<PAGE>
MARCH 31, 1998
SunAmerica
INCOME Funds
[GRAPHIC]
Annual Report
U.S. Government Securities . Federal Securities
Diversified Income . High Income . Tax exempt insured
[LOGO] SunAmerica
Asset Management
<PAGE>
SUNAMERICA INCOME FUNDS
SHAREHOLDER LETTER
May 12, 1998
Dear Shareholder:
The SunAmerica Federal Securities, Diversified Income, High Income, and Tax
Exempt Insured Funds each outperformed its respective Lipper category average
for the twelve months ended March 31, 1998 on a cumulative basis. Given the
market volatility during the fiscal year, active yet disciplined management--
particularly through effective portfolio maturity adjustments, individual
issue selection, and sector allocation--was key to these strong performance
results. The dramatic decline in the interest rates over the twelve months
favored longer duration portfolios. The U.S. Government Securities Fund, which
is inherently of shorter duration, performed as expected for the annual
period.
MARKET ACTIVITY
Overall, the fiscal year favored fixed income investors and was driven by
three major factors. First, the market expectation of a U.S. federal budget
surplus was realized, which, in turn, generated positive supply/demand forces
within the fixed income market. Second, inflation remained low because of
productivity enhancements, cheaper goods globally, and declining commodity
prices. The third major factor was the appreciation of the U.S. dollar. The
strong dollar was boosted both by the unrest in Asia and by the early
implementation of the European economic and monetary union (EMU). Together,
these factors--along with declining interest rates, a Federal Reserve Board on
hold, and economic growth between 2%-4% for the eighth year in a row--made
investing in U.S. fixed income assets attractive. Perhaps the biggest
beneficiary of lower interest rates was the consumer, who enjoyed lower loan
rates, strong employment, and rising compensation. Subsequently, homeownership
hit record highs as did tax payments and reinvestment of capital gains.
Interestingly, savings rates fell to a 57 year low.
U.S. GOVERNMENT SECURITIES. A favorable supply/demand balance, very high
interest payments, and a growing need of mortgage-backed securities investors,
to own Treasuries (as mortgages pre-paid very quickly in a declining rate
environment) all led to a strong rally in the U.S. Treasury market. A notable
increase in foreign interest in U.S. securities also supported the rally.
Asian turmoil prompted a "flight to quality;" U.S. rates were relatively
favorable compared to most international securities; and faith in Federal
Reserve Board Chairman Alan Greenspan grew worldwide. Securities at the long-
term end of the yield curve appreciated most, with the 30-year U.S. Treasury
yield moving from a peak of 7.20% in March 1997 to a low of 5.68% in January
1998 and ending the fiscal period at 5.93%.
HIGH YIELD CORPORATE SECURITIES. The high yield sector outperformed all
other fixed income sectors for the annual period, as several factors converged
to provide an excellent backdrop. Specifically, the telecommunications sector,
which was oversold in March 1997, rallied back strongly through the summer and
fall, boosted by increased merger and acquisition activity. Also, default
rates within the overall market remained below 2% throughout the year. A
rising stock market, stable yields, declining interest rates, and economic
growth with low inflation also were ideal for high yield bonds during the
fiscal year. As a result, this sector continued to benefit from large cash
inflows, from both individuals investing in mutual funds and institutional
investors increasing their allocations to high yield securities. Supply and
demand continued their record-setting pace. Underlying fundamentals remained
strong, but credits in the overall market weakened as the number of non-rated
bonds from start-up companies and others increased. The telecommunications and
gaming industries performed well, supermarkets were mixed, and commodities
lagged.
1
<PAGE>
SUNAMERICA INCOME FUNDS
SHAREHOLDER LETTER
INTERNATIONAL SECURITIES. Foreign debt markets suffered during this annual
period. In the fourth calendar quarter of 1997, the Asian currency crises
raised questions regarding the heralding of reform packages of certain of the
region's nations as prototypes for future development. The crises also made
clear that the economies of the Asian region were more closely linked than
those of Latin America when it suffered in its own crisis years earlier. In
addition, we believe that the evolution of EMU, while viewed as a long-term
positive, is still a short-term uncertainty for the markets, as European
countries are in varying economic cycles and several open issues of
implementation remain.
TAX EXEMPT SECURITIES. The supply of municipal securities set new records,
up approximately 19% for the calendar year 1997 over the previous twelve
months. This pace continued into the first quarter of 1998, with volume up
over 70% versus first quarter 1997 issuance. Lower interest rates led to
refundings by municipalities, and the increase in new issuance largely
reflected the trend of the Federal government to empower state and local
governments to fund regional projects. These local governments have been able
to do this because of their improved fiscal management and healthier coffers.
At the same time, demand remained strong, particularly from property and
casualty insurance companies and from taxable buyers attracted to the yield
ratios of municipal securities over U.S. Treasuries. The credit
upgrade/downgrade ratio also remained strong throughout the fiscal period at
nearly 4:1. Among those upgraded were New York City, which is the largest
municipal issuer, and Washington D.C., which has returned from near
insolvency. Credit spreads continued to narrow, due to high issuance of
insured paper, increased demand for higher yielding non-insured paper, and the
recent establishment of a company offering to insure municipal bonds up to an
"A" quality.
INVESTMENT REVIEW
THE U.S. GOVERNMENT SECURITIES AND FEDERAL SECURITIES FUNDS, while
maintaining their "thirds" allocations to premium, higher coupon mortgages,
current coupon, total return-oriented mortgages, and U.S. Treasuries, each
benefited from enhanced focus on lower coupon mortgages that perform well in a
declining interest rate environment. The Funds also benefited from our
lengthening both of their average maturities.
The Federal Securities Fund, the longer duration, more total return-oriented
of the two, was ranked #1 of the 56 funds in its Lipper category for the
twelve months ended December 31, 1997. It finished its fiscal year ranked #5
of the 52 funds in its category for the twelve months ended March 31, 1998.
This impressive outperformance was achieved primarily by maintaining a longer
duration--between 5.8 and 6.8 years--than most of its competition and by
taking advantage of opportunities to enhance total return through active
trading whenever possible. As of March 31, 1998, the Fund's average maturity
stood at 15.3 years.
The U.S. Government Securities Fund, while lagging the index, met its
objective. We structured the conservative portfolio to provide income and
principal stability from shorter maturity, higher coupon, premium mortgages
and to generate total return from longer maturity U.S. Treasuries. We
maintained the Fund's duration at about 5 years throughout the fiscal year. As
of March 31, 1998, the Fund's average maturity stood at 13.1 years.
THE DIVERSIFIED INCOME AND HIGH INCOME FUNDS, each of which significantly
outperformed their respective Lipper category averages for the annual period,
both benefited from favorable sector selection. The Diversified Income Fund
had a particularly strong year, finishing in the top decile of its Lipper
category
2
<PAGE>
SUNAMERICA INCOME FUNDS
SHAREHOLDER LETTER
average for the twelve months ending March 31, 1998. We accomplished this by
increasing its allocation to longer-term U.S. Treasuries, effectively
selecting individual higher yield corporate securities and moving to a modest
overweighted position in this sector, and completely avoiding the difficulties
in the Asian markets. The Fund's foreign securities remained overweighted in
Brazil and Argentina, which traded down in sympathy to the Asian markets but
not nearly to the same extent. These Latin American markets also rebounded
relatively quickly, as investors re-focused on the underlying fundamentals of
each individual country. On March 31, 1998, the Fund was 47.1% invested in
foreign securities, 40.5% in high yield corporate bonds, 5.6% in U.S.
Treasuries, and 6.8% in cash and other securities.
The High Income Fund benefited from its overweighting in the
telecommunications sectors, particularly the cellular and competitive local
exchange carrier industries, which performed well. The Fund stayed
underweighted in supermarkets, and though the gaming sector did well, we
remained underweighted in that area since we currently do not see much value
in these securities. Finally, the Fund's total return benefited from strong
merger and acquisition, Initial Public Offering (IPO), and tender-offer
activity as well as from several warrant positions, where we were able to
realize gains on the stocks. Although credits in the high yield market as a
whole weakened, we improved the overall credit quality of the Fund's portfolio
during the year. We decreased the Fund's allocation to preferred stock, moved
into higher grade corporate bonds, and, through intensive research and
analysis, found value in certain of the start-up companies' issues.
THE TAX EXEMPT INSURED FUND outperformed its Lipper category average for the
fiscal year, primarily because we continued to focus on bond structure, i.e.
those bonds with good names and strong underlying credit ratings that were
either non-callable, had call protection, or had discounts offering potential
price appreciation. The Fund's total return also benefited from our adjustment
of the portfolio's duration, moving slightly longer at the end of 1997 to take
advantage of the declining interest rate environment, the balanced Federal
budget, and the Asian crisis-prompted flight to quality (which helped
municipal securities along with U.S. Treasuries). By fiscal year end, we moved
to a duration neutral position but maintained the Fund's barbell structure,
i.e., overweighting on both the shorter- and longer-term ends of the yield
curve. We believe this strategy helped the Fund capture the majority of the
sector's rally in the early part of 1998.
The Fund's overall credit quality remains high, with 82.5% of assets in
"Aaa"-rated bonds as of March 31, 1998. In the second half of the fiscal year,
we sold credits, such as Hawaiian issues, that could be impacted by the Asian
turmoil and we purchased some Puerto Rico issues, considered a specialty state
that we believe should perform well on a relative value play. We also moved to
an underweighted position in New York to negate the impact of heavy issuance
in the second quarter of 1998. As of March 31st, the Fund was broadly
diversified among 30 states plus Puerto Rico, and just under 89% of its assets
were invested in insured municipal bonds.
MANAGER OUTLOOK
We believe that many of the attributes that favored the fixed income market
in the past fiscal year remain viable looking ahead. These include a
formidable U.S. monetary policy, a positive Federal deficit picture, and
strong benefits from low commodity inflation. We believe that the Federal
Reserve Board will achieve its goal of 2.5% GDP growth for 1998.
3
<PAGE>
SUNAMERICA INCOME FUNDS
SHAREHOLDER LETTER
The risk becomes whether domestic growth will continue to outpace
expectations. This would make it difficult for the Fed not to adjust their
stance back towards a tightening bias in the effort to remain both vigilant
and preemptive. At the same time, Chairman Greenspan would be reluctant to
appear uncertain in his belief of Asia's potential impact on the U.S. market.
We believe that the market has already begun to discount a shift towards
tightening. The other question is whether major U.S. corporations will be able
to cut back on production and allow wage inflation fears to subside or whether
they will seek market share. We believe they will seek profitability and thus
stem a bit of the wage inflation tide.
Volatility will almost certainly increase, and thus the SunAmerica Income
Funds' active management style becomes more essential than ever. We maintain
our long-standing commitment to our top-down, issue-specific, value-oriented
strategies, carried out in a disciplined manner consistent with market
conditions and interest rate activity.
In the Diversified Income and High Income Funds, we intend to continue
upgrading credit quality over the near term and to monitor valuations as we
seek opportunities for yield. We intend to maintain our current "thirds
strategy" in the U.S. Government Securities and Federal Securities Funds. And
in the Tax-Exempt Insured Fund, we intend to continue emphasizing high quality
bonds and to carefully seek opportunities in several market trends just coming
into focus.
We value your ongoing support of the SunAmerica Income Funds and look
forward to serving your investment needs in the years ahead with pro-active
management and high current income consistent with each Fund's objective.
/s/ P. Christopher Leary
P. Christopher Leary
Director of Fixed Income
/s/ James T. McGrath
/s/ John W. Risner James T. McGrath
John W. Risner Portfolio Manager
Portfolio Manager
4
<PAGE>
SUNAMERICA INCOME FUNDS
STATEMENT OF ASSETS AND LIABILITIES -- March 31, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT
SECURITIES FUND SECURITIES FUND INCOME FUND INCOME FUND INSURED FUND
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investment securities,
at value (identified
cost $302,111,257;
$43,785,438;
$81,841,431;
$181,853,876 and
$100,416,712,
respectively).......... $305,882,429 $44,635,181 $ 83,653,354 $181,939,792 $109,129,854
Short-term securities,
at value (identified
cost $493,605; 0;
$1,051,250; $1,576,875
and $700,000,
respectively).......... 493,611 -- 1,030,000 1,545,000 700,000
Repurchase agreements
(cost equals market)... 27,473,000 9,030,000 1,722,000 -- --
Cash.................... 1,230 351 448,692 812,672 71,604
Receivable for
investments sold....... 37,637,824 2,623,576 1,490,055 2,584,155 185,078
Interest and dividends
receivable............. 3,104,846 382,104 1,762,511 3,510,561 1,627,566
Receivable for variation
margin on futures
contracts.............. 66,344 -- -- -- --
Receivable for shares of
beneficial interest
sold................... 49,859 137,221 35,246 1,829,350 69,177
Prepaid expenses........ 31,274 28,285 3,991 29,472 20,847
Receivable due from
investment adviser..... -- -- -- 2,995 --
------------ ----------- ------------ ------------ ------------
Total assets........... 374,740,417 56,836,718 90,145,849 192,253,997 111,804,126
------------ ----------- ------------ ------------ ------------
LIABILITIES:
Payable for investments
purchased.............. 43,845,473 6,108,317 623,618 8,656,239 --
Payable for securities
loaned................. 23,543,750 -- -- -- --
Dividends payable....... 599,805 95,055 290,956 634,016 179,988
Payable for shares of
beneficial interest
redeemed............... 490,916 58,761 125,416 71,279 47,148
Accrued expenses........ 407,803 62,674 81,087 110,054 87,161
Distribution and service
maintenance fees
payable................ 209,885 25,299 61,603 119,681 45,821
Investment advisory and
management fees
payable................ 196,843 22,414 49,176 112,377 47,399
------------ ----------- ------------ ------------ ------------
Total liabilities...... 69,294,475 6,372,520 1,231,856 9,703,646 407,517
------------ ----------- ------------ ------------ ------------
Net assets........... $305,445,942 $50,464,198 $ 88,913,993 $182,550,351 $111,396,609
============ =========== ============ ============ ============
NET ASSETS WERE COMPOSED
OF:
Shares of beneficial
interest, $.01 par
value.................. $ 352,638 $ 45,721 $ 189,569 $ 234,293 $ 85,458
Paid-in capital......... 331,443,039 48,864,044 111,458,940 204,731,580 106,047,602
------------ ----------- ------------ ------------ ------------
331,795,677 48,909,765 111,648,509 204,965,873 106,133,060
Accumulated
undistributed
(distributions in
excess of) net
investment income...... (60,738) (75,487) 191,746 439,881 (110,607)
Accumulated net realized
gain (loss) on
investments, futures,
options and foreign
currency............... (30,136,632) 780,177 (24,716,935) (22,909,444) (3,338,986)
Net unrealized
appreciation on
investments............ 3,771,178 849,743 1,790,673 54,041 8,713,142
