UAM FUNDS INC, N-30D, 1996-12-27

UAM FUNDS INC
N-30D, 1996-12-27

Previous: UAM FUNDS INC, 24F-2NT, 1996-12-27

Next: VERSUS TECHNOLOGY INC, 4, 1996-12-27

<PAGE>

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

UAM FUNDS
STERLING PARTNERS' PORTFOLIOS

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

OFFICERS AND DIRECTORS

Norton H. Reamer William H. Park
Director, President Vice President
and Chairman

John T. Bennett, Jr. Michael E. DeFao
Director Secretary

Philip D. English Karl O. Hartmann
Director Assistant Secretary

William A. Humenuk Gary L. French
Director Treasurer

Robert R. Flaherty
Peter M. Whitman, Jr. Assistant Treasurer
Director

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

INVESTMENT ADVISER
Sterling Capital Management Company
One First Union Center
301 S. College Street
Suite 3200
Charlotte, NC 28202

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

ADMINISTRATOR
UAM Fund Services, Inc.
211 Congress Street
Boston, MA 02110

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

CUSTODIAN
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, NY 11245

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

LEGAL COUNSEL
Stradley, Ronon, Stevens & Young LLP
2600 One Commerce Square
Philadelphia, PA 19103

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

INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110

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

DISTRIBUTOR
UAM Fund Distributors, Inc.
211 Congress Street
Boston, MA 02110

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

This report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus.

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

UAM FUNDS

STERLING PARTNERS' PORTFOLIOS

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

ANNUAL REPORT
OCTOBER 31, 1996
<PAGE>

UAM FUNDS STERLING PARTNERS' PORTFOLIOS
- --------------------------------------------------------------------------------

TABLE OF CONTENTS

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

<TABLE>
<S> <C>
Shareholder's Letter........................................................ 1
Portfolio of Investments
Balanced.................................................................. 9
Equity.................................................................... 15
Short-Term Fixed Income................................................... 19
Statement of Assets and Liabilities......................................... 23
Statement of Operations..................................................... 24
Statement of Changes in Net Assets
Balanced.................................................................. 25
Equity.................................................................... 26
Short-Term Fixed Income................................................... 27
Financial Highlights
Balanced.................................................................. 28
Equity.................................................................... 29
Short-Term Fixed Income................................................... 30
Notes to the Financial Statements........................................... 31
Report of Independent Accountants........................................... 36
</TABLE>

- --------------------------------------------------------------------------------
<PAGE>

To Our Fellow Shareholders:

OVERVIEW OF ECONOMIC AND MARKET CONDITIONS

The past year was characterized by decelerating economic growth and low
inflation. Not surprisingly, corporate earnings have generally followed the
slowing pattern of the economy. Earnings for the S&P 500 Index started the
year growing at nearly 20% year-over-year, but have decelerated to single
digit growth rates currently. Meanwhile, inflation as measured by the Consumer
Price Index remained in the low single digits all year long as it has for the
past five years.

Traditional logic would suggest that decelerating earnings growth is bad for
stocks, and low inflation is good for bonds. However, this has not been a
traditional year. In spite of weakening growth, the stock market moved up
strongly, as evidenced by the 24.08% total return of the S&P 500 Index over
the 12 months ended October 31, 1996. Conversely, bonds turned in a lackluster
performance with the Lehman Brothers Government/Corporate Index producing only
a 5.39% return over the same period.

At this point, it appears that the Federal Reserve has been successful in its
goal of engineering a "soft landing." Although the economy is weakening
somewhat, it does not appear that a full-blown recession is on the horizon.
Thus, the current environment of decelerating earnings growth is not likely to
deteriorate into anything more sinister. Also, as long as inflation remains
under control, the interest rate environment should remain a positive for the
financial markets. Given the recent move in the equity markets, valuation
levels are sounding a note of caution. Still, attractive investment
opportunities can be found, but diligent and careful security selection is of
increasing importance. Certain industries will suffer more than others within
this slowing environment, thus creating a high level of uncertainty. In such
an environment, a focus on quality is prudent.

FIXED INCOME OVERVIEW

Bond investors have experienced a difficult environment for fixed income
securities during the last twelve months. After a brief rally in late 1995 and
the first two months of this year, intermediate to longer term interest rates
rose approximately 1.50%. A pickup in economic activity in the second quarter
helped to generate a large creation of new jobs which resulted in a
significant decline in the nation's unemployment rate. In November of 1995,
the unemployment rate stood at 5.6% but has declined throughout most of this
year to a low of 5.1% in August. The strength in employment coupled with a
significant rise in oil prices ($19 to $25 per barrel) lead many market
observers to forecast a significant pickup in inflation.

During this same period however the U.S. currency strengthened significantly
and foreigners poured record amounts of capital into the U.S. Treasury market.
The significant flow of new funds into the government market helped to calm
nervous bond investors and stabilized bond prices. In the third quarter of
this year, economic activity slowed significantly and continued good
productivity gains helped to keep a lid on any rise in inflation. In fact, the
much feared rise in the Employment Cost Index did not occur, and despite tight
labor markets and a rise in the minimum wage, labor costs remained well under
control.

Moderate economic growth, low inflation and balanced government in Washington
(Republican Congress, Democratic White House) all are contributors to our
current constructive outlook for the bond market. While we

1
<PAGE>

believe that the bond market may be vulnerable to a consolidation phase, we
continue to view the longer term outlook as favorable for bonds.

We believe that the Christmas season will be an important turning point for
the fixed income markets. With the recent gains in employment and increases in
personal income, consumers should be primed for an excellent opportunity to
demonstrate their positive degree of confidence. A slow third quarter economy
resulted in a ballooning of inventories that manufacturers hope will be
reduced over the next few months.

The pace of retail consumption during the holiday season should help us
identify the direction of sustainable economic activity. It is our belief that
this will be a modest holiday season in terms of consumption which contributes
to our optimistic outlook for bonds.

