STATE STREET RESEARCH FINANCIAL TRUST, N-30D, 1998-01-02

STATE STREET RESEARCH FINANCIAL TRUST
N-30D, 1998-01-02

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<PAGE>

[Front Cover]
State Street Research
GOVERNMENT INCOME FUND

ANNUAL REPORT
October 31, 1997
WHAT'S INSIDE

From the Chairman

An exciting
year for investors

Portfolio Manager's Review

Strategy and environment
combine for a good year

Fund Information

Facts and figures

Plus, Complete Portfolio Holdings
and Financial Statements

[Dalbar pyramid logo]

---------------------
DALBAR KEY HONORS
COMMITMENT TO:
INVESTORS
1 9 9 6
---------------------
For Excellence
in
Shareholder Service

State Street Research Funds

<PAGE>

FROM THE CHAIRMAN

[PHOTO OF RALPH F. VERNI]

Dear Shareholder:
In the past 12 months, both stock and bond investors have reaped the rewards of
a very favorable financial environment. The nation's economy continued to expand
at a moderate, but healthy pace. Inflation and interest rates remain low.
Employment is high, and Americans are the most confident they have been in
nearly 30 years. Although history teaches us that a convergence of so many
positive factors is rare, no major concerns appear to threaten the economy. Even
the recent volatility in the financial markets, influenced by weakness in
Southeast Asia, has failed to dampen investor optimism much. However, it reminds
us that stock markets can go down as well as up.

Stocks
Although the U.S. stock market lost ground in October, it posted extraordinary
returns for the year ended October 31, 1997. The S&P 500, a broad measure of
common stock performance, rose 32.10%(1) for the period, and investors continued
to add money to equity mutual funds at a record pace.

Outside the U.S. investment performance was mixed. Markets in Europe and Latin
America posted strong gains in local currency, while key stock markets in
Southeast Asia took a beating at the end of the period, the result of currency
devaluations and excessive optimism.

Bonds
Bonds lagged stocks for the year, but most segments of the bond market delivered
respectable gains. The yield on the 30-year Treasury bond ended the period at
6.15% after spiking above 7.0% in April, the weakest month of the year for both
stocks and bonds. The Lehman Brothers Aggregate Bond Index, a common benchmark
for bond market performance, gained 8.89%(1). Corporate bonds were strong
performers, especially lower-rated high-yield bonds, which returned 14.75%(1),
according to the First Boston High Yield Index.

What's Ahead
While the environment for financial assets has been clouded by concerns
that the turmoil in Southeast Asia could extend to the U.S., our outlook
for both stocks and bonds remains relatively positive. It may not be
realistic to expect stocks to deliver another year of double digit returns.
However, inflation remains low, corporate profits are still relatively
strong, and there are few reasons for the Federal Reserve to raise interest
rates in the near term.

Regardless of the environment, we believe there are certain basic principles
that can help to keep you focused on your long-term goals: Think long term.
Maintain a diversified portfolio. Discipline yourself to stay with your
investment program. If you have questions or concerns about your investments,
review them with your investment professional. Thank you for investing with
State Street Research.

Sincerely,

/s/ Ralph F. Verni

Ralph F. Verni
Chairman

October 31, 1997

Please note that the discussion throughout this shareholder report is dated as
indicated and, because of possible changes in viewpoint, data and transactions,
should not be relied upon as being current thereafter.

(1)The Standard & Poor's 500 Composite Index (S&P 500) is a market-value
weighted index composed of 500 widely held common stocks. The Lehman Brothers
Aggregate Bond Index is a market-value weighted index of fixed-rate debt issues,
including U.S. treasury, agency, and corporate bond issues, and mortgage-backed
securities. The First Boston High Yield Index is a commonly used measure of high
yield bond performance. The Merrill Lynch Government Master Index is a commonly
used measure of bond market performance. The indices are unmanaged and do not
take sales charges into consideration. Direct investment in the indices is not
possible; results are for illustrative purposes only.

(2)+7.66% for Class B shares; +7.65% for Class C shares; +8.80% for Class S
shares.

(3)All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in the
Fund will fluctuate and shares, when redeemed, may be worth more or less than
their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. Investments in the Fund are not insured or
guaranteed by the U.S. government or any other entity. Performance for a class
includes periods prior to the adoption of class designations. "S" shares,
offered without a sales charge, are available through certain employee benefit
plans and special programs. Performance for "B" and "C" shares prior to class
designations in 1993 reflects annual 12b-1 fees of .25%, and performance
thereafter reflects annual 12b-1 fees of 1%, which will reduce subsequent
performance.

(4)Performance reflects maximum 4.5% "A" share front-end sales charge or 5% "B"
share or 1% "C" share contingent deferred sales charges, where applicable.

(5)Before November 1, 1997, Class C shares were designated Class D and Class S
shares were designated Class C.

- --------------------------------------------------------------------------------
FUND INFORMATION (all data are for periods ended October 31, 1997,
except where noted)
- --------------------------------------------------------------------------------

Total value of $10,000 invested on October 31, 1987(3)
(Class A shares, at maximum applicable sales charge)

[Mountain chart with the following plot points]

10/87 9550
10/88 10483
10/89 11492
10/90 12128
10/91 14099
10/92 15489
10/93 17291
10/94 16671
10/95 19183
10/96 20196
10/97 21917

SEC Yield(5)
- -------------------------------------------
Class A 5.76%
- -------------------------------------------
Class B 5.30%
- -------------------------------------------
Class C 5.31%
- -------------------------------------------
Class S 6.30%
- -------------------------------------------

SEC yield is based on the net investment income produced for the 30 days ended
October 31, 1997.

SEC Average Annual Compound Rates of Return for periods ended 9/30/97
(at maximum applicable sales charge)(3),(4),(5)

- -------------------------------------------
10 Years 5 Years 1 Year
- -------------------------------------------
Class A +8.31% +5.64% +4.03%
- -------------------------------------------
Class B +8.44% +5.58% +3.15%
- -------------------------------------------
Class C +8.44% +5.90% +7.05%
- -------------------------------------------
Class S +8.92% +6.84% +9.21%
- -------------------------------------------

SEC Average Annual Compound Rates of Return
(at maximum applicable sales charge)(3),(4),(5)

- -------------------------------------------
10 Years 5 Years 1 Year
- -------------------------------------------
Class A +8.16% +6.21% +3.64%
- -------------------------------------------
Class B +8.28% +6.12% +2.66%
- -------------------------------------------
Class C +8.29% +6.45% +6.65%
- -------------------------------------------
Class S +8.77% +7.41% +8.80%
- -------------------------------------------

<PAGE>

PORTFOLIO MANAGER'S REVIEW
Strategy and environment combine for a good year

[PHOTO OF JOHN H. KALLIS]

John H. Kallis
Portfolio Manager

We spoke with John H. Kallis, portfolio manager of State
Street Research Government Income Fund, about the Fund's performance for the
year ended October 31, 1997 and his views on the period ahead.

Q: How did the Fund perform last year?

A: It was a good year for the Fund. Class A shares returned +8.52% for the 12
months ended October 31, 1997 [without sales charge].(2) That was higher than
the average U.S. government income fund, which returned 7.99%, as reported by
Lipper Analytical Services, and just shy of the return on the Merrill Lynch
Government Master Index, which gained 8.67%(1) for the same period.

Q: What accounted for the Fund's strong performance?

A: A favorable environment and several strategic moves helped the Fund. In
general, it has been a good year for bonds. Fewer Treasury bonds were issued
because the U.S. budget deficit has been reduced more than expected. That,
coupled with declining interest rates, made Treasuries more attractive than
mortgage bonds. Long-term interest rates came down about one half of one
percent. Short-term interest rates have been relatively unchanged. We positioned
the portfolio to take advantage of this environment. We reduced our investment
in mortgage bonds about half way through the year and shifted some assets into
longer-duration Treasuries. Duration measures a bond's sensitivity to changing
interest rates. The longer the duration, the more a bond's value is likely to
change as interest rates go up or down.

Q: What other factors helped the Fund?

A: Not only did it help the Fund to lighten up on mortgage bonds, the structured
mortgage bonds we owned fared better than other types of mortgage bonds as
interest rates came down.

Q: Falling interest rates are usually good for bonds. Why do lower rates hurt
mortgage bonds?

A: As interest rates come down, more homeowners find it attractive to refinance
their mortgages. That means some mortgage bonds are called away, and a manager
is faced with reinvesting the money at a lower interest rate. However, most of
our investment was in structured mortgages, which were less sensitive to
refinancing activity.

Q: The Fund's investment in foreign bonds was increased during the year. Was
that a good move?

A: Yes, we raised the Fund's foreign bond position from 4% to 8%, adding
government bonds from the U.K., Australia and New Zealand. All of our positions
were hedged. In other words, we protected them against the risk that a strong
dollar could offset their returns. That was a good move. The portfolio's
foreign bonds outperformed its U.S. bonds and contributed to the Fund's strong
performance.

Q: What is your outlook for the economy, the bond market and the Fund?

A: The U.S. economy continues to grow at a moderate pace, driven by strong
consumer and capital spending. Inflation remains stable, and the Federal
Reserve appears to be on hold for the time being. The dollar, which rallied
during the Fund's last fiscal year as currencies in Southeast Asia collapsed,
remains strong. We believe the pressure on Asian currencies and stock markets
makes a rise in interest rates in the U.S. less likely.

October 31, 1997

- --------------------------------------------------------------------------------

Asset Allocation
(by percentage of net assets)

[pie chart]

U.S. Treasury 42%
U.S. Agency mortgage 27%
Trust certificates/other 16%
Foreign government 8%
Other mortgages 5%
Cash 2%

Bond Yields
(October 31, 1996 to October 31, 1997)

[Graph comparing Bond Yields with the following plot points]

30-year 90-day 30-year
Mortgage U.S. Treasury U.S. Treasury
Securities Securities Securities
---------- ---------- ----------
10/96 6.641% 5.144% 7.48%
11/96 6.36 5.121 7.21
12/96 6.641 5.186 7.54
1/97 6.794 5.142 7.52
2/97 6.802 5.215 7.58
3/97 7.095 5.307 7.95
4/97 6.954 5.238 7.71
5/97 6.91 4.934 7.63
6/97 6.78 5.172 7.47
7/97 6.299 5.227 7.05
8/97 6.611 5.215 7.3
9/97 6.403 5.094 7.1
10/97 6.154 5.194 6.93

Source: Bloomberg
2

<PAGE>

STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
October 31, 1997

<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES 71.2%
U.S. Treasury 41.5%
U.S. Treasury Bond, 13.75% ........ $ 7,725,000 8/15/2004 $ 11,092,637
U.S. Treasury Bond, 11.625% ....... 24,900,000 11/15/2004 33,031,344
U.S. Treasury Bond, 10.75% ........ 21,500,000 8/15/2005 27,916,460
U.S. Treasury Bond, 12.00% ........ 12,000,000 8/15/2013 17,583,720
U.S. Treasury Bond, 9.875% ........ 8,500,000 11/15/2015 11,893,370
U.S. Treasury Bond, 9.25% ......... 17,000,000 2/15/2016 22,668,480
U.S. Treasury Bond, 8.75% ......... 11,225,000 5/15/2017 14,438,156
U.S. Treasury Bond, 8.125% ........ 43,400,000 8/15/2021 53,510,895
U.S. Treasury Bond, 6.25% ......... 14,050,000 8/15/2023 14,100,440
U.S. Treasury Bond, 7.50% ......... 20,000,000 11/15/2024 23,334,400
U.S. Treasury Note Inflation
Indexed, 3.375% ................. 3,399,580 1/15/2007 3,353,890
U.S. Treasury Note, 6.625% ........ 3,900,000 7/31/2001 4,013,334
U.S. Treasury Note, 6.25% ......... 3,450,000 2/28/2002 3,511,445
U.S. Treasury Note, 7.875% ........ 13,825,000 11/15/2004 15,412,663
U.S. Treasury Note, 6.50% ......... 4,575,000 8/15/2005 4,746,563
U.S. Treasury Note, 6.875% ........ 7,150,000 5/15/2006 7,606,957
U.S. Treasury STRIPS, 0.00% ....... 13,000,000 11/15/2001 10,333,180
------------
278,547,934
------------
U.S. Agency Mortgage 26.5%
Federal Home Loan Mortgage
Corp. FHA-VA, 9.00% ............. 5,325,142 12/01/2009 5,664,354
Federal Home Loan Mortgage
Corp. Series 29-H PAC,
6.50% ........................... 5,525,000 3/25/2023 5,537,045
Federal Housing Administration
Court Yard Project, 10.75% ...... 6,477,776 8/01/2032 7,174,137
Federal Housing Administration
East Bay Manor Project,
10.00% .......................... 6,748,516 3/01/2033 7,414,932
Federal Housing Administration
Charles River Project,
9.625% .......................... 9,453,561 12/01/2033 10,398,917
Federal National Mortgage
Association, 8.50% .............. 10,000,000 2/01/2005 10,459,300
Federal National Mortgage
Association, 7.50% .............. 10,880,196 6/01/2010 11,206,602
Federal National Mortgage
Association, 7.00% .............. 40,118 2/01/2024 40,431
Federal National Mortgage
Association FHA-VA, 8.00% ....... 4,141,193 4/01/2008 4,328,872
Federal National Mortgage
Association FHA-VA, 8.00% ....... 5,865,417 6/01/2008 6,131,237

Principal Maturity Value
Amount Date (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal National Mortgage
Association FHA-VA, 8.50% ....... $ 7,665,481 2/01/2009 $ 8,053,508
Federal National Mortgage
Association FHA-VA, 9.00% ....... 7,138,894 5/01/2009 7,582,862
Federal National Mortgage
Association FHA-VA, 9.00% ....... 1,660,462 4/01/2016 1,763,726
Federal National Mortgage
Association TBA, 7.50% .......... 6,250,000 12/15/2012 6,402,344
Government National Mortgage
Association, 7.50% .............. 10,456,865 6/15/2009 10,793,367
Government National Mortgage
Association, 9.50% .............. 2,770,840 9/15/2009 3,006,139
Government National Mortgage
Association, 9.50% .............. 4,958,526 10/15/2009 5,378,432
Government National Mortgage
Association, 9.50% .............. 2,254,638 11/15/2009 2,446,102
Government National Mortgage
Association, 9.00% .............. 1,783,238 4/15/2017 1,934,046
Government National Mortgage
Association, 8.00% .............. 1,735,198 10/15/2017 1,826,834
Government National Mortgage
Association, 9.50% .............. 12,231,956 11/15/2017 13,224,871
Government National Mortgage
Association, 9.50% .............. 248,451 9/15/2019 269,768
Government National Mortgage
Association, 7.50% .............. 2,655,950 9/15/2021 2,729,626
Government National Mortgage
Association, 7.50% .............. 1,310,682 1/15/2023 1,344,261
Government National Mortgage
Association, 10.00% ............. 28,545,686 6/15/2023 30,094,763
Government National Mortgage
Association, 7.50% .............. 736,003 8/15/2023 754,859
Government National Mortgage
Association, 7.50% .............. 780,210 10/15/2023 800,199
Government National Mortgage
Association, 7.50% .............. 534,501 12/15/2023 548,195
Government National Mortgage
Association, 7.50% .............. 715,792 1/15/2024 733,679
Government National Mortgage
Association, 7.50% .............. 9,085,943 4/15/2024 9,313,001
------------
177,356,409
------------
</TABLE>

The accompanying notes are an integral part of the financial statements.

3
<PAGE>

STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Agency 3.2%
Federal Home Loan Mortgage
Corp. Deb., 7.24% ............ $10,020,000 5/15/2002 $ 10,074,809
Guaranteed Export Trust Notes
Series 95-A, 6.28% ............ 7,411,765 6/15/2004 7,488,402
Guaranteed Export Trust Notes
Series 96-A, 6.55% ............ 3,747,055 6/15/2004 3,817,462
------------
21,380,673
------------
Total U.S. Government Securities (Cost $457,523,646) .......... 477,285,016
------------
OTHER INVESTMENTS 26.4%
Trust Certificates 12.9%
Cooperative Utility Trust
Certificates, 9.50% ............ 25,499,000 2/15/2017 26,969,272
Cooperative Utility Trust
Certificates, 10.11% ......... 1,500,000 12/15/2017 1,582,005
Cooperative Utility Trust
Certificates, 9.52% ............ 24,525,000 3/15/2019 25,986,690
Government Backed Trust Class
T-3, 9.625% .................. 8,420,577 5/15/2002 8,925,054
Government Trust Certificates
Class 2-E, 9.40% ............... 21,939,540 5/15/2002 23,275,658
------------
86,738,679
------------
Foreign Government 7.9%
Commonwealth of Australia, Australian Dollar
9.00% ........................ 19,950,000 9/15/2004 16,560,825

Canadian Dollar
Government of Canada, 0.00% 5,875,000 2/05/1998 4,128,153

Government of New Zealand, New Zealand Dollar
10.00% ........................ 9,625,000 3/15/2002 6,715,102
Government of New Zealand,
8.00% ........................ 9,500,000 11/15/2006 6,484,273

United Kingdom Treasury, Pound Sterling
8.50% ........................ 10,000,000 12/07/2005 18,733,130
------------
52,621,483
------------

Principal Maturity Value
Amount Date (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance/Mortgage 5.6%
Chase Mortgage Finance Corp.
Series 93L-5, 6.25% ............ $ 5,000,000 10/25/2024 $ 4,951,562
CWMBS Inc. Series 1994-9 A-2
PAC, 6.50% ..................... 6,844,898 5/25/2024 6,857,732
GE Capital Mortgage Services
Inc., 5.85% .................. 3,647,520 9/25/2023 3,633,842
Prudential Home Mortgage
Securities Co. Series 93-29
A-6 PAC, 6.75% ............... 8,089,032 8/25/2008 8,139,589
Residential Funding Corp.
Series 93-S25 A-1, 6.50% ...... 7,323,294 7/25/2008 7,336,989
Structured Asset Securities
Corp. Series 97-LL1-A1,
Certificates Series 97-LLI,
6.79% ........................ 6,625,000 10/15/2034 6,717,412
------------
37,637,126
------------
Total Other Investments (Cost $177,693,180) ................... 176,997,288
------------
SHORT-TERM OBLIGATIONS 1.9%
Federal Home Loan Bank, 5.50% 4,253,000 11/04/1997 4,251,051
Federal Home Loan Bank, 5.47% 8,100,000 11/05/1997 8,095,077
------------
Total Short-Term Obligations (Cost $12,346,128) .............. 12,346,128
------------
Total Investments (Cost $647,562,954)--99.5% ................. 666,628,432
Cash and Other Assets, Less Liabilities--0.5% ................ 3,604,290
------------
Net Assets--100.0% ........................................... $670,232,722
============
Federal Income Tax Information:
AtOctober 31, 1997, the net unrealized appreciation of investments
based on cost for Federal income tax purposes of $647,562,954 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost .............................................. $ 22,467,765
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value ............................................ (3,402,287)
------------
$ 19,065,478
============
</TABLE>

- --------------------------------------------------------------------------------
TBA Represents "TBA" (to be announced) purchase commitment to purchase
securities for a fixed unit price at a future date beyond customary
settlement time. Although the unit price has been established, the
principal value has not been finalized and may vary by no more than 1%.

The accompanying notes are an integral part of the financial statements.

4
<PAGE>

STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- --------------------------------------------------------------------------------

Forward currency exchange contracts outstanding at October 31, 1997 are as
follows:

<TABLE>
<CAPTION>
Unrealized
Appreciation
Total Value Contract Price (Depreciation) Delivery Date
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sell Australian dollars, Buy U.S. dollars 1,272,000 AUD .73565 AUD $ 40,960 11/14/97
Sell Australian dollars, Buy U.S. dollars 11,783,000 AUD .70850 AUD 44,357 1/23/98
Sell Australian dollars, Buy U.S. dollars 4,000,000 AUD .73289 AUD 116,058 12/10/97
Sell Australian dollars, Buy U.S. dollars 4,910,000 AUD .73480 AUD 151,835 12/10/97
Sell British pounds, Buy U.S. dollars 10,687,000 GBP 1.62700 GBP (479,216) 1/23/98
Sell New Zealand dollars, Buy U.S. dollars 10,700,000 NZD .62300 NZD 37,918 1/23/98
Sell New Zealand dollars, Buy U.S. dollars 10,310,000 NZD .62414 NZD 48,290 1/23/98
----------
$ (39,798)
==========
</TABLE>

Written put option transactions during the year ended October 31, 1997 were as
follows:

Principal
Amount Premiums
------------ ----------
Outstanding, beginning of year -- --
Options written $ 16,500,000 $ 101,876
Options expired -- --
Options closed (16,500,000) (101,876)
------------- ----------
Outstanding, end of year $ -- $ --
============= ==========

The accompanying notes are an integral part of the financial statements.

5
<PAGE>

STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
October 31, 1997

<TABLE>
<S> <C>
Assets
Investments, at value (Cost $647,562,954) (Note 1) ......... $ 666,628,432
Cash ......................................................... 150,428
Receivable for securities sold .............................. 29,114,789
Interest receivable .......................................... 11,517,167
Receivable for open forward contracts ........................ 439,418
Receivable for fund shares sold .............................. 179,448
Other assets ................................................ 5,396
-------------
708,035,078
Liabilities
Payable for securities purchased ........................... 33,634,280
Dividends payable .......................................... 2,040,973
Payable for fund shares redeemed ........................... 552,035
Payable for open forward contracts ........................... 479,216
Accrued management fee (Note 2) .............................. 368,054
Accrued transfer agent and shareholder services
(Note 2) ................................................... 264,200
Accrued distribution and service fees (Note 3) ............... 206,647
Accrued trustees' fees (Note 2) .............................. 8,516
Other accrued expenses ....................................... 248,435
-------------
37,802,356
-------------
Net Assets $ 670,232,722
=============
Net Assets consist of:
Undistributed net investment income ........................ $ 2,339,029
Unrealized appreciation of investments ..................... 19,065,478
Unrealized depreciation of forward contracts and
foreign currency .......................................... (34,015)
Accumulated net realized loss .............................. (39,689,487)
Shares of beneficial interest .............................. 688,551,717
-------------
$ 670,232,722
=============
Net Asset Value and redemption price per share of
Class A shares ($524,564,649 [divided by] 41,460,715 shares
of beneficial interest) .................................... $12.65
======
Maximum Offering Price per share of Class A shares
($12.65 [divided by] .955) ................................. $13.25
======
Net Asset Value and offering price per share of Class B
shares ($97,252,569 [divided by] 7,709,687 shares of
beneficial interest)* .................................... $12.62
======
Net Asset Value and offering price per share of Class C
shares ($16,300,666 [divided by] 1,291,316 shares of
beneficial interest)* .................................... $12.62
======
Net Asset Value, offering price and redemption price per
share of Class S shares ($32,114,838 [divided by]
2,540,378 shares of beneficial interest) .................. $12.64
======
</TABLE>

- --------------------------------------------------------------------------------
* Redemption price per share for Class B and Class C is equal to net asset
value less any applicable contingent deferred sales charge.

- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the year ended October 31, 1997

<TABLE>
<S> <C>
Investment Income
Interest ................................................ $50,464,680
Expenses
Management fee (Note 2) ................................. 4,364,193
Transfer agent and shareholder services (Note 2) ......... 686,265
Custodian fee .......................................... 226,325
Service fee-Class A (Note 3) ........................... 1,362,695
Distribution and service fees-Class B (Note 3) ......... 947,297
Distribution and service fees-Class C (Note 3) ......... 154,317
Reports to shareholders ................................. 120,433
Registration fees ....................................... 53,334
Audit fee ................................................ 43,561
Trustees' fees (Note 2) ................................. 34,065
Legal fees ............................................. 13,590
Miscellaneous .......................................... 33,406
-----------
8,039,481
-----------
Net investment income .................................... 42,425,199
-----------
Realized and Unrealized Gain (Loss) on
Investments, Options, Forward Contracts
and Foreign Currency
Net realized gain on investments (Notes 1 and 4) ......... 5,443,859
Net realized gain on written options ..................... 92,892
Net realized gain on forward contracts and foreign
currency (Note 1) .................................... 3,226,994
-----------
Total net realized gain ................................. 8,763,745
-----------
Net unrealized appreciation of investments (Note 5) ...... 2,636,837
Net unrealized depreciation of forward contracts and
foreign currency ....................................... (79,138)
-----------
Total net unrealized appreciation ..................... 2,557,699
-----------
Net gain on investments, options, forward contracts
and foreign currency ................................. 11,321,444
-----------
Net increase in net assets resulting from operations ..... $53,746,643
===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

6
<PAGE>

STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Years ended October 31
----------------------------------
1996 1997
--------------- ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income ......... $ 46,482,643 $ 42,425,199
Net realized gain (loss) on
investments, options,
forward contracts and
foreign currency ............ (3,552,004) 8,763,745
Net unrealized appreciation
(depreciation) of
investments, forward
contracts and foreign
currency ..................... (6,405,085) 2,557,699
------------ -------------
Net increase resulting from
operations .................. 36,525,554 53,746,643
------------ -------------
Dividends from net investment income:
Class A ........................ (39,055,243) (35,201,643)
Class B ........................ (5,188,785) (5,410,928)
Class C ........................ (773,463) (880,065)
Class S ........................ (404,930) (1,061,597)
------------ -------------
(45,422,421) (42,554,233)
------------ -------------
Net decrease from fund share
transactions (Note 6) ......... (50,352,743) (42,731,617)
------------ -------------
Total decrease in net assets .... (59,249,610) (31,539,207)
Net Assets
Beginning of year ............... 761,021,539 701,771,929
------------ -------------
End of year (including
undistributed net
investment income of
$100,856 and $2,339,029,
respectively) ............... $701,771,929 $ 670,232,722
============ =============
</TABLE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
October 31, 1997

Note 1

State Street Research Government Income Fund (the "Fund") is a series of State
Street Research Financial Trust (the "Trust"), which was organized as a
Massachusetts business trust in November, 1986 and is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. The Fund commenced operations in March, 1987. The Trust consists
presently of four separate funds: State Street Research Government Income Fund,
State Street Research Strategic Portfolios: Moderate, State Street Research
Strategic Portfolios: Conservative and State Street Research Strategic
Portfolios: Aggressive.

The investment objective of the Fund is to seek high current income. In seeking
to achieve its investment objective, the Fund invests primarily in U.S.
Government securities.