Net unrealized
appreciation on futures
contracts.............. 76,457 -- -- -- --
------------ ----------- ------------ ------------ ------------
Net assets........... $305,445,942 $50,464,198 $ 88,913,993 $182,550,351 $111,396,609
============ =========== ============ ============ ============
CLASS A (UNLIMITED
SHARES AUTHORIZED):
Net assets............. $ 97,495,609 $31,627,516 $ 25,516,573 $ 56,442,305 $ 88,518,909
Shares of beneficial
interest issued and
outstanding........... 11,259,592 2,868,465 5,449,294 7,250,438 6,791,093
Net asset value and
redemption price per
share................. $ 8.66 $ 11.03 $ 4.68 $ 7.78 $ 13.03
Maximum sales charge
(4.75% of offering
price)................ 0.43 0.55 0.23 0.39 0.65
------------ ----------- ------------ ------------ ------------
Maximum offering price
to public............. $ 9.09 $ 11.58 $ 4.91 $ 8.17 $ 13.68
============ =========== ============ ============ ============
CLASS B (UNLIMITED
SHARES AUTHORIZED):
Net assets............. $207,950,333 $18,836,682 $ 63,397,420 $124,962,181 $ 22,877,700
Shares of beneficial
interest issued and
outstanding........... 24,004,195 1,703,670 13,507,605 16,031,814 1,754,749
Net asset value,
offering and
redemption price per
share................. $ 8.66 $ 11.06 $ 4.69 $ 7.79 $ 13.04
============ =========== ============ ============ ============
CLASS C (UNLIMITED
SHARES AUTHORIZED):
Net assets............. $ 1,145,865
Shares of beneficial
interest issued and
outstanding........... 147,022
Net asset value,
offering and
redemption price per
share................. $ 7.79
============
</TABLE>
See Notes to Financial Statements
5
<PAGE>
SUNAMERICA INCOME FUNDS
STATEMENT OF OPERATIONS -- For the year ended March 31, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT
SECURITIES FUND SECURITIES FUND INCOME FUND INCOME FUND INSURED FUND
--------------- --------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Interest................. $29,715,115 $3,563,623 $ 9,902,668 $15,827,269 $ 6,714,012
Dividends................ -- -- -- 193,979 --
----------- ---------- ----------- ----------- -----------
Total Investment Income.. 29,715,115 3,563,623 9,902,668 16,021,248 6,714,012
----------- ---------- ----------- ----------- -----------
Expenses:
Investment advisory and
management fees......... 2,618,884 259,246 630,297 1,128,548 582,729
Distribution and service
maintenance fees--Class
A....................... 374,850 108,151 82,072 161,715 324,213
Distribution and service
maintenance fees--Class
B....................... 2,483,056 184,550 735,197 1,041,969 239,135
Distribution and service
maintenance fees--Class
C....................... -- -- -- 719 --
Custodian fees and
expenses................ 788,005 90,080 66,300 89,190 76,980
Transfer agent fees and
expenses--Class A....... 290,141 91,849 68,239 131,360 242,205
Transfer agent fees and
expenses--Class B....... 637,618 54,847 196,384 268,421 59,414
Transfer agent fees and
expenses--Class C....... -- -- -- 251 --
Trustees' fees and
expenses................ 44,736 5,487 11,868 17,130 13,971
Audit and tax consulting
fees.................... 28,830 24,725 25,035 26,545 24,455
Printing expense......... 24,970 5,980 7,065 11,975 5,075
Registration fees--Class
A....................... 10,489 11,023 8,310 13,357 13,056
Registration fees--Class
B....................... 13,247 9,289 12,622 17,764 8,449
Registration fees--Class
C....................... -- -- -- 3,799 --
Legal fees and expenses.. 8,300 526 1,610 1,820 1,760
Insurance expense........ 6,524 768 1,582 2,051 12,855
Interest expense......... 4,020 -- 3,481 9,691 --
Miscellaneous expenses... 6,755 822 1,656 2,251 1,998
----------- ---------- ----------- ----------- -----------
Total expenses........... 7,340,425 847,343 1,851,718 2,928,556 1,606,295
Less: expenses
reimbursed by
investment adviser...... -- -- -- (3,859) --
----------- ---------- ----------- ----------- -----------
Net expenses............. 7,340,425 847,343 1,851,718 2,924,697 1,606,295
----------- ---------- ----------- ----------- -----------
Net investment income..... 22,374,690 2,716,280 8,050,950 13,096,551 5,107,717
----------- ---------- ----------- ----------- -----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS:
Net realized gain on
investments.............. 3,606,429 1,918,591 5,155,099 11,231,344 3,219,309
Net realized foreign
exchange loss on other
assets and liabilities... -- -- (4,627) (2,086) --
Net realized loss on
future contracts......... -- -- -- -- (10,563)
Net change in unrealized
appreciation/depreciation
on investments........... 5,602,705 928,406 783,223 2,889,820 3,147,644
Net change in unrealized
appreciation/depreciation
on futures contracts..... 76,457 -- -- -- --
----------- ---------- ----------- ----------- -----------
Net realized and
unrealized gain on
investments.............. 9,285,591 2,846,997 5,933,695 14,119,078 6,356,390
----------- ---------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS............... $31,660,281 $5,563,277 $13,984,645 $27,215,629 $11,464,107
=========== ========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements
6
<PAGE>
SUNAMERICA INCOME FUNDS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES FUND FEDERAL SECURITIES FUND DIVERSIFIED INCOME FUND
------------------------------- -------------------------- --------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1998 1997 1998 1997
--------------- --------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS:
Net investment income.. $ 22,374,690 $ 31,171,251 $ 2,716,280 $ 3,342,605 $ 8,050,950 $ 9,277,031
Net realized gain
(loss) on investments. 3,606,429 (13,021,676) 1,918,591 (270,175) 5,155,099 3,537,013
Net realized gain
(loss) on futures and
options contracts..... -- (68,606) -- 19,076 -- (19,031)
Net realized foreign
exchange loss on other
assets and
liabilities........... -- -- -- -- (4,627) (1,754)
Net change in
unrealized
appreciation/
depreciation on
investments........... 5,602,705 (1,446,259) 928,406 (165,240) 783,223 (866,163)
Net change in
unrealized
appreciation/
depreciation on
futures contracts..... 76,457 -- -- -- -- 15
--------------- --------------- ----------- ------------ ------------ ------------
Net increase in net
assets resulting from
operations............. 31,660,281 16,634,710 5,563,277 2,926,266 13,984,645 11,927,111
--------------- --------------- ----------- ------------ ------------ ------------
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS:
From net investment
income (Class A)...... (5,951,438) (6,332,560) (1,684,720) (1,939,301) (1,963,415) (1,544,886)
From net investment
income (Class B)...... (12,224,144) (18,378,969) (886,109) (1,107,790) (5,673,779) (7,502,127)
From net realized gain
on investments
(Class A)............. -- -- (51,944) -- -- --
From net realized gain
on investments
(Class B)............. -- -- (30,053) -- -- --
--------------- --------------- ----------- ------------ ------------ ------------
Total dividends and
distributions to
shareholders.......... (18,175,582) (24,711,529) (2,652,826) (3,047,091) (7,637,194) (9,047,013)
--------------- --------------- ----------- ------------ ------------ ------------
NET DECREASE IN NET
ASSETS RESULTING FROM
CAPITAL SHARE
TRANSACTIONS (NOTE 6).. (110,250,060) (143,987,563) (1,884,623) (16,883,153) (18,116,083) (29,908,684)
--------------- --------------- ----------- ------------ ------------ ------------
TOTAL INCREASE
(DECREASE) IN NET
ASSETS................. (96,765,361) (152,064,382) 1,025,828 (17,003,978) (11,768,632) (27,028,586)
NET ASSETS:
Beginning of period..... 402,211,303 554,275,685 49,438,370 66,442,348 100,682,625 127,711,211
--------------- --------------- ----------- ------------ ------------ ------------
End of period [including
undistributed
(distributions in
excess of) net
investment income for
March 31,1998 and March
31, 1997 of $(60,738),
$(318,396), $(75,487),
$(82,950), $191,746 and
$(217,383),
respectively].......... $ 305,445,942 $ 402,211,303 $50,464,198 $ 49,438,370 $ 88,913,993 $100,682,625
=============== =============== =========== ============ ============ ============
</TABLE>
See Notes to Financial Statements
7
<PAGE>
SUNAMERICA INCOME FUNDS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
HIGH INCOME FUND TAX EXEMPT INSURED FUND
-------------------------- --------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
OPERATIONS:
Net investment income.... $ 13,096,551 $ 12,780,101 $ 5,107,717 $ 6,361,674
Net realized gain on
investments............. 11,231,344 8,745,205 3,219,309 2,352,893
Net realized foreign
exchange gain (loss) on
other assets and
liabilities............. (2,086) -- -- 15,222
Net realized loss on
futures contracts....... -- -- (10,563) --
Net change in unrealized
appreciation/depreciation
on investments.......... 2,889,820 (6,210,119) 3,147,644 (3,258,254)
------------ ------------ ------------ ------------
Net increase in net assets
resulting from
operations............... 27,215,629 15,315,187 11,464,107 5,471,535
------------ ------------ ------------ ------------
DIVIDENDS TO SHAREHOLDERS:
From net investment
income (Class A)........ (4,011,096) (3,645,653) (4,101,670) (5,107,379)
From net investment
income (Class B)........ (8,387,799) (9,395,202) (903,110) (1,167,279)
From net investment
income (Class C)........ (6,158) -- -- --
------------ ------------ ------------ ------------
Total dividends to
shareholders............. (12,405,053) (13,040,855) (5,004,780) (6,274,658)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
CAPITAL SHARE
TRANSACTIONS (NOTE 6).... 28,217,413 9,485,027 (18,491,567) (27,040,178)
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS............ 43,027,989 11,759,359 (12,032,240) (27,843,301)
NET ASSETS:
Beginning of period....... 139,522,362 127,763,003 123,428,849 151,272,150
------------ ------------ ------------ ------------
End of period [including
undistributed
(distributions in excess
of) net investment income
for March 31,1998 and
March 31, 1997 of
$439,881, $(267,317),
$(110,607) and
$(213,544),
respectively]............ $182,550,351 $139,522,362 $111,396,609 $123,428,849
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
8
<PAGE>
SUNAMERICA INCOME FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES FUND
- -------------------------------
NET
GAIN
(LOSS)
ON DISTRI-
INVEST- BUTIONS
MENTS TOTAL DIVIDENDS IN EXCESS NET NET
NET ASSET (BOTH FROM FROM NET OF NET ASSET ASSETS
VALUE, NET REALIZED INVEST- INVEST- RETURN INVEST- TOTAL VALUE, END OF
PERIOD BEGINNING INVESTMENT AND MENT MENT OF MENT DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME CAPITAL INCOME BUTIONS PERIOD RETURN(2) (000'S)
- ---------------- --------- ---------- ----------- ---------- --------- ------- --------- ------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
-------
10/01/93-
3/31/94(3)..... $8.68 $0.28 $(0.34) $(0.06) $(0.14) $(0.01) $(0.08) $(0.23) $8.39 (0.68)% $ 76,586
3/31/95......... 8.39 0.61 (0.30) 0.31 (0.47) -- -- (0.47) 8.23 3.89 73,399
3/31/96......... 8.23 0.62 0.16 0.78 (0.51) -- -- (0.51) 8.50 9.62 125,504
3/31/97......... 8.50 0.59 (0.26) 0.33 (0.48) -- -- (0.48) 8.35 3.98 113,171
3/31/98......... 8.35 0.58 0.21 0.79 (0.48) -- -- (0.48) 8.66 9.62 97,496
CLASS B
-------
7/01/93-
3/31/94(5)..... $8.74 $0.43 $(0.40) $0.03 $(0.24) $(0.01) $(0.13) $(0.38) $8.39 0.25% $886,089
3/31/95......... 8.39 0.56 (0.30) 0.26 (0.41) -- -- (0.41) 8.24 3.25 594,779
3/31/96......... 8.24 0.55 0.17 0.72 (0.45) -- -- (0.45) 8.51 8.87 428,772
3/31/97......... 8.51 0.54 (0.26) 0.28 (0.43) -- -- (0.43) 8.36 3.31 289,040
3/31/98......... 8.36 0.52 0.20 0.72 (0.42) -- -- (0.42) 8.66 8.80 207,950
<CAPTION>
U.S. GOVERNMENT SECURITIES FUND
- -------------------------------
RATIO OF RATIO OF
EXPENSES NET
TO INVESTMENT
AVERAGE INCOME TO
PERIOD NET AVERAGE PORTFOLIO
ENDED ASSETS NET ASSETS TURNOVER
- ---------------- ------------- -------------- ---------
<S> <C> <C> <C>
10/01/93-
3/31/94(3)..... 1.35%(4)(6) 6.83%(4)(6) 35%
3/31/95......... 1.46(6) 7.50(6) 105
3/31/96......... 1.44(6) 7.11(6) 142
3/31/97......... 1.54(6) 7.01(6) 148
3/31/98......... 1.63 6.73 229
7/01/93-
3/31/94(5)..... 1.95%(4)(6) 6.61%(4)(6) 35%
3/31/95......... 2.15(6) 6.80(6) 105
3/31/96......... 2.13 6.46 142
3/31/97......... 2.18 6.36 148
3/31/98......... 2.26 6.11 229
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FEDERAL SECURITIES FUND
- -----------------------
NET
GAIN
(LOSS)
ON DISTRI-
INVEST- BUTIONS
MENTS TOTAL DIVIDENDS DISTRI- IN EXCESS NET NET
NET ASSET (BOTH FROM FROM NET BUTIONS OF NET ASSET ASSETS
VALUE, NET REALIZED INVEST- INVEST- FROM INVEST- TOTAL VALUE, END OF
PERIOD BEGINNING INVESTMENT AND MENT MENT CAPITAL MENT DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME GAINS INCOME BUTIONS PERIOD RETURN(2) (000'S)
- ---------------- --------- ---------- ----------- ---------- --------- ------- --- --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
-------
10/11/93-
3/31/94(3)..... $10.58 $0.22 $(0.34) $(0.12) $(0.23) $(0.01) $ -- $(0.24) $10.22 (1.14)% $ 592
3/31/95......... 10.22 0.60 (0.20) 0.40 (0.64) -- -- (0.64) 9.98 4.18 6,259
3/31/96......... 9.98 0.68 0.40 1.08 (0.63) -- -- (0.63) 10.43 10.94 40,278
3/31/97......... 10.43 0.65 (0.10) 0.55 (0.59) -- -- (0.59) 10.39 5.40 30,509
3/31/98......... 10.39 0.62 0.63 1.25 (0.59) (0.02) -- (0.61) 11.03 12.29 31,628
CLASS B
-------
3/31/94......... $10.84 $0.62 $(0.71) $(0.09) $(0.49) $(0.03) $(0.01) $(0.53) $10.22 (0.89)% $81,011
3/31/95......... 10.22 0.63 (0.26) 0.37 (0.58) -- -- (0.58) 10.01 3.81 65,631
3/31/96......... 10.01 0.56 0.44 1.00 (0.56) -- -- (0.56) 10.45 10.13 26,165
3/31/97......... 10.45 0.57 (0.08) 0.49 (0.52) -- -- (0.52) 10.42 4.82 18,929
3/31/98......... 10.42 0.55 0.63 1.18 (0.52) (0.02) -- (0.54) 11.06 11.54 18,837
<CAPTION>
FEDERAL SECURITIES FUND
- -----------------------
RATIO OF RATIO OF
EXPENSES NET
TO INVESTMENT
AVERAGE INCOME TO
PERIOD NET AVERAGE PORTFOLIO
ENDED ASSETS NET ASSETS TURNOVER
- ---------------- ------------- -------------- ---------
<S> <C> <C> <C>
10/11/93-
3/31/94(3)..... 1.39%(4)(6) 4.68%(4)(6) 68%
3/31/95......... 1.40(6) 6.90(6) 267
3/31/96......... 1.37 6.12 311
3/31/97......... 1.41 6.11 426
3/31/98......... 1.47 5.75 529
3/31/94......... 1.98% 5.79% 68%
3/31/95......... 2.03 6.33 267
3/31/96......... 2.01 5.64 311
3/31/97......... 2.07 5.46 426
3/31/98......... 2.13 5.09 529
</TABLE>
- ------------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Commencement of sale of respective class of shares
(4) Annualized
(5) Pursuant to a reorganization of the SunAmerica Mutual Funds, the Fund
changed its fiscal year end to March 31
(6) Net of the following expense reimbursements (based on average net assets):
<TABLE>
<CAPTION>
3/31/94 3/31/95 3/31/96 3/31/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund Class A .10% .07% .04% .01%
U.S. Government Securities Fund Class B .06% .03% -- --
Federal Securities Fund Class A 6.74% 1.26% -- --
</TABLE>
See Notes to Financial Statements
9
<PAGE>
SUNAMERICA INCOME FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
DIVERSIFIED INCOME FUND
- -----------------------
NET GAIN
(LOSS) ON RATIO OF
INVESTMENTS NET NET EXPENSES RATIO OF NET
NET ASSET (BOTH DIVIDENDS ASSET ASSETS TO INVESTMENT
VALUE, NET REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE INCOME TO
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD NET AVERAGE NET
PERIOD ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME PERIOD RETURN(2) (000'S) ASSETS ASSETS
- ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
-------
11/01/93 -
3/31/94(3)..... $5.07 $0.13 $(0.23) $(0.10) $(0.18) $4.79 (2.10)% $ 12,600 1.42%(4)(7) 8.25%(4)(7)
3/31/95......... 4.79 0.43 (0.66) (0.23) (0.42) 4.14 (5.10) 14,213 1.59 9.58
3/31/96......... 4.14 0.39 0.16 0.55 (0.40) 4.29 13.78 16,762 1.46 8.96
3/31/97......... 4.29 0.37 0.10 0.47 (0.37) 4.39 11.43 22,601 1.42 8.68
3/31/98......... 4.39 0.40 0.27 0.67 (0.38) 4.68 15.84 25,517 1.45 8.83
CLASS B
-------
11/01/93 -
3/31/94(3)..... $5.07 $0.15 $(0.27) $(0.12) $(0.16) $4.79 (2.52)% $174,072 2.11%(4) 7.48%(4)
3/31/95......... 4.79 0.40 (0.65) (0.25) (0.39) 4.15 (5.46) 132,378 2.12 8.98
3/31/96......... 4.15 0.36 0.17 0.53 (0.38) 4.30 13.09 110,949 2.06 8.42
3/31/97......... 4.30 0.35 0.10 0.45 (0.35) 4.40 10.73 78,081 2.04 8.05
3/31/98......... 4.40 0.38 0.26 0.64 (0.35) 4.69 15.11 63,397 2.06 8.14
<CAPTION>
DIVERSIFIED INCOME FUND
- -----------------------
PORTFOLIO
PERIOD ENDED TURNOVER
- ---------------- ---------
<S> <C>
11/01/93 -
3/31/94(3)..... 48%
3/31/95......... 160
3/31/96......... 166
3/31/97......... 131
3/31/98......... 157
11/01/93 -
3/31/94(3)..... 48%
3/31/95......... 160
3/31/96......... 166
3/31/97......... 131
3/31/98......... 157
