COMPOSITE DEFERRED SERIES INC, N-30D, 1999-03-05

COMPOSITE DEFERRED SERIES INC
N-30D, 1999-03-05

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<PAGE>

Composite
Deferred Series,
Inc.

Annual Report for the year ended December 31, 1998
<PAGE>

dear contract owner:

[PHOTO]
As we move into 1999, I would like to take this opportunity to reflect on the
events that we have witnessed in the investment markets this past year. While
the U.S. stock and bond markets both posted positive returns to investors in
1998, you probably know there were a couple of bumpy periods along the way.

The widespread stock market volatility that began in Asia and culminated in
substantial declines in some Latin American markets demonstrated quite clearly
that the world's financial markets have become intertwined in recent years. Yet,
the economies of these geographic regions, and even individual countries, remain
less closely linked.
In 1998, this difference between economic and market events highlighted the
importance of maintaining a long-term perspective when pursuing long-term
objectives. This perspective rewarded investors who held their assets, as equity
markets rebounded significantly and closed out the year with one of the best
quarters in history.

Twenty years ago, money moved more slowly between investment markets than it
does today. The development of new communication and money-transfer technologies
over the years has created a new type of investor institutions who invest large
amounts of capital in short-term opportunities throughout the world. One result
is that local events which affect one financial market can quickly spill over to
far-distant economies as money is moved around the globe. In some cases, the
result can be the tail wagging the dog. An example is the nearly 11% decline in
the U.S. stock market in August immediately following Russia's devaluation of
its currency. That decline was in part due to the need by some investment
companies to raise cash by selling holdings in the U.S. Maintaining a long-term
perspective during such periods can help investors avoid turning a "paper loss"
into a real one. Focusing on the longer term can also be key to recognizing
opportunity. A basic tenet of the investment approach followed by portfolio
managers who steer the underlying funds in the Composite Deferred Series, Inc.
is that long-term investment opportunities are identified by focusing on
fundamental factors such as earnings. When distortions in market prices occur
due to temporary factors that do not affect fundamentals, investment managers
often have opportunities to buy at below-value prices. In addition, maintaining
nearly fully-invested portfolios greatly rewarded shareholders, as economic
fundamentals helped push equity markets near all-time highs to close out 1998.

Three Key Reasons for Keeping on Track

Staying focused on investment objectives can help individuals withstand market
turbulence. As an individual investor, how you pursue your financial goals will
be affected by several factors including your investment time frame and ability
to withstand a potential loss in the value of your investments. If you choose
investments that are appropriate for your goals, you'll probably be less tempted
to abandon your strategy during a market downturn.

Maintaining realistic expectations is another key to keeping your equilibrium
during changing markets. According to a recent survey, nearly two thirds of
individual investors expect the long-term total return on their stock
investments to average 12% per year or less.* That's actually lower than recent
trends and in line with historical averages. For example, over the four decades
that ended on December 31, 1998, the compound rate of return on the S&P 500 was
exactly 12%, with periods of declining as well as rising prices. During those 40
years, there were 13 corrections in which prices slid by 10% or more before
resuming their generally upward trend.**

Finally, following sound investment principles by diversifying your investments
is always wise. Stock investments have captured the media's attention for the
last several years, but fixed-income investments have always been an important
part of a diversified portfolio, providing an income stream that can help smooth
out returns. For example, during the second and third quarters of 1998, bond
investments were some of the top performers while stock prices were on the
decline.

As you plan and invest for the long term, we encourage you to meet at least
annually with your Investment Representatives. Regular communications with your
Investment Representatives will help ensure that your portfolio remains
appropriately diversified and positioned to attain your long-term financial
goals.

Sincerely,

/s/ William G. Papesh

William G. Papesh
President

*Source: Business Week, June 15, 1998.

**Source: Standard & Poor's. The S&P 500 is an unmanaged index that is generally
considered representative of the U.S. stock market. The performance of any index
is not indicative of the performance of a particular investment and does not
take into account the effects of fees and expenses associated with purchasing
mutual fund shares. Individuals cannot invest directly in an index. Past
performance does not guarantee future results.
<PAGE>

individual fund reviews

WM Advisors, Inc. is the investment advisor to Composite Deferred Series, Inc.,
and has general oversight responsibility for the advisory services provided to
the underlying Funds. These services include formulating the underlying Funds'
investment policies, analyzing economic trends affecting the Funds, and
directing and evaluating the investment services provided by the Sub-Advisors
and the individual Portfolio Managers of each Fund. WM Advisors supervises the
individual Portfolio Managers in their day-to-day management of the underlying
Funds in the Composite Deferred Series, Inc. family to ensure that policies and
guidelines are met, and to determine appropriate investment performance
measures.

Understanding the Enclosed Charts

In order to help you understand each Composite Deferred Series, Inc. Fund's
investment performance, we have included the following discussions along with
graphs that compare the Funds' performance with certain market indices.
Descriptions of these indices are provided next to the individual graphs on the
following pages.

Generally, an index represents the market value of an unmanaged group of
securities, regarded by investors as representative of a particular market. An
index does not reflect any asset-based charges for investment management or
other expenses. Total return is used to measure a Fund's performance and
reflects both changes in the unit value of the Fund as well as any income
dividend and/or capital gain distributions made by the Fund during the period.
Past performance is not a guarantee of future results. A Fund's unit value and
investment return will vary with market conditions, and the principal value of
an investment when you redeem your units may be more or less than the original
cost.

Where applicable, the total returns of the Funds reflect the Advisors' voluntary
waiver of fees, absorption of certain expenses, and credits allowed by the
Custodian. Total returns would have been lower if these fees and expenses had
not been waived, absorbed, or reduced by credits.

Both the Funds' performance results and the market indices reflect total
reinvestment of income, dividends, and capital gains. The unit values of these
variable options will fluctuate with market conditions.

The Year 2000 Problem

Many computer systems in use today cannot properly process date-related
information in relation to the year 2000. This issue originates in the practice
of abbreviating years to their last two digits. Computer systems may not be able
to decide correctly when a date entered with a year of "00" should be
interpreted as 1900 or 2000. At the turn of the new century, computer systems
may not function properly because they may not be able to recognize or interpret
the year 2000.

Should any of the computer systems employed by the underlying Composite Deferred
Series, Inc. Funds' or Portfolios' major service providers fail to process this
type of information properly, it could have a negative impact on underlying Fund
or Portfolio operations and services that are provided to contract owners.
Similarly, the values of certain of the underlying Composite Deferred Series,
Inc. Funds' or Portfolios' assets may be adversely affected by the inability of
their issues or third parties to properly process date-related information.

The Advisor, Shareholder Servicing Agent and Administrator have advised the
underlying Funds and Portfolios that they are reviewing all of their computer
systems with the goal of modifying or replacing such systems prior to January 1,
2000 to the extent necessary to avoid any such negative impact. Furthermore, the
underlying Funds and Portfolios are seeking assurances from each of their key
service providers that similar replacements or modifications will be completed
to avoid any negative impact from this issue. In the event a key service
provider cannot provide such assurances, the underlying Funds and Portfolios may
consider retaining an alternative service provider.

In addition, the Advisor has been advised by the Custodian that it is also in
the process of reviewing its systems with the same goal. As of the date of this
report, the underlying Funds, Portfolios, and Advisor have no reason to believe
that these goals will not be achieved.

2
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Composite Deferred Series, Inc.
growth & income portfolio

Portfolio Manager:
WM Advisors, Inc.

The equity team at WM Advisors, Inc. manages the underlying Portfolio. The firm
has roots in the investment industry dating back nearly 60 years and has managed
money through multiple economic and market cycles.

What were the most significant factors contributing to Portfolio performance
over the 12-month period ended December 31, 1998, and what investment techniques
were used to address those conditions?

The period began with strong results as, although volatile, large-cap stocks
advanced to new highs. The positive performance lasted until July when markets
began to slide in the midst of global turmoil and uncertainty. August proved to
be a very negative month, with the S&P 500 dropping nearly 15%. The period
closed on a positive note as accommodative monetary policy aided in quelling
some of the unrest worldwide, and the stock market rebounded significantly.
Performance of the overall market was concentrated in the largest, most-liquid,
mega-caps of the S&P 500. Small stocks gained some ground late in the year, but
underperformed for the fifth year in a row. Fundamental style factors also
played a significant role in Portfolio performance as the growth style advanced
nearly three times that of the value style employed by the Portfolio. Overall,
while the Portfolio performance was positive, it underperformed the S&P 500 for
the 12-month period.

