STATE STREET RESEARCH FINANCIAL TRUST, N-30D, 1999-01-04

STATE STREET RESEARCH FINANCIAL TRUST
N-30D, 1999-01-04

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<PAGE>

STATE STREET RESEARCH

----------------------
GOVERNMENT INCOME FUND
----------------------

ANNUAL REPORT
October 31, 1998

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

From the Chairman

From good news
to modest results

Portfolio Manager's Review

A good year for bonds

Fund Information

Facts and figures

Plus, Complete Portfolio Holdings
and Financial Statements

[DALBAR LOGO]

For Excellence
in
Shareholder Service

STATE STREET RESEARCH FUNDS
<PAGE>

FROM THE CHAIRMAN

[RALPH F. VERNI PHOTO]

Dear Shareholder:

After nearly four years of uninterrupted good news, 1998 has produced more
modest results for investors. On the economic front, most indicators remain
positive: inflation is low; personal income has risen; and unemployment is
steady at about 4.5%. Consumer confidence has fallen slightly. Investors wavered
about the economy at home, while markets abroad sent stock prices down sharply
in the late summer. By the end of October, however, most major market indices
had rebounded, resulting in positive but single-digit returns for the year to
date.

Stocks

Earlier, the corporate profit picture was pessimistic. Financial stocks were
among the hardest hit, as announcements were made that big U.S. financial
institutions expected losses from loans to foreign markets. Technology companies
also lost ground on lower demand from Asia. Now both the S&P 500 and the Nasdaq
Composite have recovered and moved ahead.(1) Small-company stocks remained
depressed.

Bonds

Bonds have benefited from the Federal Reserve Board's two successive,
one-quarter percent cuts in the federal funds rate. The yield on the bellwether
long-term Treasury bond fell below 5.0%. Although the yield has risen since,
high quality bonds have delivered attractive returns.

International

Indications that economic growth has slowed around the world, plus specific
concerns over Asia's woes, continued to bring returns down on most major foreign
exchanges. Even Europe, which had delivered strong gains, felt the effects of
Russia's currency problems and Japan's recession. As interest rates converge in
anticipation of the euro, Europe's new common currency in 1999, Spain and Italy
appear to be in the best position to grow. Germany and France are the most
likely to suffer.

Outlook and Opportunities

As investors, you may be asking where opportunities lie ahead. My answer is in
diversification--and in some of the markets that have been beaten down. But
every investor is different. Now is a good time to seek advice from your
financial professional. And as always, thank you for your confidence in State
Street Research funds.

Sincerely,

/s/ Ralph F. Verni
- ------------------
Ralph F. Verni
Chairman
October 31, 1998

(1) The S&P 500 (officially the "Standard and Poor's 500 Composite Stock Price
Index") is an unmanaged index of 500 U.S. stocks. The index does not take
transaction charges into consideration. It is not possible to invest directly in
the indices.

(2) 9.07% for Class B shares; 9.06% for Class C shares; 10.13% for Class S
shares.

(3) Keep in mind that past performance is no guarantee of future results. The
Fund's share price, yield and return will fluctuate, and you may have a gain or
loss when you sell your shares. All returns assume reinvestment of capital gain
distributions and income dividends at net asset value. Performance reflects a
maximum 4.5% Class A share front-end sales charge, or 5% Class B share or 1%
Class C share contingent deferred sales charge, where applicable.

(4) Class S shares, offered without a sales charge, are available through
certain employee benefit plans and special programs.

(5) The fund's returns include performance before the creation of share classes.
If this performance reflected the share classes' current 12b-1 fees, the fund's
returns may have been lower.

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

- --------------------------------------------------------------------------------
FUND INFORMATION (all data are for periods ended October 31, 1998, except where
noted)
- --------------------------------------------------------------------------------

Total value of $10,000 invested on October 31, 1988(3)
(Class A shares, at maximum applicable sales charge)

[Mountain Chart Plot Points]

Yield(5)

<TABLE>
<S> <C>
==============================================
Class A 4.31%
- ----------------------------------------------
Class B 3.78%
- ----------------------------------------------
Class C 3.77%
- ----------------------------------------------
Class S 4.70%
==============================================
</TABLE>

Yield is based on the net investment income produced for the 30 days ended
October 31, 1998.

Average Annual Total Return
for periods ended 9/30/98
(at maximum applicable sales charge)(3,4,5)

<TABLE>
<CAPTION>
===========================================
10 Years 5 Years 1 Year
- -------------------------------------------
<S> <C> <C> <C>
Class A 8.41% 6.05% 7.08%
- -------------------------------------------
Class B 8.46% 5.91% 6.25%
- -------------------------------------------
Class C 8.47% 6.24% 10.33%
- -------------------------------------------
Class S 9.05% 7.31% 12.42%
===========================================
</TABLE>

Average Annual Total Return
(at maximum applicable sales charge)(3,4,5)

<TABLE>
<CAPTION>
===========================================
10 Years 5 Years 1 Year
- -------------------------------------------
<S> <C> <C> <C>
Class A 8.17% 5.87% 4.91%
- -------------------------------------------
Class B 8.21% 5.70% 4.07%
- -------------------------------------------
Class C 8.22% 6.03% 8.06%
- -------------------------------------------
Class S 8.81% 7.10% 10.13%
===========================================
</TABLE>

<PAGE>

PORTFOLIO MANAGER'S REVIEW
Government Income Fund: A good year for bonds

[Jack Kallis Photo]

[photo caption]
John H. Kallis
Portfolio Manager
[end photo caption]

Jack Kallis, portfolio manager of State Street Research Government Income Fund,
comments on the year ended October 31, 1998 and his outlook for the period
ahead.

Q: How did the Fund perform last year?

A: It was a strong year for Government Income Fund. Class A shares returned
9.85% for the year ended October 31, 1998 [does not reflect sales charge].(2)
That was higher than the average government income fund return of 9.06%, as
reported by Lipper Analytical Services.

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

A: The Fund benefited from a 1% decline in long-term interest rates in the U.S.
and more dramatic interest rate declines overseas. We had positioned the Fund to
anticipate declining interest rates, by increasing the duration of the portfolio
from 5.1 to 5.4 years. (Duration is a measure of the Fund's sensitivity to
changing interest rates.) The longer duration helped performance.

Q: Did you make any other changes to the Fund's investments?

A: We made several moves. We increased the Fund's investment in U.S. Treasuries
from 42% to 44%. The Treasury sector was particularly strong in the second half
of the year, as investors looked for a safe haven from global turmoil and a
volatile stock market at home. We also increased our investment in mortgage
securities. But even more important, we changed our investment mix: we bought
commercial mortgages and sold our position in residential mortgages. The reason?
Residential mortgages are vulnerable to prepayment when interest rates fall. The
commercial mortgages typically lock out the possibility of prepayment for at
least five years. Finally, we recently added to our investment in agency
mortgages because the threat of prepayment had made the sector look inexpensive
and attractive again.

Q: Did you make any changes to the Fund's foreign investments?

A: We cut back somewhat on the Fund's foreign investments. However, we did
invest in Greek bonds, which appeared attractive because Greece is working to
improve its financial condition to qualify for entry into the European Monetary
Union (EMU) in 2001. If Greece succeeds in bringing its interest rates down, the
bonds have the potential to do well. Right now, they are inexpensive relative to
German bonds--Germany being something of a benchmark for European bonds.

Q: What is your outlook for the period ahead?

A: We believe the U.S. economy will continue to slow down. The signs are already
there: Consumers are no longer saving money, and it also looks like capital
spending is starting to slow. Those have been two of the main drivers of the
economy. We expect the Federal Reserve to move cautiously and to possibly lower
rates as a follow-up to the two quick cuts they announced in September and
October. Against this back-drop, the portfolio is positioned conservatively.

October 31, 1998

================================================================================

Asset Allocation
(by percentage of net assets)

[Pie Chart]

<TABLE>
<S> <C>
Cash 2%
Trust certificates/other 4%
Foreign government 5%
Other mortgages 7%
U.S. Agency mortgage 38%
U.S. Treasury 44%
</TABLE>

Bond Yields
(October 31, 1997 to October 31, 1998)

[Line Chart]

<TABLE>
<CAPTION>
30-year Mortgage 30-year U.S. 90-day U.S.
Securities Treasury Securities Treasury Securities
<S> <C> <C> <C>
10/97 6.88 6.154 5.194
11/97 6.94 6.041 5.194
12/97 6.79 5.924 5.342
1/98 6.57 5.805 5.183
2/98 6.72 5.919 5.308
3/98 6.75 5.932 5.125
4/98 6.72 5.951 4.978
5/98 6.63 5.803 5.007
6/98 6.58 5.626 5.093
7/98 6.6 5.714 5.08
8/98 6.36 5.256 4.83
9/98 6.02 4.965 4.356
10/98 6.28 5.15 4.323
</TABLE>

Source: Bloomberg

2
<PAGE>

STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
October 31, 1998

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES 83.1%
U.S. Treasury 44.5%
U.S. Treasury Bond, 13.75% .............. $7,725,000 8/15/2004 $11,302,602
U.S. Treasury Bond, 11.625% ............. 39,400,000 11/15/2004 53,916,536
U.S. Treasury Bond, 10.75% .............. 9,500,000 8/15/2005 12,850,270
U.S. Treasury Bond, 12.00% .............. 12,000,000 8/15/2013 18,526,920
U.S. Treasury Bond, 9.875% .............. 8,500,000 11/15/2015 12,880,135
U.S. Treasury Bond, 9.25% ............... 17,000,000 2/15/2016 24,527,770
U.S. Treasury Bond, 8.75% ............... 19,150,000 5/15/2017 26,747,188
U.S. Treasury Bond, 8.50% ............... 17,900,000 2/15/2020 24,867,038
U.S. Treasury Bond, 7.50% ............... 20,000,000 11/15/2024 25,909,400
U.S. Treasury Bond, 6.875% .............. 24,825,000 8/15/2025 30,065,309
U.S. Treasury Bond, 6.625% .............. 8,600,000 2/15/2027 10,182,916
U.S. Treasury Note, 6.375% .............. 16,625,000 8/15/2002 17,752,341
U.S. Treasury Note, 5.75% ............... 25,000 4/30/2003 26,410
U.S. Treasury Note, 7.875% .............. 16,975,000 11/15/2004 19,958,866
U.S. Treasury Note, 7.00% ............... 11,875,000 7/15/2006 13,674,775
U.S. Treasury STRIPS, 0.00% ............. 13,000,000 11/15/2001 11,398,010
-----------
314,586,486
-----------
U.S. Agency Mortgage 37.7%
Federal Home Loan Mortgage
Corp., 9.00% .......................... 4,099,076 12/01/2009 4,315,835
Federal Home Loan Mortgage
Corp., 6.00% .......................... 9,523,333 3/01/2013 9,561,997
Federal Home Loan Mortgage
Corp., 6.00% .......................... 5,818,816 5/01/2013 5,842,441
Federal Housing Administration
Charles River Project,
9.625% ................................ 9,420,393 12/01/2033 10,486,075
Federal Housing Administration
Court Yard Project, 10.75% ............ 6,460,206 8/01/2032 7,243,506
Federal Housing Administration
East Bay Manor Project,
10.00% ................................ 6,727,794 3/01/2033 7,484,671
Federal National Mortgage
Association, 8.50% .................... 10,000,000 2/01/2005 10,457,800
Federal National Mortgage
Association, 7.65% .................... 4,000,000 3/10/2005 4,576,880
Federal National Mortgage
Association, 6.82% .................... 12,825,000 8/23/2005 14,127,507
Federal National Mortgage
Association, 6.96% .................... 27,525,000 4/02/2007 30,634,499
Federal National Mortgage
Association, 8.00% .................... 3,267,388 4/01/2008 3,401,808
Federal National Mortgage
Association, 6.00% .................... 6,400,000 5/15/2008 6,784,000

<CAPTION>
- -----------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal National Mortgage
Association, 8.00% .................... $4,657,567 6/01/2008 $ 4,868,602
Federal National Mortgage
Association, 8.50% .................... 6,030,716 2/01/2009 6,321,759
Federal National Mortgage
Association, 9.00% .................... 5,715,876 5/01/2009 6,017,789
Federal National Mortgage
Association, 9.00% .................... 1,316,791 4/01/2016 1,386,344
Federal National Mortgage
Association TBA, 6.50% ................ 65,525,000 11/12/2028 65,995,961
Federal National Mortgage
Association TBA, 6.50% ................ 9,675,000 11/12/2028 9,554,063
Government National Mortgage
Association, 9.50% .................... 2,003,318 9/15/2009 2,149,885
Government National Mortgage
Association, 9.50% .................... 3,699,379 10/15/2009 3,970,886
Government National Mortgage
Association, 9.50% .................... 1,599,583 11/15/2009 1,717,345
Government National Mortgage
Association, 9.50% .................... 432,527 11/15/2017 466,882
Government National Mortgage
Association, 9.50% .................... 141,638 9/15/2019 152,817
Government National Mortgage
Association TBA, 7.00% ................ 26,600,000 11/18/2028 27,206,813
Government National Mortgage
Association TBA, 7.00% ................ 15,000,000 11/18/2028 14,859,375
U.S. Department of Veterans
Affairs REMIC 1998-3C,
6.50% ................................. 7,500,000 6/15/2021 7,457,756
-----------
267,043,296
-----------
U.S. Agency 0.9%
EXIM Vnesheconombank,
5.73%+ ................................ 6,300,000 1/15/2003 6,418,503
-----------
Total U.S. Government Securities (Cost $563,557,322) ................... 588,048,285
-----------
OTHER INVESTMENTS 15.4%
Trust Certificates 3.5%
Government Backed Trust Class
T-3, 9.625% ........................... 6,238,602 5/15/2002 6,594,701
Government Trust Certificates
Class 2-E, 9.40% ...................... 16,971,900 5/15/2002 17,968,999
-----------
24,563,700
-----------
</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>
Foreign Government 4.7%
Republic of Greece, Greek Drachma
8.80% .......................... 3,700,000,000 6/19/2007 13,643,398
Government of New Zealand, New Zealand Dollar
10.00% ......................... 11,625,000 3/15/2002 7,040,330
Government of New Zealand,
8.00% .......................... 10,000,000 11/15/2006 6,183,131
United Kingdom Treasury, Pound Sterling
8.50% .......................... 3,300,000 12/07/2005 6,627,848
------------
33,494,707
------------
Finance/Mortgage 7.2%
Chase Commercial Mortgage
Securities Corp. 1996-2
Cl. A2, 6.90% .................. $4,675,000 9/19/2006 $ 4,862,000
Chase Commercial Mortgage
Securities Corp. 1997-1
Cl. A1, 7.27% .................. 4,507,215 7/19/2004 4,707,250
Credit Suisse First Boston
97-C2 Cl. A2, 6.52% ............ 5,855,000 7/17/2007 5,911,720
First Union-Lehman Brothers
Commercial Corp. Series
1997-C2 Cl. A1, 6.479% ......... 4,385,345 3/18/2004 4,508,683
GMAC Commercial Mortgage
Security Inc. 1997-C2 Cl. A,
6.55% .......................... 6,700,000 4/15/2029 6,846,563
LB Commercial Conduit
Mortgage Trust 97-LL1-A1,
6.79% .......................... 6,476,647 6/12/2004 6,735,713
LB Commercial Conduit
Mortgage Trust 98-C1-A1,
6.33% .......................... 6,402,191 11/18/2004 6,472,215
Merrill Lynch Mortgage
Investments Inc. Series
1997-C2 Cl. A1, 6.46% .......... 3,175,927 12/10/2029 3,270,212
Merrill Lynch Mortgage
Investments Inc. Series
1998-C2 Cl. A1, 6.22% .......... 4,794,659 2/15/2030 4,889,803
Morgan Stanley Capital I Inc.
98-Cl. A1, 6.19% ............... 2,979,204 1/15/2007 3,017,300
-----------
51,221,459
-----------
Total Other Investments (Cost $108,972,069) ................... 109,279,866
-----------

<CAPTION>
- -------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMERCIAL PAPER 17.1%
Federal Farm Credit Bank,
4.75% ...................... $11,757,000 11/04/1998 $11,752,346
Federal Home Loan Bank,
4.74% ...................... 25,000,000 11/04/1998 24,990,146
Federal Home Loan Bank,
4.89% ...................... 30,340,000 11/12/1998 30,294,760
Federal Home Loan Mortgage
Corp., 4.93% ............... 19,971,000 11/04/1998 19,962,795
Federal National Mortgage
Association, 4.81% ......... 8,930,000 11/06/1998 8,924,047
Federal National Mortgage
Association, 4.76% ......... 14,970,000 11/06/1998 14,960,124
Federal National Mortgage
Association, 4.76% ......... 10,020,000 11/09/1998 10,009,423
-----------
Total Commercial Paper (Cost $120,893,641)..................... 120,893,641
-----------
- --------------------------------------------------------------------------------
<CAPTION>
Shares
- --------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS 6.9%
State Street Navigator Securities Lending
Prime Portfolio ................................. 48,452,337 48,452,337
----------
Total Short-Term Investments (Cost $48,452,337)................ 48,452,337
----------
Total Investments (Cost $841,875,369)--122.5%.................. 866,674,129
Cash and Other Assets, Less Liabilities--(22.5%) .............. (158,919,463)
------------
Net Assets--100.0% ............................................ $707,754,666
============
Federal Income Tax Information:
At October 31, 1998, the net unrealized appreciation of investments based on
cost for Federal income tax purposes of $842,087,767 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost ............................................... $ 28,016,271
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value ............................................. (3,429,909)
------------
$ 24,586,362
============
</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%.

+ 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, 1998 were $6,300,000 and $6,418,503 (0.91% of net
assets), respectively.

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, 1998 are as
follows:

<TABLE>
<CAPTION>
Unrealized
Appreciation
Total Value Contract Price (Depreciation) Delivery Date
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sell Deutsche marks, Buy U.S. dollars 12,040,000 DEM .56453 DEM $(476,414) 11/13/98
Sell Deutsche marks, Buy U.S. dollars 11,485,000 DEM .56465 DEM (452,989) 11/13/98
Sell British pounds, Buy U.S. dollars 3,877,000 GBP 1.69865 GBP 123,676 1/22/99
Sell New Zealand dollars, Buy U.S. dollars 95,000 NZD .50741 NZD (2,122) 11/13/98
Sell New Zealand dollars, Buy U.S. dollars 465,000 NZD .50400 NZD (11,972) 11/13/98
Sell New Zealand dollars, Buy U.S. dollars 2,280,000 NZD .50100 NZD (65,541) 11/13/98
Sell New Zealand dollars, Buy U.S. dollars 10,700,000 NZD .52640 NZD (43,675) 1/22/99
Sell New Zealand dollars, Buy U.S. dollars 10,310,000 NZD .52550 NZD (51,362) 1/22/99
----------
$(980,399)
==========
</TABLE>

Written put option transactions during the year ended October 31, 1998 were as
follows:

<TABLE>
<CAPTION>
Principal
Amount Premiums
------------ ---------
<S> <C> <C>
Outstanding, beginning of year -- --
Options written $ 14,500,000 $ 108,320
Options expired (14,500,000) (108,320)
Options closed -- --
------------ ---------
Outstanding, end of year $ -- $ --
============ =========
</TABLE>

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, 1998

<TABLE>
<S> <C>
Assets
Investments, at value (Cost $841,875,369) (Note 1)................. $866,674,129
Cash .............................................................. 2,049
Receivable for securities sold .................................... 12,371,578
Interest receivable ............................................... 10,812,027
Receivable for fund shares sold ................................... 1,585,977
Receivable for open forward contracts ............................. 123,676
Other assets ...................................................... 15,400
------------
891,584,836
Liabilities
Payable for securities purchased .................................. 130,477,633
Payable for collateral received on securities loaned .............. 48,452,337
Dividends payable ................................................. 1,891,329
Payable for open forward contracts ................................ 1,104,075
Payable for fund shares redeemed .................................. 644,889
Accrued transfer agent and shareholder services
(Note 2) ........................................................ 352,543
Accrued management fee (Note 2) ................................... 351,052
Accrued distribution and service fees (Note 3) .................... 241,787
Accrued trustees' fees (Note 2) ................................... 82,780
Other accrued expenses ............................................ 231,745
------------
183,830,170
------------
Net Assets $707,754,666
============
Net Assets consist of:
Undistributed net investment income .............................. $ 3,653,715
Unrealized appreciation of investments ........................... 24,798,760
Unrealized depreciation of forward contracts and
foreign currency ............................................... (955,050)
Accumulated net realized loss .................................... (21,548,506)
Paid-in capital .................................................. 701,805,747
------------
$707,754,666
============
Net Asset Value and redemption price per share of
Class A shares ($518,651,372 [divided by] 39,669,554 shares)..... $13.07
============
Maximum Offering Price per share of Class A shares
($13.07 [divided by] .955)....................................... $13.69
============
Net Asset Value and offering price per share of Class
B shares ($129,975,892 [divided by] 9,973,242 shares)*........... $ 13.03
============
Net Asset Value and offering price per share of Class
C shares ($27,659,059 [divided by] 2,121,167 shares)*............ $ 13.04
============
Net Asset Value, offering price and redemption price per
share of Class S shares ($31,468,343 [divided by] 2,409,057
shares) ......................................................... $ 13.06
============
</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, 1998

<TABLE>
<S> <C>
Investment Income
Interest (Note 1) ............................................ $47,980,631
Expenses
Management fee (Note 2) ...................................... 4,226,796
Transfer agent and shareholder services (Note 2) ............. 869,017
Custodian fee ................................................ 273,078
Service fee-Class A (Note 3) ................................. 1,279,457
Distribution and service fees-Class B (Note 3) ............... 1,058,552
Distribution and service fees-Class C (Note 3) ............... 185,917
Reports to shareholders ...................................... 46,617
Audit fee .................................................... 44,165
Trustees' fees (Note 2) ...................................... 41,778
Legal fees ................................................... 32,465
Registration fees ............................................ 30,614
Miscellaneous ................................................ 25,774
-----------
8,114,230
-----------
Net investment income ........................................ 39,866,401
-----------
Realized and Unrealized Gain (Loss) on
Investments, Options, Forward Contracts
and Foreign Currency
Net realized gain on investments (Notes 1 and 4) ............. 14,112,149
Net realized gain on written options ......................... 108,320
Net realized gain on forward contracts and foreign
currency (Note 1) .......................................... 3,081,711
-----------
Total net realized gain ..................................... 17,302,180
-----------
Net unrealized appreciation of investments ................... 5,733,282
Net unrealized depreciation of forward contracts and
foreign currency ........................................... (921,035)
-----------
Total net unrealized appreciation ........................... 4,812,247
-----------
Net gain on investments, options, forward contracts
and foreign currency ....................................... 22,114,427
-----------
Net increase in net assets resulting from operations ......... $61,980,828
===========
</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
-------------------------------
1997 1998
- -----------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income ......... $ 42,425,199 $ 39,866,401
Net realized gain on
investments, options,
forward contracts and
foreign currency ............ 8,763,745 17,302,180
Net unrealized appreciation of
investments, forward
contracts and foreign
currency .................... 2,557,699 4,812,247
------------ ------------
Net increase resulting from
operations .................. 53,746,643 61,980,828
------------ ------------
Dividends from net
investment income:
Class A ...................... (35,201,643) (31,530,438)
Class B ...................... (5,410,928) (5,721,251)
Class C ...................... (880,065) (998,658)
Class S ...................... (1,061,597) (1,982,171)
------------ ------------
(42,554,233) (40,232,518)
------------ ------------
Net increase (decrease) from
fund share transactions
(Note 5) .................... (42,731,617) 15,773,634
------------ ------------
Total increase (decrease) in
net assets .................. (31,539,207) 37,521,944

Net Assets
Beginning of year ............. 701,771,929 670,232,722
------------ ------------
End of year (including
undistributed net
investment income of
$2,339,029 and $3,653,715,
respectively) ............... $670,232,722 $707,754,666
============ ============
</TABLE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
October 31, 1998

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 five separate funds: State Street Research Government Income Fund,
State Street Research Strategic Portfolios: Moderate, State Street Research
Strategic Portfolios: Conservative, State Street Research Strategic Portfolios:
Aggressive and State Street Research IntelliQuant Portfolios:
Small-Cap Value.