BALANCED PORTFOLIO REVIEW

For the year ended October 31, 1996, the Sterling Partners' Balanced Portfolio
had an attractive total return of 15.52%. This was roughly in line with the
returns posted by other balanced managers. This return was achieved with a
minimal amount of risk due to our overly-defensive asset mix early in the
year. We started the year with equity exposure representing only about 45% of
the Portfolio. As we communicated to you in the Semi-Annual Report dated April
30, 1996, our intention was to transition toward a target of 60% in a
disciplined and methodical fashion. We did just that, and the Portfolio's
equity exposure is now very close to the targeted level. Because we chose to
move gradually, we were modestly under-invested in stocks early in the year
during a time when stocks performed relatively well. The result was a modest
drag on portfolio returns.

Going forward, we do not intend to deviate meaningfully from a 60% equity
target, so under-investment in equities will no longer be an issue. It is our
belief that a permanent allocation of 60% equities and 40% bonds is more in
line with traditional balanced portfolio management and will better serve our
clients over the long term. You should note that we have included in the line
graph for the Balanced Portfolio, data on a new comparative benchmark index of
60% S&P 500 Index and 40% Lehman Brothers Government/Corporate Index for your
review. We were compelled to add this new benchmark index for the Balanced
Portfolio because it will provide a better comparison than the benchmark index
it will be replacing. It will be better since we plan to maintain a slightly
higher equity exposure of approximately 60% going forward. The old benchmark
index had a lower exposure to equity, and was comprised of 50% S&P 500 Index,
45% Lehman Brothers Intermediate Government/Corporate Index, and 5% Salomon
Brothers 3-Month Treasury Bill Index.

The equity portion of the Sterling Partners' Balanced Portfolio is generally
made up of the same stocks which are held in the Sterling Partner's Equity
Portfolio. Both Portfolios employ a stock selection process which is value-
oriented and dependent on traditional fundamental analysis. Such an approach
typically favors quality companies selling at reasonable prices as opposed to
cheap stocks. Given the risks of the current environment, we have stressed the
quality emphasis even more than usual.

As noted earlier, inflation remains under control and our economic outlook
calls for a continuation of slow to moderate growth. As long as this remains
true, we believe bonds will offer reasonably attractive returns. In the fixed
income portion of the Portfolio, we currently have an average duration of 5.9
years which is approximately 110% of the Lehman Brothers Government/Corporate
Index.

2
<PAGE>

As with stocks, our approach to bonds is also focused on quality. Bond
selection is heavily slanted toward government issues and high-quality
corporate bonds. During the last twelve months, the fixed income segment of
our Balanced Portfolio has generated returns in line with the Lehman Brothers
Government/Corporate Index of 5.39%. During this period the duration on the
fixed income segment of the Balanced Portfolio has ranged from 5.1 years to as
long as 6.0 years as compared to the benchmark index of 5.5 years.

EQUITY PORTFOLIO REVIEW

In last year's letter, we introduced our new equity investment professionals.
Brian Walton and Ed Brea had just joined Sterling veteran Jim Norris to form
the new team responsible for stock selection. Now, one year later, we can look
back assessing the effectiveness of this team. We are happy to report that for
the year ended October 31, 1996, the Sterling Partners' Equity Portfolio
posted an attractive 24.76% return, modestly exceeding the 24.08% return for
the S&P 500 Index.

Recall from last year that the hiring of the new equity team resulted in an
unusual number of transactions as old investments were largely replaced by
ideas which the new analysts brought with them. We said in last year's letter
that this was unusual and that turnover would decline dramatically this year.
That is, indeed, what happened. This year's turnover rate was 78% compared to
135% the year before. This lower rate is roughly in line with the average for
most mutual funds. While satisfied with this progress, we would like to see
future turnover rates fall even further to below-average levels, and we are
working to accomplish this goal.

Strength in the market was fairly broad based with most sectors and industry
groups participating, although to varying degrees. The Portfolio benefited
from policies ensuring broad diversification. Thus, the main driver of
performance was stock selection, as opposed to concentration in any one group.
This diversity is illustrated by the top five contributors to our excess
returns which included an electric utility (Portland General), a consumer
products company (Interstate Bakeries), a specialty chemical company (Cytee),
and two healthcare products companies (U.S. Surgical and Guidant Corporation).

As you know, our approach to investing is to focus on the businesses which
underlie each stock. We view ourselves as businessmen. Ours is not a portfolio
of stocks--it is a portfolio of businesses in which we are minority owners.
The quality of the business is what counts over the long run. A weak or
troubled business may look cheap, but it is usually not a wise investment.
This focus on quality, which was intensified with the formation of the new
equity team, is what sets us apart from many other value managers. Quality
businesses, more than anything else, produced the superior returns we enjoyed
over the past year. We believe this focus on quality is becoming even more
important in the increasingly uncertain investment environment. To avoid the
pitfalls, careful and disciplined stock selection is required. Our approach
continues to uncover good businesses available at reasonable prices.

Examples of high-quality, recognizable businesses in which we initiated
investments during the past year include Nabisco, Disney, Intel, J.P. Morgan,
and Ingersoll-Rand. Other purchases which are less recognizable but similar in
quality include Stanhome, Associates First Capital, Unifi, United Dominion
Industries, and Belden Corporation. Belden Corporation (BWC) provides a great
example of what we mean by a quality business, BWC is a wire manufacturer. On
the surface, wire manufacturing does not seem like a great business, but the
returns it generates are outstanding. During its three years as a public
company (it was spun out of Cooper Industries), the incremental return on
equity reinvested into the business has been 22%. Any business that can
reinvest at those levels of return is a great business--even if it is a
"grungy" old wire manufacturer.

3
<PAGE>

BWC can sustain these high returns because they enjoy several competitive
advantages. First, they have the broadest assortment of products in the
industry (over 4,000 excluding color options). This is a barrier to entry that
no one can match, and is important since many customers are shortening their
list of suppliers. Furthermore, product breadth diversifies away product
obsolescence risk. Second, BWC has a well-established reputation for quality
and on-time delivery and has the best brand name in the industry.

Third, the breadth and quality attributes noted above cause BWC to be highly
sought after by distributors. Everyone wants to carry the Belden line.
Distribution accounts for 65% of sales, and BWC has the largest distribution
network in the industry. Fourth, BWC is the low cost producer in most
categories. This is the result of economies of scale, vertical integration to
the wire mill level, and leading edge manufacturing which is beyond the scope
of most "Mom & Pop" competitors.