Although many of the stocks in the portfolio were out of favor relative to the
largest positions in the S&P 500, we continue to believe we own many good
businesses that are trading at attractive prices. We utilized the

[GRAPH APPEARS HERE]

1 The Standard & Poor's 500 Composite Index (S&P 500) represents an unmanaged
weighted index of 500 industrial, transportation, utility and financial
companies widely regarded by investors as representative of the stock market.

The Consumer Price Index is a measurement of inflation for all urban consumers
(CPI-U). The indices assume reinvestment of all dividends/distributions and do
not reflect any asset-based charges for investment management or other expenses.
<TABLE>
<CAPTION>

Growth of a $10,000 Investment 2, 3
<S> <C> <C> <C>
Fund (not adjusted for sales charge)
Standard & Poor's 500 Composite Index1
Inflation (CPI)1

Total Returns as of 12/31/98 2, 3 One Year Five Years4 10 Years4
Fund (not adjusted for sales charge) 11.11% 19.29% 14.33%
Standard & Poor's 500 Composite Index1 28.58% 24.06% 19.19%
</TABLE>

2 Past investment performance does not guarantee future performance, and
returns and values will fluctuate. The returns for the Portfolio assume
reinvestment of all dividends/distributions.

3 The chart depicts the Portfolio's performance. An investment in the Portfolio
through a variable annuity contract will result in lower returns because annuity
returns are typically net of all fees and assume payment of a contingent
deferred sales charge.

4 Annualized.

3
<PAGE>

volatility in the markets to buy positions in companies whose prices had been
pushed down to levels under our overall valuation of those firms. The short-term
weakness in financial markets and the corresponding market rally was an
excellent example of the benefits of a long-term focus to equity investment, as
we continue to stress a buy and hold value-oriented philosophy.

Were there any shifts in the underlying Portfolio's holdings/sectors that have
had a significant impact on performance?

During the period, large technology companies dominated the markets as
securities such as Microsoft and EMC Corporation appreciated significantly,
positively contributing to the overall performance of the Portfolio. In
addition, drug holdings contributed positively toward overall performance as
many pharmaceutical firms, such as Warner Lambert, performed very well. However,
the Portfolio was negatively impacted by its exposure to the aerospace and
energy sectors. For example, Northrup Grumman declined throughout the period,
dragging on the positive overall results of the securities held by the
Portfolio. Another disappointment was Penncorp Financial, which lost much of
its value before we sold the holding.

An environment of slow growth and low inflation helped our overweighted position
in foods and drugs as these sectors provided relative performance strength.
Strong domestic economic growth was good for retail and consumer cyclical
stocks, but we were underweighted in these sectors. The Portfolio benefited from
its position in Wal-Mart, as the company's stock price more than doubled over
the course of the year. We used the decline in equity prices in the fall to pick
up fundamentally strong financial holdings; these stocks subsequently led the
market through the end of the year. We will maintain our focus of finding strong
companies at good valuations. Although value investing has underperformed growth
recently, we feel that our commitment to this approach has the opportunity to
reward contract owners over the long-term.

What is the outlook for both the underlying Portfolio and the overall economy?

Our economic outlook is positive, as interest rate easing by the Federal Reserve
was quite beneficial to stocks and very tame inflation gives the Federal Reserve
additional flexibility in enacting monetary policy. Low interest rates and
strong consumer spending should keep the economy moving forward, although some
slowing could result as reduced corporate capital spending and lower offshore
demand for U.S. goods works its way through the economy. We think that small-and
mid-cap stocks are undervalued and oversold, and the Portfolio's positions in
these firms could provide strong relative performance in the coming months. We
have 30% of our holdings in mid- and small-company stocks, making the overall
representation of the Portfolio less than that of the S&P 500. Lower interest
rates are especially good for these holdings. Long-term prospects for the
securities held by the Portfolio are very strong and patience should be
rewarded. Valuations for the market as a whole look very rich, but disparities
with respect to market capitalization or overlooked sectors create some
compelling investment opportunities. Another positive demographic factor is the
currently low global savings rate. We feel that as the population ages, this
rate will increase and more money will head into investments. Overall, we expect
slow growth and low inflation in 1999, a scenario that is positive for financial
assets.

4
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Composite Deferred Series, Inc.
northwest portfolio

Portfolio Manager:
David Simpson
WM Advisors, Inc.

The equity team, led by David Simpson, Senior Portfolio Manager of WM Advisors,
Inc., has managed the Northwest Portfolio since its inception. Mr. Simpson is a
Chartered Financial Analyst, holds an MBA, and has over 11 years of continuous
investment experience.

What were the most significant factors contributing to Portfolio performance
over the 12-month period ended December 31, 1998, and what investment techniques
were used to address those conditions?

Equity markets were extremely volatile during the period, which was magnified in
the small-capitalization area where the Portfolio invests. Small-caps
underperformed large-caps after the inception of the Portfolio, eventually
dropping nearly 40% in four months (as measured by the Russell 2000 Index). The
Portfolio bounced back significantly in September and October and closed out the
year with very strong results. Over the period, the Portfolio was particularly
impacted by its high concentration in small-cap technology holdings as the
sector was especially damaging early, then led the market rebound. The weakness
was largely due to the perceived dependency of small-technology companies on the
economies of Asia. Equities of companies with such exposure were
indiscriminately sold by many market participants as the impact of the Asian
crisis created concern for investors. In addition, semiconductor and personal
computer manufacturers dealt with excess inventory for much of the year,
impacting their performance and the performance of their suppliers. As
improvements in Asia developed, these stocks rallied and a technology-led
rebound ensued. Holdings such as

[GRAPH APPEARS HERE]

<S> <C> <C> <C>
Growth of a $10,000 Investment 2, 3
Fund (not adjusted for sales charge)
Standard & Poor's 500 Composite Index1
Inflation (CPI)1

Total Returns as of 12/31/98 2, 3 One Year Five Years4 Since Inception4
(January 1, 1993)
Fund (not adjusted for sales charge) 22.78% 19.98% 16.95%
Standard & Poor's 500 Composite Index1 28.58% 24.06% 21.59%
</TABLE>

2 Past investment performance does not guarantee future performance, and
returns and values will fluctuate. The returns for the Portfolio assume
reinvestment of all dividends/distributions.

3 The chart depicts the Portfolio's performance. An investment in the Portfolio
through a variable annuity contract will result in lower returns because
annuity returns are typically net of all fees and assume payment of a
contingent deferred sales charge.

4 Annualized.

5
<PAGE>

Microsoft and Micron Technologies doubled in value in 1998. Conversely, areas
such as Basic Industry and Aerospace hurt overall results; companies such as
Schnitzer Steel and Boeing lost value over the course of the year.

Although market volatility increased in 1998, our long-term investment focus
remains unchanged. We will continue to seek out strong companies located or
doing business in the Northwest region of the United States. In fact, with the
market pullback in the summer and fall, we were able to find good companies at
attractive valuations. This strategy paid off as the Portfolio appreciated
significantly in the fourth quarter. Our basic buy-and-hold strategy continues
as we maintain our long-term approach to stock selection. Short-term volatility
serves as a reminder of the significance of a long-term outlook and highlights
the importance of keeping sight of your financial goals.

Were there any shifts in the underlying Portfolio's holdings/sectors that have
had a significant impact on performance?

Early in the period, the Portfolio benefited from holdings in the retail and
technology sectors. Throughout the course of the summer, prices fell across the
board with almost no company left untouched. With over 50% of the portfolio
invested in small-cap companies, the Portfolio was especially vulnerable. After
the Asian crisis unwound and small-cap stocks dropped in value, we increased the
weighting of these holdings in the portfolio. The valuations appeared compelling
as many stocks had dropped 50% in price, providing a great buying opportunity.
Holdings such as Immunex and Multiple Zones International provided very positive
performance in the fourth quarter. We also reduced our exposure to both retail
and financial stocks that may be impacted if the economy of the Northwest slows.

What is the outlook for both the underlying Portfolio and the overall economy?

Until global unrest is resolved, we expect volatility in both the equity markets
and performance of the Portfolio to continue. It is still too early to
understand all of the ramifications of the crash in global emerging markets on
worldwide growth and demand for goods. We continue to stress that long-term
investing and patience should be rewarded. The portfolio is geared towards a
longer-term time horizon and should be able to withstand short-term market
volatility. While the economy of the Northwest region is very important to the
Portfolio, many companies such as Microsoft, Boeing, Starbucks, Intel, and
Micron Technology have a national or global scope and bring increased levels of
economic diversification to the Portfolio. As small-cap stocks have been
battered over the summer, good values and the possibility of some catch-up in
relative performance create a positive environment for the Portfolio.