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. 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"),
an indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), 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.

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

7
<PAGE>

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

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 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, 1998, the Fund had a
capital loss carryforward of $21,336,108 available, to the extent provided in
regulations, to offset future capital gains, if any, of which $17,196,293 and
$4,139,815 expire on October 31, 2002 and 2004, respectively. The Fund had a
capital loss carryforward of $2,519,604 expire on October 31, 1998. 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 expire 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.

I. Securities Lending

The Fund may seek additional income by lending portfolio securities to qualified
institutions. The Fund will receive cash or securities as collateral in an
amount equal to at least 100% of the current market value of any loaned
securities plus accrued interest. By reinvesting any cash collateral it receives
in these transactions, the Fund could realize additional gains and losses. If
the borrower fails to return the securities and the value of the collateral has
declined during the term of the loan, the Fund will bear the loss. At October
31, 1998, the value of the securities loaned and the value of collateral were
$39,960,699 and $48,452,337, respectively. During the year ended October 31,
1998, income from securities lending amounted to $55,303 and is included in
interest income.

8
<PAGE>

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

Note 2

Prior to August 1, 1998, the Adviser earned monthly fees at an annual rate of
0.65% of the Fund's average daily net assets. Effective August 1, 1998 the
management fee is 0.60% of the first $500 million of net assets, annually, 0.55%
of the next $500 million, and 0.50% of any amount over $1 billion. 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, 1998, the fees pursuant to such agreement
amounted to $4,226,796.

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 plans, through or
under which shares of the Fund may be purchased. During the year ended October
31, 1998, the amount of such expenses was $448,732.

The fees of the Trustees not currently affiliated with the Adviser amounted to
$41,778 during the year ended October 31, 1998.

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 services and/or the
maintenance or servicing of shareholder accounts, to compensate or 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, 1998, fees pursuant to such
plan amounted to $1,279,457, $1,058,552 and $185,917 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 $69,104 and $328,749, respectively, on sales of Class A shares of
the Fund during the year ended October 31, 1998, and that MetLife Securities,
Inc. earned commissions aggregating $402,636 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges aggregating
$201,962 and $563 on redemptions of Class B and Class C shares, respectively,
during the same period.

Note 4

For the year ended October 31, 1998, purchases and sales of securities,
exclusive of short-term obligations, aggregated $1,085,696,497 and
$1,063,583,137 (including $984,513,078 and $872,520,189 of U.S. Government
obligations), respectively.

9
<PAGE>

Note 5

The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At October 31, 1998,
Metropolitan owned 1,373,252 Class S shares of the Fund.

Share transactions were as follows:

<TABLE>
<CAPTION>
Years ended October 31
----------------------------------------------------------
1997 1998
--------------------------- ---------------------------
Class A Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ..................................... 1,724,885 $ 21,326,126 3,586,515 $ 46,086,161
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 1,385,176 17,717,475
Shares repurchased .............................. (8,994,512) (111,248,439) (6,762,852) (86,341,586)
---------- ------------- ---------- ------------
Net decrease .................................... (5,529,805) $ (68,387,150) (1,791,161) $(22,537,950)
========== ============= ========== ============

Class B Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------
Shares sold ..................................... 1,428,886 $ 17,617,666 4,159,555 $ 53,455,262
Issued in connection with acquisition of
International Fixed Income Fund 226,623 2,798,800 -- --
Issued upon reinvestment of dividends ........... 289,207 3,569,308 301,432 3,848,414
Shares repurchased .............................. (1,914,285) (23,580,814) (2,197,432) (28,041,070)
---------- ------------- ---------- ------------
Net increase .................................... 30,431 $ 404,960 2,263,555 $ 29,262,606
========== ============= ========== ============

Class C Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------
Shares sold ..................................... 463,886 $ 5,714,578 1,161,428 $ 14,905,734
Issued in connection with acquisition of
International Fixed Income Fund 46,221 571,293 -- --
Issued upon reinvestment of dividends ........... 51,335 634,002 51,157 654,285
Shares repurchased .............................. (436,411) (5,400,255) (382,734) (4,857,752)
---------- ------------- ---------- ------------
Net increase .................................... 125,031 $ 1,519,618 829,851 $ 10,702,267
========== ============= ========== ============

Class S Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------
Shares sold ..................................... 211,412 $ 2,620,092 570,184 $ 7,285,127
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 53,615 686,273
Shares repurchased .............................. (184,733) (2,249,070) (755,120) (9,624,689)
---------- ------------- ---------- ------------
Net increase (decrease) ......................... 1,915,103 $ 23,730,955 (131,321) $ (1,653,289)
========== ============= ========== ============
</TABLE>

10
<PAGE>

STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

For a share outstanding throughout each year:

<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------
Years ended October 31
--------------------------------------------------------------
1994(1) 1995(1) 1996(1) 1997(1) 1998(1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.92 11.68 12.58 12.43 12.65
------ ------ ----- ------ ------
Net investment income ($) 0.81 0.83 0.81 0.80 0.78

Net realized and unrealized gain (loss) on investments,
options, forward contracts and foreign currency ($) (1.26) 0.88 (0.17) 0.22 0.43
------ ------ ----- ------ ------
Total from investment operations ($) (0.45) 1.71 0.64 1.02 1.21
------ ------ ----- ------ ------
Dividends from net investment income ($) (0.79) (0.81) (0.79) (0.80) (0.79)
------ ------ ----- ------ ------
Total distributions ($) (0.79) (0.81) (0.79) (0.80) (0.79)
------ ------ ----- ------ ------
Net asset value, end of year ($) 11.68 12.58 12.43 12.65 13.07
===== ===== ===== ===== =====
Total return(2)(%) (3.58) 15.07 5.28 8.52 9.85

Ratios/supplemental data:

Net assets at end of year ($ thousands) 638,418 655,045 584,313 524,565 518,651

Ratio of operating expenses to average net assets (%) 1.07 1.10 1.09 1.08 1.09

Ratio of net investment income to average net assets (%) 6.54 6.83 6.50 6.44 6.11

Portfolio turnover rate (%) 134.41 105.57 88.79 124.95 160.89
</TABLE>

<TABLE>
<CAPTION>
Class B
-----------------------------------------------------------
Years ended October 31
-----------------------------------------------------------
1994(1) 1995(1) 1996(1) 1997(1) 1998(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.91 11.66 12.55 12.40 12.61
------ ------ ----- ------ ------
Net investment income ($) 0.72 0.73 0.71 0.70 0.68

Net realized and unrealized gain (loss) on investments,
options, forward contracts and foreign currency ($) (1.27) 0.87 (0.16) 0.22 0.43
------- ------ ------ ------ ------
Total from investment operations ($) (0.55) 1.60 0.55 0.92 1.11
------- ------ ------ ------ ------
Dividends from net investment income ($) (0.70) (0.71) (0.70) (0.71) (0.69)
------- ------- ------ ------- -------
Total distributions ($) (0.70) (0.71) (0.70) (0.71) (0.69)
------- ------- ------ ------- -------
Net asset value, end of year ($) 11.66 12.55 12.40 12.61 13.03
======= ======= ====== ======= =======
Total return(2)(%) (4.38) 14.15 4.51 7.66 9.07

Ratios/supplemental data:

Net assets at end of year ($ thousands) 52,319 87,908 95,218 97,253 129,976

Ratio of operating expenses to average net assets (%) 1.82 1.85 1.84 1.83 1.84

Ratio of net investment income to average net assets (%) 5.86 6.01 5.75 5.68 5.33

Portfolio turnover rate (%) 134.41 105.57 88.79 124.95 160.89
</TABLE>

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

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

11
<PAGE>

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

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

<TABLE>
<CAPTION>
Class C
----------------------------------------------------------
Years ended October 31
----------------------------------------------------------
1994(1) 1995(1) 1996(1) 1997(1) 1998(1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.91 11.66 12.56 12.41 12.62
----- ----- ----- ----- -----
Net investment income ($) 0.72 0.74 0.71 0.70 0.67

Net realized and unrealized gain (loss) on investments,
options, forward contracts and foreign currency ($) (1.27) 0.87 (0.16) 0.22 0.44
----- ----- ----- ----- -----
Total from investment operations ($) (0.55) 1.61 0.55 0.92 1.11
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.70) (0.71) (0.70) (0.71) (0.69)
----- ----- ----- ----- -----
Total distributions ($) (0.70) (0.71) (0.70) (0.71) (0.69)
----- ----- ----- ----- -----
Net asset value, end of year ($) 11.66 12.56 12.41 12.62 13.04
===== ===== ===== ===== =====
Total return(2)(%) (4.38) 14.24 4.51 7.65 9.06

Ratios/supplemental data:

Net assets at end of year ($ thousands) 13,425 13,033 14,473 16,301 27,659

Ratio of operating expenses to average net assets (%) 1.82 1.85 1.84 1.83 1.84

Ratio of net investment income to average net assets (%) 5.84 6.08 5.76 5.68 5.28

Portfolio turnover rate (%) 134.41 105.57 88.79 124.95 160.89
</TABLE>

<TABLE>
<CAPTION>
Class S
----------------------------------------------------------
Years ended October 31
----------------------------------------------------------
1994(1) 1995(1) 1996(1) 1997(1) 1998(1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.92 11.67 12.57 12.42 12.64
----- ----- ----- ----- -----
Net investment income ($) 0.84 0.90 0.84 0.80 0.81

Net realized and unrealized gain (loss) on investments,
options, forward contracts and foreign currency ($) (1.27) 0.84 (0.17) 0.25 0.43
----- ----- ----- ----- -----
Total from investment operations ($) (0.43) 1.74 0.67 1.05 1.24
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.82) (0.84) (0.82) (0.83) (0.82)
----- ----- ----- ----- -----
Total distributions ($) (0.82) (0.84) (0.82) (0.83) (0.82)
----- ----- ----- ----- -----
Net asset value, end of year ($) 11.67 12.57 12.42 12.64 13.06
===== ===== ===== ===== =====
Total return(2)(%) (3.42) 15.37 5.55 8.80 10.13

Ratios/supplemental data:

Net assets at end of year ($ thousands) 203 5,036 7,767 32,115 31,468

Ratio of operating expenses to average net assets (%) 0.82 0.85 0.84 0.82 0.84

Ratio of net investment income to average net assets (%) 8.01 6.79 6.78 6.66 6.38

Portfolio turnover rate (%) 134.41 105.57 88.79 124.95 160.89
</TABLE>

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

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

12
<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, 1998, 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 reason-able 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, 1998 by correspondence with the custodian and brokers provide a reasonable
basis for the opinion expressed above.

PricewaterhouseCoopers LLP
Boston, Massachusetts
December 11, 1998

13
<PAGE>

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

State Street Research Government Income Fund was among the top performers in its
Lipper category for the year ended October 31, 1998. The total return for the
Fund's Class A shares was 9.85% (does not reflect sales charge). The Fund
outperformed the average government income fund tracked by Lipper Analytical
Services, which rose 9.06% during the same period.

The Fund benefited from declining U.S. interest rates and a heavier weighting
in long-term bonds. The Fund's investment in long-term U.S. Treasuries helped
performance, as did its avoidance of the U.S. residential mortgage market.
Almost 45% of the Fund's assets were committed to high quality U.S. Treasury
bonds at the end of the period.

Going forward, we expect a slowing U.S. economy. The Federal Reserve will be
cautious, but may lower interest rates further. To that end, we have lengthened
the Fund's duration from 5.1 to 5.4 years, slightly longer than its benchmark.
Non-dollar bond exposure has been limited to the United Kingdom, Greece and New
Zealand, all markets where we expect interest rates to decline over the period
ahead.

October 31, 1998

Keep in mind that past performance is no guarantee of future results. The fund's
share price, yield and return will fluctuate, and you may have a gain or loss
when you sell your shares. All returns assume reinvestment of capital gain
distributions and income dividends at net asset value. Performance reflects a
maximum 4.5% Class A share front-end sales charge, or 5% Class B share or 1%
Class C share contingent deferred sales charge, where applicable. The fund's
returns include performance before the creation of share classes. If this
performance reflected the share classes' current 12b-1 fees, the fund's returns
may have been lower. Class S shares, offered without a sales charge, are
available only through certain employee benefit plans and special programs. The
Merrill Lynch Government Master and Mortgage Master 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 Mortgage Master Index and
the Merrill Lynch Government Master Index
Compared to Change in Value of $10,000 Invested
in Government Income Fund

Class A Shares

Average Annual Total Return
- -----------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -----------------------------------
<S> <C> <C>
4.91% 5.87% 8.17%
</TABLE>

<TABLE>
<CAPTION>
Government ML Mortgage ML Government
Income Fund Master Index Master Index
<S> <C> <C> <C>
10/31/88 9550 10,000 10,000
10/31/89 10,469 11,048 11,202
10/31/90 11,049 11,993 11,867
10/31/91 12,844 14,003 13,604
10/31/92 14,110 15,226 15,012
10/31/93 15,752 16,455 16,964
10/31/94 15,187 16,239 16,229
10/31/95 17,476 18,666 18,730
10/31/96 18,398 19,943 19,676
10/31/97 19,966 21,754 21,383
10/31/98 21,933 23,364 23,806
</TABLE>

Class B Shares

Average Annual Total Return
- -----------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -----------------------------------
<S> <C> <C>
4.07% 5.70% 8.21%
</TABLE>

<TABLE>
<CAPTION>
Government ML Mortgage ML Government
Income Fund Master Index Master Index
<S> <C> <C> <C>
10/31/88 10,000 10,000 10,000
10/31/89 10,962 11,048 11,202
10/31/90 11,569 11,993 11,867
10/31/91 13,449 14,003 13,604
10/31/92 14,775 15,226 15,012
10/31/93 16,432 16,455 16,964
10/31/94 15,713 16,239 16,229
10/31/95 17,937 18,666 18,730
10/31/96 18,746 19,943 19,676
10/31/97 20,182 21,754 21,383
10/31/98 22,012 23,364 23,806
</TABLE>

Class C Shares

Average Annual Total Return
- -----------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -----------------------------------
<S> <C> <C>
8.06% 6.03% 8.22%
</TABLE>

<TABLE>
<CAPTION>
Government ML Mortgage ML Government
Income Fund Master Index Master Index
<S> <C> <C> <C>
10/31/88 10,000 10,000 10,000
10/31/89 10,962 11,048 11,202
10/31/90 11,569 11,993 11,867
10/31/91 13,449 14,003 13,604
10/31/92 14,775 15,226 15,012
10/31/93 16,431 16,455 16,964
10/31/94 15,712 16,239 16,229
10/31/95 17,949 18,666 18,730
10/31/96 18,758 19,943 19,676
10/31/97 20,194 21,754 21,383
10/31/98 22,024 23,364 23,806
</TABLE>

Class S Shares

Average Annual Total Return
- -----------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -----------------------------------
<S> <C> <C>
10.13% 7.10% 8.81%
</TABLE>

<TABLE>
<CAPTION>
Government ML Mortgage ML Government
Income Fund Master Index Master Index
<S> <C> <C> <C>
10/31/88 10,000 10,000 10,000
10/31/89 10,962 11,048 11,202
10/31/90 11,569 11,993 11,867
10/31/91 13,449 14,003 13,604
10/31/92 14,775 15,226 15,012
10/31/93 16,511 16,455 16,964
10/31/94 15,946 16,239 16,229
10/31/95 18,396 18,666 18,730
10/31/96 19,416 19,943 19,676
10/31/97 21,125 21,754 21,383
10/31/98 23,266 23,364 23,806
</TABLE>

14
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
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
Government Income Fund 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 Steve A. Garban
One Financial Center John H. Kallis Former Senior Vice President
Boston, MA 02111 Vice President for Finance and Operations and
Treasurer, The Pennsylvania
Distributor E.K. Ragsdale, Jr. State University
State Street Research Vice President
Investment Services, Inc. Malcolm T. Hopkins
One Financial Center Thomas A. Shively Former Vice Chairman of the
Boston, MA 02111 Vice President Board and Chief Financial
Officer, St. Regis Corp.
Shareholder Services James M. Weiss
State Street Research Vice President Edward M. Lamont
Service Center Formerly in banking
P.O. Box 8408 Gerard P. Maus (with an affiliate of
Boston, MA 02266-8408 Treasurer J.P. Morgan & Co. in New York);
1-800-562-0032 presently engaged in private
Joseph W. Canavan investments and civic affairs
Custodian Assistant Treasurer
State Street Bank and Robert A. Lawrence
Trust Company Douglas A. Romich Former Partner, Saltonstall & Co.
225 Franklin Street Assistant Treasurer
Boston, MA 02110 Dean O. Morton
Francis J. McNamara, III Former Executive Vice President
Legal Counsel Secretary and General Counsel Chief Operating Officer
Goodwin, Procter & Hoar LLP and Director, Hewlett-Packard
Exchange Place Darman A. Wing Company
Boston, MA 02109 Assistant Secretary and
Assistant General Counsel Susan M. Phillips
Independent Accountants Dean, School of Business and
PricewaterhouseCoopers LLP Amy L. Simmons Public Management, George
One Post Office Square Assistant Secretary Washington University; former
Boston, MA 02109 Member of the Board of Governors
of the Federal Reserve System and
Chairman and Commissioner of
the Commodity Futures Trading
Commission

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
</TABLE>
15
<PAGE>

State Street Research Government Income Fund Bulk Rate
One Financial Center U.S. Postage
Boston, MA 02111 PAID
Permit #20
Holliston, MA
01746

Questions? Comments?

Call us at 1-800-562-0032
[hearing-impaired 1-800-676-7876]

Write us at:
State Street Research
Service Center
P.O. Box 8408
Boston, MA 02266-8408

E-mail us at:
[email protected]

Internet site:
www.ssrfunds.com

[STATE STREET RESEARCH LOGO]

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, 1998, 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: (exp1299)SSR-LD GI-109E-1298
<PAGE>
------------------------------
STATE STREET RESEARCH
------------------------------
STRATEGIC PORTFOLIOS: MODERATE
------------------------------

ANNUAL REPORT

October 31, 1998

---------------------
WHAT'S INSIDE
---------------------
State Street Research

FROM THE CHAIRMAN
From good news
to modest results

PORTFOLIO MANAGER'S REVIEW
A disappointing year,
but positive signs ahead

FUND INFORMATION
Facts and figures

PLUS, COMPLETE PORTFOLIO HOLDINGS
AND FINANCIAL STATEMENTS

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

[DALBAR LOGO]

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

For Excellence
in STATE STREET RESEARCH FUNDS
Shareholder Service

<PAGE>

FROM THE CHAIRMAN

[Photo of Ralph F. Verni]

DEAR SHAREHOLDER:
After nearly four years of uninterrupted good news, 1998 has produced more
modest results for investors. On the economic front, most indicators remain
positive: inflation is low; personal income has risen; and unemployment is
steady at about 4.5%. Consumer confidence has fallen slightly. Investors wavered
about the economy at home, while markets abroad sent stock prices down sharply
in the late summer. By the end of October, however, most major market indices
had rebounded, resulting in positive but single-digit returns for the year to
date.

STOCKS
Earlier, the corporate profit picture was pessimistic. Financial stocks were
among the hardest hit, as announcements were made that big U.S. financial
institutions expected losses from loans to foreign markets. Technology companies
also lost ground on lower demand from Asia. Now both the S&P 500 and the Nasdaq
Composite have recovered and moved ahead. Small- company stocks remained
depressed.

BONDS
Bonds have benefited from the Federal Reserve Board's two successive, one-
quarter percent cuts in the federal funds rate. The yield on the bellwether
long-term Treasury bond fell below 5.0%. Although the yield has risen
since, high quality bonds have delivered attractive returns.

INTERNATIONAL Indications that economic growth has slowed around the world, plus
specific concerns over Asia's woes, continued to bring returns down on most
major foreign exchanges. Even Europe, which had delivered strong gains, felt the
effects of Russia's currency problems and Japan's recession. As interest rates
converge in anticipation of the euro, Europe's new common currency in 1999,
Spain and Italy appear to be in the best position to grow. Germany and France
are the most likely to suffer.

OUTLOOK AND OPPORTUNITIES
As investors, you may be asking where opportunities lie ahead. My answer is
in diversification -- and in some of the markets that have been beaten
down. But every investor is different. Now is a good time to seek advice
from your financial professional. And as always, thank you for your
confidence in State Street Research funds.

Sincerely,

/s/ Ralph F. Verni

Ralph F. Verni
Chairman

October 31, 1998

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.

- -------------------------------------------------------------------------------
FUND INFORMATION (all data are for periods ended October 31, 1998, except where
noted)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR PERIODS ENDED 9/30/98(2)(3) AVERAGE ANNUAL TOTAL RETURN(2)(3)
- --------------------------------------------- --------------------------------------------
LIFE OF FUND LIFE OF FUND
(since 9/28/93) 5 YEARS 1 YEAR (since 9/28/93) 5 YEARS 1 YEAR
- --------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class S 9.86% 9.95% 3.22% Class S 9.98% 10.13% 6.53%
- --------------------------------------------- --------------------------------------------
</TABLE>

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

(2) Keep in mind that past performance is no guarantee of future results. The
Fund's share price, yield and return will fluctuate, and you may have a
gain or loss when you sell your shares. All returns assume reinvestment of
capital gain distributions and income dividends at net asset value.

(3) Class S shares, offered without a sales charge, are available through
certain employee benefit plans and special programs.

