portfolio Manager Market Overview and Outlook We continue to believe that the fundamental backdrop for the market is improving. Our recent observations suggest that earnings estimates have been brought down to achievable levels and the economy has begun to slowly pick up momentum. The third quarter was the first quarter in quite a while for which many companies reported earnings exceeding expectations. In addition, the number of companies revising earnings lower was significantly lower than we have seen in prior periods. During October, orders for durable goods rose nearly twice as much as was expected and unemployment claims were the lowest in almost two years. We believe corporate earnings and earnings momentum are improving. According to The Leuthold Group, the strongest year over year earnings momentum has been in the financial, consumer discretionary and technology sectors. The only sectors with negative year over year comparisons have been in energy and telecommunications. But the investment world remains skittish and skeptical. We expect to see continued volatility and a very different kind of market leadership from what we've seen over the past few years. With concerns about economic and competitive pressures, accounting issues and corporate responsibility, and the possibility of war, we anticipate the markets will return to a more basic focus on the fundamentals of cash flows and balance sheets. Our strategy has been to focus on companies with strong franchise positions that have the potential to grow in what we expect to be -------- 1 The performance returns set for above do not reflect the reduction of initial charges and expenses imposed in connection with investing in variable annuity contracts such as administrative fees, account charges and surrender charges, which if reflected, would reduce the performance of the Portfolio. -------- 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. 8 Smith Barney Investment Series | 2002 Annual Report to Shareholders a relatively modest recovery. We believe companies with strong balance sheets and consistent cash flows should be in a position to drive shareholder value through investment, acquisitions, share buybacks or even dividends. By focusing on what we perceive to be the higher quality end of the large cap sector, we feel investors can participate in the potential growth and revaluation of the companies that have a chance to benefit from an economic recovery. With interest rates at extraordinarily low levels and potential growth deeply discounted due to investors' near-term concerns, we believe sound growth companies that are competitively well-positioned and conservatively financed offer a compelling investment opportunity. We believe employing a core strategy with a bias towards growth allows us to take advantage of the attractive relative price of long-term growth in this type of market. We have positioned the Portfolio to attempt to benefit from an anticipated change in investor perception; our bias has become more positive and we have begun to slowly and measurably increase the Portfolio's exposure to growth. Portfolio Manager Portfolio Overview and Outlook The Portfolio invests in the shares of companies that we believe are well positioned for growth and trading at reasonable valuations. We employ a "core" strategy, which is based on investing in companies that we believe have more consistent and stable growth. We believe these companies can be found in a variety of sectors, including sectors that might not be traditionally associated with growth investing. The Portfolio continues to be diversified across sectors as well as individual companies. Its 10 largest positions comprised only 31% of the portfolio at the end of the reporting period. While under normal market conditions the Portfolio invests at least 80% of its net assets in equity securities of large cap issuers, the Portfolio invests in a complement of medium-sized companies that we believe are well positioned for future growth. Although the Portfolio remains substantially invested, we feel that we have reacted quickly to the changing market environment. Currently, the Portfolio's largest sector concentrations are in finance, technology and healthcare. Through the end of September 2002, we reduced the Portfolio's weightings in technology in favor of the healthcare sector and increased its exposure to financials based on fundamental trends and valuation. In early October 2002, we began to take some profits in the healthcare sector, which dramatically outperformed the S&P 500 Index off the July 2002 market lows, while increasing the Portfolio's exposure to technology. We also took some profits in the financials and consumer non-durables industries. While the Portfolio's largest holdings are in a variety of different industries, we believe that they possess inherent competitive advantages that we expect will result in more stable and consistent growth. For example, American International Group Inc., Wells Fargo & Co., and Bank of America Corp. are financial leaders. Pfizer Inc., Johnson & Johnson and Wyeth are leaders in new drug development. Wal-Mart Stores Inc. is the world's largest retailer operating over 4,000 domestic stores. Microsoft Corp. is the world's largest independent software company and Dell Computer Corp. is a leading direct marketer of personal computers, notebook computers and servers. Also included in our holdings are several medium-sized companies, such as AMBAC Financial Group, Inc., The TJX Cos., Inc. and IndyMac Bancorp, Inc., all of which we feel are well-positioned for future growth. We have built a portfolio that follows a growth-oriented strategy by owning some of the classic blue-chip companies as well as companies that we believe have the potential to become the blue-chips of tomorrow. We believe this strategy will provide attractive risk-adjusted returns over the long-term. Thank you for your investment in the Smith Barney Investment Series Large Cap Core Portfolio. We recognize that you have many investment choices and we appreciate your trust and support. 9 Smith Barney Investment Series | 2002 Annual Report to Shareholders SMITH BARNEY LARGE CAP CORE PORTFOLIO HISTORICAL PERFORMANCE
Net Asset Value ----------------- Beginning End Income Capital Gain Total Year Ended of Year of Year Dividends Distributions Returns+ ------------------------------------------------------------------------------ 10/31/02 $ 8.96 $ 7.24 $0.02 $0.00 (18.94)% ----------------------------------------------------------------------------- 10/31/01 12.14 8.96 0.03 0.00 (26.03) ----------------------------------------------------------------------------- 10/31/00 10.51 12.14 0.01 0.00 15.61 ----------------------------------------------------------------------------- 9/15/99* -- 10/31/99 10.00 10.51 0.00 0.00 5.10++ ----------------------------------------------------------------------------- Total $0.06 $0.00 -----------------------------------------------------------------------------
It is the Portfolio's policy to distribute dividends and capital gains, if any, annually. AVERAGE ANNUAL TOTAL RETURNS+ Year Ended 10/31/02 (18.94)% ----------------------------------------------------------------------------- 9/15/99* through 10/31/02 (9.64) -----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN+ 9/15/99* through 10/31/02 (27.15)% -----------------------------------------------------------------------------
+ Assumes reinvestment of all dividends and capital gain distributions. ++Total return is not annualized, as it may not be representative of the total return for the year. * Commencement of operations. 10 Smith Barney Investment Series | 2002 Annual Report to Shareholders SMITH BARNEY LARGE CAP CORE PORTFOLIO AT A GLANCE (UNAUDITED) Value of $10,000 Invested in the Smith Barney Large Cap Core Portfolio vs. S&P 500 Index+ -------------------------------------------------------------------------------- September 1999 -- October 2002 [CHART] Smith Barney S&P Large Cap Core 500 Portfolio Index -------------- ------- Sept 5, 1999 $10,000 $10,000 Oct 1999 10,510 10,633 Oct 2000 12,150 11,278 Oct 2001 8,988 8,471 Oct 31, 2002 7,285 7,193 +Hypothetical illustration of $10,000 invested on September 15, 1999 (commencement of operations), assuming the reinvestment of dividends and capital gains, if any, at net asset value through October 31, 2002. The S&P 500 Index is an index of widely held common stocks listed on the New York and American Stock Exchanges and the over-the-counter markets. Figures for the S&P 500 Index include reinvestment of dividends. The Index is unmanaged and is not subject to the same management and trading expenses of a mutual fund. Please note that an investor cannot invest directly in an index. All figures represent past performance and are not a guarantee of future results. The performance data represents past performance including the investment return and principal value of an investment, which will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. INDUSTRY DIVERSIFICATION++* [CHART] 10.0% Consumer Non-Durables 4.6% Consumer Services 5.9% Energy 20.5% Finance 14.2% Healthcare 7.9% Producer Manufacturing 7.7% Retail 6.9% Software 7.4% Technology 4.7% Utilities 10.2% Other INVESTMENT BREAKDOWN++** [CHART] 2.7% Repurchase Agreement 97.3% Common Stock ++ All information is as of October 31, 2002. Please note that the Portfolio's holdings are subject to change. * As a percentage of total common stock. ** As a percentage of total investments. 11 Smith Barney Investment Series | 2002 Annual Report to Shareholders SMITH BARNEY GROWTH AND INCOME PORTFOLIO Investment Strategy The Smith Barney Growth and Income Portfolio ("Portfolio") seeks reasonable growth and income. It aims to achieve this objective by investing in a portfolio consisting principally of equity securities, including convertible securities, that provide dividend or interest income. PORTFOLIO MANAGER: Michael Kagan [PHOTO] kagan ASSUMED MANAGEMENT: August 14, 2000 INVESTMENT EXPERIENCE: More than 17 years BACKGROUND: Joined Smith Barney Asset Management in 2000 and has been with Salomon Brothers Asset Management since 1994. EDUCATION: B.A., Economics, Harvard University; attended the MIT Sloan School of Management. Performance Update/1/ For the year ended October 31, 2002, the Portfolio returned negative 14.47%. In comparison, the S&P 500 Index/2/ returned negative 15.10% for the same period. Portfolio Manager Market Overview The stock market was terrible during the past year. Returns for the third calendar quarter of 2002 were the worst since 1987, and the fall from the peak in March 2000 to the trough in October 2002 was the worst decline since the Great Depression. Historically, dramatic moves in the market have reflected inflection points in major economic variables. What do the negative returns of the past three years tell us? We do not believe that they forecast dire economic conditions. We feel that the early, aggressive response by the U.S. Federal Reserve Board ("Fed") and the resilience of the American consumer led the U.S. economy out of recession in the first calendar quarter of 2002 and has kept it growing since. Unemployment, which we believe is the single best indicator of the economy's health, peaked in the spring of 2002 and has since declined slowly. Instead, we believe that the market is indicating that several favorable trends that powered the great bull market of 1982-2000 have come to an end, and that economic growth will be slower during the coming decade than it was during the 1990s. We believe that the 1990s economic boom was boosted by successive waves of mortgage refinancing, which consumers used to fuel their consumption. We feel that the next decade will have no such aid. Generally, we believe that the consumer's balance sheet is stretched and needs to be rebuilt. These factors do not make our outlook for the economy negative, but they do temper our view on how robust any future recovery will be. Another significant change is the emergence of China as a world economic power. China is now the U.S.'s largest economic partner, having eclipsed Mexico earlier this year. The growth in Chinese manufacturing capacity and the expansion in Chinese exports has pressured pricing. In industries that the U.S. has long dominated, such as chemicals, U.S. manufacturers are losing market share to the Chinese. We believe that other industries may also benefit from growth of the Chinese manufacturing industry. China lacks an indigenous source of copper, and its alumina (aluminum oxide, the key raw material for aluminum) reserves are inferior. We are positioning the Portfolio to reflect what we view as the risks and opportunities that China's continued economic growth may provide. Portfolio Manager Portfolio Overview The Portfolio continues to be highly diversified, with holdings in every major sector of the market. The market leaders during the past year were many consumer stocks. Despite a strong performance in the fourth calendar quarter of 2001, technology stocks performed poorly for the whole of the last year. Telecommunications stocks were the worst performing group in the -------- 1The performance returns set for above do not reflect the reduction of initial charges and expenses imposed in connection with investing in variable annuity contracts such as administrative fees, account charges and surrender charges, which if reflected, would reduce the performance of the Portfolio. -------- 2The 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. 12 Smith Barney Investment Series | 2002 Annual Report to Shareholders market. The Portfolio's performance was helped by positions in Teva Pharmaceutical Industries Ltd. ADR and Canadian National Railway Co. Positions in Federated Department Stores, Inc., AT&T Wireless Services Inc., Sun Microsystems, Inc. and OM Group, Inc. hurt the Portfolio's performance. Portfolio Manager Market and Portfolio Outlook Despite recent economic data, we believe that the U.S. economy will slowly recover in 2002 and 2003. We are attempting to "barbell" the Portfolio's holdings, overweighting versus the S&P 500 Index defensive stocks such as regulated utilities, healthcare companies, basic materials and technology stocks. We believe that dividend yields will constitute a greater portion of stock returns over the next decade. It also looks likely to us that the Federal government will reduce or eliminate the double taxation of dividends in 2003. In keeping with the Portfolio's growth and income objectives, we favorably view those companies with above-average dividend yields. The Portfolio generally has maintained a defensive posture towards technology stocks during the past two years. The Portfolio was, in general, underweight in the sector versus the S&P 500 Index, favoring stocks we deemed less volatile in other industries. However, because of the enormous decline in valuations in the sector over the past two years, and because sentiment about the sector was so poor, we initiated many positions in the technology sector during the third quarter of 2002. We saw opportunities in companies that were trading at low multiples of cash, or in the case of Comverse Technology, Inc., below net cash. These stocks have experienced significant price appreciation since early October 2002, so we are paring back a bit. Because we feel that the fundamentals for the sector seem to be bottoming, we may hold a more aggressive position in technology stocks going forward than we did over the past two years. Basic materials stocks have historically been strong performers coming out of recessions. The Portfolio is overweight aluminum companies and we are avoiding the large commodity chemicals companies. Agricultural equipment and heavy trucks are two areas in the capital goods sector that we feel may offer unusually good investment opportunities. We like the valuations and high dividend yields of the international oil companies. We feel these stocks are reflecting oil prices of only $18-20 per barrel, compared to oil prices of about $26 per barrel as of the date of this letter. By contrast, we believe the supply-demand fundamentals are poor for the natural gas market, where inventories are at historical highs. The Portfolio is overweight in the international oil sector, but it has no exploration and production (natural gas) sector exposure at the end of the reporting period. We feel regulated utility companies such as Consolidated Edison, Inc. and The Southern Co. should offer dividends of over 5% and modest growth of 2-3% even in a recession. We continue to avoid investments in utilities with large unregulated businesses because we are concerned about the prospects for returns in those businesses. The Portfolio is overweight stocks of utility sector issuers versus the S&P 500 Index. We believe rising healthcare costs make HMO's and ethical pharmaceutical companies unattractive investments. We cut in half the Portfolio's position in HCA Inc., as we feel the hospital cycle is aging and its valuation is no longer compelling. The Portfolio is significantly underweight in ethical drug companies, but it owns a large position in Teva Pharmaceutical Industries Ltd. ADR, the largest and, in our opinion, highest quality generic drug company. We believe that pricing in the ethical drug industry will be pressured by recently enacted state laws reducing Medicaid reimbursement. There is also patent litigation about to go before the U.S. Supreme Court that could damage the business models of the ethical pharmaceutical companies. Thank you for your investment in the Smith Barney Investment Series Growth and Income Portfolio. We look forward to continuing to help you meet your investment objectives. 13 Smith Barney Investment Series | 2002 Annual Report to Shareholders SMITH BARNEY GROWTH AND INCOME PORTFOLIO HISTORICAL PERFORMANCE