We expect both regional and national economies to slow in the coming months. The
effects of an overall global slowdown will be felt in the United States, but
lower interest rates should mitigate the magnitude of the impact. The diversity
of the Northwest economy should also continue to provide benefit, as investments
are spread across multiple sectors. Regional employment factors will play a role
in economic advances, as the effects of workforce reductions by Boeing will
ripple through the area. Conversely, Microsoft continues to aggressively hire
and is spending in excess of $3 billion on research and development in fiscal
1999 alone.

6
<PAGE>

Composite Deferred Series, Inc.
income portfolio

Portfolio Manager:
Gary Pokrzywinski
WM Advisors, Inc.

The Income Portfolio is managed by a fixed-income team led by Senior Portfolio
Manager Gary Pokrzywinski, who has over 12 years of asset management experience
and has been with WM Advisors, Inc. for more than six years. Mr. Pokrzywinski
is a Chartered Financial Analyst and holds a Business Degree from the University
of Wisconsin.

What were the most significant factors contributing to Portfolio's performance
over the 12-month period ended December 31, 1998, and what investment techniques
were used to address those conditions?

During the 12-month period, there was a fairly significant drop in interest
rates; this is positive for the Portfolio as its value moves in the opposite
direction of rates. Rates on intermediate-maturity Treasury notes dropped by
over 100 basis points (1%). For much of the period, the interest rate decline
was segmented to the highest quality assets such as Treasuries. The flight to
quality was most evident during the period of August through October, as
Treasuries outperformed all other types of fixed-income securities. To
summarize, despite the drop in rates and corresponding increase in price for
Treasury securities, corporate securities, which make up a significant portion
of the holdings of the Portfolio, significantly underperformed the U.S. Treasury
market. Corporate yields fell by only 50 basis points for intermediate "A" or
average quality rating++, and therefore, the price increase was half that of
similar maturity Treasuries. Yet, because the Portfolio has almost 50% of its
securities in Treasury notes, it was able to capture some of the benefit of the
decline in rates. Typical of a portfolio of this nature, the income
characteristics of the securities produced the majority of the overall return to
shareholders during the year. The performance of the higher-risk securities
(below

[GRAPH APPEARS HERE]

1 The Lehman Brothers Government/Corporate Bond Index represents all government
and corporate bonds.

2 Past investment performance does not guarantee future performance, and
returns and values will fluctuate. The returns for the Portfolio assume
reinvestment of all dividends/distributions.
<TABLE>
<CAPTION>

Growth of a $10,000 Investment 2, 3
<S> <C> <C> <C>
Fund (not adjusted for sales charge)

Lehman Brothers Government/Corporate Bond Index1

Inflation (CPI)1

Total Returns as of 12/31/98 2, 3 One Year Five Years4 10 Years4

Fund (not adjusted for sales charge) 9.50% 7.25% 8.73%

Lehman Brothers Government/Corporate Bond Index1 9.47% 7.30% 9.34%
</TABLE>

4 Annualized.

7
<PAGE>

investment grade) that the underlying Portfolio invests in was neutral, as a few
did poorly and a few did exceptionally well.

Looking a little deeper, global economic uncertainty, stock market jitters,
excess financial leverage, and the general slowdown in economic growth caused
investors to shy away from perceived riskier assets. These factors coupled with
the volume of money flowing into the Treasury market and the easing stance of
the Federal Reserve, pushed Treasury rates to unprecedented lows. The risk
aversion caused yield spreads between securities that are not guaranteed by the
government, such as corporate bonds, to increase substantially. Despite the
underperformance of corporate securities, historical results show that fixed-
income investors with a long-term time horizon benefit from having a diverse
portfolio which includes non-government guaranteed securities.++ The income
generated from these securities can be substantial relative to similar maturity
Treasuries. The extreme relative performance strength of the Treasury market has
begun to subside and, therefore, we continue to invest in corporate securities.
Because the corporate rates did not drop as much as government rates, these
securities now offer even more attractive income potential relative to other
investments.

Were there any shifts in the Portfolio's holdings/sectors that have had a
significant impact on performance?

There were no shifts that had a significant impact. We strive to meet the
objective of current income by investing a significant portion of the portfolio
in corporate securities. The underlying securities in the Portfolio have an
average rating of AA++ and average nearly 10 years in maturity and 6 years in
duration (a measure of the price sensitivity to changes in interest rates).
Looking forward, we will increase the allocation in corporate securities and
concentrate purchases in the less economic sensitive sectors of the market, like
healthcare, consumer non-durables and defense companies.

What is the outlook for both the Portfolio and the overall economy?

The intermediate outlook of the Portfolio looks positive as the worries that
caused the recent underperformance of non-government guaranteed securities
should diminish. As yield spreads between Treasuries and corporate securities
close, we may see relative performance strength shift back to the corporate
sector. The longer-term outlook remains the same. By investing largely in
intermediate-maturity securities, conducting proprietary research, and keeping
the portfolio to an average risk profile, the volatility of the Portfolio should
be reasonable, and the income characteristics should be attractive, especially
when compared to inflation.

Slow economic growth should continue for the next 12 months, with a slight
possibility that growth could slip to below potential. The economy will have a
difficult time gathering momentum against the major worldwide structural forces
(excess capacity, aging demographics, fiscal austerity) pushing against growth.
These forces are slowly beginning to change, but it will likely be two or more
years before we see anything but a slow-growth, low-inflation environment. As
such, we believe interest rates should continue to trend down over the next
year. These factors create a positive environment for fixed-income securities
and, therefore, a positive environment for the Portfolio.

++ Bond ratings are of portfolio holdings and are provided by a combination of
both Moody's and Standard & Poor's. Past performance is not a guarantee of
future results.

8
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statements of assets and liabilities
Composite Deferred Series, Inc.
December 31, 1998
<TABLE>
<CAPTION>

Growth &
Income Northwest Income
Portfolio Portfolio Portfolio
-------------- ------------- -------------

ASSETS:
<S> <C> <C> <C>
Investments, at value
(See portfolios of investments) (a)................ $54,203,278 $20,989,037 $18,327,311
Cash................................................. 364 440 797
Dividends and/or interest receivable................. 61,407 17,074 288,532
Receivable for Portfolio shares sold................. -- -- 91,848
Receivable for investment securities sold............ 237,759 38,349 --
----------- ----------- -----------
Total Assets....................................... 54,502,808 21,044,900 18,708,488
----------- ----------- -----------

LIABILITIES:
Payable for Portfolio shares redeemed................ 4,665 -- 27,730
Payable for investment securities purchased.......... -- 28,069 --
Dividends payable.................................... -- -- 91,842
Investment advisory fee payable...................... 22,532 8,197 7,893
Accrued legal and audit fees......................... 11,200 9,600 12,000
Accrued printing fees................................ 6,562 2,615 3,060
Accrued expenses and other payables.................. 7,157 3,338 6,353
----------- ----------- -----------
Total Liabilities.................................. 52,116 51,819 148,878
----------- ----------- -----------

NET ASSETS........................................... $54,450,692 $20,993,081 $18,559,610
=========== =========== ===========

NET ASSETS consist of:
Accumulated net realized gain/(loss) on investments.. $ 4,721,890 $ 3,090,880 $ (65,208)
Net unrealized appreciation of investments........... 16,298,986 6,552,414 1,273,380
Paid-in capital...................................... 33,429,816 11,349,787 17,351,438
----------- ----------- -----------
Total Net Assets................................... $54,450,692 $20,993,081 $18,559,610
=========== =========== ===========

NET ASSETS VALUE, offering price and
redemption price per share of beneficial interest
outstanding........................................ $ 29.52 $ 26.78 $ 12.91
=========== =========== ==========

Number of Portfolio shares outstanding............... 1,844,627 783,847 1,438,071
=========== =========== ===========
(a) Investments, at cost............................. $37,904,292 $14,436,623 $17,053,931
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.

<PAGE>

statements of operations
Composite Deferred Series, Inc.
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>

Growth &
Income Northwest Income
Portfolio Portfolio Portfolio
-------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................................ $ 801,073 $ 158,413 $ 13,687
Interest............................................. 39,330 31,417 1,241,424
------------- ------------- -------------
Total investment income............................ 840,403 189,830 1,255,111
------------- ------------- -------------

EXPENSES:
Investment advisory fee............................. 277,136 95,723 92,577
Legal and audit fees................................ 11,489 9,375 11,334
Custodian fees...................................... 15,431 9,069 6,487
Other............................................... 28,950 11,776 15,130
------------- ------------- -------------
Subtotal......................................... 333,006 125,943 125,528
Fees reduced by credits allowed by the custodian. (227) (371) (2,009)
------------- ------------- -------------
Net expenses...................................... 332,779 125,572 123,519
------------- ------------- -------------
NET INVESTMENT INCOME............................... 507,624 64,258 1,131,592
------------- ------------- -------------

NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Realized gain from security transactions............ 4,762,524 3,264,693 39,906
Change in unrealized appreciation of investments
during the year................................... 242,333 504,331 503,998
------------- ------------- ------------
Net realized and unrealized gain on investments. 5,004,857 3,769,024 543,904
------------- ------------- ------------

NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS........................... $ 5,512,481 $ 3,833,282 $ 1,675,496
============= ============= ============
</TABLE>
See Notes to Financial Statements.