- --------------------------------------------------------------------------------
<CAPTION>
HIGH INCOME FUND
- ----------------
NET GAIN
(LOSS) ON RATIO OF
INVESTMENTS NET NET EXPENSES RATIO OF NET
NET ASSET (BOTH DIVIDENDS ASSET ASSETS TO INVESTMENT
VALUE, NET REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE INCOME TO
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD NET AVERAGE NET
PERIOD ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME PERIOD RETURN(2) (000'S) ASSETS ASSETS
- ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
-------
3/31/94(5)...... $8.12 $0.87 $(0.14) $0.73 $(0.82) $8.03 9.14% $ 33,724 1.72% 10.34%
3/31/95......... 8.03 0.78 (1.03) (0.25) (0.83) 6.95 (2.91) 40,585 1.61 10.82
3/31/96......... 6.95 0.67 0.02 0.69 (0.69) 6.95 10.43 35,963 1.53 9.36
3/31/97......... 6.95 0.65 0.12 0.77 (0.66) 7.06 11.46 41,139 1.50 9.10
3/31/98......... 7.06 0.68 0.68 1.36 (0.64) 7.78 20.07 56,442 1.52 9.13
CLASS B
-------
10/01/93 -
3/31/94(6)..... $8.18 $0.38 $(0.17) $ 0.21 $(0.35) $8.04 2.46% $131,713 2.15%(4)(7) 9.07%(4)(7)
3/31/95......... 8.04 0.73 (1.02) (0.29) (0.79) 6.96 (3.42) 153,034 2.16 (7) 10.26 (7)
3/31/96......... 6.96 0.62 0.03 0.65 (0.65) 6.96 9.83 91,800 2.06 (7) 8.85 (7)
3/31/97......... 6.96 0.61 0.12 0.73 (0.62) 7.07 10.78 98,383 2.11 (7) 8.49 (7)
3/31/98......... 7.07 0.63 0.69 1.32 (0.60) 7.79 19.31 124,962 2.13 8.51
CLASS C
-------
2/02/98 -
3/31/98(6).... $7.70 $0.10 $ 0.07 $ 0.17 $(0.08) $7.79 2.18% $ 1,146 2.10%(4)(7) 9.78%(4)(7)
<CAPTION>
HIGH INCOME FUND
- ----------------
PORTFOLIO
PERIOD ENDED TURNOVER
- ---------------- ---------
<S> <C>
3/31/94(5)...... 290%
3/31/95......... 196
3/31/96......... 183
3/31/97......... 164
3/31/98......... 236
10/01/93 -
3/31/94(6)..... 290%
3/31/95......... 196
3/31/96......... 183
3/31/97......... 164
3/31/98......... 236
2/02/98 -
3/31/98(6).... 236%
</TABLE>
- ------------
(1)Calculated based upon average shares outstanding
(2)Total return is not annualized and does not reflect sales load
(3)Pursuant to a reorganization of the SunAmerica Mutual Funds, the Fund
changed its fiscal year end to March 31
(4)Annualized
(5)Restated to reflect 1.174107276-for-1 stock split effective October 1, 1993
(6)Commencement of sale of respective class of shares
(7)Net of the following expense reimbursements (based on average net assets):
<TABLE>
<CAPTION>
3/31/94 3/31/95 3/31/96 3/31/97 3/31/98
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Diversified Income Fund Class A .62% -- -- -- --
High Income Fund
Class B .08% .08% .08% .01% --
High Income Fund
Class C -- -- -- -- 5.37%
</TABLE>
See Notes to Financial Statements
10
<PAGE>
SUNAMERICA INCOME FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TAX EXEMPT INSURED FUND
- -----------------------
NET GAIN
(LOSS) ON RATIO OF RATIO OF
INVESTMENTS NET NET EXPENSES NET
NET ASSET (BOTH DIVIDENDS ASSET ASSETS TO INVESTMENT
VALUE, NET REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE INCOME TO
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD NET AVERAGE
PERIOD ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME PERIOD RETURN(2) (000'S) ASSETS NET ASSETS
- ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
-------
11/01/93-
3/31/94(3)..... $12.79 $0.26 $(0.84) $(0.58) $(0.26) $11.95 (4.61)% $165,216 $1.28%(4)(5) 4.99%(4)(5)
3/31/95......... 11.95 0.63 0.17 0.80 (0.62) 12.13 6.97 137,955 1.20 (5) 5.32 (5)
3/31/96......... 12.13 0.59 0.29 0.88 (0.59) 12.42 7.37 121,957 1.22 4.72
3/31/97......... 12.42 0.59 (0.07) 0.52 (0.59) 12.35 4.24 98,376 1.24 4.77
3/31/98......... 12.35 0.58 0.67 1.25 (0.57) 13.03 10.28 88,519 1.24 4.52
CLASS B
-------
11/01/93-
3/31/94(3)..... $12.79 $0.22 $(0.83) $(0.61) $(0.23) $11.95 (4.84)% $20,765 2.12%(4) 4.17%(4)
3/31/95......... 11.95 0.54 0.19 0.73 (0.54) 12.14 6.29 25,985 1.92 4.60
3/31/96......... 12.14 0.50 0.29 0.79 (0.51) 12.42 6.58 29,315 1.90 4.03
3/31/97......... 12.42 0.52 (0.08) 0.44 (0.51) 12.35 3.57 25,053 1.88 4.13
3/31/98......... 12.35 0.49 0.68 1.17 (0.48) 13.04 9.65 22,878 1.90 3.86
<CAPTION>
TAX EXEMPT INSURED FUND
- -----------------------
PORTFOLIO
PERIOD ENDED TURNOVER
- ---------------- ---------
<S> <C>
11/01/93-
3/31/94(3)..... 52%
3/31/95......... 162
3/31/96......... 46
3/31/97......... 51
3/31/98......... 48
11/01/93-
3/31/94(3)..... 52%
3/31/95......... 162
3/31/96......... 46
3/31/97......... 51
3/31/98......... 48
</TABLE>
- ------------
(1)Calculated based upon average shares outstanding
(2)Total return is not annualized and does not reflect sales load
(3)Pursuant to a reorganization of the SunAmerica Mutual Funds, the Fund
changed its fiscal year end to March 31
(4)Annualized
(5)Net of the following expense reimbursements (based on average net assets):
<TABLE>
<CAPTION>
3/31/94 3/31/95
------- -------
<S> <C> <C>
Tax Exempt Insured Fund Class A .11% .04%
</TABLE>
See Notes to Financial Statements
11
<PAGE>
SUNAMERICA U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--23.5%
7.50% due 4/01/24 - 6/01/25........................ $8,012 $ 8,215,251
8.50% due 6/01/01.................................. 2 2,160
9.00% due 1/01/02 - 10/01/16....................... 391 416,031
9.25% due 9/01/08 - 3/01/17........................ 370 394,611
9.50% due 9/01/16 - 9/01/21........................ 4,119 4,418,663
10.00% due 10/01/02 - 8/01/21...................... 15,325 16,675,690
10.50% due 6/01/00 - 1/01/21....................... 571 631,669
10.75% due 9/01/00 - 1/01/15....................... 182 203,916
11.00% due 9/01/00 - 6/01/17....................... 1,540 1,739,678
11.25% due 11/01/13................................ 57 64,759
11.50% due 11/01/01 - 7/01/19...................... 633 718,689
11.75% due 8/01/11 - 10/01/14...................... 152 173,158
12.00% due 7/01/99 - 1/01/15....................... 122 138,247
12.13% due 9/01/11................................. 558 624,175
12.25% due 10/01/99 - 7/01/15...................... 476 550,246
12.50% due 8/01/99 - 4/01/19....................... 15,875 18,630,645
12.75% due 9/01/04 - 6/01/15....................... 660 771,482
13.00% due 5/01/00 - 10/01/15...................... 8,227 9,782,769
13.25% due 11/01/10 - 5/01/15...................... 952 1,130,103
13.50% due 2/01/10 - 2/01/19....................... 4,632 5,583,329
13.75% due 7/01/11 - 8/01/14....................... 80 95,327
14.00% due 6/01/11 - 4/01/16....................... 503 606,226
14.50% due 12/01/10 - 5/01/13...................... 87 105,066
-----------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP.
(cost $68,417,577)................................. 71,671,890
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--14.7%
5.25% due 1/15/03.................................. 5,000 4,884,350
5.75% due 2/15/08.................................. 10,250 10,078,620
6.50% due 8/01/99 - 1/01/01........................ 5,137 5,168,826
8.00% due 12/01/22 - 1/01/23....................... 12,288 12,721,431
9.00% due 6/01/01 - 4/01/07........................ 1,759 1,848,799
9.25% due 12/01/10 - 1/01/17....................... 383 407,053
10.25% due 6/01/14 - 7/01/16....................... 104 114,099
10.50% due 3/01/15................................. 295 325,778
11.00% due 3/01/09 - 8/01/20....................... 986 1,104,936
11.50% due 5/01/00 - 3/01/14....................... 411 449,611
11.75% due 11/01/15................................ 22 25,132
12.00% due 9/01/07 - 3/01/17....................... 2,154 2,482,482
12.25% due 9/01/99 - 10/01/15...................... 1,127 1,307,952
12.50% due 12/01/09 - 9/01/15...................... 852 989,773
12.75% due 9/01/12 - 9/01/15....................... 375 442,835
13.00% due 10/01/09 - 9/01/16...................... 95 112,280
13.25% due 10/01/13 - 2/01/15...................... 162 193,351
13.50% due 10/01/10 - 2/01/17...................... 1,222 1,473,937
13.75% due 11/01/11 - 10/01/14..................... 107 128,801
14.00% due 10/01/14................................ 288 349,937
14.50% due 7/01/11................................. 123 149,826
14.75% due 7/01/12................................. 88 112,007
15.00% due 10/01/12 - 2/01/13...................... 116 141,658
15.50% due 10/01/12................................ 51 62,194
-----------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(cost $44,849,193)................................ 45,075,668
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--26.9%
6.50% due TBA...................................... $ 5,000 $ 4,948,786
7.00% due 7/15/23 - 9/15/25........................ 12,339 12,464,670
7.00% due TBA...................................... 14,000 14,140,000
7.50% due 1/15/17 - 10/15/23....................... 21,728 22,281,683
8.50% due 6/15/01 - 11/15/20....................... 8,961 9,393,622
9.00% due 5/15/01 - 12/15/20....................... 6,893 7,366,656
9.50% due 4/15/98 - 7/15/20........................ 1,842 1,981,059
10.00% due 5/15/98 - 5/15/19....................... 1,315 1,422,027
10.25% due 7/15/15................................. 48 55,066
10.50% due 4/15/98 - 11/15/03...................... 920 984,198
11.00% due 4/15/98 - 1/15/11....................... 579 612,632
11.50% due 11/15/98 - 1/15/21...................... 755 857,591
11.75% due 7/15/13 - 11/15/15...................... 591 669,387
12.00% due 9/15/98 - 12/15/15...................... 472 531,586
12.25% due 8/15/13 - 7/15/15....................... 36 40,552
12.50% due 4/15/10 - 3/15/16....................... 191 216,920
12.75% due 10/15/13................................ 5 6,218
13.25% due 7/15/14 - 9/15/14....................... 92 105,454
13.50% due 5/15/10 - 1/15/15....................... 1,642 1,971,119
14.00% due 5/15/11 - 12/15/14...................... 954 1,146,302
15.00% due 6/15/11 - 2/15/13....................... 649 786,414
16.00% due 12/15/11 - 7/15/12...................... 255 311,496
-----------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(cost $82,622,530)................................. 82,293,438
-----------
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION II--0.8%
10.00% due 9/20/16 - 4/20/19....................... 15 16,214
11.50% due 8/20/13 - 7/20/20....................... 860 993,528
11.75% due 5/20/15 - 2/20/16....................... 262 293,811
12.00% due 10/20/13 - 5/20/15...................... 541 628,449
12.25% due 10/20/15................................ 33 37,569
12.50% due 9/20/13 - 1/20/15....................... 50 59,961
12.75% due 11/20/13 - 7/20/15...................... 143 164,543
13.25% due 12/20/14 - 5/20/15...................... 60 68,500
13.50% due 10/20/14................................ 71 86,214
-----------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II
(cost $2,272,316).................................. 2,348,789
-----------
U.S. TREASURY NOTES--22.8%
5.50% due 2/28/03(1)............................... 37,150 36,929,329
5.50% due 2/15/08.................................. 22,775 22,497,373
6.13% due 8/15/07.................................. 10,000 10,284,400
-----------
TOTAL U.S. TREASURY NOTES
(cost $69,420,168)................................. 69,711,102
-----------
U.S. TREASURY BONDS--11.4%
6.13% due 11/15/27................................. 23,360 23,954,979
6.38% due 8/15/27.................................. 10,250 10,826,563
-----------
TOTAL U.S. TREASURY BONDS
(cost $34,529,473)................................. 34,781,542
-----------
</TABLE>
12
<PAGE>
SUNAMERICA U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------
TOTAL INVESTMENT SECURITIES--100.1%
(cost $302,111,257).............................. $305,882,429
------------
SHORT-TERM SECURITIES--0.2%
United States Treasury Bills
5.00% due 7/02/98 (cost $493,605)(4)............ $ 500 493,611
------------
REPURCHASE AGREEMENT--9.0%
PaineWebber, Inc. Joint Repurchase Agreement
Account (Note 2) (cost $27,473,000)(3)(4)....... 27,473 27,473,000
------------
TOTAL INVESTMENTS--
(cost $330,077,862*)............................. 109.3% 333,849,040
Liabilities in excess of other assets(2).......... (9.3) (28,403,098)
------- ------------
NET ASSETS-- 100.0% $305,445,942
======= ============
</TABLE>
- --------
* See Note 5
TBA--Securities purchased on a forward commitment basis with an approximate
principal amount and no definitive maturity date. The actual principal and
maturity date will be determined upon settlement.
(1) The security or a portion thereof is out on loan; see Note 2.
(2) Includes a liability of fully collateralized securities on loan.
(3) Includes cash received as collateral for securities out on loan in the
amount of $23,543,750.
(4) The security or a portion thereof represents collateral for the following
open futures contracts:
<TABLE>
<CAPTION>
VALUE AS OF
NUMBER OF DESCRIPTION AND MARCH 31, UNREALIZED
CONTRACTS EXPIRATION DATE 1998 GAIN
--------- --------------- ----------- ----------
<S> <C> <C> <C>
193 Long U.S. Treasury 10 Year $21,688,375 $76,457
Note--June 98
</TABLE>
See Notes to Financial Statements
13
<PAGE>
SUNAMERICA FEDERAL SECURITIES FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--7.6%
7.50% due 2/01/23 - 6/01/25........................ $1,671 $ 1,713,837
10.00% due 1/01/17................................. 1,942 2,124,935
12.50% due 9/30/13(1).............................. 14 13,531
13.50% due 2/01/14................................. 6 7,545
-----------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP.
(cost $3,812,534).................................. 3,859,848
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--3.9%
5.75% due 2/15/08.................................. 2,000 1,966,560
15.50% due 10/01/12................................ 7 8,892
-----------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(cost $1,999,438).................................. 1,975,452
-----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION--38.5%
7.00% due 3/15/23 - 9/15/25........................ 5,693 5,758,317
8.50% due 3/15/17 - 9/15/24........................ 8,792 9,306,082
9.00% due 6/15/16 - 5/15/17........................ 3,357 3,635,404
11.25% due 8/15/15................................. 25 27,718
12.00% due 5/15/15................................. 27 31,738
12.25% due 9/15/13 - 7/15/15....................... 427 481,326
12.50% due 11/15/10 - 6/15/15...................... 91 105,584
13.25% due 10/15/13................................ 20 22,680
13.50% due 5/15/11 - 10/15/14...................... 50 60,143
-----------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(cost $18,649,717)................................. 19,428,992
-----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION II--8.4%
6.50% due TBA...................................... 3,500 3,463,880
10.00% due 10/20/13 - 3/20/17...................... 288 317,292
12.00% due 3/20/15 - 1/20/16....................... 164 191,741
12.25% due 12/20/14 - 10/20/15..................... 225 252,409
13.75% due 9/20/14................................. 8 9,117
-----------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II
(cost $4,201,124).................................. 4,234,439
-----------
U.S. TREASURY NOTES--4.0%
6.13% due 12/31/01
(cost $1,986,563).................................. 2,000 2,030,320
-----------
U.S. TREASURY BONDS--26.0%
zero coupon due 2/15/05 ........................... 8,080 5,466,362
6.13% due 11/15/27................................. 6,420 6,583,518
6.38% due 8/15/27.................................. 1,000 1,056,250
-----------
TOTAL U.S. TREASURY BONDS
(cost $13,136,062)................................. 13,106,130
-----------
TOTAL INVESTMENT SECURITIES--88.4%
(cost $43,785,438)................................. 44,635,181
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
REPURCHASE AGREEMENT--17.9%
PaineWebber, Inc.
Joint Repurchase Agreement
Account (Note 2)
(cost $9,030,000)................................. $ 9,030 $9,030,000
-----------
TOTAL INVESTMENTS--
(cost $52,815,438*)............................... 106.3% 53,665,181
Liabilities in excess of other assets.............. (6.3) (3,200,983)
------- -----------
NET ASSETS-- 100.0% $50,464,198
======= ===========
</TABLE>
- -------
* See Note 5
(1) Fair valued security; see Note 2
TBA--Securities purchased on a forward commitment basis with an approximate
principal amount and no definitive maturity date. The actual principal amount
and maturity date will be determined upon settlement date.
See Notes to Financial Statements
14
<PAGE>
SUNAMERICA DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
CORPORATE BONDS & NOTES--40.5%
BROADCASTING--3.6%
Big City Radio, Inc.
Sr. Disc. Notes
zero coupon due 3/15/05(1)(2).. $ 750 $ 551,250
Fox Kids Worldwide, Inc.
Sr. Notes
9.25% due 11/01/07(1)............................. 1,000 1,005,000
Peoples Choice TV Corp.