<PAGE>

PORTFOLIO MANAGER'S REVIEW
Strategic Portfolios: Moderate: A disappointing year, but positive signs ahead.

[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, 1998 and
the Fund's strategy for the year ahead.

Q: HOW DID THE FUND PERFORM LAST YEAR?
A: The Fund had a disappointing year. Class S shares gained 6.53% for the 12
months ended October 31, 1998. It underperformed the average balanced fund,
which rose 9.13%, according to Lipper Analytical Services. It also lagged the
S&P 500, which gained 22.01% for the period.(1)

Q: WHAT ACCOUNTED FOR THE FUND'S WEAK PERFORMANCE?
A: Our decision to underweight stocks, in general, hurt the Fund, because stocks
did much better than bonds for the 12 months - despite weakness late in the
period. Also, to the extent that the Fund was invested in small-cap growth
stocks, mid-cap value stocks and high-yield bonds, there was a further drag on
performance, because these sectors were all underperformers.

Q: HAVE YOU ALTERED THE FUND'S ASSET ALLOCATION AS A RESULT OF LAST YEAR'S
PERFORMANCE?
A: No. At the end of the year, approximately 42% of the Fund's assets were
invested in stocks. While we were disap pointed in last year's performance,
there are still a lot of uncertainties for the stock market, and we believe our
decision to underweight stocks, in general, is a prudent move going forward. We
also believe that the Fund's investments in small and mid- cap stocks have the
potential to recover. We did not sell them on weakness.

Q: WHAT IS YOUR OUTLOOK FOR THE PERIOD AHEAD?
A: We remain cautious, but there are some positive signs: the stock market has
started to recover from a weak September, helped by the Federal Reserve's back-
to-back interest-rate cuts. Japan has taken steps to address problems in its
banking system. The International Monetary Fund has come up with a $40 billion
package to help stabilize the situation in Brazil.

All of these are positive signs for the world's financial markets and for the
United States economy. However, we're not out of the woods. Our expectation is
for modest growth in corporate profits in 1999. There's still a lot of
uncertainty, and we expect continued volatility going forward. As a result, our
strategy is to remain somewhat underweighted in U.S. equities, overweighted in
high-grade bonds relative to our normal target mix and, in general, to continue
to focus on quality and liquidity.

October 31, 1998

- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ASSET ALLOCATION TOP 5 BOND SECTORS TOP 5 EQUITIY INDUSTRIES
(by percentage (by percentage (by percentage
of net assets) of net assets) of net assets)

Bonds 53% U.S. TREASURY 15.1% COMPUTER SOFTWARE 3.9%
Equities 42% FINANCE/MORTGAGE 10.8% & SERVICE
Cash 5% CORPORTATE 10.1% INSURANCE 3.7%
U.S. AGENCY 9.8% ELECTRIC 3.5%
MORTGAGE RETAIL TRADE 3.2%
FOREIGN 5.8% OIL 2.5%
GOVERNMENT

Total: 51.6% Total: 16.8%
<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
October 31, 1998
- ------------------------------------------------------------------------------
VALUE
SHARES NOTE 1)
- --------------------------------------------------------------------------------

EQUITY SECURITIES 42.5%
BASIC INDUSTRIES 4.8%
CHEMICAL 1.3%
Agrium Inc. ......................................... 19,600 $ 205,800
Cabot Corp. ......................................... 10,800 303,075
Cambrex Corp. ....................................... 1,900 48,569
Cordant Technologies Inc. ........................... 1,000 40,687
-----------
598,131
-----------
DIVERSIFIED 1.1%
Johnson Controls Inc. ............................... 1,500 84,375
Mark IV Industries Inc. ............................. 12,600 193,725
Ogden Corp. ......................................... 7,900 212,313
-----------
490,413
-----------
ELECTRICAL EQUIPMENT 0.4%
Asia Pacific Wire & Cable Corp. Ltd.* ............... 13,600 34,850
General Electric Co. ................................ 1,600 140,000
-----------
174,850
-----------
MACHINERY 1.2%
Harsco Corp. ........................................ 900 29,475
Howmet International Inc.* .......................... 14,100 211,500
ITEQ Inc.* .......................................... 6,500 17,469
Sundstrand Corp. .................................... 1,600 75,100
Tyco International Ltd. ............................. 2,200 136,262
Valeo SA ............................................ 700 60,602
Valeo SA Wts.* ...................................... 700 3,780
-----------
534,188
-----------
METAL & MINING 0.5%
General Cable Corp.* ................................ 950 18,763
Kennametal Inc. ..................................... 4,200 87,150
Shaw Communications Inc. Cl. B ...................... 3,800 76,000
Wyman-Gordon Co.* ................................... 1,500 21,562
-----------
203,475
-----------
TRUCKERS 0.3%
CNF Transportation Inc. ............................. 400 12,100
Laidlaw Inc. ........................................ 13,900 131,181
-----------
143,281
-----------
Total Basic Industries .............................. 2,144,338
-----------
CONSUMER CYCLICAL 5.7%
AUTOMOTIVE 0.5%
Copart Inc.* ........................................ 600 13,200
Gencorp Inc. ........................................ 7,800 172,575
Teleflex Inc. ....................................... 400 15,475
-----------
201,250
-----------
BUILDING 0.0%
Golf Trust of America Inc.* ......................... 400 10,700
-----------
HOTEL & RESTAURANT 1.0%
CKE Restaurants Inc.* ............................... 530 13,946
Harrah's Entertainment Inc.* ........................ 9,200 129,950
McDonald's Corp. .................................... 2,100 140,437
Mirage Resorts Inc.* ................................ 9,000 152,437
Motels of America Inc.*+ ............................ 75 619
Servico Inc.* ....................................... 900 4,388
-----------
441,777
-----------
RECREATION 1.0%
American Tower Corp. Cl. A* ......................... 1,100 24,063
Chancellor Media Corp. .............................. 3,100 118,962
Cinar Films Inc. Cl. B* ............................. 1,400 29,575
Cox Communications Inc. Cl. A* ...................... 1,300 71,337
GTech Holdings Corp.* ............................... 2,900 69,600
MediaOne Group Inc.* ................................ 2,300 97,319
Steiner Leisure Ltd.* ............................... 1,900 46,313
-----------
457,169
-----------
RETAIL TRADE 3.2%
Blyth Industries Inc.* .............................. 700 19,338
CSK Auto Corp.* ..................................... 700 18,244
CVS Corp. ........................................... 3,600 164,475
Hannaford Brothers Co. .............................. 6,300 276,019
Home Depot Inc. ..................................... 3,600 156,600
Jones Apparel Group Inc.* ........................... 1,400 24,150
Kroger Co.* ......................................... 2,500 138,750
Linens 'n Things Inc.* .............................. 600 18,563
Safeway Inc. ........................................ 3,000 143,437
Saks Inc.* .......................................... 1,550 35,262
Staples Inc.* ....................................... 2,300 75,037
Stride Rite Corp. ................................... 1,600 14,600
Wal-Mart Stores, Inc. ............................... 2,000 138,000
Wolters Kluwer NV* .................................. 900 174,369
-----------
1,396,844
-----------
TEXTILE & APPAREL 0.0%
Maxwell Shoe Inc. Cl. A* ............................ 1,200 14,100
-----------
Total Consumer Cyclical ............................. 2,521,840
-----------
CONSUMER STAPLE 10.1%
BUSINESS SERVICE 1.7%
A.C. Nielson Corp.* ................................. 14,100 377,175
Apollo Group Inc. Cl. A* ............................ 3,050 97,981
Aviation Sales Co.* ................................. 300 9,975
Bright Horizons Family Solutions Corp.* ............. 500 9,250
Hagler Bailly Inc.* ................................. 1,300 30,550
Lamar Advertising Co. Cl. A* ........................ 1,000 31,219
Maximus Inc.* ....................................... 1,400 40,600
Metris Companies Inc.* .............................. 400 13,150
Pacific Gateway Exchange Inc.* ...................... 800 23,100
ProBusiness Services Inc.* .......................... 700 25,594
Staff Leasing Inc.* ................................. 1,100 13,613
Strayer Education Inc. .............................. 300 10,200
United Rentals Inc.* ................................ 900 24,187
Waddell & Reed Financial Inc. Cl. A* ................ 500 10,469
Young & Rubicam Inc.* ............................... 1,400 36,575
-----------
753,638
-----------
CONTAINER 0.9%
Ball Corp. .......................................... 9,100 383,906
-----------
DRUG 1.5%
Ascent Pediatrics Inc.* ............................. 800 1,800
Atrix Laboratories Inc.* ............................ 1,100 11,138
Axogen Ltd. ADR* .................................... 600 38,700
Biovail Corp.* ...................................... 3,100 96,681
Intelligent Polymers Ltd.* .......................... 3,400 78,200
Kos Pharmaceuticals, Inc.* .......................... 3,000 16,500
Pathogenesis Corp.* ................................. 900 36,000
Pfizer Inc. ......................................... 900 96,581
PharmaPrint Inc.* ................................... 1,300 12,919
Schering-Plough Corp. ............................... 1,600 164,600
Spiros Development Corp.* ........................... 2,500 26,875
Warner-Lambert Co. .................................. 1,200 94,050
-----------
674,044
-----------
FOOD & BEVERAGE 2.2%
Coca-Cola Co. ....................................... 2,300 155,537
Coca-Cola Enterprises Inc. .......................... 3,700 133,431
Golden State Vintners Inc. Cl. B* ................... 1,200 12,600
H.J. Heinz Co. ...................................... 1,100 63,938
Keebler Foods Co.* .................................. 2,900 83,375
Q.P. Corp. .......................................... 11,500 87,695
Snow Brand Milk Products Co. ........................ 26,200 96,638
Takara Shuzo Co. .................................... 27,000 144,982
Whitman Corp. ....................................... 9,400 201,512
-----------
979,708
-----------
HOSPITAL SUPPLY 1.7%
Abbott Laboratories ................................. 2,900 136,119
Aviron Corp.* ....................................... 1,300 24,700
Healthsouth Corp.* .................................. 1,206 14,623
Henry Schein Inc.* .................................. 300 11,606
IMPATH Inc.* ........................................ 900 27,562
Johnson & Johnson ................................... 2,200 179,300
Medtronic Inc. ...................................... 1,100 71,500
NCS Healthcare Inc. Cl. A* .......................... 1,400 24,675
Quorum Health Group Inc.* ........................... 8,000 116,000
Total Renal Care Holdings Inc.* ..................... 6,600 161,700
-----------
767,785
-----------
PERSONAL CARE 0.2%
DeVry Inc.* ......................................... 1,200 26,400
Wesley Jessen VisionCare Inc.* ...................... 2,200 39,325
-----------
65,725
-----------
PRINTING & PUBLISHING 1.9%
Hollinger International, Inc. Cl. A* ................ 18,500 240,500
Prosieben Media AG* ................................. 3,200 164,202
Torstar Corp. Cl. B* ................................ 7,900 93,950
Valassis Communications Inc.* ....................... 8,900 354,887
-----------
853,539
-----------
Total Consumer Staple ............................... 4,478,345
-----------
ENERGY 2.6%
OIL 2.5%
Abacan Resource Corp.* .............................. 11,300 3,531
Amoco Corp. ......................................... 1,800 101,025
British Petroleum Co. PLC* .......................... 7,500 110,088
Energy Africa Ltd.* ................................. 23,300 39,544
Exxon Corp. ......................................... 1,700 121,125
Gulfstream Resources Ltd. ........................... 4,200 11,704
IRI International Corp.* ............................ 1,300 7,069
KCS Energy Inc. ..................................... 2,000 10,125
Maxx Petroleum Ltd.* ................................ 3,700 9,019
Mobil Corp. ......................................... 1,700 128,669
Oryx Energy Co. ..................................... 7,000 98,000
Post Energy Corp.* .................................. 3,900 12,006
PTT Exploration & Production Public Co. Ltd.* ....... 7,500 72,255
Seagull Energy Corp.* ............................... 9,512 113,549
Seven Seas Petroleum Inc.* .......................... 1,300 11,456
Talisman Energy Inc. ................................ 570 12,540
Tosco Corp. ......................................... 2,200 61,738
Total SA Cl. B ADR .................................. 2,200 128,700
Unocal Corp. ........................................ 1,600 54,300
-----------
1,106,443
-----------
OIL SERVICE 0.1%
Atwood Oceanics Inc.* ............................... 700 19,687
Cliffs Drilling Co.* ................................ 500 11,437
NewPark Resources Inc.* ............................. 1,700 16,044
Willbros Group Inc.* ................................ 1,100 7,288
-----------
54,456
-----------
Total Energy ........................................ 1,160,899
-----------
FINANCE 6.1%
BANK 1.6%
Banco Di Roma ....................................... 56,300 98,209
BHF Bank AG ......................................... 1,800 69,273
Chase Manhattan Corp. ............................... 1,900 107,944
City National Corp.* ................................ 400 13,675
Commercial Federal Corp. ............................ 350 7,941
Golden State Bancorp Inc. ........................... 1,000 19,187
Golden State Bancorp Inc. Wts.* ..................... 1,000 4,875
National Bank of Canada ............................. 14,700 220,071
One Valley Bancorp Inc.* ............................ 400 12,950
TCF Financial Corp. ................................. 500 11,781
U.S. Bancorp ........................................ 3,800 138,700
-----------
704,606
-----------
FINANCIAL SERVICE 0.8%
Federal National Mortgage Association ............... 2,400 169,950
First Industrial Realty Trust Inc. .................. 500 12,813
Heller Financial Inc. Cl. A ......................... 700 16,800
Household International Inc. ........................ 1,500 54,844
IndyMac Mortgage Holdings Inc. ...................... 1,100 12,031
Knight/Trimark Group, Inc. Cl. A* ................... 1,400 11,375
Liberty Property Trust .............................. 500 11,500
Nomura Securities Co. ............................... 7,600 57,368
T & W Financial Corp.* .............................. 2,100 24,675
-----------
371,356
-----------
INSURANCE 3.7%
Ace Ltd. ............................................ 11,300 382,787
AMBAC Inc. .......................................... 5,500 320,031
American International Group Inc. ................... 1,100 93,775
ARM Financial Group, Inc. Cl. A ..................... 1,200 23,025
Capital Re Corp. .................................... 800 14,650
Citigroup Inc. ...................................... 2,200 103,538
Envoy Corp.* ........................................ 800 23,600
Exel Ltd. Cl. A ..................................... 4,188 320,120
Mutual Risk Management Ltd. ......................... 632 21,370
Orion Capital Corp. ................................. 100 3,419
Saint Paul Companies, Inc. .......................... 1,000 33,125
Terra Nova Holdings Ltd. Cl. A* ..................... 500 13,875
Transamerica Corp. .................................. 400 41,600
UNUM Corp. .......................................... 5,900 262,181
-----------
1,657,096
-----------
Total Finance ....................................... 2,733,058
-----------

SCIENCE & TECHNOLOGY 7.2%
COMPUTER SOFTWARE & SERVICE 3.9%
America Online Inc.* ................................ 1,000 127,062
Ascend Communications Inc.* ......................... 2,700 130,275
Automatic Data Processing Inc. ...................... 1,200 93,375
Broadcast.com Inc.* ................................. 100 4,988
Check Point Software Technologies Ltd.* ............. 900 20,475
Cisco Systems Inc.* ................................. 2,375 149,625
Duane Reade Inc.* ................................... 300 11,588
EMC Corp.* .......................................... 2,500 160,937
Fore Systems Inc.* .................................. 1,300 20,313
International Telecomm Systems Inc.* ................ 900 21,488
IXOS Software AG .................................... 300 32,599
META Group Inc.* .................................... 600 14,400
Microsoft Corp.* .................................... 800 84,700
Microstrategy Inc. Cl. A* ........................... 400 9,750
Nintendo Co. Ltd.* .................................. 2,500 211,443
Nova Corp.* ......................................... 1,900 54,862
Platinum Technology Inc.* ........................... 1,400 23,012
Radiant Systems Inc.* ............................... 2,400 16,200
Sema Group PLC* ..................................... 10,200 82,627
Softbank Corp. ...................................... 2,500 108,938
Summitt Design Inc.* ................................ 1,700 14,238
Tietotehdas Corp. ................................... 3,600 109,329
Transition Systems Inc.* ............................ 1,100 11,481
Ultimate Software Group Inc.* ....................... 1,900 13,300
Verio Inc.* ......................................... 800 11,100
Walker Interactive Systems, Inc.* ................... 2,800 14,000
Wang Laboratories Inc.* ............................. 1,100 23,512
Wind River Systems Inc.* ............................ 400 17,525
WM Data AB Cl. B* ................................... 3,200 116,423
Xylan Corp.* ........................................ 1,100 17,600
-----------
1,727,165
-----------
ELECTRONIC COMPONENTS 1.1%
Analog Devices Inc.* ................................ 2,100 41,738
Cymer Inc.* ......................................... 800 9,800
Digital Microwave Corp.* ............................ 3,780 16,538
Dupont Photomasks Inc.* ............................. 200 7,250
Intel Corp. ......................................... 1,400 124,862
Lernout & Hauspie Speech Products NV ADR* ........... 2,600 103,025
ONIX Systems Inc.* .................................. 1,900 11,875
Remec Inc.* ......................................... 4,550 47,775
RF Micro Devices Inc.* .............................. 900 21,375
Rohm Co.* ........................................... 1,000 88,351
-----------
472,589
-----------
ELECTRONIC EQUIPMENT 1.3%
Advanced Fibre Communications, Inc.* ................ 1,700 16,469
Aeroflex Inc.* ...................................... 6,900 77,625
L-3 Communications Holding Corp.* ................... 200 8,600
L.M. Ericsson Telephone Co. Cl. B* .................. 5,000 112,734
Lucent Technologies Inc. ............................ 2,000 160,375
Nokia AB Cl. K* ..................................... 1,400 127,301
Novellus Systems Inc.* .............................. 200 7,762
SLI Inc.* ........................................... 4,650 77,887
Spectrian Corp.* .................................... 800 8,550
-----------
597,303
-----------
OFFICE EQUIPMENT 0.9%
International Business Machines Corp. ............... 1,000 148,438
NCR Corp. ........................................... 1,200 40,350
Silicon Graphics Inc.* .............................. 4,400 49,500
Xerox Corp. ......................................... 1,700 164,687
-----------
402,975
-----------
Total Science & Technology .......................... 3,200,032
-----------
UTILITY 6.0%
ELECTRIC 3.5%
Consolidated Edison Inc. ............................ 800 40,100
DQE, Inc. ........................................... 1,000 39,437
Duke Energy Co. ..................................... 2,000 129,375
Edison International Corp. .......................... 1,400 36,925
GPU Inc. ............................................ 4,400 189,750
Illinova Corp. ...................................... 8,800 222,750
Montana Power Co. ................................... 2,400 103,950
OGE Energy Corp. .................................... 8,000 212,500
Pinnacle West Capital Corp. ......................... 6,300 276,019
Texas Utilities Co. ................................. 900 39,375
Unicom Corp. ........................................ 3,200 120,600
Western Resources Inc. .............................. 4,800 168,000
-----------
1,578,781
-----------
NATURAL GAS 0.8%
Calpine Corp.* ...................................... 1,300 28,925
Williams Companies Inc. ............................. 11,187 306,944
-----------
335,869
-----------
TELEPHONE 1.7%
AirTouch Communications Inc.* ....................... 2,000 112,000
Bellsouth Corp. ..................................... 1,600 127,700
Cable & Wireless PLC ................................ 5,200 39,164
Clearnet Communications Inc. Wts.* .................. 495 2,104
MCI Worldcom Inc.* .................................. 4,700 259,675
Qwest Communications International Inc.* ............ 2,200 86,075
Telecom Italia SPA* ................................. 18,700 135,156
Viatel Inc. Pfd(+)+ ................................. 24 1,440
-----------
763,314

-----------
Total Utility ....................................... 2,677,964

-----------
Total Equity Securities (Cost $17,627,579) .......... 18,916,476
-----------