11
<PAGE>

statements of changes in net assets
Composite Deferred Series, Inc.

<TABLE>
<CAPTION>
Growth &
Income Portfolio Northwest Portfolio Income Portfolio
---------------------- ------------------------ --------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
----------- ----------- ----------- ----------- ----------- -----------
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net investment income........... $ 507,624 $ 546,269 $ 64,258 $ 52,530 $ 1,131,592 $ 1,143,242
Realized gain from
investment transactions........ 4,762,524 4,774,997 3,264,693 1,411,838 39,906 25,271
Change in unrealized
appreciation of
investments during the year.... 242,333 7,701,072 504,331 3,116,022 503,998 632,976
----------- ----------- ----------- ----------- ----------- -----------

Net increase in net assets
resulting from operations...... 5,512,481 13,022,338 3,833,282 4,580,390 1,675,496 1,801,489
Distributions to
shareholders from:
Net investment income.......... (507,624) (547,667) (64,258) (53,379) (1,131,592) (1,143,242)

Net realized gain on
investments................... (4,800,946) (3,110,023) (1,560,748) (356,675) -- --
Net increase/(decrease) in
net assets from Portfolio share
transactions.................. (3,008,718) 6,489,184 (1,139,451) 2,984,274 (348,467) 321,422
----------- ----------- ----------- ----------- ----------- -----------
Total increase/(decrease)
in net assets.................. (2,804,807) 15,853,832 1,068,825 7,154,610 195,437 979,669

NET ASSETS:
Beginning of year............... 57,255,499 41,401,667 19,924,256 12,769,646 18,364,173 17,384,504
----------- ----------- ----------- ----------- ----------- -----------
End of year..................... $54,450,692 $57,255,499 $20,993,081 $19,924,256 $18,559,610 $18,364,173
=========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.

12
<PAGE>

statements of changes in net assets -- capital stock activity
Composite Deferred Series, Inc.
<TABLE>
<CAPTION>

Growth &
Income Portfolio Northwest Portfolio Income Portfolio
---------------------- ---------------------- ---------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
---------------------- ---------------------- ----------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
SHARES:
Sold................................. 31,924 291,319 11,707 181,653 109,080 187,345
Issued as reinvestment of dividends
and capital gains.................. 181,368 151,465 67,169 21,689 88,761 94,003
Redeemed............................. (338,938) (174,893) (140,957) (57,730) (224,982) (254,747)
----------- ----------- ----------- ----------- ----------- -----------
Net increase/(decrease).............. (125,646) 267,891 (62,081) 145,612 (27,141) 26,601
=========== =========== =========== =========== =========== ===========

AMOUNT:
Sold................................. $ 924,483 $ 7,614,916 $ 274,298 $ 3,869,744 $ 1,392,114 $ 2,265,856
Issued as reinvestment of dividends
and capital gains.................. 5,308,570 3,658,611 1,625,005 410,111 1,131,596 1,143,078
Redeemed............................. (9,241,771) (4,784,343) (3,038,754) (1,295,581) (2,872,177) (3,087,512)
----------- ----------- ----------- ----------- ----------- -----------
Net increase/(decrease).............. $(3,008,718) $ 6,489,184 $(1,139,451) $ 2,984,274 $ (348,467) $ 321,422
=========== =========== =========== =========== =========== ===========

See Notes to Financial Statements.
</TABLE>
13
<PAGE>

financial highlights
Growth & Income Portfolio
For a Portfolio share outstanding throughout each year.

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year..........................$ 29.06 $ 24.32 $ 20.22 $ 15.70 $ 15.71
------- ------- ------- ------- -------
Income from investment operations:
Net investment income....................................... 0.26 0.29 0.34 0.35 0.31
Net realized and unrealized gain on investments............. 2.92 6.49 4.10 4.90 0.12
------- ------- ------- ------- -------
Total from investment operations............................ 3.18 6.78 4.44 5.25 0.43
------- ------- ------- ------- -------

Less distributions:
Dividends from net investment income........................ (0.26) (0.29) (0.34) (0.35) (0.31)
Distributions from net realized gains....................... (2.46) (1.75) -- (0.38) (0.13)
------- ------- ------- ------- -------
Total distributions......................................... (2.72) (2.04) (0.34) (0.73) (0.44)
------- ------- ------- ------- -------
Net asset value, end of year................................$ 29.52 $ 29.06 $ 24.32 $ 20.22 $ 15.70
======= ======= ======= ======= =======
Total return+............................................... 11.11% 29.66% 22.09% 33.70% 2.72%
======= ======= ======= ======= =======
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's)..........................$54,451 $57,255 $41,402 $24,448 $14,195
Ratio of operating expenses to average net assets (a)....... 0.60% 0.59% 0.61% 0.70% 0.68%
Ratio of net income to average net assets................... 0.92% 1.07% 1.59% 2.01% 1.97%
Portfolio turnover rate..................................... 32% 50% 45% 36% 25%
</TABLE>
- --------------------------------
+ Total return does not reflect a sales charge.
(a) Ratio of operating expenses to average net assets includes expenses paid
indirectly beginning in fiscal 1995.

See Notes to Financial Statements.

14
<PAGE>

financial highlights
Northwest Portfolio

For a Portfolio share outstanding throughout each year.
<TABLE>
<CAPTION>

Year Ended December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............................ $ 23.55 $ 18.23 $ 14.99 $ 11.97 $ 12.19
--------- --------- --------- -------- ---------
Income from investment operations:
Net investment income......................................... 0.08 0.07 0.09 0.09 0.08
Net realized and unrealized gain/(loss) on investments........ 5.07 5.80 3.24 3.02 (0.21)
--------- --------- --------- -------- ---------
Total from investment operations.............................. 5.15 5.87 3.33 3.11 (0.13)
--------- --------- --------- -------- ---------
Less distributions:
Dividends from net investment income.......................... (0.08) (0.07) (0.09) (0.09) (0.08)
Distributions from net realized gains......................... (1.84) (0.48) -- -- (0.01)
--------- --------- --------- -------- ---------
Total distributions........................................... (1.92) (0.55) (0.09) (0.09) (0.09)
--------- --------- --------- -------- ---------
Net asset value, end of year.................................. $ 26.78 $ 23.55 $ 18.23 $ 14.99 $ 11.97
========= ========= ========= ======== =========
Total return+................................................. 22.78% 32.92% 22.23% 26.03% (1.12)%
========= ========= ========= ======== =========
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's)............................ $ 20,993 $ 19,924 $ 12,770 $7,495 $ 4,647
Ratio of operating expenses to average net assets (a)......... 0.66% 0.68% 0.77% 0.90% 0.87%
Ratio of net income to average net assets..................... 0.34% 0.31% 0.56% 0.67% 0.76%
Portfolio turnover rate....................................... 38% 31% 31% 11% 17%
</TABLE>

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

+ Total return does not reflect a sales charge.
(a) Ratio of operating expenses to average net assets includes expenses paid
indirectly beginning in fiscal 1995.

See Notes to Financial Statements.
15
<PAGE>

financial highlights
Income Portfolio
For a Portfolio share outstanding throughout each year.
<TABLE>
<CAPTION>

Year Ended December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year................................ $ 12.53 $ 12.08 $ 12.59 $ 11.22 $ 12.57
------- ------- ------- ------- -------
Income from investment operations:
Net investment income............................................. 0.78 0.79 0.78 0.79 0.79
Net realized and unrealized gain/(loss) on investments............ 0.38 0.45 (0.51) 1.37 (1.35)
------- ------- ------- ------- -------
Total from investment operations.................................. 1.16 1.24 0.27 2.16 (0.56)
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income.............................. (0.78) (0.79) (0.78) (0.79) (0.79)
------- ------- ------- ------- -------
Total distributions............................................... (0.78) (0.79) (0.78) (0.79) (0.79)
------- ------- ------- ------- -------
Net asset value, end of year...................................... $ 12.91 $ 12.53 $ 12.08 $ 12.59 $ 11.22
======= ======= ======= ======= =======
Total return+..................................................... 9.50% 10.62% 2.34% 19.86% (4.48)%
======= ======= ======= ======= =======
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's)................................ $18,560 $18,364 $17,385 $15,206 $10,842
Ratio of operating expenses to average net assets (a)............. 0.67% 0.70% 0.67% 0.76% 0.74%
Ratio of operating expenses to average net assets without fees
reduced by credits allowed by the custodian...................... 0.68% 0.70% 0.67% 0.76% 0.74%
Ratio of net income to average net assets......................... 6.11% 6.48% 6.46% 6.62% 6.79%
Portfolio turnover rate........................................... 6% 9% 11% 14% 15%
</TABLE>

- ----------------------------
+ Total return does not reflect a sales charge.
(a) Ratio of operating expenses to average net assets includes expenses paid
indirectly beginning in fiscal 1995.