The Fund offers four classes of shares. Before November 1, 1997, Class C shares
were designated Class D and Class S shares were designated Class C. Class A
shares are subject to an initial sales charge of up to 4.50% and an annual
service fee of 0.25% of average daily net assets. Class B shares are subject to
a contingent deferred sales charge on certain redemptions made within five years
of purchase and pay annual distribution and service fees of 1.00%. Class B
shares automatically convert into Class A shares (which pay lower ongoing
expenses) at the end of eight years after the issuance of the Class B shares.
Class C shares are subject to a contingent deferred sales charge of 1.00% on any
shares redeemed within one year of their purchase. Class C shares also pay
annual distribution and service fees of 1.00%. Class S shares are only offered
through certain retirement accounts, advisory accounts of State Street Research
& Management Company (the "Adviser") and special programs. No sales charge is
imposed at the time of purchase or redemption of Class S shares. Class S shares
do not pay any distribution or service fees. The Fund's expenses are borne
pro-rata by each class, except that each class bears expenses, and has exclusive
voting rights with respect to provisions of the Plan of Distribution, related
specifically to that class. The Trustees declare separate dividends on each
class of shares.

The following significant accounting policies are consistently followed by the
Fund in preparing its financial statements, and such policies are in conformity
with generally accepted accounting principles for investment companies.

A. Investment Valuation

Securities are valued by a pricing service, which utilizes market transactions,
quotations from dealers, and various relationships among securities in
determining value. Securities for which there is no such valuation, if any, are
valued at their fair value as determined in accordance with established methods
consistently applied. Short-term securities maturing within sixty days are
valued at amortized cost. Securities quoted in foreign currencies are translated
into U.S. dollars at the current exchange rate.

B. Security Transactions

Security transactions are accounted for on the trade date (date the order to buy
or sell is executed). Realized gains or losses are reported

The accompanying notes are an integral part of the financial statements.

7
<PAGE>

STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

on the basis of identified cost of securities delivered. Gains and losses that
arise from changes in exchange rates are not segregated from gains and losses
that arise from changes in market prices of investments.

C. Net Investment Income

Net investment income is determined daily and consists of interest accrued and
discount earned, less the estimated daily expenses of the Fund. Interest income
is accrued daily as earned. Accretion of discount is computed under the
effective yield method. The Fund is charged for expenses directly attributable
to it, while indirect expenses are allocated among all funds in the Trust.

D. Dividends

Dividends are declared daily based upon projected net investment income and are
paid or reinvested monthly. Net realized capital gains, if any, are distributed
annually, unless additional distributions are required for compliance with
applicable tax regulations. Income dividends and capital gain distributions are
determined in accordance with Federal income tax regulations which may differ
from generally accepted accounting principles. The difference is primarily due
to differing treatments for foreign currency transactions.

E. Federal Income Taxes

No provision for Federal income taxes is necessary because the Fund has elected
to qualify under Subchapter M of the Internal Revenue Code and its policy is to
distribute all of its taxable income, including net realized capital gains, if
any, within the prescribed time periods. At October 31, 1997, the Fund had a
capital loss carryforward of $39,689,487 available, to the extent provided in
regulations, to offset future capital gains, if any, of which $18,353,379,
$17,196,293 and $4,139,815 expires on October 31, 1998, 2002 and 2004,
respectively. The Fund had a capital loss carryforward of $40,525,802 expire on
October 31, 1997. In addition, as part of a merger that occurred on May 12,
1995, the Fund acquired from MetLife-State Street Research Government Securities
Fund a capital loss carryforward of $5,100,777, of which $3,074,207 and
$2,026,570 expires on October 31, 2001 and 2002, respectively. The Fund's use of
such capital loss carryforward may be limited under current tax laws.

F. Forward Contracts and Foreign Currencies

The Fund enters into forward foreign currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings and to hedge certain purchase and sale commitments
denominated in foreign currencies. A forward foreign currency exchange contract
is an obligation by the Fund to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the origination date of the
contract. Forward foreign currency exchange contracts establish an exchange rate
at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. Risks may arise from the potential inability of a counterparty
to meet the terms of a contract and from unanticipated movements in the value of
foreign currencies relative to the U.S. dollar. The aggregate principal amount
of forward currency exchange contracts is recorded in the Fund's accounts. All
commitments are marked-to-market at the applicable transaction rates resulting
in unrealized gains or losses. The Fund records realized gains or losses at the
time the forward contracts are extinguished by entry into a closing contract or
by delivery of the currency. Neither spot transactions nor forward currency
exchange contracts eliminate fluctuations in the prices of the Fund's portfolio
securities or in foreign exchange rates, or prevent loss if the price of these
securities should decline.

G. Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.

H. Written Put Options

The Fund may write put options to enhance return and to hedge against
unfavorable market conditions. A written put option is a contract in which the
option writer grants the option buyer the right to sell back to the writer a
designated security at a specified price and time. The premium paid by the buyer
is recorded in the Fund's accounts as a liability and subsequently marked to the
current market value of the written option resulting in an unrealized gain or
loss. Exchange traded written options are valued at the last sale price, or if
no sales are reported, the last ask price. If the written option expires
unexercised, the Fund will realize a gain in the amount of the premium. If the
option is closed, the Fund will recognize a gain or loss based on the difference
between the cost of closing the option and the premium. If the option is
exercised, the Fund's cost basis of the acquired security will be the exercise
price decreased by the premium. The Fund accepts the risk of a decline in value
of the underlying security below the exercise price and the risk that an
illiquid secondary market will limit the Fund's ability to close the option
contract.

Note 2

The Trust and the Adviser, an indirect wholly owned subsidiary of Metropolitan
Life Insurance Company ("Metropolitan"), have entered into an agreement under
which the Adviser earns monthly fees at an annual rate of 0.65% of the Fund's
average daily net assets. In consideration of these fees, the Adviser furnishes
the Fund with management, investment advisory, statistical and research
facilities and services. The Adviser also pays all salaries, rent and certain
other expenses of management. During the year ended October 31, 1997, the fees
pursuant to such agreement amounted to $4,364,193.

State Street Research Service Center, a division of State Street Research
Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance of
the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or

8
<PAGE>

STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
NOTES (cont'd)
- --------------------------------------------------------------------------------

plans, through or under which shares of the Trust may be purchased. During the
year ended October 31, 1997, the amount of such expenses was $242,080.

The fees of the Trustees not currently affiliated with the Adviser amounted to
$34,065 during the year ended October 31, 1997.

Note 3

The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the "Plan")
under the Investment Company Act of 1940. Under the Plan, the Fund pays annual
service fees to the Distributor at a rate of 0.25% of average daily net assets
for Class A, Class B and Class C shares. In addition, the Fund pays annual
distribution fees of 0.75% of average daily net assets for Class B and Class C
shares. The Distributor uses such payments for personal service and/or the
maintenance or servicing of shareholder accounts, to reimburse securities
dealers for distribution and marketing services, to furnish ongoing assistance
to investors and to defray a portion of its distribution and marketing expenses.
For the year ended October 31, 1997, fees pursuant to such plan amounted to
$1,362,695, $947,297 and $154,317 for Class A, Class B and Class C shares,
respectively.

The Fund has been informed that the Distributor and MetLife Securities, Inc., a
wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $50,558 and $258,372, respectively, on sales of Class A shares of
the Fund during the year ended October 31, 1997, and that MetLife Securities,
Inc. earned commissions aggregating $253,677 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges aggregating
$287,730 and $3,988 on redemptions of Class B and Class C shares, respectively,
during the same period.

Note 4

For the year ended October 31, 1997, purchases and sales of securities,
exclusive of short-term obligations, aggregated $813,782,491 and $860,992,919
(including $745,334,612 and $697,592,306 of U.S. Government obligations),
respectively.

Note 5

On June 20, 1997, the Fund acquired the assets and liabilities of State Street
Research International Fixed Income Fund ("International Fixed Income Fund") in
exchange for shares of each class of the Fund. The acquisition was accounted for
as a tax-free exchange of 122,345 Class A shares, 226,623 Class B shares, 46,221
Class C shares and 1,845,952 Class S shares of the Fund for the net assets of
International Fixed Income Fund which amounted to $1,514,628, $2,798,800,
$571,293 and $22,834,432 for Class A, Class B, Class D and Class C shares,
respectively. The net assets of International Fixed Income Fund included
$801,654 of unrealized appreciation at the close of business on June 20, 1997.
The net assets of the Fund immediately after the acquisition were $680,812,302.

Note 6

The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At October 31, 1997, the
Distributor owned 12,241 Class A shares and Metropolitan owned 1,768,508 Class S
shares of the Fund.

Share transactions were as follows:

<TABLE>
<CAPTION>
Years ended October 31
---------------------------------
1996
---------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold ............................................................ 2,386,852 $ 29,601,645
Issued in connection with acquisition of International Fixed Income Fund -- --
Issued upon reinvestment of dividends ................................. 1,707,616 21,188,423
Shares repurchased ...................................................... (9,183,464) (113,908,052)
---------- --------------
Net decrease ............................................................ (5,088,996) $ (63,117,984)
========== ==============

Class B Shares Amount
- -----------------------------------------------------------------------------------------------------------
Shares sold ............................................................ 2,341,362 $ 29,026,329
Issued in connection with acquisition of International Fixed Income Fund -- --
Issued upon reinvestment of dividends ................................. 275,775 3,412,679
Shares repurchased ...................................................... (1,940,555) (24,024,991)
---------- --------------
Net increase ............................................................ 676,582 $ 8,414,017
========== ==============

Class C (Formerly Class D) Shares Amount
- -----------------------------------------------------------------------------------------------------------
Shares sold ............................................................ 520,289 $ 6,453,505
Issued in connection with acquisition of International Fixed Income Fund -- --
Issued upon reinvestment of dividends ................................. 43,660 539,841
Shares repurchased ...................................................... (435,567) (5,400,796)
---------- --------------
Net increase ............................................................ 128,382 $ 1,592,550
========== ==============

Class S (Formerly Class C) Shares Amount
- -----------------------------------------------------------------------------------------------------------
Shares sold ............................................................ 518,980 $ 6,381,030
Issued in connection with acquisition of International Fixed Income Fund -- --
Issued upon reinvestment of dividends ................................. 30,667 379,365
Shares repurchased ...................................................... (324,941) (4,001,721)
---------- --------------
Net increase ............................................................ 224,706 $ 2,758,674
========== ==============

<CAPTION>
1997
---------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold ............................................................ 1,724,885 $ 21,326,126
Issued in connection with acquisition of International Fixed Income Fund 122,345 1,514,628
Issued upon reinvestment of dividends ................................. 1,617,477 20,020,535
Shares repurchased ...................................................... (8,994,512) (111,248,439)
---------- --------------
Net decrease ............................................................ (5,529,805) $ (68,387,150)
========== ==============

Class B Shares Amount
- -----------------------------------------------------------------------------------------------------------
Shares sold ............................................................ 1,428,886 $ 17,617,666
Issued in connection with acquisition of International Fixed Income Fund 226,623 2,798,800
Issued upon reinvestment of dividends ................................. 289,207 3,569,308
Shares repurchased ...................................................... (1,914,285) (23,580,814)
---------- --------------
Net increase ............................................................ 30,431 $ 404,960
========== ==============

Class C (Formerly Class D) Shares Amount
- -----------------------------------------------------------------------------------------------------------
Shares sold ............................................................ 463,886 $ 5,714,578
Issued in connection with acquisition of International Fixed Income Fund 46,221 571,293
Issued upon reinvestment of dividends ................................. 51,335 634,002
Shares repurchased ...................................................... (436,411) (5,400,255)
---------- --------------
Net increase ............................................................ 125,031 $ 1,519,618
========== ==============

Class S (Formerly Class C) Shares Amount
- -----------------------------------------------------------------------------------------------------------
Shares sold ............................................................ 211,412 $ 2,620,092
Issued in connection with acquisition of International Fixed Income Fund 1,845,952 22,834,432
Issued upon reinvestment of dividends ................................. 42,472 525,501
Shares repurchased ...................................................... (184,733) (2,249,070)
---------- --------------
Net increase ............................................................ 1,915,103 $ 23,730,955
========== ==============
</TABLE>

9
<PAGE>

STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share outstanding throughout each year:

<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------
Years ended October 31
--------------------------------------------------------------
1993 1994(1) 1995(1) 1996(1) 1997(1)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.38 12.92 11.68 12.58 12.43
------ ------ ------ ----- ------
Net investment income ($) 0.84 0.81 0.83 0.81 0.80
Net realized and unrealized gain (loss) on investments,
options, forward contracts and foreign currency ($) 0.56 ( 1.26) 0.88 (0.17) 0.22
------ ------ ------ ----- ------
Total from investment operations ($) 1.40 ( 0.45) 1.71 0.64 1.02
------ ------ ------ ----- ------
Dividends from net investment income ($) ( 0.84) ( 0.79) ( 0.81) (0.79) ( 0.80)
Distributions from capital gains ($) ( 0.02) -- -- -- --
------ ------ ------ ----- ------
Total distributions ($) ( 0.86) ( 0.79) ( 0.81) (0.79) ( 0.80)
------ ------ ------ ----- ------
Net asset value, end of year ($) 12.92 11.68 12.58 12.43 12.65
====== ====== ====== ===== ======
Total return(3)(%) 11.63 ( 3.58) 15.07 5.28 8.52
Ratios/supplemental data:
Net assets at end of year ($ thousands) 868,556 638,418 655,045 584,313 524,565
Ratio of operating expenses to average net assets (%) 1.05 1.07 1.10 1.09 1.08
Ratio of net investment income to average net assets (%) 6.59 6.54 6.83 6.50 6.44
Portfolio turnover rate (%) 103.49 134.41 105.57 88.79 124.95
</TABLE>

<TABLE>
<CAPTION>
Class B
---------------------------------------------------------------
Years ended October 31
---------------------------------------------------------------
1993(2) 1994(1) 1995(1) 1996(1) 1997(1)
---------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.67 12.91 11.66 12.55 12.40
------ ------ ------ ----- ------
Net investment income ($) 0.30 0.72 0.73 0.71 0.70
Net realized and unrealized gain (loss) on investments,
options, forward contracts and foreign currency ($) 0.24 ( 1.27) 0.87 (0.16) 0.22
------ ------ ------ ----- ------
Total from investment operations ($) 0.54 ( 0.55) 1.60 0.55 0.92
------ ------ ------ ----- ------
Dividends from net investment income ($) ( 0.30) ( 0.70) ( 0.71) (0.70) ( 0.71)
------ ------ ------ ----- ------
Total distributions ($) ( 0.30) ( 0.70) ( 0.71) (0.70) ( 0.71)
------ ------ ------ ----- ------
Net asset value, end of year ($) 12.91 11.66 12.55 12.40 12.61
====== ====== ====== ===== ======
Total return(3)(%) 4.32(4) ( 4.38) 14.15 4.51 7.66
Ratios/supplemental data:
Net assets at end of year ($ thousands) 26,578 52,319 87,908 95,218 97,253
Ratio of operating expenses to average net assets (%) 1.81(5) 1.82 1.85 1.84 1.83
Ratio of net investment income to average net assets (%) 5.67(5) 5.86 6.01 5.75 5.68
Portfolio turnover rate (%) 103.49 134.41 105.57 88.79 124.95
</TABLE>

- --------------------------------------------------------------------------------
(1) Per-share figures have been calculated using the average shares method.

(2) June 1, 1993 (commencement of share class designations) to October 31, 1993.

(3) Does not reflect any front-end or contingent deferred sales charges.

(4) Not annualized.

(5) Annualized.
10

<PAGE>

STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (cont'd)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Class C (Formerly Class D)
---------------------------------------------------------------
Years ended October 31
---------------------------------------------------------------
1993(2) 1994(1) 1995(1) 1996(1) 1997(1)
---------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.67 12.91 11.66 12.56 12.41
------ ------ ------ ----- ------
Net investment income ($) 0.30 0.72 0.74 0.71 0.70
Net realized and unrealized gain (loss) on investments,
options, forward contracts and foreign currency ($) 0.24 ( 1.27) 0.87 (0.16) 0.22
------ ------ ------ ----- ------
Total from investment operations ($) 0.54 ( 0.55) 1.61 0.55 0.92
------ ------ ------ ----- ------
Dividends from net investment income ($) ( 0.30) ( 0.70) ( 0.71) (0.70) ( 0.71)
------ ------ ------ ----- ------
Total distributions ($) ( 0.30) ( 0.70) ( 0.71) (0.70) ( 0.71)
------ ------ ------ ----- ------
Net asset value, end of year ($) 12.91 11.66 12.56 12.41 12.62
====== ====== ====== ===== ======
Total return(3)(%) 4.32(4) ( 4.38) 14.24 4.51 7.65
Ratios/supplemental data:
Net assets at end of year ($ thousands) 12,101 13,425 13,033 14,473 16,301
Ratio of operating expenses to average net assets (%) 1.88(5) 1.82 1.85 1.84 1.83
Ratio of net investment income to average net assets (%) 5.59(5) 5.84 6.08 5.76 5.68
Portfolio turnover rate (%) 103.49 134.41 105.57 88.79 124.95
</TABLE>

<TABLE>
<CAPTION>
Class S (Formerly Class C)
---------------------------------------------------------------
Years ended October 31
---------------------------------------------------------------
1993(2) 1994(1) 1995(1) 1996(1) 1997(1)
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.67 12.92 11.67 12.57 12.42
------ ------ ------ ----- ------
Net investment income ($) 0.19 0.84 0.90 0.84 0.80
Net realized and unrealized gain (loss) on investments,
options, forward contracts and foreign currency ($) 0.42 ( 1.27) 0.84 (0.17) 0.25
------ ------ ------ ----- ------
Total from investment operations ($) 0.61 ( 0.43) 1.74 0.67 1.05
------ ------ ------ ----- ------
Dividends from net investment income ($) ( 0.36) ( 0.82) ( 0.84) (0.82) ( 0.83)
------ ------ ------ ----- ------
Total distributions ($) ( 0.36) ( 0.82) ( 0.84) (0.82) ( 0.83)
------ ------ ------ ----- ------
Net asset value, end of year ($) 12.92 11.67 12.57 12.42 12.64
====== ====== ====== ===== ======
Total return(3)(%) 4.82(4) ( 3.42) 15.37 5.55 8.80
Ratios/supplemental data:
Net assets at end of year ($ thousands) 36 203 5,036 7,767 32,115
Ratio of operating expenses to average net assets (%) 0.80(5) 0.82 0.85 0.84 0.82
Ratio of net investment income to average net assets (%) 6.59(5) 8.01 6.79 6.78 6.66
Portfolio turnover rate (%) 103.49 134.41 105.57 88.79 124.95
</TABLE>

- --------------------------------------------------------------------------------
(1) Per-share figures have been calculated using the average shares method.

(2) June 1, 1993 (commencement of share class designations) to October 31, 1993.

(3) Does not reflect any front-end or contingent deferred sales charges.

(4) Not annualized.

(5) Annualized.

11
<PAGE>

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Trustees of State Street Research
Financial Trust and the Shareholders of
State Street Research Government Income Fund

In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, 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 State Street Research Government
Income Fund (a series of State Street Research Financial Trust, hereafter
referred to as the "Trust") at October 31, 1997, and the results of its
operations, the changes in its net assets and the financial highlights for 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 Trust'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 October
31, 1997 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
Boston, Massachusetts
December 12, 1997

12
<PAGE>

STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------

Government Income Fund had a strong year. Class A shares of the Fund returned
+8.52% [without sales charge] for the 12 months ended October 31, 1997. This
total return performance was higher than that of the average U.S. government
income fund tracked by Lipper

Analytical Services, which returned +7.99% for the same period. The Merrill
Lynch Government Master Index was up 8.67%.

The Fund's current portfolio consists primarily of U.S. Treasury bonds and
bonds issued or backed by agencies of the U.S. government.

A generally favorable environment and a shift from mortgage bonds to longer
duration U.S. Treasuries helped the Fund. The manager reduced the portfolio's
mortgage exposure from 37% to 27%, and reinvested the proceeds in U.S.
Treasuries. The Fund benefited as long-term bonds gained the most as interest
rates came down during the year and fewer new bonds were issued, the result of a
reduced budget deficit.

The Fund's foreign bond investments also added value. The manager increased the
Fund's exposure to foreign bonds and hedged the positions to protect returns
against a rising dollar.

October 31, 1997

All returns represent past performance, which is no guarantee of future results.
The investment return and principal value of an investment made in the Fund will
fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. All returns assume reinvestment of capital gain distributions and
income dividends. Investments in the Fund are not insured or guaranteed by the
U.S. government or any other entity. Performance for a class includes periods
prior to the adoption of class designations. "S" shares, offered without a sales
charge, are available only through employee benefit plans and special programs.
Performance for "B" and "C" shares prior to class designations in 1993 reflects
annual 12b-1 fees of .25%, and performance thereafter reflects annual 12b-1 fees
of 1%, which will reduce subsequent performance. Performance reflects maximum
4.5% "A" share front-end sales charge or 5% "B" share or 1% "C" share contingent
deferred sales charges, where applicable. Before November 1, 1997, Class C
shares were designated Class D and Class S shares were designated Class C. The
Merrill Lynch Government Master and Blended Indices are commonly used measures
of bond market performance. The indices are unmanaged and do not take sales
charges into consideration. Direct investment in the indices is not possible;
results are for illustrative purposes only.

Change In Value Of $10,000 Based On
The Merrill Lynch Blended Index And
The Merrill Lynch Government Master Index
Compared To Change In Value Of $10,000 Invested
In Government Income Fund

[Line chart with the following plot points]
Class A Shares

Average Annual Total Return
- ---------------------------
1 Year 5 Years 10 Years
+3.64% +6.21% +8.16%

Government ML Blended ML Government
Income Fund Index Master Index
----------- ----- ------------
10/87 9550 10000 10000
10/88 10483 11113 10973
10/89 11492 12393 12291
10/90 12128 13233 13022
10/91 14099 15259 14928
10/92 15489 16760 16472
10/93 17291 18672 18614
10/94 16671 18043 17808
10/95 19183 20797 20553
10/96 20196 21966 21590
10/97 21917 23900 23463

[Line chart with the following plot points]
Class B Shares

Average Annual Total Return
- ---------------------------
1 Year 5 Years 10 Years
+2.66% +6.12% +8.28%

Government ML Blended ML Government
Income Fund Index Master Index
----------- ----- ------------
10/87 10000 10000 10000
10/88 10977 11113 10973
10/89 12033 12393 12291
10/90 12700 13233 13022
10/91 14763 15259 14928
10/92 16219 16760 16472
10/93 18037 18672 18614
10/94 17248 18043 17808
10/95 19689 20797 20553
10/96 20577 21966 21590
10/97 22153 23900 23463

[Line chart with the following plot points]
Class C Shares

Average Annual Total Return
---------------------------
1 Year 5 Years 10 Years
+6.65% +6.45% +8.29%

Government ML Blended ML Government
Income Fund Index Master Index
----------- ----- ------------

10/87 10000 10000 10000
10/88 10977 11113 10973
10/89 12033 12393 12291
10/90 12700 13233 13022
10/91 14763 15259 14928
10/92 16219 16760 16472
10/93 18037 18672 18614
10/94 17247 18043 17808
10/95 19703 20797 20553
10/96 20591 21966 21590
10/97 22149 23900 23463

[Line chart with the following plot points]
Class D Shares

Average Annual Total Return
- ---------------------------
1 Year 5 Years10 Years
+8.80% +7.41% +8.77%

Government ML Blended ML Government
Income Fund Index Master Index
----------- ----- ------------

10/87 10000 10000 10000
10/88 10977 11113 10973
10/89 12033 12393 12291
10/90 12700 13233 13022
10/91 14763 15259 14928
10/92 16219 16760 16472
10/93 18124 18672 18614
10/94 17503 18043 17808
10/95 20193 20797 20553
10/96 21313 21966 21590
10/97 23189 23900 23463

13
<PAGE>

STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
FUND INFORMATION, OFFICERS AND TRUSTEES OF
STATE STREET RESEARCH FINANCIAL TRUST
- --------------------------------------------------------------------------------

Fund Information

State Street Research
Government Income Fund
One Financial Center
Boston, MA 02111

Investment Adviser
State Street Research &
Management Company
One Financial Center
Boston, MA 02111

Distributor
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111

Shareholder Services
State Street Research
Service Center
P.O. Box 8408
Boston, MA 02266-8408
1-800-562-0032

Custodian
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110

Legal Counsel
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109

Independent Accountants
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110

Officers

Ralph F. Verni
Chairman of the Board,
President and
Chief Executive Officer

Peter C. Bennett
Vice President

John H. Kallis
Vice President

Thomas A. Shively
Vice President

Gerard P. Maus
Treasurer

Joseph W. Canavan
Assistant Treasurer

Douglas A. Romich
Assistant Treasurer

Francis J. McNamara, III
Secretary and General Counsel

Darman A. Wing
Assistant Secretary and
Assistant General Counsel

Amy L. Simmons
Assistant Secretary

Trustees

Ralph F. Verni
Chairman of the Board,
President, Chief Executive
Officer and Director,
State Street Research &
Management Company

Steve A. Garban
Retired; formerly Senior Vice
President for Finance and
Operations and Treasurer, The
Pennsylvania State University

Malcolm T. Hopkins
Former Vice Chairman of the
Board and Chief Financial
Officer, St. Regis Corp.

Edward M. Lamont
Formerly in banking
(Morgan Guaranty Trust
Company of New York);
presently engaged in private
investments and civic affairs

Robert A. Lawrence
Associate, Saltonstall & Co.

Dean O. Morton
Retired; formerly Executive
Vice President, Chief
Operating Officer and Director,
Hewlett-Packard Company

Thomas L. Phillips
Retired; formerly Chairman of
the Board and Chief Executive
Officer, Raytheon Company

Toby Rosenblatt
President,
The Glen Ellen Company
Vice President,
Founders Investments Ltd.

Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts Institute of Technology

Jeptha H. Wade
Retired; formerly Of Counsel, Choate, Hall & Stewart

<PAGE>
[Back Cover]

State Street Research Government Income Fund Bulk Rate
One Financial Center U.S. Postage
Boston, MA 02111 PAID
Randolph, MA
Permit No. 600

Questions? Comments?
Call us at 1-800-562-0032
Write us at:
State Street Research
Service Center
P.O. Box 8408
Boston, MA 02266-8408 or
E-Mail us at:
[email protected]

[State Street Research Logo] State Street Research

This report is prepared for the general information of current shareholders.

When used in the general solicitation of investors, this report must be
accompanied or preceded by a current State Street Research Government Income
Fund prospectus. When used after December 31, 1997, this report must be
accompanied by a current Quarterly Performance Update.

Portfolio changes should not be considered recommendations for action by
individual investors.

The Dalbar awards recognize quality shareholder service and should not be
considered a rating of fund performance. The survey included mutual fund
complexes that volunteered or were otherwise selected to participate and was not
industry-wide.