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY
AMOUNT DATE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 52.8%
U.S. TREASURY 15.1%
U.S. Treasury Bond, 12.00% ....................... $ 150,000 8/15/2013 231,587
U.S. Treasury Bond, 8.75% ........................ 1,025,000 5/15/2017 1,431,638
U.S. Treasury Bond, 8.50% ........................ 150,000 2/15/2020 208,383
U.S. Treasury Bond, 6.875% ....................... 175,000 8/15/2025 211,941
U.S. Treasury Bond, 6.625% ....................... 875,000 2/15/2027 1,036,052
U.S. Treasury Note, 6.375% ....................... 1,000,000 8/15/2002 1,067,810
U.S. Treasury Note, 6.25% ........................ 150,000 8/31/2002 159,539
U.S. Treasury Note, 5.75% ........................ 75,000 4/30/2003 79,465
U.S. Treasury Note, 7.875% ....................... 575,000 11/15/2004 676,073
U.S. Treasury Note, 7.00% ........................ 250,000 7/15/2006 287,890
U.S. Treasury Note TIPS, 3.625% .................. 202,036 4/15/2028 202,161
U.S. Treasury STRIPS, 0.00% ...................... 225,000 11/15/2001 197,273
U.S. Treasury STRIPS, 0.00% ...................... 600,000 5/15/2003 490,776
U.S. Treasury STRIPS, 0.00% ...................... 650,000 5/15/2007 432,874
-----------
6,713,462
-----------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY VALUE
AMOUNT DATE (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. AGENCY MORTGAGE 9.8%
Federal Home Loan Mortgage
Corp., 6.00% ................................... $ 534,612 4/01/2013 $ 536,783
Federal National Mortgage
Association, 9.50% ............................. 102,304 10/01/2003 105,549
Federal National Mortgage
Association, 7.00% ............................. 120,253 12/01/2007 124,309
Federal National Mortgage
Association, 8.00% ............................. 143,371 4/01/2008 149,269
Federal National Mortgage
Association, 6.00% ............................. 175,000 5/15/2008 185,500
Federal National Mortgage
Association, 7.50% ............................. 366,580 11/01/2027 375,858
Federal National Mortgage
Association REMIC Series
1993-102H, 6.80% ............................... 100,000 9/25/2022 104,781
Federal National Mortgage
Association TBA, 6.50% ......................... 325,000 11/17/2013 330,282
Federal National Mortgage
Association TBA, 6.00% ......................... 550,000 11/12/2028 543,125
Federal National Mortgage
Association TBA, 6.50% ......................... 1,425,000 11/12/2028 1,435,242
Government National Mortgage Association, 6.50% .. 82,259 2/15/2009 83,930
Government National Mortgage Association, 6.50% .. 178,699 5/15/2009 182,007
Government National Mortgage Association, 7.00% .. 117,371 2/15/2025 120,195
Government National Mortgage Association TBA,
7.00% .......................................... 100,000 11/18/2028 102,281
-----------
4,379,111
-----------
FOREIGN GOVERNMENT 5.8%
Greek Drachma
Republic of Greece, 8.80% ........................ 175,000,000 6/19/2007 645,296
New Zealand Dollar
Government of New Zealand, 10.00% ................ 825,000 3/15/2002 499,636
Government of New Zealand, 8.00% ................. 1,000,000 11/15/2006 618,313
Pound Sterling
United Kingdom Treasury, 8.50% ................... 400,000 12/07/2005 803,376
-----------
2,566,621
-----------
FINANCE/MORTGAGE 10.8%
Advanta Credit Card Master Trust Series 1996-A Cl.
A1, 6.00% ...................................... $ 75,000 11/15/2005 76,476
Arcadia Automobile Trust
97-C A5, 6.55% ................................. 100,000 6/15/2005 101,375
AT&T Capital Corp. Note, 6.25% ................... 200,000 5/15/2001 198,452
Auto Leasing Investment Trust LLC
1997-A4, 6.07%+ ................................ 100,000 8/14/2002 101,968
Capital One Bank Note, 6.15% ..................... 150,000 6/01/2001 149,471
Capital One Bank Note, 7.08% ..................... 150,000 10/30/2001 151,923
Chase Manhattan Master Trust
96-3A, 7.04% ................................... 175,000 2/15/2005 182,000
Commercial Credit Group Inc.
Note, 6.45% .................................... 200,000 7/01/2002 205,124
Countrywide Funding Corp. Note, 6.58% 150,000 9/21/2001 154,833
Countrywide Funding Corp. Note, 6.46% 225,000 2/10/2003 233,593
CS First Boston Mortgage Securities Corp. Series
96-2A, 6.32% ................................... 22,485 3/25/2005 22,408
ERAC USA Finance Co., 6.75%+ ..................... 250,000 5/15/2007 252,450
GE Global Insurance Holding Corp.
Note, 7.00% .................................... 200,000 2/15/2026 215,032
GMAC Commercial Mortgage Security Inc. 97-C2 Cl.
A, 6.45% ....................................... 96,170 12/15/2004 98,093
GS Mortgage Securities Corp., 6.86% .............. 200,000 7/13/2030 208,250
Household Finance Co. Note, 6.75% ................ 100,000 6/01/2000 101,644
IBM Credit Corp. Note, 5.79% ..................... 200,000 3/20/2000 202,352
LB Commercial Conduit Mortgage Trust 97-LL1-A1,
6.79% .......................................... 195,521 6/12/2004 203,342
LB Commercial Conduit Mortgage Trust 98C1-A1,
6.33% .......................................... 95,555 11/18/2004 96,600
MBNA Corp. Sr. Note, 6.875% ...................... 100,000 11/15/2002 105,321
MBNA Corp. Sr. Note, 6.15% ....................... 250,000 10/01/2003 258,328
MBNA Master Credit Card Trust Series 98-JA, 5.25% 375,000 2/15/2006 373,912
Morgan Stanley Capital Inc.
98-A1, 6.22% ................................... 98,209 5/03/2005 98,576
Morgan Stanley Capital Inc.
98-A1, 6.19% ................................... 96,103 1/15/2007 97,332
Prime Credit Card Master Trust Series 1995-1A,
6.75% .......................................... 125,000 11/15/2005 129,844
Prime Credit Card Master Trust Series 1996-1A,
6.70% .......................................... 100,000 7/15/2004 103,062
Prudential Home Mortgage Securities Co. Series
93-29 A-6 PAC, 6.75% ........................... 34,555 8/25/2008 34,652
Railcar Leasing LLC Sr. Sec.
Note, 6.75%+ ................................... 146,674 7/15/2006 150,203
Sears Credit Account Master Trust Series 1997-1A,
6.20% .......................................... 100,000 7/16/2007 102,156
Sears Credit Account Master Trust Series 1998-2A,
5.25% .......................................... 200,000 10/16/2008 198,113
Zurich Capital Trust Note, 8.38%+ ................ 200,000 6/01/2037 214,808
-----------
4,821,693
-----------
CORPORATE 10.1%
Allbritton Communications Co. Sr. Sub. Deb., 9.75% 25,000 11/30/2007 25,250
Ameristar Casinos Inc. Sr. Sub.
Note, 10.50%+ .................................. 100,000 8/01/2004 94,000
Archibald Candy Corp. Sr. Sec.
Note, 10.25% ................................... 125,000 7/01/2004 126,250
California Infrastructure Development Series 1997-
A7, 6.42% ...................................... 100,000 9/25/2008 103,813
Chevron Corp. Profit Sharing
Note, 8.11% .................................... 92,000 12/01/2004 100,485
Coca-Cola Enterprises Inc., 5.75% ................ 200,000 11/01/2008 200,875
Coca-Cola Enterprises Inc. Deb., 6.75% 200,000 9/15/2028 199,516
Columbia/HCA Healthcare Corp.
Note, 6.50% .................................... 200,000 3/15/1999 199,256
Columbia/HCA Healthcare Corp.
Note, 7.69% .................................... 100,000 6/15/2025 85,356
Columbia/HCA Healthcare Corp.
Note, 7.75% .................................... 100,000 7/15/2036 86,425
Edison Mission Energy Funding Corp. Series A Note,
6.77%+ ......................................... 172,855 9/15/2003 179,052
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 193,750
Envirosource Inc. Note, 9.75% .................... 125,000 6/15/2003 120,000
First Wave Marine Inc. Sr.
Note, 11.00% ................................... 150,000 2/01/2008 143,250
Fort James Corp. Note, 6.23% ..................... 75,000 3/15/2001 76,160
Fort James Corp. Sr. Note, 6.625% ................ 200,000 9/15/2004 202,830
Healthsouth Corp. Sr. Note, 6.875%+ .............. 100,000 6/15/2005 96,861
International Shipholding Corp. Sr. Note Series B,
7.75% .......................................... 250,000 10/15/2007 233,750
J.B. Poindexter Inc. Sr. Note, 12.50% ............ 50,000 5/15/2004 45,000
New York State Power Authority, Revenue Bonds,
Series D, 6.17% ................................ 150,000 2/15/2001 153,562
News America Holdings Inc.
Deb., 7.375% ................................... 200,000 10/17/2008 207,316
Norcal Waste Systems Inc. Series B Sr. Note,
13.50% ......................................... 200,000 11/15/2005 220,000
Ocean Energy Inc. Series B Sr.
Note, 7.625%+ .................................. 50,000 7/01/2005 47,500
Owens-Illinois Inc. Sr. Deb., 7.50% .............. 150,000 5/15/2010 157,546
Pool Energy Services Co. Sr. Sub.
Note, 8.625% ................................... 150,000 4/01/2008 138,000
Prime Succession Inc. Sr. Sub.
Note, 10.75% ................................... 100,000 8/15/2004 91,000
RSL Communications Ltd. Sr.
Note, 12.25% ................................... 200,000 11/15/2006 206,000
Spanish Broadcasting Systems Inc. Sr. Note, 12.50%
................................................ 100,000 6/15/2002 108,500
U.S.A. Mobile Communications Inc. Sr. Note, 9.50% 200,000 2/01/2004 150,000
United Technologies Corp. Note, 6.70% 100,000 8/01/2028 103,800
Viatel Inc. Sr. Note, 11.25%+ .................... 50,000 4/15/2008 40,000
Westpoint Stevens Inc. Sr.
Note, 7.875%+ .................................. 250,000 6/15/2008 251,094
Wisconsin Central Transportation Corp. Note,
6.625% ......................................... 100,000 4/15/2008 98,413
-----------
4,484,610
-----------
CANADIAN-YANKEE 1.2%
Province of Ontario Deb., 5.50% .................. 175,000 10/01/2008 173,922
Province of Quebec Deb., 7.50% ................... 75,000 7/15/2023 82,301
Trans-Canada Pipelines Ltd. Note, 6.43% 100,000 3/15/2004 102,867
Usinor Sacilor Note, 7.25% ....................... 100,000 8/01/2006 102,026
Woodside Finance Ltd. Note, 6.60%+ ............... 100,000 4/15/2008 94,302
-----------
555,418
-----------
Total Fixed Income Securities (Cost $23,134,527) ........................................ 23,520,915
-----------
COMMERCIAL PAPER 10.5%
American Express Credit Corp., 5.12% .............. 724,000 11/02/1998 724,000
American Express Credit Corp., 5.18% .............. 450,000 11/02/1998 450,000
American Express Credit Corp., 5.10% .............. 1,000,000 11/12/1998 1,000,000
Ford Motor Credit Co., 5.13% ...................... 1,961,000 11/05/1998 1,961,000
General Electric Capital Corp., 5.43% ............. 257,000 11/05/1998 257,000
General Electric Capital Corp., 5.06% ............. 303,000 11/12/1998 303,000
-----------
Total Commercial Paper (Cost $4,695,000) ............................................... 4,695,000
-----------

- ---------------------------------------------------------------------------------------------------------------
SHARES
- ---------------------------------------------------------------------------------------------------------------

SHORT-TERM INVESTMENTS 23.5%
State Street Navigator Securities Lending Prime Portfolio ................... 10,483,857 10,483,857
-----------
Total Short-Term Investments (Cost $10,483,857) ........................................ 10,483,857
-----------
Total Investments (Cost $55,940,963) - 129.3% .......................................... 57,616,248
Cash and Other Assets, Less Liabilities - (29.3%) ...................................... (13,046,349)
-----------
Net Assets - 100.0% .................................................................... $44,569,899
===========

Federal Income Tax Information:
At October 31, 1998, the net unrealized appreciation of investments based on cost for
Federal income tax purposes of $56,027,309 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess
of value over tax cost ............................................................... $ 3,510,387
Aggregate gross unrealized depreciation for all investments in which there is an excess
of tax cost over value ............................................................... (1,921,448)
-----------
$ 1,588,939
===========
</TABLE>

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

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 c ustomary
settlement time. Although the unit price has been established, the
principal value has not been finalized and may vary by no m ore than 1%.

* Nonincome-producing securities.

(+) Payments of income may be made in cash or in the form of 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, 1998 were $1,521, 148 and $1,524,297 (3.42% of net
assets), respectively.
Futures contracts open at October 31, 1998, are as follows:

EXPIRATION UNREALIZED
TYPE NOTIONAL AMOUNT MONTH APPRECIATION
--------------------------------------------------------------------------

10 year U.S. Treasury Notes $200,000 December, 1998 $ 2,687

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

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

Forward currency exchange contracts outstanding at October 31, 1998, are as
follows:

<TABLE>
<CAPTION>
UNREALIZED
CONTRACT APPRECIATION DELIVERY
TOTAL VALUE PRICE (DEPRECIATION) DATE
- -----------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
Sell Canadian dollars, Buy U.S. dollars 332,786 CAD .66122 CAD $ 4,363 12/15/98
Sell Deutsche marks, Buy U.S. dollars 361,000 DEM .56465 DEM (14,238) 11/13/98
Sell Deutsche marks, Buy U.S. dollars 350,000 DEM .56484 DEM (13,738) 11/13/98
Sell Deutsche marks, Buy U.S. dollars 390,000 DEM .56453 DEM (15,432) 11/13/98
Sell British pounds, Buy U.S. dollars 470,000 GBP 1.69865 GBP 14,993 1/22/99
Sell Japanese yen, Buy U.S. dollars 86,726,934 JPY .00725 JPY (120,099) 12/16/98
Buy New Zealand dollars, Sell U.S. dollars 177,000 NZD .52700 NZD 486 11/13/98
Sell New Zealand dollars, Buy U.S. dollars 1,170,000 NZD .50100 NZD (33,633) 11/13/98
Sell New Zealand dollars, Buy U.S. dollars 90,000 NZD .50741 NZD (2,010) 11/13/98
Sell New Zealand dollars, Buy U.S. dollars 47,000 NZD .50400 NZD (1,210) 11/13/98
Sell New Zealand dollars, Buy U.S. dollars 450,000 NZD .52640 NZD (1,837) 1/22/99
Sell New Zealand dollars, Buy U.S. dollars 430,000 NZD .52550 NZD (2,142) 1/22/99
---------
$(184,497)
=========
</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, 1998

ASSETS
Investments, at value (Cost $55,940,963) (Note 1) ........ $57,616,248
Cash ..................................................... 5,042
Receivable for securities sold ........................... 1,987,777
Interest and dividends receivable ........................ 378,238
Receivable from Distributor (Note 3) ..................... 30,468
Receivable for open forward contracts .................... 19,842
Receivable for fund shares sold .......................... 2,741
Other assets ............................................. 23,690
-----------
60,064,046
LIABILITIES
Payable for collateral received on securities loaned ..... 10,483,857
Payable for securities purchased ......................... 4,561,183
Payable for open forward contracts ....................... 204,339
Accrued transfer agent and shareholder services
(Note 2) ............................................... 88,097
Accrued management fee (Note 2) .......................... 24,247
Accrued trustees' fees (Note 2) .......................... 16,302
Payable for variation margin (Note 1) .................... 1,563
Payable for fund shares redeemed ......................... 885
Other accrued expenses ................................... 113,674
-----------
15,494,147
-----------
NET ASSETS $44,569,899
===========
Net Assets consist of:
Undistributed net investment income .................... $ 663,696
Unrealized appreciation of investments ................. 1,675,285
Unrealized depreciation of forward contracts and
foreign currency ..................................... (182,594)
Unrealized appreciation of futures contracts ........... 2,687
Accumulated net realized gain .......................... 4,617,399
Paid-in capital ........................................ 37,793,426
-----------
$44,569,899
===========
Net Asset Value, offering price and redemption
price per share of Class S shares
($44,569,899 / 3,988,727 shares) ....................... $11.17
======

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

<PAGE>

INVESTMENT INCOME
Interest, net of foreign taxes of $5,113 (Note 1) .............. $ 1,839,856
Dividends, net of foreign taxes of $7,493 ...................... 248,241
-----------
2,088,097
EXPENSES
Management fee (Note 2) ........................................ 324,438
Transfer agent and shareholder services (Note 2) ............... 232,373
Custodian fee .................................................. 151,057
Reports to shareholders ........................................ 39,690
Registration fees .............................................. 33,636
Audit fee ...................................................... 24,130
Trustees' fees (Note 2) ........................................ 18,781
Amortization of organization costs (Note 1) .................... 8,831
Miscellaneous .................................................. 2,820
-----------
835,756
Expenses borne by the Distributor (Note 3) ..................... (330,694)
-----------
505,062
-----------
Net investment income .......................................... 1,583,035
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FORWARD CONTRACTS, FOREIGN CURRENCY AND
FUTURES CONTRACTS
Net realized gain on investments (Notes 1 and 4) ............... 4,622,483
Net realized gain on forward contracts and foreign
currency (Note 1) ............................................ 229,317
Net realized gain on futures contracts (Note 1) ................ 8,821
-----------
Total net realized gain ...................................... 4,860,621
-----------
Net unrealized depreciation of investments ..................... (2,847,817)
Net unrealized depreciation of forward contracts and
foreign currency ............................................. (189,072)
Net unrealized appreciation of futures contracts ............... 2,687
-----------
Total net unrealized depreciation ............................ (3,034,202)
-----------
Net gain on investments, forward contracts, foreign
currency and futures contracts ............................... 1,826,419
-----------
Net increase in net assets resulting from operations ........... $ 3,409,454
===========

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
---------------------------------------
1997 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ....................................... $ 1,470,707 $ 1,583,035
Net realized gain on investments,
forward contracts, foreign currency
and futures contracts ..................................... 5,688,492 4,860,621
Net unrealized appreciation
(depreciation) of investments, forward
contracts, foreign currency and futures
contracts ................................................. 728,722 (3,034,202)
----------- -----------
Net increase resulting from
operations ................................................ 7,887,921 3,409,454
----------- -----------
Dividends from net investment income
-- Class S ................................................ (1,636,395) (1,562,753)
----------- -----------
Distributions from net realized gains
-- Class S ................................................ (2,787,815) (5,543,465)
----------- -----------
Class S share transactions (Note 6):
Proceeds from sale of shares .............................. 10,637,538 7,459,681
Net asset value of shares issued in
payment of:
Dividends from net investment
income ................................................ 1,010,909 790,394
Distributions from net realized
gains ................................................. 2,787,811 5,543,456
Cost of shares repurchased ................................ (9,391,187) (19,024,501)
----------- -----------
Net increase (decrease) from fund share
transactions .............................................. 5,045,071 (5,230,970)
----------- -----------
Total increase (decrease) in net assets 8,508,782 (8,927,734)
NET ASSETS
Beginning of year ........................................... 44,988,851 53,497,633
----------- -----------
End of year (including undistributed net
investment income of $449,237 and $663,696, respectively) . $53,497,633 $44,569,899
=========== ===========

Number of Class S shares:
Sold ...................................................... 930,934 649,043
Issued upon reinvestment of:
Dividends from net investment
income ................................................ 90,518 72,139
Distributions from net realized
gains ................................................. 258,131 520,024
Repurchased ............................................... (837,303) (1,681,422)
----------- -----------
Net increase (decrease) in fund
shares .................................................. 442,280 (440,216)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE

- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS IN NET ASSETS
- -------------------------------------------------------------------------------
OCTOBER 31, 1998

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 five separate funds: State Street Research Strategic Portfolios:
Moderate, State Street Research Government Income Fund, State Street Research
Strategic Portfolios: Conservative, State Street Research Strategic Portfolios:
Aggressive and State Street Research IntelliQuant Portfolios: Small-Cap Value.

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. 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"),
an indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), 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 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.

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. For the year ended October 31, 1998, the Fund has designated its
distributions from net realized gains as $1,598,162 from 20% rate gains and
$2,648,085 from 28% rate gains.

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 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 exchange 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.

I. SECURITIES LENDING
The Fund may seek additional income by lending portfolio securities to qualified
institutions. The Fund will receive cash or securities as collateral in an
amount equal to at least 100% of the current market value of any loaned
securities plus accrued interest. By reinvesting any cash collateral it receives
in these transactions, the Fund could realize additional gains and losses. If
the borrower fails to return the securities and the value of the collateral has
declined during the term of the loan, the Fund will bear the loss. At October
31, 1998, the value of the securities loaned and the value of collateral were
$9,207,620 and $10,483,857, respectively. During the year ended October 31,
1998, income from securities lending amounted to $15,630 and is included in
interest income.

J. FUTURES CONTRACTS
The Fund may enter into futures contracts as a hedge against unfavorable market
conditions and to enhance income. The Fund will not purchase any futures
contract if, after such purchase, more than one-third of net assets would be
represented by long futures contracts. The Fund will limit its risks by entering
into a futures position only if it appears to be a liquid investment.

Upon entering into a futures contract, the Fund deposits with the selling broker
sufficient cash or U.S. Government securities to meet the minimum "initial
margin" requirements. Thereafter, the Fund receives from or pays to the broker
cash or U.S. Government securities equal to the daily fluctuation in value of
the contract ("variation margin"), which is recorded as unrealized gain or loss.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.

NOTE 2

The Trust and the Adviser 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, 1998, the fees pursuant to such
agreement amounted to $324,438.

The fees of the Trustees not currently affiliated with the Adviser amounted to
$18,781 during the year ended October 31, 1998.

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, 1998, the amount of such expenses assumed by the
Distributor and its affiliates was $330,694.

NOTE 4

For the year ended October 31, 1998, purchases and sales of securities,
exclusive of short-term obligations, aggregated $71,492,910 and $81,051,900
(including $36,017,787 and $37,038,936 of U.S. Government obligations),
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 compensate or 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, 1998, Metropolitan owned 1,704,109 Class S shares of the Fund.

- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
For a Class S share outstanding throughout each year:

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
-----------------------------------------------------
1994 1995(1) 1996(1) 1997(1) 1998(1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.57 9.18 10.26 11.28 12.08
-------- -------- -------- -------- --------
Net investment income ($)* 0.28 0.36 0.35 0.35 0.36
Net realized and unrealized gain (loss) on
investments, foreign contracts, foreign
currency and futures contracts ($) (0.45) 1.01 1.07 1.53 0.34
-------- -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS ($) (0.17) 1.37 1.42 1.88 0.70
-------- -------- -------- -------- --------
Dividends from net investment income ($) (0.22) (0.29) (0.40) (0.39) (0.36)
Distributions from net realized gains ($) -- -- -- (0.69) (1.25)
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS ($) (0.22) (0.29) (0.40) (1.08) (1.61)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR ($) 9.18 10.26 11.28 12.08 11.17
======== ======== ======== ======== ========
Total return(2) (%) (1.81) 15.24 14.08 17.83 6.53
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 28,494 39,821 44,989 53,498 44,570

Ratio of operating expenses to average net
assets (%)* 1.00 1.00 1.00 1.00 1.00
Ratio of net investment income to average net
assets (%)* 3.05 3.68 3.23 3.03 3.17
Portfolio turnover rate (%) 142.86 120.62 127.59 136.17 150.05
*Reflects voluntary reduction of expenses per
share of these amounts (Note 3) ($) 0.05 0.07 0.05 0.07 0.08
- -----------------------------------------------------------------------------------------------------------
</TABLE>

(1) Per-share figures have been calculated using the average shares method.
(2) Does not reflect front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily reduced a portion of the Fund's expenses.

<PAGE>

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

TO THE TRUSTEES OF STATE STREET RESEARCH FINANCIAL TRUST
AND THE SHAREHOLDERS OF STATE STREET RESEARCH
STRATEGIC PORFOLIOS: 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, 1998, 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, 1998 by correspondence with the
custodian and brokers provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP
Boston, Massachusetts
December 11, 1998

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE

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

For the year ended October 31, 1998, Class S shares of State Street Research
Strategic Portfolios: Moderate gained 6.53%. That was less than its peer group,
the Lipper balanced fund average, which rose 9.13%. It was also well below the
S&P 500, which gained 22.01%.

Strategic Portfolios: Moderate seeks high total return primarily through capital
appreciation by investing in a mix of common stocks and bonds. The manager's
strategy is to adjust the asset allocation based on changing market conditions.

In general, investors sought quality and liquidity during the year. Large
company stocks outperformed small and mid-cap stocks. High-quality bonds
outperformed high-yield bonds. The Fund was hurt by its reduced exposure to
stocks, in general. And to the extent that it owned small and mid-cap stocks and
high-yield bonds, that was a further blow to performance.

We expect modest growth in corporate profits and continued volatility in the
financial markets in 1999. An uncertain global economic environment has been
aided by an infusion of cash from the International Monetary Fund, by proposed
reforms to Japan's banking system, and the Federal Reserve's cuts in interest
rates in the United States. However, we remain cautious about the prospects for
the markets and the economy, and we continue to underweight U.S. equities,
overweight bonds and focus on quality and liquidity.