See Notes to Financial Statements.

16
<PAGE>

portfolio of investments
Growth & Income Portfolio
December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>

Shares Value
- ------ ---------
COMMON STOCKS - 96.9%
Consumer Staples - 15.1%
22,444 Alberto-Culver Company, Class A.............. $ 566,711
10,000 Anheuser-Busch Companies, Inc................ 656,250
7,000 Campbell Soup Company........................ 385,000
625 Estee Lauder Companies, Inc.................. 48,437
17,500 Kimberly-Clark Corporation................... 953,750
57,300 Kimberly-Clark de Mexico, ADR................ 909,684
16,000 Libbey, Inc.................................. 463,000
17,900 PepsiCo, Inc................................. 732,781
8,900 Philip Morris Companies, Inc................. 476,150
9,500 Procter & Gamble Company..................... 867,469
10,500 Ralston Purina Company....................... 339,938
22,100 Sara Lee Corporation......................... 622,944
12,600 Seagram Company, Ltd......................... 478,800
9,000 Unilever NV.................................. 746,438
----------
8,247,352
----------
Computer Software/Services - 9.3%
15,100 Adobe Systems, Inc........................... 705,925
34,250 Barra, Inc................................... 809,156
14,000 Computer Associates International, Inc....... 596,750
22,300 First Data Corporation....................... 706,631
11,500 Microsoft Corporation+....................... 1,594,906
15,500 Oracle Corporation........................... 668,438
----------
5,081,806
----------
Banks/Savings & Loans - 7.3%
17,600 Bank of New York Company, Inc................ 708,400
16,000 Citigroup, Inc............................... 792,000
10,714 Mellon Bank Corporation...................... 736,587
15,300 Prime Bancshares, Inc........................ 263,925
36,460 Wells Fargo & Company........................ 1,456,121
----------
3,957,033
----------
Business Services - 5.8%
32,466 AC Nielson Corporation....................... 917,165
26,434 Cendant Corporation.......................... 503,898
21,000 Dun & Bradstreet Corporation................. 662,813
23,172 Waste Management, Inc........................ 1,080,395
----------
3,164,271
----------
Health Care Products - 5.6%
15,000 Abbott Laboratories.......................... 735,000
10,000 Johnson & Johnson............................ 838,750
5,150 Merck & Company, Inc......................... 760,591
5,000 Perkin Elmer Corporation..................... 487,813
2,000 Pfizer, Inc.+................................ 250,875
----------
3,073,029
----------
Financial Services - 5.2%
26,300 Federal Home Loan
Mortgage Corporation....................... 1,694,706
4,950 Heller Financial, Inc........................ 145,406
24,600 Liberty Financial Companies.................. 664,200
2,000 Merrill Lynch & Company, Inc................. 133,500
5,100 Price (T. Rowe) Associates, Inc.............. 174,675
----------
2,812,487
----------
Oil & Gas - 4.8%
5,800 Exxon Corporation............................ $ 424,125
4,850 Mobil Corporation............................ 422,556
21,700 Occidental Petroleum Corporation............. 366,187
9,500 PennzEnergy Company.......................... 154,969
9,500 Pennzoil Company............................. 140,718
14,800 Royal Dutch Petroleum, ADR................... 708,550
16,000 Tosco Corporation............................ 414,000
----------
2,631,105
----------
Media - 4.4%
56,750 Tele-Communication TCI Venture Group......... 1,337,172
7,625 Viacom, Inc., Class A+....................... 560,914
17,000 Walt Disney Company.......................... 510,000
----------
2,408,086
----------
Insurance - 4.0%
5,000 Aetna, Inc................................... 393,125
9,562 American International Group, Inc............ 923,928
27,495 Coseco, Inc.................................. 840,316
----------
2,157,369
----------
Capital Goods - 3.7%
6,000 Caterpillar, Inc............................. 276,000
23,375 Crane Company................................ 705,633
50,100 Donaldson Company, Inc....................... 1,039,575
----------
2,021,208
----------
Health Care Services - 3.4%
17,900 Columbia/HCA Healthcare Corporation.......... 443,025
5,300 IMS Health, Inc.............................. 399,819
43,100 MedPartners, Inc............................. 331,331
9,006 PacifiCare Health Systems, Inc., Class A..... 655,187
----------
1,829,362
----------
Retail Sales - 3.1%
15,500 Dayton Hudson Corporation.................... 840,875
28,500 Intimate Brands, Inc......................... 851,438
----------
1,692,313
----------
Electrical Equipment - 3.0%
10,000 Emerson Electric Company..................... 605,000
10,200 General Electric Company..................... 1,041,037
----------
1,646,037
----------
Consumer Durables - 2.9%
2,000 Federal-Mogul Corporation.................... 119,000
300 Honda Motor Company Ltd., Sponsored ADR...... 20,025
11,400 Sony Corporation, ADR........................ 817,950
33,760 U.S. Industries, Inc......................... 628,780
----------
1,585,755
----------
Utilities/Telecommunications - 2.8%
2,000 Comcast Corporation, Special Class A......... 117,375
14,500 Sprint Corporation........................... 1,219,813
7,250 Sprint Corporation, PCS Group................ 167,656
----------

1,504,844
----------
</TABLE>
See Notes to Financial Statements

17
<PAGE>

portfolio of investments (continued)

Growth & Income Portfolio
December 31, 1998
<TABLE>
<CAPTION>
Shares Value
- ---------- --------
COMMON STOCKS - (continued)
<S> <C> <C>
Transportation - 2.6%
6,500 Airborne Freight Corporation.......... $ 234,406
3,000 AMR Corporation....................... 178,125
17,800 Expeditors International
of Washington, Inc.................. 747,600
5,500 Union Pacific Corporation............. 247,844
-----------
1,407,975
-----------
Computer Systems - 2.4%
4,700 Compaq Computer Corporation........... 197,106
2,800 EMC Corporation+...................... 238,000
13,000 Hewlett-Packard Company............... 888,062
-----------
1,323,168
-----------
Basic Industry - 2.2%
2,500 du Pont (E.I.) de Nemours & Company... 140,781
3,000 Nucor Corporation..................... 129,750
8,000 Sealed Air Corporation+............... 408,500
10,600 Weyerhaeuser Company.................. 538,613
-----------
1,217,644
-----------
Electronics/Semiconductors - 2.2%
10,200 Intel Corporation..................... 1,209,338
-----------
Aerospace/Defense - 2.0%
6,500 Boeing Company........................ 212,063
1,000 Lockheed Martin Corporation........... 84,750
19,400 Loral Space & Communications, Ltd..... 345,563
6,000 Northrop Grumman Corporation.......... 438,750
-----------
1,081,126
-----------
Real Estate Investment Trusts - 1.9%
12,750 CCA Prison Realty Trust............... 261,375
10,000 Equity Office Properties Trust........ 240,000
16,400 Health Care Property Investors, Inc... 504,300
2,450 Patriot American Hospitality, Inc..... 14,700
-----------
1,020,375
-----------
Lodging & Restaurants - 1.5%
40,000 Choice Hotels International, Inc.+.... 547,500
61,783 Sunburst Hospitality Corporation...... 262,578
-----------
810,078
-----------
Utilities/Gas & Electric - 1.1%
10,000 Enron Corporation..................... 570,625
-----------
Consumer Cyclicals - 0.6%
6,975 Mattel, Inc........................... 159,117
3,600 Nike, Inc., Class B................... 146,025
-----------
305,142
-----------
Total Common Stocks
(Cost $36,579,630).................... 52,757,528
----------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
- ---------- --------

CONVERTIBLE PREFERRED STOCKS - 1.0%
<S> <C> <C>
5,000 Lehman Brothers Holdings
Series CSCO, Conv. Pfd.,
5.000% due 02/26/2001.................. $ 429,375
2,500 Loral Space & Communications, Ltd.,
Series C, Conv. Pfd.,
6.000% due 11/01/2006++................ 130,625
-----------
Total Convertible Preferred Stocks
(Cost $490,938).......................... 560,000
-----------

Principal
Amount
- ---------
CONVERTIBLE BOND - 0.4%
(Cost $194,181)
$370,000 At Home Corporation, Sub. Deb.,
6.550% due 12/28/2018++. .............. 208,125
-----------
U.S. TREASURY OBLIGATION - 0.8%
(Cost $398,543)
400,000 U.S. Treasury Bond,
6.000% due 02/15/2026.................. 436,625
-----------
REPURCHASE AGREEMENT - 0.4%
(Cost $241,000)
241,000 Agreement with Goldman Sachs Company,
4.000% dated 12/31/1998,
to be repurchased at $241,107 on
01/04/1999, collateralized by $207,689
U.S. Treasury Note, 11.750%
due 02/15/2001
(Market Value $246,540)................ 241,000
-----------
TOTAL INVESTMENTS (Cost $37,904,292*)... 99.5% 54,203,278
OTHER ASSETS AND LIABILITIES (Net)...... 0.5 247,414
-------- -----------
NET ASSETS.............................. 100.0% $54,450,692
======== ===========
</TABLE>
- -------------
* Aggregate cost for federal tax purposes is $37,906,560.
+ Non-income producing security.
++ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.