Sr. Disc. Notes
zero coupon due 6/01/04(2)(5)..................... 1,000 220,000
Spanish Broadcasting Systems, Inc.
Sr. Notes
12.50% due 6/15/02(1)............................. 1,250 1,431,250
------------
3,207,500
------------
CABLE--3.9%
Diamond Holdings PLC
Sr. Notes
9.13% due 2/01/08(1).............................. 1,000 1,030,000
Echostar Satellite Broadcasting Corp.
Sr. Secured Disc. Notes
zero coupon due 3/15/04(2)........................ 500 456,250
UIH Australia Pacific, Inc.
Sr. Disc. Notes, Series B
zero coupon due 5/15/06(2)........................ 1,000 690,000
United International Holdings, Inc.
Sr. Secured Disc. Notes
zero coupon due 2/15/08(1)(2)..................... 2,000 1,250,000
------------
3,426,250
------------
CELLULAR--5.7%
Celcaribe SA
Sr. Notes
13.50% due 3/15/04................................ 750 773,437
Cencall Communications Corp.
Sr. Disc. Notes
zero coupon due 1/15/04(2)........................ 1,000 970,000
International Wireless Communication
Sr. Secured Disc. Notes
zero coupon due 8/15/01........................... 1,750 603,750
Microcell Telecommunications
Sr. Disc. Notes, Series B
zero coupon due 6/01/06(2)........................ 1,000 742,500
Omnipoint Communications, Inc.
Sr. Notes
8.88% due 2/17/06(1)(4)........................... 1,000 997,500
Transtel Pass Through Trust
Sr. Notes
12.50% due 11/01/07(1)............................ 1,000 956,250
------------
5,043,437
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
CONSUMER GOODS--1.7%
Polymer Group, Inc.
Sr. Subordinated Notes, Series B
9.00% due 7/01/07................................. $1,500 $ 1,556,250
------------
ENERGY--0.5%
Southwest Royalties, Inc.
Sr. Notes, Series B
10.50% due 10/15/04............................... 500 445,000
------------
FINANCIAL SERVICES--1.7%
Homeside, Inc.
Sr. Secured Priority Notes, Series B
11.25% due 5/15/03................................ 1,299 1,549,058
------------
LEISURE & TOURISM--1.2%
HMH Properties, Inc.
Sr. Secured Notes, Series B
9.50% due 5/15/05................................. 1,000 1,062,500
------------
MANUFACTURING--2.3%
Trident Automotive PLC
Sr. Subordinated Notes
10.00% due 12/15/05(1)............................ 1,000 1,035,000
Wavetek Corp.
Sr. Subordinated Notes
10.13% due 6/15/07................................ 1,000 1,040,000
------------
2,075,000
------------
MEDIA--1.9%
Diva Systems Corp.
Sr. Disc. Notes
zero coupon due 3/01/08(1)(2)(5).................. 750 412,500
Knology Holdings, Inc.
Sr. Disc. Notes
zero coupon due 10/15/07(2)....................... 500 300,000
SFX Entertainment, Inc.
Sr. Subordinated Notes
9.13% due 2/01/08(1).............................. 1,000 985,000
------------
1,697,500
------------
</TABLE>
15
<PAGE>
SUNAMERICA DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
CORPORATE BONDS & NOTES (CONTINUED)
METALS & MINING--4.8%
Acme Metals, Inc.
Sr. Notes
10.88% due 12/15/07(1)............................ $ 500 $ 517,500
Acme Metals, Inc.
Sr. Notes
12.50% due 8/01/02................................ 1,000 1,068,750
Kaiser Aluminum & Chemical Corp.
Sr. Subordinated Notes
12.75% due 2/01/03................................ 1,000 1,066,250
Renco Metals, Inc.
Sr. Notes
11.50% due 7/01/03................................ 1,500 1,597,500
------------
4,250,000
------------
OFFICE PRODUCTS--0.7%
American Pad & Paper Co.
Sr. Subordinated Notes, Series B
13.00% due 11/15/05............................... 650 656,500
------------
OIL & GAS--1.8%
Statia Terms International
Mortgage Notes, Series B 11.75% due 11/15/03...... 1,500 1,595,625
------------
PAPER PRODUCTS--0.9%
Florida Coast Paper Co. LLC
First Mortgage Notes, Series B
12.75% due 6/01/03................................ 750 802,500
------------
RETAIL--0.7%
Electronic Retailing Systems International
Sr. Disc. Notes
zero coupon due 2/01/04(2)........................ 1,000 580,000
------------
SHIPPING--2.0%
Golden Ocean Group Ltd.
Sr. Notes
10.00% due 8/31/01(1)(5).......................... 1,000 766,250
Panoceanic Bulk Carriers Ltd.
First Preferred Ship
Mortgage Notes
12.00% due 12/15/07(1)............................ 1,000 977,500
------------
1,743,750
------------
TELECOMMUNICATIONS--7.1%
Covad Communications Group, Inc.
Sr. Disc. Notes
zero coupon due 3/15/08(1)(2)(5).................. 1,000 525,000
DTI Holdings, Inc.
Sr. Disc. Notes
zero coupon due 3/01/08(2)(5)..................... 750 436,875
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
TELECOMMUNICATIONS (CONTINUED)
Hermes Europe Railtel BV
Sr. Notes
11.50% due 8/15/07(1)............................. $1,000 $ 1,132,500
ICG Holdings, Inc.
Sr. Disc. Notes
zero coupon due 3/15/07(1)(2)..................... 1,250 912,500
MGC Communications, Inc.
Sr. Secured Notes, Series B
13.00% due 10/01/04(1)(5)......................... 750 780,000
Orbcomm Global LP
Sr. Notes
14.00% due 8/15/04................................ 1,000 1,167,500
Orion Network Systems, Inc.
Sr. Disc. Notes
zero coupon due 1/15/07(2)........................ 1,000 767,500
USN Communications, Inc.
Sr. Disc. Notes, Series B
zero coupon due 8/15/04(2)........................ 750 615,000
------------
6,336,875
------------
TOTAL CORPORATE BONDS & NOTES
(cost $36,280,671).................................. 36,027,745
------------
FOREIGN BONDS & NOTES--47.1%
BROADCASTING--3.4%
Central European Media Enterprises Ltd.
Sr. Notes
9.38% due 8/15/04................................. 1,000 991,510
RBS Participacoes SA
Guaranteed Notes
11.00% due 4/01/07(1)............................. 1,000 998,270
Tv Azteca SA de CV
Guaranteed Sr. Notes, Series B
10.50% due 2/15/07................................ 1,000 1,067,500
------------
3,057,280
------------
CABLE--4.4%
Australis Holdings Property Ltd.
Sr. Disc. Notes
zero coupon due 11/01/02(2)....................... 500 174,995
Comcast UK Cable Partners Ltd.
Sr. Disc. Notes
zero coupon due 11/15/07(2)....................... 2,000 1,660,000
Multicanal Participacoes SA
Guaranteed Sr. Notes
12.63% due 6/18/04................................ 1,000 1,097,500
Tevecap SA
Sr. Notes, Series B
12.63% due 11/26/04............................... 1,000 1,011,120
------------
3,943,615
------------
</TABLE>
16
<PAGE>
SUNAMERICA DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
FOREIGN BONDS & NOTES (CONTINUED)
CELLULAR--1.7%
Occidente Y Caribe Celular SA
Sr. Disc. Notes, Series B
zero coupon due 3/15/04(2)........................ $2,000 $ 1,535,000
------------
FINANCE--1.8%
Cei Citicorp Holdings SA
Sr. Notes, Series B
9.75% due 2/14/07................................. 1,500 1,560,000
------------
FOOD, BEVERAGE & TOBACCO--2.0%
DGS International Finance Co. BV
Guaranteed Notes
10.00% due 6/01/07(1)............................. 2,000 1,775,000
------------
FOOD RETAIL--2.3%
Bepensa SA
Sr. Notes
9.75% due 9/30/04(1).............................. 2,000 2,010,180
------------
GOVERNMENT AGENCY--11.9%
Federal Republic of Brazil
Capitalization Bonds
4.50% due 4/15/14(4)(6)........................... 2,281 1,915,637
Republic of Argentina
Bonds
11.38% due 1/30/17................................ 2,500 2,828,125
Republic of Brazil
Bonds
10.13% due 5/15/27................................ 2,562 2,549,190
Republic of Venezuela
Bonds
9.25% due 9/15/27................................. 1,000 912,500
United Mexican States
Bonds
11.38% due 9/15/16................................ 2,000 2,355,000
------------
10,560,452
------------
OIL & GAS--2.4%
Bridas Corp.
Sr. Notes
12.50% due 11/15/99............................... 2,000 2,143,420
------------
PACKAGING--1.2%
Vicap SA
Guaranteed Sr. Notes
11.38% due 5/15/07(1)............................. 1,000 1,100,000
------------
PAGING--1.2%
Paging Network Do Brasil SA
Sr. Notes
13.50% due 6/06/05................................ 1,000 1,017,500
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
SHIPPING--0.6%
Pegasus Shipping Ltd.
Sr. Mortgage Notes
11.88% due 11/15/04(1)............................ $ 500 $ 503,750
------------
TELECOMMUNICATIONS--10.8%
Colt Telecom Group PLC
Sr. Disc. Notes
zero coupon due 12/15/06(2)....................... 750 585,937
Globo Communicacoes e Participacoes SA
Guaranteed Notes
10.63% due 12/05/08............................... 2,000 2,035,000
Ionica PLC
Sr. Disc. Notes
zero coupon due 5/01/07(2)(5)..................... 2,500 1,028,125
RSL Communications Ltd.
Sr. Notes
12.25% due 11/15/06............................... 150 168,375
RSL Communications Ltd.
Sr. Notes
12.25% due 11/15/06............................... 350 399,000
Telecom Argentina
Notes
12.00% due 11/15/02............................... 3,000 3,420,000
Tricom SA
Guaranteed Sr. Notes
11.38% due 9/01/04................................ 2,000 1,990,000
------------
9,626,437
------------
TELEPHONE-- 2.3%
Comtel Brasileira
Bonds
10.75% due 9/26/04................................ 2,000 2,006,316
------------
UTILITY--1.1%
Companhia Paranaense
Unsubordinated Notes
9.75% due 5/02/05(1).............................. 1,000 1,010,000
------------
TOTAL FOREIGN BONDS & NOTES
(cost $39,689,184)................................ 41,848,950
------------
U.S. GOVERNMENT AND AGENCIES--5.6%
U.S. TREASURY BONDS--3.3%
6.13% due 11/15/27................................ 1,000 1,025,470
11.13% due 8/15/03................................ 1,500 1,871,490
------------
2,896,960
------------
U.S. TREASURY NOTES--2.3%
6.13% due 8/15/07................................. 2,000 2,056,880
------------
TOTAL U.S. GOVERNMENT AND AGENCIES
(cost $5,280,781)................................. 4,953,840
------------
</TABLE>
17
<PAGE>
SUNAMERICA DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998 -- (continued)
<TABLE>
<CAPTION>
SHARES/ VALUE
SECURITY DESCRIPTION WARRANTS (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
PREFERRED STOCK--0.4%
CABLE--0.2%
Echostar Communications Corp. 6.75%..................... 4,000 $ 232,000
------------
TELECOMMUNICATIONS--0.2%
IXC Communications, Inc. 6.75%(1)....................... 3,000 154,875
------------
TOTAL PREFERRED STOCK
(cost $377,375)......................................... 386,875
------------
COMMON STOCK--0.2%
CELLULAR--0.2%
Microcell Telecommunications+(1)........................ 21,436 192,924
------------
PAGING--0.0%
Paging Do Brazil Holdings Co. LLC,
Class B+(1)(3)......................................... 1,000 10
------------
TOTAL COMMON STOCK
(cost $143,760)......................................... 192,934
------------
WARRANTS--0.3%+
CABLE--0.0%
Australis Holdings Property Ltd.(1)..................... 500 0
UIH Australia Pacific, Inc.(3).......................... 1,000 10
United International Holdings, Inc...................... 3,000 36,000
------------
36,010
------------
CELLULAR--0.0%
International Wireless Communication(1)(3).............. 1,750 0
Occidente Y Caribe Celular SA(1)(3)..................... 8,000 28,000
------------
28,000
------------
MEDIA--0.0%
Knology Holdings, Inc.(1)(3)............................ 1,500 3,750
------------
RETAIL--0.1%
Electronic Retailing Systems International.............. 1,000 40,000
------------
SHIPPING--0.0%
Golden Ocean Group Ltd.................................. 1,000 4,000
------------
TELECOMMUNICATIONS--0.2%
Hyperion Telecommunications, Inc.(1).................... 1,500 105,000
MGC Communications, Inc.(1)............................. 750 26,250
------------
131,250
------------
TOTAL WARRANTS
(cost $69,660).......................................... 243,010
------------
TOTAL INVESTMENT SECURITIES--94.1%
(cost $81,841,431)...................................... 83,653,354
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(IN THOUSANDS) (NOTE 2)
<S> <C> <C>
SHORT-TERM SECURITIES--1.2%
PAPER PRODUCTS--1.2%
Stone Container Corp.
Sr. Notes
11.88% due 12/01/98
(cost $1,051,250)................................. $ 1,000 $ 1,030,000
------------
REPURCHASE AGREEMENT--1.9%
PaineWebber, Inc.
Joint Repurchase Agreement Account (Note 2)
(cost $1,722,000)................................. 1,722 1,722,000
------------
TOTAL INVESTMENTS--
(cost $84,614,681*)............................... 97.2% 86,405,354
Other assets less liabilities...................... 2.8 2,508,639
-------- ------------
NET ASSETS-- 100.0% $ 88,913,993
======== ============
</TABLE>
- -------
* See Note 5
+ Non income producing security
(1) Resale restricted to qualified institutional buyers
(2) Represents a zero coupon bond which will convert to an interest- bearing
security at a later date
(3) Fair valued security; see Note 2
(4) Variable rate security; rate as of March 31, 1998
(5) Bond issued as part of a unit which includes an equity component
(6) A portion of the coupon interest is received in cash and a portion is
capitalized in the principal of the security
(7) Allocation of investments by country as a percentage of net assets as of
March 31, 1998:
<TABLE>
<S> <C>
United States.......................................................... 50.1%
Brazil................................................................. 15.4%
Argentina.............................................................. 8.8%
Mexico................................................................. 7.3%
Britain................................................................ 4.3%
Bermuda................................................................ 4.2%
Dominican Republic..................................................... 2.2%
Indonesia.............................................................. 2.0%
Columbia............................................................... 1.7%
Venezuala.............................................................. 1.0%
Australia.............................................................. 0.2%
-----
97.2%
=====
</TABLE>
See Notes to Financial Statements
18
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- -------------------------------------------------------------------------------
CORPORATE BONDS & NOTES--86.3%
AEROSPACE & DEFENSE--1.2%
Hawk Corp.
Sr. Notes
10.25% due 12/01/03.............................. $2,000 $ 2,150,000
------------
BROADCASTING--5.1%
Big City Radio, Inc.
Sr. Disc. Notes
zero coupon due 3/15/05(1)(2).................... 2,000 1,470,000
Busse Broadcasting Corp.
Sr. Secured Notes
11.63% due 10/15/00.............................. 1,500 1,618,125
Fox Kids Worldwide, Inc.
Sr. Notes
9.25% due 11/01/07(1).. 1,500 1,507,500
Peoples Choice TV Corp.
Sr. Disc. Notes
zero coupon due 6/01/04(2)(6).................... 3,500 770,000
Radio One, Inc.
Sr. Subordinated Notes, Series B
7.00% due 5/15/04................................ 1,385 1,412,700
Spanish Broadcasting Systems, Inc.
Sr. Notes
12.50% due 6/15/02(1)............................ 2,250 2,576,250
------------
9,354,575
------------
BUILDING MATERIALS--0.7%
Ainsworth Lumber Ltd.
Sr. Secured Notes
12.50% due 7/15/07(3)............................ 1,250 1,284,375
------------
CABLE--5.6%
Diamond Cable PLC
Sr. Disc. Notes
zero coupon due 2/15/07(1)(2).................... 1,500 1,057,500
Diamond Holdings PLC
Sr. Notes
9.13% due 2/01/08(1)............................. 1,500 1,545,000
Echostar Satellite Broadcasting Corp.
Sr. Secured Disc. Notes
zero coupon due 3/15/04(2)....................... 1,000 912,500
International CableTel, Inc.
Sr. Deferred Coupon Notes, Series B
zero coupon due 2/01/06(2)....................... 4,000 3,260,000
UIH Australia Pacific, Inc.
Sr. Disc. Notes, Series B
zero coupon due 5/15/06(2)....................... 1,000 690,000
United International Holdings, Inc.
Sr. Secured Disc. Notes
zero coupon due 2/15/08(1)(2).................... 4,500 2,812,500
------------
10,277,500
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
CELLULAR--9.3%
Celcaribe SA
Sr. Notes
13.50% due 3/15/04............................... $1,000 $ 1,031,250
Cellnet Data Systems Inc.
Sr. Notes
zero coupon due 10/01/07(2)...................... 2,000 1,115,000
Cencall Communications Corp.
Sr. Disc. Notes
zero coupon due 1/15/04(2)....................... 1,000 970,000
Centennial Cellular Corp.
Sr. Notes
8.88% due 11/01/01............................... 1,000 1,025,000
Comcast Cellular Holdings, Inc.