CONTROL NUMBER: 4488-971223(0199)SSR-LD GI-109E-1297IBSRN

<PAGE>

STATE STREET RESEARCH
------------------------------
STRATEGIC PORTFOLIOS: MODERATE
------------------------------

ANNUAL REPORT
October 31, 1997

-------------
WHAT'S INSIDE
-------------

FROM THE CHAIRMAN

An exciting year
to be an investor

PORTFOLIO MANAGER'S REVIEW

Portfolio delivers
positive performance

FUND INFORMATION

Facts and figures

PLUS, COMPLETE PORTFOLIO HOLDINGS
AND FINANCIAL STATEMENTS

[graphic omitted]

For Excellence
in
Shareholder Service

STATE STREET RESEARCH FUNDS

<PAGE>
FROM THE CHAIRMAN

[Photo of Ralph F. Verni]

DEAR SHAREHOLDER:
In the past 12 months, both stock and bond investors have reaped the rewards of
a very favorable financial environment. The nation's economy continued to expand
at a moderate, but healthy pace. Inflation and interest rates remain low.
Employment is high, personal income has increased, and Americans are the most
confident they have been in nearly 30 years. Although history teaches us that a
convergence of so many positive factors is rare, no major concerns appear to
threaten the economy. Even the recent volatility in the financial markets,
influenced by weakness in Southeast Asia, has failed to seriously dampen
investor optimism. However, it reminds us that stock markets can go down as well
as up.

STOCKS
Although the U.S. stock market lost ground in October, it posted extraordinary
returns for the year ended October 31, 1997. The S&P 500, a broad measure of
common stock performance, rose 32.10%(1) for the period, while small stocks, as
measured by the Russell 2000, were up 29.33%.(1) Corporate profits rose for a
sixth consecutive year, and investors continued to add money to equity mutual
funds at a record pace.

BONDS
Bonds lagged stocks for the year, but most segments of the bond market delivered
respectable gains. The yield on the 30-year Treasury bond ended the period at
6.15% after spiking above 7.0% in April, the weakest month of the year for both
stocks and bonds. The Lehman Brothers Aggregate Bond Index, a common benchmark
for bond market performance, gained 8.89%(1). Corporate bonds were strong
performers, especially lower-rated high-yield bonds, which returned 14.75%(1),
according to the First Boston High Yield Index.

WHAT'S AHEAD
While the environment for financial assets has been clouded by concerns that the
turmoil in Southeast Asia could extend to the U.S., our outlook for both stocks
and bonds remains relatively positive. It may not be realistic to expect stocks
to deliver another year of double digit returns. However inflation remains low,
corporate profits are still relatively strong, and there are few reasons for the
Federal Reserve to raise interest rates in the near term.

Sincerely,

/s/ Ralph F. Verni

Ralph F. Verni
Chairman

October 31, 1997

PLEASE NOTE THAT THE DISCUSSION THROUGHOUT THIS SHAREHOLDER REPORT IS DATED AS
INDICATED AND, BECAUSE OF POSSIBLE CHANGES IN VIEWPOINT, DATA AND TRANSACTIONS,
SHOULD NOT BE RELIED UPON AS BEING CURRENT THEREAFTER.

<PAGE>

- ------------------------------------------------------------------------------
FUND INFORMATION (all data are for periods ended October 31, 1997, except where
noted)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEC AVERAGE ANNUAL COMPOUND RATES OF AVERAGE ANNUAL COMPOUND
RETURN FOR PERIODS ENDED 9/30/97(2)(3)(4) RATES OF RETURN(2)(3)(4)
- -------------------------------------------- -------------------------------------------
LIFE OF FUND LIFE OF FUND
(since 9/28/93) 3 YEARS 1 YEAR (since 9/28/93) 3 YEARS 1 YEAR
- ------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class S +11.58% +16.57% +21.37% Class S +10.84% +15.70% +17.83%
- ------------------------------------------- -------------------------------------------

(1) The Standard & Poor's 500 Composite Index (S&P 500) is a market-value
weighted index composed of 500 widely held common stocks. The Russell 2000
Index is a weighted index comprised of the 2000 smallest stocks within the
Russell 3000 weighted index of the 3000 largest capitalized U.S. companies.
The Lehman Brothers Aggregate Bond Index is a market-value weighted index
of fixed-rate debt issues, including U.S. treasury, agency, and corporate
bond issues, and mortgage-backed securities. The First Boston High Yield
Index is a commonly used measure of high yield bond performance. The indices
are unmanaged and do not take sales charges into consideration. Direct
investment in the indices is not possible; results are for illustrative
purposes only.
(2) All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or
less than their original cost. All returns assume reinvestment of capital
gain distributions and income dividends.
(3) "S" shares, offered without a sales charge, are available through certain
employee benefit plans and special programs.
(4) Before November 1, 1997, Class S shares were designated Class C.
</TABLE>

Performance results for the Fund are increased by the voluntary reduction of
Fund fees and expenses, without subsidization performance would be lower.

<PAGE>
PORTFOLIO MANAGER'S REVIEW
Portfolio delivers positive performance.

[Photo of Peter Bennett]
Peter Bennett
Portfolio Manager

Peter Bennett, portfolio manager and team leader of State Street Research
Strategic Portfolios: Moderate, comments on the year ended October 31, 1997 and
the Fund's strategy for the year ahead.

Q: HOW DID THE FUND PERFORM LAST YEAR?
A: Class S shares (formerly Class C) gained 17.83% for the 12 months ended
October 31, 1997. That was slightly less than the average balanced fund, which
rose 19.51%, according to Lipper Analytical Services. It lagged the S&P 500,
which gained 32.10% for the period, but exceeded the Lehman Brothers Aggregate
Bond Index which gained 8.89%.

Q: WHAT ACCOUNTED FOR THE FUND'S UNDERPERFORMANCE COMPARED TO OTHER BALANCED
FUNDS?
A: We reduced the Fund's equity position at mid-year to 48%, below its targeted
normal position. That move was based on our judgment that much of the U.S. stock
market appeared to be overvalued, while bonds offered attractive real returns.
As a result, the Fund failed to participate fully in the strong gains earned by
the U.S. stock market during the second half of the year.

Q: WHAT ADJUSTMENTS DID YOU MAKE TO THE FUND'S ASSET MIX DURING THE YEAR?
A: We shifted from large company stocks to mid- and small-company stocks as the
market rotated at mid- year. Also, we increased the Fund's exposure to high-
yield bonds, which were among the Fund's strongest performers, along with
small-cap growth and mid-cap value segments of the stock market. Both moves were
well-timed and contributed to the Fund's positive performance in the second half
of the year.

Q: WHAT IS YOUR OUTLOOK FOR THE PERIOD AHEAD?
A: The U.S. economy continues to grow at a moderate pace, driven by strong
consumer and capital spending. Inflation remains stable. Corporate earnings
forecasts for 1997 have been revised upward, primarily as a result of
productivity improvements. However, we expect a smaller gain in earnings in
1998. The recent turmoil in Asia has made us cautious about international stock
markets. There could be downward pressure on interest rates, and that would be
favorable for international bond markets.

We remain moderately bullish on stocks, but cautious. It's my view that stocks
are somewhat overvalued and that bonds -- especially high grade bonds --
represent relatively lower risk. Our strategy is to remain underweighted in U.S.
equities, somewhat overweighted in bonds, and to focus on quality.

October 31, 1997
- --------------------------------------------------------------------------------
ASSET ALLOCATION TOP 5 EQUITY INDUSTRIES
(by percentage of net assets) (by percentage of net assets)

Equities 48% OIL 5.1%
Bonds 45% INSURANCE 4.1%
Cash 7% RETAIL TRADE 3.3%
HOSPITAL SUPPLY 2.9%
DRUG 2.5%
Total: 17.9%
TOP 5 BOND SECTORS
(by percentage of net assets)

U.S. TREASURY 14.0%
FINANCE/MORTGAGE 10.6%
U.S. AGENCY MORTGAGE 8.4%
FOREIGN GOVERNMENT 5.4%
CORPORATE 5.2%
Total: 43.6%

<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------
October 31, 1997
- -------------------------------------------------------------------------------
VALUE
SHARES (NOTE 1)
- -------------------------------------------------------------------------------
EQUITY SECURITIES 47.6%
BASIC INDUSTRIES 7.4%
CHEMICAL 2.3%
Agrium Inc. ............................ 29,900 $ 334,506
Cabot Corp. ............................ 11,500 282,469
Cambrex Corp. .......................... 1,050 50,334
Ciba Specialty Chemicals AG* ........... 300 29,459
E.I. Du Pont De Nemours & Co. .......... 2,800 159,250
H.B. Fuller Co. ........................ 500 23,625
Indus International Inc.* .............. 1,100 15,538
JLM Industries Inc.* ................... 1,300 14,788
OM Group Inc. .......................... 800 30,200
Thiokol Corp. .......................... 3,000 274,687
----------
1,214,856
----------
DIVERSIFIED 0.6%
Hoya Corp. ............................. 3,000 104,196
Johnson Controls Inc. .................. 5,100 228,863
----------
333,059
----------
ELECTRICAL EQUIPMENT 0.9%
Asia Pacific Wire & Cable Corp. Ltd.* .. 13,600 125,800
Essex International Inc.* .............. 500 16,563
General Electric Co. ................... 3,800 245,337
Sony Corp.* ............................ 1,000 83,008
----------
470,708
----------
FOREST PRODUCT 0.9%
Abitibi-Consolidated Inc. .............. 15,400 219,450
Aracruz Celulose SA ADR ................ 4,250 63,750
Stone Container Corp. .................. 15,800 190,587
----------
473,787
----------
MACHINERY 1.2%
Hanover Compressor Co.* ................ 800 17,300
ITEQ Inc.* ............................. 4,300 53,750
Sundstrand Corp. ....................... 5,300 288,187
Tyco International Ltd. ................ 4,800 181,200
US Filter Corp.* ....................... 2,800 112,350
----------
652,787
----------
METAL & MINING 1.5%
Alumax Inc.* ........................... 8,200 266,500
General Cable Corp.* ................... 1,500 48,563
Kennametal Inc. ........................ 7,300 354,050
RTZ Corp.* ............................. 4,574 58,937
Wyman-Gordon Co.* ...................... 2,500 60,312
----------
788,362
----------
TRUCKERS 0.0%
CNF Transportation Inc. ................ 400 17,850
----------
Total Basic Industries ................................. 3,951,409
----------
CONSUMER CYCLICAL 7.4%
AIRLINE 0.2%
China Southern Airlines Co. Ltd.* ...... 220,500 97,680
----------
AUTOMOTIVE 1.6%
Budget Group Inc. Cl. A* ............... 400 14,000
Excelsior-Henderson Motorcycle
Manufacturing Co.* .................. 1,100 6,050
Exide Corp. ............................ 14,000 326,375
Lear Corp.* ............................ 8,600 413,338
Renault SA* ............................ 3,400 94,604
----------
854,367
----------
BUILDING 0.3%
Lafarge Corp. .......................... 4,500 136,687
----------
HOTEL & RESTAURANT 0.8%
Apple South Inc. ....................... 1,400 26,075
CKE Restaurants Inc.* .................. 400 15,975
Fine Host Corp.* ....................... 500 14,000
Harrah's Entertainment Inc.* ........... 17,800 350,437
Motels of America Inc.*+ ............... 75 750
----------
407,237
----------
RECREATION 1.2%
American Radio Systems Corp. Cl. A* .... 700 34,125
Chancellor Media Corp. ................. 700 38,413
Cox Communications Inc.* ............... 6,200 190,650
International Game Technology Inc. ..... 5,300 135,481
Panavision Inc.* ....................... 700 17,456
TCA Cable TV Inc.* ..................... 500 20,625
US West Inc.* .......................... 9,300 234,825
----------
671,575
----------
RETAIL TRADE 3.3%
Carson Pirie Scott & Co.* .............. 800 38,550
Dominick's Supermarkets Inc.* .......... 1,400 51,100
Global DirectMail Corp.* ............... 700 12,863
Hannaford Brothers Co. ................. 7,300 276,031
Home Depot Inc. ........................ 3,000 166,875
InaCom Corp.* .......................... 400 12,325
Kroger Co.* ............................ 16,300 531,787
Rite Aid Corp. ......................... 4,300 255,313
Sothebys Holdings Inc. Cl. A ........... 900 16,875
Staples Inc.* .......................... 12,400 325,500
Wal-Mart Stores, Inc. .................. 2,200 77,275
----------
1,764,494
----------
TEXTILE & APPAREL 0.0%
Samsonite Corp.* ....................... 300 13,913
----------
Total Consumer Cyclical ................................ 3,945,953
----------
CONSUMER STAPLE 10.3%
BUSINESS SERVICE 1.0%
Avis Rent A Car, Inc.* ................. 500 13,719
Carriage Services, Inc. Cl. A* ......... 900 15,075
HBO & Co. .............................. 4,000 174,000
Maximus Inc.* .......................... 1,000 28,000
Microage Inc.* ......................... 500 11,000
Norrell Corp. .......................... 1,000 29,125
Pameco Corp.* .......................... 2,500 42,500
Philip Services Corp.* ................. 1,222 21,385
Shared Medical Systems Corp. ........... 400 21,900
Staff Leasing Inc.* .................... 1,000 24,625
USA Waste Services Inc.* ............... 2,000 74,000
Vestcom International Inc.* ............ 1,600 29,000
Waterlink Inc.* ........................ 2,400 40,950
----------
525,279
----------
CONTAINER 0.3%
Ball Corp. ............................. 4,600 161,000
----------
DRUG 2.5%
Ascent Pediatrics Inc.* ................ 1,700 15,512
Axogen Ltd. ADR* ....................... 1,400 54,600
BioVail Corp.* ......................... 2,700 77,962
Eli Lilly & Co. ........................ 3,800 254,125
Intelligent Polymers Ltd.* ............. 2,600 51,350
Novartis AG ............................ 300 469,845
Pathogenesis Corp.* .................... 500 18,000
Pfizer Inc. ............................ 2,300 162,725
Schering-Plough Corp. .................. 3,900 218,644
----------
1,322,763
----------
FOOD & BEVERAGE 0.9%
H.J. Heinz Co. ......................... 3,800 176,462
Whitman Corp. .......................... 11,200 294,000
----------
470,462
----------
HOSPITAL SUPPLY 2.9%
Aradigm Corp.* ......................... 700 8,225
Aviron Corp.* .......................... 700 15,313
Baxter International Inc. .............. 2,000 92,500
Boston Scientific Corp.* ............... 1,400 63,700
Centennial Healthcare Corp.* ........... 1,600 33,200
Genesis Health Ventures Inc.* .......... 400 9,800
Guidant Corp. .......................... 3,800 218,500
Healthdyne Technologies Inc.* .......... 3,700 74,000
National Surgery Centers Inc.* ......... 1,500 37,500
Pacificare Health Systems, Inc. Cl. A* . 4,500 286,312
Roche Holdings AG* ..................... 35 307,570
Rural/Metro Corp.* ..................... 500 17,375
Tenet Healthcare Corp. ................. 9,300 284,231
Total Renal Care Holdings Inc.* ........ 3,000 92,438
Xomed Surgical Products Inc.* .......... 1,600 33,600
----------
1,574,264
----------
PERSONAL CARE 0.5%
Procter & Gamble Co. ................... 2,000 136,000
Wesley Jessen VisionCare Inc.* ......... 3,500 102,375
----------
238,375
----------
PRINTING & PUBLISHING 1.7%
A.H. Belo Corp. Cl. A .................. 719 33,973
Hollinger International, Inc. Cl. A* ... 28,900 377,506
Torstar Corp.* ......................... 3,200 109,327
Valassis Communications Inc. ........... 13,900 410,050
----------
930,856
----------
TOBACCO 0.5%
Dimon Inc. ............................. 7,600 197,125
Philip Morris Companies, Inc. .......... 1,900 75,288
----------
272,413
----------
Total Consumer Staple .................................. 5,495,412
----------
ENERGY 6.4%
OIL 5.1%
Abacan Resource Corp.* ................. 5,700 17,813
Arakis Energy Corp.* ................... 7,300 24,181
British Petroleum Co. PLC* ............. 7,500 110,228
Energy Africa Ltd.* .................... 55,000 288,571
ENI SPA ADR ............................ 3,800 214,225
Fletcher Challenge Ltd.* ............... 22,500 100,869
Gulf Indonesia Resources Ltd.* ......... 800 16,800
KCS Energy Inc. ........................ 3,200 84,200
Maxx Petroleum Ltd.* ................... 8,800 16,984
Nuevo Energy Co.* ...................... 700 29,006
Oryx Energy Co.* ....................... 15,900 438,244
PTT Exploration & Production Public Co. Ltd.* 900 8,995
Royal Dutch Petroleum Co. .............. 2,800 147,350
Seagull Energy Corp.* .................. 16,812 410,843
Tosco Corp. ............................ 9,200 303,600
Total SA* .............................. 2,049 227,341
Total SA Cl. B ADR ..................... 3,500 194,250
Woodside Petroleum Ltd. ADR* ........... 12,500 105,575
----------
2,739,075
----------
OIL SERVICE 1.3%
Daniel Industries Inc. ................. 800 16,100
Dreco Energy Services Ltd.* ............ 333 25,733
Mapco Inc. ............................. 11,100 366,300
Schlumberger Ltd. ...................... 3,100 271,250
Willbros Group Inc.* ................... 800 15,600
----------
694,983
----------
Total Energy ........................................... 3,434,058
----------
FINANCE 6.6%
BANK 1.8%
BankAmerica Corp. ...................... 3,000 214,500
Commercial Federal Corp. ............... 300 14,550
Fleet Financial Group Inc. ............. 5,600 360,150
Golden State Bancorp Inc. .............. 1,300 43,225
Mellon Bank Corp. ...................... 6,700 345,469
----------
977,894
----------
FINANCIAL SERVICE 0.7%
CMAC Investment Corp. .................. 700 38,281
CRIIMI MAE Inc.* ....................... 800 12,700
Federal National Mortgage Association .. 3,900 188,906
First Industrial Realty Trust Inc. ..... 700 24,238
Homeside Inc.* ......................... 2,400 64,350
INMC Mortgage Holdings Inc. ............ 1,300 30,875
Liberty Property Trust ................. 600 16,800
----------
376,150
----------
INSURANCE 4.1%
Ace Ltd. ............................... 7,100 659,856
AMBAC Inc. ............................. 8,300 350,675
Capital Re Corp.* ...................... 300 17,681
General Re Corp. ....................... 800 157,750
HCC Insurance Holdings Inc.* ........... 1,000 23,375
Mid Ocean Ltd. ......................... 6,100 395,737
Mutual Risk Management Ltd. ............ 1,532 39,736
Penncorp Financial Group Inc.* ......... 1,100 35,819
Travelers Group Inc. ................... 2,200 154,000
Travelers Property Casualty Corp. Cl. A 6,500 234,813
Unum Corp. ............................. 2,300 112,125
----------
2,181,567
----------
Total Finance .......................................... 3,535,611
----------
SCIENCE & TECHNOLOGY 7.6%
AEROSPACE 0.4%
Boeing Co. ............................. 4,318 206,724
First Aviation Services Inc.* .......... 1,600 12,400
----------
219,124
----------
COMPUTER SOFTWARE & SERVICE 1.7%
Boston Technology Inc.* ................ 1,000 27,125
Box Hill Systems Corp.* ................ 600 9,300
Cisco Systems Inc.* .................... 1,600 131,250
Complete Business Solutions Inc.* ...... 800 28,200
Diamond Multimedia Systems Inc.* ....... 1,700 18,275
Industir-Matematik International Corp.* 800 16,050
Mapics Inc.* ........................... 2,200 25,025
Mastech Corp.* ......................... 1,100 36,438
Nintendo Co. Ltd.* ..................... 1,500 129,622
Sema Group PLC* ........................ 5,800 129,908
Transition Systems Inc.* ............... 1,600 32,400
TT Tieto Oy Cl. B* ..................... 600 67,269
Wang Laboratories Inc.* ................ 1,400 32,375
Western Digital Corp.* ................. 5,300 158,669
WM Data AB Cl. B* ...................... 3,000 52,070
Xylan Corp.* ........................... 900 14,400
----------
908,376
----------
ELECTRONIC COMPONENTS 2.1%
AMP Inc. ............................... 3,000 135,000
Hitachi Ltd.* .......................... 15,000 115,289
Intel Corp. ............................ 1,700 130,900
Lernout & Hauspie Speech Products NV ADR* 6,000 291,000
Microtouch Systems Inc.* ............... 800 19,300
MMC Networks Inc.* ..................... 100 2,188
Remec Inc.* ............................ 1,950 49,481
Rohm Co.* .............................. 1,000 98,878
Texas Instruments Inc. ................. 2,100 224,044
Vitesse Semiconductor Corp.* ........... 400 17,350
World Access Inc.* ..................... 1,300 34,450
----------
1,117,880
----------
ELECTRONIC EQUIPMENT 1.9%
Aeroflex Inc.* ......................... 3,300 34,031
Brooks Automation Inc.* ................ 200 4,438
Chicago Miniature Lamp, Inc.* .......... 2,900 92,800
Integrated Process Equipment Corp.* .... 800 17,750
KLA-Tencor Corp.* ...................... 2,000 87,875
L.M. Ericsson Telephone Co. ADR Cl. B* . 5,170 228,772
L.M. Ericsson Telephone Co. Cl. B* ..... 8,769 386,356
MAS Technology Ltd. ADR* ............... 1,200 18,450
Scientific Atlanta Inc. ................ 1,500 27,844
Silicon Valley Group Inc.* ............. 800 23,000
Spectrian Corp.* ....................... 1,600 37,600
Teradyne Inc.* ......................... 1,700 63,644
----------
1,022,560
----------
OFFICE EQUIPMENT 1.5%
Compaq Computer Corp. .................. 1,600 102,000
Hewlett-Packard Co. .................... 1,200 74,025
International Business Machines Corp. .. 1,500 147,094
Quantum Corp.* ......................... 4,400 139,150
Unisys Corp. ........................... 24,100 320,831
----------
783,100
----------
Total Science & Technology ............................. 4,051,040
----------
UTILITY 1.9%
ELECTRIC 1.3%
Edison International Inc. .............. 8,800 225,500
OGE Energy Corp. ....................... 5,100 247,031
Western Resources Inc. ................. 5,700 212,325
----------
684,856
NATURAL GAS 0.0% ----------
Calpine Corp.* ......................... 1,700 26,988
----------
TELEPHONE 0.6%
Allen Telecom Inc.* .................... 100 1,894
China Telecom Hong Kong Ltd. ADR* ...... 1,400 45,325
Clearnet Communications Inc. Wts.* ..... 495 4,702
NEXTLINK Communications Inc. Cl. A* .... 600 13,575
Telecom Italia SPA* .................... 18,700 117,193
WorldCom Inc.* ......................... 4,500 151,312
----------
334,001
----------
Total Utility .......................................... 1,045,845
----------
Total Equity Securities (Cost $21,437,388) 25,459,328
----------
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY VALUE
AMOUNT DATE (NOTE 1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 45.5%
U.S. TREASURY 14.0%
U.S. Treasury Bond, 12.00% ........................... $ 400,000 8/15/2013 $ 586,124
U.S. Treasury Bond, 8.75% ............................ 850,000 5/15/2017 1,093,312
U.S. Treasury Bond, 8.125% ........................... 275,000 8/15/2021 339,067
U.S. Treasury Bond, 6.25% ............................ 500,000 8/15/2023 501,795
U.S. Treasury Note, 6.75% ............................ 125,000 5/31/1999 127,070
U.S. Treasury Note, 6.875% ........................... 825,000 8/31/1999 842,275
U.S. Treasury Note, 6.875% ........................... 600,000 3/31/2000 615,750
U.S. Treasury Note, 6.00% ............................ 75,000 8/15/2000 75,598
U.S. Treasury Note, 6.375% ........................... 25,000 3/31/2001 25,477
U.S. Treasury Note, 6.625% ........................... 550,000 7/31/2001 565,983
U.S. Treasury Note, 7.50% ............................ 275,000 11/15/2001 291,929
U.S. Treasury Note, 6.25% ............................ 400,000 2/28/2002 407,124
U.S. Treasury Note, 7.875% ........................... 550,000 11/15/2004 613,162
U.S. Treasury Note, 6.50% ............................ 1,150,000 8/15/2005 1,193,125
U.S. Treasury Note Inflation Indexed, 3.375% 101,526 1/15/2007 100,161
U.S. Treasury STRIPS, 0.00% .......................... 200,000 5/15/2007 112,956
-----------
7,490,908
-----------
U.S. AGENCY MORTGAGE 8.4%
Federal Home Loan Mortgage Corp., 7.00% 302,735 12/01/2024 305,665
Federal Home Loan Mortgage Corp., 7.50% 507,422 2/01/2027 518,677
Federal Home Loan Mortgage Corp. Series 29-H PAC,
6.50% .............................................. 100,000 3/25/2023 100,218
Federal Home Loan Mortgage Corp. TBA, 7.00% .......... 400,000 12/15/2012 405,000
Federal National Mortgage
Association, 9.50% ................................. 155,432 10/01/2003 162,409
Federal National Mortgage
Association, 7.00% ................................. 152,986 12/01/2007 155,847
Federal National Mortgage
Association, 8.00% ................................. 181,712 4/01/2008 189,948
Federal National Mortgage
Association, 7.50% ................................. 582,870 6/01/2012 597,804
Federal National Mortgage
Association, 7.00% ................................. 214,453 10/01/2025 215,122
Federal National Mortgage
Association REMIC Series 1993-102H, 6.80% .......... 100,000 9/25/2022 101,968
Federal National Mortgage
Association TBA, 7.00% ............................. 175,000 11/20/2004 177,188
Government National Mortgage
Association, 6.50% ................................. 99,835 2/15/2009 100,537
Government National Mortgage
Association, 6.50% ................................. 218,890 5/15/2009 220,462
Government National Mortgage
Association, 8.00% ................................. 43,241 9/15/2017 45,524
Government National Mortgage
Association, 9.00% ................................. 115,926 2/15/2022 124,728
Government National Mortgage
Association, 6.50% ................................. 83,751 12/15/2023 83,070
Government National Mortgage
Association, 6.50% ................................. 275,569 7/15/2024 273,328
Government National Mortgage
Association, 7.00% ................................. 135,030 1/15/2025 136,168
Government National Mortgage
Association, 7.50% ................................. 292,983 11/15/2025 299,756
Government National Mortgage
Association, 7.50% ................................. 141,532 4/15/2026 144,717
Government National Mortgage
Association, 8.00% ................................. 127,583 9/15/2026 132,407
-----------
4,490,543
-----------
TRUST CERTIFICATES 0.3%
Cooperative Utility Trust
Certificates, 10.70% ............................... 125,000 9/15/2017 131,250
-----------
FINANCE/MORTGAGE 10.6%
Advanta Credit Card Master Trust Series
95F-A1, 6.05% ...................................... 75,000 8/01/2003 74,648
AFC Capital Trust, 8.21% ............................. 275,000 2/03/2027 303,666
American Express Credit Account Master
Trust 97-1A, 6.40% ................................. 100,000 4/15/2005 101,000
Amresco Commercial Mortgage Funding
Corp. Series 1997-A1, 6.73% ........................ 123,647 6/17/2029 125,657
Arcadia Automobile Trust 97-C A5, 6.55% 100,000 6/15/2005 101,203
Associates Corp. North America, 6.45% ................ 100,000 10/15/2001 100,635
Associates Corp. North America, 6.50% ................ 200,000 8/15/2002 201,568
AT&T Universal Card Master Trust Series
95-2A, 5.95% ....................................... 200,000 10/17/2002 199,124
Bank of New York Institutional Capital
Trust, 7.78%+ ...................................... 250,000 12/01/2026 254,450
BankAmerica Institutional Capital
Series B, 7.70%+ ................................... 225,000 12/31/2026 229,831
Capital One Bank Note, 7.08% ......................... 150,000 10/30/2001 153,717
CIT Group Holdings Inc., 6.20% ....................... 200,000 10/20/2000 200,322
Citicorp Capital I Sec. Note, 7.93% .................. 225,000 2/15/2027 233,721
Commercial Credit Group Inc. Note, 6.45% 200,000 7/01/2002 203,750
Countrywide Funding Corp. Note, 6.58% ................ 150,000 9/21/2001 151,225
Countrywide Mortgage Inc. Series
1994-2 Class A-7, 6.50% ............................ 109,442 4/25/2008 109,236
CS First Boston Mortgage Securities
Corp., 6.32% ....................................... 100,000 3/25/2005 99,992
Discover Credit Card Trust
Series 1993 A, 6.25% ............................... 104,167 8/16/2000 104,069
First USA Credit Card Master Trust Series 1997-6A,
6.42% .............................................. 200,000 3/17/2005 200,031
Ford Credit Auto Loan Master Trust Series 95-1, 6.50% 200,000 8/15/2002 201,500
Ford Credit Auto Owner Trust Series
1997B-A3, 6.05% .................................... 200,000 4/15/2001 200,891
GE Global Insurance Holding Corp.
Note, 7.00% ........................................ 200,000 2/15/2026 203,348
Household Finance Co. Sr. Note, 6.75% ................ 100,000 6/01/2000 101,160
International Lease Finance Corp.
Note, 6.50% ........................................ 200,000 7/01/2001 201,750
MBNA Corp. Sr. Note, 6.875% .......................... 100,000 11/15/2002 100,907
Morgan Stanley Capital Inc. Series
1997-WF1-A1, 6.83%+ ................................ 98,918 10/15/2006 100,773
NationsBank Credit Card Master Trust
Series 1995-1A, 6.45% .............................. 150,000 4/15/2003 151,264
Prime Credit Card Master Trust Series
1995-1A, 6.75% ..................................... 125,000 11/15/2005 127,148
Prime Credit Card Master Trust Series
1996-1A, 6.70% ..................................... 100,000 7/15/2004 101,437
Prudential Home Mortgage Securities Co. Series 93-29
A-6 PAC, 6.75% ..................................... 56,743 8/25/2008 57,098
Prudential Home Mortgage Securities Co. Series 93-47
A-11 PAC-2, 6.10% .................................. 200,000 12/25/2023 192,312
Railcar Leasing 1997-1 A1, 6.75%+ .................... 161,038 7/15/2006 165,668
Sears Credit Account Master Trust Series
1995-2A, 8.10% ..................................... 100,000 6/15/2004 103,468
Sears Credit Account Master Trust Series
1997-1A, 6.20% ..................................... 100,000 7/16/2007 100,094
Structured Asset Securities Corp. Series
97-LL1-A1, 6.79% ................................... 200,000 10/15/2034 202,790
Zurich Capital Trust, 8.38%+ ......................... 200,000 6/01/2037 213,358
-----------
5,672,811
-----------
CORPORATE 5.2%
Ameristar Casinos Inc. Sr. Sub.
Note, 10.50%+ ...................................... 100,000 8/01/2004 100,000
Archibald Candy Corp. Sr. Sec.
Notes, 10.25%+ ..................................... 250,000 7/01/2004 262,500
Chevron Corp. Profit Sharing Note, 8.11% 100,000 12/01/2004 106,293
Columbia/HCA Healthcare Corp.
Deb., 7.50% ........................................ 100,000 12/15/2023 99,040
Columbia/HCA Healthcare Corp.
Note, 6.50% ........................................ 200,000 3/15/1999 201,576
Columbia/HCA Healthcare Corp.
Note, 7.69% ........................................ 100,000 6/15/2025 95,191
Edison Mission Energy Funding Corp. Series A Note,
6.77%+ ............................................. 201,410 9/15/2003 203,988
Empire Gas Corp. Sr. Sec. Note, 7.00% to
7/14/99, 12.875% from 7/15/99 to
maturity ........................................... 250,000 7/15/2004 233,750
Envirosource Inc. Note, 9.75% ........................ 125,000 6/15/2003 122,500
Fort James Corp. Sr. Note, 6.625% .................... 200,000 9/15/2004 200,468
Corporate (cont'd)
French Fragrances Inc. Series B Sr.
Note, 10.375% ...................................... 250,000 5/15/2007 258,750
Johnstown America Industries Inc. Series B Sr. Sub.
Note, 11.75%+ ...................................... 125,000 8/15/2005 136,250
Norcal Waste Systems Inc. Series B Sr.
Note, 13.00% to 5/14/97,13.25% from
5/15/97 to 11/14/97, 13.50% from
11/15/97 to maturity ............................... 200,000 11/15/2005 224,000
Outdoor Systems Inc. Sr. Sub. Note, 9.375% 100,000 10/15/2006 103,500
Spanish Broadcasting Systems Inc. Sr.
Note, 7.50% ........................................ 100,000 6/15/2002 115,500
Sun Media Corp. Sr. Sub. Note, 9.50% ................. 100,000 2/15/2007 105,000
Trump Atlantic City Associates First
Mortgage Note, 11.25% .............................. 125,000 5/01/2006 123,125
U.S.A. Mobile Communications Inc. Sr.
Note, 14.00% ....................................... 100,000 11/01/2004 112,000
-----------
2,803,431
-----------
CANADIAN-YANKEE 1.6%
British Aerospace Finance Inc.
Note, 7.50%+ ....................................... 100,000 7/01/2027 106,414
Petroliam Nasional BHD Note, 6.875%+ ................. 125,000 7/01/2003 125,213
Petroliam Nasional BHD Note, 7.125%+ ................. 100,000 8/15/2005 100,862
Province of Quebec Deb., 7.125% ...................... 200,000 2/09/2024 199,760
Talisman Energy Inc. Deb., 7.125% .................... 125,000 6/01/2007 128,639
Usinor Sacilor ADR Note, 7.25% ....................... 225,000 8/01/2006 232,166
-----------
893,054
-----------
FOREIGN GOVERNMENT 5.4%
Australian Dollar
Commonwealth of Australia, 9.00% ..................... 950,000 9/15/2004 788,611
Canadian Dollar
Government of Canada, 0.00% .......................... 375,000 2/05/1998 263,499
New Zealand Dollar
Government of New Zealand, 10.00% .................... 300,000 3/15/2002 209,302
Government of New Zealand, 8.00% ..................... 650,000 11/15/2006 443,661
Pound Sterling
United Kingdom Treasury, 8.50% ....................... 625,000 12/07/2005 1,170,820
-----------
2,875,893
-----------
Total Fixed Income Securities (Cost $23,856,728) ..................................... 24,357,890
-----------
SHORT-TERM OBLIGATIONS 7.1%
American Express Credit Corp., 5.60% ................. $ 181,000 11/04/1997 181,000
American Express Credit Corp., 5.55% ................. 2,246,000 11/07/1997 2,246,000
Beneficial Corp., 5.54% .............................. 1,357,000 11/04/1997 1,357,000
-----------
Total Short-Term Obligations (Cost $3,784,000) ....................................... 3,784,000
-----------
Total Investments (Cost $49,078,116) - 100.2% ........................................ 53,601,218
Cash and Other Assets, Less Liabilities - (0.2)% ..................................... (103,585)
-----------
Net Assets - 100.0% .................................................................. $53,497,633
===========
- -------------------------------------------------------------------------------------------------------
Federal Income Tax Information:
At October 31, 1997, the net unrealized appreciation of investments based on cost for
Federal income tax purposes of $49,141,622 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an
excess of value over tax cost ...................................................... $ 5,294,756
Aggregate gross unrealized depreciation for all investments in which there is an
excess of tax cost over value ...................................................... (835,160)
-----------
$ 4,459,596
===========