Industry categories are unaudited.

GLOSSARY OF TERMS
ADR - American Depositary Receipts

See Notes to Financial Statements.

18
<PAGE>

portfolio of investments
Northwest Portfolio

December 31, 1998

<TABLE>
<CAPTION>
Shares Value
- ------ ---------
<S> <C> <C>
COMMON STOCKS - 91.9%
Computer Software/Services - 13.2%
7,585 Adobe Systems, Inc........................ $ 354,599
38,225 Mentor Graphics Corporation+.............. 324,912
6,835 Microsoft Corporation+.................... 947,929
13,575 Orcad, Inc.+.............................. 115,388
14,415 Visio Corporation+........................ 527,048
20,880 Wall Data, Inc.+.......................... 501,120
----------
2,770,996
-----------
Health Care Products - 11.4%
32,300 Corixa Corporation+....................... 298,775
22,350 ICOS Corporation.......................... 664,913
3,905 Immunex Corporation+...................... 491,298
33,000 NeoRx Corporation+........................ 44,344
11,305 PathoGenesis Corporation+................. 655,690
23,126 SonoSight, Inc.+.......................... 239,932
----------
2,394,952
----------
Electronics/Semiconductors - 8.1%
9,820 Credence Systems Corporation+............. 181,670
29,015 FEI Company+.............................. 221,239
1,655 Intel Corporation......................... 196,221
7,305 Lattice Semiconductor Corporation+........ 335,345
6,150 Micrion Corporation....................... 72,262
9,405 Micron Technology, Inc.+.................. 475,540
11,910 TriQuint Semiconductor, Inc.+............. 229,268
----------
1,711,545
----------
Electrical Equipment - 8.0%
12,220 Electro Scientific Industries, Inc.+...... 553,719
8,900 Flir Systems, Inc.+....................... 206,925
6,550 Microvision, Inc.......................... 85,150
27,675 Tektronix, Inc............................ 831,980
----------
1,677,774
----------
Computer Systems - 6.8%
44,110 In Focus Systems, Inc.+................... 391,476
4,400 Micron Electronics, Inc................... 76,175
20,150 Radisys Corporation+...................... 604,500
29,320 Sequent Computer Systems, Inc.+........... 353,673
----------
1,425,824
----------
Banks/Savings & Loans - 6.1%
9,650 First Savings Bank of
Washington Bancorp, Inc................... 231,600
144 Horizon Financial Corporation............. 1,818
5,850 Interwest Bancorp, Inc.................... 129,431
5,300 KeyCorp................................... 169,600
9,400 Sterling Financial Corporation+........... 159,800
9,181 U.S. Bancorp.............................. 325,925
9,843 Washington Federal, Inc................... 262,674
----------
1,280,848
----------
Transportation - 5.6%
11,210 Airborne Freight Corporation.............. $ 404,260
8,045 Alaska Air Group, Inc.+................... 355,991
9,800 Expeditors International of
Washington, Inc........................... 411,600
----------
1,171,851
----------
Basic Industry - 5.5%
3,000 Boise Cascade Corporation................. 93,000
22,630 Oregon Steel Mills, Inc................... 268,731
19,475 Schnitzer Steel Industries, Inc., Class A. 279,953
5,050 Weyerhaeuser Company...................... 256,603
7,700 Willamette Industries, Inc................ 257,950
----------
1,156,237
----------
Consumer Staples - 4.1%
6,900 Albertson's, Inc.......................... 439,444
6,938 Fred Meyer, Inc., Class A+................ 418,014
----------
857,458
----------
Lodging & Restaurants - 3.4%
13,515 Ambassadors International, Inc.+.......... 199,346
17,855 Cavanaugh's Hospitality Corporation+...... 191,941
5,700 Starbucks Corporation+.................... 319,913
----------
711,200
----------
Consumer Cyclicals - 3.2%
23,025 Building Materials Holding Corporation+... 279,178
26,530 K2, Inc................................... 273,591
3,020 Nike, Inc., Class B....................... 122,499
----------
675,268
----------
Utilities/Telecommunications - 2.8%
11,400 General Communication, Inc.+.............. 46,313
1,615 GST Telecommunications, Inc.+............. 10,598
29,130 Metro One Telecommunications, Inc.+....... 385,973
6,825 Western Wireless Corporation, Class A+.... 150,150
----------
593,034
----------
Retail Sales - 2.8%
5,675 Costco Companies, Inc.+................... 409,664
8,380 Multiple Zones International, Inc.+....... 147,698
670 Nordstrom, Inc............................ 23,241
----------
580,603
----------
Aerospace & Defense - 2.2%
9,370 Boeing Company............................ 305,696
3,800 Precision Castparts Corporation........... 168,150
----------
473,846
----------
Real Estate Investment Trusts - 1.8%
11,750 Pacific Gulf Properties, Inc.............. 235,734
5,290 Shurgard Storage Centers, Inc., Class A... 136,548
----------
372,282
----------
Insurance - 1.7%
8,300 Safeco Corporation........................ 356,381
----------
</TABLE>
See Notes to Financial Statements.

19
<PAGE>

portfolio of investments (continued)

Northwest Portfolio

December 31, 1998
<TABLE>
<CAPTION>

Shares Value
- ------- ----------
<S> <C> <C>
COMMON STOCKS - (continued)
Consumer Durables - 1.6%
12,630 Monaco Coach Corporation+..................... $ 334,695
-----------
Health Care Services - 1.5%
12,230 Foundation Health Systems, Inc., Class A+.... 145,996
2,050 PacifiCare Health Systems, Inc., Class B+.... 162,975
-----------
308,971
-----------

Capital Goods - 1.4%
10,300 Greenbrier Companies, Inc..................... 145,488
3,630 PACCAR, Inc................................... 149,284
-----------
294,772
-----------

Business Services - 0.7%
17,000 Barrett Business Services, Inc.+.............. 144,500
-----------
Total Common Stocks
(Cost $12,740,623)............................ 19,293,037
-----------
</TABLE>

Principal
Amount Value
- --------- -----
<S> <C> <C>
REPURCHASE AGREEMENT - 8.1%
(Cost $1,696,000)
$1,696,000 Agreement with Goldman Sachs Company,
4.000% dated 12/31/1998,
to be repurchased at $1,696,754
on 01/04/1999, collateralized
by $1,461,582 U.S. Treasury Note,
11.750% due 02/15/2001
(Market Value $1,734,983).................. $ 1,696,000
-----------
TOTAL INVESTMENTS (Cost $14,436,623*)......... 100.0% 20,989,037
OTHER ASSETS AND LIABILITIES (Net)............ 0.0 4,044
-------- -----------
NET ASSETS.................................... 100.0% $20,993,081
======== ============
</TABLE>
- --------------
* Aggregate cost for federal tax purposes is $14,713,489.
+ Non-income producing security.

Industry categories are unaudited.

See Notes to Financial Statements.