Surprisingly, this is not a very capital intensive business. New product
designs do not require new production equipment--minor retooling of existing
equipment is usually sufficient. Maintenance capital spending required to
maintain current competitive status runs at only about 1% of sales.

High profitability with little required capital expenditure is a great
combination. It means that BWC generates a lot of cash. Fortunately, BWC has
the opportunity to reinvest that cash in the business. It is doing so by
adding capacity for telecommunications and computer wiring products and by
making selected acquisitions. The supply of attractive acquisition targets is
virtually endless due to the fragmented nature of the industry--BWC is the
largest player and has only a 7% market share. We take comfort in the fact
that BWC's management team has a history of making wise capital investment
decisions.

BWC has all of the characteristics we look for. It has a strong management
team. It is highly profitable. It enjoys competitive advantages and barriers
to entry which make the high profitability sustainable over time. It does not
require a lot of capital investment. Finally, it has opportunities to reinvest
its cash at a high rate of return, thus generating growth. This is what we
mean by quality. Amazingly, at the time of our purchase, this fine company was
selling at a Price/Earnings ratio of only 12.5--a substantial discount to the
average stock.

SHORT-TERM FIXED INCOME PORTFOLIO REVIEW

The total return of the Sterling Partners' Short-Term Fixed Income Portfolio
for the twelve months ended October 31, 1996 was 5.51%. This compares to a
twelve month return on the Lehman Brothers 1-3 Year Government Bond Index of
5.99% and the Salomon Brothers 3-Month Treasury Bill Average of 5.30%.

Over the last twelve months, the duration of this Portfolio has ranged between
16 to 23 months. Currently, the duration of the Portfolio is 1.8 years and is
in line with the Lehman Brothers 1-3 Year Government Bond Index.

Short-term interest rates have been volatile in the last twelve months. After
a decline in the fourth quarter of 1995 and the first two months of 1996, the
yield on the two year treasury notes bottomed in February of this year at a
yield of 4.74%. A subsequent pickup in economic activity and concerns of a
possible accompanying rise in inflation sent yields on the two year treasury
note up by nearly a full 1% in the second quarter of this year. A near
consensus view of a necessary tightening by the Federal Reserve during this
same time period proved incorrect as economic activity slowed during the third
quarter.

The very narrow incremental spreads offered by corporate, asset-backed and
agency securities have continued a high commitment of this Portfolio to
government securities. Throughout the last twelve months, approximately

4
<PAGE>

two-thirds of this Portfolio has been invested in U.S. Treasury securities.
This high government allocation has resulted in a slightly lower yield, but
has afforded us very good liquidity and an average credit quality of AA+.

Looking forward, we believe that the bond market should fair well over the
next twelve months. The significant rally in bonds during the last three
months, however, raises some degree of concern about the upside in bond prices
on a near term basis. We continue to manage this Portfolio in a conservative
manner and will look for opportunities to add value in this Portfolio with the
expected volatility in short-term interest rates.

In closing, we would once again like to thank you for your continued
confidence in Sterling Capital Management Company. As always, we remain
committed to serving your investment needs.

STERLING CAPITAL MANAGEMENT COMPANY

November 8, 1996

The investment results presented in the Adviser's letter represent past
performance and should not be construed as a guarantee of future results.
Without the Adviser's temporary fee waivers (also expenses assumed by the
Adviser), total returns for the Sterling Partners' Equity and Sterling
Partners' Short-Term Fixed Income Portfolios would have been lower. The
investment return and principal value of an investment will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.

5
<PAGE>

[CHART SHOWING COMPARISON OF THE CHANGE IN VALUE OF A $10,000 PURCHASE IN THE
STERLING PARTNERS' BALANCED PORTFOLIO, THE STANDARD & POOR'S 500 INDEX (S&P
500), THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE INDEX, LEHMAN
BROTHERS GOVERNMENT/CORPORATE INDEX, THE SALOMON BROTHERS 3-MONTH TREASURY BILL
INDEX, THE BALANCED INDEX AND THE BALANCED INDEX (NEW) APPEARS HERE]

<TABLE>
<CAPTION>
Lehman Salomon
Brothers Brothers
Sterling Intermediate 3-Month Lehman Brothers
Partners' Government Treasury Government/
Balanced S&P 500 Corporate Bill Balanced Balanced Corporate
Portfolio Index Index Index Index Index (New) Index+
<S> <C> <C> <C> <C> <C> <C> <C>
3/15/91* 10,000 10,000 10,000 10,000 10,000 10,000 10,000
10/31/91 10,454 10,791 10,831 10,360 10,778 10,754 10,634
10/31/92 11,358 11,776 11,914 10,752 11,787 11,813 11,753
10/31/93 12,748 13,535 13,098 11,089 13,217 13,143 13,355
10/31/94 12,832 14,058 12,845 11,517 13,382 13,337 12,735
10/31/95 14,658 17,770 14,452 12,178 15,944 15,942 14,293
10/31/96 16,933 22,049 15,292 12,825 18,323 19,864 15,590
</TABLE>

<TABLE>
<CAPTION>
- --------------------------------------
AVERAGE ANNUAL TOTAL RETURN**
FOR PERIOD ENDED OCTOBER 31, 1996
- --------------------------------------
<S> <C> <C>
SINCE
1 YEAR 5 YEAR 3/15/91*
- --------------------------------------
15.52% 10.12% 9.79%
- --------------------------------------
</TABLE>

Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate.
When shares are redeemed, they may be worth more or less than the original
cost.
* Commencement of Operations
** Total return for the Portfolio reflects fees waived and expenses assumed by
the Adviser. Without such waiver of fees and expenses assumed, total return
would be lower.
+ The comparative indices are not adjusted to reflect expenses or other fees
that the SEC requires to be reflected in the Portfolio's performance. The
fees, if reflected, would reduce the performance quoted. The Portfolio's
performance assume the reinvestment of all dividends and distributions. Each
comparative index (excluding the Lehman Brothers Intermediate
Government/Corporate Index) has been adjusted to reflect reinvestment of
dividends on securities in the index.
++The vertical line above has been positioned to reflect the change of the
Balanced Index for the Sterling Partners' Balanced Portfolio on January 1,
1996. As of that point in time, management decided to use a new benchmark to
reflect the higher exposure of equities owned within the fund. Going forward,
the equity allocation within the Balanced Fund will remain close to 60%. The
old Balanced Index had a lower exposure to equity, and was comprised of 50%
S&P 500, 45% Lehman Brothers Intermediate Government/Corporate Index, and 5%
Salomon Brothers 3-Month Treasury Bill Index. The new Balanced Index is
comprised of a 60% weighting of the S&P 500 and a 40% weighting of the Lehman
Brothers Government/Corporate Index.