October 31, 1998

Keep in mind that past performance is no guarantee of future results. The Fund's
share price, yield and return will fluctuate, and you may have a gain or loss
when you sell your shares. All returns assume reinvestment of capital gain
distributions and income dividends at net asset value. Class S shares, offered
without a sales charge, are available only through certain employee benefit
plans and special programs. The S&P 500 (officially the "Standard and Poor's 500
Composite Stock Price Index") is an unmanaged index of 500 U.S. 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

-----------------------------------
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------
1 Year 5 Years Life of Fund
-----------------------------------
6.53% 10.13% 9.98%
-----------------------------------

VALUE OF
VALUE OF ACCOUNT OF
ACCCOUNT OF LEHMAN BROTHERS
VALUE OF S & P 500 GOV'T/CORP
ACCOUNT AT INDEX AT INDEX AT
DATE YEAR END YEAR END YEAR END
- ---- -------- -------- --------
Inception 09/28/93 $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
10/31/98 16,237 26,798 14,066

<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 Former Senior Vice President
for Finance and Operations and
DISTRIBUTOR E.K. RAGSDALE, JR. Treasurer, The Pennsylvania
State Street Research Vice President State University
Investment Services, Inc.
One Financial Center THOMAS A. SHIVELY
Boston, MA 02111 Vice President MALCOLM T. HOPKINS
Former Vice Chairman of the
SHAREHOLDER SERVICES JAMES M. WEISS Board and Chief Financial
State Street Research Vice President Officer, St. Regis Corp.
Service Center
P.O. Box 8408 GERARD P. MAUS
Boston, MA 02266-8408 Treasurer EDWARD M. LAMONT
1-800-562-0032 Formerly in banking
JOSEPH W. CANAVAN (with an affiliate of
CUSTODIAN Assistant Treasurer J.P. Morgan & Co. in New York);
State Street Bank and presently engaged in private
Trust Company DOUGLAS A. ROMICH investments and civic affairs
225 Franklin Street Assistant Treasurer
Boston, MA 02110
FRANCIS J. MCNAMARA, III ROBERT A. LAWRENCE
LEGAL COUNSEL Secretary and General Counsel Former Partner, Saltonstall & Co.
Goodwin, Procter & Hoar LLP
Exchange Place DARMAN A. WING
Boston, MA 02109 Assistant Secretary and DEAN O. MORTON
Assistant General Counsel Former Executive Vice President,
INDEPENDENT ACCOUNTANTS Chief Operating Officer and
PricewaterhouseCoopers LLP AMY L. SIMMONS Director, Hewlett-Packard
One Post Office Square Assistant Secretary Company
Boston, MA 02109

SUSAN M. PHILLIPS
Dean, School of Business and
Public Management, George
Washington University; former
Member of the Board of Governors
of the Federal Reserve System and
Chairman and Commissioner of
the Commodity Futures Trading
Commission

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
</TABLE>

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE -------------------
One Financial Center Bulk Rate
Boston, MA 02111 U.S. Postage
PAID
Permit #20
Holliston, MA 01746
-------------------
QUESTIONS? COMMENTS?

CALL us at 1-800-562-0032
[hearing-impaired 1-800-676-7876]

WRITE us at:
State Street Research
Service Center
P.O. Box 8408
Boston, MA 02266-8408

EMAIL us at:
[email protected]
INTERNET site:
www.ssrfunds.com

[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, 1998, 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: (exp1299)SSR-LD SP-124E-1298

<PAGE>

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

ANNUAL REPORT

October 31, 1998

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

FROM THE CHAIRMAN
From good news
to modest results

PORTFOLIO MANAGER'S REVIEW
A disappointing year,
but positive signs ahead

FUND INFORMATION
Facts and figures

PLUS, COMPLETE PORTFOLIO HOLDINGS
AND FINANCIAL STATEMENTS

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

[DALBAR LOGO]

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

For Excellence
in STATE STREET RESEARCH FUNDS
Shareholder Service

<PAGE>

FROM THE CHAIRMAN

[Photo of Ralph F. Verni]

BONDS
Bonds have benefited from the Federal Reserve Board's two successive,
one-quarter percent cuts in the federal funds rate. The yield on the bellwether
long-term Treasury bond fell below 5.0%. Although the yield has risen since,
high quality bonds have delivered attractive returns.

INTERNATIONAL
Indications that economic growth has slowed around the world, plus specific
concerns over Asia's woes, continued to bring returns down on most major foreign
exchanges. Even Europe, which had delivered strong gains, felt the effects of
Russia's currency problems and Japan's recession. As interest rates converge in
anticipation of the euro, Europe's new common currency in 1999, Spain and Italy
appear to be in the best position to grow. Germany and France are the most
likely to suffer.

OUTLOOK AND OPPORTUNITIES
As investors, you may be asking where opportunities lie ahead. My answer is in
diversification -- and in some of the markets that have been beaten down. But
every investor is different. Now is a good time to seek advice from your
financial professional. And as always, thank you for your confidence in State
Street Research funds.

Sincerely,

/s/ Ralph F. Verni

Ralph F. Verni
Chairman

October 31, 1998

- -------------------------------------------------------------------------------
FUND INFORMATION (all data are for periods ended October 31, 1998, except where
noted)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR PERIODS ENDED 9/30/98(2)(3) AVERAGE ANNUAL TOTAL RETURN(2)(3)
- --------------------------------------------- --------------------------------------------
LIFE OF FUND LIFE OF FUND
(since 6/16/94) 3 YEARS 1 YEAR (since 5/16/94) 3 YEARS 1 YEAR
- --------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class S 13.36% 12.71% -1.99% Class S 13.65% 14.57% 3.69%
- --------------------------------------------- --------------------------------------------
</TABLE>

(3)Class S shares, offered without a sales charge, are available through certain
employee benefit plans and special programs.

<PAGE>

PORTFOLIO MANAGER'S REVIEW
Strategic Portfolios: Aggressive: A disappointing year, but positive signs
ahead.

[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, 1998
and the Fund's strategy for the year ahead.

Q: HOW DID THE FUND PERFORM LAST YEAR?
A: The Fund had a disappointing year. Class S shares gained 3.69% for the 12
months ended October 31, 1998. The Fund underperformed the average flexible
portfolio fund, which rose 9.05%, according to Lipper Analytical Services. It
lagged the S&P 500, which gained 22.01% for the period.(1) Some of the
underperformance can be attributed to the fact that the Fund had more than 30%
of its assets invested in bonds and cash, while the S&P 500 only measures common
stock performance.

Q: WHAT ACCOUNTED FOR THE FUND'S WEAK PERFORMANCE?
A: To the extent that the Fund was invested in small-cap growth stocks, mid-cap
value stocks and high-yield bonds, there was a drag on performance, because
these sectors were all underperformers. Also, our decision to underweight
stocks, in general, hurt the Fund, because stocks did much better than bonds for
the 12 months - despite weakness late in the period.

Q: HAVE YOU ALTERED THE FUND'S ASSET ALLOCATION AS A RESULT OF LAST YEAR'S
PERFORMANCE?
A: No. At the end of the year, approximately 65% of the Fund's assets were
invested in stocks - well below the normal guideline. While we were disappointed
in last year's performance, there are a lot of uncertainties for the stock
market, and we believe our decision to underweight stocks, in general, is a
prudent move going forward. We also believe that the Fund's investments in small
and mid-cap stocks have the potential to recover. We did not sell them on
weakness.

Q: WHAT IS YOUR OUTLOOK FOR THE PERIOD AHEAD?
A: We remain cautious, but there are some positive signs: the stock market has
started to recover from a weak September, helped by the Federal Reserve's two
quick interest-rate cuts. Japan has taken some steps to address the problems in
its banking system. The International Monetary Fund has come up with a $40
billion package to help stabilize the situation in Brazil.

All of these are positive signs for the world's financial markets and for the
U.S. economy. However, we're not out of the woods. Our expectation is for
modestly higher corporate profits in 1999. There's still a lot of uncertainty,
and we expect continued volatility going forward. As a result, our strategy is
to remain somewhat underweighted in U.S. equities, overweighted in high-grade
bonds relative to our normal target mix, and to continue to focus on quality.

October 31, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSET ALLOCATION TOP 5 BOND SECTORS TOP 5 EQUITIY INDUSTRIES
(by percentage (by percentage (by percentage
of net assets) of net assets) of net assets)

Equities 65% BALL 1.2% COMPUTER SOFTWARE 6.3%
Bonds 30% VALASSIS 1.2% & SERVICE
Cash 5% COMMUNICATIONS INSURANCE 5.3%
ACE 1.2% ELECTRIC 4.8%
A.C. NEILSON 1.2% RETAIL TRADE 4.6%
AMBAC 1.0% OIL 3.8%

Total: 5.8% Total: 24.8%
<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
October 31, 1998
- --------------------------------------------------------------------------------
VALUE
SHARES (NOTE 1)
- --------------------------------------------------------------------------------
EQUITY SECURITIES 65.4%
BASIC INDUSTRIES 6.7%
CHEMICAL 1.9%
Agrium Inc. .................................... 33,500 $ 351,750
Cabot Corp. .................................... 18,500 519,156
Cambrex Corp. .................................. 5,300 135,481
Cordant Technologies Inc. ...................... 1,800 73,238
------------
1,079,625
------------
DIVERSIFIED 1.5%
Johnson Controls Inc. .......................... 2,600 146,250
Mark IV Industries Inc. ........................ 21,600 332,100
Ogden Corp. .................................... 13,500 362,812
------------
841,162
------------
ELECTRICAL EQUIPMENT 0.6%
Asia Pacific Wire & Cable Corp. Ltd.* .......... 29,700 76,106
General Electric Co. ........................... 2,800 245,000
------------
321,106
------------
MACHINERY 1.7%
Harsco Corp. ................................... 1,500 49,125
Howmet International Inc.* ..................... 24,000 360,000
ITEQ Inc.* ..................................... 17,700 47,569
Sundstrand Corp. ............................... 2,800 131,425
Tyco International Ltd. ........................ 3,800 235,363
Valeo SA ....................................... 1,600 138,519
Valeo SA Wts.* ................................. 1,600 8,639
------------
970,640
------------
METAL & MINING 0.5%
General Cable Corp.* ........................... 2,550 50,363
Kennametal Inc. ................................ 7,100 147,325
Wyman-Gordon Co.* .............................. 4,100 58,937
------------
256,625
------------
TRUCKERS 0.5%
CNF Transportation Inc. ........................ 1,100 33,275
Laidlaw Inc. ................................... 23,800 224,613
------------
257,888
------------
Total Basic Industries ......................... 3,727,046
------------
CONSUMER CYCLICAL 8.5%
AUTOMOTIVE 0.7%
Copart Inc.* ................................... 1,200 26,400
Gencorp Inc. ................................... 13,400 296,475
Teleflex Inc. .................................. 1,200 46,425
------------
369,300
------------
BUILDING 0.0%
Golf Trust of America Inc.* .................... 1,000 26,750
------------
HOTEL & RESTAURANT 1.4%
CKE Restaurants Inc.* .......................... 1,530 40,258
Harrah's Entertainment Inc.* ................... 15,500 218,937
McDonald's Corp. ............................... 3,700 247,437
Mirage Resorts Inc.* ........................... 15,300 259,144
Motels of America Inc.*+ ....................... 175 1,444
Servico Inc.* .................................. 2,500 12,188
------------
779,408
------------
RECREATION 1.7%
American Tower Corp. Cl. A* .................... 3,000 65,625
Chancellor Media Corp. ......................... 6,600 253,275
Cinar Films Inc. Cl. B* ........................ 3,800 80,275
Cox Communications Inc. Cl. A* ................. 2,500 137,188
GTECH Holdings Corp.* .......................... 5,000 120,000
MediaOne Group Inc.* ........................... 4,100 173,481
Steiner Leisure Ltd.* .......................... 5,250 127,969
------------
957,813
------------
RETAIL TRADE 4.6%
Blyth Industries Inc.* ......................... 1,900 52,487
CSK Auto Corp.* ................................ 1,800 46,913
CVS Corp. ...................................... 6,300 287,831
Hannaford Brothers Co. ......................... 10,700 468,794
Home Depot Inc. ................................ 6,300 274,050
Jones Apparel Group Inc.* ...................... 3,700 63,825
Kroger Co.* .................................... 4,400 244,200
Linens 'n Things Inc.* ......................... 1,800 55,687
Safeway Inc. ................................... 5,200 248,625
Saks Inc.* ..................................... 4,500 102,375
Staples Inc.* .................................. 4,100 133,762
Stride Rite Corp. .............................. 4,300 39,238
Wal-Mart Stores, Inc. .......................... 3,500 241,500
Wolters Kluwer NV* ............................. 1,700 329,364
------------
2,588,651
------------
TEXTILE & APPAREL 0.1%
Maxwell Shoe Inc. Cl. A* ....................... 3,400 39,950
------------
Total Consumer Cyclical ........................ 4,761,872
------------
CONSUMER STAPLE 16.0%
BUSINESS SERVICE 2.8%
A.C. Nielson Corp.* ............................ 24,100 644,675
Apollo Group Inc. Cl. A* ....................... 5,200 167,050
Aviation Sales Co.* ............................ 700 23,275
Bright Horizons Family Solutions Corp. ......... 1,400 25,900
Hagler Bailly Inc.* ............................ 3,600 84,600
Lamar Advertising Co. Cl. A* ................... 2,700 84,291
Maximus Inc.* .................................. 3,900 113,100
Metris Companies Inc.* ......................... 1,200 39,450
Pacific Gateway Exchange Inc.* ................. 2,200 63,525
ProBusiness Services Inc.* ..................... 1,800 65,812
Staff Leasing Inc.* ............................ 3,000 37,125
Strayer Education Inc. ......................... 300 10,200
United Rentals Inc. ............................ 2,600 69,875
Waddell & Reed Financial Inc. Cl. A* ........... 1,300 27,219
Young & Rubicam Inc.* .......................... 3,800 99,275
------------
1,555,372
------------
CONTAINER 1.2%
Ball Corp. ..................................... 15,600 658,125
------------
DRUG 2.7%
Ascent Pediatrics Inc.* ........................ 4,500 10,125
Atrix Laboratories Inc.* ....................... 2,900 29,363
Axogen Ltd. ADR* ............................... 1,700 109,650
Biovail Corp.* ................................. 8,300 258,856
Intelligent Polymers Ltd.* ..................... 9,500 218,500
Kos Pharmaceuticals, Inc.* ..................... 7,800 42,900
Pathogenesis Corp.* ............................ 2,500 100,000
Pfizer Inc. .................................... 1,600 171,700
PharmaPrint Inc.* .............................. 3,600 35,775
Schering-Plough Corp. .......................... 2,900 298,337
Spiros Development Corp.* ...................... 7,000 75,250
Warner-Lambert Co. ............................. 2,100 164,588
------------
1,515,044
------------
FOOD & BEVERAGE 3.4%
Coca-Cola Co. .................................. 4,300 290,787
Coca-Cola Enterprises Inc. ..................... 6,500 234,406
Golden State Vintners Inc. Cl. B * ............. 3,400 35,700
H.J. Heinz Co. ................................. 1,900 110,438
Keebler Foods Co.* ............................. 5,000 143,750
QP Corp. ....................................... 24,400 186,066
Takara Shuzo Co. ............................... 61,000 327,552
Whitman Corp. .................................. 16,000 343,000
Snow Brand Milk Co. ............................ 54,500 201,021
------------
1,872,720
------------
HOSPITAL SUPPLY 2.8%
Abbott Laboratories ............................ 5,100 239,381
Aviron Corp.* .................................. 3,500 66,500
Healthsouth Corp.* ............................. 3,127 37,915
Henry Schein Inc.* ............................. 900 34,819
IMPATH Inc.* ................................... 2,600 79,625
Johnson & Johnson .............................. 3,800 309,700
Medtronic Inc. ................................. 2,000 130,000
NCS HealthCare Inc. Cl. A* ..................... 3,700 65,213
Quorum Health Group Inc.* ...................... 13,600 197,200
Total Renal Care Holdings Inc.* ................ 17,333 424,658
------------
1,585,011
------------
PERSONAL CARE 0.3%
DeVry Inc.* .................................... 3,300 72,600
Wesley Jessen VisionCare Inc.* ................. 6,100 109,037
------------
181,637
------------
PRINTING & PUBLISHING 2.8%
Hollinger International, Inc. Cl. A* ........... 31,400 408,200
Prosieben Media AG* ............................ 6,200 318,141
Torstar Corp. Cl. B* ........................... 13,400 159,358
Valassis Communications Inc.* .................. 16,500 657,938
------------
1,543,637
------------
Total Consumer Staple .......................... 8,911,546
------------
ENERGY 4.1%
OIL 3.8%
Abacan Resource Corp.* ......................... 30,200 9,438
Amoco Corp. .................................... 3,200 179,600
British Petroleum Co. PLC* ..................... 16,100 236,321
Energy Africa Ltd.* ............................ 57,400 97,418
Exxon Corp. .................................... 3,000 213,750
Gulfstream Resources Ltd. ...................... 11,500 32,048
IRI International Corp.* ....................... 3,400 18,488
KCS Energy Inc. ................................ 5,100 25,819
Maxx Petroleum Ltd.* ........................... 10,300 25,106
Mobil Corp. .................................... 3,000 227,062
Oryx Energy Co. ................................ 11,900 166,600
Post Energy Corp.* ............................. 10,700 32,939
PTT Exploration & Production Public Co. Ltd.* .. 16,100 155,107
Seagull Energy Corp.* .......................... 18,624 222,324
Seven Seas Petroleum Inc.* ..................... 3,300 29,081
Talisman Energy Inc. ........................... 1,490 32,780
Tosco Corp. .................................... 3,800 106,638
Total SA Cl. B ADR ............................. 3,900 228,150
Unocal Corp. ................................... 2,700 91,631
------------
2,130,300
------------
OIL SERVICE 0.3%
Atwood Oceanics Inc.* .......................... 2,000 56,250
Cliffs Drilling Co.* ........................... 1,400 32,025
NewPark Resources Inc.* ........................ 4,800 45,300
Willbros Group Inc.* ........................... 4,200 27,825
------------
161,400
------------
Total Energy ................................... 2,291,700
------------
FINANCE 9.1%
BANK 2.4%
Banco Di Roma .................................. 117,800 205,488
BHF Bank AG .................................... 3,800 146,242
Chase Manhattan Corp. .......................... 3,300 187,481
City National Corp.* ........................... 1,100 37,606
Commercial Federal Corp. ....................... 1,400 31,762
Golden State Bancorp Inc. ...................... 2,900 55,644
Golden State Bancorp Inc. Wts.* ................ 2,900 14,138
National Bank of Canada ........................ 25,100 375,768
One Valley Bancorp Inc.* ....................... 900 29,138
TCF Financial Corp. ............................ 1,300 30,631
U.S. Bancorp ................................... 6,800 248,200
------------
1,362,098
------------
FINANCIAL SERVICE 1.4%
Federal National Mortgage Association .......... 4,100 290,331
First Industrial Realty Trust Inc. ............. 2,100 53,813
Heller Financial Inc. Cl. A .................... 1,800 43,200
Household International Inc. ................... 2,700 98,719
IndyMac Mortgage Holdings Inc. ................. 3,100 33,906
Knight/Trimark Group, Inc. Cl. A* .............. 3,800 30,875
Liberty Property Trust ......................... 1,400 32,200
Nomura Securities Co. .......................... 15,700 118,511
T & W Financial Corp.* ......................... 5,400 63,450
------------
765,005
------------
INSURANCE 5.3%
Ace Ltd. ....................................... 19,200 650,400
AMBAC Inc. ..................................... 9,400 546,962
American International Group Inc. .............. 1,850 157,713
ARM Financial Group, Inc. Cl. A ................ 3,200 61,400
Capital Re Corp. ............................... 2,300 42,119
Citigroup Inc. ................................. 4,200 197,663
Envoy Corp.* ................................... 2,300 67,850
Exel Ltd. Cl. A ................................ 7,150 546,528
Mutual Risk Management Ltd. .................... 1,632 55,182
Orion Capital Corp. ............................ 400 13,675
Saint Paul Companies, Inc. ..................... 1,800 59,625
Terra Nova Holdings Ltd. Cl. A* ................ 1,500 41,625
Transamerica Corp. ............................. 700 72,800
UNUM Corp. ..................................... 10,300 457,706
------------
2,971,248
------------
Total Finance .................................. 5,098,351
------------
SCIENCE & TECHNOLOGY 12.3%
COMPUTER SOFTWARE & SERVICE 6.3%
America Online Inc.* ........................... 1,800 228,712
Ascend Communications Inc.* .................... 4,700 226,775
Automatic Data Processing Inc. ................. 2,100 163,406
Broadcast.com Inc.* ............................ 100 4,988
Check Point Software Technologies Ltd.* ........ 2,500 56,875
Cisco Systems Inc.* ............................ 4,075 256,725
Duane Reade Inc.* .............................. 900 34,763
EMC Corp.* ..................................... 4,400 283,250
Fore Systems Inc.* ............................. 3,500 54,688
International Telecomm Systems Inc.* ........... 2,400 57,300
IXOS Software AG ............................... 500 54,331
META Group Inc.* ............................... 1,600 38,400
Microsoft Corp.* ............................... 1,400 148,225
Microstrategy Inc. Cl. A* ...................... 1,200 29,250
Nintendo Co. Ltd.* ............................. 5,200 439,801
Nova Corp.* .................................... 5,200 150,150
Platinum Technology Inc.* ...................... 3,800 62,462
Radiant Systems Inc.* .......................... 7,300 49,275
Sema Group PLC* ................................ 21,000 170,115
Softbank Corp. ................................. 5,200 226,591
Summit Design Inc.* ............................ 4,700 39,363
Tieto Corp. .................................... 7,400 224,732
Transition Systems Inc.* ....................... 3,000 31,313
Ultimate Software Group Inc.* .................. 4,900 34,300
Verio Inc.* .................................... 2,200 30,525
Walker Interactive Systems, Inc.* .............. 7,600 38,000
Wang Laboratories Inc.* ........................ 2,900 61,987
Wind River Systems Inc.* ....................... 1,200 52,575
WM Data AB Cl. B* .............................. 6,600 240,123
Xylan Corp.* ................................... 3,000 48,000
------------
3,537,000
------------
ELECTRONIC COMPONENTS 2.2%
Analog Devices Inc.* ........................... 3,500 69,562
Cymer Inc.* .................................... 2,100 25,725
Digital Microwave Corp.* ....................... 10,520 46,025
Dupont Photomasks Inc.* ........................ 200 7,250
Intel Corp. .................................... 2,500 222,969
Lernout & Hauspie Speech Products NV ADR* ...... 5,400 213,975
ONIX Systems Inc.* ............................. 4,800 30,000
Remec Inc.* .................................... 11,450 120,225
RF Micro Devices Inc.* ......................... 2,400 57,000
Rohm Co.* ...................................... 5,000 441,757
------------
1,234,488
------------
ELECTRONIC EQUIPMENT 2.5%
Advanced Fibre Communications, Inc.* ........... 4,800 46,500
Aeroflex Inc.* ................................. 18,600 209,250
L-3 Communications Holding Corp.* .............. 400 17,200
L.M. Ericsson Telephone Co. Cl. B* ............. 15,200 342,711
Lucent Technologies Inc. ....................... 3,500 280,656
Nokia AB Cl. K* ................................ 2,800 254,601
Novellus Systems Inc.* ......................... 500 19,406
SLI Inc.* ...................................... 12,700 212,725
Spectrian Corp.* ............................... 2,300 24,581
------------
1,407,630
------------
OFFICE EQUIPMENT 1.3%
International Business Machines Corp. .......... 1,800 267,188
NCR Corp. ...................................... 2,000 67,250
Silicon Graphics Inc.* ......................... 7,500 84,375
Xerox Corp. .................................... 2,900 280,937
------------
699,750
------------
Total Science & Technology ..................... 6,878,868
------------
UTILITY 8.7%
ELECTRIC 4.8%
Consolidated Edison Holdings Inc. .............. 1,300 65,163
DQE Inc. ....................................... 1,700 67,044
Duke Energy Corp. .............................. 3,500 226,406
Edison International Corp. ..................... 2,300 60,663
GPU Inc. ....................................... 7,500 323,437
Illinova Corp. ................................. 15,000 379,687
Montana Power Co. .............................. 4,200 181,913
OGE Energy Corp. ............................... 13,700 363,906
Pinnacle West Capital Corp. .................... 10,700 468,794
Texas Utilities Co. ............................ 1,500 65,625
Unicom Corp. ................................... 5,600 211,050
Western Resources Inc. ......................... 8,200 287,000
------------
2,700,688
------------
NATURAL GAS 1.1%
Calpine Corp.* ................................. 3,500 77,875
Williams Companies Inc. ........................ 19,047 522,602
------------
600,477
------------
TELEPHONE 2.8%
AirTouch Communications Inc.* .................. 3,500 196,000
Bellsouth Corp. ................................ 2,700 215,494
Cable & Wireless PLC ........................... 11,000 82,848
Clearnet Communications Inc. Wts.* ............. 990 4,207
MCI Worldcom Inc.* ............................. 8,100 447,525
Qwest Communications International Inc.* ....... 3,900 152,587
Shaw Communications Inc. Cl. B ................. 7,800 156,000
Telecom Italia SPA* ............................ 40,500 292,718
Viatel Inc. Pfd.(+) ............................ 49 2,940
------------
1,550,319
------------
Total Utility .................................. 4,851,484
------------
Total Equity Securities (Cost $34,201,310) ..... 36,520,867
------------