- -------------------------------------------------------------------------------------------------------

ADR Stands for American Depositary Receipt, representing ownership of foreign securities.
TBA Represents "TBA" (to be announced) purchase commitment to purchase securities for a fixed unit price
at a future date beyond customary settlement time. Although the unit price has been established, the
principal value has not been finalized and may vary by no more than 1%.
* Nonincome-producing securities.

+ Security restricted in accordance with Rule 144A under the Securities Act of 1933, which allows for
the resale of such securit ies among certain qualified buyers. The total cost and market value of Rule
144A securities owned at October 31, 1997 were $1,940, 274 and $2,000,057 (3.74% of net assets), respectively.
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE

<TABLE>
<CAPTION>
Forward currency exchange contracts outstanding at October 31, 1997, are as follows:

UNREALIZED
CONTRACT APPRECIATION DELIVERY
TOTAL VALUE PRICE (DEPRECIATION) DATE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sell Australian dollars, Buy U.S. dollars 500,000 AUD .74214 AUD $ 19,346 11/14/97
Sell Australian dollars, Buy U.S. dollars 300,000 AUD .73289 AUD 8,704 12/10/97
Sell Australian dollars, Buy U.S. dollars 62,000 AUD .73565 AUD 1,997 11/14/97
Sell Australian dollars, Buy U.S. dollars 173,000 AUD .70843 AUD 639 1/23/98
Sell British pounds, Buy U.S. dollars 195,000 GBP 1.62570 GBP (9,713) 12/01/97
Buy British pounds, Sell U.S. dollars 70,000 GBP 1.66430 GBP 785 12/01/97
Sell British pounds, Buy U.S. dollars 450,000 GBP 1.62700 GBP (20,178) 1/23/98
Buy British pounds, Sell U.S. dollars 125,000 GBP 1.61130 GBP 8,026 12/01/97
Sell British pounds, Buy U.S. dollars 110,000 GBP 1.61600 GBP (6,143) 1/23/98
Sell British pounds, Buy U.S. dollars 103,000 GBP 1.62800 GBP (4,516) 1/23/98
Buy Italian lira, Sell U.S. dollars 209,440,000 ITL .00058 ITL 1,853 11/04/97
Buy Japanese yen, Sell U.S. dollars 5,015,875 JPY .00834 JPY (174) 11/05/97
Sell New Zealand dollars, Buy U.S. dollars 621,000 NZD .62400 NZD 2,822 1/23/98
Sell New Zealand dollars, Buy U.S. dollars 430,000 NZD .62414 NZD 2,014 1/23/98
Buy New Zealand dollars, Sell U.S. dollars 68,913 NZD .62240 NZD 17 11/06/97
Buy South African rand, Sell U.S. dollars 223,628 ZAR .20747 ZAR 72 11/03/97
Sell South African rand, Buy U.S. dollars 975,000 ZAR .20362 ZAR 2,279 2/27/98
--------
$ 7,830
========
</TABLE>
The accompanying notes are an integral part of the financial statements.

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE

- -----------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------
October 31, 1997

ASSETS
Investments, at value (Cost $49,078,116) (Note 1) ............. $53,601,218
Cash .......................................................... 37,414
Receivable for securities sold ................................ 2,208,285
Interest and dividends receivable ............................. 391,009
Receivable for fund shares sold ............................... 72,748
Receivable for open forward contracts ......................... 48,554
Receivable from Distributor (Note 3) .......................... 22,021
Deferred organization costs and other assets (Note 1) 34,264
-----------
56,415,513
LIABILITIES
Payable for securities purchased .............................. 2,681,393
Accrued transfer agent and shareholder services
(Note 2) .................................................... 55,644
Payable for open forward contracts ............................ 40,724
Accrued management fee (Note 2) ............................... 30,188
Payable for fund shares redeemed .............................. 14,686
Accrued trustees' fees (Note 2) ............................... 6,171
Other accrued expenses ........................................ 89,074
-----------
2,917,880
-----------
NET ASSETS .................................................... $53,497,633
===========
Net Assets consist of:
Undistributed net investment income ......................... $ 449,237
Unrealized appreciation of investments ...................... 4,523,102
Unrealized appreciation of forward contracts and
foreign currency .......................................... 6,478
Accumulated net realized gain ............................... 5,494,910
Shares of beneficial interest ............................... 43,023,906
-----------
$53,497,633
===========
Net Asset Value, offering price and redemption price
per share of Class S shares ($53,497,633 /
4,428,943 shares of beneficial interest) .................... $12.08
======
<PAGE>

- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
For the year ended October 31, 1997

INVESTMENT INCOME
Interest, net of foreign taxes of $589 ........................ $1,664,157
Dividends, net of foreign taxes of $7,946 ..................... 292,752
----------
1,956,909
EXPENSES
Management fee (Note 2) ....................................... 315,798
Transfer agent and shareholder services (Note 2) .............. 195,409
Custodian fee ................................................. 119,915
Reports to shareholders ....................................... 53,719
Registration fees ............................................. 25,611
Audit fee ..................................................... 22,279
Trustees' fees (Note 2) ....................................... 17,303
Amortization of organization costs (Note 1) ................... 16,637
Legal fees .................................................... 9,651
Miscellaneous ................................................. 8,095
----------
784,417
Expenses borne by the Distributor (Note 3) .................... (298,215)
----------
486,202
----------
Net investment income ......................................... 1,470,707
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS,
FOREIGN CURRENCY AND FORWARD CONTRACTS
Net realized gain on investments (Notes 1 and 4) .............. 5,563,196
Net realized gain on forward contracts and foreign
currency (Note 1) ........................................... 125,296
----------
Total net realized gain ..................................... 5,688,492
----------
Net unrealized appreciation of investments .................... 716,077
Net unrealized appreciation of forward contracts and
foreign currency ............................................ 12,645
----------
Total net unrealized appreciation ........................... 728,722
----------
Net gain on investments, foreign currency and forward contracts 6,417,214
----------
Net increase in net assets resulting from operations .......... $7,887,921
==========

The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE

- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
-------------------------------------
1996 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ........................................ $ 1,504,079 $ 1,470,707
Net realized gain on investments, foreign currency and forward
contracts .................................................. 3,151,150 5,688,492
Net unrealized appreciation of
investments, foreign currency and
forward contracts .......................................... 1,101,514 728,722
----------- -----------
Net increase resulting from operations 5,756,743 7,887,921
----------- -----------
Dividends from net investment income -- Class S .............. (1,633,976) (1,636,395)
----------- -----------
Distribution from net realized gains -- Class S .............. -- (2,787,815)
----------- -----------
Class S share transactions (Note 6):
Proceeds from sale of shares ............................... 14,756,256 10,637,538
Net asset value of shares issued in payment of:
Dividends from net investment
income ................................................. 510,768 1,010,909
Distribution from net realized gains -- 2,787,811
Cost of shares repurchased ................................. (14,221,849) (9,391,187)
----------- -----------
Net increase from fund share
transactions ............................................... 1,045,175 5,045,071
----------- -----------
Total increase in net assets ................................. 5,167,942 8,508,782
NET ASSETS
Beginning of year ............................................ 39,820,909 44,988,851
----------- -----------
End of year (including undistributed net
investment income of $541,601 and $449,237, respectively) .. $44,988,851 $53,497,633
=========== ===========
Number of Class S shares:
Sold ....................................................... 1,373,024 930,934
Issued upon reinvestment of:
Dividends from net investment
income ................................................. 47,952 90,518
Distribution from net realized gains -- 258,131
Repurchased ................................................ (1,314,427) (837,303)
----------- -----------
Net increase in fund shares ................................ 106,549 442,280
=========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE

- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
October 31, 1997

NOTE 1
State Street Research Strategic Portfolios: Moderate (the "Fund"), is a series
of State Street Research Financial Trust (the "Trust"), which was organized as a
Massachusetts business trust in November, 1986 and is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. The Fund commenced operations in September, 1993. The Trust consists
presently of four separate funds: State Street Research Strategic Portfolios:
Moderate, State Street Research Government Income Fund, State Street Research
Strategic Portfolios: Conservative and State Street Research Strategic
Portfolios: Aggressive.

The investment objective of the Fund is to provide both current income and
capital appreciation, consistent with the preservation of capital and reasonable
investment risk.

The Fund is authorized to issue four classes of shares. Before November 1, 1997,
Class S shares were designated Class C. Only Class S shares are presently
available for purchase. Class A, Class B and Class C shares are not being
offered at this time. Class A shares are subject to an initial sales charge of
up to 4.50% and an annual service fee of 0.25% of average daily net assets.
Class B shares are subject to a contingent deferred sales charge on certain
redemptions made within five years of purchase and pay annual distribution and
service fees of 1.00%. Class B shares automatically convert into Class A shares
(which pay lower ongoing expenses) at the end of eight years after the issuance
of the Class B shares. Class C shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase. Class
C shares also pay annual distribution and service fees of 1.00%. Class S shares
are only offered through certain retirement accounts, advisory accounts of State
Street Research & Management Company (the "Adviser") and special programs. No
sales charge is imposed at the time of purchase or redemption of Class S shares.
Class S shares do not pay any distribution or service fees. The Fund's expenses
are borne pro-rata by each class, except that each class bears expenses, and has
exclusive voting rights with respect to provisions of the Plan of Distribution,
related specifically to that class. The Trustees declare separate dividends on
each class of shares.

A. INVESTMENT VALUATION
Values for listed equity securities reflect final sales on national securities
exchanges quoted prior to the close of the New York Stock Exchange. Over-the-
counter securities quoted on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") system are valued at closing prices supplied
through such system. If not quoted on the NASDAQ system, such securities are
valued at prices obtained from brokers. In the absence of recorded sales,
valuations are at the mean of the closing bid and asked quotations. Fixed income
securities are valued by a pricing service, which utilizes market transactions,
quotations from dealers, and various relationships among securities in
determining value. Short-term securities maturing within sixty days are valued
at amortized cost. Securities quoted in foreign currencies are translated into
U.S. dollars at the current exchange rate.

B. SECURITY TRANSACTIONS
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed). Realized gains or losses are reported on the basis of
identified cost of securities delivered. Gains and losses that arise from
changes in exchange rates are not segregated from gains and losses that arise
from changes in market prices of investments.

C. NET INVESTMENT INCOME
Net investment income is determined daily and consists of interest and dividends
accrued and discount earned, less the estimated daily expenses of the Fund.
Interest income is accrued daily as earned. Dividend income is accured on the
ex-dividend date. Discount on debt obligations is amortized under the effective
yield method. The Fund is charged for expenses directly attributable to it,
while indirect expenses are allocated among all funds in the Trust.

D. DIVIDENDS
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains, if any, are distributed annually, unless
additional distributions are required for compliance with applicable tax
regulations.

Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing treatments
for foreign currency transactions.

E. FEDERAL INCOME TAXES
No provision for Federal income taxes is necessary because the Fund intends to
qualify under Subchapter M of the Internal Revenue Code and its policy is to
distribute all of its taxable income, including net realized capital gains,
within the prescribed time periods.

F. DEFERRED ORGANIZATION COSTS
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a period
of five years.

G. FORWARD CONTRACTS AND FOREIGN CURRENCIES
The Fund enters into forward foreign currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings and to hedge certain purchase and sale commitments
denominated in foreign currency. A forward foreign currency exchange contract is
an obligation by the Fund to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the origination date of the
contract. Forward foreign currency exchange contracts establish an exchange rate
at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. Risks may arise from the potential inability of a counterparty
to meet the terms of a contract and from unanticipated movements in the value of
foreign currencies relative to the U.S. dollar. The aggregate principal amount
of forward currency exchange contracts is recorded in the Fund's accounts. All
commitments are marked-to- market at the applicable transaction rates resulting
in unrealized gains or losses. The Fund records realized gains or losses at the
time the forward contracts are extinguished by entry into a closing contract or
by delivery of the currency. Neither spot transactions nor forward currency
exchange contracts eliminate fluctuations in the prices of the Fund's portfolio
securities or in foreign exchange rates, or prevent loss if the price of these
securities should decline.

H. ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.

NOTE 2
The Trust and the Adviser, an indirect wholly owned subsidiary of Metropolitan
Life Insurance Company ("Metropolitan"), have entered into an agreement under
which the Adviser earns monthly fees at an annual rate of 0.65% of the Fund's
average daily net assets. In consideration of these fees, the Adviser furnishes
the Fund with management, investment advisory, statistical and research
facilities and services. The Adviser also pays all salaries, rent and certain
other expenses of management. During the year ended October 31, 1997, the fees
pursuant to such agreement amounted to $315,798.

The fees of the Trustees not currently affiliated with the Adviser amounted to
$17,303 during the year ended October 31, 1997.

NOTE 3
The Distributor and its affiliates may from time to time and in varying amounts
voluntarily assume some portion of fees or expenses relating to the Fund. During
the year ended October 31, 1997, the amount of such expenses assumed by the
Distributor and its affiliates was $298,215.

NOTE 4
For the year ended October 31, 1997, purchases and sales of securities,
exclusive of short-term obligations, aggregated $63,620,058 and $61,215,260
(including $23,377,531 and $21,173,242 of U.S. Government securities),
respectively.

NOTE 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the "Plan")
under the Investment Company Act of 1940. Under the Plan, the Fund will pay
annual service fees to the Distributor at a rate of 0.25% of average daily net
assets for Class A, Class B and Class C shares. In addition, the Fund will pay
annual distribution fees of 0.75% of average daily net assets for Class B and
Class C shares. The Distributor uses such payments for personal service and/or
the maintenance or servicing of shareholder accounts, to reimburse securities
dealers for distribution and marketing services, to furnish ongoing assistance
to investors and to defray a portion of its distribution and marketing expenses.

NOTE 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share.

At October 31, 1997, Metropolitan owned 1,525,372 Class C shares of the Fund and
the Adviser owned one Class C share of the Fund.

<PAGE>

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------------

For a Class S share (formerly Class C) outstanding throughout each year:
YEARS ENDED OCTOBER 31
--------------------------------------------------------------------------------
1993((2)) 1994 1995((1)) 1996((1)) 1997((1))
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.55 9.57 9.18 10.26 11.28
-- ---- ---- ----- ----- -----
Net investment income ($)* 0.02 0.28 0.36 0.35 0.35
Net realized and unrealized gain (loss) on
investments, foreign currency and forward
contracts ($) -- (0.45) 1.01 1.07 1.53
-- ---- ---- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.02 (0.17) 1.37 1.42 1.88
-- ---- ---- ----- ----- -----
Dividends from net investment income ($) -- (0.22) (0.29) (0.40) (0.39)
Distributions from net realized gains ($) -- -- -- -- (0.69)
-- ---- ---- ----- ----- -----
TOTAL DISTRIBUTIONS ($) -- (0.22) (0.29) (0.40) (1.08)
-- ---- ---- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 9.57 9.18 10.26 11.28 12.08
== ==== ==== ===== ===== =====
Total return(3) (%) 0.21(4) (1.81) 15.24 14.08 17.83
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 25,040 28,494 39,821 44,989 53,498
Ratio of operating expenses to average net assets(%)* 1.00(5) 1.00 1.00 1.00 1.00
Ratio of net investment income to average net
assets (%)* 2.32(5) 3.05 3.68 3.23 3.03
Portfolio turnover rate (%) 0.00 142.86 120.62 127.59 136.17
Average commission rate ($)(6) -- -- -- 0.0258 0.0257
*Reflects voluntary assumption of fees or
expenses per share in each year (Note 3) ($) 0.00 0.05 0.07 0.05 0.07
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Per-share figures have been calculated using the average shares method.
(2) September 28, 1993 (commencement of operations) to October 31, 1993.
(3) Does not reflect any front-end or contingent deferred sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid for security trades beginning with the fiscal year ended October 31, 1996.
</TABLE>
<PAGE>

- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------

TO THE TRUSTEES OF STATE STREET RESEARCH FINANCIAL TRUST
AND THE SHAREHOLDERS OF STATE STREET RESEARCH
STRATEGIC PORTFOLIOS: MODERATE

In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, 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 State Street Research Strategic
Portfolios: Moderate (a series of State Street Research Financial Trust,
hereafter referred to as the "Trust") at October 31, 1997, and the results of
its operations, the changes in its net assets and the financial highlights for
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 Trust's
manage- ment; 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 October 31, 1997 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
Boston, Massachusetts
December 12, 1997
<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- -------------------------------------------------------------------------------

The Fund's Class S shares gained 17.83% for the year ended October 31, 1997.
That was slightly lower than its peer group, the Lipper balanced fund average,
which rose 19.51% It was well below the S&P 500, which gained 32.10%. That's not
surprising since the S&P 500 is a measure of common stock performance, and the
Fund has 45% of its assets invested in bonds, which far underperformed the stock
market during the period.

Strategic Portfolios: Moderate seeks both current income and capital
appreciation by investing in a mix of common stocks and bonds. The manager's
strategy is to adjust the asset allocation to take advantage of changing market
conditions.

In general, large company stocks outperformed small and mid-sized company stocks
during the first half of the year. But small and mid-cap stocks came back
stronger in the second half of the year. The Fund benefited from reducing its
exposure to large company stocks and shifting its emphasis to small and mid-cap
stocks as the market began to shift its favor to these groups. However a
decision to cut back on the Fund's equity holdings hurt performance against
competitive funds.

Going forward, we expect a slower year for corporate profits in the U.S. but
relatively stable to declining interest rates. The recent turmoil in Asia makes
further volatility in international markets likely. As a result, we will
continue to underweight U.S. equities, overweight U.S. bonds and focus on
quality.

October 31, 1997

All returns represent past performance, which is no guarantee of future results.
The investment return and principal value of an investment made in the Fund will
fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. All returns assume reinvestment of capital gain distributions and
income dividends. "S" shares, offered without a sales charge, are available
through certain employee benefit plans and special programs. Before November 1,
1997, Class S shares were designated Class C. The Standard & Poor's 500
Composite Index (S&P 500) is a market-value weighted index composed of 500
widely held common stocks. The Lehman Brothers Government/Corporate Bond Index
is a market-value weighted index of U.S. government treasury and agency
securities, corporate and yankee bonds. The indices are unmanaged and do not
take sales charges into consideration. Direct investment in the indices is not
possible; results are for illustrative purposes only. Performance results for
the Fund are increased by the voluntary reduction of Fund fees and expenses;
without subsidization, performance would have been lower.