Sr. Notes, Series B
9.50% due 5/01/07................................ 2,000 2,100,000
International Wireless Communication
Sr. Secured Disc. Notes
zero coupon due 8/15/01.......................... 3,250 1,121,250
Microcell Telecommunications
Sr. Disc. Notes, Series B
zero coupon due 6/01/06(2)....................... 2,000 1,485,000
Millicom International Cellular
Sr. Subordinated Disc. Notes
zero coupon due 6/01/06(2)....................... 1,500 1,170,000
Nextel Communications, Inc.
Sr. Disc. Notes
zero coupon due 8/15/04(2)....................... 2,000 1,925,000
Nextel International, Inc.
Sr. Disc. Notes
zero coupon due 4/15/08(1)(2).................... 750 448,125
Omnipoint Communications, Inc.
Sr. Notes
8.88% due 2/17/06(1)(5).......................... 2,000 1,995,000
Omnipoint Corp.
Sr. Notes, Series A
11.63% due 8/15/06............................... 1,000 1,100,000
Transtel Pass Through Trust
Sr. Notes
12.50% due 11/01/07(1)........................... 1,500 1,434,375
------------
16,920,000
------------
CHEMICALS--2.6%
American Pacific Corp.
Sr. Notes
9.25% due 3/01/05(1)............................. 1,000 1,032,500
Huntsman Corp.
Sr. Subordinated Notes
9.09% due 7/01/07(1)(5).......................... 1,500 1,535,625
NL Industries, Inc.
Sr. Notes
11.75% due 10/15/03.............................. 2,000 2,225,000
------------
4,793,125
------------
</TABLE>
19
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- ------------------------------------------------------------------------------
CORPORATE BONDS & NOTES (CONTINUED)
COMPUTERS--0.2%
Verio, Inc.
Sr. Notes
13.50% due 6/15/04(1)(6)........................ $ 300 $ 405,000
------------
CONSUMER GOODS--5.3%
Carson, Inc.
Sr. Subordinated Notes, Series B
10.38% due 11/01/07............................. 1,000 1,030,000
Phillips Van Heusen Corp.
Debenture
7.75% due 11/15/23.............................. 1,500 1,365,000
Polymer Group, Inc.
Sr. Subordinated Notes
8.75% due 3/01/08(1)............................ 2,000 2,040,000
Polymer Group, Inc.
Sr. Subordinated Notes, Series B
9.00% due 7/01/07............................... 5,000 5,187,500
------------
9,622,500
------------
ENERGY--4.4%
ICO, Inc.
Sr. Notes, Series B
10.38% due 6/01/07(1)........................... 1,250 1,309,375
Parker Drilling Company
Sr. Notes, Series C
9.75% due 11/15/06(1)........................... 2,000 2,140,000
Pride Petroleum Services, Inc.
Subordinated Debenture
9.38% due 5/01/07............................... 2,000 2,130,000
Southwest Royalties, Inc.
Sr. Notes, Series B
10.50% due 10/15/04............................. 1,750 1,557,500
Transamerican Energy Corp.
Sr. Disc. Notes, Series B
zero coupon due 6/15/02(1)(2)................... 1,000 850,000
------------
7,986,875
------------
FINANCIAL SERVICES--3.1%
Homeside, Inc.
Sr. Secured Priority Notes, Series B
11.25% due 5/15/03.............................. 2,598 3,098,115
Nationwide Credit, Inc.
Sr. Subordinated Notes
10.25% due 1/15/08(1)........................... 1,000 1,030,000
Western Financial Savings Bank
Sr. Subordinated Notes
8.88% due 8/01/07............................... 1,500 1,453,125
------------
5,581,240
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
FOOD SERVICE--0.9%
Richmont Marketing Specialist
Sr. Subordinated Notes
10.13% due 12/15/07(1).......................... $ 1,500 $ 1,560,000
-------------
FOOD & BEVERAGES--1.6%
Specialty Foods Acquisition Corp.
Sr. Disc. Notes, Series B
zero coupon due 8/15/05(2)...................... 1,500 605,625
Specialty Foods Corp.
Sr. Notes
11.13% due 10/01/02............................. 2,250 2,283,750
-------------
2,889,375
-------------
GAMING--2.0%
Ameristar Casinos, Inc.
Sr. Subordinated Notes,
Series B
10.50% due 8/01/04.............................. 2,000 2,100,000
Capital Gaming International, Inc.
Promissory Notes
zero coupon due 8/01/95(4)(7)................... 20 200
Hard Rock Hotel, Inc.
Sr. Subordinated Notes
9.25% due 4/01/05(1)............................ 1,500 1,530,000
-------------
3,630,200
-------------
HEALTH CARE--0.8%
Schein Pharmaceutical, Inc.
Sr. Notes
8.59% due 12/15/04(1)(5)........................ 1,500 1,458,750
-------------
HEALTH SERVICES--2.0%
Abbey Healthcare Group, Inc.
Sr. Subordinated Notes
9.50% due 11/01/02.............................. 1,025 1,045,500
Tenet Healthcare Corp.
Sr. Notes
8.00% due 1/15/05............................... 2,500 2,562,500
-------------
3,608,000
-------------
HOUSEHOLD PRODUCTS--1.6%
French Fragrances, Inc.
Sr. Notes, Series B
10.38% due 5/15/07.............................. 2,250 2,396,250
Signature Brands USA, Inc.
Sr. Subordinated Notes
13.00% due 8/15/02(6)........................... 500 565,000
-------------
2,961,250
-------------
</TABLE>
20
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- ------------------------------------------------------------------------------
CORPORATE BONDS & NOTES (CONTINUED)
LEISURE & TOURISM--2.3%
HMH Properties, Inc.
Sr. Secured Notes, Series B
9.50% due 5/15/05............................... $ 3,000 $ 3,187,500
Premier Parks, Inc.
Sr. Notes
9.25% due 4/01/06............................... 1,000 1,022,500
------------
4,210,000
------------
MANUFACTURING--3.4%
Columbus Mckinnon Corp.
Sr. Subordinated Notes
8.50% due 4/01/08(1)............................ 1,000 1,005,000
Interlake Corp.
Sr. Subordinated Debentures
12.13% due 3/01/02.............................. 2,000 2,060,000
Trident Automotive PLC
Sr. Subordinated Notes
10.00% due 12/15/05(1).......................... 1,000 1,035,000
Wavetek Corp.
Sr. Subordinated Notes
10.13% due 6/15/07.............................. 2,000 2,080,000
------------
6,180,000
------------
MEDIA--3.0%
Diva Systems Corp.
Sr. Disc. Notes
zero coupon due 3/01/08(1)(2)(6)................ 1,750 962,500
Knology Holdings, Inc.
Sr. Disc. Notes
zero coupon due 10/15/07(2)..................... 2,500 1,500,000
SFX Entertainment, Inc.
Sr. Subordinated Notes
9.13% due 2/01/08(1)............................ 2,000 1,970,000
Source Media, Inc.
Sr. Notes
12.00% due 11/01/04(1).......................... 1,000 995,000
------------
5,427,500
------------
METALS & MINING--5.7%
Acme Metals, Inc.
Sr. Notes
10.88% due 12/15/07(1).......................... 1,000 1,035,000
Acme Metals, Inc.
Sr. Notes
12.50% due 8/01/02.............................. 1,500 1,603,125
Ameristeel Corp.
Sr. Notes
8.75% due 4/15/08(1)............................ 1,500 1,515,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
METALS & MINING (CONTINUED)
Kaiser Aluminum & Chemical Corp.
Sr. Subordinated Notes
12.75% due 2/01/03............................... $ 1,500 $ 1,599,375
Newcor, Inc.
Sr. Notes
9.88% due 3/01/08(1)............................. 1,000 1,012,500
Renco Metals, Inc.
Sr. Notes
11.50% due 7/01/03............................... 2,000 2,130,000
Westmin Resources Ltd
Sr. Notes
11.00% due 3/15/07............................... 1,400 1,604,750
------------
10,499,750
------------
OFFICE PRODUCTS--0.9%
American Pad & Paper Co.
Sr. Subordinated Notes, Series B
13.00% due 11/15/05.............................. 1,600 1,616,000
------------
PAPER PRODUCTS--1.0%
Florida Coast Paper Co. LLC
First Mortgage Notes, Series B
12.75% due 6/01/03............................... 1,750 1,872,500
------------
RETAIL--1.1%
Commemorative Brands, Inc.
Sr. Subordinated Notes
11.00% due 1/15/07............................... 1,000 1,022,500
Electronic Retailing Systems International
Sr. Disc. Notes
zero coupon due 2/01/04(2)........................ 1,000 580,000
Jumbo Sports, Inc.
Subordinated Notes
4.25% due 11/01/00................................ 900 360,000
------------
1,962,500
------------
SHIPPING--5.2%
Alpha Shipping PLC
Sr. Notes
9.50% due 2/15/08(1).............................. 750 725,625
Ermis Maritime Holdings Ltd.
First Preferred Ship
Mortgage Notes
12.50% due 3/15/06(1)(6).......................... 1,363 1,503,048
First Wave Marine, Inc.
Sr. Notes
11.00% due 2/01/08................................ 1,225 1,270,938
</TABLE>
21
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
CORPORATE BONDS & NOTES (CONTINUED)
SHIPPING (CONTINUED)
Golden Ocean Group Ltd.
Sr. Notes
10.00% due 8/31/01(1)(6).......................... $3,750 $ 2,873,437
Panoceanic Bulk Carriers Ltd.
First Preferred Ship Mortgage Notes
12.00% due 12/15/07(1)............................ 1,000 977,500
Stena AB
Sr. Notes
10.50% due 12/15/05............................... 2,000 2,180,000
------------
9,530,548
------------
STEEL--1.6%
GS Technologies Operating, Inc.
Guaranteed Sr. Notes
12.00% due 9/01/04................................ 1,500 1,668,750
International Utility Structures, Inc.
Sr. Subordinated Notes
10.75% due 2/01/08(1)............................. 1,250 1,303,125
------------
2,971,875
------------
SUPERMARKETS--1.2%
Jitney Jungle Stores America, Inc.
Sr. Notes
12.00% due 3/01/06................................ 2,000 2,280,000
------------
TELECOMMUNICATIONS--13.9%
American Communications Services, Inc.
Sr. Disc. Notes
zero coupon due 11/01/05(2)....................... 1,500 1,278,750
American Mobile Satellite Corp.
Sr. Notes
12.25% due 4/01/08(1)(6).......................... 1,000 1,040,000
Covad Communications Group, Inc.
Sr. Disc. Notes
zero coupon due 3/15/08(1)(2)(6)................. 2,000 1,050,000
DTI Holdings, Inc.
Sr. Disc. Notes
zero coupon due 3/01/08(2)(6)..................... 2,750 1,601,875
Econophone, Inc.
Sr. Disc. Notes
13.50% due 7/15/07(1)(6).......................... 2,000 2,257,500
Hermes Europe Railtel BV
Sr. Notes
11.50% due 8/15/07(1)............................. 1,000 1,132,500
ICG Holdings, Inc.
Sr. Disc. Notes
11.63% due 3/15/07(1)............................. 2,250 1,642,500
IDT Corp.
Sr. Notes
8.75% due 2/15/06(1).............................. 1,000 998,750
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
TELECOMMUNICATIONS (CONTINUED)
KMC Telecom Holdings, Inc.
Sr. Disc. Notes
zero coupon due 2/15/08(1)(2)(6).................. $4,000 $ 2,380,000
MGC Communications, Inc.
Sr. Secured Notes, Series B
13.00% due 10/01/04(1)(6)......................... 1,500 1,560,000
Orbcomm Global LP
Sr. Notes
14.00% due 8/15/04................................ 1,600 1,868,000
Orion Network Systems, Inc.
Sr. Disc. Notes
zero coupon due 1/15/07(2)........................ 2,500 1,918,750
Primus Telecommunications Group
Sr. Notes
11.75% due 8/01/04(6)............................. 1,000 1,117,500
USN Communications, Inc.
Sr. Disc. Notes, Series B
zero coupon due 8/15/04(2)........................ 2,500 2,050,000
Vialog Corp.
Sr. Notes, Series B
12.75% due 11/15/01(1)(6)......................... 1,500 1,565,220
Viatel, Inc.
Sr. Disc. Notes
zero coupon due 1/15/05(2)........................ 2,000 1,917,500
------------
25,378,845
------------
TRANSPORTATION--0.6%
Travelcenters of America, Inc.
Sr. Subordinated Notes
10.25% due 4/01/07................................ 1,000 1,063,750
------------
TOTAL CORPORATE BONDS & NOTES
(cost $156,824,867)............................... 157,476,033
------------
FOREIGN BONDS & NOTES--9.1%
BROADCASTING--1.2%
Central European Media
Enterprises Ltd.
Sr. Notes
9.38% due 8/15/04................................ 2,250 2,230,897
------------
CABLE--0.6%
Australis Holdings Property Ltd.
Sr. Disc. Notes
zero coupon due 11/01/02(2)...................... 1,000 349,990
Comcast UK Cable Partners Ltd.
Sr. Disc. Notes
zero coupon due 11/15/07(2)...................... 1,000 830,000
------------
1,179,990
------------
</TABLE>
22
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- -------------------------------------------------------------------------------
FOREIGN BONDS & NOTES (CONTINUED)
CELLULAR--0.8%
Occidente Y Caribe Celular SA
Sr. Disc. Notes, Series B
zero coupon due 3/15/04(2)....................... $2,000 $ 1,535,000
------------
OIL & GAS--1.2%
Statia Terms International
Mortgage Notes, Series B
11.75% due 11/15/03(1)........................... 2,000 2,127,500
------------
PAGING--0.8%
Paging Network Do Brasil SA
Sr. Notes
13.50% due 6/06/05............................... 1,400 1,424,500
------------
PAPER PRODUCTS--0.5%
Doman Industries Ltd.
Sr. Notes
8.75% due 3/15/04................................ 1,000 997,500
------------
SHIPPING--0.6%
Pegasus Shipping Ltd.
Sr. Mortgage Notes
11.88% due 11/15/04(1)........................... 1,000 1,007,500
------------
TELECOMMUNICATIONS--3.4%
Colt Telecom Group PLC
Sr. Disc. Notes
zero coupon due 12/15/06(2)...................... 1,000 781,250
Ionica PLC
Sr. Disc. Notes
zero coupon due 5/01/07(2)(6).................... 3,250 1,336,562
Ionica PLC
Sr. Notes
13.50% due 8/15/06............................... 500 406,250
Poland Telecom Finance BV
Sr. Notes
14.00% due 12/01/07(1)(6)........................ 1,000 1,070,000
RSL Communications Ltd.
Sr. Notes
12.25% due 11/15/06.............................. 675 757,688
RSL Communications Ltd.
Sr. Notes
12.25% due 11/15/06.............................. 1,575 1,795,500
------------
6,147,250
------------
TOTAL FOREIGN BONDS & NOTES
(cost $16,963,009)................................ 16,650,137
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES/ VALUE
SECURITY DESCRIPTION WARRANTS (NOTE 2)
<S> <C> <C>
PREFERRED STOCK--3.7%
CABLE--0.8%
CSC Holdings, Inc. 11.13%(3).......................... 13,205 $ 1,511,969
------------
FINANCIAL SERVICES--1.2%
Bankunited Financial Corp. 10.25%..................... 2,000 2,120,000
------------
MEDIA--0.9%
Echostar Communications Corp. 6.75%................... 30,000 1,740,000
------------
TELECOMMUNICATIONS--0.8%
Intermedia Communications, Inc. 7.00%(1).............. 10,000 353,750
IXC Communications, Inc. 6.75%(1)..................... 12,000 619,500
Nextlink Communications, Inc. 6.50%(1)................ 10,000 483,750
------------
1,457,000
------------
TOTAL PREFERRED STOCK
(cost $6,222,223)..................................... 6,828,969
------------
COMMON STOCK--0.2%
CELLULAR--0.2%
Microcell Telecommunications+(1)...................... 34,298 308,682
------------
GAMING--0.0%
Capital Gaming International, Inc.+(4)................ 77 1
------------
MEDIA--0.0%
TMM, Inc.+............................................ 1,250,000 15,000
------------
PAGING--0.0%
Paging Do Brazil Holdings Co. LLC(4).................. 1,400 14
------------
TOTAL COMMON STOCK
(cost $1,255,100)..................................... 323,697
------------
WARRANTS--0.4%+
BROADCASTING--0.0%
Benedek Communications Corp.(4)....................... 12,500 31,250
------------
CABLE--0.0%
Australis Holdings Property Ltd.(1)................... 1,000 0
UIH Australia Pacific, Inc.(4)........................ 1,000 10
United International Holdings, Inc.................... 3,000 36,000
------------
36,010
------------
CELLULAR--0.1%
Cellnet Data Systems, Inc.(1)......................... 1,000 50,000
Clearnet Communications, Inc.......................... 4,950 29,700
International Wireless Communication(1)(4)............ 3,250 0
Occidente Y Caribe Celular SA(1)(4)................... 8,000 28,000
------------
107,700
------------
</TABLE>
23
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998 -- (continued)
<TABLE>
<CAPTION>
VALUE
SECURITY DESCRIPTION WARRANTS (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
WARRANTS (CONTINUED)
GAMING--0.0%
Capital Gaming International, Inc.(4)................... 45,500 $ 228
Fitzgerald Gaming Corp.(1)(4)........................... 2,000 20
------------
248
------------
MEDIA--0.0%
Knology Holdings, Inc.(1)(4)............................ 4,500 11,250
------------
RETAIL--0.0%
Electronic Retailing Systems International.............. 1,000 40,000
------------
SHIPPING--0.0%
Golden Ocean Group Ltd. ................................ 2,500 10,000
------------
TELECOMMUNICATIONS--0.3%
Hyperion Telecommunications, Inc.(1).................... 3,000 210,000
Ionica PLC.............................................. 1,000 40,000
MGC Communications, Inc.(1)............................. 1,500 52,500
Primus Telecommunications Group, Inc.................... 1,000 32,000
Vialog Corp............................................. 1,500 89,998
------------
424,498
------------
TOTAL WARRANTS
(cost $588,677)......................................... 660,956
------------
TOTAL INVESTMENT SECURITIES--99.7%
(cost $181,853,876)..................................... 181,939,792
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
SHORT-TERM SECURITIES--0.8%
PAPER PRODUCTS--0.8%
Stone Container Corp.