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

<PAGE>

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

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY VALUE
AMOUNT DATE (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 30.0%
U.S. TREASURY 6.9%
U.S. Treasury Bond, 8.75% .................................. $ 310,000 5/15/2017 $ 432,983
U.S. Treasury Bond, 8.50% .................................. 255,000 2/15/2020 354,251
U.S. Treasury Bond, 8.125% ................................. 10,000 8/15/2021 13,536
U.S. Treasury Bond, 6.875% ................................. 380,000 8/15/2025 460,214
U.S. Treasury Bond, 6.625% ................................. 200,000 2/15/2027 236,812
U.S. Treasury Note, 5.625% ................................. 200,000 10/31/1999 202,282
U.S. Treasury Note, 6.25% .................................. 225,000 2/28/2002 237,726
U.S. Treasury Note, 6.375% ................................. 575,000 8/15/2002 613,991
U.S. Treasury Note, 6.25% .................................. 125,000 8/31/2002 132,949
U.S. Treasury Note, 5.75% .................................. 80,000 4/30/2003 84,513
U.S. Treasury Note, 7.875% ................................. 75,000 11/15/2004 88,183
U.S. Treasury Note, 7.00% .................................. 50,000 7/15/2006 57,578
U.S. Treasury Note TIPS, 3.625% ............................ 101,018 4/15/2028 101,081
U.S. Treasury STRIPS, 0.00% ................................ 220,000 11/15/2001 192,889
U.S. Treasury STRIPS, 0.00% ................................ 450,000 5/15/2003 368,082
U.S. Treasury STRIPS, 0.00% ................................ 425,000 5/15/2007 283,033
------------
3,860,103
------------
U.S. AGENCY MORTGAGE 3.7%
Federal Home Loan Mortgage Corp., 6.00% .................... 194,405 4/01/2013 195,194
Federal National Mortgage Association, 6.00% ............... 100,000 5/15/2008 106,000
Federal National Mortgage Association, 7.50% ............... 173,643 11/01/2027 178,038
Federal National Mortgage Association REMIC
93-102-H PAC, 6.80% ...................................... 25,000 9/25/2022 26,195
Federal National Mortgage Association TBA, 6.50% ........... 650,000 11/17/2013 654,672
Federal National Mortgage Association TBA, 6.00% ........... 125,000 11/12/2028 123,438
Federal National Mortgage Association TBA, 6.50% ........... 225,000 11/12/2028 228,656
Government National Mortgage Association, 6.50% ............ 32,904 2/15/2009 33,572
Government National Mortgage Association, 6.50% ............ 79,363 7/15/2009 80,832
Government National Mortgage Association, 6.50% ............ 92,968 11/15/2010 94,828
Government National Mortgage Association, 7.50% ............ 86,697 12/15/2010 89,149
Government National Mortgage Association, 7.00% ............ 20,297 2/15/2025 20,785
Government National Mortgage Association TBA, 7.00% ........ 250,000 11/18/2028 255,703
------------
2,087,062
------------
CANADIAN-YANKEE 0.9%
Province of Ontario Deb., 5.50% ............................ 75,000 10/01/2008 74,538
Usinor Sacilor Note, 7.25% ................................. 350,000 8/01/2006 357,091
Woodside Finance Ltd. Note, 6.60%+ ......................... 50,000 4/15/2008 47,151
------------
478,780
------------
FOREIGN GOVERNMENT 5.5%
Greek Drachma
Republic of Greece, 8.80% .................................. 105,000,000 6/19/2007 387,178
New Zealand Dollar
Government of New Zealand, 10.00% .......................... 1,050,000 3/15/2002 635,901
Government of New Zealand, 8.00% ........................... 1,400,000 11/15/2006 865,638
Pound Sterling
United Kingdom Treasury, 8.50% ............................. 575,000 12/07/2005 1,154,852
------------
3,043,569
------------
FINANCE/MORTGAGE 3.4%
American Express Master Trust, 5.90% ....................... 100,000 4/15/2004 103,125
Arcadia Automobile Trust
97-C A5, 6.55% ........................................... 50,000 6/15/2005 50,688
AT&T Capital Corp. Note, 6.25% ............................. 75,000 5/15/2001 74,419
Capital One Bank Note, 6.15% ............................... 75,000 6/01/2001 74,735
Capital One Bank Sr. Note, 7.08% ........................... 75,000 10/30/2001 75,961
Countrywide Funding Corp. Note, 6.58% ...................... 75,000 9/21/2001 77,416
Finova Capital Corp. Sr. Note, 6.375% ...................... 50,000 5/15/2005 49,905
Florida Windstorm Sr. Sec. Note Series 1997, 6.85%+ ........ 25,000 8/25/2007 26,085
Ford Credit Auto Owner Trust 1996A-A3, 6.50% ............... 19,399 11/15/1999 19,411
GS Mortgage Securities Corp. Series 97-GI-1, 6.86% ......... 100,000 7/13/2030 104,125
Household Finance Corp. Note, 6.125% ....................... 50,000 7/15/2002 50,298
IBM Credit Corp. Note, 5.79% ............................... 50,000 3/20/2000 50,588
LB Commercial Mortgage Trust Series 97LL1-A1, 6.79% ........ 97,761 6/12/2004 101,671
LB Commercial Mortgage Trust Series 98C1-A1, 6.33% ......... 95,555 11/18/2004 96,600
MBNA Corp. Sr. Note, 6.12% ................................. 100,000 8/13/2001 102,248
MBNA Corp. Sr. Note, 6.875% ................................ 100,000 11/15/2002 105,321
MBNA Master Credit Card Trust Series 98-JA, 5.25% .......... 190,000 2/15/2006 189,449
Morgan Stanley Capital Inc. 98-A1, 6.22% ................... 49,104 5/03/2005 49,288
Morgan Stanley Capital Inc. 98-A1, 6.19% ................... 33,636 1/15/2007 34,066
New Jersey Economic Development Authority, 7.425% .......... 50,000 2/15/2029 56,959
Prime Credit Card Master Trust Series 1995-1A, 6.75% ....... 50,000 11/15/2005 51,938
Prime Credit Card Master Trust Series 1996-1A, 6.70% ....... 50,000 7/15/2004 51,531
Sears Credit Account Master Trust Series 1998-2A, 5.25% .... 100,000 10/16/2008 99,056
Sears Credit Trust Series 1995-2A, 8.10% ................... 50,000 6/15/2004 51,516
Textron Finance Corp. Note, 6.125%+ ........................ 25,000 3/15/2001 25,761
Zurich Capital Trust Note, 8.38%+ .......................... 100,000 6/01/2037 107,404
------------
1,879,564
------------
CORPORATE 9.6%
Advanstar Commerce Inc. Sr. Note, 9.25%+ ................... 150,000 5/01/2008 139,500
American Lawyer Media Inc. Sr. Sub. Note Series B, 9.75% ... 250,000 12/15/2007 248,125
Ameristar Casinos Inc. Sr. Sub. Note, 10.50% ............... 150,000 8/01/2004 141,000
Aramark Services Inc. Note, 7.00% .......................... 100,000 7/15/2006 102,980
Archibald Candy Corp. Sr. Sec. Note, 10.25% ................ 125,000 7/01/2004 126,250
Arizona Public Service Co. Note, 6.25% ..................... 75,000 1/15/2005 76,253
California Infrastructure Development Series 1997-
A7, 6.42% ................................................ 50,000 9/25/2008 51,906
Coca-Cola Enterprises Inc., 5.75% .......................... 100,000 11/01/2008 100,437
Coca-Cola Enterprises Inc. Deb., 6.75% ..................... 100,000 9/15/2028 99,758
Columbia/HCA Healthcare Corp. Note, 7.69% .................. 50,000 6/15/2025 42,678
Columbia/HCA Healthcare Corp. Note, 7.75% .................. 50,000 7/15/2036 43,212
Columbia/HCA Healthcare Corp. Note, 8.12% .................. 75,000 8/04/2003 77,401
Dover Corp. Deb., 6.65% .................................... 100,000 6/01/2028 99,775
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 193,750
Envirosource Inc. Sr. Note, 9.75% .......................... 500,000 6/15/2003 480,000
First Wave Marine Inc. Sr. Note, 11.00% .................... 100,000 2/01/2008 95,500
Fort James Corp. Note, 6.234% .............................. 50,000 3/15/2001 50,773
Healthsouth Corp. Sr. Note, 6.875%+ ........................ 50,000 6/15/2005 48,431
International Shipholding Corp. Sr. Note Series B,
7.75% .................................................... 100,000 10/15/2007 93,500
J.B. Poindexter Inc. Sr. Note, 12.50% ...................... 100,000 5/15/2004 90,000
News America Holdings Inc. Deb., 7.375% .................... 75,000 10/17/2008 77,744
Norcal Waste Systems Inc. Series B Sr. Note, 13.50% ........ 250,000 11/15/2005 275,000
Ocean Energy Inc. Series B Sr. Note, 7.625%+ ............... 100,000 7/01/2005 95,000
Owens-Illinois Inc. Sr. Deb., 7.50% ........................ 100,000 5/15/2010 105,031
Packaging Resources Inc. Sr. Sec. Note, 11.625% ............ 250,000 5/01/2003 242,500
Pool Energy Services Co. Sr. Sub. Note, 8.625% ............. 150,000 4/01/2008 138,000
Prime Succession Inc. Sr. Sub. Note, 10.75% ................ 150,000 8/15/2004 136,500
Rose Hills Co. Sr. Sub. Note, 9.50% ........................ 250,000 11/15/2004 220,000
RSL Communications Ltd. Sr. Note, 12.25% ................... 250,000 11/15/2006 257,500
Simonds Industries Inc. Sr. Sub. Note, 10.25%+ ............. 50,000 7/01/2008 47,500
Solutia Inc. Note, 6.50% ................................... 100,000 10/15/2002 101,389
Spanish Broadcasting Systems Inc. Sr. Note, 12.50% ......... 250,000 6/15/2002 271,250
Stena AB Sr. Note, 8.75% ................................... 250,000 6/15/2007 231,250
Tyco International Group SA, 6.25% ......................... 100,000 6/15/2003 101,990
U.S.A. Mobile Communications Inc. Sr. Note, 9.50% .......... 250,000 2/01/2004 187,500
United Technologies Corp. Note, 6.70% ...................... 50,000 8/01/2028 51,900
Viatel Inc. Sr. Note, 11.25%+ .............................. 100,000 4/15/2008 80,000
Westpoint Stevens Inc. Sr. Note, 7.875% .................... 350,000 6/15/2008 351,531
------------
5,372,814
------------
Total Fixed Income Securities (Cost $16,691,085) ............................................... 16,721,892
------------

COMMERCIAL PAPER 7.2%
Ford Motor Credit Co., 5.13% ............................... $ 476,000 11/04/1998 $ 476,000
Ford Motor Credit Co., 5.25% ............................... 633,000 11/12/1998 633,000
Household Finance Corp., 5.50% ............................. 2,283,000 11/04/1998 2,283,000
Toys 'R Us Inc., 5.33% ..................................... 650,000 11/12/1998 648,947
------------
Total Commercial Paper (Cost $4,040,947) ....................................................... 4,040,947
------------

- --------------------------------------------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------------------------------------------

SHORT-TERM INVESTMENTS 24.1%
State Street Navigator Securities Lending Prime Portfolio ...................... 13,448,516 13,448,516
------------
Total Short-Term Investments (Cost $13,448,516) ................................................ 13,448,516
------------
Total Investments (Cost $68,381,858) - 126.7% .................................................. 70,732,222
Cash and Other Assets, Less Liabilities - (26.7%) .............................................. (14,884,323)
------------
Net Assets - 100.0% ............................................................................ $ 55,847,899
============

Federal Income Tax Information:
At October 31, 1998, the net unrealized appreciation of investments based on cost for Federal
income tax purposes of $68,527,516 was as follows:
Aggregate gross unrealized appreication for all investments in which there is an excess of
value over tax cost ........................................................................... $ 6,054,956
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax
cost over value ............................................................................... (3,850,250)
------------
$ 2,204,706
============
</TABLE>

- -------------------------------------------------------------------------------
ADR Stands for American Depositary Receipt, representing ownership of foreign
securities.
* Non-income-producing securities.
(+) Payments of income may be made in cash or in the form of additional
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%.
+ 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, 1998 were $667,733 and $618,276 (1.11% of net
assets), respectively.

Forward currency exchange contracts outstanding at October 31, 1998, are as
follows:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACT APPRECIATION DELIVERY
TOTAL VALUE PRICE (DEPRECIATION) DATE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sell Canadian dollars, Buy U.S. dollars 563,993 CAD .66122 CAD $ 7,395 11/13/98
Sell Deutsche marks, Buy U.S. dollars 160,000 DEM .56484 DEM (6,280) 11/13/98
Sell Deutsche marks, Buy U.S. dollars 242,000 DEM .56465 DEM (9,545) 11/13/98
Sell Deutsche marks, Buy U.S. dollars 260,000 DEM .56452 DEM (10,288) 11/13/98
Sell British pounds, Buy U.S. dollars 676,000 GBP 1.69865 GBP 21,564 1/22/99
Sell Japanese yen, Buy U.S. dollars 207,389,996 JPY .00725 JPY (287,193) 12/16/98
Sell New Zealand dollars, Buy U.S. dollars 135,000 NZD .50741 NZD (3,015) 11/13/98
Buy New Zealand dollars, Sell U.S. dollars 114,000 NZD .52700 NZD 313 11/13/98
Sell New Zealand dollars, Buy U.S. dollars 59,000 NZD .50400 NZD (1,519) 11/13/98
Sell New Zealand dollars, Buy U.S. dollars 1,520,000 NZD .50100 NZD (43,694) 11/13/98
Sell New Zealand dollars, Buy U.S. dollars 1,110,000 NZD .52640 NZD (4,531) 1/22/99
---------
$(336,793)
=========
</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, 1998

ASSETS
Investments, at value (Cost $68,381,858) (Note 1) ........... $70,732,222
Cash ........................................................ 13,955
Receivable for securities sold .............................. 850,436
Interest and dividends receivable ........................... 384,682
Receivable for open forward contracts ....................... 29,272
Receivable from Distributor (Note 3) ........................ 13,453
Receivable for fund shares sold ............................. 1,003
Deferred organization costs and other assets (Note 1) 47,281
-----------
72,072,304
LIABILITIES
Payable for collateral received on securities loaned ........ 13,448,516
Payable for securities purchased ............................ 2,195,280
Payable for open forward contracts .......................... 366,065
Accrued transfer agent and shareholder services
(Note 2) .................................................. 41,096
Accrued management fee (Note 2) ............................. 34,520
Payable for fund shares redeemed ............................ 26,148
Accrued trustees' fees (Note 2) ............................. 16,378
Other accrued expenses ...................................... 96,402
-----------
16,224,405
-----------
NET ASSETS $55,847,899
===========
Net Assets consist of:
Undistributed net investment income ....................... $ 583,345
Unrealized appreciation of investments .................... 2,350,364
Unrealized depreciation of forward contracts and
foreign currency ........................................ (334,484)
Accumulated net realized gain ............................. 7,856,347
Paid-in capital ........................................... 45,392,327
-----------
$55,847,899
===========
Net Asset Value, offering price and redemption
price per share of Class S shares
($55,847,899 / 4,879,679 shares) .......................... $11.44
======

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

<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE

- ------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
For the year ended October 31, 1998

INVESTMENT INCOME
Interest, net of foreign taxes of $321 (Note 1) ................. $ 1,425,172
Dividends, net of foreign taxes of $14,372 ...................... 449,201
------------
1,874,373
EXPENSES
Management fee (Note 2) ......................................... 483,814
Custodian fee ................................................... 144,921
Transfer agent and shareholder services (Note 2) ................ 124,933
Audit fee ....................................................... 24,320
Reports to shareholders ......................................... 20,827
Trustees' fees (Note 2) ......................................... 18,931
Registration fees ............................................... 9,812
Amortization of organization costs (Note 1) ..................... 7,482
Miscellaneous ................................................... 2,233
------------
837,273
Expenses borne by the Distributor (Note 3) ...................... (128,643)
------------
708,630
------------
Net investment income ........................................... 1,165,743
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY AND FORWARD CONTRACTS
Net realized gain on investments (Notes 1 and 4) ................ 7,747,085
Net realized gain on foreign currency and
forward contracts (Note 1) .................................... 452,116
------------
Total net realized gain ....................................... 8,199,201
------------
Net unrealized depreciation of investments ...................... (6,712,388)
Net unrealized depreciation of foreign currency and
forward contracts ............................................. (364,739)
------------
Total net unrealized depreciation ............................. (7,077,127)
------------
Net gain on investments, foreign currency and forward contracts . 1,122,074
------------
Net increase in net assets resulting from operations ............ $ 2,287,817
============

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

<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE

Net increase resulting from
operations ................................................... 13,870,242 2,287,817
------------ ------------

Dividends from net investment income:
Class A ...................................................... (7,266) --
Class S ...................................................... (1,418,981) (1,317,557)
------------ ------------
(1,426,247) (1,317,557)
------------ ------------
Distributions from net realized gains:
Class A ...................................................... (80,854) --
Class S ...................................................... (7,708,753) (11,099,159)
------------ ------------
(7,789,607) (11,099,159)
------------ ------------
Net increase (decrease) from fund share
transactions (Note 6) ........................................ 9,203,933 (11,776,222)
------------ ------------
Total increase (decrease) in net
assets ....................................................... 13,858,321 (21,905,121)
NET ASSETS
Beginning of year .............................................. 63,894,699 77,753,020
------------ ------------
End of year (including undistributed
net investment income of $473,826
and $583,345, respectively) .................................. $ 77,753,020 $ 55,847,899
============ ============
</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, 1998

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 five separate funds: State Street Research Strategic
Portfolios: Aggressive, State Street Research Government Income Fund, State
Street Research Strategic Portfolios: Moderate, State Street Research Strategic
Portfolios: Conservative and State Street Research IntelliQuant Portfolios:
Small-Cap Value.

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. 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 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"),
an indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), 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.

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. For the year ended October 31, 1998, the Fund has designated its
distributions from net realized gains as $2,866,848 from 20% rate gains and
$5,160,449 from 28% rate gains.

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 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 exchange 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.

I. SECURITIES LENDING
The Fund may seek additional income by lending portfolio securities to qualified
institutions. The Fund will receive cash or securities as collateral in an
amount equal to at least 100% of the current market value of any loaned
securities plus accrued interest. By reinvesting any cash collateral it receives
in these transactions, the Fund could realize additional gains and losses. If
the borrower fails to return the securities and the value of the collateral has
declined during the term of the loan, the Fund will bear the loss. At October
31, 1998, the value of the securities loaned and the value of collateral were
$12,403,143 and $13,448,516, respectively. During the year ended October 31,
1998, income from securities lending amounted to $26,301 and is included in
interest income.

NOTE 2

The Trust and the Adviser 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, 1998, the fees
pursuant to such agreement amounted to $483,814.

The fees of the Trustees not currently affiliated with the Adviser amounted to
$18,931 during the year ended October 31, 1998.

NOTE 3

NOTE 4

For the year ended October 31, 1998, purchases and sales of securities,
exclusive of short-term obligations, aggregated $76,602,417 and $96,418,418
(including $22,200,321 and $20,970,529 of U.S. Government obligations),
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, 1998,
Metropolitan owned 2,863,567 Class S shares of the Fund.