CHANGE IN VALUE OF
$10,000 BASED ON THE S&P 500 AND
THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX
COMPARED TO CHANGE IN VALUE OF $10,000
INVESTED IN STRATEGIC PORTFOLIOS: MODERATE

Strategic Portfolios: S&P Lehman Brothers
Moderate 500 Gov't/Corp Bond
--------------------- ------ ---------------
9/28/93 $ 10,000 $ 10,000 $ 10,000
10/31/93 10,021 10,207 10,041
10/31/94 9,840 10,600 9,575
10/31/95 11,340 13,400 11,123
10/31/96 12,936 16,627 11,722
10/31/97 15,242 21,964 12,755

<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE

- -------------------------------------------------------------------------------
FUND INFORMATION, OFFICERS AND TRUSTEES OF STATE STREET RESEARCH FINANCIAL TRUST
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FUND INFORMATION OFFICERS TRUSTEES
<S> <C> <C>
STATE STREET RESEARCH RALPH F. VERNI RALPH F. VERNI
STRATEGIC PORTFOLIOS: MODERATE Chairman of the Board, Chairman of the Board,
One Financial Center President and President, Chief Executive
Boston, MA 02111 Chief Executive Officer Officer and Director,
State Street Research &
INVESTMENT ADVISER PETER C. BENNETT Management Company
State Street Research & Vice President
Management Company
One Financial Center JOHN H. KALLIS STEVE A. GARBAN
Boston, MA 02111 Vice President Retired; formerly Senior Vice
President for Finance and
DISTRIBUTOR THOMAS A. SHIVELY Operations and Treasurer, The
State Street Research Vice President Pennsylvania State University
Investment Services, Inc.
One Financial Center GERARD P. MAUS
Boston, MA 02111 Treasurer MALCOLM T. HOPKINS
Former Vice Chairman of the
SHAREHOLDER SERVICES JOSEPH W. CANAVAN Board and Chief Financial
State Street Research Assistant Treasurer Officer, St. Regis Corp.
Service Center
P.O. Box 8408 DOUGLAS A. ROMICH
Boston, MA 02266-8408 Assistant Treasurer EDWARD M. LAMONT
1-800-562-0032 Formerly in banking
FRANCIS J. MCNAMARA, III (Morgan Guaranty Trust
CUSTODIAN Secretary and General Counsel Company of New York);
State Street Bank and presently engaged in private
Trust Company DARMAN A. WING investments and civic affairs
225 Franklin Street Assistant Secretary and
Boston, MA 02110 Assistant General Counsel
ROBERT A. LAWRENCE
LEGAL COUNSEL AMY L. SIMMONS Associate, Saltonstall & Co.
Goodwin, Procter & Hoar LLP Assistant Secretary
Exchange Place
Boston, MA 02109 DEAN O. MORTON
Retired; formerly Executive
INDEPENDENT ACCOUNTANTS Vice President, Chief
Price Waterhouse LLP Operating Officer and Director,
160 Federal Street Hewlett-Packard Company
Boston, MA 02110

THOMAS L. PHILLIPS
Retired; formerly Chairman of
the Board and Chief Executive
Officer, Raytheon Company

TOBY ROSENBLATT
President,
The Glen Ellen Company
Vice President,
Founders Investments Ltd.

MICHAEL S. SCOTT MORTON
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology

JEPTHA H. WADE
Retired; formerly Of Counsel,
Choate, Hall & Stewart
</TABLE>
<PAGE>
-------------
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE Bulk Rate
One Financial Center U.S. Postage
Boston, MA 02111 PAID
Randolph, MA
Permit No. 600
--------------

QUESTIONS? COMMENTS?

CALL us at 1-800-562-0032
WRITE us at:
State Street Research
Service Center
P.O. Box 8408
Boston, MA 02266-8408

E-MAIL us at:
[email protected]

[LOGO] STATE STREET RESEARCH

This report is prepared for the general information of current shareholders.

When used in the general solicitation of investors, this report must be
accompanied or preceded by a current State Street Research Strategic Portfolios:
Moderate prospectus. When used after December 31, 1997, this report must be
accompanied by a current Quarterly Performance Update.

Portfolio changes should not be considered recommendations for action by
individual investors.

CONTROL NUMBER: 4491-971224(0199)SSR-LD SP-124E-1297IBSRN
<PAGE>

STATE STREET RESEARCH
--------------------------------
STRATEGIC PORTFOLIOS: AGGRESSIVE
--------------------------------

ANNUAL REPORT

October 31, 1997

- ---------------
WHAT'S INSIDE
- ---------------

FROM THE CHAIRMAN
An exciting year
to be an investor

PORTFOLIO MANAGERS REVIEW
Smaller stocks
drive performance

FUND INFORMATION
Facts and figures

PLUS, COMPLETE PORTFOLIO HOLDINGS
AND FINANCIAL STATEMENTS

[graphic omitted]

For Excellence
in
Shareholder Service

STATE STREET RESEARCH FUNDS
<PAGE>
FROM THE CHAIRMAN

[Photo of Ralph F. Verni]

Regardless of the environment, we believe there are certain basic principles
that can help to keep you focused on your long-term goals: Think long term.
Maintain a diversified portfolio. And discipline yourself to stay with your
investment program. If you have questions or concerns about your investments,
review them with your investment professional. And, thank you for investing with
State Street Research.

Sincerely,

/S/ Ralph F. Verni

Ralph F. Verni
Chairman

October 31, 1997

<TABLE>
<CAPTION>
SEC AVERAGE ANNUAL COMPOUND RATES OF AVERAGE ANNUAL COMPOUND
RETURN FOR PERIODS ENDED 9/30/97(2)(3)(4) RATES OF RETURN(2)(3)(4)
- -------------------------------------------- -------------------------------------------
LIFE OF FUND LIFE OF FUND
(since 5/16/94) 3 YEARS 1 YEAR (since 5/16/94) 3 YEARS 1 YEAR
- ------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class S +18.34% +19.99% +27.53% Class S +16.70% +18.54% +22.54%
- ------------------------------------------- -------------------------------------------

(1) The Standard & Poor's 500 Composite Index (S&P 500) is a market-value
weighted index composed of 500 widely held common stocks. The Russell 2000
Index is a weighted index comprised of the 2000 smallest stocks within the
Russell 3000 (a weighted index of the 3000 largest capitalized U.S.
companies). The Lehman Brothers Aggregate Bond Index is a market-value
weighted index of fixed-rate debt issues, including U.S. treasury, agency,
and corporate bond issues, and mortgage-backed securities. The First Boston
High Yield Index is a commonly used measure of high yield bond performance.
The indices are unmanaged and do not take sales charges into consideration.
Direct investment in the indices is not possible; results are for
illustrative purposes only.
(2) All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or
less than their original cost. All returns assume reinvestment of capital
gain distributions and income dividends.
(3) "S" shares, offered without a sales charge, are available through certain
employee benefit plans and special programs.
(4) Before November 1, 1997, Class S shares where designated Class C.
</TABLE>
<PAGE>
PORTFOLIO MANAGER'S REVIEW
Smaller Stocks drive performance.

[Photo of Peter Bennett]
Peter Bennett
Portfolio Manager

Peter Bennett, portfolio manager and team leader of State Street Research
Strategic Portfolios: Aggressive, comments on the year ended October 31, 1997
and the Fund's strategy for the year ahead.

Q: HOW DID THE FUND PERFORM LAST YEAR?
A: The Fund had a strong year, Class S shares (formerly Class C) gained 22.54%
for the 12 months ended October 31, 1997. It outperformed the average flexible
portfolio fund, which rose 19.22%, according to Lipper Analytical Services. It
lagged the S&P 500, which gained 32.10% for the period. That's not surprising
since the S&P 500 is a measure of common stock performance, and the Fund has 30%
of its assets invested in bonds and cash.

Q: WHAT ACCOUNTED FOR THE FUND'S STRONG PERFORMANCE?
A: During the third quarter, the U.S. stock market's advance broadened to
include mid- and small-cap stocks. Our decision to underweight large-cap growth
stocks as the market began to rotate and to overweight high-yield bonds helped
performance. Small cap growth, mid-cap value and high yield bonds were among the
Fund's strongest performers.

Q: HOW DID THE FUND'S ASSET ALLOCATION AFFECT PERFORMANCE?
A: Early in the period, we decided to reduce the Fund's exposure to stocks and
add to bonds. That held performance back. However, we believe it also reduced
the Fund's risk exposure. At the end of the quarter, 70% of the Fund's assets
were invested in stocks -- well below the targeted normal mix.

Q: WHAT IS YOUR OUTLOOK FOR THE PERIOD AHEAD?
A: The U.S. economy continues to grow at a moderate pace, driven by strong
consumer and capital spending. Inflation remains stable. Consensus earnings
forecasts for 1997 have been revised upward, primarily as a result of
productivity improvements. However, earnings could be lower in 1998. The recent
turmoil in Asia has made us cautious about international stock markets. There
could be downward pressure on interest rates, and that would be favorable for
international bond markets.

October 31, 1997

- -------------------------------------------------------------------------------
ASSET ALLOCATION TOP 5 EQUITY HOLDINGS
(by percentage of net assets) (by percentage of net assets)

Equities 70% L.M. ERICKSON TELEPHONE 1.8%
Bonds 23% ACE 1.5%
Cash 7% KROGER 1.2%
SEAGULL ENERGY 1.0%
HOYA 1.0%
Total: 6.5%

TOP 5 EQUITY INDUSTRIES
(by percentage of net assets)

OIL 7.4%
INSURANCE 5.5%
RETAIL TRADE 4.6%
HOSPITAL SUPPLY 3.9%
ELECTRONIC COMPONENTS 3.9%
Total: 25.3%
<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------
October 31, 1997
VALUE
SHARES (NOTE 1)
- -------------------------------------------------------------------------
EQUITY SECURITIES 69.9%
BASIC INDUSTRIES 11.4%
CHEMICAL 3.1%
Agrium Inc. ............................ 53,100 $ 594,056
Cabot Corp. ............................ 20,300 498,619
Cambrex Corp. .......................... 4,250 203,734
Ciba Specialty Chemicals AG* ........... 300 29,459
E.I. Du Pont De Nemours & Co. .......... 5,300 301,438
H.B. Fuller Co. ........................ 1,800 85,050
Indus International Inc.* .............. 4,500 63,563
JLM Industries Inc.* ................... 5,200 59,150
OM Group Inc. .......................... 3,100 117,025
Thiokol Corp. .......................... 5,300 485,281
----------
2,437,375
----------
DIVERSIFIED 1.8%
Hoya Corp. ............................. 23,000 798,837
Johnson Controls Inc. .................. 9,000 403,875
Tenma Corp.* ........................... 12,000 157,540
----------
1,360,252
----------
ELECTRICAL EQUIPMENT 1.3%
Asia Pacific Wire & Cable Corp. Ltd.* .. 29,700 274,725
Essex International Inc.* .............. 2,100 69,563
General Electric Co. ................... 7,300 471,306
Sony Corp.* ............................ 2,300 190,918
----------
1,006,512
----------
FOREST PRODUCT 1.1%
Abitibi-Consolidated Inc. .............. 27,400 390,450
Aracruz Celulose SA ADR ................ 10,000 150,000
Stone Container Corp. .................. 28,000 337,750
----------
878,200
----------
MACHINERY 2.0%
Hanover Compressor Co.* ................ 3,300 71,363
ITEQ Inc.* ............................. 17,000 212,500
Sundstrand Corp. ....................... 9,400 511,125
Tyco International Ltd. ................ 9,100 343,525
US Filter Corp.* ....................... 11,100 445,387
----------
1,583,900
----------
METAL & MINING 2.0%
Alumax Inc.* ........................... 14,500 471,250
General Cable Corp.* ................... 6,000 194,250
Kennametal Inc. ........................ 12,900 625,650
Wyman-Gordon Co.* ...................... 9,700 234,012
----------
1,525,162
----------
TRUCKERS 0.1%
CNF Transportation Inc. ................ 1,700 75,863
----------
Total Basic Industries ................................. 8,867,264
----------
CONSUMER CYCLICAL 10.3%
AIRLINE 0.3%
China Southern Airlines Co. Ltd.* ...... 487,000 215,738
----------
AUTOMOTIVE 2.1%
Budget Group Inc. Cl. A* ............... 1,700 59,500
Excelsior-Henderson Motorcycle
Manufacturing Co.* ................... 4,300 23,650
Exide Corp. ............................ 24,800 578,150
Lear Corp.* ............................ 15,200 730,550
Renault SA* ............................ 7,500 208,685
----------
1,600,535
----------
BUILDING 0.3%
Lafarge Corp. .......................... 8,000 243,000
----------
HOTEL & RESTAURANT 1.0%
Apple South Inc. ....................... 5,200 96,850
CKE Restaurants Inc.* .................. 1,600 63,900
Fine Host Corp.* ....................... 1,800 50,400
Harrah's Entertainment Inc.* ........... 30,200 594,563
Motels of America Inc.*+ ............... 175 1,750
----------
807,463
----------
RECREATION 1.9%
American Radio Systems Corp. Cl. A* .... 2,600 126,750
Chancellor Media Corp. ................. 2,800 153,650
Cox Communications Inc. Cl. A* ......... 11,800 362,850
International Game Technology Inc. ..... 10,100 258,181
Panavision Inc.* ....................... 2,700 67,331
TCA Cable TV Inc.* ..................... 2,100 86,625
US West Inc.* .......................... 17,900 451,975
----------
1,507,362
----------
RETAIL TRADE 4.6%
Carson Pirie Scott & Co.* .............. 3,400 163,837
Dominick's Supermarkets Inc.* .......... 5,600 204,400
Global DirectMail Corp.* ............... 3,900 71,663
Hannaford Brothers Co. ................. 12,900 487,781
Home Depot Inc. ........................ 5,800 322,625
InaCom Corp.* .......................... 1,700 52,381
Kroger Co.* ............................ 29,600 965,700
Rite Aid Corp. ......................... 8,200 486,875
Sothebys Holdings Inc. Cl. A ........... 3,700 69,375
Staples Inc.* .......................... 23,800 624,750
Wal-Mart Stores, Inc. .................. 4,300 151,038
----------
3,600,425
----------
TEXTILE & APPAREL 0.1%
Samsonite Corp.* ....................... 1,400 64,925
----------
Total Consumer Cyclical ................................ 8,039,448
----------
CONSUMER STAPLE 14.4%
BUSINESS SERVICE 2.0%
Avis Rent A Car, Inc.* ................. 1,800 49,388
Carriage Services, Inc. Cl. A* ......... 3,600 60,300
HBO & Co. .............................. 7,800 339,300
Maximus Inc.* .......................... 3,700 103,600
Microage Inc.* ......................... 2,000 44,000
Norrell Corp. .......................... 4,000 116,500
Pameco Corp.* .......................... 9,800 166,600
Philip Services Corp.* ................. 4,605 80,582
Shared Medical Systems Corp. ........... 1,500 82,125
Staff Leasing Inc.* .................... 3,900 96,037
USA Waste Services Inc.* ............... 3,900 144,300
Vestcom International Inc.* ............ 6,200 112,375
Waterlink Inc.* ........................ 9,200 156,975
----------
1,552,082
----------
CONTAINER 0.4%
Ball Corp. ............................. 8,100 283,500
----------
DRUG 3.3%
Ascent Pediatrics Inc.* ................ 6,900 62,962
Axogen Ltd. ADR* ....................... 5,500 214,500
BioVail Corp.* ......................... 10,600 306,075
Eli Lilly & Co. ........................ 7,400 494,875
Intelligent Polymers Ltd.* ............. 10,200 201,450
Novartis AG ............................ 300 469,845
Pathogenesis Corp.* .................... 1,800 64,800
Pfizer Inc. ............................ 4,500 318,375
Schering-Plough Corp. .................. 7,500 420,469
----------
2,553,351
----------
FOOD & BEVERAGE 1.1%
Coca-Cola Enterprises Inc. ............. 400 11,250
H.J. Heinz Co. ......................... 7,400 343,638
Whitman Corp. .......................... 19,800 519,750
----------
874,638
----------
HOSPITAL SUPPLY 3.9%
Aradigm Corp.* ......................... 2,500 29,375
Aviron Corp.* .......................... 2,700 59,063
Baxter International Inc. .............. 3,900 180,375
Boston Scientific Corp.* ............... 2,600 118,300
Centennial Healthcare Corp.* ........... 6,400 132,800
Genesis Health Ventures Inc.* .......... 1,700 41,650
Guidant Corp. .......................... 7,400 425,500
Healthdyne Technologies Inc.* .......... 14,700 294,000
National Surgery Centers Inc.* ......... 5,850 146,250
PacifiCare Health Systems, Inc. Cl. A* . 7,900 502,637
Rural/Metro Corp.* ..................... 1,900 66,025
Tenet Healthcare Corp. ................. 16,400 501,225
Total Renal Care Holdings Inc.* ........ 12,333 380,021
Xomed Surgical Products Inc.* .......... 6,200 130,200
----------
3,007,421
----------
PERSONAL CARE 0.8%
Procter & Gamble Co. ................... 4,000 272,000
Wesley Jessen VisionCare Inc.* ......... 13,600 397,800
----------
669,800
----------
PRINTING & PUBLISHING 2.3%
A.H. Belo Corp. Cl. A .................. 3,359 158,713
Hollinger International, Inc. Cl. A* ... 51,100 667,494
Torstar Corp Cl. B* .................... 5,700 194,738
Valassis Communications Inc. ........... 25,200 743,400
----------
1,764,345
----------
TOBACCO 0.6%
Dimon Inc. ............................. 13,500 350,156
Philip Morris Companies, Inc. .......... 3,600 142,650
----------
492,806
----------
Total Consumer Staple .................................. 11,197,943
----------
ENERGY 9.2%
OIL 7.4%
Abacan Resource Corp.* ................. 22,400 70,000
Arakis Energy Corp.* ................... 29,600 98,050
British Petroleum Co. PLC* ............. 16,100 236,623
Energy Africa Ltd.* .................... 118,700 622,790
ENI SPA ADR ............................ 6,300 355,162
Fletcher Challenge Ltd.* ............... 47,200 211,601
Gulf Indonesia Resources Ltd.* ......... 3,100 65,100
KCS Energy Inc. ........................ 13,200 347,325
Maxx Petroleum Ltd.* ................... 34,800 67,163
Nuevo Energy Co.* ...................... 2,800 116,025
Oryx Energy Co.* ....................... 28,000 771,750
PTT Exploration & Production Public Co.
Ltd.* ............................... 1,900 18,988
Royal Dutch Petroleum Co. .............. 5,300 278,913
Seagull Energy Corp.* .................. 32,824 802,136
Tosco Corp. ............................ 17,600 580,800
Total SA Cl. B* ........................ 4,610 511,490
Total SA Cl. B ADR* .................... 6,700 371,850
Woodside Petroleum Ltd. ADR* ........... 25,600 216,219
----------
5,741,985
----------
OIL SERVICE 1.8%
Daniel Industries Inc. ................. 3,300 66,412
Dreco Energy Services Ltd.* ............ 1,522 117,749
Mapco Inc. ............................. 19,600 646,800
Schlumberger Ltd. ...................... 5,900 516,250
Willbros Group Inc.* ................... 3,100 60,450
----------
1,407,661
----------
Total Energy ........................................... 7,149,646
----------
FINANCE 9.3%
BANK 2.4%
BankAmerica Corp. ...................... 5,700 407,550
Commercial Federal Corp. ............... 1,200 58,200
Fleet Financial Group Inc. ............. 9,900 636,694
Golden State Bancorp Inc. .............. 5,300 176,225
Mellon Bank Corp. ...................... 11,800 608,437
----------
1,887,106
----------
FINANCIAL SERVICE 1.4%
CMAC Investment Corp. .................. 2,600 142,188
CRIIMI MAE Inc.* ....................... 3,200 50,800
Federal National Mortgage Association .. 7,500 363,281
First Industrial Realty Trust Inc. ..... 2,800 96,950
Homeside Inc.* ......................... 9,500 254,719
INMC Mortgage Holdings Inc. ............ 5,000 118,750
Liberty Property Trust ................. 2,400 67,200
----------
1,093,888
----------
INSURANCE 5.5%
Ace Ltd. ............................... 12,900 1,198,894
AMBAC Inc. ............................. 14,700 621,075
Capital Re Corp.* ...................... 1,300 76,619
General Re Corp. ....................... 1,500 295,781
HCC Insurance Holdings Inc.* ........... 4,000 93,500
Mid Ocean Ltd. ......................... 10,800 700,650
Mutual Risk Management Ltd. ............ 6,132 159,049
Penncorp Financial Group Inc.* ......... 4,700 153,044
Travelers Group Inc. ................... 4,200 294,000
Travelers Property Casualty Corp. Cl. A 11,500 415,437
UNUM Corp. ............................. 4,500 219,375
----------
4,227,424
----------
Total Finance .......................................... 7,208,418
----------
SCIENCE & TECHNOLOGY 12.5%
AEROSPACE 0.5%
Boeing Co. ............................. 7,754 371,223
First Aviation Services Inc.* .......... 7,300 56,575
----------
427,798
----------
COMPUTER SOFTWARE & SERVICE 2.8%
Boston Technology Inc.* ................ 4,000 108,500
Box Hill Systems Corp.* ................ 2,200 34,100
Cisco Systems Inc.* .................... 3,000 246,094
Complete Business Solutions Inc.* ...... 3,100 109,275
Diamond Multimedia Systems Inc.* ....... 6,600 70,950
Industir-Matematik International Corp.* 3,200 64,175
Mapics Inc.* ........................... 8,800 100,100
Mastech Corp.* ......................... 4,500 149,062
Nintendo Co. Ltd.* ..................... 3,200 276,527
Sema Group PLC* ........................ 9,300 208,301
Transition Systems Inc.* ............... 6,300 127,575
TT Tieto Oy Cl. B* ..................... 1,000 112,115
Wang Laboratories Inc.* ................ 5,400 124,875
Western Digital Corp.* ................. 9,400 281,412
WM-Data AB Cl. B* ...................... 5,000 86,784
Xylan Corp.* ........................... 3,500 56,000
----------
2,155,845
----------
ELECTRONIC COMPONENTS 3.9%
AMP Inc. ............................... 5,700 256,500
Hitachi Ltd.* .......................... 32,000 245,949
Intel Corp. ............................ 3,200 246,400
Lernout & Hauspie Speech Products NV ADR* 13,000 630,500
Microtouch Systems Inc.* ................ 3,300 79,612
MMC Networks Inc.* ...................... 400 8,750
Remec Inc.* ............................. 8,050 204,269
Rohm Co.* ............................... 7,000 692,148
Texas Instruments Inc. .................. 4,100 437,419
Vitesse Semiconductor Corp.* ............ 1,500 65,062
World Access Inc.* ...................... 5,200 137,800
----------
3,004,409
----------
ELECTRONIC EQUIPMENT 3.5%
Aeroflex Inc.* .......................... 13,200 136,125
Brooks Automation Inc.* ................. 1,000 22,188
Chicago Miniature Lamp, Inc.* ........... 11,500 368,000
Integrated Process Equipment Corp.* ..... 3,000 66,563
KLA-Tencor Corp.* ....................... 3,900 171,356
L.M. Ericsson Telephone Co. ADR Cl. B* .. 9,930 439,402
L.M. Ericsson Telephone Co. Cl. B* ...... 21,920 965,781
MAS Technology Ltd. ADR* ................ 4,700 72,262
Scientific Atlanta Inc. ................. 6,000 111,375
Silicon Valley Group Inc.* .............. 3,200 92,000
Spectrian Corp.* ........................ 6,300 148,050
Teradyne Inc.* .......................... 3,200 119,800
----------
2,712,902
----------
OFFICE EQUIPMENT 1.8%
Compaq Computer Corp. ................... 3,200 204,000
Hewlett-Packard Co. ..................... 2,300 141,881
International Business Machines Corp. ... 2,800 274,575
Quantum Corp.* .......................... 7,900 249,838
Unisys Corp. ............................ 42,800 569,775
----------
1,440,069
----------
Total Science & Technology ............................. 9,741,023
----------
UTILITY 2.8%
ELECTRIC 1.6%
Edison International Corp. .............. 15,600 399,750
OGE Energy Corp. ........................ 9,000 435,938
Western Resources Inc. .................. 10,100 376,225
----------
1,211,913
----------
NATURAL GAS 0.3%
Calpine Corp.* .......................... 6,800 107,950
TransTexas Gas Corp.* ................... 7,900 150,100
----------
258,050
----------
TELEPHONE 0.9%
Allen Telecom Inc.* ..................... 400 7,575
China Telecom Hong Kong Ltd. ADR* ....... 2,900 93,887
Clearnet Communications Inc. Wts.* ...... 990 9,405
NEXTLINK Communications Inc. Cl. A* ..... 2,400 54,300
Telecom Italia SPA* ..................... 40,500 253,813
WorldCom Inc.* .......................... 8,600 289,175
----------
708,155
----------
Total Utility .......................................... 2,178,118
----------
Total Equity Securities (Cost $45,568,925) ............. 54,381,860
----------