Definitions of the Comparative Indices
The Lehman Brothers Intermediate Government/Corporate Index is an unmanaged
index composed of a combination of the Government and Corporate Bond Indices.
All issues are investment grade (BBB) or higher, with maturities of one to ten
years and an outstanding par value of at least $100 million for U.S.
Government issues and $25 million for others. The Government Index includes
public obligations of the U.S. Treasury, issues of Government agencies, and
corporate debt backed by the U.S. Government. The Corporate Bond Index
includes fixed-rate nonconvertible corporate debt. Also included are Yankee
Bonds and nonconvertible debt issued by or guaranteed by foreign or
international governments and agencies. Any security down-graded during the
month is held in the index until month-end and then removed. All returns are
market value weighted inclusive of accrued income.
The Lehman Brothers Government/Corporate Index is an unmanaged index composed
of approximately 5,000 publicly issued, fixed-rate, non-convertible corporate
and U.S. Government debt rated "BBB" or better, with at least one year to
maturity and at least $1 million par value outstanding. It is a market value-
weighted price index, in which the relative importance of each issue is
proportional to its aggregate market value. The percentage change between one
month's total market value and the next, plus one twelfth of the current
yield, results in monthly total return. The rates of return reflect total
return, with interest reinvested.
The S&P 500 Index is an unmanaged index composed of 400 industrial, 40
financial, 40 utilities and 20 transportation stocks.
The Balanced Index, a hypothetical combination of unmanaged indices, reflects
the Portfolio's neutral mix of 50% stocks, 45% bonds, and 5% short-term
instruments. This index combines returns from the S&P 500 Index, Lehman
Brothers Intermediate Government/Corporate Index and the Salomon Brothers 3-
month Treasury Bill Index.
The Balanced Index (New), a hypothetical combination of unmanaged indices,
reflects the Portfolio's neutral mix of 60% stocks and 40% bonds.
Please note that one cannot invest in an unmanaged index.

6
<PAGE>

[CHART SHOWING COMPARISON OF THE CHANGE IN VALUE OF A $10,000 PURCHASE IN THE
STERLING PARTNERS' EQUITY PORTFOLIO AND THE STANDARD & POOR'S 500 INDEX (S&P
500) APPEARS HERE]

- --------------------------------------------
AVERAGE ANNUAL TOTAL RETURN**
FOR PERIOD ENDED OCTOBER 31, 1996
- --------------------------------------------
1 YEAR 5 YEAR SINCE 5/15/91*
- --------------------------------------------
24.76% 13.64% 13.11%
- --------------------------------------------

Performance Comparison
- -------------------------------------------------------------------------------
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 PURCHASE IN
THE STERLING PARTNERS' EQUITY PORTFOLIO
AND THE STANDARD & POOR'S 500 INDEX (S&P 500)

[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Sterling Partners'
Equity Portfolio+ S&P 500 Index+
<S> <C> <C>
5/15/91* 10,000 10,000
10/31/91 10,351 10,801
10/31/92 11,284 11,876
10/31/93 13,028 13,650
10/31/94 13,484 14,177
10/31/95 15,724 17,921
10/31/96 19,617 22,236
</TABLE>

Definition of the Comparative Index
The S&P 500 Index is an unmanaged index composed of 400 industrial, 40
financial, 40 utilities and 20 transportation stocks.
Please note that one cannot invest in an unmanaged index.

7
<PAGE>

[CHART SHOWING COMPARISON OF THE CHANGE IN VALUE OF A $10,000 PURCHASE IN THE
STERLING PARTNERS' SHORT-TERM FIXED INCOME PORTFOLIO, THE LEHMAN BROTHERS 1-3
YEAR GOVERNMENT BOND INDEX AND THE SALOMON BROTHERS 3-MONTH TREASURY BILL INDEX
APPEARS HERE]
<TABLE>
<CAPTION>

Sterling Partners' The Lehman 1-3 Salomon Brothers
Short-Term Fixed Year Government 3-Month Treasury
Income Portfolio+ Bond Index+ Bill
<S> <C> <C> <C>
2/10/92* 10,000 10,000 10,000
10/31/92 10,375 10,500 10,300
10/31/93 10,995 11,155 10,579
10/31/94 11,123 11,283 10,986
10/31/95 12,030 12,280 11,617
10/31/96 12,693 13,014 12,234
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------
AVERAGE ANNUAL TOTAL RETURN**
FOR PERIOD ENDED OCTOBER 31, 1996
-----------------------------------
<S> <C>
1 YEAR SINCE 2/10/92*
-----------------------------------
5.51% 5.18%
-----------------------------------
</TABLE>

Definition of the Comparative Index
The Lehman Brothers 1-3 Year Government Bond Index is composed of agency and
Treasury securities with maturities of one to three years.
Please note that one cannot invest in an unmanaged index.