20
<PAGE>

<TABLE>
<CAPTION>
portfolio of investments
Income Portfolio

December 31, 1998

Principal
Amount Value
- ----------- ----------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS - 47.9%
U.S. Treasury Bonds - 24.8%
$ 1,200,000 6.250% due 08/15/2023........................ $1,342,875
250,000 6.500% due 11/15/2026........................ 291,016
2,200,000 7.250% due 05/15/2016 - 08/15/2022........... 2,709,688
200,000 7.500% due 11/15/2024........................ 259,375
----------
4,602,954
----------
U.S. Treasury Notes - 23.1%
1,000,000 5.750% due 08/15/2003........................ 1,044,063
1,250,000 5.875% due 02/15/2004........................ 1,319,531
250,000 5.875% due 11/15/2005........................ 266,797
250,000 6.375% due 08/15/2002........................ 263,750
100,000 7.125% due 02/29/2000........................ 102,750
1,200,000 7.875% due 08/15/2001........................ 1,293,750
----------
4,290,641
----------
Total U.S. Treasury Obligations
(Cost $7,962,182)............................ 8,893,595
----------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES - 11.9%
Government National
Mortgage Association (GNMA) - 7.4%
443,703 6.500% due 07/15/2026........................ 448,661
304,600 7.000% due 07/15/2023........................ 311,928
327,501 7.500% due 06/15/2024........................ 338,043
91,443 8.000% due 06/15/2022........................ 95,100
7,970 8.500% due 03/15/2022........................ 8,458
153,720 9.000% due 05/15/2009........................ 164,192
----------
Total GNMAs (Cost $1,312,825)................ 1,366,382
----------
Collateralized Mortgage Obligations (CMO) - 2.7%
131,883 Resolution Trust Corporation-1991-M2-A-2,
7.375% due 09/25/2020..................... 112,101
370,371 Weyerhauser 1982-C FHA Putable,
7.430%, due 06/01/2022.................... 391,465
----------
Total CMOs (Cost $467,576)................... 503,566
----------
Federal National Mortgage Association (FNMA) - 1.1%
186,268 8.000% due 12/01/2026........................ 193,078
5,310 9.000% due 10/01/2004........................ 5,582
----------
Total FNMAs (Cost $197,005).................. 198,660
----------
Federal Home Loan Mortgage Corporation (FHLMC) - 0.7%
(Cost $140,636)
134,338 7.500% due 07/15/2020........................ 134,921
----------

Total U.S. Government Agency Mortgage-
Backed Securities (Cost $2,118,042).......... 2,203,529
----------
CORPORATE BONDS AND NOTES - 30.4%
Industrial - 14.9%
250,000 American Home Products Corporation, Deb.,
7.250% due 03/01/2023..................... 280,564
300,000 Burlington Northern, Note,
8.750% due 02/25/2022..................... 374,131
200,000 Burlington Resources, Deb.,
7.150% due 05/01/1999..................... 200,917
200,000 Caterpillar Corporation, Deb.,
9.375% due 07/15/2001..................... 218,021

Industrial - (continued)
$ 175,000 CII Financial, Inc., Conv. Sub. Deb.,
7.500% due 09/15/2001..................... $ 167,562
250,000 Conagra, Inc., Sr. Note,
6.700% due 08/01/2027..................... 262,938
100,000 General Motors Corporation, Deb.,
7.750% due 01/15/1999..................... 100,051
300,000 Loral Corporation, Deb.,
7.625% due 06/15/2025..................... 336,265
50,000 Mariner Post, Sr. Sub. Note,
9.500% due 11/01/2007..................... 38,750
150,000 Medical Care International, Sub. Deb.,
6.750% due 10/01/2006..................... 132,000
250,000 PacifiCare Health Systems, Sr. Note,
7.000% due 09/15/2003..................... 262,732
200,000 Time Warner, Inc., Deb.,
9.150% due 02/01/2023..................... 263,709
150,000 Veterinary Centers of America,
Conv. Sub. Deb.,
5.250% due 05/01/2006..................... 124,500
----------
2,762,140
----------
Financial - 5.8%
300,000 Continental Corporation, Note,
8.250% due 04/15/1999..................... 301,725
Franchise Finance Corporation, Sr. Note:
100,000 7.000% due 11/30/2000..................... 99,477
200,000 7.875% due 11/30/2005..................... 200,251
200,000 Kemper Corporation, Note,
6.875% due 09/15/2003..................... 209,589
250,000 Morgan Stanley Group, Note,
6.750% due 03/04/2003..................... 259,225
----------
1,070,267
----------
Electric - 4.5%
150,000 Commonwealth Edison, Mortgage,
9.375% due 02/15/2000..................... 156,216
Niagara Mohawk Power, Deb.:
150,000 9.500% due 06/01/2000..................... 157,377
49,000 8.770% due 01/01/2018..................... 52,188
150,000 Portland General Electric, First Mortgage,
8.880% due 08/12/1999..................... 153,055
150,000 Public Service Electric & Gas, Mortgage,
8.875% due 06/01/2003..................... 168,945
150,000 Texas Utilities Electric Company,
First Mortgage,
9.500% due 08/01/1999..................... 152,513
----------
840,294
----------
Banks - 3.8%
195,000 Bank of New York, Sub. Note,
7.875% due 11/15/2002..................... 211,355
250,000 First Nationwide Bank, Sub. Deb.,
10.000% due 10/01/2006.................... 291,079
200,000 Mercantile Bank, Sub. Note,
7.625% due 10/15/2002..................... 213,587
----------
</TABLE>
716,021
---------
See Notes to Financial Statements.

21
<PAGE>

portfolio of investments (continued)
Income Portfolio

December 31, 1998

Principal
Amount Value
- --------- --------
<S> <C> <C>
CORPORATE BONDS AND NOTES - (continued)
Foreign (U.S. Dollar Denominated) - 1.4%
$150,000 Alberta Province,
9.250% due 04/01/2000............................... $ 157,506
100,000 Manitoba Province,
9.625% due 03/15/1999............................... 101,084
-----------
258,590
-----------
Total Corporate Bonds and Notes
(Cost $5,392,707)...................................... 5,647,312
-----------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
- --------- --------
<S> <C> <C>
PREFERRED STOCK - 0.8%
(Cost $150,000)
6,000 California Federal Savings Bank,
Series A............................................ $ 151,875
-----------
Principal
Amount
- ----------
REPURCHASE AGREEMENT - 7.7%
(Cost $1,431,000)
$1,431,000 Agreement with Goldman Sachs Company,
4.000% dated 12/31/1998, to be
repurchased at $1,431,636 on
01/04/1999, collateralized by
$1,233,210 U.S. Treasury Note,
11.750% due 02/15/2001
(Market Value $ 1,463,892)............................. 1,431,000
-----------
TOTAL INVESTMENTS (Cost $17,053,931*).................. 98.7% 18,327,311
OTHER ASSETS AND LIABILITIES (Net)..................... 1.3 232,299
------ -----------
NET ASSETS............................................. 100.0% $18,559,610
====== ===========
</TABLE>
- ----------------------------------------
*Aggregate cost for federal tax purposes.

Industry categories are unaudited.

See Notes to Financial Statements.

22
<PAGE>

notes to financial statements
Composite Deferred Series, Inc.

1. Organization and Business

Composite Deferred Series, Inc. (the "Fund"), is registered under the
Investment Company Act of 1940, as amended, as an open-end diversified
management investment company. The Fund consists of three separate portfolios:
the Growth & Income, Northwest, and Income Portfolios (each a "Portfolio"). Each
Portfolio is designed to meet a variety of investment objectives.

Safeco Life Insurance Company (the "Company"), a subsidiary of Safeco
Corporation, is the sole shareholder of the Fund. Shares are sold only to
Composite Deferred Series variable accounts to fund the benefits under certain
flexible premium variable annuity contracts (the "Contract") issued by the
Company. Contract holders have the right to instruct the Company how to vote
Fund shares attributable to their contracts.

WM Advisors, Inc. (the "Advisor" or "WM Advisors"), a wholly-owned subsidiary of
Washington Mutual, Inc. ("Washington Mutual"), a publicly owned financial
services company, serves as investment advisor to the Fund.

2. Significant Accounting Policies

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Portfolios in the
preparation of their financial statements.

Portfolio valuation:

A security that is primarily traded on a U.S. exchange (including securities
traded through the Nasdaq National Market System) is valued at the last sale
price on that exchange or, if there were no sales during the day, at the mean of
the current day's bid and asked prices. Securities traded only on over-the-
counter markets (other than the Nasdaq National Market System and U.S.
Government Securities) are valued at the closing over-the-counter bid prices, or
if no sale occurred on such day, at the mean of the current days bid and asked
prices. An option is generally valued at the last sale price or, in the absence
of a last sale price, at the mean of the current day's bid and asked prices.
Short term debt securities that mature in 60 days or less are valued at
amortized cost. Debt securities, other than short-term securities, are valued
at prices supplied by the Fund's pricing agent.

Repurchase agreements:

Each Portfolio may engage in repurchase agreement transactions. Under the terms
of a typical repurchase agreement, the Portfolio, through its custodian, takes
possession of an underlying debt obligation subject to an obligation of the
seller to repurchase. The Portfolio is then obligated to resell the obligation
at an agreed upon price and time, thereby determining the yield during the
Portfolio's holding period. The value of the collateral is at all times at least
equal to the total amount of the repurchase obligation, including interest. In
the event of counterparty default, the Portfolio would seek to use the
collateral to offset losses incurred. There is potential loss to the Portfolio
in the event the Portfolio is delayed or prevented from exercising its right to
dispose of the collateral securities, including the risk of a possible decline
in the value of the underlying securities during the period while the Portfolio
seeks to assert its rights. WM Advisors, acting under the supervision of the
Board of Directors, reviews the value of the collateral and the creditworthiness
of those banks and dealers with whom the Funds and Portfolios enter into
repurchase agreements.