Sr. Notes
11.88% due 12/01/98
(cost $1,576,875)............................... $1,500 $ 1,545,000
------------
TOTAL INVESTMENTS--
(cost $183,430,751*)............................. 100.5% 183,484,792
Liabilities in excess of other assets............. (0.5) (934,441)
------ ------------
NET ASSETS-- 100.0% $182,550,351
====== ============
</TABLE>
- -------
* See Note 5
+ Non-income producing security
(1) Resale restricted to qualified institutional buyers
(2) Represents a zero coupon bond which will convert to an interest-bearing
security at a later date
(3) PIK ("Payment-in-Kind") payment made with additional securities in lieu of
cash
(4) Fair valued security; see Note 2
(5) Variable rate security; rate as of March 31, 1998
(6) Bond issued as part of a unit which includes an equity component
(7) Bond in default
See Notes to Financial Statements
24
<PAGE>
SUNAMERICA TAX EXEMPT INSURED FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
MUNICIPAL BONDS--98.0%
ALASKA--1.8%
Alaska State Housing Finance Corp.,
7.50% due 12/01/15+............................... $1,975 $ 2,030,675
------------
ARIZONA--3.3%
Northern Arizona University, Revenue,
6.50% due 6/01/10+................................ 1,845 2,159,296
Pima County, Arizona Unified School District
Number 1, General Obligation,
7.50% due 7/01/10+................................ 1,200 1,513,968
------------
3,673,264
------------
ARKANSAS--0.1%
Arkansas State Development Finance Authority,
Single Family Mortgage Revenue,
9.00% due 6/01/14+................................ 125 127,714
Arkansas State Development Finance Authority,
Single Family Mortgage Revenue, Series A,
9.38% due 8/01/14+................................ 5 5,045
------------
132,759
------------
CALIFORNIA--4.9%
Anaheim, California Public Financing Authority,
Revenue, Series A,
zero coupon due 9/01/18+.......................... 1,500 519,660
California Housing Finance Agency, Home Mortgage
Revenue, Series A,
8.13% due 8/01/19+................................ 770 790,875
Long Beach, California Harbor Revenue Refunding,
Series A,
6.00% due 5/15/17+................................ 1,000 1,112,950
San Francisco, California City & County
Redevelopment Agency, Lease Revenue,
6.75% due 7/01/15+................................ 1,000 1,134,110
San Jose, California Redevelopment Agency, Tax
Allocation,
6.00% due 8/01/11+................................ 1,700 1,922,411
------------
5,480,006
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
COLORADO--4.2%
Colorado Housing Finance Authority, Single Family
Revenue, Series C,
9.38% due 3/01/12+................................ $ 65 $ 66,399
Highlands Ranch Metropolitan District, Colorado
General Obligation,
6.50% due 6/15/09+................................ 1,960 2,277,461
Jefferson County, Colorado School District R001,
Refunding,
6.50% due 12/15/11+............................... 2,000 2,358,340
------------
4,702,200
------------
GEORGIA--2.8%
Municipal Electric Authority, Georgia Special
Obligation, Fifth Crossover Series,
6.40% due 1/01/09+................................ 1,250 1,427,625
Municipal Electric Authority, Georgia Special
Obligation, Fifth Crossover Series,
6.40% due 1/01/13+................................ 1,500 1,734,195
------------
3,161,820
------------
IDAHO--0.9%
Idaho Housing & Finance Association, Single Family
Mortgage,
5.63% due 7/01/15+................................ 1,000 1,018,690
------------
ILLINOIS--10.9%
Chicago Illinois Board Of Education, General
Obligation,
6.75% due 12/01/11+............................... 2,000 2,389,640
Cook & Du Page Counties, Illinois High School,
District Number 210, General Obligation,
zero coupon due 12/01/12+......................... 1,600 764,432
Cook County, Illinois Community College, District
Number 508,
7.70% due 12/01/07+............................... 4,000 4,976,960
Illinois Health Facilities Authority, Lutheran
General Health System,
7.00% due 4/01/08+................................ 3,400 4,015,298
------------
12,146,330
------------
</TABLE>
25
<PAGE>
SUNAMERICA TAX EXEMPT INSURED FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
INDIANA--1.3%
Indiana State Housing Finance Authority, Multi-
Unit Mortgage Program, Series A,
9.00% due 1/01/14+................................ $1,470 $ 1,475,998
------------
KENTUCKY--5.0%
Kenton County Kentucky Airport, Board Revenue
Refunding, Cincinnati/Northern
Kentucky, Series A,
6.30% due 3/01/15+................................ 1,500 1,645,605
Louisville & Jefferson County, Kentucky Regional
Airport Authority, Series A,
6.50% due 7/01/17+................................ 3,500 3,942,925
------------
5,588,530
------------
MARYLAND--0.1%
Maryland State Community Development
Administration, Multi-Family Housing Revenue,
1985 Series B,
8.75% due 5/15/12+................................ 110 110,482
------------
MASSACHUSETTS--4.4%
Massachusetts State Housing Finance Agency,
Insured Rental, Series A,
6.60% due 7/01/14+................................ 1,000 1,063,200
Massachusetts State Port Authority, Revenue,
Series A,
5.00% due 7/01/27................................. 2,000 1,922,620
Massachusetts State Water Resources Authority,
Refunding General, Series D,
5.00% due 8/01/24+................................ 2,000 1,934,480
------------
4,920,300
------------
MICHIGAN--1.9%
Michigan Municipal Bond Authority, Revenue Capital
Appreciation, Local Government Loan,
zero coupon due 5/01/17+.......................... 2,875 1,071,398
Michigan Municipal Bond Authority, Revenue Capital
Appreciation, Local Government Loan,
zero coupon due 5/01/16+.......................... 2,735 1,079,012
------------
2,150,410
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
MISSOURI--6.2%
Missouri State Housing Development Commission,
Insured, Single Family Mortgage Revenue,
9.38% due 4/01/16+................................ $ 45 $ 48,432
Sikeston, Missouri Electric, Revenue,
6.20% due 6/01/10+................................ 6,000 6,856,260
------------
6,904,692
------------
NEVADA--4.5%
Nevada Housing Division, Single Family Mortgage
Revenue, Series A,
zero coupon due 4/01/16+(1)....................... 4,945 5,009,285
------------
NEW JERSEY--1.6%
New Jersey State Transportation Trust Fund
Authority, Transportation Systems Revenue, Series
B,
6.50% due 6/15/10+................................ 1,500 1,756,110
------------
NEW MEXICO--1.1%
Bernalillo County, New Mexico Gross Receipts Tax,
Revenue,
5.75% due 10/01/17................................ 1,000 1,094,050
New Mexico Mortgage Finance Authority, Single
Family Mortgage Revenue, Series C,
8.63% due 7/01/17+................................ 170 175,494
------------
1,269,544
------------
NEW YORK--11.7%
New York City, New York, Prerefunding, General
Obligation, Series K,
6.25% due 4/01/11................................. 1,000 1,087,550
New York State Dormitory Authority, Lease Revenue,
State University Dormitory Facilities Issue,
Series A,
6.00% due 7/01/09+................................ 1,970 2,204,430
New York State Medical Care Facilities Finance
Agency, Revenue, New York Hospital, Mortgage A,
6.75% due 8/15/14+................................ 2,850 3,296,623
Niagara Falls, New York,
General Obligation,
7.50% due 3/01/14+................................ 555 712,453
</TABLE>
26
<PAGE>
SUNAMERICA TAX EXEMPT INSURED FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
NEW YORK (CONTINUED)
Niagara Falls, New York,
General Obligation,
7.50% due 3/01/13+................................ $ 445 $ 569,151
Port Authority of New York & New Jersey Special
Obligation, Revenue, JFK International Air
Terminal-6,
6.25% due 12/01/10+............................... 1,500 1,702,995
Port Authority of New York & New Jersey Special
Obligation, Revenue, JFK International Air
Terminal-6,
6.25% due 12/01/11+............................... 3,000 3,415,860
------------
12,989,062
------------
NORTH DAKOTA--0.5%
North Dakota State Housing Finance Agency, Single
Family Mortgage Revenue, Series A,
7.38% due 7/01/17+................................ 545 556,625
------------
OHIO--4.6%
Lucas County, Ohio Hospital Revenue, St. Vincent
Medical Center,
6.50% due 8/15/07+................................ 3,500 3,843,140
Woodridge, Ohio Local School District, General
Obligation,
6.80% due 12/01/14+............................... 1,000 1,215,650
------------
5,058,790
------------
OKLAHOMA--1.6%
Grand River Dam Authority Oklahoma Revenue
Refunding,
6.25% due 6/01/11+................................ 1,500 1,724,625
------------
PENNSYLVANIA--0.1%
Pennsylvania Housing Finance Agency, Multi-Family
Mortgage,
9.38% due 8/01/28+................................ 120 121,783
------------
PUERTO RICO--1.9%
Puerto Rico Commonwealth Highway & Transportation
Authority, Revenue, Series A,
5.50% due 7/01/13+................................ 2,000 2,147,760
------------
RHODE ISLAND--0.8%
Rhode Island Housing & Mortgage Finance Corp.,
Revenue,
8.38% due 10/01/16+............................... 835 852,410
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
SOUTH DAKOTA--2.2%
South Dakota State Health And Educational
Facilities Authority Revenue,
6.25% due 7/01/10+................................ $2,120 $ 2,406,242
------------
TEXAS--12.0%
Alliance Airport Authority, Inc., Texas Special
Facilities Revenue,
6.38% due 4/01/21................................. 2,000 2,158,780
Bexar County, Texas Health Facilities Development
Corp., Hospital Revenue,
6.75% due 8/15/19+................................ 4,000 4,599,480
Harris County, Texas Hospital District Mortgage,
Revenue,
7.40% due 2/15/10+................................ 2,500 3,031,375
Houston, Texas Water Conveyance Systems Contract,
Certificates of Participation,
6.13% due 12/15/08+............................... 1,250 1,416,425
Houston, Texas Water Conveyance Systems Contract,
Certificates of Participation,
6.13% due 12/15/09+............................... 1,000 1,133,850
San Antonio, Texas, Hotel Occupancy, Revenue,
zero coupon due 8/15/17+.......................... 2,700 976,401
------------
13,316,311
------------
UTAH--0.0%
Utah State Housing Finance Agency, Single Family
Mortgage, Series D,
7.50% due 7/01/16+................................ 20 20,198
------------
VIRGINIA--0.9%
Virginia State Housing Development Authority,
Multi- Family, Series H,
5.50% due 5/01/13+................................ 1,000 1,026,040
------------
WASHINGTON--3.8%
Washington State Housing Finance Commission,
Multi-Family Mortgage Revenue, Series A,
9.13% due 7/01/10+................................ 380 403,370
Washington State, Series B, General Obligation,
6.00% due 6/01/11................................. 3,400 3,819,356
------------
4,222,726
------------
</TABLE>
27
<PAGE>
SUNAMERICA TAX EXEMPT INSURED FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1998 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
WEST VIRGINIA--2.8%
West Virginia State Housing Development Fund,
Series A,
7.25% due 5/01/17+................................ $3,000 $ 3,090,030
------------
WISCONSIN--0.1%
Wisconsin Housing & Economic Development
Authority, Homeownership Revenue, Issue III,
9.13% due 6/01/05+................................ 65 66,157
------------
TOTAL INVESTMENT SECURITIES--98.0%
(cost $100,416,712*).............................. 109,129,854
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
SHORT-TERM SECURITIES--0.6%
NEW JERSEY--0.6%
New Jersey Economic Development Authority,
Water Facilities Revenue,
3.55% due 4/01/98(2)
(cost $700,000).................................. $ 700 $ 700,000
------------
TOTAL INVESTMENTS--
(cost $101,116,712*).............................. 98.6% 109,829,854
Other assets less liabilities...................... 1.4 1,566,755
------ ------------
NET ASSETS-- 100.0% $111,396,609
====== ============
</TABLE>
- -------
* See Note 5
+ All or part of this security is insured by Government National Mortgage
Association ("GNMA"), Financial Security Assurance ("FSA"), Federal Housing
Administration ("FHA"), Financial Guarantee Insurance Corp. ("FGIC"),
Municipal Bond Insurance Association ("MBIA"), or AMBAC ($99,047,499 or
88.9% of net assets)
(1) Represents a zero coupon bond which will convert to an interest-bearing
security at a later date
(2) Variable rate security; maturity date reflects next reset date
See Notes to Financial Statements
28
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1998
Note 1. Organization
SunAmerica Income Funds is an open-end diversified management investment
company organized as a Massachusetts business trust (the "Trust"). It
currently consists of five different investment series (each, a "Fund" and
collectively, the "Funds"). Each Fund is a separate series of the Trust
with distinct investment objectives and/or strategies. Each Fund is managed
by SunAmerica Asset Management Corp. (the "Adviser" or "SAAMCo"), an
indirect wholly owned subsidiary of SunAmerica Inc. An investor may invest
in one or more of the following Funds: SunAmerica U.S. Government
Securities Fund, SunAmerica Federal Securities Fund, SunAmerica Diversified
Income Fund, SunAmerica High Income Fund and SunAmerica Tax Exempt Insured
Fund. The Funds are considered to be separate entities for financial and
tax reporting purposes. The investment objectives for each of the Funds are
as follows:
U.S. Government Securities Fund seeks high current income consistent with
relative safety of capital by investing primarily in securities issued or
guaranteed by the U.S. government, or any agency or instrumentality
thereof.
Federal Securities Fund seeks current income, with capital appreciation as
a secondary objective, by investing primarily in securities issued or
guaranteed by the U.S. government or any agency or instrumentality thereof.
Diversified Income Fund seeks a high level of current income consistent
with moderate investment risk, with preservation of capital as a secondary
objective.
High Income Fund seeks maximum current income by investing primarily in
high-yield, high-risk corporate bonds.
Tax Exempt Insured Fund seeks a high level of current income exempt from
Federal income taxes as is consistent with preservation of capital.
Each Fund currently offers two classes of shares. Class A shares are
offered at net asset value per share plus an initial sales charge. Class B
shares are offered without an initial sales charge, although a declining
contingent sales charge may be imposed on redemptions made within six years
of purchase. High Income Fund also offers Class C shares. Class C shares
are offered at net asset value, although they may be subject to a
contingent deferred sales charge on redemptions made within one year of
purchase. Additionally, any purchases of Class A shares in excess of
$1,000,000 will be purchased at net asset value but will be subject to a
contingent deferred sales charge on redemptions made within one year of
purchase. Class B shares of each Fund convert automatically to Class A
shares on the first business day of the month following the seventh
anniversary of the issuance of such Class B shares and at such time will be
subject to the lower distribution fee applicable to Class A shares. Each
class of shares bears the same voting, dividend, liquidation and other
rights and conditions and each makes distribution and account maintenance
and service fee payments under a distribution plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 (the "1940 Act") except that Class
B and Class C shares are subject to higher distribution fee rates.
29
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1998 -- (continued)
Note 2. Significant Accounting Policies
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from these estimates.
The following is a summary of the significant accounting policies followed
by the Funds in the preparation of their financial statements:
SECURITY VALUATIONS: Securities that are actively traded in the over-the-
counter market, including listed securities for which the primary market is
believed by the Adviser to be over-the-counter, are valued at the quoted
bid price provided by principal market makers. Securities listed on the New
York Stock Exchange ("NYSE") or other national securities exchanges, are
valued on the basis of the last sale price on the exchange on which they
are primarily traded. If there is no sale on that day, then securities are
valued at the closing bid price on the NYSE or other primary exchange for
that day. However, if the last sale price on the NYSE is different than the
last sale price on any other exchange, the NYSE price is used. Securities
that are traded on foreign exchanges are ordinarily valued at the last
quoted sales price available before the time when the assets are valued. If
a securities price is available from more than one foreign exchange, a Fund
uses the exchange that is the primary market for the security. Options
traded on national securities exchanges are valued as of the close of the
exchange on which they are traded. Futures and options traded on
commodities exchanges are valued at their last sale price as of the close
of such exchange. The Funds may make use of a pricing service in the
determination of their net asset values. The preceding procedures need not
be used to determine the value of debt securities owned by a Fund if, in
the opinion of the Trustees, some other method would more accurately
reflect the fair market value of such debt securities in quantities owned
by such Fund. Securities for which market quotations are not readily
available and other assets are valued at fair value as determined pursuant
to procedures adopted in good faith by the Trustees. Short-term investments
which mature in less than 60 days are valued at amortized cost, if their
original maturity was 60 days or less, or by amortizing their value on the
61st day prior to maturity, if their original term to maturity exceeded 60
days.