8
<PAGE>
STERLING PARTNERS' BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
October 31, 1996

<TABLE>
<CAPTION>
SHARES VALUE+
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (61.3%)
- -------------------------------------------------------------------------------
BANKS (2.4%)
Bankers Trust New York Corp. ............................. 10,042 $ 848,549
NationsBank Corp. ........................................ 5,750 541,937
-----------
1,390,486
- -------------------------------------------------------------------------------
BASIC RESOURCES (0.5%)
*Destec Energy, Inc. ...................................... 20,884 313,260
- -------------------------------------------------------------------------------
BEVERAGES, FOOD & TOBACCO (4.4%)
Interstate Bakeries Corp. ................................ 25,050 1,061,494
Nabisco Holdings Corp. ................................... 29,100 1,083,975
Tyson Foods, Inc., Class A................................ 14,133 416,923
-----------
2,562,392
- -------------------------------------------------------------------------------
BROADCASTING & PUBLISHING (2.3%)
Knight-Ridder, Inc. ...................................... 8,737 326,545
Scripps Co. (E.W.)........................................ 21,275 1,007,903
-----------
1,334,448
- -------------------------------------------------------------------------------
CAPITAL EQUIPMENT (3.7%)
Ingersoll-Rand Co. ....................................... 23,675 985,472
Keystone International, Inc. ............................. 22,275 400,950
Stewart & Stevenson Services, Inc. ....................... 36,244 770,185
-----------
2,156,607
- -------------------------------------------------------------------------------
CONSTRUCTION (1.2%)
*USG Corp. ................................................ 24,400 719,800
- -------------------------------------------------------------------------------
CONSUMER NON-DURABLES (4.3%)
First Brands Corp. ....................................... 29,374 833,487
Hasbro, Inc. ............................................. 14,067 546,855
Philip Morris Cos., Inc. ................................. 12,100 1,120,762
-----------
2,501,104
- -------------------------------------------------------------------------------
ELECTRONICS (0.5%)
Motorola, Inc. ........................................... 6,025 277,150
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

9
<PAGE>

STERLING PARTNERS' BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
October 31, 1996
<TABLE>
<CAPTION>
SHARES VALUE+
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--(CONTINUED)
- -------------------------------------------------------------------------------
ENERGY (4.9%)
Chevron Corp. ............................................ 12,922 $ 849,622
Exxon Corp. .............................................. 3,434 304,338
Mobil Corp. .............................................. 7,174 837,564
Schlumberger Ltd. ........................................ 8,925 884,691
-----------
2,876,215
- -------------------------------------------------------------------------------
ENTERTAINMENT & LEISURE TIME (1.3%)
Walt Disney Co. .......................................... 11,557 761,317
- -------------------------------------------------------------------------------
FINANCIAL SERVICES (2.7%)
J.P. Morgan & Co. ........................................ 10,071 869,883
Paine Webber Group........................................ 31,900 749,650
-----------
1,619,533
- -------------------------------------------------------------------------------
HEALTH CARE (7.1%)
*Acuson Corp. ............................................. 48,621 1,027,119
*Magellan Health Services, Inc. ........................... 50,350 925,181
McKesson Corp. ........................................... 8,400 417,900
*St. Jude Medical, Inc. ................................... 21,875 864,063
U.S. Surgical Corp. ...................................... 21,725 909,734
-----------
4,143,997
- -------------------------------------------------------------------------------
HOME FURNISHINGS & APPLIANCES (1.0%)
Stanhome, Inc. ........................................... 21,888 580,032
- -------------------------------------------------------------------------------
INSURANCE (3.5%)
Associates First Capital Corp. ........................... 10,017 434,487
Chubb Corp. .............................................. 22,093 1,104,650
Ohio Casualty Corp. ...................................... 15,525 504,563
-----------
2,043,700
- -------------------------------------------------------------------------------
MANUFACTURING (4.7%)
*Amphenol Corp., Class A................................... 31,814 632,303
Belden, Inc. ............................................. 19,258 553,668
Snap-On Tools Corp. ...................................... 25,925 832,841
United Dominion Industries................................ 37,295 769,209
-----------
2,788,021
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

10
<PAGE>

STERLING PARTNERS' BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
October 31, 1996
<TABLE>
<CAPTION>
SHARES VALUE+
- ----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--(CONTINUED)
- ----------------------------------------------------------------------------
MINING (0.8%)
Potash Corp. of Saskatchewan, Inc. .................... 6,622 $ 469,334
- ----------------------------------------------------------------------------
PHARMACEUTICALS (0.9%)
Pharmacia & Upjohn, Inc. .............................. 7,775 279,900
Rhone-Poulenc Rorer, Inc. ............................. 4,000 268,500
-----------
548,400
- ----------------------------------------------------------------------------
RETAIL (3.7%)
Family Dollar Stores, Inc. ............................ 45,150 767,550
*Federated Department Stores, Inc. ..................... 9,237 304,821
*Price/Costco, Inc. .................................... 54,750 1,088,156
-----------
2,160,527
- ----------------------------------------------------------------------------
SERVICES (0.7%)
Flight Safety International, Inc. ..................... 8,620 425,612
- ----------------------------------------------------------------------------
TECHNOLOGY (3.0%)
*Cisco Systems, Inc. ................................... 6,337 392,102
Hewlett-Packard Co. ................................... 16,213 715,399
Intel Corp. ........................................... 4,590 504,326
Lucent Technologies, Inc. ............................. 3,254 152,914
-----------
1,764,741
- ----------------------------------------------------------------------------
TELECOMMUNICATIONS (1.2%)
Ameritech Corp. ....................................... 6,894 377,446
AT&T Corp. ............................................ 9,242 322,315
-----------
699,761
- ----------------------------------------------------------------------------
TEXTILES & APPAREL (2.2%)
Russell Corp. ......................................... 18,375 521,391
Unifi, Inc. ........................................... 24,775 771,122
-----------
1,292,513
- ----------------------------------------------------------------------------
TRANSPORTATION (2.0%)
Canadian National Railway.............................. 42,655 1,173,013
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