<TABLE>
<CAPTION>
PRINCIPAL MATURITY VALUE
AMOUNT DATE (NOTE 1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 22.6%
U.S. TREASURY 3.4%
U.S. Treasury Bond, 12.00% ........................... $ 225,000 8/15/2013 $ 329,694
U.S. Treasury Bond, 8.75% ............................ 400,000 5/15/2017 514,500
U.S. Treasury Bond, 8.125% ........................... 175,000 8/15/2021 215,770
U.S. Treasury Note, 6.75% ............................ 75,000 5/31/1999 76,242
U.S. Treasury Note, 6.875% ........................... 100,000 8/31/1999 102,094
U.S. Treasury Note, 6.875% ........................... 25,000 3/31/2000 25,656
U.S. Treasury Note, 6.00% ............................ 100,000 8/15/2000 100,797
U.S. Treasury Note, 6.375% ........................... 125,000 3/31/2001 127,383
U.S. Treasury Note, 6.625% ........................... 175,000 7/31/2001 180,086
U.S. Treasury Note, 6.25% ............................ 250,000 2/28/2002 254,452
U.S. Treasury Note, 7.875% ........................... 350,000 11/15/2004 390,194
U.S. Treasury Note, 6.50% ............................ 200,000 8/15/2005 207,500
U.S. Treasury Note Inflation
Indexed, 3.375% .................................... 50,740 1/15/2007 50,058
U.S. Treasury STRIPS, 0.00% .......................... 150,000 5/15/2007 84,717
-----------
2,659,143
-----------
U.S. AGENCY MORTGAGE 2.4%
Federal Home Loan Mortgage Corp., 7.50% 29,010 3/01/2027 29,653
Federal Home Loan Mortgage Corp.
Gold, 7.00% ........................................ 166,164 12/01/2024 167,773
Federal Home Loan Mortgage Corp.
Gold TBA, 7.00% .................................... 200,000 12/15/2012 202,500
Federal Home Loan Mortgage Corp.
Series 29-H PAC, 6.50% ............................. 50,000 3/25/2023 50,109
Federal National Mortgage
Association, 7.50% ................................. 216,659 7/01/2012 222,210
Federal National Mortgage Association
Remic 93-102-H, 6.80% .............................. 25,000 9/25/2022 25,492
Federal National Mortgage Association
TBA, 7.00% ......................................... 100,000 11/20/2004 101,250
Federal National Mortgage Association
TBA, 7.50% ......................................... 325,000 1/14/2028 330,789
Government National Mortgage
Association, 6.50% ................................. 96,635 7/15/2009 97,329
Government National Mortgage
Association, 6.50% ................................. 39,934 9/15/2009 40,215
Government National Mortgage
Association, 6.50% ................................. 110,639 11/15/2010 110,984
Government National Mortgage
Association, 7.00% ................................. 23,351 1/15/2025 23,548
Government National Mortgage
Association, 8.00% ................................. 145,196 5/15/2025 150,776
Government National Mortgage
Association, 7.50% ................................. 112,686 11/15/2025 115,291
Government National Mortgage
Association, 7.50% ................................. 70,767 4/15/2026 72,359
Government National Mortgage
Association, 8.00% ................................. 46,603 9/15/2026 48,365
Government National Mortgage Association
TBA, 7.50% ......................................... 100,000 11/17/2012 102,875
-----------
1,891,518
-----------
CANADIAN-YANKEE 1.0%
Petroliam Nasional BHD Note, 6.875%+ ................. 125,000 7/01/2003 125,213
Stena AB Sr. Note, 8.75% ............................. 250,000 6/15/2007 251,875
Usinor Sacilor ADR Note, 7.25% ....................... 350,000 8/01/2006 361,147
-----------
738,235
-----------
TRUST CERTIFICATES 0.3%
Cooperative Utility Trust
Certificates, 10.70% ............................... 75,000 9/15/2017 78,750
Deseret Generation Cooperative Trust
Certificates, 10.11% ............................... 75,000 12/15/2017 79,100
Zurich Capital Trust, 8.376%+ ........................ 100,000 6/01/2037 106,679
-----------
264,529
-----------
FOREIGN GOVERNMENT 5.6%
Australian Dollar
Commonwealth of Australia, 9.00% ..................... 1,700,000 9/15/2004 1,411,198
Canadian Dollar
Government of Canada, 0.00% .......................... 425,000 2/05/1998 298,632
New Zealand Dollar
Government of New Zealand, 10.00% .................... 800,000 3/15/2002 557,939
Government of New Zealand, 8.00% ..................... 700,000 11/15/2006 477,789
Pound Sterling
United Kingdom Treasury, 8.50% ....................... 875,000 12/07/2005 1,639,149
-----------
4,384,707
-----------
FINANCE/MORTGAGE 3.4%
American Express Credit Account Master Trust 97-1A,
6.40% .............................................. 50,000 4/15/2005 50,500
Bank of New York Institutional Capital
Trust, 7.78%+ ...................................... 350,000 12/01/2026 356,230
BankAmerica Institutional Capital
Series B, 7.70%+ ................................... 325,000 12/31/2026 331,978
Capital One Bank Sr. Note, 7.08% ..................... 225,000 10/30/2001 230,575
Chemical Master Credit Card Trust Series
1996-1 A, 5.55% .................................... 100,000 9/15/2003 98,430
Countrywide Funding Corp. Note, 6.58% ................ 75,000 9/21/2001 75,613
Countrywide Series 1994-3 Cl. A-7, 6.75% 325,000 3/25/2024 323,069
Discover Credit Card Trust
Series 1993 A, 6.25% ............................... 62,500 8/16/2000 62,441
DLJ Mortgage Acceptance Corp.
97-CF2-A1A, 6.55%+ ................................. 50,000 11/15/2006 50,688
First USA Credit Card Master Trust Series 1997-6A,
6.42% .............................................. 75,000 3/17/2005 75,012
Ford Credit Auto Loan Master Trust Series 95-1, 6.50% 125,000 8/15/2002 125,937
Ford Credit Auto Owner Trust Series
1997B-A3, 6.05% .................................... 75,000 4/15/2001 75,334
Household Affinity Credit Card Master Trust Series
1994-1A, 5.8375% ................................... 50,000 5/15/2001 50,031
MBNA Corp. Sr. Note, 6.875% .......................... 100,000 11/15/2002 100,907
Prime Credit Card Master Trust
1996-1A, 6.70% ..................................... 50,000 7/15/2004 50,719
Prime Credit Card Master Trust Series
1995-1A, 6.75% ..................................... 50,000 11/15/2005 50,859
Sears Credit Trust Series 1995-2A, 8.10% 200,000 6/15/2004 206,936
Structured Asset Securities Corp.
Series 97-LL1-A1, 6.79% ............................ 75,000 10/15/2034 76,046
Trump Atlantic City Associates First
Mortgage Note, 11.25% .............................. 250,000 5/01/2006 246,250
-----------
2,637,555
-----------
CORPORATE 6.5%
Ameristar Casinos Inc. Sr. Sub.
Note, 10.50%+ ...................................... 150,000 8/01/2004 150,000
Arcadia Automobile Trust 97-C A5, 6.55% 50,000 6/15/2005 50,602
Archibald Candy Corp. Sr. Sec.
Notes, 10.25%+ ..................................... 250,000 7/01/2004 262,500
Belden & Blake Corp. Sr. Sub.
Note, 9.875%+ ...................................... 250,000 6/15/2007 252,500
CHC Helicopter Corp. Sr. Sub. Note, 11.50% 250,000 7/15/2002 266,250
Chevron Corp. Profit Sharing Note, 8.11% 75,000 12/01/2004 79,720
Cigna Corp. Deb., 7.875% ............................. 100,000 5/15/2027 105,921
Coleman Escrow Corp. Sr. Sec.
Note, 0.00%+ ....................................... 250,000 5/15/2001 147,500
Columbia/HCA Healthcare Corp.
Deb., 7.50% ........................................ 50,000 12/15/2023 49,520
Columbia/HCA Healthcare Corp.
Note, 7.69% ........................................ 50,000 6/15/2025 47,596
Columbia/HCA Healthcare Corp.
Trust, 8.12% ....................................... 75,000 8/04/2003 80,143
Edison Mission Energy Funding Corp. Series A Note,
6.77%+ ............................................. 313,305 9/15/2003 317,315
Empire Gas Corp. Sr. Sec. Note, 7.00% to
7/14/99, 12.875% from 7/15/99 to
maturity ........................................... 250,000 7/15/2004 233,750
Envirosource Inc. Sr. Note, 9.75% .................... 500,000 6/15/2003 490,000
French Fragrances Inc. Sr. Note B, 10.375% 250,000 5/15/2007 258,750
Johnstown America Industries Inc. Sr. Sub. Note B,
11.75%+ ............................................ 125,000 8/15/2005 136,250
La Petite Holdings Corp. Sr. Sec.
Notes, 9.625% ...................................... 250,000 8/01/2001 255,000
Norcal Waste Systems Inc. Series B Sr.
Note, 13.00% to 11/14/97, 13.50% from
11/15/97 to maturity ............................... 250,000 11/15/2005 280,000
Outdoor Systems Inc. Sr. Sub. Note, 9.375% 200,000 10/15/2006 207,000
Packaging Resources Inc. Sr. Sec.
Note, 11.625% ...................................... 250,000 5/01/2003 261,875
Rose Hills Co. Sr. Sub. Note, 9.50%+ ................. 250,000 11/15/2004 261,250
Solutia Inc. Note, 6.50% ............................. 100,000 10/15/2002 100,375
Spanish Broadcasting Systems Inc. Sr.
Note, 7.50% ........................................ 250,000 6/15/2002 288,750
Sun Media Corp. Sr. Sub. Note, 9.50% ................. 250,000 2/15/2007 262,500
U.S.A. Mobile Communications Inc.
Sr. Note, 14.00% ................................... 150,000 11/01/2004 169,500
-----------
5,014,567
-----------
Total Fixed Income Securities (Cost $17,340,437) ..................................... 17,590,254
-----------
SHORT-TERM OBLIGATIONS 8.0%
American Express Credit Corp., 5.55% ................. 280,000 11/04/1997 280,000
Chevron Oil Finance Co., 5.55% ....................... 2,350,000 11/04/1997 2,350,000
Ford Motor Credit Co., 5.65% ......................... 2,555,000 11/05/1997 2,555,000
Merrill Lynch & Company Inc., 5.62% .................. 997,000 11/03/1997 996,689
-----------
Total Short-Term Obligations (Cost $6,181,689) ....................................... 6,181,689
-----------
Total Investments (Cost $69,091,051) - 100.5% ........................................ 78,153,803
Cash and Other Assets, Less Liabilities - (0.5%) ..................................... (400,783)
-----------
Net Assets - 100.0% .................................................................. $77,753,020
===========

Federal Income Tax Information:
At October 31, 1997, the net unrealized appreciation of investments based on cost for
Federal income tax purposes of $69,180,248 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an
excess of value over tax cost ...................................................... $10,886,235
Aggregate gross unrealized depreciation for all investments in which there is an
excess of tax cost over value ...................................................... (1,912,680)
-----------
$ 8,973,555
===========

- -------------------------------------------------------------------------------------------------------

ADR Stands for American Depositary Receipt, representing ownership of foreign securities.
* Non-income-producing securities.
TBA Represents "TBA" (to be announced) purchase commitment to purchase securities for a fixed unit price
at a future date beyond cutomary settlement time. Although the unit price has been established, the
principal value has not been finalized and may vary by no more than 1%.
+ Security restricted in accordance with Rule 144A under the Securities Act of 1933, which allows for the
resale of such securities among certain qualified buyers. The total cost and market value of Rule 144A
securities owned at October 31, 1997 were $2,450,936 and $2,499,853 (3.22% of net assets), respectively.
</TABLE>

Forward currency exchange contracts outstanding at October 31, 1997, are as
follows:

<TABLE>
<CAPTION>
UNREALIZED
CONTRACT APPRECIATION DELIVERY
TOTAL VALUE PRICE (DEPRECIATION) DATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sell Australian dollars, Buy U.S. dollars 124,000 AUD .73565 AUD $ 3,993 11/14/97
Sell Australian dollars, Buy U.S. dollars 183,300 AUD .70850 AUD 709 1/23/98
Sell Australian dollars, Buy U.S. dollars 430,000 AUD .74214 AUD 16,637 11/14/97
Sell Australian dollars, Buy U.S. dollars 430,000 AUD .73289 AUD 12,476 12/10/97
Sell Australian dollars, Buy U.S. dollars 390,000 AUD .73480 AUD 12,061 12/10/97
Sell Australian dollars, Buy U.S. dollars 300,000 AUD .70843 AUD 1,108 1/23/98
Buy British pounds, Sell U.S. dollars 125,000 GBP 1.66430 GBP 1,401 12/01/97
Buy British pounds, Sell U.S. dollars 220,000 GBP 1.61130 GBP 14,126 12/01/97
Sell British pounds, Buy U.S. dollars 767,000 GBP 1.62700 GBP (34,393) 1/23/97
Sell British pounds, Buy U.S. dollars 345,000 GBP 1.62570 GBP (17,185) 12/01/97
Sell British pounds, Buy U.S. dollars 155,000 GBP 1.62800 GBP (6,795) 1/23/98
Buy Italian lira, Sell U.S. dollars 453,600,000 ITL .00058 ITL 4,013 11/04/97
Buy Japanese yen, Sell U.S. dollars 11,034,925 JPY .00834 JPY (382) 11/05/97
Buy New Zealand dollars, Sell U.S. dollars 148,594 NZD .93736 NZD 37 11/06/97
Sell New Zealand dollars, Buy U.S. dollars 760,000 NZD .64200 NZD 17,133 1/23/98
Sell New Zealand dollars, Buy U.S. dollars 858,000 NZD .62400 NZD 3,899 1/23/98
Sell South African rand, Buy U.S. dollars 2,100,000 ZAR .20362 ZAR 4,908 2/27/98
Buy South African rand, Sell U.S. dollars 485,375 ZAR .20747 ZAR 157 11/03/97
--------
$ 33,903
========
</TABLE>

The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
- ------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------
October 31, 1997

ASSETS
Investments, at value (Cost $69,091,051) (Note 1) .............. $78,153,803
Cash ........................................................... 75,487
Receivable for securities sold ................................. 2,276,680
Interest and dividends receivable .............................. 388,920
Receivable for open forward contracts .......................... 92,658
Receivable for fund shares sold ................................ 57,629
Receivable from Distributor (Note 3) ........................... 4,490
Deferred organization costs and other assets (Note 1) 54,017
-----------
81,103,684
LIABILITIES
Payable for securities purchased ............................... 3,096,619
Payable for open forward contracts ............................. 58,755
Accrued management fee (Note 2) ................................ 51,348
Accrued transfer agent and shareholder services
(Note 2) ..................................................... 37,480
Payable for fund shares redeemed ............................... 9,110
Accrued trustees' fees (Note 2) ................................ 6,097
Other accrued expenses ......................................... 91,255
-----------
3,350,664
-----------
NET ASSETS ..................................................... $77,753,020
===========
Net Assets consist of:
Undistributed net investment income .......................... $ 473,826
Unrealized appreciation of investments ....................... 9,062,752
Unrealized appreciation of forward contracts and
foreign currency ........................................... 30,255
Accumulated net realized gain ................................ 11,024,948
Shares of beneficial interest ................................ 57,161,239
-----------
$77,753,020
===========
Net Asset Value, offering price and redemption price per share
of Class S shares ($77,753,020 / 5,900,731 shares of
beneficial interest) ........................................ $13.18
======
<PAGE>

INVESTMENT INCOME
Interest, net of foreign taxes of $195 ...................... $ 1,495,176
Dividends, net of foreign taxes of $14,980 .................. 515,670
-----------
2,010,846
EXPENSES
Management fee (Note 2) ..................................... 521,687
Custodian fee ............................................... 138,308
Transfer agent and shareholder services (Note 2) ............ 113,270
Reports to shareholders ..................................... 36,242
Audit fee ................................................... 27,633
Trustees' fees (Note 2) ..................................... 17,040
Registration fees ........................................... 11,007
Amortization of organization costs (Note 1) ................. 7,483
Legal fees .................................................. 7,081
Service fee-Class A (Note 5) ................................ 266
Miscellaneous ............................................... 7,993
-----------
888,010
Expenses borne by the Distributor (Note 3) .................. (122,711)
-----------
765,299
-----------
Net investment income ....................................... 1,245,547
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS,
FOREIGN CURRENCY AND FORWARD CONTRACTS
Net realized gain on investments (Notes 1 and 4) ............ 11,042,411
Net realized gain on forward contracts and foreign
currency (Note 1) ......................................... 141,527
-----------
Total net realized gain ................................... 11,183,938
-----------
Net unrealized appreciation of investments .................. 1,401,758
Net unrealized appreciation of forward contracts and
foreign currency .......................................... 38,999
-----------
Total net unrealized appreciation ......................... 1,440,757
-----------
Net gain on investments, foreign currency and forward contracts 12,624,695
-----------
Net increase in net assets resulting from operations ........ $13,870,242
===========

The accompanying notes are an integral part of the financial statements.
<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Years ended October 31
-------------------------------------
1996 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ......................................... $ 1,192,012 $ 1,245,547
Net realized gain on investments, foreign currency and forward
contracts ................................................... 7,998,701 11,183,938
Net unrealized appreciation of investments, foreign currency
and forward contracts ....................................... 1,718,152 1,440,757
------------ ------------
Net increase resulting from operations......................... 10,908,865 13,870,242
------------ ------------
Dividends from net investment income:
Class A ..................................................... (365,226) (7,266)
Class S ..................................................... (910,584) (1,418,981)
------------ ------------
(1,275,810) (1,426,247)
------------ ------------
Distributions from net realized gains:
Class A ..................................................... (850,522) (80,854)
Class S ..................................................... (463,669) (7,708,753)
------------ ------------
(1,314,191) (7,789,607)
------------ ------------
Net increase (decrease) from fund share transactions (Note 6) . (4,788,166) 9,203,933
------------ ------------
Total increase in net assets................................... 3,530,698 13,858,321
NET ASSETS
Beginning of year ............................................. 60,364,001 63,894,699
------------ ------------
End of year (including undistributed net investment income of
$606,033 and $473,826, respectively) ........................ $ 63,894,699 $ 77,753,020
============ ============
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
October 31, 1997

NOTE 1

State Street Research Strategic Portfolios: Aggressive (the "Fund"), is a series
of State Street Research Financial Trust (the "Trust"), which was organized as a
Massachusetts business Trust in November, 1986 and is registered under the
Investment Company Act of 1940, as amended, as an open- end management
investment company. The Fund commenced operations in May, 1994. The Trust
consists presently of four separate funds: State Street Research Strategic
Portfolios: Aggressive, State Street Research Government Income Fund, State
Street Research Strategic Portfolios: Moderate and State Street Research
Strategic Portfolios: Conservative.

The investment objective of the Fund is to provide high total return from,
primarily, growth of capital and secondarily, current income, consistent with
reasonable investment risk.

The Fund is authorized to issue four classes of shares. Before November 1, 1997,
Class S shares were designated Class C. Only Class S shares are presently
available for purchase. Class A, Class B and Class C shares are not being
offered at this time. Effective March 27, 1997, the Fund discontinued offering
Class A shares. Class A shares are subject to an initial sales charge of up to
4.50% and an annual service fee of 0.25% of average daily net assets. Class B
shares will be subject to a contingent deferred sales charge on certain
redemptions made within five years of purchase and pay annual distribution and
service fees of 1.00%. Class B shares automatically convert into Class A shares
(which pay lower ongoing expenses) at the end of eight years after the issuance
of the Class B shares. Class C shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase. Class
C shares also pay annual distribution and service fees of 1.00%. Class S shares
are only offered through certain retirement accounts, advisory accounts of State
Street Research & Management Company (the "Adviser") and special programs. No
sales charge is imposed at the time of purchase or redemption of Class S shares.
Class S shares do not pay any distribution or service fees. The Fund's expenses
are borne pro-rata by each class, except that each class bears expenses, and has
exclusive voting rights with respect to provisions of the Plan of Distribution,
related specifically to that class. The Trustees declare separate dividends on
each class of shares.

G. FORWARD CONTRACTS AND FOREIGN CURRENCIES
The Fund enters into forward foreign currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings and to hedge certain purchase and sale commitments
denominated in foreign currencies. A forward foreign currency exchange contract
is an obligation by the Fund to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the origination date of the
contract. Forward foreign currency exchange contracts establish an exchange rate
at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. Risks may arise from the potential inability of a counterparty
to meet the terms of a contract and from unanticipated movements in the value of
foreign currencies relative to the U.S. dollar. The aggregate principal amount
of forward currency exchange contracts is recorded in the Fund's accounts. All
commitments are marked-to- market at the applicable transaction rates resulting
in unrealized gains or losses. The Fund records realized gains or losses at the
time the forward contracts are extinguished by entry into a closing contract or
by delivery of the currency. Neither spot transactions nor forward currency
exchange contracts eliminate fluctuations in the prices of the Fund's portfolio
securities or in foreign exchange rates, or prevent loss if the price of these
securities should decline.

NOTE 2

The Trust and the Adviser, an indirect wholly owned subsidiary of Metropolitan
Life Insurance Company ("Metropolitan"), have entered into an agreement under
which the Adviser earns monthly fees at an annual rate of 0.75% of the Fund's
average daily net assets. In consideration of these fees, the Adviser furnishes
the Fund with management, investment advisory, statistical and research
facilities and services. The Adviser also pays all salaries, rent and certain
other expenses of management. During the year ended October 31, 1997, the fees
pursuant to such agreement amounted to $521,687.

The fees of the Trustees not currently affiliated with the Adviser amounted to
$17,040 during the year ended October 31, 1997.

NOTE 3

The Distributor and its affiliates may from time to time and in varying amounts
voluntarily assume some portion of fees or expenses relating to the Fund. During
the year ended October 31, 1997, the amount of such expenses assumed by the
Distributor and its affiliates was $122,711.

NOTE 4

For the year ended October 31, 1997, purchases and sales of securities,
exclusive of short-term obligations, aggregated $89,692,029 and $87,638,492
(including $15,025,249 and $16,900,880 of U.S. Government securities),
respectively.

NOTE 5

The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the "Plan")
under the Investment Company Act of 1940. Under the Plan, the Fund will pay
annual service fees to the Distributor at a rate of 0.25% of average daily net
assets for Class A, Class B and Class C shares. In addition, the Fund will pay
annual distribution fees of 0.75% of average daily net assets for Class B and
Class C shares. The Distributor uses such payments for personal service and/or
the maintenance or servicing of shareholder accounts, to reimburse securities
dealers for distribution and marketing services, to furnish ongoing assistance
to investors and to defray a portion of its distribution and marketing expenses.
For the period November 1, 1996 to March 27, 1997, fees pursuant to such plan
amounted to $266 for Class A shares.

NOTE 6

The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At October 31, 1997,
Metropolitan owned 3,605,965 Class S shares of the Fund.

Share transactions were as follows:

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
----------------------------------------------------------------------
1996 1997
---------------------------------- ----------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ................... -- $ -- 8,328 $ 101,499
Issued upon reinvestment of:
Dividend from net investment
income ................... -- -- 54 615
Distributions from net
realized gains ........... 78,245 850,522 606 6,845
Shares repurchased ............ (3,647,468) (42,310,619) (59,010) (669,014)
---------- -------------- ------- -----------
Net decrease .................. (3,569,223) $ (41,460,097) (50,022) $ (560,055)
========== ============== ======= ===========

<CAPTION>
CLASS S (FORMERLY CLASS C) SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ................... 5,031,860 $ 58,556,573 1,008,062 $12,442,073
Issued upon reinvestment of:
Dividends from net investment
income ................... 14,250 168,031 47,450 565,762
Distributions from net
realized gains ........... 42,616 463,669 683,399 7,708,745
Shares repurchased ............ (1,901,217) (22,516,342) (927,982) (10,952,592)
---------- -------------- ------- -----------
Net increase .................. 3,187,509 $ 36,671,931 810,929 $ 9,763,988
========== ============== ======= ===========
</TABLE>
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------

For a share outstanding throughout each year:
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31
------------------------------------------------------ NOVEMBER 1, 1996
1994(2) 1995(1) 1996(1) TO MARCH 27, 1997(1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.55 9.74 10.93 12.45
---- ---- ----- -----
Net investment income ($) 0.09 0.20 0.14 0.10
Net realized and unrealized gain on
investments, foreign currency and
forward contracts ($) 0.14 1.19 1.79 0.41
---- ---- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.23 1.39 1.93 0.51
---- ---- ----- -----
Dividends from net investment income ($) (0.04) (0.20) (0.17) (0.13)
Distributions from net realized gains ($) -- -- (0.24) (1.48)
---- ---- ----- -----
TOTAL DISTRIBUTIONS ($) (0.04) (0.20) (0.41) (1.61)
---- ---- ----- -----
NET ASSET VALUE, END OF YEAR ($) 9.74 10.93 12.45 11.35
==== ===== ===== =====
Total return(3) (%) 2.41(4) 14.49 18.05 4.18(4)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 50,999 39,555 623 --
Ratio of operating expenses to average net
assets (%) 1.35(5) 1.35 1.35 1.35(5)
Ratio of net investment income to average
net assets (%) 2.01(5) 1.98 1.43 1.69(5)
Portfolio turnover rate (%) 37.75 127.44 145.59 136.48
Average commission rate ($)(6) -- -- 0.0251 0.0244
*Reflects voluntary assumption of fees or
expenses per share in each year (Note 3)
($) 0.01 0.02 0.01 0.02

CLASS S (FORMERLY CLASS C)
-------------------------------------------------------------------
YEARS ENDED OCTOBER 31
-------------------------------------------------------------------
1994(2) 1995(1) 1996(1) 1997(1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.55 9.74 10.94 12.43
---- ---- ----- -----
Net investment income ($) 0.10 0.22 0.22 0.22
Net realized and unrealized gain on investments,
foreign currency and forward contracts ($) 0.14 1.20 1.74 2.27
---- ---- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.24 1.42 1.96 2.49
---- ---- ----- -----
Dividends from net investment income ($) (0.05) (0.22) (0.23) (0.26)
Distributions from net realized gains ($) -- -- (0.24) (1.48)
---- ---- ----- -----
TOTAL DISTRIBUTIONS ($) (0.05) (0.22) (0.47) (1.74)
---- ---- ----- -----
NET ASSET VALUE, END OF YEAR ($) 9.74 10.94 12.43 13.18
==== ===== ===== =====
Total return(3) (%) 2.50(4) 14.85 18.37 22.54
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 102 20,809 63,272 77,753
Ratio of operating expenses to average net assets (%) 1.10(5) 1.10 1.10 1.10
Ratio of net investment income to average net assets(%) 2.26(5) 2.13 1.78 1.79
Portfolio turnover rate (%) 37.75 127.44 145.59 136.48
Average commission rate ($)(6) -- -- 0.0251 0.0244
*Reflects voluntary assumption of fees or expenses per
share in each year (Note 3) ($) 0.01 0.02 0.03 0.02
- ------------------------------------------------------------------------------------------------------------------------------

(1) Per-share figures have been calculated using the average shares method.
(2) May 16,1994 (commencement of operations) to October 31, 1994.
(3) Does not reflect any front-end or contingent deferred sales charges. Total return would be lower if the Distributor
and its affiliates had not voluntarily assumed a portion of the Fund's expenses.
(4) Not Annualized.
(5) Annualized.
(6) Average commission rate per share paid for security trades beginning with the fiscal year ended October 31, 1996.
</TABLE>
<PAGE>

- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------

TO THE TRUSTEES OF STATE STREET RESEARCH FINANCIAL TRUST
AND THE SHAREHOLDERS OF STATE STREET RESEARCH
STRATEGIC PORTFOLIOS: AGGRESSIVE

In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, 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 State Street Research Strategic
Portfolios: Aggressive (a series of State Street Research Financial Trust,
hereafter referred to as the "Trust") at October 31, 1997, and the results of
its operations, the changes in its net assets and the financial highlights for
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 Trust'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 October 31, 1997 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
Boston, Massachusetts
December 12, 1997
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- -------------------------------------------------------------------------------

The Fund provided shareholders with attractive returns for the year ended
October 31, 1997. Class S shares (formerly Class C) gained 22.54%. That was
higher than its peer group, the Lipper flexible portfolio fund average, which
rose 19.22%. It was below the S&P 500, which gained 32.10%. That's not
surprising since the S&P 500 is a measure of common stock performance, and the
Fund had 30% of its assets invested in bonds and cash.

Strategic Portfolios: Aggressive seeks high total return primarily through
capital appreciation, and secondarily through current income, by investing in
common stocks and bonds. The Manager's strategy is to adjust the asset
allocation to take advantage of changing market conditions.

In general, large company stocks outperformed small and mid-sized company stocks
during the first half of the year. But small and mid-cap stocks came back
stronger in the second half of the year. The Fund benefited from reducing its
exposure to large company stocks and shifting its emphasis to small and mid-cap
stocks as the market began to shift its favor to these groups. A decision to cut
back on the Fund's equity holdings hurt performance. However, adding proceeds to
high yield bonds was a good call. High yield bonds were the best performing
segment in the fixed-income markets during the period.