Net Asset Value ----------------- Beginning End Income Capital Gain Total Year Ended of Year of Year Dividends Distributions Returns+ ------------------------------------------------------------------------------ 10/31/02 $ 8.15 $ 6.95 $0.02 $0.00 (14.47)% ----------------------------------------------------------------------------- 10/31/01 10.77 8.15 0.05 0.04 (23.63) ----------------------------------------------------------------------------- 10/31/00 10.10 10.77 0.02 0.00 6.86 ----------------------------------------------------------------------------- 9/15/99* -- 10/31/99 10.00 10.10 0.00 0.00 1.00++ ----------------------------------------------------------------------------- Total $0.09 $0.04 -----------------------------------------------------------------------------
It is the Portfolio's policy to distribute dividends and capital gains, if any, annually. AVERAGE ANNUAL TOTAL RETURNS+ Year Ended 10/31/02 (14.47)% ----------------------------------------------------------------------------- 9/15/99* through 10/31/02 (10.58) -----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN+ 9/15/99* through 10/31/02 (29.50)% -----------------------------------------------------------------------------
+ Assumes reinvestment of all dividends and capital gain distributions. ++ Total return is not annualized, as it may not be representative of the total return for the year. * Commencement of operations. 14 Smith Barney Investment Series | 2002 Annual Report to Shareholders SMITH BARNEY GROWTH AND INCOME PORTFOLIO AT A GLANCE (UNAUDITED) Value of $10,000 Invested in the Smith Barney Growth and Income Portfolio vs. S&P 500 Index+ -------------------------------------------------------------------------------- September 1999 -- October 2002 [CHART] Smith Barney Growth S&P and Income Portfolio 500 Index -------------------- ----------------- Sep 15, 1999 $10,000 $10,000 Oct 1999 10,100 10,633 Oct 2000 10,793 11,278 Oct 2001 8,242 8,471 Oct 31, 2002 7,050 7,193 +Hypothetical illustration of $10,000 invested on September 15, 1999 (commencement of operations), assuming the reinvestment of dividends and capital gains, if any, at net asset value through October 31, 2002. The S&P 500 Index is an index of widely held common stocks listed on the New York and American Stock Exchanges and the over-the-counter markets. Figures for the S&P 500 Index include reinvestment of dividends. The Index is unmanaged and is not subject to the same management and trading expenses of a mutual fund. Please note that an investor cannot invest directly in an index. All figures represent past performance and are not a guarantee of future results. The performance data represents past performance including the investment return and principal value of an investment, which will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. INDUSTRY DIVERSIFICATION++* [CHART] Banks 9.5% Communications Equipment 3.8% Diversified Telecommunications 3.5% Electric Utilities 4.3% Insurance 5.9% Media 3.7% Multi-Line Retail 4.6% Oil and Gas 6.1% Pharmaceuticals 11.8% Software 6.7% Other 40.1% ++All information is as of October 31, 2002. Please note that the Portfolio's holdings are subject to change. *As a percentage of total common stock. **As a percentage of total investments. INVESTMENT BREAKDOWN++** [CHART] Repurchase Agreement 2.2% Convertible Corporate Bonds 1.0% Common Stock 96.8% 15 Smith Barney Investment Series | 2002 Annual Report to Shareholders SMITH BARNEY GOVERNMENT PORTFOLIO Investment Strategy The Smith Barney Government Portfolio ("Portfolio") seeks high current return consistent with the preservation of capital. Under normal market conditions, the Portfolio invests at least 80% of its net assets in government debt issued or guaranteed by the U.S. government, its agencies or instrumentalities and related investments. These securities include U.S. Treasury securities, mortgage-related and asset-backed securities. PORTFOLIO MANAGERS: Roger M. Lavan [PHOTO] ASSUMED MANAGEMENT: July 12, 2002 Roger M. Lavan INVESTMENT EXPERIENCE: 17 years BACKGROUND: Roger, a certified financial analyst, is an investment officer of Smith Barney Fund Management LLC, the Portfolio's manager, and managing director of Salomon Brothers Asset Management Inc., an affiliate of the manager. EDUCATION: B.S. Management, State University of New York, M.B.A., Fordham University Francis L. Mustaro [PHOTO] ASSUMED MANAGEMENT: July 12, 2002 Francis L. Mustaro INVESTMENT EXPERIENCE: 27 years BACKGROUND: Mr. Mustaro is an investment officer of the manager and is a director of Citibank, N.A. EDUCATION: Mr. Mustaro holds a BA degree in History and Economics from Lafayette College. Performance Update/1/ For the year ended October 31, 2002, the Portfolio returned 4.20%. In comparison, the Lehman Brothers Government Bond Index ("Lehman Government Bond Index")/2/ returned 6.41% for the same period. Portfolio Manager Market and Portfolio Overview The reduction of the federal funds rate ("fed funds rate")/3/ to a 40-year low combined with continued equity market volatility, increased investor appetite for fixed-income investments. Interest in U.S. Treasury securities was particularly high as investors sought out safer havens. During the period, the U.S. Treasury modified its financing schedule by adding a weekly issued 4-week U.S. Treasury bill ("T-bills") to its issuance schedule (complementing its regularly scheduled weekly issuance of T-bills with 3-month and 6-month maturities). Four-week T-bills are typically issued to reduce the U.S. government's reliance on irregularly issued cash-management bills and to help bridge the government's short-term borrowing needs. Cash-management bills/4/ were still issued during the period, but the volume was much lower than that of prior years. The yields on U.S. Treasury bills, which generally move in the opposite direction of T-bill prices, dropped in lockstep with the reduction in the official fed funds target. T-bill yields, despite the increased supply of bills, remained at historically low levels. In our opinion, yields are not likely to dramatically increase until the Federal Open Market Committee ("FOMC")/5/ increases its fed funds target. -------- 1 The performance returns set for above do not reflect the reduction of initial charges and expenses imposed in connection with investing in variable annuity contracts such as administrative fees, account charges and surrender charges, which if reflected, would reduce the performance of the Portfolio. 2 The Lehman Government Bond Index is a broad measure of bonds with maturities of up to ten years. Please note that an investor cannot invest directly in an index. 3 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. The fed funds rate often indicates the direction of U.S. interest rates. -------- 4 Cash management bills are obligations of the U.S. Government with maturities that are set on an issue-by-issue basis. Most are issued with terms of less than 3 months. 5 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. 16 Smith Barney Investment Series | 2002 Annual Report to Shareholders Portfolio Manager Market Outlook We continue to believe that the U.S. economic recovery remains on track. Third-quarter Gross Domestic Product ("GDP")/6/ appears to be accelerating following this year's slow second quarter. We interpret the mid-year slowdown as a reaction by the business sector to the heightened state of concern over corporate accounting issues and the extreme volatility of the stock market. If our view is correct, then we believe the next move by the FOMC will likely increase the fed funds rate target in early 2003. We expect the short-term U.S. Treasury yield curve will steepen in anticipation of a less accommodative monetary policy by the U.S. Federal Reserve Board in 2003. We, therefore, plan to assume a more cautious maturity stance in the weeks ahead in anticipation of seeking an opportunity to lock in more attractive yield. Thank you for your investment in the Smith Barney Government Portfolio. We look forward to continuing to help you meet your investment objectives. -------- 6 GDP is a market value of goods and services produced by labor and property in the U.S. 17 Smith Barney Investment Series | 2002 Annual Report to Shareholders SMITH BARNEY GOVERNMENT PORTFOLIO HISTORICAL PERFORMANCE
Net Asset Value ----------------- Beginning End Income Capital Gain Total Year Ended of Year of Year Dividends Distributions Returns+ ------------------------------------------------------------------------------ 10/31/02 $11.44 $11.74 $0.11 $0.07 4.20% ----------------------------------------------------------------------------- 10/31/01 10.62 11.44 0.57 0.00 13.56 ----------------------------------------------------------------------------- 10/31/00 10.13 10.62 0.16 0.00 6.55 ----------------------------------------------------------------------------- 9/15/99* -- 10/31/99 10.00 10.13 0.00 0.00 1.30++ ----------------------------------------------------------------------------- Total $0.84 $0.07 -----------------------------------------------------------------------------
It is the Portfolio's policy to distribute dividends and capital gains, if any, annually. AVERAGE ANNUAL TOTAL RETURNS+ Year Ended 10/31/02 4.20% -------------------------------------------------------------------------- 9/15/99* through 10/31/02 8.14 --------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN+ 9/15/99* through 10/31/02 27.72% ---------------------------------------------------------------------------
+ Assumes reinvestment of all dividends and capital gain distributions. ++ Total return is not annualized, as it may not be representative of the total return for the year. * Commencement of operations. 18 Smith Barney Investment Series | 2002 Annual Report to Shareholders SMITH BARNEY GOVERNMENT PORTFOLIO AT A GLANCE (UNAUDITED) Value of $10,000 Invested in the Smith Barney Government Portfolio vs. Lehman Brothers Government Bond Index+ -------------------------------------------------------------------------------- September 1999 -- October 2002 [CHART] Smith Barney Lehman Brothers Government Portfolio Government Bond Index -------------------- --------------------- Sep 15, 1999 $10,000 $10,000 Oct 1999 10,130 10,016 Oct 2000 10,793 10,820 Oct 2001 12,257 12,451 Oct 31, 2002 12,772 13,249 +Hypothetical illustration of $10,000 invested on September 15, 1999 (commencement of operations), assuming the reinvestment of dividends and capital gains, if any, at net asset value through October 31, 2002. The Lehman Brothers Government Bond Index includes U.S. Treasury and government agency securities with maturities of one year or more having a minimum outstanding principal of $100 million and are only fixed-coupon securities. The index is unmanaged and is not subject to the same management and trading expenses as a mutual fund. Please note that an investor cannot invest directly in an index. All figures represent past performance and are not a guarantee of future results. The performance data represents past performance including the investment return and principal value of an investment, which will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. INVESTMENT BREAKDOWN* [CHART] Mortgage-Backed Securities 31.6% U.S. Treasury Obligations 38.4% U.S. Government Agencies 4.9% Repurchase Agreements 25.1% U.S. Treasury Obligations are debt obligations of the United States government. They are secured by the full faith and credit of the U.S. government, and include such instruments as Treasury bonds, notes and bills. Mortgage-Backed Securities are debt securities issued by U.S. government agencies such as the Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA") and Government National Mortgage Association ("GNMA"). They generally represent thousands of individual home mortgages that are pooled to form securities. As homeowners pay interest and principal each month, these payments are passed on to investors. Mortgage-backed securities are backed by the full faith and credit of the issuing agency. *As a percentage of total investments. Please note holdings are as of October 31, 2002 and are subject to change. 19 Smith Barney Investment Series | 2002 Annual Report to Shareholders SCHEDULES OF INVESTMENTS OCTOBER 31, 2002 Smith Barney Premier Selections All Cap Growth Portfolio
SHARES SECURITY VALUE ----------------------------------------------------------------- COMMON STOCK -- 96.1% Aerospace and Defense -- 0.9% 4,025 Alliant Techsystems Inc.* $ 242,104 ----------------------------------------------------------------- Auto Parts and Equipment -- 0.4% 3,400 Lear Corp.* 124,270 ----------------------------------------------------------------- Banks -- 1.3% 5,100 Mercantile Bankshares Corp. 198,594 6,800 National Commerce Financial Corp. 166,464 ----------------------------------------------------------------- 365,058 ----------------------------------------------------------------- Biotechnology -- 0.3% 1,850 IDEC Pharmaceuticals Corp.* 85,137 ----------------------------------------------------------------- Casino/Hotels -- 1.5% 4,700 Mandalay Resort Group* 132,963 16,600 Station Casinos, Inc.* 298,634 ----------------------------------------------------------------- 431,597 ----------------------------------------------------------------- Chemicals -- 0.5% 3,900 International Flavors & Fragrances Inc. 130,845 ----------------------------------------------------------------- Commercial Services -- 0.2% 5,700 Plexus Corp.* 61,161 ----------------------------------------------------------------- Computers -- 2.6% 7,402 The BISYS Group, Inc.* 132,496 8,000 CACI International Inc., Class A Shares* 327,280 2,800 Lexmark International, Inc.* 166,376 4,800 Manhattan Associates, Inc.* 107,904 ----------------------------------------------------------------- 734,056 ----------------------------------------------------------------- Consumer Durables -- 1.1% 3,500 Alcon, Inc. 143,570 1,210 Electronic Arts Inc.* 78,795 1,920 SPX Corp. 80,659 ----------------------------------------------------------------- 303,024 ----------------------------------------------------------------- Consumer Non-Durables -- 3.7% 22,500 The Coca-Cola Co. 1,045,800 ----------------------------------------------------------------- Consumer Services -- 3.5% 23,900 AOL Time Warner, Inc.* 352,525 5,930 Imax Corp.* 29,591 3,900 Univision Communications Inc., Class A Shares* 101,049 3,500 Valassis Communications, Inc.* 90,300 24,700 The Walt Disney Co. 412,490 ----------------------------------------------------------------- 985,955 ----------------------------------------------------------------- Cosmetics -- 0.6% 3,550 Alberto-Culver Co. 170,932 ----------------------------------------------------------------- Education -- 1.1% 7,500 Career Education Corp.* 300,825 ----------------------------------------------------------------- Electronic Components -- 3.9% 25,500 Intel Corp. 441,150 12,700 Lam Research Corp.* 159,893
See Notes to Financial Statements. 20 Smith Barney Investment Series | 2002 Annual Report to Shareholders SCHEDULES OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