REPURCHASE AGREEMENTS: Pursuant to exemptive relief granted by the
Securities and Exchange Commission, the Funds are permitted to participate
in joint repurchase agreement transactions with other affiliated investment
companies. The Funds, along with other affiliated registered investment
companies, transfer uninvested cash balances into a single joint account,
the daily aggregate balance of which is invested in one or more repurchase
agreements collateralized by U.S. Treasury or federal agency obligations.
The Funds' custodian takes possession of the collateral pledged for
investments in repurchase agreements. The underlying collateral is valued
daily on a mark to market basis to ensure that the value, including accrued
interest, is at least equal to the repurchase price. In the event of
default of the obligation to repurchase, a Fund has the right to liquidate
the collateral and apply the proceeds in satisfaction of the obligation. If
the seller defaults and the value of the collateral declines or if
bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Fund may be delayed or
limited.
30
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1998 -- (continued)
As of March 31, 1998 the U.S. Government Securities Fund, Federal
Securities Fund and Diversified Income Fund had a 28.1%, 9.2% and 1.8%
undivided interest, respectively, which represented $27,473,000, $9,030,000
and $1,722,000, respectively, in principal amount in a joint repurchase
agreement with PaineWebber, Inc. As of such date, the repurchase agreement
in the joint account and the collateral therefore were as follows:
PaineWebber, Inc. Repurchase Agreement, 5.75% dated 3/31/98, in the
principal amount of $97,641,000, repurchase price $97,656,595, due 4/01/98,
collateralized by $50,000,000 U.S. Treasury Bonds 6.375% due 1/15/99 and
$47,885,000 U.S. Treasury Notes 6.25% due 6/30/98, approximate aggregate
value $99,682,537.
SECURITIES TRANSACTIONS, INVESTMENT INCOME, DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS: Securities transactions are recorded on a trade date basis.
Realized gains and losses on sales of investments are calculated on the
identified cost basis. Interest income is recorded on the accrual basis;
dividend income is recorded on the ex-dividend date. The Funds do not
amortize market premiums (except for Tax Exempt Insured Fund) or accrete
market discounts (except for Diversified Income Fund and High Income Fund)
except original issue discounts for which amortization is required for
federal income tax purposes.
Net investment income, other than class specific expenses, and realized and
unrealized gains and losses are allocated daily to each class of shares
based upon the relative net asset value of outstanding shares (or the value
of dividend-eligible shares, as appropriate) of each class of shares at the
beginning of the day (after adjusting for the current capital share
activity of the respective class).
Expenses common to all funds are allocated among the Funds based upon their
relative net asset values or other appropriate allocation methods.
Dividends from net investment income are accrued daily and paid monthly.
Capital gain distributions, if any, are paid annually. The amount of
dividends and distributions from net investment income and net realized
capital gains are determined in accordance with federal income tax
regulations, which may differ from generally accepted accounting
principles. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in
nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification. Net investment income/loss, net realized gain/loss, and
net assets are not affected.
31
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1998 -- (continued)
For the year ended March 31, 1998, the following reclassifications arising
from book/tax differences were primarily the result of market discount and
paydown losses.
<TABLE>
<CAPTION>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET UNDISTRIBUTED NET
INVESTMENT REALIZED PAID-IN
INCOME/(LOSS) GAIN/(LOSS) CAPITAL
----------------- ----------------- -----------
<S> <C> <C> <C>
U.S. Government Securities
Fund....................... $(3,941,450) $3,941,450 $ --
Federal Securities Fund..... (137,988) 137,988 --
Diversified Income Fund..... (4,627) 4,627 --
High Income Fund............ 15,700 3,599,690 (3,615,390)
Tax Exempt Insured Fund..... -- -- --
</TABLE>
INVESTMENT SECURITIES LOANED: During the six months ended March 31, 1998,
U.S. Government Securities Fund and Federal Securities Fund participated in
securities lending with qualified brokers. In lending portfolio securities
to brokers the Funds receive cash as collateral against the loaned
securities, which must be maintained at not less than 102% of the market
value of the loaned securities during the period of the loan. The Funds may
use the cash collateral received to invest in short-term investments which
earn interest income or to cover bank overdrafts. Any interest earned from
the investment of the collateral is recorded by the Funds net of the
portion of interest that is rebated to the borrowing broker. If the amounts
are used to cover bank overdrafts, the broker rebates incurred are
reflected as interest expense on the Statement of Operations. As with other
extensions of credit, should the borrower of the securities fail
financially, the Funds may bear the risk of delay in recovery or may be
subject to replacing the loaned securities by purchasing them with the cash
collateral held, which may be less than 100% of the market value of such
securities at the time of replacement.
At March 31, 1998, U.S. Government Securities Fund has loaned securities
having a value of $23,125,356 and held cash collateral of $23,543,750 for
these loans. The value of the collateral was sufficient at the time the
loan agreements were entered into. As a result of an increase in the market
value of the loaned securities on the last business day of the fiscal year,
the Fund was furnished with additional collateral on the following business
day.
FOREIGN CURRENCY TRANSLATION: The books and records of the Funds are
maintained in U.S. dollars. Assets and liabilities denominated in foreign
currencies and commitments under forward foreign currency contracts are
translated into U.S. dollars at the mean of the quoted bid and asked prices
of such currencies against the U.S. dollar.
The Fund does not isolate that portion of the results of operations arising
as a result of changes in the foreign exchange rates from the changes in
the market prices of securities held at fiscal year-end. Similarly, the
Fund does not isolate the effect of changes in foreign exchange rates from
the changes in the market prices of portfolio securities sold during the
year.
Realized foreign exchange gains and losses on other assets and liabilities
and change in unrealized foreign exchange gains and losses on other assets
and liabilities include foreign exchange gains and losses from currency
gains or losses realized between the trade and settlement dates of
securities
32
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1998 -- (continued)
transactions, the difference between the amounts of interest, dividends and
foreign withholding taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid and changes in the unrealized
foreign exchange gains and losses relating to other assets and liabilities
arising as a result of changes in the exchange rate.
FUTURES CONTRACTS: A futures contract is an agreement between two parties
to buy and sell a financial instrument at a set price on a future date.
Upon entering into such a contract the Funds are required to pledge to the
broker an amount of cash or U.S. government securities equal to the minimum
"initial margin" requirements of the exchange on which the futures contract
is traded. The Funds' activities in futures contracts are for hedging
purposes and are conducted through regulated exchanges which do not result
in counterparty credit risks. A Fund's participation in the futures markets
involves certain risks, including imperfect correlation between movements
in the price of futures contracts and movements in the price of the
securities hedged or used for cover. Pursuant to a contract the Funds agree
to receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known
as "variation margin" and are recorded by the Funds as unrealized
appreciation or depreciation. Futures contracts involve elements of risk in
excess of the amount reflected in the Statement of Assets and Liabilities.
When a contract is closed, the Funds record a realized gain or loss equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed.
Note 3. Investment Advisory and Management Agreement, Distribution Agreement
and Service Agreement
The Trust, on behalf of each Fund, has an Investment Advisory and
Management Agreement (the "Agreement") with SAAMCo. Under the Agreement,
SAAMCo provides continuous supervision of a Fund's portfolio and
administers its corporate affairs, subject to general review by the
Trustees. In connection therewith, SAAMCo furnishes the Funds with office
facilities, maintains certain of the Funds' books and records, and pays the
salaries and expenses of all personnel, including officers of the Funds,
who are employees of SAAMCo and its affiliates.
The Funds pay SAAMCo a monthly investment advisory and management fee
calculated daily at the following annual percentages of each Fund's average
daily net assets:
<TABLE>
<CAPTION>
MANAGEMENT
ASSETS FEES
----------------- ----------
<S> <C> <C>
U.S. Government Securities Fund and High In-
come Fund.................................... $0 - $200 million 0.75%
> $200 million 0.72%
> $400 million 0.55%
Federal Securities Fund....................... $0 - $25 million 0.55%
> $25 million 0.50%
> $50 million 0.45%
Diversified Income Fund....................... $0 - $350 million 0.65%
> $350 million 0.60%
Tax Exempt Insured Fund....................... $0 - $350 million 0.50%
> $350 million 0.45%
</TABLE>
For the period ended March 31, 1998, SAAMCo has agreed to voluntarily
reimburse expenses of $3,859 on Class C of the High Income Fund.
33
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1998 -- (continued)
The Trust, on behalf of each Fund, has a Distribution Agreement with
SunAmerica Capital Services, Inc. ("SACS" or "Distributor"), an indirect
wholly owned subsidiary of SunAmerica Inc. Each Fund, has adopted a
Distribution Plan (the "Plan") in accordance with the provisions of Rule
12b-1 under the 1940 Act. Rule 12b-1 under the 1940 Act permits an
investment company directly or indirectly to pay expenses associated with
the distribution of its shares ("distribution expenses") in accordance with
a plan adopted by the investment company's board of trustees and approved
by its shareholders. Pursuant to such rule, the Trustees and the
shareholders of each class of shares of each Fund have adopted Distribution
Plans, hereinafter referred to as the "Class A Plan," the "Class B Plan"
and the "Class C Plan." In adopting the Class A Plan, the Class B Plan and
the Class C Plan, the Trustees determined that there was a reasonable
likelihood that each Plan would benefit the Trust and the shareholders of
the respective class. The sales charge and distribution fees of a
particular class will not be used to subsidize the sale of shares of any
other class.
Under the Class A Plan, Class B Plan and Class C Plan, the Distributor
receives payments from a Fund at an annual rate of up to 0.10%, .75% and
.75%, respectively, of average daily net assets of such Fund's Class A,
Class B and Class C shares to compensate the Distributor and certain
securities firms for providing sales and promotional activities for
distributing that class of shares. The distribution costs for which the
Distributor may be reimbursed out of such distribution fees include fees
paid to broker-dealers that have sold Fund shares, commissions, and other
expenses such as those incurred for sales literature, prospectus printing
and distribution and compensation to wholesalers. It is possible that in
any given year the amount paid to the Distributor under the Class A Plan,
Class B Plan or Class C Plan may exceed the Distributor's distribution
costs as described above. The Distribution Plans provide that each class of
shares of each Fund may also pay the Distributor an account maintenance and
service fee at the annual rate of up to 0.25% of the aggregate average
daily net assets of such class of shares for payments to broker-dealers for
providing continuing account maintenance. Accordingly, for the periods
ended March 31, 1998, SACS received fees (see the Statement of Operations)
based upon the aforementioned rates.
SACS receives sales charges on each Fund's Class A shares, portions of
which are reallowed to affiliated broker-dealers and non-affiliated broker-
dealers. SACS also receives the proceeds of contingent deferred sales
charges paid by investors in connection with certain redemptions of Class B
and Class C fund shares. SACS has advised the Funds that for the periods
ended March 31, 1998, the proceeds received from Class A sales (and paid
out to affiliated and non-affiliated broker-dealers) and Class B and Class
C redemptions were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------------- ------------ ------------
CONTINGENT CONTINGENT
SALES AFFILIATED NON-AFFILIATED DEFERRED DEFERRED
CHARGES BROKER-DEALERS BROKER-DEALERS SALES CHARGE SALES CHARGE
-------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
U.S. Government Securi-
ties Fund.............. $ 25,103 $ 17,121 $ 4,070 $270,398 $ --
Federal Securities Fund. 36,021 11,517 16,849 19,862 --
Diversified Income Fund. 72,686 20,452 38,553 124,129 --
High Income Fund........ 353,552 115,057 178,181 402,985 0
Tax Exempt Insured Fund. 62,143 33,967 16,329 69,255 --
</TABLE>
34
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1998 -- (continued)
The Trust has entered into a Service Agreement with SunAmerica Fund
Services, Inc. ("SAFS"), an indirect wholly owned subsidiary of SunAmerica
Inc. Under the Service Agreement, SAFS performs certain shareholder account
functions by assisting the Funds' transfer agent in connection with the
services that it offers to the shareholders of the Funds. The Service
Agreement permits the Funds to compensate SAFS for services rendered, based
upon an annual rate of .22% of average daily net assets, which is approved
annually by the Trustees. For the periods ended March 31, 1998, the Funds
incurred the following expenses which are included in transfer agent fees
and expenses in the Statement of Operations to compensate SAFS pursuant to
the terms of the Service Agreement:
<TABLE>
<CAPTION>
PAYABLE AT
EXPENSES MARCH 31, 1998
------------------------- -----------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
-------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Securi-
ties Fund............... $235,618 $546,272 $-- $19,099 $39,490 $--
Federal Securities Fund.. 67,980 40,601 -- 5,901 3,500 --
Diversified Income Fund.. 51,588 161,743 -- 4,756 11,888 --
High Income Fund......... 101,649 229,233 158 10,205 22,624 134
Tax Exempt Insured Fund.. 203,791 52,610 -- 16,577 4,279 --
</TABLE>
Note 4. Purchases and Sales of Investment Securities
The aggregate cost of purchases and proceeds from sales and maturities of
long-term investments (excluding U.S. Government securities in the
Diversified Income and High Income Funds, respectively) during the year
ended March 31, 1998 were as follows:
<TABLE>
<CAPTION>
U.S.
GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT
SECURITIES SECURITIES INCOME INCOME INSURED
FUND FUND FUND FUND FUND
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Aggregate purchases..... $813,642,011 $250,645,171 $145,587,451 $393,036,948 $55,025,082
============ ============ ============ ============ ===========
Aggregate sales......... $860,905,921 $249,558,886 $162,603,386 $346,639,045 $73,721,350
============ ============ ============ ============ ===========
</TABLE>
Note 5. Portfolio Securities (Tax Basis)
The Funds intend to comply with the requirements of the Internal Revenue
Code, as amended, applicable to regulated investment companies and to
distribute all of their net income (taxable and tax exempt) to their
shareholders. Therefore, no federal income tax or excise tax provisions are
required.
The amounts of aggregate unrealized gain (loss) and the cost of investment
securities for federal tax purposes, including short-term securities and
repurchase agreements, were as follows:
<TABLE>
<CAPTION>
U.S.
GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT
SECURITIES SECURITIES INCOME INCOME INSURED
FUND FUND FUND FUND FUND
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cost.................... $330,670,627 $52,826,532 $84,614,681 $183,572,204 $101,116,712
============ =========== =========== ============ ============
Appreciation............ $ 5,226,169 $ 957,556 $ 4,246,165 $ 5,525,107 $ 8,819,099
Depreciation............ (2,047,756) (118,907) (2,455,492) (5,612,519) (105,957)
------------ ----------- ----------- ------------ ------------
Unrealized appreciation
(depreciation)--net.... $ 3,178,413 $ 838,649 $ 1,790,673 $ (87,412) $ 8,713,142
============ =========== =========== ============ ============
</TABLE>
35
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1998 -- (continued)
At March 31, 1998, U.S. Government Securities Fund, Diversified Income
Fund, High Income Fund and Tax Exempt Insured Fund had capital loss
carryforwards of $29,467,409, $24,716,935, $22,767,991 and $3,338,986,
respectively, which were available to the extent provided in regulations
and which will expire between 1999-2005. To the extent that these carryover
losses are used to offset future capital gains, it is probable that the
gains so offset will not be distributed.
U.S. Government Securities Fund, Federal Securities Fund, Diversified
Income Fund, High Income Fund and Tax Exempt Insured Fund utilized capital
loss carryforwards of $7,942,831, $1,045,533, $5,115,099, $11,236,372 and
$3,208,746, respectively, to offset the Funds' net taxable gains realized
and recognized in the year ended March 31, 1998.
High Income Fund had capital loss carryforwards of $3,615,390 which expired
in the year ended March 31, 1998.