October 31, 1997

All returns represent past performance, which is no guarantee of future results.
The investment return and principal value of an investment made in the Fund will
fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. All returns assume reinvestment of capital gain distributions and
income dividends. "S" shares, offered without a sales charge, are available
through certain employee benefit plans and special programs. Before November 1,
1997, Class S shares were designated Class C. The Standard & Poor's 500
Composite Index (S&P 500) is a market-value weighted index composed of 500
widely held common stocks. The Lehman Brothers Government/Corporate Bond Index
is a market-value weighted index of U.S. government treasury and agency
securities, corporate and yankee bonds. The indices are unmanaged and do not
take sales charges into consideration. Direct investment in the indices is not
possible; results are for illustrative purposes only.

CHANGE IN VALUE OF $10,000 BASED ON THE
S&P 500 AND THE LEHMAN BROTHERS
GOVERNMENT/CORPORATE BOND INDEX COMPARED
TO CHANGE IN VALUE OF $10,000 INVESTED IN
STRATEGIC PORTFOLIOS: AGGRESSIVE

Strategic Portfolios: S&P Lehman Brothers
Aggressive 500 Gov't/Corp Bond
--------------------- ------ ---------------
5/16/94 $ 10,000 $ 10,000 $ 10,000
10/31/94 10,250 10,549 10,006
10/31/95 11,772 13,334 11,622
10/31/96 13,935 16,546 12,250
10/31/97 17,076 21,856 13,329
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
- -------------------------------------------------------------------------------
FUND INFORMATION, OFFICERS AND TRUSTEES OF STATE STREET RESEARCH FINANCIAL TRUST
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FUND INFORMATION OFFICERS TRUSTEES
<S> <C> <C>
STATE STREET RESEARCH RALPH F. VERNI RALPH F. VERNI
STRATEGIC PORTFOLIOS: AGGRESSIVE Chairman of the Board, Chairman of the Board,
One Financial Center President and President, Chief Executive
Boston, MA 02111 Chief Executive Officer Officer and Director,
State Street Research &
INVESTMENT ADVISER PETER C. BENNETT Management Company
State Street Research & Vice President
Management Company
One Financial Center JOHN H. KALLIS STEVE A. GARBAN
Boston, MA 02111 Vice President Retired; formerly Senior Vice
President for Finance and
DISTRIBUTOR THOMAS A. SHIVELY Operations and Treasurer, The
State Street Research Vice President Pennsylvania State University
Investment Services, Inc.
One Financial Center GERARD P. MAUS
Boston, MA 02111 Treasurer MALCOLM T. HOPKINS
Former Vice Chairman of the
SHAREHOLDER SERVICES JOSEPH W. CANAVAN Board and Chief Financial
State Street Research Assistant Treasurer Officer, St. Regis Corp.
Service Center
P.O. Box 8408 DOUGLAS A. ROMICH
Boston, MA 02266-8408 Assistant Treasurer EDWARD M. LAMONT
1-800-562-0032 Formerly in banking
FRANCIS J. MCNAMARA, III (Morgan Guaranty Trust
CUSTODIAN Secretary and General Counsel Company of New York);
State Street Bank and presently engaged in private
Trust Company DARMAN A. WING investments and civic affairs
225 Franklin Street Assistant Secretary and
Boston, MA 02110 Assistant General Counsel
ROBERT A. LAWRENCE
LEGAL COUNSEL AMY L. SIMMONS Associate, Saltonstall & Co.
Goodwin, Procter & Hoar LLP Assistant Secretary
Exchange Place
Boston, MA 02109 DEAN O. MORTON
Retired; formerly Executive
INDEPENDENT ACCOUNTANTS Vice President, Chief
Price Waterhouse LLP Operating Officer and Director,
160 Federal Street Hewlett-Packard Company
Boston, MA 02110

THOMAS L. PHILLIPS
Retired; formerly Chairman of
the Board and Chief Executive
Officer, Raytheon Company

TOBY ROSENBLATT
President,
The Glen Ellen Company
Vice President,
Founders Investments Ltd.

MICHAEL S. SCOTT MORTON
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology

JEPTHA H. WADE
Retired; formerly Of Counsel,
Choate, Hall & Stewart
</TABLE>
<PAGE>

--------------
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE Bulk Rate
One Financial Center U.S. Postage
Boston, MA 02111 PAID
Randolph, MA
Permit No. 600
--------------

QUESTIONS? COMMENTS?
CALL us at 1-800-562-0032
WRITE us at:
State Street Research
Service Center
P.O. Box 8408
Boston, MA 02266-8408
E-MAIL us at:
[email protected]

[graphic omitted] STATE STREET RESEARCH

This report is prepared for the general information of current shareholders.

When used in the general solicitation of investors, this report must be
accompanied or preceded by a current State Street Research Strategic Portfolios:
Aggressive prospectus. When used after December 31, 1997, this report must be
accompanied by a current Quarterly Performance Update.

Portfolio changes should not be considered recommendations for action by
individual investors.

CONTROL NUMBER: 4492-971224(0199)SSR-LD SP-112E-1297IBSRN
<PAGE>

STATE STREET RESEARCH
----------------------------------
STRATEGIC PORTFOLIOS: CONSERVATIVE
----------------------------------

ANNUAL REPORT

October 31, 1997

- -------------
WHAT'S INSIDE
- -------------

FROM THE CHAIRMAN
An exciting year
to be an investor

PORTFOLIO MANAGERS REVIEW
Stocks, high yield bonds
drive performance

FUND INFORMATION
Facts and figures

PLUS, COMPLETE PORTFOLIO HOLDINGS
AND FINANCIAL STATEMENTS

[graphic omitted]

For Excellence
in
Shareholder Service

STATE STREET RESEARCH FUNDS
<PAGE>
FROM THE CHAIRMAN

[Photo of Ralph F. Verni]

DEAR SHAREHOLDER:
In the past 12 months, both stock and bond investors have reaped the rewards of
a very favorable financial environment. The nation's economy continued to expand
at a moderate, but healthy pace. Inflation and interest rates remain low.
Employment is high, personal income has increased, and Americans are the most
confident they have been in nearly 30 years. Although history teaches us that a
convergence of so many positive factors is rare, no major concerns appear to
threaten the economy. Even the recent volatility in the financial markets,
influenced by weakness in Southeast Asia, has failed to seriously dampen
investor optimism much. However, it reminds us that stock markets can go down as
well as up.

Regardless of the environment, we believe there are certain basic principles
that can help to keep you focused on your long-term goals: Think long term.
Maintain a diversified portfolio. And discipline yourself to stay with your
investment program. If you have questions or concerns about your investments,
review them with your investment professional. And, thank you for investing with
State Street Research.

Sincerely,

/s/ Ralph F. Verni

Ralph F. Verni
Chairman

October 31, 1997

- -------------------------------------------------------------------------------
FUND INFORMATION (all data are for periods ended October 31, 1997, except
where noted)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEC AVERAGE ANNUAL COMPOUND RATES OF AVERAGE ANNUAL COMPOUND
RETURN FOR PERIODS ENDED 9/30/97(2)(3)(4) RATES OF RETURN(2)(3)(4)
- -------------------------------------------- -------------------------------------------
LIFE OF FUND LIFE OF FUND
(since 5/16/94) 3 YEARS 1 YEAR (since 5/16/94) 3 YEARS 1 YEAR
- ------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class S +12.53% +13.80% +16.65% Class S +12.12% +13.66% +14.11%
- ------------------------------------------- -------------------------------------------
(1) The Standard & Poor's 500 Composite Index (S&P 500) is a market-value
weighted index composed of 500 widely held common stocks. The Russell 2000
Index is a weighted index comprised of the 2000 smallest stocks within the
Russell 3000 (a weighted index of the 3000 largest capitalized U.S.
companies). The Lehman Brothers Aggregate Bond Index is a market-value
weighted index of fixed-rate debt issues, including U.S. treasury, agency,
and corporate bond issues, and mortgage-backed securities. The First Boston
High Yield Index is a commonly used measure of high yield bond performance.
The indices are unmanaged and do not take sales charges into consideration.
Direct investment in the indices is not possible; results are for
illustrative purposes only.
(2) All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or
less than their original cost. All returns assume reinvestment of capital
gain distributions and income dividends.
(3) "S" shares, offered without a sales charge, are available through certain
employee benefit plans and special programs.
(4) Before November 1, 1997, Class S shares were designated Class C.
</TABLE>

Performance results for the Fund are increased by the voluntary reduction of
Fund fees and expenses, without subsidization, performance would have been
lower.
<PAGE>

PORTFOLIO MANAGER'S REVIEW
Stocks, high yield bonds drive performance

[Photo of Peter Bennett]

Peter Bennett
Portfolio Manager

Peter Bennett, portfolio manager and team leader of State Street Research
Strategic Portfolios: Conservative, comments on the year ended October 31, 1997
and the Fund's strategy for the year ahead.

Q: HOW DID THE FUND PERFORM LAST YEAR?
A: The Fund had a strong year, Class S shares (formerly Class C) gained 14.11%
for the 12 months ended October 31, 1997. It outperformed the average flexible
income fund, which rose 8.10%, according to Lipper Analytical Services.

Q: WHAT ACCOUNTED FOR THE FUND'S STRONG PERFORMANCE?
A: A decision to underweight large-cap growth stocks mid way through the year
and to overweight high-yield bonds helped performance. Large cap stocks were the
market's strongest performers early in the year, and the Fund benefited from its
heavy weighting in the group. Overall, small-cap growth, mid-cap value, and
high-yield bonds were the Fund's strongest-performing positions for the period.

Q: HOW DID THE FUND'S ASSET ALLOCATION AFFECT PERFORMANCE?
A: Early in the period, we decided to make modest reductions in the Fund's
exposure to stocks and add to bonds. That held performance back. However, we
believe it also reduced the Fund's risk exposure. We also raised the Fund's
international fixed-income position; however, so far that shift has had no
meaningful effect on performance.

Q: HOW WERE ASSETS DIVIDED AT THE END OF THE YEAR?
A: As of October 31, 1997, 25% of the Fund's assets were invested in stocks, 70%
in bonds and 5% in cash. That's approximately the Fund's targeted normal mix.

Q: WHAT IS YOUR OUTLOOK FOR THE PERIOD AHEAD?
A: The U.S. economy continues to grow at a moderate pace, driven by strong
consumer and capital spending. Inflation remains stable. Consensus earnings
forecasts for 1997 have been revised upward, primarily as a result of
productivity improvements. However, the gain in earnings could be lower in 1998.
The recent turmoil in Asia has made us cautious about international stock
markets. However there could be downward pressure on interest rates, and that
would be favorable for international bond markets.

Equities 25% OIL 2.6%
Bonds 70% INSURANCE 2.5%
Cash 5% RETAIL TRADE 1.9%
CHEMICAL 1.3%
BANK 1.2%
Total: 9.5%
TOP 5 BOND SECTORS
(by percentage of net assets)

U.S. TREASURY 23.5%
FINANCE/MORTGAGE 18.6%
U.S. AGENCY MORTGAGE 15.1%
FOREIGN GOVERNMENT 5.6%
CORPORATE 3.2%
Total: 66.0%
<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE

- -------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------
October 31, 1997

- -------------------------------------------------------------------------
VALUE
SHARES (NOTE 1)
- -------------------------------------------------------------------------

EQUITY SECURITIES 25.3%
BASIC INDUSTRIES 4.1%
CHEMICAL 1.3%
Agrium Inc. ............................ 14,800 $ 165,575
Cabot Corp. ............................ 5,600 137,550
Ciba Specialty Chemicals AG* ........... 70 6,874
E.I. Du Pont De Nemours & Co. .......... 1,200 68,250
Thiokol Corp. .......................... 1,400 128,187
-----------
506,436
-----------
DIVERSIFIED 0.4%
Hoya Corp. ............................. 1,000 34,732
Johnson Controls Inc. .................. 2,500 112,188
-----------
146,920
-----------
ELECTRICAL EQUIPMENT 0.3%
Asia Pacific Wire & Cable Corp. Ltd.* .. 3,800 35,150
General Electric Co. ................... 1,600 103,300
-----------
138,450
-----------
ELECTRONIC EQUIPMENT 0.1%
Sony Corp.* ............................ 300 24,902
-----------
FOREST PRODUCT 0.6%
Abitibi-Consolidated Inc. .............. 7,600 108,300
Aracruz Celulose SA ADR ................ 1,650 24,750
Stone Container Corp. .................. 7,800 94,088
-----------
227,138
-----------
MACHINERY 0.6%
Sundstrand Corp. ....................... 2,600 141,375
Tyco International Ltd. ................ 2,100 79,275
-----------
220,650
-----------
METAL & MINING 0.8%
Alumax Inc.* ........................... 4,000 130,000
Kennametal Inc. ........................ 3,600 174,600
RTZ Corp.* ............................. 1,421 18,310
-----------
322,910
-----------
Total Basic Industries ................................. 1,587,406
-----------
CONSUMER CYCLICAL 4.2%
AIRLINE 0.1%
China Southern Airlines Co. Ltd.* ...... 62,400 27,643
-----------
AUTOMOTIVE 1.0%
Exide Corp. ............................ 6,900 160,856
Lear Corp.* ............................ 4,200 201,862
Renault SA* ............................ 1,000 27,825
-----------
390,543
-----------
BUILDING 0.2%
Lafarge Corp. .......................... 2,200 66,825
-----------
Hotel & Restaurant 0.4%
Harrah's Entertainment Inc.* ........... 8,800 173,250
-----------
RECREATION 0.6%
Cox Communications Inc. Cl. A* ......... 2,600 79,950
International Game Technology Inc. ..... 2,300 58,794
US West Inc.* .......................... 3,900 98,475
-----------
237,219
-----------
RETAIL TRADE 1.9%
Hannaford Brothers Co. ................. 3,600 $ 136,125
Home Depot Inc. ........................ 1,300 72,313
Kroger Co.* ............................ 7,300 238,162
Rite Aid Corp. ......................... 1,800 106,875
Staples Inc.* .......................... 5,300 139,125
Wal-Mart Stores, Inc. .................. 1,000 35,125
-----------
727,725
-----------
Total Consumer Cyclical ................................ 1,623,205
-----------
CONSUMER STAPLE 4.9%
AIRPORT 0.2%
Ball Corp. ............................. 2,300 80,500
-----------
BUSINESS SERVICE 0.3%
HBO & Co. .............................. 1,800 78,300
USA Waste Services Inc.* ............... 900 33,300
-----------
111,600
-----------
DRUG 1.0%
Eli Lilly & Co. ........................ 1,600 107,000
Novartis AG ............................ 70 109,631
Pfizer Inc. ............................ 1,000 70,750
Schering-Plough Corp. .................. 1,700 95,306
-----------
382,687
-----------
FOOD & BEVERAGE 0.6%
Coca-Cola Enterprises Inc. ............. 800 22,500
H.J. Heinz Co. ......................... 1,700 78,944
Whitman Corp. .......................... 5,500 144,375
-----------
245,819
-----------
HOSPITAL SUPPLY 1.2%
Baxter International Inc. .............. 900 41,625
Boston Scientific Corp.* ............... 600 27,300
Guidant Corp. .......................... 1,600 92,000
PacifiCare Health Systems, Inc. Cl. A* . 2,200 139,975
Tenet Healthcare Corp. ................. 4,500 137,531
-----------
438,431
-----------
PERSONAL CARE 0.2%
Procter & Gamble Co. ................... 800 54,400
-----------
PRINTING & PUBLISHING 1.1%
Hollinger International, Inc. Cl. A* ... 14,200 185,487
Torstar Corp. Cl. B* ................... 1,600 54,664
Valassis Communications Inc. ........... 6,500 191,750
-----------
431,901
-----------
TOBACCO 0.3%
Dimon Inc. ............................. 3,800 98,562
Philip Morris Companies, Inc. .......... 800 31,700
-----------
130,262
-----------
Total Consumer Staple .................................. 1,875,600
-----------
ENERGY 3.4%
OIL 2.6%
British Petroleum Co. PLC* ............. 2,100 30,864
Energy Africa Ltd.* .................... 15,700 82,374
ENI SPA ADR ............................ 1,000 56,375
Fletcher Challenge Ltd.* ............... 6,600 29,588
Oryx Energy Co.* ....................... 7,800 214,987
PTT Exploration & Production Public Co. Ltd.* 300 2,998
Royal Dutch Petroleum Co. .............. 1,200 63,150
Seagull Energy Corp.* .................. 7,500 183,281
Tosco Corp. ............................ 4,900 161,700
Total SA Cl. B* ........................ 717 79,553
Total SA Cl. B ADR* .................... 1,500 83,250
Woodside Petroleum Ltd. ADR* ........... 3,900 32,940
-----------
1,021,060
-----------
OIL SERVICE 0.8%
Mapco Inc. ............................. 5,500 181,500
Schlumberger Ltd. ...................... 1,300 113,750
-----------
295,250
-----------
Total Energy ........................................... 1,316,310
-----------
FINANCE 3.9%
BANK 1.2%
BankAmerica Corp. ...................... 1,300 92,950
Fleet Financial Group Inc. ............. 2,800 180,075
Mellon Bank Corp. ...................... 3,300 170,156
-----------
443,181
-----------
FINANCIAL SERVICE 0.2%
Federal National Mortgage Association .. 1,700 82,344
-----------
INSURANCE 2.5%
Ace Ltd. ............................... 3,200 297,400
AMBAC Inc. ............................. 4,100 173,225
General Re Corp. ....................... 300 59,156
Mid Ocean Ltd. ......................... 3,000 194,625
Travelers Group Inc. ................... 1,000 70,000
Travelers Property Casualty Corp. Cl. A 3,200 115,600
UNUM Corp. ............................. 1,000 48,750
-----------
958,756
-----------
Total Finance .......................................... 1,484,281
-----------
SCIENCE & TECHNOLOGY 3.6%
AEROSPACE 0.3%
Boeing Co. ............................. 2,126 101,782
-----------
COMPUTER SOFTWARE & SERVICE 0.6%
Cisco Systems Inc.* .................... 700 57,422
Nintendo Co. Ltd.* ..................... 400 34,566
Sema Group PLC* ........................ 1,600 35,837
TT Tieto Oy Cl. B* ..................... 200 22,423
Western Digital Corp.* ................. 2,600 77,837
WM-Data AB Cl. B* ...................... 1,000 17,357
-----------
245,442
-----------
ELECTRONIC COMPONENTS 1.1%
AMP Inc. ............................... 1,300 58,500
Hitachi Ltd. ........................... 4,000 30,744
Intel Corp.* ........................... 700 53,900
Lernout & Hauspie Speech Products NV ADR* 1,700 82,450
Rohm Co.* .............................. 1,000 98,878
Texas Instruments Inc. ................. 900 96,019
-----------
420,491
-----------
ELECTRONIC EQUIPMENT 0.7%
KLA-Tencor Corp.* ...................... 900 $ 39,544
L.M. Ericsson Telephone Co. ADR Cl. B* . 2,190 96,908
L.M. Ericsson Telephone Co. Cl. B* ..... 2,568 113,144
Teradyne Inc.* ......................... 700 26,206
-----------
275,802
-----------
OFFICE EQUIPMENT 0.9%
Compaq Computer Corp. .................. 700 44,625
Hewlett-Packard Co. .................... 500 30,844
International Business Machines Corp. .. 600 58,837
Quantum Corp.* ......................... 2,200 69,575
Unisys Corp. ........................... 11,900 158,419
-----------
362,300
-----------
Total Science & Technology ............................. 1,405,817
-----------
UTILITY 1.2%
ELECTRIC 0.9%
Edison International Corp. ............. 4,300 110,187
OGE Energy Corp. ....................... 2,500 121,094
Western Resources Inc. ................. 2,800 104,300
-----------
335,581
-----------
Natural Gas 0.1%
TransTexas Gas Corp.* .................. 1,800 34,200
-----------
Telephone 0.2%
Telecom Italia SPA* .................... 5,300 33,215
WorldCom Inc.* ......................... 1,900 63,888
-----------
97,103
-----------
Total Utility .......................................... 466,884
-----------
Total Equity Securities (Cost $8,229,749................ 9,759,503
-----------

The accompanying notes are an integral part of the financial statements.

<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY VALUE
AMOUNT DATE (NOTE 1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 70.3%
U.S. TREASURY 23.5%
U.S. Treasury Bond, 12.00% .......................... $ 200,000 8/15/2013 293,062
U.S. Treasury Bond, 8.75% ........................... 1,125,000 5/15/2017 1,447,031
U.S. Treasury Bond, 8.125% .......................... 375,000 8/15/2021 462,364
U.S. Treasury Bond, 6.25% ........................... 875,000 8/15/2023 878,141
U.S. Treasury Note, 6.75% ........................... 100,000 5/31/1999 101,656
U.S. Treasury Note, 6.875% .......................... 1,050,000 8/31/1999 1,071,987
U.S. Treasury Note, 7.125% .......................... 850,000 9/30/1999 872,448
U.S. Treasury Note, 6.25% ........................... 175,000 8/31/2000 177,406
U.S. Treasury Note, 6.625% .......................... 675,000 7/31/2001 694,616
U.S. Treasury Note, 7.875% .......................... 850,000 11/15/2004 947,614
U.S. Treasury Note, 6.50% ........................... 1,650,000 8/15/2005 1,711,875
U.S. Treasury Note, 6.875% .......................... 100,000 5/15/2006 106,391
U.S. Treasury Note Inflation
Indexed, 3.375% ................................... 126,850 1/15/2007 125,145
U.S. Treasury STRIPS, 0.00% ......................... 275,000 5/15/2007 155,315
-----------
9,045,051
-----------
U.S. AGENCY MORTGAGE 15.1%
Federal Home Loan Mortgage
Corp., 7.50% ...................................... $ 584,616 2/01/2027 $ 597,583
Federal Home Loan Mortgage Corp.
Gold, 7.00% ....................................... 799,256 6/01/2024 806,993
Federal Home Loan Mortgage Corp.
Gold, 7.50% ....................................... 498,635 8/01/2024 511,101
Federal Home Loan Mortgage Corp.
Series 29-H PAC, 6.50% ............................ 125,000 3/25/2023 125,272
Federal Home Loan Mortgage Corp.
TBA, 7.00% ........................................ 500,000 12/15/2012 506,250
Federal National Mortgage
Association, 7.50% ................................ 457,391 7/01/2012 469,109
Federal National Mortgage Association
Remic 93-102-H PAC, 6.80% ......................... 125,000 9/25/2022 127,460
Federal National Mortgage Association
TBA, 7.00% ........................................ 250,000 11/20/2004 253,125
Government National Mortgage
Association, 6.50% ................................ 119,802 2/15/2009 120,644
Government National Mortgage
Association, 6.50% ................................ 59,660 6/15/2009 60,079
Government National Mortgage
Association, 6.50% ................................ 270,576 7/15/2009 272,519
Government National Mortgage
Association, 8.00% ................................ 118,439 10/15/2017 124,694
Government National Mortgage
Association, 8.00% ................................ 59,837 11/15/2017 62,997
Government National Mortgage
Association, 6.50% ................................ 83,726 12/15/2023 83,046
Government National Mortgage
Association, 6.50% ................................ 423,955 7/15/2024 420,509
Government National Mortgage
Association, 7.00% ................................ 295,912 1/15/2025 298,407
Government National Mortgage
Association, 7.50% ................................ 360,594 11/15/2025 368,931
Government National Mortgage
Association, 7.50% ................................ 188,711 4/15/2026 192,957
Government National Mortgage
Association, 8.00% ................................ 114,040 9/15/2026 118,351
Government National Mortgage
Association TBA, 7.50% ............................ 300,000 11/17/2016 308,625
-----------
5,828,652
-----------
CANADIAN-YANKEE 3.1%
British Aerospace Finance Inc.
Note, 7.50%+ ...................................... 125,000 7/01/2027 133,018
DR Investments Sr. Note, 7.10%+ ..................... 125,000 5/15/2002 129,135
Petroliam Nasional BHD, 7.125%+ ..................... 125,000 8/15/2005 126,078
Petroliam Nasional BHD Note, 6.875%+ ................ 175,000 7/01/2003 175,297
Province of Quebec, 7.125% .......................... 250,000 2/09/2024 249,700
Usinor Sacilor ADR Note, 7.25% ...................... 350,000 8/01/2006 361,147
-----------
1,174,375
-----------
TRUST CERTIFICATES 1.2%
Cooperative Utility Trust
Certificates, 10.70% .............................. 225,000 9/15/2017 236,250
Rural Electric Cooperative Grantor Trust
Certificates, 10.11% .............................. 200,000 12/15/2017 210,934
-----------
447,184
-----------
FOREIGN GOVERNMENT 5.6%
Australian Dollar
Commonwealth of Australia, 9.00% .................... 775,000 9/15/2004 $ 643,340
Canadian Dollar
Government of Canada, 0.00% ......................... 225,000 2/05/1998 158,099
New Zealand Dollar
Government of New Zealand, 10.00% ................... 375,000 3/15/2002 261,534
Government of New Zealand, 8.00% .................... 300,000 11/15/2006 204,767
Pound Sterling
United Kingdom Treasury, 8.50% ...................... 475,000 12/07/2005 889,824
-----------
2,157,564
-----------
FINANCE/MORTGAGE 18.6%
American Express Credit Account Master
Trust 96-1A, 6.80% ................................ $ 250,000 12/15/2003 255,155
American Express Credit Account Master
Trust 97-1A, 6.40% ................................ 125,000 4/15/2005 126,250
Arcadia Automobile Trust
97-B A5, 6.70% .................................... 125,000 2/15/2005 126,875
Arcadia Automobile Trust
97-C A5, 6.55% .................................... 125,000 6/15/2005 126,504
Associates Corp. of North America
Sr. Note, 6.70% ................................... 250,000 5/29/2001 253,505
Associates Corp. of North America
Sr. Note, 6.45% ................................... 125,000 10/15/2001 125,794
Bank of New York Institutional Capital
Trust, 7.78%+ ..................................... 175,000 12/01/2026 178,115
BankAmerica Institutional Capital
Series B, 7.70%+ .................................. 350,000 12/31/2026 357,514
Chase Manhattan Master
Trust 96-3A, 7.04% ................................ 275,000 2/15/2005 282,389
Cigna Corp. Deb., 7.875% ............................ 175,000 5/15/2027 185,362
CIT Group Holdings Inc. Sr.
Note, 6.80% ....................................... 250,000 4/17/2000 253,757
Citicorp Capital Security
Note, 7.93% ....................................... 175,000 2/15/2027 181,783
Commercial Credit Group Inc.
Note, 6.45% ....................................... 250,000 7/01/2002 254,687
Commercial Credit Group Inc.
Sr. Note, 5.55% ................................... 250,000 2/15/2001 244,528
Countrywide Funding Corp.
Note, 6.58% ....................................... 200,000 9/21/2001 201,634
Countrywide Funding Corp.
Note, 6.28% ....................................... 200,000 1/15/2003 200,236
CWMBS Inc. Series
1994-3 A-7, 6.75% ................................. 225,000 3/25/2024 223,664
Discover Credit Card Trust
Series 1993 A, 6.25% .............................. 208,334 8/16/2000 208,138
DLJ Mortgage Acceptance Corp. 97-CF2
A1A, 6.55%+ ....................................... 125,000 11/15/2006 126,719
First USA Credit Card Master Trust
Series 1997-6A, 6.42% ............................. 250,000 3/17/2005 250,039
Ford Credit Auto Loan Master Trust
Series 95-1, 6.50% ................................ 375,000 8/15/2002 377,812
Ford Credit Auto Owner Trust
Series 1997B-A3, 6.05% ............................ 250,000 4/15/2001 251,113
GE Global Insurance Holding Corp.
Note, 7.00% ....................................... 150,000 2/15/2026 152,511
General Motors Acceptance Corp.
Note, 7.85% ....................................... 325,000 11/17/1997 325,231
Household Affinity Master Trust
Series 1994-1A, 5.8375% ........................... 175,000 5/15/2001 175,109
Household Finance Co. Note, 6.75% ................... 125,000 6/01/2000 126,450
MBNA Corp. Sr. Note, 6.875% ......................... 175,000 11/15/2002 176,587
Morgan Stanley Capital Inc.
97-WF1-1A, 6.83%+ ................................. 123,648 10/15/2006 125,967
Prime Credit Card Master Trust
Series 1995-1A, 6.75% ............................. 125,000 11/15/2005 127,148
Prudential Home Mortgage Securities Co.
Series 93-29 A-6 PAC, 6.75% ....................... 188,285 8/25/2008 189,462
Prudential Home Mortgage Securities Co.
Series 93-47 1-11 PAC, 6.10% ...................... 275,000 12/25/2023 264,429
Railcar Leasing LLC Sr. Sec.
Note, 6.75%+ ...................................... 113,004 7/15/2006 116,252
Sears Credit Account Master Trust
Series 1997-1A, 6.20% ............................. 125,000 7/16/2007 125,117
Structured Asset Securities Corp.
Note, 6.79% ....................................... 250,000 10/15/2034 253,487
Zurich Capital Trust, 8.376%+ ....................... 200,000 6/01/2037 213,358
-----------
7,162,681
-----------
CORPORATE 3.2%
Chevron Corp. Note, 8.11% ........................... 175,000 12/01/2004 186,013
Columbia/HCA Healthcare Corp.
Note, 6.87% ....................................... 150,000 9/15/2003 151,386
Columbia/HCA Healthcare
Corp. Deb., 7.50% ................................. 125,000 12/15/2023 123,800
Columbia/HCA Healthcare Corp.
Note, 8.12% ....................................... 125,000 8/04/2003 133,572
Columbia/HCA Healthcare Corp.
Note, 7.69% ....................................... 125,000 6/15/2025 118,989
Edison Mission Energy Funding Corp.
Series A Note, 6.77%+ ............................ 156,653 9/15/2003 158,658
Electronic Data Systems Corp.
Note, 6.85%+ ...................................... 250,000 5/15/2000 254,780
Loews Corp. Sr. Note, 7.00% ......................... 125,000 10/15/2023 118,111
-----------
1,245,309
-----------
Total Fixed Income Securities (Cost $26,400,955) .................................... 27,060,816
-----------
SHORT-TERM OBLIGATIONS 6.1%
American Express Credit Corp., 5.48% ................ 452,000 11/05/1997 452,000
American Express Credit Corp., 5.55% ................ 1,000,000 11/05/1997 1,000,000
General Electric Capital Corp., 5.53% ............... 884,000 11/07/1997 884,000
-----------
Total Short-Term Obligations (Cost $2,336,000) ...................................... 2,336,000
-----------
Total Investments (Cost $36,966,704) - 101.7% ....................................... 39,156,319
Cash and Other Assets, Less Liabilities - (1.7%) .................................... (655,620)
-----------
Net Assets - 100.0% ................................................................. $38,500,699
===========