11
<PAGE>

STERLING PARTNERS' BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
October 31, 1996
<TABLE>
<CAPTION>
SHARES VALUE+
- ----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--(CONTINUED)
- ----------------------------------------------------------------------------
UTILITIES (2.3%)
CMS Energy Corp. ................................... 19,623 $ 620,577
Portland General Corp............................... 11,205 490,219
Sierra Pacific Resources............................ 9,500 264,813
-----------
1,375,609
- ----------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $30,530,701)............... 35,977,572
- ----------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
- ----------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (13.8%)
- ----------------------------------------------------------------------------
BANKS (2.6%)
BankAmerica Corp.
6.65%, 5/1/01...................................... $ 910,000 915,988
NationsBank Corp.
5.70%, 2/12/01..................................... 640,000 621,939
-----------
1,537,927
- ----------------------------------------------------------------------------
FINANCIAL SERVICES (6.0%)
Associates Corp. of North America
6.00%, 6/15/01..................................... 1,750,000 1,716,400
Sears Roebuck Acceptance Corp.
6.54%, 5/6/99...................................... 1,800,000 1,813,590
-----------
3,529,990
- ----------------------------------------------------------------------------
INDUSTRIAL (2.3%)
Ford Motor Corp.
7.25%, 10/1/08..................................... 1,300,000 1,318,044
- ----------------------------------------------------------------------------
TRANSPORTATION (2.9%)
Southern Railway Corp.
10.00%, 7/15/00.................................... 1,535,000 1,720,935
- ----------------------------------------------------------------------------
TOTAL CORPORATE BONDS (COST $8,013,658).............. 8,106,896
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

12
<PAGE>

STERLING PARTNERS' BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
October 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE+
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES (22.4%)
- --------------------------------------------------------------------------------
U.S. TREASURY NOTES (14.0%)
6.50%, 4/30/99......................................... $2,460,000 $ 2,497,663
5.625%, 11/30/00....................................... 200,000 197,062
5.50%, 12/31/00........................................ 450,000 441,072
5.625%, 2/28/01........................................ 745,000 732,894
7.50%, 11/15/01........................................ 375,000 397,148
6.50%, 8/15/05......................................... 3,905,000 3,945,885
-----------
8,211,724
- --------------------------------------------------------------------------------
U.S. TREASURY BONDS (7.2%)
6.25%, 8/15/23......................................... 1,205,000 1,131,941
7.625%, 2/15/25........................................ 2,435,000 2,713,126
6.75%, 8/15/26......................................... 390,000 394,629
-----------
4,239,696
- --------------------------------------------------------------------------------
U.S. TREASURY STRIPS (0.3%)
Zero Coupon, 5/15/01................................... 235,000 179,190
- --------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.5%)
Federal National Mortgage Association
REMIC Series 92-150G
6.75%, 9/25/18,
Estimated Average Life 8/97++.......................... 293,445 293,861
- --------------------------------------------------------------------------------
MORTGAGE PASS-THROUGHS (0.4%)
Federal Home Loan Mortgage Corporation
Pool #M90315
5.50%, 12/1/98,
Estimated Average Life 7/98++.......................... 129,732 128,435
Federal Home Loan Mortgage Corporation
Pool #G50213
6.50%, 11/1/99,
Estimated Average Life 12/98++......................... 66,437 66,603
-----------
195,038
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $13,013,667)..... 13,119,509
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

13
<PAGE>

STERLING PARTNERS' BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
October 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE+
- -------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (2.0%)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT (2.0%)
Chase Securities, Inc., 5.58%, dated 10/31/96, due
11/1/96, to be repurchased at $1,168,181,
collateralized by $1,129,001 various U.S. Treasury
Notes, 5.875%-7.75%, due from 3/31/99-11/30/99,
valued at $1,168,003 (COST $1,168,000)............... $1,168,000 $ 1,168,000
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.5%) (COST $52,726,026)(A)......... 58,371,977
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.5%)..................... 319,144
- -------------------------------------------------------------------------------
NET ASSETS (100%)....................................... $58,691,121
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
+ See Note A to Financial Statements.
++ Estimated Average Life is unaudited.
* Non-Income Producing Security.
(a) The cost for federal income tax purposes was $52,766,288. At October 31,
1996, net unrealized appreciation for all securities based on tax cost was
$5,605,689. This consisted of aggregate gross unrealized appreciation for
all securities of $6,222,695 and aggregate gross unrealized depreciation
for all securities of $617,006.

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

14
<PAGE>

STERLING PARTNERS' EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
October 31, 1996

<TABLE>
<CAPTION>
SHARES VALUE+
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (95.4%)
- -------------------------------------------------------------------------------
BANKS (3.7%)
Bankers Trust New York Corp. ............................. 8,685 $ 733,883
NationsBank Corp. ........................................ 5,062 477,093
-----------
1,210,976
- -------------------------------------------------------------------------------
BASIC RESOURCES(0.8%)
*Destec Energy, Inc. ...................................... 18,467 277,005
- -------------------------------------------------------------------------------
BEVERAGES, FOOD & TOBACCO (7.1%)
Interstate Bakeries Corp. ................................ 24,130 1,022,509
Nabisco Holdings Corp. ................................... 25,761 959,597
Tyson Foods, Inc., Class A................................ 11,661 344,000
-----------
2,326,106
- -------------------------------------------------------------------------------
BROADCASTING & PUBLISHING (3.5%)
Knight-Ridder, Inc. ...................................... 7,750 289,656
Scripps Co. (E.W.)........................................ 18,382 870,847
-----------
1,160,503
- -------------------------------------------------------------------------------
CAPITAL EQUIPMENT (5.9%)
Ingersoll-Rand Co. ....................................... 22,611 941,183
Keystone International, Inc. ............................. 17,329 311,922
Stewart & Stevenson Services, Inc. ....................... 32,025 680,531
-----------
1,933,636
- -------------------------------------------------------------------------------
CONSTRUCTION (1.9%)
*USG Corp. ................................................ 21,575 636,463
- -------------------------------------------------------------------------------
CONSUMER NON-DURABLES (6.7%)
First Brands Corp. ....................................... 25,902 734,969
Hasbro, Inc. ............................................. 12,465 484,577
Philip Morris Cos., Inc. ................................. 10,666 987,938
-----------
2,207,484
- -------------------------------------------------------------------------------
ELECTRONICS (0.7%)
Motorola, Inc. ........................................... 5,102 234,692
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