Share transactions were as follows:

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
----------------------------------------------------------------------
1997 1998
---------------------------------- ----------------------------------
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 -- --
Distribution from net
realized gains ............ 606 6,845 -- --
Shares repurchased ............ (59,010) (669,014) -- --
--------- ------------ ---------- --------------
Net decrease .................. (50,022) $ (560,055) -- $ --
========= ============ ========== ==============

<CAPTION>
CLASS S SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ................... 1,008,062 $ 12,442,073 770,407 $ 9,214,900
Issued upon reinvestment of:
Dividends from net investment
income .................... 47,450 565,762 39,840 449,769
Distributions from net
realized gains ............ 683,399 7,708,745 1,012,696 11,099,149
Shares repurchased ............ (927,982) (10,952,592) (2,843,995) (32,540,040)
--------- ------------ ---------- --------------
Net increase (decrease) ....... 810,929 $ 9,763,988 (1,021,052) $ (11,776,222)
========= ============ ========== ==============
</TABLE>

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE

- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
For a share outstanding throughout each year:
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
*Reflects voluntary reduction of
expenses per share of these
amounts (Note 3) ($) 0.01 0.02 0.01 0.02

CLASS S
----------------------------------------------------------------------------
YEARS ENDED OCTOBER 31
----------------------------------------------------------------------------
1994(2) 1995(1) 1996(1) 1997(1) 1998(1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR($) 9.55 9.74 10.94 12.43 13.18
------- ------- ------- ------- -------
Net investment income ($)* 0.10 0.22 0.22 0.22 0.21
Net realized and unrealized gain
on investments, foreign
currency and forward contracts($) 0.14 1.20 1.74 2.27 0.17
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS($) 0.24 1.42 1.96 2.49 0.38
------- ------- ------- ------- -------
Dividends from net investment income ($) (0.05) (0.22) (0.23) (0.26) (0.24)
Distributions from net realized gains ($) -- -- (0.24) (1.48) (1.88)
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS ($) (0.05) (0.22) (0.47) (1.74) (2.12)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR ($) 9.74 10.94 12.43 13.18 11.44
======= ======= ======= ======= =======
Total return(3) (%) 2.50(4) 14.85 18.37 22.54 3.69
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 102 20,809 63,272 77,753 55,848
Ratio of operating expenses to
average net assets (%)* 1.10(5) 1.10 1.10 1.10 1.10
Ratio of net investment income to
average net assets (%)* 2.26(5) 2.13 1.78 1.79 1.81
Portfolio turnover rate (%) 37.75 127.44 145.59 136.48 124.15
*Reflects voluntary reduction of
expenses per share of these
amounts (Note 3) ($) 0.01 0.02 0.03 0.02 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 reduced a portion of the Fund's expenses.
(4) Not annualized.
(5) Annualized.
</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, 1998, 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, 1998 by correspondence with the
custodian and brokers provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP
Boston, Massachusetts
December 11, 1998

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE

- -------------------------------------------------------------------------------
MANAGEMENTS DISCUSSION OF FUND PERFORMANCE
- -------------------------------------------------------------------------------

For the year ended October 31, 1998, Class S shares of State Street Research
Strategic Portfolios: Aggressive gained 3.69%. That was less than its peer
group, the Lipper flexible portfolio fund average, which rose 9.05%. It was also
well below the S&P 500, which gained 22.01%. That's not surprising since the S&P
500 is a measure of common stock performance, and the Fund had more than 30% of
its assets invested in bonds and cash.

Strategic Portfolios: Aggressive seeks high total return primarily through
capital appreciation by investing in common stocks and bonds. The manager's
strategy is to adjust the asset allocation based on changing market conditions.

In general, investors sought quality and liquidity during the year. Large
company stocks outperformed small and mid-cap stocks. High-quality bonds
outperformed high-yield bonds. To the extent that it owned small and mid-cap
stocks and high-yield bonds, there was a blow to performance. Also, the Fund was
hurt by its reduced exposure to stocks, in general.

We expect modestly higher corporate profits and continued volatility in the
financial markets in 1999. An uncertain global economic environment has been
aided by an infusion of cash from the International Monetary Fund, by proposed
reforms to Japan's banking system, and the Federal Reserve's cuts in interest
rates in the U.S. However, we remain cautious about the prospects for the
markets and the economy in the U.S. and we will continue to underweight U.S.
equities, overweight U.S. bonds and focus on quality.

October 31, 1998

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: AGGRESIVE

-----------------------------------
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------
1 Year 3 Years Life of Fund
-----------------------------------
3.69% 14.57% 13.65%
-----------------------------------

VALUE OF
VALUE OF ACCOUNT OF
ACCCOUNT OF LEHMAN BROTHERS
VALUE OF S & P 500 GOV'T/CORP
ACCOUNT AT INDEX AT INDEX AT
DATE YEAR END YEAR END YEAR END
- ---- -------- -------- --------
Inception 05/16/94 $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
10/31/98 17,706 26,668 14,699

<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 Former Senior Vice President
for Finance and Operations and
DISTRIBUTOR E.K. RAGSDALE, JR. Treasurer, The Pennsylvania
State Street Research Vice President State University
Investment Services, Inc.
One Financial Center THOMAS A. SHIVELY
Boston, MA 02111 Vice President MALCOLM T. HOPKINS
Former Vice Chairman of the
SHAREHOLDER SERVICES JAMES M. WEISS Board and Chief Financial
State Street Research Vice President Officer, St. Regis Corp.
Service Center
P.O. Box 8408 GERARD P. MAUS
Boston, MA 02266-8408 Treasurer EDWARD M. LAMONT
1-800-562-0032 Formerly in banking
JOSEPH W. CANAVAN (with an affiliate of
CUSTODIAN Assistant Treasurer J.P. Morgan & Co. in New York);
State Street Bank and presently engaged in private
Trust Company DOUGLAS A. ROMICH investments and civic affairs
225 Franklin Street Assistant Treasurer
Boston, MA 02110
FRANCIS J. MCNAMARA, III ROBERT A. LAWRENCE
LEGAL COUNSEL Secretary and General Counsel Former Partner, Saltonstall & Co.
Goodwin, Procter & Hoar LLP
Exchange Place DARMAN A. WING
Boston, MA 02109 Assistant Secretary and DEAN O. MORTON
Assistant General Counsel Former Executive Vice President,
INDEPENDENT ACCOUNTANTS Chief Operating Officer and
PricewaterhouseCoopers LLP AMY L. SIMMONS Director, Hewlett-Packard
One Post Office Square Assistant Secretary Company
Boston, MA 02109
SUSAN M. PHILLIPS
Dean, School of Business and
Public Management, George
Washington University; former
Member of the Board of Governors
of the Federal Reserve System and
Chairman and Commissioner of
the Commodity Futures Trading
Commission

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
</TABLE>

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE -------------------
One Financial Center Bulk Rate
Boston, MA 02111 U.S. Postage
PAID
Permit #20
Holliston, MA 01746
-------------------
QUESTIONS? COMMENTS?

CALL us at 1-800-562-0032
[hearing-impaired 1-800-676-7876]

WRITE us at:
State Street Research
Service Center
P.O. Box 8408
Boston, MA 02266-8408

EMAIL us at:
[email protected]
INTERNET site:
www.ssrfunds.com

[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:
Aggressive prospectus. When used after December 31, 1998, 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: (exp1299)SSR-LD SP-112E-1298

<PAGE>

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

ANNUAL REPORT

October 31, 1998

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

FROM THE CHAIRMAN
From good news
to modest results

PORTFOLIO MANAGER'S REVIEW
An outstanding year,
with positive signs ahead

FUND INFORMATION
Facts and figures

PLUS, COMPLETE PORTFOLIO HOLDINGS
AND FINANCIAL STATEMENTS

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

[DALBAR LOGO]

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

For Excellence
in STATE STREET RESEARCH FUNDS
Shareholder Service

<PAGE>

FROM THE CHAIRMAN

[Photo of Ralph F. Verni]

INTERNATIONAL
Indications that economic growth has slowed around the world, plus specific
concerns over Asia's woes, continued to bring returns down on most major
foreign exchanges. Even Europe, which had delivered strong gains, felt the
effects of Russia's currency problems and Japan's recession. As interest
rates converge in anticipation of the euro, Europe's new common currency in
1999, Spain and Italy appear to be in the best position to grow. Germany
and France are the most likely to suffer.

Sincerely,

/s/ Ralph F. Veri

Ralph F. Verni
Chairman

October 31, 1998

- -------------------------------------------------------------------------------
FUND INFORMATION (all data are for periods ended October 31, 1998, except where
noted)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR PERIODS ENDED 9/30/98(2)(3) AVERAGE ANNUAL TOTAL RETURN(2)(3)
- --------------------------------------------- --------------------------------------------
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 11.39% 10.98% 7.68% Class S 11.32% 11.15% 8.60%
- --------------------------------------------- --------------------------------------------
</TABLE>

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

(3) Class S shares, offered without a sales charge, are available through
certain employee benefit plans and special programs.

<PAGE>

PORTFOLIO MANAGER'S REVIEW
Strategic Portfolios: Conservative: An outstanding year, with positive signs
ahead

[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, 1998
and the Fund's strategy for the year ahead.

Q: HOW DID THE FUND PERFORM LAST YEAR?
A: The Fund had an outstanding year relative to its peer group. Class S shares
gained 8.60% for the 12 months ended October 31, 1998. That was significantly
higher than the average flexible income fund, which rose only 1.55%, according
to Lipper Analytical Services.

Q: WHAT ACCOUNTED FOR THE FUND'S STRONG PERFORMANCE?
A: Our investment in large cap growth stocks, while it was below the Fund's
normal weighting, made a sizable contribution to performance as this sector
continued to outdistance the rest of the stock market. Also, the Fund's
above-normal weighting in international equities and in high-grade bonds were
good tactical moves. Both segments delivered good performance for the period.

Q: WERE THERE AREAS OF DISAPPOINTMENT FOR THE FUND?
A: Yes. The Fund's investment in value stocks, especially mid-cap value,
significantly lagged the stock market as a whole. Although the Fund was slightly
underweighted in the segment, it was a drag on performance.

Q: DID YOU MAKE ANY SIGNIFICANT CHANGES IN THE FUND'S ASSET ALLOCATION DURING
THE PERIOD?
A: We made only modest adjustments to asset allocation. We increased the Fund's
exposure to the bond market from 71% six months ago to over 73% at the end of
the period. The Fund's stock position was lowered from 27% to 23%. By
comparison, the Fund's normal asset mix is 30% stocks/70% bonds. We believe our
decision to underweight stocks and overweight bonds is prudent in light of
continued uncertainties for the U.S. economy and the financial markets. However,
we also believe that the Fund's investments in value stocks and high- yield
bonds have the potential to recover. We did not sell them on weakness.

Q: WHAT IS YOUR OUTLOOK FOR THE PERIOD AHEAD?
A: We remain cautious, but there are some positive signs: The stock market has
started to recover from a weak September, helped by the Federal Reserve's back-
to-back interest-rate cuts. Japan has taken steps to address problems in its
banking system. The International Monetary Fund has come up with a $40 billion
package to help stabilize the situation in Brazil.

All of these are positive signs for the world's financial markets and for the
United States economy. However, we're not out of the woods. Our expectation is
for a modest increase in corporate profits in 1999. There's still a lot of
uncertainty, and we expect continued volatility going forward. As a result, our
strategy is to remain somewhat underweighted in U.S. equities, overweighted in
high-grade bonds relative to our normal target mix and, in general, to continue
to focus on quality and liquidity.

October 31, 1998

Bonds 73% U.S. TREASURY 26.3% INSURANCE 2.5%
Equities 23% U.S. AGENCY ELECTRIC 2.4%
Cash 4% MORTGAGE 15.8% COMPUTER SOFTWARE
FINANCE/MORTGAGE 15.0% & SERVICE 1.6%
CORPORATE 8.1% RETAIL TRADE 1.6%
FOREIGN OIL 1.3%
GOVERNMENT 5.5%

Total: 70.7% Total: 9.4%

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
October 31, 1998
- --------------------------------------------------------------------------------
VALUE
SHARES (NOTE 1)
- --------------------------------------------------------------------------------
EQUITY SECURITIES 22.9%
BASIC INDUSTRIES 3.2%
CHEMICAL 1.0%
Agrium Inc. .................................... 12,100 $ 127,050
Cabot Corp. .................................... 6,700 188,019
Cordant Technologies Inc. ...................... 600 24,412
------------
339,481
------------
DIVERSIFIED 0.8%
Johnson Controls Inc. .......................... 900 50,625
Mark IV Industries Inc. ........................ 7,800 119,925
Ogden Corp. .................................... 4,900 131,687
------------
302,237
------------
ELECTRICAL EQUIPMENT 0.2%
Asia Pacific Wire & Cable Corp. Ltd.* .......... 3,800 9,738
General Electric Co. ........................... 700 61,250
------------
70,988
------------
MACHINERY 0.7%
Harsco Corp. ................................... 500 16,375
Howmet International Inc.* ..................... 8,700 130,500
Sundstrand Corp. ............................... 1,000 46,937
Tyco International Ltd. ........................ 900 55,744
------------
249,556
------------
METAL & MINING 0.3%
Kennametal Inc. ................................ 2,500 51,875
RTZ Corp.* ..................................... 1,421 17,255
Valeo SA ....................................... 300 25,972
Valeo SA Wts.* ................................. 300 1,620
------------
96,722
------------
TRUCKERS 0.2%
Laidlaw Inc. ................................... 8,600 81,163
------------
Total Basic Industries ......................... 1,140,147
------------
CONSUMER CYCLICAL 2.9%
AUTOMOTIVE 0.3%
Gencorp Inc. ................................... 4,800 106,200
------------
HOTEL & RESTAURANT 0.6%
Harrah's Entertainment Inc.* ................... 5,500 77,687
McDonald's Corp. ............................... 900 60,188
Mirage Resorts Inc.* ........................... 5,400 91,462
------------
229,337
------------
RECREATION 0.4%
Chancellor Media Corp. ......................... 800 30,700
Cox Communications Inc. Cl. A* ................. 600 32,925
GTech Holdings Corp.* .......................... 1,800 43,200
MediaOne Group Inc.* ........................... 1,000 42,312
------------
149,137
------------
RETAIL TRADE 1.6%
CVS Corp. ...................................... 1,600 73,100
Hannaford Brothers Co. ......................... 3,900 170,869
Home Depot Inc. ................................ 1,500 65,250
Kroger Co.* .................................... 1,100 61,050
Safeway Inc. ................................... 1,300 62,156
Staples Inc.* .................................. 900 29,363
Wal-Mart Stores, Inc. .......................... 800 55,200
Wolters Kluwer NV* ............................. 300 58,123
------------
575,111
------------
Total Consumer Cyclical ........................ 1,059,785
------------
CONSUMER STAPLE 4.9%
BUSINESS SERVICE 0.8%
A.C. Nielson Corp.* ............................ 8,700 232,725
Apollo Group Inc. Cl. A* ....................... 1,150 36,944
------------
269,669
------------
AIRPORT 0.7%
Ball Corp. ..................................... 5,600 236,250
------------
DRUG 0.4%
Pfizer Inc. .................................... 400 42,925
Schering-Plough Corp. .......................... 700 72,012
Warner-Lambert Co. ............................. 500 39,188
------------
154,125
------------
FOOD & BEVERAGE 1.2%
Coca-Cola Co. .................................. 1,000 67,625
Coca-Cola Enterprises Inc. ..................... 1,600 57,700
H.J. Heinz Co. ................................. 400 23,250
Keebler Foods Co.* ............................. 1,800 51,750
QP Corp. ....................................... 4,100 31,265
Snow Brand Milk Co. ............................ 9,300 34,303
Takara Shuzo Co. ............................... 11,000 59,067
Whitman Corp. .................................. 5,800 124,337
------------
449,297
------------
HOSPITAL SUPPLY 0.6%
Abbott Laboratories ............................ 1,200 56,325
Johnson & Johnson .............................. 900 73,350
Medtronic Inc. ................................. 500 32,500
Quorum Health Group Inc.* ...................... 4,800 69,600
------------
231,775
------------
PRINTING & PUBLISHING 1.2%
Hollinger International, Inc. Cl. A* ........... 11,300 146,900
Prosieben Media AG* ............................ 1,000 51,313
Torstar Corp. Cl. B* ........................... 4,700 55,894
Valassis Communications Inc. ................... 4,900 195,388
------------
449,495
------------
Total Consumer Staple .......................... 1,790,611
------------
ENERGY 1.3%
OIL 1.3%
Amoco Corp. .................................... 800 44,900
British Petroleum Co. PLC* ..................... 2,100 30,825
Exxon Corp. .................................... 700 49,875
Fletcher Challenge Ltd.* ....................... 6,600 12,163
Mobil Corp. .................................... 700 52,981
Oryx Energy Co. ................................ 4,300 60,200
PTT Exploration & Production Public Co. Ltd.* .. 2,100 20,231
Seagull Energy Corp.* .......................... 5,100 60,881
Tosco Corp. .................................... 1,400 39,287
Total SA Cl. B ADR ............................. 900 52,650
Unocal Corp. ................................... 1,000 33,938
------------
457,931
------------
Total Energy ................................... 457,931
------------
FINANCE 3.6%
BANK 0.8%
Banco Di Roma .................................. 20,100 35,062
BHF Bank AG .................................... 700 26,939
Chase Manhattan Corp. .......................... 800 45,450
National Bank of Canada ........................ 9,000 134,738
U.S. Bancorp ................................... 1,500 54,750
------------
296,939
------------
FINANCIAL SERVICE 0.3%
Federal National Mortgage Association .......... 1,000 70,812
Household International Inc. ................... 600 21,938
Nomura Securities Co. .......................... 2,700 20,381
------------
113,131
------------
INSURANCE 2.5%
Ace Ltd. ....................................... 6,500 220,187
AMBAC Inc. ..................................... 3,400 197,838
American International Group Inc. .............. 500 42,625
Citigroup Inc. ................................. 900 42,356
Exel Ltd. Cl. A ................................ 2,553 195,145
Saint Paul Companies, Inc. ..................... 600 19,875
Transamerica Corp. ............................. 200 20,800
UNUM Corp. ..................................... 3,300 146,644
------------
885,470
------------
Total Finance .................................. 1,295,540
------------
SCIENCE & TECHNOLOGY 3.1%
COMPUTER SOFTWARE & SERVICE 1.6%
America Online Inc.* ........................... 400 50,825
Ascend Communications Inc.* .................... 1,100 53,075
Automatic Data Processing Inc. ................. 500 38,906
Cisco Systems Inc.* ............................ 1,000 63,000
EMC Corp.* ..................................... 1,000 64,375
IXOS Software AG ............................... 100 10,866
Microsoft Corp.* ............................... 300 31,763
Nintendo Co. Ltd.* ............................. 1,400 118,408
Sema Group PLC* ................................ 4,100 33,213
Softbank Corp. ................................. 1,000 43,575
Tieto Corp. .................................... 1,400 42,517
WM-Data AB Cl. B* .............................. 1,100 40,021
------------
590,544
------------
ELECTRONIC COMPONENTS 0.6%
Analog Devices Inc.* ........................... 1,300 25,838
Intel Corp. .................................... 600 53,512
Lernout & Hauspie Speech Products NV ADR* ...... 1,100 43,588
Rohm Co.* ...................................... 1,000 88,351
------------
211,289
------------
ELECTRONIC EQUIPMENT 0.4%
L.M. Ericsson Telephone Co. Cl. B* ............. 1,836 41,396
Lucent Technologies Inc. ....................... 800 64,150
Nokia AB Cl. K* ................................ 400 36,371
------------
141,917
------------
OFFICE EQUIPMENT 0.5%
International Business Machines Corp. .......... 400 59,375
NCR Corp. ...................................... 700 23,538
Silicon Graphics Inc. .......................... 2,600 29,250
Xerox Corp. .................................... 700 67,812
------------
179,975
------------
Total Science & Technology ..................... 1,123,725
------------
UTILITY 3.9%
ELECTRIC 2.4%
DQE Inc. ....................................... 600 23,663
Duke Energy Co. ................................ 800 51,750
Edison International Corp. ..................... 800 21,100
GPU Inc. ....................................... 2,700 116,437
Illinova Corp. ................................. 5,400 136,687
Montana Power Co. .............................. 1,500 64,969
OGE Energy Corp. ............................... 4,900 130,156
Pinnacle West Capital Corp. .................... 3,900 170,869
Unicom Corp. ................................... 1,300 48,994
Western Resources Inc. ......................... 3,000 105,000
------------
869,625
------------
NATURAL GAS 0.5%
Williams Companies Inc. ........................ 6,827 187,316
------------
TELEPHONE 0.9%
AirTouch Communications Inc.* .................. 800 44,800
Bellsouth Corp. ................................ 700 55,869
Cable & Wireless PLC ........................... 1,900 14,310
MCI Worldcom Inc.* ............................. 1,900 104,975
Qwest Communications International Inc.* ....... 900 35,213
Shaw Communications Inc. Cl. B ................. 1,400 28,000
Telecom Italia SPA* ............................ 5,300 38,306
------------
321,473
------------
ELECTRICAL 0.1%
Consolidated Edison Inc. ....................... 500 25,062
Texas Utilities Co. ............................ 500 21,875
------------
46,937
------------
Total Utility .................................. 1,425,351
------------
Total Equity Securities (Cost $7,520,897) ...... 8,293,090
------------