Smith Barney Premier Selections All Cap Growth Portfolio SHARES SECURITY VALUE ----------------------------------------------------------------- Electronic Components -- 3.9% (continued) 8,900 Micrel Inc.* $ 73,514 27,000 Texas Instruments, Inc. 428,220 ----------------------------------------------------------------- 1,102,777 ----------------------------------------------------------------- Electronics -- 1.2% 6,900 Cymer, Inc.* 173,328 1,700 L-3 Communications Holdings, Inc.* 79,900 4,100 Pepco Holdings, Inc.* 84,870 ----------------------------------------------------------------- 338,098 ----------------------------------------------------------------- Energy -- 1.8% 2,300 Mirant Corp.* 4,922 6,000 Newfield Exploration Co.* 209,940 6,000 Stone Energy Corp.* 192,960 5,000 Wisconsin Energy Corp. 114,900 ----------------------------------------------------------------- 522,722 ----------------------------------------------------------------- Engineering and Construction -- 0.3% 3,200 Jacobs Engineering Group Inc.* 96,928 ----------------------------------------------------------------- Finance -- 11.4% 4,017 Ambac Financial Group, Inc. 248,251 12,100 American International Group, Inc. 756,855 8,400 Bank One Corp. 323,988 7,350 Banknorth Group, Inc. 170,299 3,200 Capital One Financial Corp. 97,504 7,400 Commerce Bancorp, Inc. 339,734 5,700 Compass Bancshares, Inc. 184,110 9,500 Eaton Vance Corp. 272,745 12,500 Merrill Lynch & Co., Inc. 474,375 3,200 Southwest Bancorporation of Texas, Inc.* 90,400 2,300 StanCorp Financial Group, Inc. 124,200 9,300 Waddell & Reed Financial, Inc., Class A Shares 162,750 ----------------------------------------------------------------- 3,245,211 ----------------------------------------------------------------- Food -- 1.2% 4,000 Dean Foods Co.* 149,960 4,100 Hormel Foods Corp. 99,220 2,150 Performance Food Group Co.* 79,959 ----------------------------------------------------------------- 329,139 ----------------------------------------------------------------- Healthcare - Drugs -- 7.5% 13,800 Amgen, Inc.* 642,528 17,200 Merck & Co., Inc. 932,928 18,100 Pfizer, Inc. 575,037 ----------------------------------------------------------------- 2,150,493 ----------------------------------------------------------------- Healthcare - Services -- 10.3% 3,600 AmerisourceBergen Corp. 256,140 13,100 Cobalt Corp.* 214,185 10,500 Coventry Health Care, Inc.* 351,330 7,500 Henry Schein, Inc.* 376,275 12,800 Johnson & Johnson 752,000 3,000 LifePoint Hospitals, Inc.* 94,050 7,500 PacifiCare Health Systems, Inc.* 221,700
See Notes to Financial Statements. 21 Smith Barney Investment Series | 2002 Annual Report to Shareholders SCHEDULES OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
Smith Barney Premier Selections All Cap Growth Portfolio SHARES SECURITY VALUE -------------------------------------------------------------------------------------- Healthcare - Services -- 10.3% (continued) 25,000 Quest Diagnostics, Inc.* $ 273,000 2,100 St. Jude Medical, Inc.* 74,781 2,000 Triad Hospitals, Inc.* 73,000 5,150 Universal Health Services, Inc., Class B Shares* 249,672 ----------------------------------------------------------------------------------- 2,936,133 ----------------------------------------------------------------------------------- Industrial Services -- 3.6% 3,800 Air Products & Chemicals, Inc. 167,960 7,200 Brooks-PRI Automation, Inc.* 110,088 2,280 Cooper Cameron Corp.* 106,294 2,750 IDEX Corp. 82,610 6,400 Smith International, Inc.* 200,064 8,500 Smurfit-Stone Container Corp.* 110,585 6,250 Weatherford International, Inc.* 250,250 ----------------------------------------------------------------------------------- 1,027,851 ----------------------------------------------------------------------------------- Insurance -- 0.9% 9,250 Arthur J. Gallagher & Co. 248,085 ----------------------------------------------------------------------------------- Leisure Time -- 0.3% 4,700 Royal Caribbean Cruises Ltd. 86,292 ----------------------------------------------------------------------------------- Lodging -- 0.8% 9,600 Fairmont Hotels & Resorts Inc. 235,776 ----------------------------------------------------------------------------------- Media -- 2.1% 1,500 The E.W. Scripps Co., Class A Shares 115,785 4,100 Entercom Communications Corp.* 201,802 4,400 Lin TV Corp., Class A Shares* 90,772 10,000 Regal Entertainment Group, Class A Shares 193,000 ----------------------------------------------------------------------------------- 601,359 ----------------------------------------------------------------------------------- Oil and Gas -- 3.2% 6,250 KeySpan Corp. 228,312 1,950 Murphy Oil Corp. 163,468 4,950 Nabors Industries, Ltd.* 173,102 13,400 Pioneer Natural Resources Co.* 333,258 ----------------------------------------------------------------------------------- 898,140 ----------------------------------------------------------------------------------- Pharmaceuticals -- 1.2% 2,000 Cephalon, Inc.* 100,540 2,500 Gilead Sciences, Inc.* 86,850 2,000 Teva Pharmaceutical Industries Ltd., Sponsored ADR 154,860 ----------------------------------------------------------------------------------- 342,250 ----------------------------------------------------------------------------------- Process Industries -- 0.6% 3,500 Ecolab Inc. 168,875 ----------------------------------------------------------------------------------- Producer Manufacturing -- 6.7% 1,450 Danaher Corp. 83,882 14,800 General Electric Co. 373,700 41,400 The Gillette Co. 1,237,032 15,700 Tyco International Ltd. 227,022 ----------------------------------------------------------------------------------- 1,921,636 ----------------------------------------------------------------------------------- Real Estate -- 0.9% 8,900 The St. Joe Co. 259,702 -----------------------------------------------------------------------------------
See Notes to Financial Statements. 22 Smith Barney Investment Series | 2002 Annual Report to Shareholders SCHEDULES OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
Smith Barney Premier Selections All Cap Growth Portfolio SHARES SECURITY VALUE ------------------------------------------------------------------------------------------ Retail -- 10.4% 34,200 Amazon.com, Inc.* $ 662,112 7,100 Barnes & Noble, Inc.* 149,810 6,300 Brinker International, Inc.* 178,857 5,700 The Cheesecake Factory Inc.* 193,230 15,800 Chico's FAS, Inc.* 304,940 9,400 Coach, Inc.* 279,650 22,300 The Home Depot, Inc. 644,024 9,000 Jo-Ann Stores, Inc.* 219,150 6,300 Outback Steakhouse, Inc.* 214,515 3,000 Ross Stores, Inc. 125,550 --------------------------------------------------------------------------------------- 2,971,838 --------------------------------------------------------------------------------------- Semiconductors -- 1.4% 9,050 ATMI, Inc.* 166,429 5,200 Microchip Technology Inc.* 126,880 7,350 Semtech Corp.* 103,856 --------------------------------------------------------------------------------------- 397,165 --------------------------------------------------------------------------------------- Software -- 0.8% 5,900 Hyperion Solutions Corp.* 159,300 11,500 Rational Software Corp.* 76,130 --------------------------------------------------------------------------------------- 235,430 --------------------------------------------------------------------------------------- Technology -- 6.7% 6,350 Activision, Inc.* 130,175 20,700 Cisco Systems, Inc.* 231,426 11,800 Emulex Corp.* 211,810 3,450 Intuit Inc.* 179,124 3,400 Jabil Circuit, Inc.* 52,462 3,275 Mercury Interactive Corp.* 86,362 16,300 Microsoft Corp.* 871,561 3,700 Network Associates, Inc.* 58,793 8,100 Teradyne, Inc.* 98,091 --------------------------------------------------------------------------------------- 1,919,804 --------------------------------------------------------------------------------------- Telecommunications -- 1.2% 4,800 Lucent Technologies Inc.* 5,904 37,900 Motorola, Inc. 347,543 --------------------------------------------------------------------------------------- 353,447 --------------------------------------------------------------------------------------- TOTAL COMMON STOCK (Cost -- $33,113,251) 27,369,915 --------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ FACE AMOUNT SECURITY VALUE ------------------------------------------------------------------------------------------ REPURCHASE AGREEMENT -- 3.9% $1,120,000 Merrill Lynch & Co., Inc., 1.850% due 11/1/02; Proceeds at maturity -- $1,120,058; (Fully collateralized by Federal Home Loan Mortgage Corp. Discount Notes and Federal National Mortgage Association Discount Notes, 0.000% due 1/29/03 to 4/30/03; Market value -- $1,142,400) (Cost -- $1,120,000) 1,120,000 --------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ TOTAL INVESTMENTS -- 100% (Cost -- $34,233,251**) $28,489,915 --------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------
*Non-income producing security. **Aggregate cost for Federal income tax purposes is substantially the same. See Notes to Financial Statements. 23 Smith Barney Investment Series | 2002 Annual Report to Shareholders SCHEDULES OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
Smith Barney Large Cap Core Portfolio SHARES SECURITY VALUE --------------------------------------------------------------------------------------- COMMON STOCK -- 97.3% Consumer Durables -- 1.6% 8,440 Electronic Arts, Inc.* $ 549,613 10,412 SPX Corp.* 437,408 -------------------------------------------------------------------------------------- 987,021 -------------------------------------------------------------------------------------- Consumer Non-Durables -- 9.7% 18,250 The Coca-Cola Co. 848,260 6,250 The Estee Lauder Cos. Inc. 182,000 12,460 The Gillette Co. 372,305 16,150 Kimberly-Clark Corp. 831,725 27,975 Kraft Foods Inc., Class A Shares 1,105,013 9,100 Medtronic, Inc. 407,680 20,505 PepsiCo, Inc. 904,271 9,850 The Procter & Gamble Co. 871,233 6,600 Unilever N.V. -- NY Shares 422,466 -------------------------------------------------------------------------------------- 5,944,953 -------------------------------------------------------------------------------------- Consumer Services -- 4.4% 23,200 AOL Time Warner, Inc.* 342,200 20,800 Cox Communications, Inc.* 569,920 5,150 Harley-Davidson, Inc. 269,345 8,250 Paychex, Inc. 237,765 22,781 Viacom Inc., Class A Shares* 1,016,260 16,900 The Walt Disney Co. 282,230 -------------------------------------------------------------------------------------- 2,717,720 -------------------------------------------------------------------------------------- Energy -- 5.7% 8,542 BP PLC, Sponsored ADR 328,440 3,750 Exelon Corp. 189,000 58,356 Exxon Mobil Corp. 1,964,263 10,200 Noble Corp.* 329,664 10,450 Total Fina Elf S.A., Sponsored ADR 710,809 -------------------------------------------------------------------------------------- 3,522,176 -------------------------------------------------------------------------------------- Finance -- 19.9% 28,750 AMBAC Financial Group, Inc. 1,776,750 35,700 American International Group, Inc. 2,233,035 17,450 Bank of America Co., Inc. 1,218,010 5,500 The Bank of New York Co., Inc. 143,000 23,050 Capital One Financial Corp. 702,333 12,050 Fannie Mae 805,663 14,950 Freddie Mac 920,621 22,530 IndyMac Bancorp, Inc.* 419,959 15,000 J.P. Morgan Chase & Co. 311,250 14,600 Lehman Brothers Holdings Inc. 777,742 19,700 Morgan Stanley 766,724 10,350 SunTrust Banks, Inc. 629,694 30,300 Wells Fargo & Co. 1,529,241 -------------------------------------------------------------------------------------- 12,234,022 -------------------------------------------------------------------------------------- Healthcare -- 13.9% 19,090 Alcon, Inc.* 783,072 12,660 Amgen Inc.* 589,450 6,675 Eli Lilly & Co. 370,463
See Notes to Financial Statements. 24 Smith Barney Investment Series | 2002 Annual Report to Shareholders SCHEDULES OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
Smith Barney Large Cap Core Portfolio SHARES SECURITY VALUE ------------------------------------------------------------------------ Healthcare -- 13.9% (continued) 15,250 HCA Inc. $ 663,222 25,750 Johnson & Johnson 1,512,812 5,500 Merck & Co., Inc. 298,320 57,975 Pfizer Inc. 1,841,866 19,000 Pharmacia Corp. 817,000 7,250 Schering-Plough Corp. 154,788 5,250 Teva Pharmaceutical Industries Ltd., Sponsored ADR 406,508 3,600 Wellpoint Health Networks Inc.* 270,756 23,600 Wyeth 790,600 ------------------------------------------------------------------------ 8,498,857 ------------------------------------------------------------------------ Indices -- 0.5% 3,050 iShares Nasdaq Biotechnology Index Fund* 155,855 6,500 Nasdaq-100 Index Tracking Stock* 159,575 ------------------------------------------------------------------------ 315,430 ------------------------------------------------------------------------ Industrial Services -- 3.4% 2,650 Danaher Corp. 153,302 6,500 Lockheed Martin Corp. 376,350 12,425 Praxair, Inc. 677,163 7,250 United Technologies Corp. 447,108 11,340 Weatherford International, Inc.* 454,054 ------------------------------------------------------------------------ 2,107,977 ------------------------------------------------------------------------ Insurance -- 1.5% 5 Berkshire Hathaway Inc., Class A Shares* 370,950 15,750 The St. Paul Cos., Inc. 516,600 ------------------------------------------------------------------------ 887,550 ------------------------------------------------------------------------ Media -- 0.5% 2,050 Gannett Co., Inc. 155,656 3,300 Tribune Co. 158,565 ------------------------------------------------------------------------ 314,221 ------------------------------------------------------------------------ Producer Manufacturing -- 7.7% 3,950 3M Co. 501,413 10,500 Alcan, Inc. 295,575 24,050 Alcoa, Inc. 530,543 6,700 E.I. Du Pont De NeMours & Co. 276,375 12,505 EnCana Corp. 363,895 61,880 General Electric Co. 1,562,470 19,050 Honeywell International Inc. 456,057 13,020 Maxim Integrated Products, Inc.* 414,557 21,500 Tyco International Ltd. 310,890 ------------------------------------------------------------------------ 4,711,775 ------------------------------------------------------------------------ Retail -- 7.5% 14,550 Costco Wholesale Corp.* 493,681 11,676 The Home Depot, Inc. 337,203 13,300 Lowe's Cos., Inc. 555,009 6,150 Safeway Inc.* 142,065 6,800 Sara Lee Corp. 155,244 8,700 Target Corp. 262,044 45,050 The TJX Cos., Inc. 924,426 32,300 Wal-Mart Stores, Inc. 1,729,665 ------------------------------------------------------------------------ 4,599,337 ------------------------------------------------------------------------
See Notes to Financial Statements. 25 Smith Barney Investment Series | 2002 Annual Report to Shareholders SCHEDULES OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
Smith Barney Large Cap Core Portfolio SHARES SECURITY VALUE ---------------------------------------------------------------------------------------------------------------------- Software -- 6.8% 19,500 BEA Systems, Inc.* $ 157,735 51,980 Microsoft Corp.* 2,779,371 62,125 Oracle Corp.* 633,054 15,450 SAP AG, Sponsored ADR 295,713 18,520 VERITAS Software Corp.* 282,430 ---------------------------------------------------------------------------------------------------------------------- 4,148,303 ---------------------------------------------------------------------------------------------------------------------- Technology -- 7.2% 51,800 Cisco Systems, Inc.* 579,124 28,700 Dell Computer Corp.* 821,107 17,700 EMC Corp.* 90,447 17,350 Hewlett-Packard Co. 274,130 51,218 Intel Corp. 886,071 6,500 International Business Machines Corp. 513,110 6,900 Intuit Inc.* 358,248 5,900 Lexmark International Group, Inc., Class A Shares* 350,578 34,800 Lucent Technologies Inc. 42,804 83,250 Sun Microsystems, Inc.* 246,503 15,500 Texas Instruments Inc. 245,830 ---------------------------------------------------------------------------------------------------------------------- 4,407,952 ---------------------------------------------------------------------------------------------------------------------- Telecommunications and Equipment -- 1.6% 32,029 AT&T Wireless Services Inc.* 220,039 26,400 Motorola, Inc. 242,088 23,850 Nokia Oyj, Sponsored ADR 396,387 4,900 Univision Communications Inc., Class A Shares* 126,959 ---------------------------------------------------------------------------------------------------------------------- 985,473 ---------------------------------------------------------------------------------------------------------------------- Transportation -- 0.8% 8,400 United Parcel Service, Inc., Class B Shares 504,084 ---------------------------------------------------------------------------------------------------------------------- Utilities -- 4.6% 57,287 AT&T Corp. 747,022 16,900 Mirant Corp.* 36,166 12,250 The Southern Co. 363,825 44,215 Verizon Communications Inc. 1,669,558 ---------------------------------------------------------------------------------------------------------------------- 2,816,571 ---------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCK (Cost -- $68,415,883) 59,703,422 ---------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- FACE AMOUNT SECURITY VALUE ---------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 2.7% $1,684,000 Merrill Lynch & Co., Inc., 1.850% due 11/1/02; Proceeds at maturity -- $1,684,087; (Fully collateralized by Federal Home Loan Mortgage Corp. Discount Notes and Federal National Mortgage Association Discount Notes, 0.000% due 1/29/03 to 4/30/03; Market value -- $1,717,680) (Cost -- 1,684,000) 1,684,000 ---------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100% (Cost -- $70,099,883**) $61,387,422 ---------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------