15
<PAGE>

STERLING PARTNERS' EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
October 31, 1996
<TABLE>
<CAPTION>
SHARES VALUE+
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--(CONTINUED)
- -------------------------------------------------------------------------------
ENERGY (7.5%)
Chevron Corp. ............................................ 11,093 $ 729,365
Exxon Corp. .............................................. 3,050 270,306
Mobil Corp. .............................................. 6,350 741,362
Schlumberger Ltd. ........................................ 7,207 714,394
-----------
2,455,427
- -------------------------------------------------------------------------------
ENTERTAINMENT & LEISURE TIME (2.0%)
Walt Disney Co. .......................................... 10,001 658,816
- -------------------------------------------------------------------------------
FINANCIAL SERVICES (4.2%)
J.P. Morgan & Co. ........................................ 8,544 737,988
Paine Webber Group........................................ 27,531 646,979
-----------
1,384,967
- -------------------------------------------------------------------------------
HEALTH CARE (10.8%)
*Acuson Corp. ............................................. 41,701 880,934
*Magellan Health Services, Inc. ........................... 44,455 816,861
McKesson Corp. ........................................... 7,325 364,419
*St. Jude Medical, Inc. ................................... 18,950 748,525
U.S. Surgical Corp. ...................................... 17,866 748,139
-----------
3,558,878
- -------------------------------------------------------------------------------
HOME FURNISHINGS & APPLIANCES (1.6%)
Stanhome, Inc. ........................................... 19,300 511,450
- -------------------------------------------------------------------------------
INSURANCE (5.4%)
Associates First Capital Corp. ........................... 8,902 386,124
Chubb Corp. .............................................. 19,546 977,300
Ohio Casualty Corp. ...................................... 13,260 430,950
-----------
1,794,374
- -------------------------------------------------------------------------------
MANUFACTURING (7.3%)
*Amphenol Corp., Class A................................... 28,168 559,839
Belden, Inc. ............................................. 16,195 465,606
Snap-On Tools Corp. ...................................... 22,850 734,056
United Dominion Industries................................ 31,300 645,563
-----------
2,405,064
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

16
<PAGE>

STERLING PARTNERS' EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
October 31, 1996
<TABLE>
<CAPTION>
SHARES VALUE+
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--(CONTINUED)
- --------------------------------------------------------------------------------
MINING (1.2%)
Potash Corp. of Saskatchewan, Inc.......................... 5,668 $ 401,719
- --------------------------------------------------------------------------------
PHARMACEUTICALS (1.4%)
Pharmacia & Upjohn, Inc.................................... 6,640 239,040
Rhone-Poulenc Rorer, Inc. ................................. 3,317 222,654
-----------
461,694
- --------------------------------------------------------------------------------
RETAIL (5.8%)
Family Dollar Stores, Inc.................................. 40,025 680,425
*Federated Department Stores, Inc........................... 7,713 254,529
*Price/Costco, Inc.......................................... 49,439 982,600
-----------
1,917,554
- --------------------------------------------------------------------------------
SERVICES (1.1%)
FlightSafety International, Inc............................ 7,410 365,869
- --------------------------------------------------------------------------------
TECHNOLOGY (4.7%)
*Cisco Systems, Inc. ....................................... 5,365 331,959
Hewlett-Packard Co. ....................................... 15,062 664,611
Intel Corp................................................. 3,806 418,184
Lucent Technologies, Inc................................... 2,545 119,615
-----------
1,534,369
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS (1.8%)
Ameritech Corp............................................. 5,831 319,247
AT&T Corp.................................................. 8,145 284,057
-----------
603,304
- --------------------------------------------------------------------------------
TEXTILES & APPAREL (3.5%)
Russell Corp. ............................................. 16,575 470,316
Unifi, Inc. ............................................... 22,268 693,091
-----------
1,163,407
- --------------------------------------------------------------------------------
TRANSPORTATION (3.2%)
Canadian National Railway.................................. 37,842 1,040,655
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

17
<PAGE>

STERLING PARTNERS' EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
October 31, 1996
<TABLE>
<CAPTION>
SHARES VALUE+
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--(CONTINUED)
- -------------------------------------------------------------------------------
UTILITIES (3.6%)
CMS Energy Corp. ..................................... 16,761 $ 530,066
Portland General Corp................................. 9,793 428,444
Sierra Pacific Resources.............................. 8,775 244,603
-----------
1,203,113
- -------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $26,372,777)................. 31,447,525
- -------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
- -------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (4.9%)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT (4.9%)
Chase Securities, Inc., 5.58%, dated 10/31/96, due
11/1/96, to be repurchased at $1,606,249,
collateralized by $1,552,376 various U.S. Treasury
Notes, 5.875%-7.75%, due from 3/31/99-11/30/99,
valued at $1,606,004 (COST $1,606,000)............... $1,606,000 1,606,000
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%) (COST $27,978,777)(A)....... 33,053,525
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.3%)................... (110,679)
- -------------------------------------------------------------------------------
NET ASSETS (100%)...................................... $32,942,846
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
(a) The cost for federal income tax purposes was $27,997,083. At October 31,
1996, net unrealized appreciation for all securities based on tax cost was
$5,056,442. This consisted of aggregate gross unrealized appreciation for
all securities of $5,464,687 and aggregate gross unrealized depreciation
for all securities of $408,245.

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

18
<PAGE>

STERLING PARTNERS' SHORT-TERM FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
October 31, 1996

<TABLE>
<CAPTION>
FACE
AMOUNT VALUE+
- --------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS AND NOTES (30.6%)
- --------------------------------------------------------------------------------
BANKS (4.9%)
Chase Manhattan Grantor Trust, Series 1995A A
6.00%, 09/17/01,
Estimated Average Life 11/97++......................... $ 290,550 $ 291,419
Irving Bank Corp.
8.50%, 6/1/02, callable 12/31/96........................ 318,000 319,984
NationsBank Corp.
6.625%, 1/15/98......................................... 500,000 504,965
----------
1,116,368
- --------------------------------------------------------------------------------
FINANCIAL SERVICES (12.2%)
*Ford Motor Credit Corp.-Medium Term Note
5.938%, 2/1/99, callable 2/1/98......................... 1,000,000 1,002,680
General Electric Capital Corp.
7.34%, 3/2/99........................................... 750,000 770,475
Grand Metropolitan Investment Corp.-Medium Term Note
6.186%, 8/3/99.......................................... 1,000,000 998,330
----------
2,771,485
- --------------------------------------------------------------------------------
INDUSTRIAL (11.3%)
Cooper Industries, Inc.
7.76%, 11/5/97.......................................... 1,000,000 1,018,490
Du Pont (E.I.) de Nemours-Medium Term Note
8.35%, 5/15/98.......................................... 1,000,000 1,036,230
PHH Group, Inc.
8.00%, 1/1/97........................................... 500,000 501,850
----------
2,556,570
- --------------------------------------------------------------------------------
TRANSPORTATION (2.2%)
Seaboard System, Series 6
10.00%, 5/15/97......................................... 500,000 511,230
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES (COST $6,925,241)......... 6,955,653
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