Covered call options written:

The Growth & Income Portfolio and the Northwest Portfolio may write listed
covered call options in which premiums received by the Portfolios are recorded
as a liability which is marked-to-market daily. A covered call option gives the
holder the right to buy the underlying security, which the Portfolio owns, at
any time during the option period at a predetermined exercise price. When a
Portfolio writes a covered call option, it gains income from the premium
received. The risk in writing a covered call option is that the Portfolio may
forego the opportunity to profit if the market price of the underlying security
increases and the option is exercised. Proceeds from the covered call options
exercised are increased by the amount of premium received. If an option expires
or is cancelled in a closing transaction, the Portfolio will realize a gain or
loss depending on whether the cost of the closing transaction, if any, is less
or greater than the premium originally received.

23
<PAGE>

notes to financial statements (continued)
Composite Deferred Series, Inc.

Securities transactions and investment income:

Securities transactions are recorded as of the trade date (the date the order to
buy or sell is executed). Realized gains and losses from securities sold are
recorded on the identified cost basis. Interest income is recorded on the
accrual basis and consists of interest accrued and, if applicable, discount
accreted less premiums amortized. Premiums on bonds can be amortized on the
basis of any of the following methods: yield-to-maturity, straight-line, or
yield-to-call. Discounts can be accreted using yield-to-maturity or straight-
line methods. Premiums and discount on mortgage-backed securities are amortized
or accreted using only the straight-line method. Dividend income is recorded on
the ex-dividend date, except that certain dividends from foreign securities are
recorded as soon as the Portfolios are informed of the ex-dividend date.

The Growth & Income Portfolio and the Income Portfolio may purchase securities
on what is called a when-issued or delayed-delivery basis. Securities purchased
or sold on a when-issued or delayed-delivery basis may be settled a month or
more after the trade date; interest income is not accrued until settlement date.
Each Portfolio instructs the custodian to segregate assets of the Portfolio with
a current value at least equal to the amount of its when-issued purchase
commitments.

Dividends and distributions to shareholders:

Dividends from net investment income of the Growth & Income Portfolio and the
Northwest Portfolio are declared and paid quarterly. Dividends from net
investment income of the Income Portfolio are calculated daily and paid monthly.
Distributions of any net long-term capital gains earned by a Portfolio are made
annually. Distributions of any net short-term capital gains earned by a
Portfolio are distributed no less frequently than annually at the discretion of
the Board of Directors. Additional distributions of net investment income and
capital gains for each Portfolio may be made at the discretion of the Board of
Directors in order to avoid the application of a 4% non-deductible excise tax on
certain undistributed amounts of ordinary income and capital gains. Income
distributions and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. Differences are primarily due to differing treatments of income and
gains on various investment securities held by the Portfolios, organizational
costs, dividends payable, redesignated distributions and differing
characterizations of distributions made by each Portfolio as a whole. Net
investment income per share calculations in the financial highlights for the
year ended December 31, 1998 exclude these adjustments:
<TABLE>
<CAPTION>

Increase/
Decrease)
Increase/ Accumulated
(Decrease) Net Realized
Name of Portfolio Paid-in Capital Gain/(Loss)
- ----------------------------- ---------------- -------------
<S> <C> <C>
Growth & Income Portfolio..... $ 554 $ (554)
Northwest Portfolio........... (695) 695
Income Portfolio.............. (11,363) 11,363
</TABLE>

Federal Income Taxes:

It is each Portfolio's policy to qualify as a regulated investment company by
complying with the requirements of the Internal Revenue Code of 1986, as
amended, applicable to regulated investment companies by, among other things,
distributing substantially all of its taxable and tax-exempt earnings to its
shareholders. Therefore, no Federal income tax provision is required.

3. Investment Advisory and Other Transactions

WM Advisors serves as investment advisor to the Fund. For its services to the
Portfolios, WM Advisors is entitled to a monthly fee, at an annual rate of 0.50%
of each Portfolio's average daily net assets. Advisory fees are calculated daily
and paid monthly.

24
<PAGE>

notes to financial statements (continued)
Composite Deferred Series, Inc.

Custodian fees for the Portfolios have been reduced by credits allowed by the
custodian for uninvested cash balances. These Portfolios could have invested
this cash in income producing securities. Fees reduced by credits allowed by the
custodian for the year ended December 31, 1998 are shown separately in the
Statement of Operations.

4. Directors' Fees

No director, officer or employee of Washington Mutual or its subsidiaries
receives any compensation from the Fund for serving as an Officer or Director of
the Fund. Directors' fees and expenses were paid directly by the Fund to
directors having no affiliation with the Fund other than in their capacity as
directors.

5. Purchases and Sales of Securities

The aggregate cost of purchases and proceeds from sales of securities, excluding
U.S. Government and short-term investments, for the year ended December 31, 1998
were as follows:
<TABLE>
<CAPTION>

Name of Portfolio Purchases Sales
- ----------------------------- ----------- -----------
<S> <C> <C>
Growth & Income Portfolio..... $17,833,040 $26,177,858
Northwest Portfolio........... 6,881,584 10,875,694
Income Portfolio.............. 51,165 1,284,066
</TABLE>

The aggregate cost of purchases and proceeds from sales of U.S. Government
securities, excluding short-term investments, for the year ended December 31,
1998 were as follows:

Name of Portfolio Purchases Sales
----------------- --------- -----
Income Portfolio.............. $1,070,469 $601,896

At December 31, 1998, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost and aggregate gross
unrealized depreciation for all securities in which there is an excess of tax
cost over value were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>

Tax Basis Tax Basis
Unrealized Unrealized
Name of Portfolio Appreciation Depreciation
- ----------------------------- ------------ ------------
Growth & Income Portfolio..... $19,011,010 $2,714,292
Northwest Portfolio........... 7,332,087 1,056,539
Income Portfolio.............. 1,351,771 78,391
</TABLE>

6. Capital Loss Carryforwards

As of December 31, 1998, the following Funds had available for Federal income
tax purposes unused capital losses as follows:

Name of Portfolio Expiring in 2004
----------------- ----------------
Income Portfolio.............. $65,208

Under current tax law, capital losses realized after October 31 may be deferred
and treated as occurring on the first day of the following fiscal year.

25
<PAGE>

notes to financial statements (continued)
Composite Deferred Series, Inc.

7. Geographic and Industry Concentration and Risk Factors

The Northwest Portfolio concentrates its investments in companies located or
doing business in the Northwest region of the United States. The Northwest
Portfolio is not intended as a complete investment program and could be
adversely impacted by economic trends within the region.

26
<PAGE>

independent auditors' report

To the Board of Directors and Shareholders of
Composite Deferred Series, Inc.:

We have audited the accompanying statements of assets and liabilities of the
Composite Deferred Series, Inc. (the "Fund") (including the Growth and Income
Portfolio, Northwest Portfolio and Income Portfolio), including the portfolios
of investments, as of December 31, 1998, and the related statements of
operations, changes in net assets and financial highlights for the year then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The financial statements of the Fund for the year ended December 31, 1997
and the financial highlights for the four years ended December 31, 1997 were
audited by other auditors whose report, dated January 20, 1998, expressed an
unqualified opinion on those statements.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at December 31, 1998, by
correspondence with the custodian and brokers; where replies were not received
from brokers, we performed other auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Composite Deferred Series, Inc. as of December 31, 1998, the results of its
operations, the changes in its net assets and the financial highlights for the
year then ended in conformity with generally accepted accounting principles.

Deloitte & Touche LLP
San Francisco, California
February 5, 1999

27
<PAGE>

This page intentionally left blank.
<PAGE>

This material is not an

offer to sell nor a

solicitation to buy

shares of the

Composite Deferred

Series, Inc. It is not

authorized for

distribution unless

preceded or

accompanied by a

current prospectus(es)

that includes

information regarding

the risk factors,

expenses, policies and

objectives of the

Composite Deferred

Series, Inc.

Shares of the

Composite Deferred

Series, Inc. are not

insured by the FDIC.

They are not deposits

or obligations of, nor

are they guaranteed by,

the depository

institution or any

other agency.

These securities are

subject to investment

risk, including possible

loss of principal

amount invested.

Distributed by WM

Funds Distributor, Inc.

Member NASD