*Non-income producing security. **Aggregate cost for Federal income tax purposes is substantially the same. See Notes to Financial Statements. 26 Smith Barney Investment Series | 2002 Annual Report to Shareholders SCHEDULES OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
Smith Barney Growth and Income Portfolio SHARES SECURITY VALUE ------------------------------------------------------------------------------------------------------------ COMMON STOCK -- 96.8% Aerospace and Defense -- 1.0% 2,800 The Boeing Co. $ 83,300 1,000 General Dynamics Corp. 79,130 3,500 United Technologies Corp. 215,845 --------------------------------------------------------------------------------------------------------- 378,275 --------------------------------------------------------------------------------------------------------- Automobiles -- 0.2% 2,700 Navistar International Corp., Inc.* 60,534 --------------------------------------------------------------------------------------------------------- Banks -- 9.2% 9,200 Bank of America Corp. 642,160 28,200 The Bank of New York Co., Inc. 733,200 11,400 Bank One Corp. 439,698 2,200 Comerica, Inc. 96,052 12,200 Fleet Boston Financial Corp. 285,358 3,300 J.P. Morgan Chase & Co. 68,475 7,700 Wachovia Corp. 267,883 1,100 Washington Mutual, Inc. 39,336 15,500 Wells Fargo & Co. 782,285 --------------------------------------------------------------------------------------------------------- 3,354,447 --------------------------------------------------------------------------------------------------------- Beverages -- 2.0% 16,500 PepsiCo, Inc. 727,650 --------------------------------------------------------------------------------------------------------- Biotechnology -- 1.3% 10,200 Amgen, Inc.* 474,912 --------------------------------------------------------------------------------------------------------- Brokers and Investment Management -- 2.8% 5,000 The Goldman Sachs Group, Inc. 358,000 10,600 Merrill Lynch & Co., Inc. 402,270 6,300 Morgan Stanley 245,196 --------------------------------------------------------------------------------------------------------- 1,005,466 --------------------------------------------------------------------------------------------------------- Chemicals -- 0.5% 4,600 OM Group, Inc. 29,854 18,200 PolyOne Corp. 145,600 --------------------------------------------------------------------------------------------------------- 175,454 --------------------------------------------------------------------------------------------------------- Commercial Services -- 2.2% 6,600 Ecolab Inc. 318,450 2,200 First Data Corp. 76,868 14,500 Paychex, Inc. 417,890 --------------------------------------------------------------------------------------------------------- 813,208 --------------------------------------------------------------------------------------------------------- Communications Equipment -- 3.6% 19,600 CIENA Corp.* 72,128 33,100 Cisco Systems, Inc.* 370,058 28,000 Comverse Technology, Inc.* 204,120 41,200 Nokia Corp., Sponsored ADR 684,744 --------------------------------------------------------------------------------------------------------- 1,331,050 --------------------------------------------------------------------------------------------------------- Computers and Peripherals -- 2.7% 5,400 Brocade Communications Systems, Inc.* 37,098 23,300 Dell Computer Corp.* 666,613 100,400 Sun Microsystems, Inc.* 297,284 --------------------------------------------------------------------------------------------------------- 1,000,995 ---------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 27 Smith Barney Investment Series | 2002 Annual Report to Shareholders SCHEDULES OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
Smith Barney Growth and Income Portfolio SHARES SECURITY VALUE -------------------------------------------------------------------------------------------------- Diversified Financials -- 0.3% 3,000 American Express Co. $ 109,110 ----------------------------------------------------------------------------------------------- Diversified Manufacturing -- 0.7% 18,800 Tyco International Ltd. 271,848 ----------------------------------------------------------------------------------------------- Diversified Telecommunications -- 3.4% 22,200 AT&T Corp. 289,488 6,600 UnitedGlobalCom Inc., Class A Shares* 12,474 24,900 Verizon Communications, Inc. 940,224 ----------------------------------------------------------------------------------------------- 1,242,186 ----------------------------------------------------------------------------------------------- Electric Utilities -- 4.2% 18,100 American Electric Power Co., Inc. 464,084 6,800 Consolidated Edison, Inc. 289,476 4,500 Exelon Corp. 226,800 18,500 The Southern Co. 549,450 ----------------------------------------------------------------------------------------------- 1,529,810 ----------------------------------------------------------------------------------------------- Electronic Equipment -- 0.3% 8,200 Celestica, Inc.* 113,160 ----------------------------------------------------------------------------------------------- Food and Drug Retailing -- 1.7% 4,700 The Kroger Co. 69,748 23,700 Safeway, Inc.* 547,470 ----------------------------------------------------------------------------------------------- 617,218 ----------------------------------------------------------------------------------------------- Food Products -- 1.9% 7,300 General Mills, Inc. 301,636 2,700 Kraft Foods Inc., Class A Shares 106,650 4,300 Unilever N.V. 275,243 ----------------------------------------------------------------------------------------------- 683,529 ----------------------------------------------------------------------------------------------- Government Sponsored Enterprises -- 1.4% 8,500 Freddie Mac 523,430 ----------------------------------------------------------------------------------------------- Healthcare Equipment -- 1.0% 10,800 Applied Biosystems Group-Applera Corp. 218,484 4,400 St. Jude Medical, Inc.* 156,684 ----------------------------------------------------------------------------------------------- 375,168 ----------------------------------------------------------------------------------------------- Healthcare Providers -- 1.2% 10,000 HCA, Inc.+ 434,900 ----------------------------------------------------------------------------------------------- Hotels and Restaurants -- 1.3% 15,000 MGM MIRAGE* 466,500 ----------------------------------------------------------------------------------------------- Household Products -- 1.0% 6,900 Kimberly-Clark Corp. 355,350 ----------------------------------------------------------------------------------------------- Industrial Conglomerates -- 2.7% 26,300 General Electric Co. 664,075 7,800 SPX Corp. 327,678 ----------------------------------------------------------------------------------------------- 991,753 ----------------------------------------------------------------------------------------------- Insurance -- 5.7% 21,168 American International Group, Inc. 1,324,059 2 Berkshire Hathaway Inc., Class A Shares* 148,380 6,100 The Hartford Financial Services Group, Inc. 240,950
See Notes to Financial Statements. 28 Smith Barney Investment Series | 2002 Annual Report to Shareholders SCHEDULES OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
Smith Barney Growth and Income Portfolio SHARES SECURITY VALUE ------------------------------------------------------------------------------------------------ Insurance -- 5.7% (continued) 4,800 Marsh & McLennan Cos., Inc. $ 224,208 1,800 XL Capital Ltd., Class A Shares 137,070 ----------------------------------------------------------------------------------------------- 2,074,667 ----------------------------------------------------------------------------------------------- Machinery -- 2.4% 3,800 Cummins, Inc. 91,048 2,900 Danaher Corp. 167,765 8,700 Deere & Co. 403,593 4,750 PACCAR, Inc. 209,570 ----------------------------------------------------------------------------------------------- 871,976 ----------------------------------------------------------------------------------------------- Media -- 3.5% 7,700 Comcast Corp., Special Class A Shares* 177,177 32,600 Liberty Media Corp., Class A Shares* 269,602 42,800 The News Corp. Ltd. 846,156 ----------------------------------------------------------------------------------------------- 1,292,935 ----------------------------------------------------------------------------------------------- Metals and Mining -- 1.8% 6,400 Alcan, Inc. 180,160 18,100 Alcoa, Inc. 399,286 5,300 Barrick Gold Corp. 79,871 ----------------------------------------------------------------------------------------------- 659,317 ----------------------------------------------------------------------------------------------- Multi-Line Retail -- 4.5% 29,000 Costco Wholesale Corp.* 983,970 21,000 Federated Department Stores, Inc.* 644,700 ----------------------------------------------------------------------------------------------- 1,628,670 ----------------------------------------------------------------------------------------------- Oil and Gas -- 6.0% 2,400 El Paso Corp. 18,600 34,000 Exxon Mobil Corp. 1,144,440 2,700 Royal Dutch Petroleum Co., Sponsored ADR 115,506 10,700 Total Fina Elf S.A., Sponsored ADR 727,814 7,500 Transocean, Inc. 164,850 ----------------------------------------------------------------------------------------------- 2,171,210 ----------------------------------------------------------------------------------------------- Paper and Forest Products -- 0.5% 8,100 Smurfit-Stone Container Corp.* 105,381 2,900 UPM-Kymmene Oyj, Sponsored ADR 94,801 ----------------------------------------------------------------------------------------------- 200,182 ----------------------------------------------------------------------------------------------- Personal Products -- 1.0% 1,800 Avon Products, Inc. 87,282 9,500 The Estee Lauder Cos., Inc., Class A Shares 276,640 ----------------------------------------------------------------------------------------------- 363,922 ----------------------------------------------------------------------------------------------- Pharmaceuticals -- 11.4% 6,300 Cephalon, Inc.* 316,701 7,200 Eli Lilly & Co. 399,600 4,600 Johnson & Johnson 270,250 6,600 Novartis AG, ADR 250,404 30,800 Pfizer Inc. 978,516 11,000 Pharmacia Corp. 473,000
See Notes to Financial Statements. 29 Smith Barney Investment Series | 2002 Annual Report to Shareholders SCHEDULES OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
Smith Barney Growth and Income Portfolio SHARES SECURITY VALUE -------------------------------------------------------------------------------------------------- Pharmaceuticals -- 11.4% (continued) 16,300 Schering-Plough Corp. $ 348,005 13,700 Teva Pharmaceutical Industries Ltd., Sponsored ADR 1,060,791 2,100 Wyeth 70,350 ----------------------------------------------------------------------------------------------- 4,167,617 ----------------------------------------------------------------------------------------------- Railroads -- 0.8% 6,400 Canadian National Railway Co. 273,088 ----------------------------------------------------------------------------------------------- Real Estate Investment Trust -- 0.4% 6,400 CarrAmerica Realty Corp. 151,936 ----------------------------------------------------------------------------------------------- Semiconductors and Equipment -- 2.2% 5,300 Applied Materials, Inc.* 79,659 14,800 Intel Corp. 256,040 3,400 Linear Technology Corp. 93,976 8,100 Micron Technology, Inc.* 129,600 6,400 STMicroelectronics N.V. 125,888 5,900 Teradyne, Inc.* 71,449 2,000 Texas Instruments, Inc. 31,720 ----------------------------------------------------------------------------------------------- 788,332 ----------------------------------------------------------------------------------------------- Software -- 6.5% 18,100 BEA Systems, Inc.* 146,411 30,100 BMC Software, Inc.* 479,794 15,500 EMC Corp. 79,205 27,125 Microsoft Corp.* 1,450,374 17,000 Oracle Corp.* 173,230 3,401 VERITAS Software Corp.* 51,865 ----------------------------------------------------------------------------------------------- 2,380,879 ----------------------------------------------------------------------------------------------- Specialty Retail -- 1.8% 18,900 The Home Depot, Inc. 545,832 6,200 Staples, Inc.* 95,604 ----------------------------------------------------------------------------------------------- 641,436 ----------------------------------------------------------------------------------------------- Wireless Telecommunications -- 1.7% 54,600 ADC Telecommunications, Inc.* 86,268 77,686 AT&T Wireless Services Inc.* 533,703 ----------------------------------------------------------------------------------------------- 619,971 ----------------------------------------------------------------------------------------------- TOTAL COMMON STOCK (Cost -- $41,930,205) 35,322,091 -------- -------------------------------------------------------------------------------------------------- FACE AMOUNT SECURITY VALUE -------------------------------------------------------------------------------------------------- CONVERTIBLE CORPORATE BONDS -- 1.0% Diversified Telecommunications -- 0.7% $231,000 Bell Atlantic Financial Services, Inc., 5.750% due 4/1/03 233,310 85,000 NTL Communications Corp., 6.750% due 5/15/08 10,200 166,000 NTL (Delaware), Inc., 5.750% due 12/15/09 18,260 ----------------------------------------------------------------------------------------------- 261,770 -----------------------------------------------------------------------------------------------
See Notes to Financial Statements. 30 Smith Barney Investment Series | 2002 Annual Report to Shareholders SCHEDULES OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
Smith Barney Growth and Income Portfolio FACE AMOUNT SECURITY VALUE ------------------------------------------------------------------------------------------------ Semiconductors and Equipment -- 0.3% $146,000 Teradyne, Inc., 3.750% due 10/15/06 $ 125,925 ----------------------------------------------------------------------------------------------- TOTAL CONVERTIBLE CORPORATE BONDS (Cost -- $500,327) 387,695 ----------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ SUB-TOTAL INVESTMENTS (Cost -- $42,430,532) 35,709,786 ----------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 2.2% 793,000 Merrill Lynch & Co., Inc., 1.850% due 11/1/02; Proceeds at maturity -- $793,041; (Fully collateralized by Federal National Mortgage Association Discount Notes and Federal Home Loan Mortgage Corp. Discount Notes, 0.000% due 1/29/03 to 4/30/03; Market value -- $808,860) (Cost -- $793,000) 793,000 ---------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100% (Cost -- $43,223,532**) $36,502,786 ---------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------
*Non-income producing security. + All or a portion of this security is on loan (See Note 8). **Aggregate cost for Federal income tax purposes is substantially the same. See Notes to Financial Statements. 31 Smith Barney Investment Series | 2002 Annual Report to Shareholders SCHEDULES OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
Smith Barney Government Portfolio FACE AMOUNT SECURITY VALUE ------------------------------------------------------------------------- U.S. TREASURY OBLIGATIONS -- 38.4% U.S. Treasury Notes: $11,500,000 3.250% due 8/15/07 (a) $ 11,768,191 1,500,000 4.875% due 2/15/12 (a) 1,617,853 25,000,000 4.375% due 8/15/12 (a) 25,960,950 U.S. Treasury Bonds: 300,000 7.250% due 5/15/16 (a) 378,856 200,000 9.000% due 11/15/18 (a) 292,844 700,000 7.625% due 2/15/25 (a) 935,840 1,350,000 U.S. Treasury Strip (Principal), due 5/15/05 (a) 1,284,131 ------------------------------------------------------------------------- TOTAL U.S. TREASURY OBLIGATIONS (Cost -- $41,647,410) 42,238,665 ------------------------------------------------------------------------- ------------------------------------------------------------------------- U.S. GOVERNMENT AGENCIES -- 4.9% Fannie Mae: 1,200,000 4.750% due 11/14/03 (a) 1,240,564 1,700,000 5.250% due 1/15/09 (a) 1,844,364 Federal Home Loan Bank (FHLB): 1,500,000 3.375% due 5/14/04 (a) 1,535,973 700,000 6.500% due 11/15/05 (a) 782,200 ------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT AGENCIES (Cost -- $5,095,002) 5,403,101 ------------------------------------------------------------------------- ------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES -- 31.6% Federal Home Loan Mortgage Corp. (FHLMC), Gold: 1,799,474 6.500% due 9/1/31 (a) 1,867,622 969,781 6.000% due 12/1/31 (a) 999,512 Federal National Mortgage Association (FNMA): 364,674 6.000% due 8/1/16 (a) 380,377 1,000,000 6.000% due 11/1/16 (b)(c) 1,041,562 1,000,000 6.500% due 11/1/17 (b)(c) 1,049,688 272,540 6.500% due 4/1/29 (a) 282,890 5,000,000 6.500% due 12/1/29 (c) 5,171,875 1,000,000 6.500% due 11/1/30 (b)(c) 1,036,250 802,422 7.000% due 11/1/31 (a) 838,558 10,000,000 6.000% due 12/1/31 (c) 10,240,620 543,897 7.500% due 4/1/32 (a)(d) 575,499 946,811 6.500% due 5/1/32 (a) 981,823 1,479,343 6.000% due 6/1/32 (a) 1,523,292 1,000,000 6.000% due 11/1/32 (b)(c) 1,027,812 1,000,000 7.000% due 11/1/32 (b)(c) 1,045,000 5,000,000 5.500% due 12/1/32 (c) 5,034,375 357,997 7.500% due 12/1/32 (a) 378,798 Government National Mortgage Association (GNMA): 18,671 7.000% due 4/15/27 (a) 19,679 451,665 6.500% due 6/15/31 (a) 470,948 692,265 7.000% due 9/15/31 (d) 727,782 ------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT AGENCIES (Cost -- $34,109,421) 34,693,962 ------------------------------------------------------------------------- ------------------------------------------------------------------------- SUB-TOTAL INVESTMENTS (Cost -- $80,851,833) 82,335,728 ------------------------------------------------------------------------- -------------------------------------------------------------------------