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

<PAGE>

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

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY VALUE
AMOUNT DATE (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 73.2%
U.S. TREASURY 26.3%
U.S. Treasury Bond, 12.00% ....................... $ 200,000 8/15/2013 $ 308,782
U.S. Treasury Bond, 8.75% ........................ 1,225,000 5/15/2017 1,710,982
U.S. Treasury Bond, 8.50% ........................ 450,000 2/15/2020 625,149
U.S. Treasury Bond, 6.875% ....................... 725,000 8/15/2025 878,040
U.S. Treasury Bond, 6.625% ....................... 425,000 2/15/2027 503,225
U.S. Treasury Note, 6.375% ....................... 1,450,000 8/15/2002 1,548,324
U.S. Treasury Note, 6.25% ........................ 675,000 8/31/2002 717,923
U.S. Treasury Note, 5.75% ........................ 175,000 4/30/2003 184,872
U.S. Treasury Note, 7.875% ....................... 450,000 11/15/2004 529,101
U.S. Treasury Note, 7.00% ........................ 325,000 7/15/2006 374,257
U.S. Treasury Note TIPS, 3.625% .................. 252,545 4/15/2028 252,702
U.S. Treasury STRIPS, 0.00% ...................... 550,000 11/15/2001 482,224
U.S. Treasury STRIPS, 0.00% ...................... 1,025,000 5/15/2003 838,409
U.S. Treasury STRIPS, 0.00% ...................... 850,000 5/15/2007 566,066
------------
9,520,056
------------
U.S. AGENCY MORTGAGE 15.8%
Federal Home Loan Mortgage Corp., 6.00% .......... 434,377 5/01/2013 436,140
Federal National Mortgage Association, 6.00% ..... 225,000 5/15/2008 238,500
Federal National Mortgage Association, 7.50% ..... 501,636 11/01/2027 514,333
Federal National Mortgage Association Remic
93-102-H PAC, 6.80% ............................ 125,000 9/25/2022 130,976
Federal National Mortgage Association TBA, 6.50% . 725,000 11/17/2013 736,781
Federal National Mortgage Association TBA, 6.00% . 725,000 11/12/2028 715,938
Federal National Mortgage Association TBA, 6.50% . 1,800,000 11/12/2028 1,812,937
Government National Mortgage Association, 6.50% .. 98,711 2/15/2009 100,716
Government National Mortgage Association, 6.50% .. 48,056 6/15/2009 49,032
Government National Mortgage Association, 6.50% .. 222,216 7/15/2009 226,329
Government National Mortgage Association, 7.50% .. 260,090 12/15/2010 267,445
Government National Mortgage Association, 7.00% .. 257,209 2/15/2025 263,397
Government National Mortgage Association TBA, 7.00% 250,000 11/18/2028 255,703
------------
5,748,227
------------
CANADIAN-YANKEE 2.5%
British Aerospace Finance Inc. Note, 7.50%+ ...... 125,000 7/01/2027 134,810
Province of Ontario Deb., 5.50% .................. 225,000 10/01/2008 223,614
Province of Quebec, 7.125% ....................... 75,000 2/09/2024 78,668
Usinor Sacilor Note, 7.25% ....................... 350,000 8/01/2006 357,091
Woodside Finance Ltd. Note, 6.60%+ ............... 125,000 4/15/2008 117,878
------------
912,061
------------
FOREIGN GOVERNMENT 5.5%
Greek Drachma
Republic of Greece, 8.80% ........................ 250,000,000 6/19/2007 921,851
New Zealand Dollar
Government of New Zealand, 10.00% ................ 475,000 3/15/2002 287,670
Government of New Zealand, 8.00% ................. 850,000 11/15/2006 525,566
Pound Sterling
United Kingdom Treasury, 8.50% ................... 125,000 12/07/2005 251,055
------------
1,986,142
------------
FINANCE/MORTGAGE 15.0%
American Express Master Trust, 5.90% $ 250,000 4/15/2004 257,812
Arcadia Automobile Trust 97-B A5, 6.70% .......... 125,000 2/15/2005 127,891
Arcadia Automobile Trust 97-C A5, 6.55% .......... 125,000 6/15/2005 126,719
Associates Corp. of North America Sr. Note, 6.45% 125,000 10/15/2001 128,186
Capital One Bank Note, 6.28% ..................... 250,000 2/20/2001 250,380
Capital One Bank Note, 6.15% ..................... 125,000 6/01/2001 124,559
Chase Commercial Mortgage Securities Corp. 1997-1
Cl. A1, 7.27% .................................. 139,327 7/19/2004 145,510
Chase Manhattan Master Trust 96-3A, 7.04% ........ 200,000 2/15/2005 208,000
Chevron Corp. Note, 8.11% ........................ 161,000 12/01/2004 175,849
Cigna Corp. Deb., 7.875% ......................... 175,000 5/15/2027 185,488
CIT Group Holdings Inc. Sr. Note, 6.80% 250,000 4/17/2000 255,465
Commercial Credit Group Inc. Note, 6.45% ......... 250,000 7/01/2002 256,405
Commercial Credit Group Inc. Sr. Note, 5.55% ..... 250,000 2/15/2001 250,305
Countrywide Funding Corp. Note, 6.58% 200,000 9/21/2001 206,444
Countrywide Funding Corp. Note, 6.28% 200,000 1/15/2003 206,202
ERAC USA Finance Co. Note, 6.75%+ ................ 250,000 5/15/2007 252,450
Florida Windstorm Sr. Sec. Note Series 1997,
6.85%+ ......................................... 125,000 8/25/2007 130,426
Ford Credit Auto Owner Trust 1996 A A3, 6.50% .... 48,497 11/15/1999 48,527
GMAC Commercial Mortgage Security Inc. 97-C2- A,
6.45% .......................................... 120,212 12/15/2004 122,616
GMAC Commercial Mortgage Security Inc. 98-C1 A1,
6.41% .......................................... 121,601 11/15/2007 121,753
Household Finance Co. Note, 6.75% ................ 125,000 6/01/2000 127,055
LB Commercial Mortgage Trust Series 97LL1-A1,
6.79% .......................................... 244,402 6/12/2004 254,178
LB Commercial Conduit Mortgage Trust 98-C1 A1,
6.33% .......................................... 119,444 11/18/2004 120,750
MBNA Master Credit Card Trust Series 98-JA, 5.25% 500,000 2/15/2006 498,550
Morgan Stanley Capital Inc. 98- A1, 6.19% ........ 120,129 1/15/2007 121,665
Prime Credit Card Master Trust Series 1995-1A,
6.75% .......................................... 125,000 11/15/2005 129,844
Prudential Home Mortgage Securities Co. Series
93-29 A-6 PAC, 6.75% ........................... 114,659 8/25/2008 114,982
Railcar Leasing LLC Sr. Sec. Note, 6.75%+ ........ 102,744 7/15/2006 105,216
Sears Credit Account Master Trust Series 1997-1A,
6.20% .......................................... 125,000 7/16/2007 127,695
Sears Credit Account Master Trust Series 1998-2A,
5.25% .......................................... 250,000 10/16/2008 247,641
------------
5,428,563
------------
CORPORATE 8.1%
Arizona Public Service Co. Note, 6.25% 250,000 1/15/2005 254,175
California Infrastructure Development Series 1997-
A7, 6.42% ...................................... 125,000 9/25/2008 129,766
Cargill Inc. Sr. Note, 6.875%+ ................... 125,000 5/01/2028 123,567
Coca-Cola Enterprises Inc., 5.75% ................ 250,000 11/01/2008 251,094
Coca-Cola Enterprises Inc. Deb., 6.75% 250,000 9/15/2028 249,395
Columbia/HCA Healthcare Corp. Note, 6.87% ........ 150,000 9/15/2003 145,662
Columbia/HCA Healthcare Corp. Note, 8.12% ........ 125,000 8/04/2003 129,001
Columbia/HCA Healthcare Corp. Note, 7.69% ........ 125,000 6/15/2025 106,695
Columbia/HCA Healthcare Corp. Note, 7.75% ........ 125,000 7/15/2036 108,031
Edison Mission Energy Funding Corp. Series A Note,
6.77%+ ......................................... 134,443 9/15/2003 139,263
Electronic Data Systems Corp. Note, 6.85%+ ....... 250,000 5/15/2000 258,030
Healthsouth Corp. Sr. Note, 6.875%+ .............. 175,000 6/15/2005 169,507
New Jersey Economic Development Authority, 7.425% 200,000 2/15/2029 227,838
News America Holdings Inc. Deb., 7.375% .......... 250,000 10/17/2008 259,145
United Technologies Corp. Note, 6.70% 125,000 8/01/2028 129,750
Worldcom Inc. Note, 6.125% ....................... 250,000 8/15/2001 253,650
------------
2,934,569
------------
Total Fixed Income Securities (Cost $25,930,670) ........................................ 26,529,618
------------

COMMERCIAL PAPER 14.3%
American Express Credit Corp., 5.12% .............. $1,457,000 11/03/1998 $ 1,457,000
Ford Motor Credit Co., 5.23% ...................... 799,000 11/03/1998 799,000
Ford Motor Credit Co., 5.25% ...................... 264,000 11/09/1998 264,000
General Electric Capital Corp., 5.22% ............. 1,589,000 11/12/1998 1,589,000
Household Finance Corp., 5.28% .................... 1,060,000 11/12/1998 1,060,000
------------
Total Commercial Paper (Cost $5,169,000) ............................................... 5,169,000
------------

<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
SHARES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS 23.9%
Total Short-Term Investments (Cost $8,679,562) ................... 8.679.562 8,679,562
------------
Total Investments (Cost $47,300,129) - 134.3% ................................. 48,671,270
Cash and Other Assets, Less Liabilities - (34.3%) ............................. (12,435,180)
------------
Net Assets - 100.0% ........................................................... $ 36,236,090
============
</TABLE>

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

Federal Income Tax Information:
At October 31, 1998, the net unrealized appreciation of
investments based on cost for Federal income tax purposes
of $47,320,196 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ....... $2,035,419
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ....... (684,345)
----------
$1,351,074
==========

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

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 securit ies among certain
qualified buyers. The total cost and market value of Rule 144A securities
owned at October 31, 1998 were $1,411,735 and $1,431,147 (3.95% 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 customary
settlement time. Although the unit price has been established, the
principal value has not been finalized and may vary by no m ore than 1%.

Forward currency exchange contracts outstanding at October 31, 1998, are as
follows:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACT APPRECIATION DELIVERY
TOTAL VALUE PRICE (DEPRECIATION) DATE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sell Canadian dollars, Buy U.S. dollars 198,443 CAD .66122 CAD $ 2,602 12/15/98
Sell Deutsche marks, Buy U.S. dollars 759,000 DEM .56465 DEM (29,936) 11/13/98
Sell Deutsche marks, Buy U.S. dollars 810,000 DEM .56453 DEM (32,051) 11/13/98
Sell British pounds, Buy U.S. dollars 147,000 GBP 1.69865 GBP 4,689 1/22/99
Sell Japanese yen, Buy U.S. dollars 40,181,127 JPY .00725 JPY (55,643) 12/16/98
Sell New Zealand dollars, Buy U.S. dollars 30,000 NZD .50400 NZD (772) 11/13/98
Sell New Zealand dollars, Buy U.S. dollars 725,000 NZD .50100 NZD (20,841) 11/13/98
Sell New Zealand dollars, Buy U.S. dollars 75,000 NZD .50741 NZD (1,675) 11/13/98
Sell New Zealand dollars, Buy U.S. dollars 590,000 NZD .52640 NZD (2,408) 1/22/99
Sell New Zealand dollars, Buy U.S. dollars 50,000 NZD .52550 NZD (250) 1/22/99
---------
$(136,285)
=========

<CAPTION>
Futures contracts open at October 31, 1998, are as follows:

EXPIRATION UNREALIZED
TYPE NOTIONAL AMOUNT MONTH APPRECIATION
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10 year U.S. Treasury Notes $400,000 December, 1998 $5,375
</TABLE>

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

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE

ASSETS
Investments, at value (Cost $47,300,129) (Note 1) ........ $48,671,270
Cash ..................................................... 46,152
Receivable for securities sold ........................... 2,022,446
Interest and dividends receivable ........................ 338,185
Receivable from Distributor (Note 3) ..................... 14,999
Receivable for open forward contracts .................... 7,291
Deferred organization costs and other assets (Note 1) 29,948

-----------
51,130,291
LIABILITIES
Payable for collateral received on securities loaned ..... 8,679,562
Payable for securities purchased ......................... 5,880,714
Payable for open forward contracts ....................... 143,576
Payable for fund shares redeemed ......................... 36,825
Accrued transfer agent and shareholder services
(Note 2) ............................................... 27,414
Accrued management fee (Note 2) .......................... 19,351
Accrued trustees' fees (Note 2) .......................... 15,673
Payable for variation margin (Note 1) .................... 3,125
Other accrued expenses ................................... 87,961
-----------
14,894,201
-----------
NET ASSETS $36,236,090
===========
Net Assets consist of:
Undistributed net investment income .................... $ 502,509
Unrealized appreciation of investments ................. 1,371,141
Unrealized appreciation of futures contracts ........... 5,375
Unrealized depreciation of forward contracts and
foreign currency ..................................... (134,505)
Accumulated net realized gain .......................... 2,248,412
Paid-in capital ........................................ 32,243,158
-----------
$36,236,090
===========

Net Asset Value, offering price and redemption
price per share of Class S shares
($36,236,090 / 3,319,052 shares) ....................... $10.92
======

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

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE

INVESTMENT INCOME
Interest, net of foreign taxes of $4,472 (Note 1) .......... $ 1,834,898
Dividends, net of foreign taxes of $3,450 .................. 121,190
-----------
1,956,088
EXPENSES
Management fee (Note 2) .................................... 223,748
Custodian fee .............................................. 109,779
Transfer agent and shareholder services (Note 2) ........... 75,241
Audit fee .................................................. 20,115
Trustees' fees (Note 2) .................................... 18,911
Reports to shareholders .................................... 18,675
Registration fees .......................................... 11,459
Amortization of organization costs (Note 1) ................ 7,483
Legal fees ................................................. 742
Miscellaneous .............................................. 2,296
-----------
488,449
Expenses borne by the Distributor (Note 3) ................. (152,851)
-----------
335,598
-----------
Net investment income ...................................... 1,620,490
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY, FORWARD CONTRACTS AND FUTURES
CONTRACTS
Net realized gain on investments (Notes 1 and 4) ........... 2,249,266
Net realized gain on futures contracts (Note 1) ............ 17,665
Net realized gain on forward contracts and foreign
currency (Note 1) ........................................ 175,234
-----------
Total net realized gain .................................. 2,442,165
-----------
Net unrealized depreciation of investments ................. (818,474)
Net unrealized appreciation of futures contracts ........... 5,375
Net unrealized depreciation of forward contracts
and foreign currency ..................................... (143,067)
-----------
Total net unrealized depreciation ........................ (956,166)
-----------
Net gain on investments, foreign currency and forward
contracts and futures contracts .......................... 1,485,999
-----------
Net increase in net assets resulting from operations ....... $ 3,106,489
===========

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
----------------------------
1997 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income .......................................... $ 1,591,879 $ 1,620,490
Net realized gain on investments, foreign currency, forward
contracts and futures contracts .............................. 2,789,109 2,442,165
Net unrealized appreciation (depreciation) of investments,
foreign currency, forward contracts and futures contracts .... 300,710 (956,166)
------------ ------------
Net increase resulting from operations ......................... 4,681,698 3,106,489
------------ ------------
Dividends from net investment income:
Class A ...................................................... (9,655) --
Class S ...................................................... (1,610,768) (1,703,599)
------------ ------------
(1,620,423) (1,703,599)
------------ ------------
Distributions from net realized gains:
Class A ...................................................... (27,562) --
Class S ...................................................... (1,688,429) (2,735,915)
------------ ------------
(1,715,991) (2,735,915)
------------ ------------
Net increase (decrease) from fund share
transactions (Note 6) ........................................ 3,367,965 (931,584)
------------ ------------
Total increase (decrease) in net assets ........................ 4,713,249 (2,264,609)
NET ASSETS
Beginning of year .............................................. 33,787,450 38,500,699
------------ ------------
End of year (including undistributed net investment income of
$458,790 and $502,509, respectively) ......................... $ 38,500,699 $ 36,236,090
============ ============
</TABLE>

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

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE

- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
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 five separate funds: State Street Research Strategic
Portfolios: Conservative, State Street Research Government Income Fund, State
Street Research Strategic Portfolios: Moderate, State Street Research Strategic
Portfolios: Aggressive and State Street Research IntelliQuant Portfolios:
Small-Cap Value.

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.

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. For the year ended October 31, 1998, the Fund has designated its
distributions from net realized gains as $452,253 from 20% rate gains and
$1,445,637 from 28% rate gains.

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 exchange 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.

I. SECURITIES LENDING
The Fund may seek additional income by lending portfolio securities to qualified
institutions. The Fund will receive cash or securities as collateral in an
amount equal to at least 100% of the current market value of any loaned
securities plus accrued interest. By reinvesting any cash collateral it receives
in these transactions, the Fund could realize additional gains and losses. If
the borrower fails to return the securities and the value of the collateral has
declined during the term of the loan, the Fund will bear the loss. At October
31, 1998, the value of the securities loaned and the value of collateral were
$7,768,238 and $8,679,562, respectively. During the year ended October 31, 1998,
income from securities lending amounted to $5,756 and is included in interest
income.

NOTE 2

The Trust and the Adviser 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, 1998, the fees pursuant to such
agreement amounted to $223,748.

The fees of the Trustees not currently affiliated with the Adviser amounted to
$18,911 during the year ended October 31, 1998.

NOTE 3

NOTE 4

For the year ended October 31, 1998, purchases and sales of securities,
exclusive of short-term obligations, aggregated $67,029,610 and $70,213,425
(including $48,032,330 and $47,681,230 of U.S. Government obligations),
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, 1998,
Metropolitan owned 2,392,390 Class S shares of the Fund.

Share transactions were as follows:

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
------------------------------------------------------------
1997 1998
--------------------------- ---------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares repurchased .................. (50,023) $ (528,933) -- $ --
--------- ------------ --------- -----------
Net decrease ........................ (50,023) $ (528,933) -- $ --
========= ============ ========= ===========

<CAPTION>
CLASS S SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ......................... 473,499 $ 5,172,822 372,648 $ 4,079,645
Issued upon reinvestment of:
Dividends from net investment
income .............................. 47,885 512,492 50,718 541,724
Distributions from net realized
gains ............................... 161,263 1,688,429 262,816 2,735,915
Shares repurchased .................. (320,767) (3,476,845) (768,832) (8,288,868)
------------ --------------- ------------ ---------------
Net increase (decrease) ............. 361,880 $ 3,896,898 (82,650) $ (931,584)
========= ============ ========= ===========
</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
*Reflects voluntary reduction of
expenses per share of these
amounts (Note 3) ($) 0.03 0.05 0.07 0.03
</TABLE>

<TABLE>
<CAPTION>
CLASS S
------------------------------------------------------------------
YEARS ENDED OCTOBER 31
------------------------------------------------------------------
1994(2) 1995(1) 1996(1) 1997(1) 1998(1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR($) 9.55 9.56 10.56 10.93 11.32
------- ------- ------- ------- -------
Net investment income ($)* 0.21 0.52 0.50 0.49 0.47
Net realized and unrealized gain
(loss) on investments, foreign
currency, forward contracts
and futures contracts ($) (0.09) 0.97 0.60 0.95 0.42
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS($) 0.12 1.49 1.10 1.44 0.89
------- ------- ------- ------- -------
Dividends from net investment income ($) (0.11) (0.49) (0.48) (0.50) (0.50)
Distributions from net realized gains ($) -- -- (0.25) (0.55) (0.79)
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS ($) (0.11) (0.49) (0.73) (1.05) (1.29)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR ($) 9.56 10.56 10.93 11.32 10.92
======= ======= ======= ======= =======
Total return(3) (%) 1.25(4) 16.11 10.82 14.11 8.60
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 100 1,433 33,236 38,501 36,236
Ratio of operating expenses to
average net assets (%)* 0.90(5) 0.90 0.90 0.90 0.90
Ratio of net investment income to
average net assets (%)* 4.73(5) 4.91 4.50 4.47 4.35
Portfolio turnover rate (%) 70.35 132.50 126.41 117.66 186.03
*Reflects voluntary reduction of
expenses per share of these
amounts (Note 3) ($) 0.03 0.05 0.06 0.05 0.04

- ----------------------------------------------------------------------------------------------------------------
(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 reduced a portion of the Fund's expenses.
(4) Not annualized.
(5) Annualized.
</TABLE>

<PAGE>

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

TO THE TRUSTEES OF STATE STREET RESEARCH FINANCIAL TRUST
AND THE SHAREHOLDERS OF STATE STREET RESEARCH STRATEGIC PORFOLIOS: 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, 1998, 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, 1998 by correspondence with the
custodian and brokers provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP
Boston, Massachusetts
December 11, 1998

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE

- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- -------------------------------------------------------------------------------
For the year ended October 31, 1998, Class S shares of State Street Research
Strategic Portfolios: Conservative gained 8.60%. That was significantly higher
than its peer group, the Lipper flexible income fund average, which rose 1.55%.

Strategic Portfolios: Conservative seeks high total return with an emphasis on
capital preservation by investing in a mix of bonds and stocks. The manager's
strategy is to adjust the asset allocation based on changing market conditions.

In general, investors sought quality and liquidity during the year. Large
company stocks outperformed small and mid-cap stocks. High-quality bonds
outperformed high-yield bonds. The Fund was helped by its exposure to large- cap
stocks and high-quality bonds. Value stocks and high-yield bonds detracted from
performance.

Going forward, we expect a modest increase in corporate profits and continued
volatility in the financial markets in 1999. An uncertain global economic
environment has been aided by an infusion of cash from the International
Monetary Fund, by proposed reforms to Japan's banking system, and the Federal
Reserve's cuts in interest rates in the U.S. However, we remain cautious about
the prospects for the markets and the economy, and we will continue to
underweight U.S. equities, overweight bonds and focus on quality and liquidity.

October 31, 1998

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

-----------------------------------
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------
1 Year 3 Years Life of Fund
-----------------------------------
8.60% 11.15% 11.32%
-----------------------------------

VALUE OF
VALUE OF ACCOUNT OF
ACCCOUNT OF LEHMAN BROTHERS
VALUE OF S & P 500 GOV'T/CORP
ACCOUNT AT INDEX AT INDEX AT
DATE YEAR END YEAR END YEAR END
- ---- -------- -------- --------
Inception 05/16/94 $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
10/31/98 16,143 26,668 14,699

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
- --------------------------------------------------------------------------------
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: 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 Former Senior Vice President
for Finance and Operations and
DISTRIBUTOR E.K. RAGSDALE, JR. Treasurer, The Pennsylvania
State Street Research Vice President State University
Investment Services, Inc.
One Financial Center THOMAS A. SHIVELY
Boston, MA 02111 Vice President MALCOLM T. HOPKINS
Former Vice Chairman of the
SHAREHOLDER SERVICES JAMES M. WEISS Board and Chief Financial
State Street Research Vice President Officer, St. Regis Corp.
Service Center
P.O. Box 8408 GERARD P. MAUS
Boston, MA 02266-8408 Treasurer EDWARD M. LAMONT
1-800-562-0032 Formerly in banking
JOSEPH W. CANAVAN (with an affiliate of
CUSTODIAN Assistant Treasurer J.P. Morgan & Co. in New York);
State Street Bank and presently engaged in private
Trust Company DOUGLAS A. ROMICH investments and civic affairs
225 Franklin Street Assistant Treasurer
Boston, MA 02110
FRANCIS J. MCNAMARA, III ROBERT A. LAWRENCE
LEGAL COUNSEL Secretary and General Counsel Former Partner, Saltonstall & Co.
Goodwin, Procter & Hoar LLP
Exchange Place DARMAN A. WING
Boston, MA 02109 Assistant Secretary and DEAN O. MORTON
Assistant General Counsel Former Executive Vice President,
INDEPENDENT ACCOUNTANTS Chief Operating Officer and
PricewaterhouseCoopers LLP AMY L. SIMMONS Director, Hewlett-Packard
One Post Office Square Assistant Secretary Company
Boston, MA 02109
SUSAN M. PHILLIPS
Dean, School of Business and
Public Management, George
Washington University; former
Member of the Board of Governors
of the Federal Reserve System and
Chairman and Commissioner of
the Commodity Futures Trading
Commission

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
</TABLE>

<PAGE>

STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE -------------------
One Financial Center Bulk Rate
Boston, MA 02111 U.S. Postage
PAID
Permit #20
Holliston, MA 01746
-------------------
QUESTIONS? COMMENTS?

CALL us at 1-800-562-0032
[hearing-impaired 1-800-676-7876]

WRITE us at:
State Street Research
Service Center
P.O. Box 8408
Boston, MA 02266-8408

EMAIL us at:
[email protected]
INTERNET site:
www.ssrfunds.com

[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:
Conservative prospectus. When used after December 31, 1998, 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: (exp1299)SSR-LD SP-125E-1298