- -------------------------------------------------------------------------------------------------------

Federal Income Tax Information:

At October 31, 1997, the net unrealized appreciation of investments based on cost
for Federal income tax purposes of $37,040,878 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an
excess of value over tax cost ..................................................... $ 2,530,684
Aggregate gross unrealized depreciation for all investments in which there is an
excess of tax cost over value ..................................................... (415,243)
-----------
$ 2,115,441
===========

</TABLE>
- -------------------------------------------------------------------------------

ADR Stands for American Depositary Receipt, representing ownership of foreign
securities.
* Nonincome-producing securities.
+ Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such securities among certain
qualified buyers. The total cost and market value of Rule 144A securities
owned at October 31, 1997 were $2,031,297 and $2,094,891 (5.44% of net
assets), respectively.
TBA Represents "TBA" (to be announced) purchase commitment to purchase
securities for a fixed unit price at a future date beyond cutomary
settlement time. Although the unit price has been established, the
principal value has not been finalized and may vary by no more than 1%.

The accompanying notes are an integral part of the financial statements.

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- -------------------------------------------------------------------------------

Forward currency exchange contracts outstanding at October 31, 1997, are as
follows:

<TABLE>
<CAPTION>
UNREALIZED
CONTRACT APPRECIATION DELIVERY
TOTAL VALUE PRICE (DEPRECIATION) DATE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sell Australian dollars, Buy U.S. dollars 31,000 AUD .73565 AUD $ 998 11/14/97
Sell Australian dollars, Buy U.S. dollars 57,000 AUD .70850 AUD 215 1/23/98
Sell Australian dollars, Buy U.S. dollars 140,000 AUD .73289 AUD 4,062 12/10/97
Sell Australian dollars, Buy U.S. dollars 236,000 AUD .74214 AUD 9,131 11/14/97
Sell Australian dollars, Buy U.S. dollars 250,000 AUD .73480 AUD 7,731 12/10/97
Sell Australian dollars, Buy U.S. dollars 135,000 AUD .70843 AUD 499 1/23/98
Sell British pounds, Buy U.S. dollars 100,000 GBP 1.62570 GBP (4,981) 12/01/97
Buy British pounds, Sell U.S. dollars 35,000 GBP 1.66430 GBP 392 12/01/97
Buy British pounds, Sell U.S. dollars 65,000 GBP 1.61130 GBP 4,174 12/01/97
Buy British pounds, Sell U.S. dollars 456,000 GBP 1.62700 GBP (20,448) 1/23/98
Sell British pounds, Buy U.S. dollars 52,000 GBP 1.62800 GBP (2,280) 1/23/98
Buy Italian lira, Sell U.S. dollars 59,360,000 ITL .00058 ITL 525 11/04/97
Buy Japanese yen, Sell U.S. dollars 1,003,175 JPY .00834 JPY (35) 11/05/97
Buy New Zealand dollars, Sell U.S. dollars 19,382 NZD .62240 NZD 5 11/06/97
Sell New Zealand dollars, Buy U.S. dollars 270,000 NZD .64200 NZD 6,087 1/23/98
Sell New Zealand dollars, Buy U.S. dollars 401,000 NZD .62400 NZD 1,822 1/23/98
Sell New Zealand dollars, Buy U.S. dollars 50,000 NZD .62414 NZD 234 1/23/98
Sell South African rand, Buy U.S. dollars 275,000 ZAR .20362 ZAR 643 2/27/98
Buy South African rand, Sell U.S. dollars 63,531 ZAR .20747 ZAR 21 11/03/97
--------
$ 8,795
========

</TABLE>

The accompanying notes are an integral part of the financial statements.
<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE

- ----------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- ----------------------------------------------------------------------------
October 31, 1997

ASSETS
Investments, at value (Cost $36,966,704) (Note 1) ......... $39,156,319
Cash ...................................................... 32,343
Receivable for securities sold ............................ 1,796,370
Interest and dividends receivable ......................... 381,861
Receivable for open forward contracts ..................... 36,539
Receivable for fund shares sold ........................... 18,074
Receivable from Distributor (Note 3) ...................... 11,777
Deferred organization costs and other assets (Note 1) 35,640
-----------
41,468,923
LIABILITIES
Payable for securities purchased .......................... 2,815,629
Payable for open forward contracts ........................ 27,744
Accrued transfer agent and shareholder services
(Note 2) ................................................ 24,004
Accrued management fee (Note 2) ........................... 19,724
Accrued trustees' fees (Note 2) ........................... 5,412
Payable for fund shares redeemed .......................... 459
Other accrued expenses .................................... 75,252
-----------
2,968,224
-----------
NET ASSETS ................................................ $38,500,699
===========
Net Assets consist of:
Undistributed net investment income ..................... $ 458,790
Unrealized appreciation of investments .................. 2,189,615
Unrealized appreciation of forward contracts and
foreign currency ...................................... 8,562
Accumulated net realized gain ........................... 2,661,943
Shares of beneficial interest ........................... 33,181,789
-----------
$38,500,699
===========
Net Asset Value, offering price and redemption price
per share of Class S shares ($38,500,699 / 3,401,702
shares of beneficial interest) .......................... $11.32
======

- ----------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------------
For the year ended October 31, 1997

INVESTMENT INCOME
Interest, net of foreign taxes of $1,252 ................... $1,781,273
Dividends, net of foreign taxes of $2,781 .................. 131,950
-----------
1,913,223
EXPENSES
Management fee (Note 2) .................................... 213,881
Custodian fee .............................................. 104,389
Transfer agent and shareholder services (Note 2) ........... 70,185
Reports to shareholders .................................... 31,511
Trustees' fees (Note 2) .................................... 16,965
Audit fee .................................................. 19,241
Registration fees .......................................... 14,253
Legal fees ................................................. 8,666
Amortization of organization costs (Note 1) ................ 7,482
Service fee-Class A (Note 5) ............................... 212
Miscellaneous .............................................. 7,307
-----------
494,092
Expenses borne by the Distributor (Note 3) ................. (172,748)
-----------
321,344
-----------
Net investment income ...................................... 1,591,879
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS,
FOREIGN CURRENCY AND FORWARD CONTRACTS
Net realized gain on investments (Notes 1 and 4) ........... 2,681,913
Net realized gain on forward contracts and foreign
currency (Note 1) ........................................ 107,196
-----------
Total net realized gain .................................. 2,789,109
-----------
Net unrealized appreciation of investments ................. 288,740
Net unrealized appreciation of forward contracts and
foreign currency ......................................... 11,970
-----------
Total net unrealized appreciation ........................ 300,710
-----------
Net gain on investments, foreign currency and forward
contracts ................................................ 3,089,819
-----------
Net increase in net assets resulting from operations ....... $ 4,681,698
===========

The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Years ended October 31
-------------------------------------
1996 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ......................................... $ 1,497,872 $ 1,591,879
Net realized gain on investments, foreign currency and forward
contracts ................................................... 1,710,843 2,789,109
Net unrealized appreciation of investments, foreign currency
and forward contracts 90,149 300,710
------------ ------------
Net increase resulting from operations ........................ 3,298,864 4,681,698
------------ ------------
Dividends from net investment income:
Class A ..................................................... (454,334) (9,655)
Class S ..................................................... (970,526) (1,610,768)
------------ ------------
(1,424,860) (1,620,423)
------------ ------------
Distributions from net realized gains:
Class A ..................................................... (651,838) (27,562)
Class S ..................................................... (42,210) (1,688,429)
------------ ------------
(694,048) (1,715,991)
------------ ------------
Net increase from fund share
transactions (Note 6) ....................................... 3,537,654 3,367,965
------------ ------------
Total increase in net assets .................................. 4,717,610 4,713,249
NET ASSETS
Beginning of year ............................................. 29,069,840 33,787,450
------------ ------------
End of year (including undistributed net
investment income of $410,962 and
$458,790, respectively) ..................................... $ 33,787,450 $ 38,500,699
============ ============
</TABLE>

The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
October 31, 1997

NOTE 1

State Street Research Strategic Portfolios: Conservative (the "Fund") is a
series of State Street Research Financial Trust (the "Trust"), which was
organized as a Massachusetts business trust in November, 1986 and is registered
under the Investment Company Act of 1940, as amended, as an open- end management
investment company. The Fund commenced operations in May, 1994. The Trust
consists presently of four separate funds: State Street Research Strategic
Portfolios: Conservative, State Street Research Government Income Fund, State
Street Research Strategic Portfolios: Moderate and State Street Research
Strategic Portfolios: Aggressive.

The investment objective of the Fund is to provide, primarily, a high level of
current income and, secondarily, long term growth of capital, consistent with
the preservation of capital and reasonable investment risk.

The Fund is authorized to issue four classes of shares. Before November 1, 1997,
Class S shares were designated Class C. Only Class S shares are presently
available for purchase. Class A, Class B and Class C shares are not being
offered at this time. Effective March 27, 1997, the Fund discontinued offering
Class A shares. Class A shares are subject to an initial sales charge of up to
4.50% and an annual service fee of 0.25% of average daily net assets. Class B
shares are subject to a contingent deferred sales charge on certain redemptions
made within five years of purchase and pay annual distribution and service fees
of 1.00%. Class B shares automatically convert into Class A shares (which pay
lower ongoing expenses) at the end of eight years after the issuance of the
Class B shares. Class C shares are subject to a contingent deferred sales charge
of 1.00% on any shares redeemed within one year of their purchase. Class C
shares also pay annual distribution and service fees of 1.00%. Class S shares
are only offered through certain retirement accounts, advisory accounts of State
Street Research & Management Company (the "Adviser") and special programs. No
sales charge is imposed at the time of purchase or redemption of Class S shares.
Class S shares do not pay any distribution or service fees. The Fund's expenses
are borne pro-rata by each class, except that each class bears expenses, and has
exclusive voting rights with respect to provisions of the Plan of Distribution,
related specifically to that class. The Trustees declare separate dividends on
each class of shares.

C. NET INVESTMENT INCOME
Net investment income is determined daily and consists of interest and dividends
accrued and discount earned, less the estimated daily expenses of the Fund.
Interest income is accrued daily as earned. Dividend income is accrued on the
ex-dividend date. Discount on debt obligations is amortized under the effective
yield method. The Fund is charged for expenses directly attributable to it,
while indirect expenses are allocated among all funds in the Trust.

G. FORWARD CONTRACTS AND FOREIGN CURRENCIES
The Fund enters into forward foreign currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings and to hedge certain purchase and sale commitments
denominated in foreign currencies. A forward foreign currency exchange contract
is an obligation by the Fund to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the origination date of the
contract. Forward foreign currency exchange contracts establish an exchange rate
at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. Risks may arise from the potential inability of a counterparty
to meet the terms of a contract and from unanticipated movements in the value of
foreign currencies relative to the U.S. dollar. The aggregate principal amount
of forward currency exchange contracts is recorded in the Fund's accounts. All
commitments are marked-to- market at the applicable transaction rates resulting
in unrealized gains or losses. The Fund records realized gains or losses at the
time the forward contracts are extinguished by entry into a closing contract or
by delivery of the currency. Neither spot transactions nor forward currency
exchange contracts eliminate fluctuations in the prices of the Fund's portfolio
securities or in foreign exchange rates, or prevent loss if the price of these
securities should decline.

NOTE 2

The Trust and the Adviser, an indirect wholly owned subsidiary of Metropolitan
Life Insurance Company ("Metropolitan"), have entered into an agreement under
which the Adviser earns monthly fees at an annual rate of 0.60% of the Fund's
average daily net assets. In consideration of these fees, the Adviser furnishes
the Fund with management, investment advisory, statistical and research
facilities and services. The Adviser also pays all salaries, rent and certain
other expenses of management. During the year ended October 31, 1997, the fees
pursuant to such agreement amounted to $213,881.

The fees of the Trustees not currently affiliated with the Adviser amounted to
$16,965 during the year ended October 31, 1997.

NOTE 3

The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended October 31, 1997, the amount of such expenses
assumed by the Distributor and its affiliates was $172,748.

NOTE 4

For the year ended October 31, 1997, purchases and sales of securities,
exclusive of short-term obligations, aggregated $43,776,107 and $39,551,568
(including $23,858,714 and $24,265,327 of U.S. Government securities),
respectively.

NOTE 5

NOTE 6

The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At October 31, 1997,
Metropolitan owned 2,223,045 Class S shares of the Fund.

Share transactions were as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
-------------------------------------------------------------------
1996 1997
---------------------------------- -------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Issued upon reinvestment of
distribution from net realized
gains .......................... 62,677 $ 651,777 -- $ --
Shares repurchased ............... (2,630,477) (28,093,497) (50,023) (528,933)
--------- ------------- ------- ------------
Net decrease ..................... (2,567,800) $ (27,441,720) (50,023) $ (528,933)
========= ============= ======= ============
<CAPTION>
CLASS S (FORMERLY CLASS C) SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares sold ...................... 3,511,159 $ 37,399,443 473,499 $ 5,172,822
Issued upon reinvestment of:
Dividends from net investment
income ........................... 21,689 229,456 47,885 512,492
Distributions from net realized
gains ............................ 4,058 42,210 161,263 1,688,429
Shares repurchased ............... (632,775) (6,691,735) (320,767) (3,476,845)
--------- ------------- ------- ------------
Net increase ..................... 2,904,131 $ 30,979,374 361,880 $ 3,896,898
========= ============= ======= ============
</TABLE>
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------

For a share outstanding throughout each year:
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------
YEARS ENDED OCTOBER 31
---------------------------------------------- NOVEMBER 1, 1996
1994)(2)) 1995(1) 1996(1) TO MARCH 27, 1997(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.55 9.56 10.56 11.03
---- ---- ----- -----
Net investment income ($) 0.20 0.47 0.42 0.21
Net realized and unrealized gain (loss) on
investments, foreign currency and forward
contracts ($) (0.09) 1.00 0.66 0.08
---- ---- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.11 1.47 1.08 0.29
---- ---- ----- -----
Dividends from net investment income ($) (0.10) (0.47) (0.36) (0.19)
Distributions from net realized gains ($) -- -- (0.25) (0.55)
---- ---- ----- -----
TOTAL DISTRIBUTIONS ($) (0.10) (0.47) (0.61) (0.74)
---- ---- ----- -----
NET ASSET VALUE, END OF YEAR ($) 9.56 10.56 11.03 10.58
==== ===== ===== =====
Total return(3) (%) 1.15(4) 15.84 10.55 2.67(4)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 25,014 27,637 552 --
Ratio of operating expenses to average net assets (%) 1.15(5) 1.15 1.15 1.15(5)
Ratio of net investment income to average net assets(%) 4.48(5) 4.74 4.35 4.18(5)
Portfolio turnover rate (%) 70.35 132.50 126.41 117.66
Average commission rate ($)(6) -- -- 0.0436 0.0308
*Reflects voluntary assumption of fees or expenses
per share in each year (Note 3) ($) 0.03 0.05 0.07 0.03

<CAPTION>
CLASS S (FORMERLY CLASS C)
-----------------------------------------------------------------------
YEARS ENDED OCTOBER 31
-----------------------------------------------------------------------
1994(2) 1995(1) 1996(1) 1997(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.55 9.56 10.56 10.93
---- ---- ----- -----
Net investment income ($) 0.21 0.52 0.50 0.49

Net realized and unrealized gain (loss) on
investments, foreign currency and forward contracts($) (0.09) 0.97 0.60 0.95
---- ---- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.12 1.49 1.10 1.44
---- ---- ----- -----
Dividends from net investment income ($) (0.11) (0.49) (0.48) (0.50)

Distributions from net realized gains ($) -- -- (0.25) (0.55)
---- ---- ----- -----
TOTAL DISTRIBUTIONS ($) (0.11) (0.49) (0.73) (1.05)
---- ---- ----- -----
NET ASSET VALUE, END OF YEAR ($) 9.56 10.56 10.93 11.32
==== ===== ===== =====
Total return(3) (%) 1.25(4) 16.11 10.82 14.11
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 100 1,433 33,236 38,501
Ratio of operating expenses to average net assets (%) 0.90(5) 0.90 0.90 0.90
Ratio of net investment income to average net assets(%) 4.73(5) 4.91 4.50 4.47
Portfolio turnover rate (%) 70.35 132.50 126.41 117.66
Average commission rate ($)(6) -- -- 0.0436 0.0308
*Reflects voluntary assumption of fees or expenses per
share in each year (Note 3) ($) 0.03 0.05 0.06 0.05

- -------------------------------------------------------------------------------------------------------------------------------

(1) Per-share figures have been calculated using the average shares method.
(2) May 16, 1994 (commencement of operations) to October 31, 1994.
(3) Does not reflect any front-end or contingent deferred sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid for security trades beginning with the fiscal year ended October 31, 1996.
</TABLE>
<PAGE>

- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------

TO THE TRUSTEES OF STATE STREET RESEARCH FINANCIAL TRUST
AND THE SHAREHOLDERS OF STATE STREET RESEARCH
STRATEGIC PORTFOLIOS: CONSERVATIVE

In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, 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 State Street Research Strategic
Portfolios: Conservative (a series of State Street Research Financial Trust,
hereafter referred to as the "Trust") at October 31, 1997, and the results of
its operations, the changes in its net assets and the financial highlights for
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 Trust's
manage- ment; 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 October 31, 1997 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
Boston, Massachusetts
December 12, 1997
<PAGE>

STATE STREET RESEASRCH STRATEGIC PORTFOLIOS: CONSERVATIVE

- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- -------------------------------------------------------------------------------

The Fund provided shareholders with attractive returns for the year ended
October 31, 1997. Class S shares (formerly Class C) gained 14.11%. That was
higher than its peer group, the Lipper flexible income fund average, which rose
8.10%.

Strategic Portfolios: Conservative seeks high current income and secondarily
long term growth of capital by investing in common stocks and bonds. The
manager's strategy is to adjust the asset allocation to take advantage of
changing market conditions.

In general, large company stocks outperformed small and mid-sized company stocks
during the first half of the year. But small and mid-cap stocks came back
stronger in the second half of the year. The Fund benefited from reducing its
exposure to large company stocks and shifting its emphasis to small and mid-cap
stocks as the market began to shift its favor to these groups. A decision to cut
back on equity holdings and add the proceeds to high yield bonds hurt
performance. High yield bonds were the best performing segment in the
fixed-income markets during the period.

October 31, 1997

All returns represent past performance, which is no guarantee of future results.
The investment return and principal value of an investment made in the Fund will
fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. All returns assume reinvestment of capital gain distributions and
income dividends. "S" shares, offered without a sales charge, are available
through certain employee benefit plans and special programs. Before November 1,
1997, Class S shares were designated Class C. The Standard & Poor's 500
Composite Index (S&P 500) is a market-value weighted index composed of 500
widely held common stocks. The Lehman Brothers Government/Corporate Bond Index
is a market-value weighted index of U.S. government treasury and agency
securities, corporate and yankee bonds. The indices are unmanaged and do not
take sales charges into consideration. Direct investment in the indices is not
possible; results are for illustrative purposes only. Performance results for
the Fund are increased by the voluntary reduction of Fund fees and expenses;
without subsidization, performance would be lower.

CHANGE IN VALUE OF $10,000 BASED ON THE
S&P 500 AND THE LEHMAN BROTHERS
GOVERNMENT/CORPORATE BOND INDEX COMPARED
TO CHANGE IN VALUE OF $10,000 INVESTED IN
STRATEGIC PORTFOLIOS: CONSERVATIVE

Strategic Portfolios: S&P Lehman Brothers
Conservative 500 Gov't/Corp Bond
--------------------- -------- ----------------
5/16/94 $ 10,000 $ 10,000 $ 10,000
10/31/94 10,125 10,549 10,006
10/31/95 11,755 13,334 11,622
10/31/96 13,027 16,546 12,250
10/31/97 14,865 21,856 13,329
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE

<TABLE>
<CAPTION>
FUND INFORMATION OFFICERS TRUSTEES

<S> <C> <C>
STATE STREET RESEARCH RALPH F. VERNI RALPH F. VERNI
STRATEGIC PORTFOLIOS: CONSERVATIVE Chairman of the Board, Chairman of the Board,
One Financial Center President and President, Chief Executive
Boston, MA 02111 Chief Executive Officer Officer and Director,
State Street Research &
INVESTMENT ADVISER PETER C. BENNETT Management Company
State Street Research & Vice President
Management Company
One Financial Center JOHN H. KALLIS STEVE A. GARBAN
Boston, MA 02111 Vice President Retired; formerly Senior Vice
President for Finance and
DISTRIBUTOR THOMAS A. SHIVELY Operations and Treasurer, The
State Street Research Vice President Pennsylvania State University
Investment Services, Inc.
One Financial Center GERARD P. MAUS
Boston, MA 02111 Treasurer MALCOLM T. HOPKINS
Former Vice Chairman of the
SHAREHOLDER SERVICES JOSEPH W. CANAVAN Board and Chief Financial
State Street Research Assistant Treasurer Officer, St. Regis Corp.
Service Center
P.O. Box 8408 DOUGLAS A. ROMICH
Boston, MA 02266-8408 Assistant Treasurer EDWARD M. LAMONT
1-800-562-0032 Formerly in banking
FRANCIS J. MCNAMARA, III (Morgan Guaranty Trust
CUSTODIAN Secretary and General Counsel Company of New York);
State Street Bank and presently engaged in private
Trust Company DARMAN A. WING investments and civic affairs
225 Franklin Street Assistant Secretary and
Boston, MA 02110 Assistant General Counsel
ROBERT A. LAWRENCE
LEGAL COUNSEL AMY L. SIMMONS Associate, Saltonstall & Co.
Goodwin, Procter & Hoar LLP Assistant Secretary
Exchange Place
Boston, MA 02109 DEAN O. MORTON
Retired; formerly Executive
INDEPENDENT ACCOUNTANTS Vice President, Chief
Price Waterhouse LLP Operating Officer and Director,
160 Federal Street Hewlett-Packard Company
Boston, MA 02110

THOMAS L. PHILLIPS
Retired; formerly Chairman of
the Board and Chief Executive
Officer, Raytheon Company

TOBY ROSENBLATT
President,
The Glen Ellen Company
Vice President,
Founders Investments Ltd.

MICHAEL S. SCOTT MORTON
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology

JEPTHA H. WADE
Retired; formerly Of Counsel,
Choate, Hall & Stewart
</TABLE>
<PAGE>
--------------
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE Bulk Rate
One Financial Center U.S. Postage
Boston, MA 02111 PAID
Randolph, MA
Permit No. 600
--------------

QUESTIONS? COMMENTS?
CALL us at 1-800-562-0032
WRITE us at:
State Street Research
Service Center
P.O. Box 8408
Boston, MA 02266-8408
E-MAIL us at:
[email protected]

[graphic omitted]

This report is prepared for the general information of current shareholders.

When used in the general solicitation of investors, this report must be
accompanied or preceded by a current State Street Research Strategic Portfolios:
Conservative prospectus. When used after December 31, 1997, this report must be
accompanied by a current Quarterly Performance Update.

Portfolio changes should not be considered recommendations for action by
individual investors.

CONTROL NUMBER: 4490-971224(0199)SSR-LD SP-125E-1297IBSRN