See Notes to Financial Statements. 32 Smith Barney Investment Series | 2002 Annual Report to Shareholders SCHEDULES OF INVESTMENTS (CONTINUED) OCTOBER 31, 2002
Smith Barney Government Portfolio FACE AMOUNT SECURITY VALUE -------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENTS -- 25.1% $ 8,523,000 Morgan Stanley, 1.800% due 11/1/02; Proceeds at maturity -- $8,523,426; (Fully collateralized by U.S. Treasury Inflation-Indexed Notes and Strips, 0.000% to 11.750% due 1/15/11 to 2/15/25; Market value -- $8,733,825) (Cost -- $8,523,000) $ 8,523,000 19,117,000 Merrill Lynch & Co., Inc., 1.850% due 11/1/02; Proceeds at maturity -- $19,117,982; (Fully collateralized by Federal Home Loan Mortgage Corp. Discount Notes and Federal National Mortgage Association Discount Notes, 10.000% due 1/29/03 to 4/30/03; Market value -- $19,499,345) (Cost -- $19,117,000) 19,117,000 -------------------------------------------------------------------------------------------------------------------------- TOTAL REPURCHASE AGREEMENTS (Cost -- $27,640,000) 27,640,000 -------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100% (Cost -- $108,491,833*) $109,975,728 -------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------
(a)Security is segregated as collateral for "to-be-announced" securities. (b)Mortgage dollar roll (See Note 10). (c)All or a portion of this security is traded on a "to-be-announced" basis (See Note 9). (d)Maturity date shown represents the last in the range of maturity dates of mortgage certificates owned. *Aggregate cost for Federal income tax purposes is substantially the same. See Notes to Financial Statements. 33 Smith Barney Investment Series | 2002 Annual Report to Shareholders STATEMENTS OF ASSETS AND LIABILITIES OCTOBER 31, 2002
Smith Barney Premier Selections Smith Barney Smith Barney Smith Barney All Cap Large Cap Growth and Government Growth Portfolio Core Portfolio Income Portfolio Portfolio ----------------------------------------------------------------------------------------------------------------------------- ASSETS: Investments, at cost $33,113,251 $ 68,415,883 $42,430,532 $ 80,851,833 Repurchase agreements, at cost 1,120,000 1,684,000 793,000 27,640,000 ---------------------------------------------------------------------------------------------------------------------------- Investments, at value $27,369,915 $ 59,703,422 $35,709,786 $ 82,335,728 Repurchase agreements, at value 1,120,000 1,684,000 793,000 27,640,000 Cash 297 960 600 1,171 Receivable for securities sold 157,550 757,198 272,637 -- Receivable from manager 35,507 -- 80,377 53,675 Dividends and interest receivable 14,949 42,156 36,209 552,091 Receivable for Fund shares sold 7,982 706 4,078 549,173 Collateral for securities on loan (Note 8) -- -- 630,000 -- ---------------------------------------------------------------------------------------------------------------------------- Total Assets 28,706,200 62,188,442 37,526,687 111,131,838 ---------------------------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for securities purchased 29,102 963,144 71,171 26,991,893 Payable for Fund shares purchased 5,467 13,478 37,934 -- Investment management fees payable -- 48,480 -- -- Payable for securities on loan (Note 8) -- -- 630,000 -- Accrued expenses 43,820 24,150 57,469 36,023 ---------------------------------------------------------------------------------------------------------------------------- Total Liabilities 78,389 1,049,252 796,574 27,027,916 ---------------------------------------------------------------------------------------------------------------------------- Total Net Assets $28,627,811 $ 61,139,190 $36,730,113 $ 84,103,922 ---------------------------------------------------------------------------------------------------------------------------- NET ASSETS: Par value of shares of beneficial interest $ 32 $ 84 $ 53 $ 72 Capital paid in excess of par value 43,344,959 95,097,990 50,607,308 81,743,256 Undistributed net investment income -- 168,399 151,960 925,706 Accumulated net realized loss from security transactions (8,973,844) (25,414,822) (7,308,462) (49,007) Net unrealized appreciation (depreciation) of investments (5,743,336) (8,712,461) (6,720,746) 1,483,895 ---------------------------------------------------------------------------------------------------------------------------- Total Net Assets $28,627,811 $ 61,139,190 $36,730,113 $ 84,103,922 ---------------------------------------------------------------------------------------------------------------------------- Shares Outstanding 3,196,113 8,440,395 5,287,682 7,166,497 ---------------------------------------------------------------------------------------------------------------------------- Net Asset Value $8.96 $7.24 $6.95 $11.74 ----------------------------------------------------------------------------------------------------------------------------
34 Smith Barney Investment Series | 2002 Annual Report to Shareholders See Notes to Financial Statements. STATEMENTS OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2002
Smith Barney Premier Selections Smith Barney Smith Barney Smith Barney All Cap Large Cap Growth and Government Growth Portfolio Core Portfolio Income Portfolio Portfolio -------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 209,065 $ 770,122 $ 472,113 -- Interest 32,490 46,925 52,285 $1,129,522 Less: Foreign withholding tax -- (4,729) (7,215) -- Interest expense -- -- -- (8,506) ---------------------------------------------------------------------------------------------------------------------------- Total Investment Income 241,555 812,318 517,183 1,121,016 ---------------------------------------------------------------------------------------------------------------------------- EXPENSES: Investment management fees (Note 2) 259,428 523,698 286,724 169,955 Audit and legal 67,718 53,709 69,777 63,206 Shareholder communications 20,497 21,387 14,058 17,963 Custody 17,765 24,755 26,530 15,706 Shareholder and system servicing fees 5,146 4,715 5,001 5,015 Trustees' fees 2,451 1,052 2,400 458 Other 8,177 13,865 11,808 3,084 ---------------------------------------------------------------------------------------------------------------------------- Total Expenses 381,182 643,181 416,298 275,387 Less: Investment management fee waiver (Note 2) (52,232) -- (53,115) (57,286) ---------------------------------------------------------------------------------------------------------------------------- Net Expenses 328,950 643,181 363,183 218,101 ---------------------------------------------------------------------------------------------------------------------------- Net Investment Income (Loss) (87,395) 169,137 154,000 902,915 ---------------------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTES 3 AND 5): Realized Loss From: Security transactions (excluding short-term securities) (6,532,841) (15,408,722) (3,914,987) (22,345) Futures contracts -- (392,579) -- -- ---------------------------------------------------------------------------------------------------------------------------- Net Realized Loss (6,532,841) (15,801,301) (3,914,987) (22,345) ---------------------------------------------------------------------------------------------------------------------------- Change in Net Unrealized Appreciation (Depreciation) (Note 1) 528,777 497,788 (3,064,839) 1,016,483 ---------------------------------------------------------------------------------------------------------------------------- Net Gain (Loss) on Investments (6,004,064) (15,303,513) (6,979,826) 994,138 ---------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Net Assets From Operations $(6,091,459) $(15,134,376) $(6,825,826) $1,897,053 ----------------------------------------------------------------------------------------------------------------------------
35 Smith Barney Investment Series | 2002 Annual Report to Shareholders See Notes to Financial Statements. STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED OCTOBER 31, 2002
Smith Barney Premier Selections Smith Barney Smith Barney Smith Barney All Cap Growth Large Cap Growth and Government Portfolio Core Portfolio Income Portfolio Portfolio ------------------------------------------------------------------------------------------------------------------------ OPERATIONS: Net investment income (loss) $ (87,395) $ 169,137 $ 154,000 $ 902,915 Net realized loss (6,532,841) (15,801,301) (3,914,987) (22,345) Change in net unrealized appreciation (depreciation) 528,777 497,788 (3,064,839) 1,016,483 ----------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Net Assets From Operations (6,091,459) (15,134,376) (6,825,826) 1,897,053 ----------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (18,768) (197,647) (113,186) (471,166) Net realized gains -- -- -- (323,201) ----------------------------------------------------------------------------------------------------------------------- Decrease in Net Assets From Distributions to Shareholders (18,768) (197,647) (113,186) (794,367) ----------------------------------------------------------------------------------------------------------------------- FUND SHARE TRANSACTIONS (NOTE 13): Net proceeds from sale of shares 5,995,549 16,910,865 15,695,927 70,965,054 Net assets value of shares issued for reinvestment of dividends 18,768 197,647 113,186 794,367 Cost of shares reacquired (5,659,901) (7,730,105) (3,716,053) (2,167,846) ----------------------------------------------------------------------------------------------------------------------- Increase in Net Assets From Fund Share Transactions 354,416 9,378,407 12,093,060 69,591,575 ----------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Net Assets (5,755,811) (5,953,616) 5,154,048 70,694,261 NET ASSETS: Beginning of year 34,383,622 67,092,806 31,576,065 13,409,661 ----------------------------------------------------------------------------------------------------------------------- End of year* $28,627,811 $ 61,139,190 $36,730,113 $84,103,922 ----------------------------------------------------------------------------------------------------------------------- * Includes undistributed net investment income of: -- $168,399 $151,960 $925,706 -----------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 36 Smith Barney Investment Series | 2002 Annual Report to Shareholders STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEAR ENDED OCTOBER 31, 2001
Smith Barney Premier Selections Smith Barney Smith Barney Smith Barney All Cap Growth Large Cap Growth and Government Portfolio Core Portfolio Income Portfolio Portfolio ------------------------------------------------------------------------------------------------------------------------ OPERATIONS: Net investment income $ 54,311 $ 263,652 $ 142,391 $ 507,145 Net realized gain (loss) (2,455,812) (9,122,294) (3,221,517) 332,198 Change in net unrealized appreciation (depreciation) (7,377,646) (9,711,357) (4,013,816) 366,865 ----------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Net Assets From Operations (9,779,147) (18,569,999) (7,092,942) 1,206,208 ----------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (82,115) (130,049) (115,954) (255,029) Net realized gains (89,141) -- (81,894) -- ----------------------------------------------------------------------------------------------------------------------- Decrease in Net Assets From Distributions to Shareholders (171,256) (130,049) (197,848) (255,029) ----------------------------------------------------------------------------------------------------------------------- FUND SHARE TRANSACTIONS (NOTE 13): Net proceeds from sale of shares 25,347,957 38,961,930 22,869,861 13,605,173 Net asset value of shares issued for reinvestment of dividends 171,256 130,049 197,848 255,029 Cost of shares reacquired (2,604,348) (2,929,509) (2,289,711) (6,397,380) ----------------------------------------------------------------------------------------------------------------------- Increase in Net Assets From Fund Share Transactions 22,914,865 36,162,470 20,777,998 7,462,822 ----------------------------------------------------------------------------------------------------------------------- Increase in Net Assets 12,964,462 17,462,422 13,487,208 8,414,001 NET ASSETS: Beginning of year 21,419,160 49,630,384 18,088,857 4,995,660 ----------------------------------------------------------------------------------------------------------------------- End of year* $34,383,622 $ 67,092,806 $31,576,065 $13,409,661 ----------------------------------------------------------------------------------------------------------------------- * Includes undistributed net investment income of: $18,516 $196,909 $112,770 $471,073 -----------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 37 Smith Barney Investment Series | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies The Smith Barney Premier Selections All Cap Growth, Smith Barney Large Cap Core, Smith Barney Growth and Income, and Smith Barney Government Portfolios ("Portfolios") are separate investment portfolios of the Smith Barney Investment Series ("Trust"). 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 and consists of these Portfolios and three other separate retail investment portfolios: Smith Barney Large Cap Core Fund, Smith Barney Growth and Income Fund and Smith Barney International Aggressive Growth Fund. The financial statements and financial highlights for the other portfolios are presented in separate shareholder reports. The significant accounting policies consistently followed by the Portfolios are: (a) security transactions are accounted for on trade date; (b) securities traded on national securities markets are valued at the closing prices on such markets or, if there were no sales during the day, at the current quoted bid price; securities primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, except that when a significant occurrence, subsequent to the time a value was so established, is likely to have significantly changed the value then, the fair value of those securities will be determined by consideration of other factors by or under the direction of the Board of Trustees or its delegates; over-the-counter securities are valued on the basis of the bid price at the close of business on each day; U.S. government and agency obligations are valued at the average between bid and asked prices in the over-the-counter market; (c) securities maturing within 60 days are valued at cost plus accreted discount or minus amortized premium, which approximates value; (d) securities for which market quotations are not available will be valued in good faith at fair value by or under the direction of the Board of Trustees; (e) interest income, adjusted for amortization of premium and accretion of discount is recorded on the accrual basis; (f) 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 Portfolios determine the existence of a dividend declaration after exercising reasonable due diligence; (g) gains or losses on the sale of securities are calculated by using the specific identification method; (h) dividends and distributions to shareholders are recorded by the Portfolios on the ex-dividend date; (i) the accounting records of the Portfolios 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. 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. Differences between income and expense amounts recorded and collected or paid are adjusted when reported by the custodian bank; (j) realized gain and loss on foreign currency includes the net realized amount from the sale of currency and the amount realized between trade date and settlement date on security transactions; (k) the character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. At October 31, 2002, reclassifications were made to the Smith Barney Premier Selections All Cap Growth, Smith Barney Growth and Income and Smith Barney Government Portfolios' capital accounts to reflect permanent book/tax differences and income and gains available for distribution under income tax regulations. Accordingly, the accumulated net investment loss amounting to $87,647 was reclassified to paid-in capital for Smith Barney Premier Selections All Cap Growth Portfolio. Net investment loss, net realized loss and net assets were not affected by these changes; (l) each Portfolio intends to comply with the requirements 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 tax; and (m) 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. 