Note 6. Capital Share Transactions
Transactions in capital shares of each class of each series were as
follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES FUND
----------------------------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------------------- ------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1998 MARCH 31, 1997
------------------------ ------------------------ -------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold..... 1,561,577 $ 13,510,139 2,843,102 $ 24,070,752 482,064 $ 4,147,772 851,285 $ 7,192,469
Reinvested
dividends...... 440,207 3,777,028 462,183 3,908,049 872,849 7,489,193 1,318,904 11,152,661
Shares redeemed. (4,288,472) (36,902,611) (4,515,889) (38,204,048) (11,930,767) (102,271,581) (17,979,626) (152,107,446)
---------- ------------ ---------- ------------ ----------- ------------- ----------- -------------
Net decrease.... (2,286,688) $(19,615,444) (1,210,604) $(10,225,247) (10,575,854) $ (90,634,616) (15,809,437) $(133,762,316)
========== ============ ========== ============ =========== ============= =========== =============
<CAPTION>
FEDERAL SECURITIES FUND
----------------------------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------------------- ------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1998 MARCH 31, 1997
------------------------ ------------------------ -------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold..... 374,888 $ 4,088,015 187,062 $ 1,941,579 358,787 $ 3,922,859 171,783 $ 1,794,682
Reinvested
dividends...... 118,009 1,278,607 130,519 1,361,673 65,988 716,876 82,353 860,591
Shares redeemed. (560,471) (6,066,157) (1,244,469) (12,990,824) (537,411) (5,824,823) (941,907) (9,850,854)
---------- ------------ ---------- ------------ ----------- ------------- ----------- -------------
Net decrease.... (67,574) $ (699,535) (926,888) $ (9,687,572) (112,636) $ (1,185,088) (687,771) $ (7,195,581)
========== ============ ========== ============ =========== ============= =========== =============
</TABLE>
36
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1998 -- (continued)
<TABLE>
<CAPTION>
DIVERSIFIED INCOME FUND
------------------------------------------------------------------------------------------------------
CLASS A CLASS B
------------------------------------------------- ---------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1998 MARCH 31, 1997
------------------------ ----------------------- ------------------------ -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ----------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold..... 1,839,412 $ 8,430,833 2,967,500 $13,107,488 2,110,864 $ 9,588,048 2,028,462 $ 8,850,838
Reinvested
dividends...... 240,267 1,101,956 192,535 845,962 671,248 3,082,375 935,249 4,101,854
Shares redeemed. (1,776,362) (8,143,958) (1,919,822) (8,393,062) (7,008,938) (32,175,337) (11,026,801) (48,421,764)
---------- ------------ ---------- ----------- ---------- ------------ ----------- ------------
Net increase
(decrease)..... 303,317 $ 1,388,831 1,240,213 $ 5,560,388 (4,226,826) $(19,504,914) (8,063,090) $(35,469,072)
========== ============ ========== =========== ========== ============ =========== ============
<CAPTION>
HIGH INCOME FUND
------------------------------------------------------------------------------------------------------
CLASS A CLASS B
------------------------------------------------- ---------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1998 MARCH 31, 1997
------------------------ ----------------------- ------------------------ -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ----------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold..... 2,986,074 $ 22,434,607 2,138,523 $15,178,086 9,598,071 $ 70,922,480 7,842,612 $ 55,170,199
Reinvested
dividends...... 321,604 2,408,861 306,218 2,170,892 630,317 4,732,950 753,534 5,344,680
Shares redeemed. (1,885,818) (13,976,905) (1,792,558) (12,665,768) (8,118,195) (59,444,035) (7,864,875) (55,713,062)
---------- ------------ ---------- ----------- ---------- ------------ ----------- ------------
Net increase.... 1,421,860 $ 10,866,563 652,183 $ 4,683,210 2,110,193 $ 16,211,395 731,271 $ 4,801,817
========== ============ ========== =========== ========== ============ =========== ============
<CAPTION>
HIGH INCOME FUND
------------------------
CLASS C
------------------------
FOR THE PERIOD
FEBRUARY 2, 1998*
THROUGH
MARCH 31, 1998
------------------------
SHARES AMOUNT
---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold..... 146,640 $ 1,136,487
Reinvested
dividends...... 396 3,080
Shares redeemed. (14) (112)
---------- ------------
Net increase.... 147,022 $ 1,139,455
========== ============
</TABLE>
* Commencement of sale of respective class of shares
<TABLE>
<CAPTION>
TAX EXEMPT INSURED FUND
-------------------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------------------- ---------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1998 MARCH 31, 1997
------------------------ ------------------------ --------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold........... 139,133 $ 1,784,062 191,259 $ 2,373,663 338,073 $ 4,316,434 530,461 $ 6,566,926
Reinvested dividends.. 166,540 2,132,131 213,682 2,650,948 45,130 578,035 59,647 740,342
Shares redeemed....... (1,483,284) (18,915,862) (2,254,438) (27,912,841) (657,257) (8,386,367) (920,911) (11,459,216)
---------- ------------ ---------- ------------ -------- ----------- -------- ------------
Net decrease.......... (1,177,611) $(14,999,669) (1,849,497) $(22,888,230) (274,054) $(3,491,898) (330,803) $ (4,151,948)
========== ============ ========== ============ ======== =========== ======== ============
</TABLE>
37
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1998 -- (continued)
Note 7. Commitments and Contingencies
The SunAmerica Family of Mutual Funds has established an uncommitted line
of credit with the State Street Bank and Trust Company, the Funds'
custodian, with interest payable at the Federal Funds rate plus 100 basis
points with respect to the U.S. Government Securities Fund and Federal
Securities Fund, and Federal Funds rate plus 125 basis points with respect
to the Diversified Income Fund and the High Income Fund. Borrowings under
the line of credit will commence when the Fund's cash shortfall exceeds
$100,000. During the year ended March 31, 1998 the Diversified Income and
High Income Fund periodically utilized the uncommitted line of credit and
incurred an interest expense of $3,481 and $9,691, respectively. The Funds
did not have any outstanding borrowings at March 31, 1998.
Note 8. Trustees Retirement Plan
The Trustees (and Directors) of the SunAmerica Family of Mutual Funds have
adopted the SunAmerica Disinterested Trustees' and Directors' Retirement
Plan (the "Retirement Plan") effective January 1, 1993 for the unaffiliated
Trustees. The Retirement Plan provides generally that if an unaffiliated
Trustee who has at least 10 years of consecutive service as a Disinterested
Trustee of any of the SunAmerica mutual funds (an "Eligible Trustee")
retires after reaching age 60 but before age 70 or dies while a Trustee,
such person will be eligible to receive a retirement or death benefit from
each SunAmerica mutual fund with respect to which he or she is an Eligible
Trustee. As of each birthday, prior to the 70th birthday, but in no event
for a period greater than 10 years, each Eligible Trustee will be credited
with an amount equal to 50% of his or her regular fees (excluding
committee fees) for services as a Disinterested Trustee of each SunAmerica
mutual fund for the calendar year in which such birthday occurs. In
addition, an amount equal to 8.5% of any amounts credited under the
preceding clause during prior years is added to each Eligible Trustee's
Account until such Eligible Trustee reaches his or her 70th birthday. An
Eligible Trustee may receive any benefits payable under the Retirement
Plan, at his or her election, either in one lump sum or in up to fifteen
annual installments. As of March 31, 1998, U.S. Government Securities Fund,
Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax
Exempt Insured Fund had accrued $71,765, $7,674, $15,488, $18,521 and
$18,258, respectively, for the Retirement Plan, which is included in
accrued expenses on the Statement of Assets and Liabilities and for the
year ended March 31, 1998 expensed $17,341, $2,132, $4,384, $6,180 and
$5,296, respectively, for the Retirement Plan, which is included in
Trustees' fees and expenses on the Statement of Operations.
38
<PAGE>
SUNAMERICA INCOME FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of SunAmerica Income Funds
In our opinion, the accompanying statement of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of SunAmerica U.S.
Government Securities Fund, SunAmerica Federal Securities Fund, SunAmerica
Diversified Income Fund, SunAmerica High Income Fund and SunAmerica Tax Exempt
Insured Fund (constituting SunAmerica Income Funds, hereafter referred to as
the "Fund") at March 31, 1998, the results of each of their operations for the
year then ended, the changes in each of their net assets for each of the two
years in the period then ended and the financial highlights for each of the
periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at March 31, 1998 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
May 12, 1998
39
<PAGE>
SUNAMERICA INCOME FUNDS
SHAREHOLDER TAX INFORMATION -- (unaudited)
Certain tax information regarding the SunAmerica Income Funds is required to be
provided to shareholders based upon each Fund's income and distributions for
the taxable periods ended March 31, 1998. The information and distributions
reported herein may differ from the information and distributions taxable to
the shareholders for the calendar year ending December 31, 1998. The
information necessary to complete your income tax returns will be included with
your Form 1099-DIV to be received under separate cover in January 1999.
During the year ended March 31, 1998 Tax Exempt Insured Fund paid tax exempt
interest dividends of $.57 per share to Class A shareholders and $.48 per share
to Class B shareholders. For the year ended March 31, 1998, 1.5% of the
dividends paid from ordinary income by the High Income Fund qualified for the
70% dividends received deduction for corporations.
40
<PAGE>
SUNAMERICA INCOME FUNDS
COMPARISONS: PORTFOLIOS VS. INDICES
As required by the Securities and Exchange Commission, the following graphs
compare the performance of a $10,000 investment in the SunAmerica Income
Funds' portfolios to a similar investment in a broad based index. It is
important to note that the SunAmerica Income Funds are professionally
managed mutual funds while the indices are not available for investment and
are unmanaged. The comparison is shown for illustrative purposes only. The
graphs present the performance of the class of that particular Fund which
has been in existence the longest. The performance of the other class will
vary based upon the difference in sales charges and fees assessed to
shareholders of that class. The maximum sales charge for Class A is 4.75%
of the public offering price. The maximum contingent deferred sales charge
("CDSC") for Class B and Class C is 4% and 1%, respectively. Class B's CDSC
is reduced to 0% after six years; Class C's CDSC is reduced to 0% after one
year. All classes bear ongoing 12b-1 distribution and service fees.
U.S. GOVERNMENT SECURITIES FUND
Lehman Brothers U.S. Government Securities
Government Index Fund Class B
10000 10000
6/88 10095 10156
6/89 11312 10830
6/90 12097 11654
6/91 13324 12767
6/92 15158 13831
6/93 17113 14590
3/94 17078 14627
3/95 17815 15108
3/96 19761 16448
3/97 20610 16993
3/98 23112 18489
U.S. Government Securities Fund Class Class
Average Annual Total Returns+ A B
1 Year Return 4.42% 4.80%
5 Year Return N/A 4.79%
10 Year Return N/A 6.34%
Since Inception* 4.67% 6.24%
+Includes any applicable sales charges
*Inception dates for Class A and Class B are 10/01/93 and 3/03/86, respectively
With a cumulative one year total return of 9.62%, the U.S. Government Securities
Fund Class A underperformed its group average's performance of 11.46% (tracked
by Lipper Analytical Services, Inc.) as of March 31, 1998. The Fund also
underperformed the return for the Lehman Brothers Government Index, which is an
unmanaged index and not available as an investment. However, given its
inherently conservative, shorter-duration strategy, we fully anticipated that
the Fund would not shine in a declining interest rate environment which favored
longer-term securities and higher yielding bonds. The Fund met its investment
objective.
FEDERAL SECURITIES FUND
Salomon Brothers GNMA Index Federal Securities Fund Class B
10000 10000
3/89 10545 10367
3/90 12049 11502
3/91 13756 12972
3/92 15424 14343
3/93 17182 15500
3/94 17394 15362
3/95 18483 15948
3/96 20496 17563
3/97 21719 18409
3/98 24080 20534
Federal Securities Fund Class Class
Average Annual Total Returns+ A B
1 Year Return 6.95% 7.54%
5 Year Return N/A 5.46%
10 Year Return N/A 7.46%
Since Inception* 5.78% 8.27%
+Includes any applicable sales charges
*Inception dates for Class A and Class B are 10/11/93 and 4/25/83, respectively
Active trading, maturity adjustments, and a focus on lower coupon mortgages that
benefit from a declining interest rate environment benefited this Fund's annual
performance. The Federal Securities Fund Class A had a cumulative one year total
return of 12.29%, outperforming its Lipper category average of 10.69%. This
performance earned the Fund a ranking of #5 out of 52 funds in its Lipper
category for the twelve months ended March 31, 1998. As you can see in the chart
to the left, the Fund underperformed relative to the Salomon Brothers GNMA
Index, which is an unmanaged index that tracks performance of the GNMA portion
of the U.S. Government bond market. However, the Fund is more diversified than
the Index, with its assets invested 46.9% in GNMAs, 30.0% in U.S. Treasury Bonds
and Notes, 7.6% in FHLMCs, 3.9% in Fannie Maes, and 11.6% in cash and
equivalents at March 31, 1998.
41
<PAGE>
SUNAMERICA INCOME FUNDS
COMPARISONS: PORTFOLIOS VS. INDICES -- (continued)
DIVERSIFIED INCOME FUND
<TABLE>
<CAPTION>
JP Morgan Global Lehman Brothers Merrill Lynch High Diversified Income Fund
Government Bond Index Government Index Yield Master II Index Class B
<S> <C> <C> <C> <C>
10000 10000 10000 10000
10/91 10905 10808 11699 10346
10/92 12275 11925 13657 10362
10/93 13625 13491 16132 11699
3/94 13578 12991 16088 11405
3/95 15217 13552 17202 10782
3/96 16217 15677 19841 12194
3/97 16559 15677 21932 13503
3/98 17977 17581 25354 15544
</TABLE>
Diversified Income Fund Class Class
Average Annual Total Returns+ A B
1 Year Return 10.33% 11.11%
5 Year Return N/A 6.88%
Since Inception* 6.15% 6.50%
+Includes any applicable sales charges
*Inception dates for Class A and Class B are 10/05/93 and 4/06/91, respectively
The Diversified Income Fund Class A had a cumulative one year total return of
15.84% as of March 31, 1998, as compared to 12.15% for its Lipper category
average. This significant outperformance earned the Fund a ranking of #7 out of
82 funds in its Lipper category for the annual period. It is primarily
attributable to superior sector selection, avoidance of the difficulties in the
Asian debt markets, and a focus on strong corporate bonds in Latin America.
Because the Fund invests in several sectors of the bond market, we did not
compare it to any one benchmark.
HIGH INCOME FUND
High Income Fund Class A Merrill Lynch High Yield Master II Index
9525 10000
3/89 10597 10938
3/90 9552 10729
3/91 10464 12232
3/92 14146 15720
3/93 16289 18205
3/94 17771 19679
3/95 17254 21041
3/96 19054 24270
3/97 21239 26827
3/98 25502 31013
High Income Fund Class Class Class
Average Annual Total Returns+ A B C
1 Year Return 14.37% 15.31% N/A
5 Year Return 8.33% N/A N/A
10 Year Return 9.81% N/A N/A
Since Inception* 9.07% 8.04% 2.18%
+Includes any applicable sales charges
*Inception dates for Class A, Class B and Class C are 9/19/86, 10/01/93 and
2/02/98, respectively
Benefiting primarily from superior sector and individual issue selection, the
High Income Fund Class A achieved a cumulative one year total return of 20.07%
as of March 31, 1998, as compared to 16.95% for its Lipper category average. The
Fund also moved toward a slightly more conservative profile, modestly upgrading
credit quality and harvesting some gains from issues that reached our price
objectives. The Fund underperformed the Merrill Lynch High Yield Master II
Index, an unmanaged index of high yield bonds. We intend to stay focused on the
telecommunications sector and to continue enhancing credit quality through the
careful selection of individual issues.
42
<PAGE>
SUNAMERICA INCOME FUNDS
COMPARISONS: PORTFOLIOS VS. INDICES -- (continued)
TAX EXEMPT INSURED FUND
Lehman Brothers Municipal Bond Index Tax Exempt Insured Fund Class A
10000 9525
10/88 10638 10122
11500 10885
10/90 12353 11568
13857 12566
10/92 15021 13312
17134 14636
3/94 16390 13962
17613 14935
3/96 19088 16036
20131 16716
3/98 22289 18434
Tax Exempt Insured Fund Class Class
Average Annual Total Returns+ A B
1 Year Return 5.04% 5.65%
5 Year Return 4.95% N/A
10 Year Return 6.31% N/A
Since Inception* 6.48% 4.16%
+Includes any applicable sales charges
*Inception dates for Class A and Class B are 11/22/85 and 10/04/93, respectively
For the year ended March 31, 1998, the Tax Exempt Insured Fund Class A had a
cumulative one year total return of 10.28%, as compared to 10.21% for its Lipper
category average. While the Fund underperformed the return for the Lehman
Brothers Municipal Bond Index, note that this is an unmanaged index consisting
of municipal bonds that may not be insured as to the timely payment of principal
and interest. In contrast, at least 65% of the holdings of the Tax Exempt
Insured Fund are insured under normal conditions. In fact, on March 31, 1998,
approximately 89% of the Fund's holdings were insured. This Fund continues to be
conservatively managed, adjusting maturity and duration based on current market
conditions and focusing on individuals bonds' call structure, underlying
fundamentals, and credit rating.
43
<PAGE>
TRUSTEES INVESTMENT ADVISER
S. James Coppersmith SunAmerica Asset Management Corp.
Samuel M. Eisenstat The SunAmerica Center
Stephen J. Gutman 733 Third Avenue
Peter A. Harbeck New York, NY 10017-3204
Peter McMillan III DISTRIBUTOR
Sebastiano Sterpa
SunAmerica Capital Services, Inc.
OFFICERS The SunAmerica Center
Peter A. Harbeck, President 733 Third Avenue
P. Christopher Leary, Vice President New York, NY 10017-3204
John Risner, Vice President SHAREHOLDER SERVICING AGENT
John DiVito, Vice President SunAmerica Fund Services, Inc.
Karolann Patranzino, Vice President The SunAmerica Center
Robert M. Zakem, Secretary 733 Third Avenue
Peter C. Sutton, Treasurer New York, NY 10017-3204
John T. Genoy, Assistant Treasurer CUSTODIAN AND TRANSFER AGENT
Donna M. Handel, Assistant Treasurer State Street Bank & Trust Company
Cheryl L. Hawthorne, Assistant Treasurer P.O. Box 419572
Abbe P. Stein, Assistant Secretary Kansas City, MO 64141-6572
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BULK RATE
SUNAMERICA INCOME FUNDS U.S. POSTAGE
THE SUNAMERICA CENTER PAID
733 THIRD AVENUE Kansas City,
NEW YORK, NY 10017-3204 MO
1-800-858-8850 PERMIT NO.
3657
This report is submitted solely for
the general information of
shareholders of the Fund.
Distribution of this report to
persons other than shareholders of
the Fund is authorized only in
connection with a currently effective
prospectus, setting forth details of
the Fund, which must precede or
accompany this report.
SPONSORED BY:
LOGO
IFANN