38 Smith Barney Investment Series | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) In November 2000, the American Institute of Certified Public Accountants ("AICPA") issued a revised Audit and Accounting Guide for Investment Companies ("Guide"). This Guide is effective for financial statements issued for fiscal years beginning after December 15, 2000. The revised Guide requires the Smith Barney Growth and Income Portfolio and Smith Barney Government Portfolio to amortize premium and accrete all discounts on all fixed-income securities. The Smith Barney Growth and Income Portfolio and Smith Barney Government Portfolio adopted this requirement November 1, 2001. This change does not affect the Smith Barney Government Portfolio's net asset value, but does change the classification of certain amounts in the statement of operations. For the year ended October 31, 2002, interest income decreased by $41,860, net realized loss decreased by $5,437 and change in net unrealized appreciation of investments increased by $36,403 for the Smith Barney Government Portfolio. In addition, the Smith Barney Government Portfolio recorded an adjustment to decrease the cost of securities and to decrease the accumulated undistributed net investment income by $3,347 to reflect the cumulative effect of this change up to the date of the adoption. There were no changes or adjustments made to the Smith Barney Growth and Income Portfolio as a result of the adoption of this policy since the Portfolio did not hold any fixed-income securities. Also, the Smith Barney Premier Selections All Cap Growth Portfolio may enter into forward exchange contracts in order to hedge against foreign currency risk. These contracts are marked-to-market daily, by recognizing the difference between the contract exchange rate and the current market rate as an unrealized gain or loss. Realized gains or losses are recognized when contracts are settled. 2. Investment Management Agreement and Other Transactions Smith Barney Fund Management LLC ("SBFM"), a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc. ("Citigroup"), acts as the investment manager to the Portfolios. The Smith Barney Premier Selections All Cap Growth, Smith Barney Large Cap Core and Smith Barney Growth and Income Portfolios pay SBFM a management fee calculated at an annual rate of 0.75% of their average daily net assets and the Smith Barney Government Portfolio pays SBFM a management fee calculated at an annual rate of 0.60% of its average daily net assets. These fees are calculated daily and paid monthly. For the year ended October 31, 2002, SBFM waived a portion of its investment management fees for each of the Portfolios, except for Smith Barney Large Cap Core Portfolio. Citicorp Trust Bank, fsb. ("CTB"), formerly known as Travelers Bank & Trust, fsb., a subsidiary of Citigroup, acts as the Portfolios' transfer agent. PFPC Global Fund Services ("PFPC") acts as the Portfolios' sub-transfer agent. CTB receives account fees and asset-based fees that vary according to 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, each Portfolio paid transfer agent fees of $5,000 to CTB. Salomon Smith Barney Inc. ("SSB"), a subsidiary of SSBH, acts as the Portfolios' distributor. In addition, SSB and certain other broker-dealers sell Portfolio shares to the public as members of the selling group. For the year ended October 31, 2002, SSB and its affiliates received $3,158 in brokerage commissions for the Portfolios' agency transactions. All officers and one Trustee of the Portfolios are employees of Citigroup or its affiliates. 39 Smith Barney Investment Series | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Trustees of the Portfolios have adopted a Retirement Plan for all Trustees who are not "interested persons" of the Portfolios, 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. Two former Trustees are currently receiving payments under the Retirement Plan. The amount of benefits to be paid under the Retirement Plan cannot currently be determined for current Trustees. Messrs. Carlton, Cocanougher, Gross, Merten and Pettit also are covered by a prior retirement plan. Under the prior plan, retirement benefits are payable for a ten-year period following retirement, with the annual payment to be based upon the Trustee's compensation from the Trust during calendar year 2000. Trustees with more than five but less than ten years of service at retirement will receive a prorated benefit. In order to receive benefits under the current Retirement Plan, a Trustee must waive all rights under the prior plan prior to receiving payment under either plan. Total aggregate retirement benefits accrued under the prior plan for the 2002 fiscal year were $3,131. The amount of benefits to be paid under the prior plan cannot currently be determined for these Trustees. 3. Investments During the year 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 --------------------------------------------------------------------------------- Smith Barney Premier Selections All Cap Growth Portfolio $ 20,082,057 $18,784,143 --------------------------------------------------------------------------------- Smith Barney Large Cap Core Portfolio 40,513,395 30,124,752 --------------------------------------------------------------------------------- Smith Barney Growth and Income Portfolio 30,230,821 17,532,852 --------------------------------------------------------------------------------- Smith Barney Government Portfolio 103,511,453 34,035,408 ---------------------------------------------------------------------------------
At October 31, 2002, the aggregate gross unrealized appreciation and depreciation of investments for Federal income tax purposes were substantially as follows:
Net Unrealized Appreciation Appreciation Depreciation (Depreciation) -------------------------------------------------------------------------------------------------- Smith Barney Premier Selections All Cap Growth Portfolio $1,672,619 $ (7,767,340) $ (6,094,721) -------------------------------------------------------------------------------------------------- Smith Barney Large Cap Core Portfolio 3,252,027 (14,500,067) (11,248,040) -------------------------------------------------------------------------------------------------- Smith Barney Growth and Income Portfolio 1,305,355 (8,921,173) (7,615,818) -------------------------------------------------------------------------------------------------- Smith Barney Government Portfolio 1,483,895 (39,770) 1,444,125 --------------------------------------------------------------------------------------------------
4. Repurchase Agreements The Portfolios purchase (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 Portfolios require continual maintenance of the market value (plus accrued interest) of the collateral in amounts at least equal to the repurchase price. 40 Smith Barney Investment Series | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. Futures Contracts The Portfolios may from time to time enter into futures contracts. Initial margin deposits made upon entering into futures contracts are recognized as assets. The initial margin is segregated by the custodian as is noted in the schedule of investments. 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 each day's trading. Variation margin payments are made or received 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 Portfolio records a realized gain or loss equal to the difference between the proceeds from (and cost of) the closing transaction and the Portfolio's basis in the contract. The Portfolio enters into such contracts to hedge a portion of its portfolio. The Portfolio bears the market risk that arises from changes in the value of the financial instruments and securities indices (futures contracts). At October 31, 2002, the Portfolios did not hold any futures contracts. 6. Option Contracts The Portfolios may from time to time enter into option contracts. Upon the purchase of a put option or a call option by the Portfolio, the premium paid is recorded as an investment, the value of which is marked-to-market daily. When a purchased option expires, the Portfolio will realize a loss in the amount of the cost of the option. When the Portfolio enters into a closing sales transaction, the Portfolio will realize a gain or loss depending on whether the sales proceeds from the closing sales transaction are greater or less than the cost of the option. When the Portfolio 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 Portfolio exercises a call option, the cost of the security which the Portfolio purchases upon exercise will be increased by the premium originally paid. At October 31, 2002, the Portfolios did not hold any purchased call or put option contracts. When the Portfolio writes a call option or a put option, an amount equal to the premium received by the Portfolio is recorded as a liability, the value of which is marked-to-market daily. When a written option expires, the Portfolio realizes a gain equal to the amount of the premium received. When the Portfolio enters into a closing purchase transaction, the Portfolio realizes a gain (or loss if the cost of the closing purchase transaction exceeds the premium received when the option was sold) 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 Portfolio realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are 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 Portfolio purchased 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 Portfolio enters into options for hedging purposes. The risk in writing a covered call option is that the Portfolio 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 covered put option is that the Portfolio is exposed to the risk of loss if the market price of the underlying security declines. During the year ended October 31, 2002, the Portfolios did not enter into any written covered call or put option contracts. 41 Smith Barney Investment Series | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. Foreign Securities Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in U.S. companies and the U.S. government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of many foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. companies and the U.S. government. 8. Lending of Portfolio Securities The Portfolios have an agreement with their custodian whereby the custodian may lend securities owned by the Portfolios to brokers, dealers and other financial organizations. Fees earned by the Portfolios on securities lending are recorded as interest income. Loans of securities by the Portfolios are collateralized by cash, U.S. government securities, high quality money market instruments or other securities that are maintained at all times in an amount at least equal to the current market value of the loaned securities, plus a margin which may vary depending on the type of securities loaned. The custodian establishes and maintains the collateral in segregated accounts. The Portfolios maintain exposure for the risk of any loss in the investment of amounts received as collateral. At October 31, 2002, Smith Barney Growth and Income Portfolio had loaned common stocks having a market value of $608,860 which were collateralized by cash. The cash collateral received for the Smith Barney Growth and Income Portfolio amounting to $630,000 was invested in the State Street Navigator Securities Lending Trust Prime Portfolio. For the year ended October 31, 2002, the Smith Barney Growth and Income Portfolio earned $2,170 in interest income from securities loaned. 9. Securities Traded on a To-Be-Announced Basis The Portfolios may trade securities on a "to-be-announced" ("TBA") basis. In a TBA transaction, the Portfolios commit to purchasing or selling securities for which specific information is not yet known at the time of the trade, particularly the face amount and maturity date in GNMA transactions. Securities purchased on a TBA basis are not settled until they are delivered to the Portfolios normally 15 to 45 days later. These transactions are subject to market fluctuations and their current value is determined in the same manner as for other securities. At October 31, 2002, the Smith Barney Government Portfolio held eight TBA securities with a total cost of $25,454,255. 10.Mortgage Dollar Rolls The Smith Barney Government Portfolio enters into dollar rolls in which the Portfolio sells mortgage-backed securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities to settle on a specified future date. During the roll period, the Portfolio forgoes principal and interest paid on the securities. The Portfolio is compensated by a fee paid by the counterparty. Dollar rolls are accounted for as financing arrangements; the fee is accrued into interest income ratably over the term of the dollar roll and any gain or loss on the roll is deferred and realized upon disposition of the rolled security. At October 31, 2002, the Portfolio had outstanding net contracts to repurchase mortgage-backed securities of $3,111,104 and $2,085,000 for scheduled settlements on November 14, 2002 and November 19, 2002, respectively. There were no counterparties with dollar rolls outstanding in excess of 10% of net assets at October 31, 2002. 42 Smith Barney Investment Series | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11.Capital Loss Carryforwards At October 31, 2002, the Smith Barney Premier Selections All Cap Growth, Smith Barney Large Cap Core, Smith Barney Growth and Income and Smith Barney Government Portfolios had, for Federal income tax purposes, capital loss carryforwards of approximately $8,622,000, $22,879,000, $6,413,000 and $49,000, respectively, available to offset future capital gains. To the extent that these carryforward losses are used to offset capital gains, it is probable that the gains so offset will not be distributed. The amount and year of the expiration for each carryforward loss is indicated below. Expiration occurs on October 31 of the year indicated:
2007 2008 2009 2010 --------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- Smith Barney Premier Selections All Cap Growth Portfolio -- -- $2,258,000 $ 6,364,000 --------------------------------------------------------------------------------------- Smith Barney Large Cap Core Portfolio $4,000 $45,000 6,983,000 15,847,000 --------------------------------------------------------------------------------------- Smith Barney Growth and Income Portfolio -- -- 2,971,000 3,442,000 --------------------------------------------------------------------------------------- Smith Barney Government Portfolio -- -- -- 49,000 --------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------
12. Income Tax Information and Distributions to Shareholders At October 31, 2002, the tax basis components of distributable earnings were:
Undistributed Unrealized Ordinary Accumulated Appreciation Income Capital Losses (Depreciation) -------------------------------------------------------------------------------------------------------------------------- Smith Barney Premier Selections All Cap Growth Portfolio $ -- $ (8,622,459) $ (6,094,721) -------------------------------------------------------------------------------------------------------------------------- Smith Barney Large Cap Core Portfolio 168,399 (22,879,243) (11,248,040) -------------------------------------------------------------------------------------------------------------------------- Smith Barney Growth and Income Portfolio 151,960 (6,413,390) (7,615,818) -------------------------------------------------------------------------------------------------------------------------- Smith Barney Government Portfolio 965,476 (49,007) 1,444,125 -------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------- The difference between book basis and tax basis unrealized appreciation and depreciation is attributable primarily to wash sale loss deferrals. The tax character of distributions paid during the year ended October 31, 2002 was: Ordinary Long Term Income Capital Gains Total -------------------------------------------------------------------------------------------------------------------------- Smith Barney Premier Selections All Cap Growth Portfolio $ 18,768 -- $ 18,768 -------------------------------------------------------------------------------------------------------------------------- Smith Barney Large Cap Core Portfolio 197,647 -- 197,647 -------------------------------------------------------------------------------------------------------------------------- Smith Barney Growth and Income Portfolio 113,186 -- 113,186 -------------------------------------------------------------------------------------------------------------------------- Smith Barney Government Portfolio 481,707 $312,660 794,367 -------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------
43 Smith Barney Investment Series | 2002 Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. Shares of Beneficial Interest At October 31, 2002, the Trust had an unlimited number of shares authorized with a par value of $0.00001 per share. Transactions in shares of each Portfolio were as follows:
Year Ended Year Ended October 31, 2002 October 31, 2001 ------------------------------------------------------------------------------------------ Smith Barney Premier Selections All Cap Growth Portfolio Shares sold 560,604 1,929,669 Shares issued on reinvestment 2,076 12,060 Shares reacquired (570,559) (217,155) ------------------------------------------------------------------------------------------ Net Increase (Decrease) (7,879) 1,724,574 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Smith Barney Large Cap Core Portfolio Shares sold 1,930,789 3,686,081 Shares issued on reinvestment 26,709 11,529 Shares reacquired (1,008,749) (295,202) ------------------------------------------------------------------------------------------ Net Increase 948,749 3,402,408 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Smith Barney Growth and Income Portfolio Shares sold 1,905,118 2,428,621 Shares issued on reinvestment 15,764 19,706 Shares reacquired (509,688) (250,724) ------------------------------------------------------------------------------------------ Net Increase 1,411,194 2,197,603 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Smith Barney Government Portfolio Shares sold 6,115,834 1,260,681 Shares issued on reinvestment 68,717 24,173 Shares reacquired (190,552) (582,687) ------------------------------------------------------------------------------------------ Net Increase 5,993,999 702,167 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------
44 Smith Barney Investment Series | 2002 Annual Report to Shareholders FINANCIAL HIGHLIGHTS For a share of each class of beneficial interest outstanding throughout the year ended October 31, unless otherwise noted:
Smith Barney Premier Selections All Cap Growth Portfolio 2002 2001 2000/(1)/ 1999/(2)/ ---------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Year $ 10.73 $ 14.48 $ 10.11 $ 10.00 ---------------------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income (loss)/(3)/ (0.03) 0.02 0.09 0.01 Net realized and unrealized gain (loss) (1.73) (3.69) 4.30 0.10 ---------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations (1.76) (3.67) 4.39 0.11 ---------------------------------------------------------------------------------------------------- Less Distributions From: Net investment income (0.01) (0.04) (0.02) -- Net realized gains -- (0.04) -- -- ---------------------------------------------------------------------------------------------------- Total Distributions (0.01) (0.08) (0.02) -- ---------------------------------------------------------------------------------------------------- Net Asset Value, End of Year $ 8.96 $ 10.73 $ 14.48 $ 10.11 ---------------------------------------------------------------------------------------------------- Total Return (16.44)% (25.45)% 43.43% 1.10%++ ---------------------------------------------------------------------------------------------------- Net Assets, End of Year (000s) $28,628 $34,384 $21,419 $3,032 ---------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses/(3)(4)/ 0.95% 0.95% 0.95% 0.95%+ Net investment income (loss) (0.25) 0.16 0.72 1.00+ ---------------------------------------------------------------------------------------------------- Portfolio Turnover Rate 58% 116% 58% 8% ----------------------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares method. (2) For the period from September 15, 1999 (commencement of operations) to October 31, 1999. (3) The Manager agreed to waive all or a portion of its fees for the years ended October 31, 2002, 2001 and 2000 and the period ended October 31, 1999. In addition, the Manager also reimbursed expenses of $45,159, $30,419 and $13,182 for the years ended October 31, 2001 and 2000, and the period ended October 31, 1999, respectively. If such fees were not waived and expenses not reimbursed, the per share effect on net investment income and the actual expense ratios would have been as follows:
Expense Ratios Net Investment Income (Loss) Without Fee Waivers and/or Per Share (Increases) Decreases Expense Reimbursements ------------------------------- ---------------------- 2002 2001 2000 1999 2002 2001 2000 1999 ------ ----- ----- ----- ---- ---- ---- ---- Smith Barney Premier Selections All Cap Growth Portfolio $(0.02) $0.02 $0.15 $0.05 1.11% 1.08% 2.14% 5.35%+
(4) As a result of a voluntary expense limitation, the expense ratio will not exceed 0.95%. ++ Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. 45 Smith Barney Investment Series | 2002 Annual Report to Shareholders FINANCIAL HIGHLIGHTS (CONTINUED) For a share of each class of beneficial interest outstanding throughout the year ended October 31, unless otherwise noted:
Smith Barney Large Cap Core Portfolio 2002 2001 2000/(1)/ 1999/(2)/ ------------------------------------------------------------------------------------ Net Asset Value, Beginning of Year $ 8.96 $ 12.14 $ 10.51 $ 10.00 ------------------------------------------------------------------------------------ Income (Loss) From Operations: Net investment income/(3)/ 0.02 0.04 0.05 0.01 Net realized and unrealized gain (loss) (1.72) (3.19) 1.59 0.50 ------------------------------------------------------------------------------------ Total Income (Loss) From Operations (1.70) (3.15) 1.64 0.51 ------------------------------------------------------------------------------------ Less Distributions From: Net investment income (0.02) (0.03) (0.01) -- ------------------------------------------------------------------------------------ Total Distributions (0.02) (0.03) (0.01) -- ------------------------------------------------------------------------------------ Net Asset Value, End of Year $ 7.24 $8.96 $ 12.14 $ 10.51 ------------------------------------------------------------------------------------ Total Return (18.94)% (26.03)% 15.61% 5.10%++ ------------------------------------------------------------------------------------ Net Assets, End of Year (000s) $61,139 $67,093 $49,630 $5,274 ------------------------------------------------------------------------------------ Ratios to Average Net Assets: Expenses/(3)(4)/ 0.93% 0.93% 0.95% 0.95%+ Net investment income 0.24 0.42 0.42 0.67+ ------------------------------------------------------------------------------------ Portfolio Turnover Rate 45% 26% 30% 6% ------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares method. (2) For the period from September 15, 1999 (commencement of operations) to October 31, 1999. (3) The Manager agreed to waive all or a portion of its fees for the year ended October 31, 2000 and the period ended October 31, 1999. In addition, the Manager also reimbursed expenses of $20,272 for the period ended October 31, 1999. If such fees were not waived and expenses not reimbursed, the per share effect on net investment income and the actual expense ratios would have been as follows:
Expense Ratios Net Investment Income Without Fee Waivers and/or Per Share Decreases Expense Reimbursements --------------------- ------------------------ 2000 1999 2000 1999 -------- ------- -------- ------ Smith Barney Large Cap Core Portfolio $0.07 $0.05 1.55% 5.00%+
(4) As a result of a voluntary expense limitation, the expense ratio will not exceed 0.95%. ++ Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. 46 Smith Barney Investment Series | 2002 Annual Report to Shareholders FINANCIAL HIGHLIGHTS (CONTINUED) For a share of each class of beneficial interest outstanding throughout the year ended October 31, unless otherwise noted:
Smith Barney Growth and Income Portfolio 2002 2001 2000/(1)/ 1999/(2)/ ----------------------------------------------------------------------------------------- Net Asset Value, Beginning of Year $ 8.15 $ 10.77 $ 10.10 $ 10.00 ----------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income/(3)(4)/ 0.02 0.05 0.16 0.01 Net realized and unrealized gain (loss)/(4)/ (1.20) (2.58) 0.53 0.09 ----------------------------------------------------------------------------------------- Total Income (Loss) From Operations (1.18) (2.53) 0.69 0.10 ----------------------------------------------------------------------------------------- Less Distributions From: Net investment income (0.02) (0.05) (0.02) -- Net realized gains -- (0.04) -- -- ----------------------------------------------------------------------------------------- Total Distributions (0.02) (0.09) (0.02) -- ----------------------------------------------------------------------------------------- Net Asset Value, End of Year $ 6.95 $8.15 $ 10.77 $ 10.10 ----------------------------------------------------------------------------------------- Total Return (14.47)% (23.63)% 6.86% 1.00%++ ----------------------------------------------------------------------------------------- Net Assets, End of Year (000s) $36,730 $31,576 $18,089 $3,045 ----------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses/(3)(5)/ 0.95% 0.95% 0.95% 0.95%+ Net investment income/(4)/ 0.40 0.53 1.54 0.69+ ----------------------------------------------------------------------------------------- Portfolio Turnover Rate 48% 68% 72% 1% -----------------------------------------------------------------------------------------
(1)Per share amounts have been calculated using the monthly average shares method. (2)For the period from September 15, 1999 (commencement of operations) to October 31, 1999. (3)The Manager agreed to waive all or a portion of its fees for the years ended October 31, 2002, 2001 and 2000 and the period ended October 31, 1999. In addition, the Manager also reimbursed expenses of $61,498, $21,016 and $12,636 for the years ended October 31, 2001 and 2000, and the period ended October 31, 1999, respectively. If such fees were not waived and expenses not reimbursed, the per share effect on net investment income and the expense ratios would have been as follows:
Expense Ratios Net Investment Income Without Fee Waivers and/or Per Share Decreases Expense Reimbursements ----------------------- ---------------------- 2002 2001 2000 1999 2002 2001 2000 1999 ----- ----- ----- ----- ---- ---- ---- ---- Smith Barney Growth and Income Portfolio $0.01 $0.02 $0.12 $0.05 1.09% 1.18% 2.05% 5.22%+
(4)The Portfolio did adopt the change in accounting method discussed in Note 1 to the financial statements for the year ended October 31, 2002, however the impact on the ratio of net investment income to average net assets was less than 0.01%. (5) As a result of a voluntary expense limitation, the expense ratio will not exceed 0.95%. ++ Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. 47 Smith Barney Investment Series | 2002 Annual Report to Shareholders FINANCIAL HIGHLIGHTS (CONTINUED) For a share of each class of beneficial interest outstanding throughout the year ended October 31, unless otherwise noted:
Smith Barney Government Portfolio 2002/(1)/ 2001 2000/(1)/ 1999/(2)/ -------------------------------------------------------------------------------------- Net Asset Value, Beginning of Year $ 11.44 $ 10.62 $ 10.13 $ 10.00 -------------------------------------------------------------------------------------- Income From Operations: Net investment income/(3)(4)/ 0.35 0.52 0.53 0.05 Net realized and unrealized gain (loss)/(4)/ 0.13 0.87 0.12 0.08 -------------------------------------------------------------------------------------- Total Income (Loss) From Operations 0.48 1.39 0.65 0.13 -------------------------------------------------------------------------------------- Less Distributions From: Net investment income (0.11) (0.57) (0.16) -- Net realized gains (0.07) -- -- -- -------------------------------------------------------------------------------------- Total Distributions (0.18) (0.57) (0.16) -- -------------------------------------------------------------------------------------- Net Asset Value, End of Year $ 11.74 $ 11.44 $ 10.62 $ 10.13 -------------------------------------------------------------------------------------- Total Return 4.20% 13.56% 6.55% 1.30++ -------------------------------------------------------------------------------------- Net Assets, End of Year (000s) $84,104 $13,410 $4,996 $5,066 -------------------------------------------------------------------------------------- Ratios to Average Net Assets: Interest expense 0.03% -- -- -- Operating expense 0.77 0.80% 0.80% 0.80%+ Total expense/(3)(5)/ 0.80 0.80 0.80 0.80+ Net investment income/(4)/ 3.17 4.47 5.19 4.36+ -------------------------------------------------------------------------------------- Portfolio Turnover Rate 145% 90% 0% 0% --------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares method. (2) For the period from September 15, 1999 (commencement of operations) to October 31, 1999. (3) The Manager agreed to waive all or a portion of its fees for the years ended October 31, 2002, 2001 and 2000 and the period ended October 31, 1999. In addition, the Manager also reimbursed expenses of $57,022, $33,010 and $14,291 for the years ended October 31, 2001 and 2000, and the period ended October 31, 1999, respectively. If such fees were not waived and expenses not reimbursed, the per share effect on net investment income and the actual expense ratios would have been as follows:
Expense Ratios Net Investment Income Without Fee Waivers and/or Per Share Decreases Expense Reimbursements ----------------------- ---------------------- 2002 2001 2000 1999 2002 2001 2000 1999 ----- ----- ----- ----- ---- ---- ---- ---- Smith Barney Government Portfolio $0.02 $0.06 $0.13 $0.04 1.00% 1.30% 2.06% 3.73%+
(4) Without the adoption of the changes in the accounting method discussed in Note 1 to the financial statements, for the year ended October 31, 2002, those amounts would have been $0.36, $0.12 and 3.32% for net investment income, net realized and unrealized gain and the ratio of net investment income to average net assets, respectively. Per share, ratios and supplemental data for the periods prior to November 1, 2001 have not been restated to reflect this change in presentation. (5) As a result of a voluntary expense limitation, the expense ratio will not exceed 0.80%. ++ Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. 48 Smith Barney Investment Series | 2002 Annual Report to Shareholders INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Trustees of the Smith Barney Investment Series: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of the Smith Barney Premier Selections All Cap Growth Portfolio, Smith Barney Large Cap Core Portfolio, Smith Barney Growth and Income Portfolio and Smith Barney Government Portfolio ("Portfolios") of the Smith Barney Investment Series ("Fund") as of October 31, 2002, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and financial highlights for each of the years in the three-year period then ended and for the period from September 15, 1999 (commencement of operations) to October 31, 1999. 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 audits. We conducted our audits 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 and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2002, by correspondence with the custodian and brokers. As to securities purchased and sold but not yet received and delivered, we performed other appropriate auditing procedures. 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Portfolios of the Fund as of October 31, 2002, and the results of their operations for the year then ended, the changes in their net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the three-year period then ended and for the period from September 15, 1999 to October 31, 1999, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP New York, New York December 11, 2002 49 Smith Barney Investment Series | 2002 Annual Report to Shareholders ADDITIONAL INFORMATION (UNAUDITED) Information about Trustees and Officers The business and affairs of the Smith Barney Investment Series ("Trust") are managed under the direction of the Trust's Board of Trustees. Information pertaining to the Trustees and officers of the Trust 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 the Trustees and is available without charge, upon request by calling the Trust's transfer agent (Citicorp Trust Bank, fsb.) at 1-800-451-2010.
Number of Length Principal Portfolios of Occupation(s) in Fund Complex Position(s) Held Time During Past Overseen Name, Address and Age with Fund Served Five Years by Trustee ------------------------------------------------------------------------------------------------------------ NON-INTERESTED TRUSTEES: Elliott J. Berv Trustee Since President and Chief Operations 35 c/o R. Jay Gerken 2001 Officer, Landmark City (Real Salomon Smith Barney Inc. ("SSB") Estate Development) (since 399 Park Avenue 2002); Executive Vice President New York, NY 10022 and Chief Operations Officer, Age 59 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) Donald M. Carlton Trustee Since Consultant, URS Corporation 30 c/o R. Jay Gerken 1997 (Engineering) (since 1999); SSB former Chief Executive Officer, 399 Park Avenue Radian International LLC New York, NY 10022 (Engineering) (from 1996 to Age 65 1998), Member of Management Committee, Signature Science (Research and Development) (since 2000) A. Benton Cocanougher Trustee Since Dean Emeritus and Wiley 30 c/o R. Jay Gerken 1991 Professor, Texas, A&M University SSB (since 2001); former Dean and 399 Park Avenue Professor of Marketing, College New York, NY 10022 and Graduate School of Business Age 64 of Texas A&M University (from 1987 to 2001) Mark T. Finn Since Chairman and Owner, Vantage 35 c/o R. Jay Gerken 2001 Consulting Group, Inc. SSB (Investment Advisory and 399 Park Avenue Consulting Firm) (since 1988); New York, NY 10022 former Vice Chairman and Chief Age 59 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)
Other Board Memberships Held by Trustee Name, Address and Age During Past 5 Years ------------------------------------------------------------ NON-INTERESTED TRUSTEES: Elliott J. Berv Board Member, American c/o R. Jay Gerken Identity Corp. (doing Salomon Smith Barney Inc. ("SSB") business as Morpheus 399 Park Avenue Technologies) (Biometric New York, NY 10022 Information Age 59 Management) (since 2001; Consultant since 1999); Director, Lapoint Industries (Industrial Filter Company) (since 2002); Director, Alzheimer's Association (New England Chapter) (since 1998) Donald M. Carlton Director, American c/o R. Jay Gerken Electric Power (Electric SSB Utility) (since 1999); 399 Park Avenue Director, Valero Energy New York, NY 10022 (Petroleum Refining) Age 65 (since 1999); Director, National Instruments Corp. Technology) (since 1994) A. Benton Cocanougher Former Director, c/o R. Jay Gerken Randall's Food Markets, SSB Inc. (from 1990 to 399 Park Avenue 1999); former Director, New York, NY 10022 First American Bank and Age 64 First American Savings Bank (from 1994 to 1999) Mark T. Finn Former President and c/o R. Jay Gerken Director, Delta Financial, SSB Inc. (Investment Advisory 399 Park Avenue Firm) (from 1983 to New York, NY 10022 1999) Age 59
50 Smith Barney Investment Series | 2002 Annual Report to Shareholders ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of Other Length Principal Portfolios Board Memberships of Occupation(s) in Fund Complex Held by Position(s) Held Time During Past Overseen Trustee Name, Address and Age with Fund Served Five Years by Trustee During past 5 Years ----------------------------------------------------------------------------------------------------------------------------- Stephen Randolph Gross Trustee Since Partner, Capital Investment 30 Director, United Telesis, c/o R. Jay Gerken 1986 Advisory Partners (Consulting) Inc.; SSB (since January 2000); Managing (Telecommunications) 399 Park Avenue Director, Fountainhead Ventures, (since 1997); Director, New York, NY 10022 LLC (Consulting) (from 1998 to eBank.com, Inc.; (since Age 54 2002); Secretary, Carint of N.A. 1997); Director, (Manufacturing) (since 1988); Andersen Calhoun, Inc. former Treasurer, Hank Aaron (Assisted Living) (since Enterprises (Fast Food Franchise) 1987); former Director, (from 1985 to 2001); Chairman, Charter Bank, Inc. (from Gross, Collins & Cress, P.C. 1987 to 1997); former (Accounting Firm) (since 1980); Director, Yu Save, Inc. Treasurer, Coventry Limited, Inc. (Internet Company) (from (since 1985) 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 Professor, Babson College 35 Former Trustee, The c/o R. Jay Gerken 2001 (since 1992) Highland Family of SSB Funds (Investment 399 Park Avenue Company) (from March New York, NY 10022 1997 to March 1998) Age 62 Susan B. Kerley Trustee Since Consultant, Strategic 35 Director, Eclipse Funds c/o R. Jay Gerken 2001 Management Advisors, LLC; (currently supervises 17 SSB Global Research Associates, Inc. investment companies in 399 Park Avenue (Investment Consulting) fund complex) (since New York, NY 10022 (since 1990) 1990) Age 51 Alan G. Merten Trustee Since President, George Mason 30 Directory of Comshare, Inc.; c/o R. Jay Gerken 1990 University (since 1996) (Information SSB Technology) (since 399 Park Avenue 1985); former Director, New York, NY 10022 Indus (Information Age 60 Technology) (from 1995 to 1999) C. Oscar Morong, Jr. Trustee Since Manager Director, Morong 35 Former Director, c/o R. Jay Gerken 2001 Capital Management (since Indonesia Fund (Closed- SSB 1993) End Fund) (from 1990 to 399 Park Avenue 1999); Trustee, Morgan New York, NY 10022 Stanley Institutional Age 67 Fund (currently supervises 75 investment companies) (since 1993) R. Richardson Pettit Trustee Since Professor of Finance, University 30 None c/o R. Jay Gerken 1990 of Houston (since 1977); SSB Independent Consultant (since 399 Park Avenue 1984) New York, NY 10022 Age 60
51 Smith Barney Investment Series | 2002 Annual Report to Shareholders ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of Length Principal Portfolios of Occupation(s) in Fund Complex Position(s) Held Time During Past Overseen Name, Address and Age with Fund Served Five Years by Trustee --------------------------------------------------------------------------------------------------------- Walter E. Robb, III Trustee Since President, Benchmark Consulting 35 c/o R. Jay Gerken 1985 Group, Inc. (Service Company) SSB (since 1991); Sole Proprietor, 399 Park Avenue Robb Associates (Consulting) New York, NY 10022 (since 1978); Co-Owner, Kedron Age 75 Design (Gifts) (since 1978); former President and Treasurer, Benchmark Advisors, Inc. (Financial) (from 1989 to 2000) INTERESTED TRUSTEES: R. Jay Gerken* Chairman, President Since Managing Director of SSB 226 SSB and Chief Executive 2002 (since 1996) 399 Park Avenue, 4th Floor Officer New York, NY 10022 Age 51 OFFICERS: Lewis E. Daidone Senior Vice Since Managing Director of SSB (since N/A SSB President and Chief 2000 1990); Chief Financial Officer, 125 Broad Street, 11th Floor Administrative Smith Barney Mutual Funds; New York, NY 10004 Officer Director and Senior Vice Age 44 President, SBFM and Travelers Investment Advisor, Inc. ("TIA") Richard L. Peteka Chief Financial Since Director and Head of Internal N/A SSB Officer and 2002 Control for Citigroup Asset 125 Broad Street, 11th Floor Treasurer Management U.S. Mutual Fund New York, NY 10004 Administration from 1999-2002; Age 41 Vice President, Head of Mutual Fund Administration and Treasurer at Oppenheimer Capital from 1996-1999. Alan J. Blake Vice President Since Managing Director of SSB N/A SSB and Investment 2001 399 Park Avenue Officer New York, NY 10022 Age 52 Michael Kagan Vice President and Since Managing Director of SSB N/A SSB Investment Officer 2000 399 Park Avenue New York, NY 10022 Age 43 Roger M. Lavan Vice President and Since Managing Director of Salomon N/A SSB Investment Officer 2002 Brothers Asset Management Inc. 399 Park Avenue ("SBAM") New York, NY 10022 Age 39
Other Board Memberships Held by Trustee Name, Address and Age During past 5 Years -------------------------------------------------------- Walter E. Robb, III Director, John Boyle & c/o R. Jay Gerken Co., Inc. (Textiles) (since SSB 1999); Director, Harbor 399 Park Avenue Sweets, Inc. (Candy) New York, NY 10022 (since 1990); Director, Age 75 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). INTERESTED TRUSTEES: R. Jay Gerken* None SSB 399 Park Avenue, 4th Floor New York, NY 10022 Age 51 OFFICERS: Lewis E. Daidone N/A SSB 125 Broad Street, 11th Floor New York, NY 10004 Age 44 Richard L. Peteka N/A SSB 125 Broad Street, 11th Floor New York, NY 10004 Age 41 Alan J. Blake N/A SSB 399 Park Avenue New York, NY 10022 Age 52 Michael Kagan N/A SSB 399 Park Avenue New York, NY 10022 Age 43 Roger M. Lavan N/A SSB 399 Park Avenue New York, NY 10022 Age 39
-------- * 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 ("SBFM") and certain of its affiliates. 52 Smith Barney Investment Series | 2002 Annual Report to Shareholders ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of Other Length Principal Portfolios Board Memberships of Occupation(s) in Fund Complex Held by Position(s) Held Time During Past Overseen Trustee Name, Address and Age with Fund Served Five Years by Trustee During past 5 Years ------------------------------------------------------------------------------------------------------------------------- Francis L. Mustaro Vice President and Since Managing Director of SBAM N/A N/A SSB Investment Officer 2002 399 Park Avenue New York, NY 10022 Age 51 Lawrence B. Weissman, CFA Vice President Since Managing Director of SSB N/A N/A SSB and Investment 1999 100 First Stamford Place Officer Stamford, CT 06902 Age 41 Tim Woods Vice President and Since Managing Director of SSB N/A N/A SSB Investment Officer 2001 100 First Stamford Place Stamford, CT 06902 Age 41 Kaprel Ozsolak Controller Since Vice President of SSB N/A N/A SSB 2002 125 Broad Street, 11th Floor New York, NY 10004 Age 37 Robert I. Frenkel Secretary Since Managing Director and General N/A N/A SSB 2000 Counsel of Global Mutual Funds 300 First Stamford Place for Citigroup Asset Management Stamford, CT 06902 Age 48
53 Smith Barney Investment Series | 2002 Annual Report to Shareholders TAX INFORMATION (UNAUDITED) The following October 31, 2002 fiscal year end disclosures are of various tax benefits that will be reported to shareholders at calendar year end. The following percentages of ordinary income distributions have been designated as qualifying for the dividends received deduction available to corporate shareholders: Smith Barney Premier Selection All Cap Growth Portfolio 100.00% Smith Barney Large Cap Core Portfolio.................. 100.00% Smith Barney Growth and Income Portfolio............... 100.00%
Percentage of ordinary dividends paid by the Portfolio from net investment income are derived from Federal obligations and may be exempt from taxation at the state level: Smith Barney Government Portfolio 32.00%
The Portfolio listed below designate for Federal income tax purposes the following amounts as long term capital gain distributions paid: Smith Barney Government Portfolio $312,660
54 Smith Barney Investment Series | 2002 Annual Report to Shareholders SMITH BARNEY INVESTMENT SERIES BOARD OF TRUSTEES OFFICERS (Cont'd.) Elliot J. Berv Francis L. Mustaro Donald M. Carlton Vice President and A. Benton Cocanougher Investment Officer Mark T. Finn R. Jay Gerken, Chairman Lawrence B. Weissman, CFA Stephen Randolph Gross Vice President and Diana R. Harrington Investment Officer Susan B. Kerley Alan G. Merten Tim Woods C. Oscar Morong, Jr. Vice President and R. Richardson Pettit Investment Officer Walter E. Robb, III Kaprel Ozsolak OFFICERS Controller R. Jay Gerken President and Robert I. Frenkel Chief Executive Officer Secretary Lewis E. Daidone INVESTMENT MANAGER Senior Vice President and Smith Barney Fund Management LLC Chief Administrative Officer CUSTODIAN Richard L. Peteka Chief Financial Officer State Street Bank and and Treasurer Trust Company Alan J. Blake TRANSFER AGENT Vice President and Investment Officer Citicorp Trust Bank, fsb. 125 Broad Street, 11th Floor Michael Kagan New York, New York 10004 Vice President and Investment Officer SUB-TRANSFER AGENT Roger M. Lavan PFPC Global Fund Services Vice President and P.O. Box 9699 Investment Officer Providence, Rhode Island 02940-9699 Smith Barney Investment Series This report is submitted for general information of the shareholders of the Smith Barney Investment Series -- Smith Barney Premier Selections All Cap Growth, Smith Barney Large Cap Core, Smith Barney Growth and Income and Smith Barney Government Portfolios. It is not authorized for distribution to prospective investors unless accompanied or preceded by a current Prospectus, which contains information concerning the investment policies and expenses as well as other pertinent information. SMITH BARNEY INVESTMENT SERIES 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 SalomonSmithBarney --------------------------- A member of citigroup[LOGO] Salomon Smith Barney is a service mark of Salomon Smith Barney Inc. FD02461 12/02 02-4180