19
<PAGE>

STERLING PARTNERS' SHORT-TERM FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
October 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE+
- -------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES (67.7%)
- -------------------------------------------------------------------------------
U.S. TREASURY NOTES (48.6%)
5.875%, 7/31/97....................................... $ 850,000 $ 852,525
6.50%, 8/15/97........................................ 500,000 503,905
5.50%, 9/30/97........................................ 400,000 400,064
5.00%, 1/31/98........................................ 1,000,000 992,340
6.125%, 5/15/98....................................... 1,000,000 1,006,560
6.25%, 7/31/98........................................ 475,000 479,156
5.875%, 8/15/98....................................... 1,900,000 1,904,446
6.875%, 8/31/99....................................... 1,000,000 1,025,000
7.125%, 9/30/99....................................... 1,000,000 1,032,030
6.25%, 5/31/00........................................ 1,250,000 1,260,150
5.50%, 12/31/00....................................... 500,000 490,080
5.25%, 1/31/01........................................ 500,000 486,330
6.625%, 7/31/01....................................... 600,000 612,654
-----------
11,045,240
- -------------------------------------------------------------------------------
GOVERNMENT AGENCY SECURITIES (6.8%)
Federal Home Loan Bank
7.76%, 9/19/01, Callable 9/19/97...................... 500,000 508,815
Federal Home Loan Mortgage Corp.
6.14%, 10/23/98, Callable 11/30/96.................... 500,000 499,610
Guaranteed Trade Trust, Series 93-A
4.86%, 4/1/98, Estimated Average Life 9/97++.......... 30,000 29,805
Tennessee Valley Authority
5.98%, 4/1/36, Putable 4/1/98......................... 500,000 506,410
-----------
1,544,640
- -------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (2.9%)
Federal Home Loan Mortgage Corporation
REMIC Series 1484Q
5.00%, 1/15/23,
Estimated Average Life 12/13++........................ 78,594 56,564
</TABLE>
The accompanying notes are an integral part of the financial statements.

20
<PAGE>

STERLING PARTNERS' SHORT-TERM FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
October 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT VALUE+
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES--(CONTINUED)
- --------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--(CONTINUED)
Federal National Mortgage Association
REMIC Series G-93 2D
6.00%, 10/25/12,
Estimated Average Life 7/97++......................... $ 225,200 $ 224,797
REMIC Series 92-49 E
7.00%, 7/25/17,
Estimated Average Life 3/97++......................... 60,863 60,819
REMIC Series 92-150G
6.75%, 9/25/18,
Estimated Average Life 8/97++......................... 310,213 310,653
-----------
652,833
- --------------------------------------------------------------------------------
MORTGAGE PASS-THROUGHS (9.4%)
Federal Home Loan Mortgage Corporation
Pool #G50213
6.50%, 11/1/99,
Estimated Average Life 12/98++........................ 1,356,100 1,359,490
Pool #G40112
7.50%, 9/1/01,
Estimated Average Life 8/99++......................... 752,558 768,080
-----------
2,127,570
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $15,297,044)..... 15,370,283
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

21
<PAGE>

STERLING PARTNERS' SHORT-TERM FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
October 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE+
- --------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (0.2%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT (0.2%)
Chase Securities, Inc., 5.58%, dated 10/31/96, due
11/1/96, to be repurchased at $43,007, collateralized
by $41,564 various U.S. Treasury Notes, 5.875%-7.75%,
due from 3/31/99-11/30/99,
valued at $43,000 (COST $43,000)..................... $ 43,000 $ 43,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.5%) (COST $22,265,285)(A)......... 22,368,936
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.5%)..................... 348,232
- --------------------------------------------------------------------------------
NET ASSETS (100%)....................................... $22,717,168
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
+See Note A to Financial Statements.
++Estimated Average Life is unaudited.
*Variable/Floating rate security--rate disclosed is as of October 31, 1996.
REMICReal Estate Mortgage Investment Conduit.
(a) The cost for federal income tax purposes was $22,267,915. At October 31,
1996, net unrealized appreciation for all securities based on tax cost
was $101,021. This consisted of aggregate gross unrealized appreciation
for all securities of $169,639 and aggregate gross unrealized
depreciation for all securities of $68,618.

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

22
<PAGE>

STERLING PARTNERS' PORTFOLIOS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
<TABLE>
<CAPTION>
STERLING
STERLING STERLING PARTNERS'
PARTNERS' PARTNERS' SHORT-TERM
BALANCED EQUITY FIXED INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments, at Cost..................... $52,726,026 $27,978,777 $22,265,285
=========== =========== ===========
Investments, at Value.................... $58,371,977 $33,053,525 $22,368,936
Cash..................................... 474 -- 109
Receivable for Investments Sold.......... 390,035 332,677 --
Receivable due from Investment Adviser... -- -- 3,335
Receivable for Portfolio Shares Sold..... 4,863 2,961 110,751
Dividends Receivable..................... 24,864 22,331 --
Interest Receivable...................... 339,596 -- 339,829
Other Assets............................. 2,079 1,443 758
- -------------------------------------------------------------------------------
Total Assets............................ 59,133,888 33,412,937 22,823,718
- -------------------------------------------------------------------------------
LIABILITIES
Payable for Investments Purchased........ 365,602 401,794 --
Payable for Portfolio Shares Redeemed.... 1,200 -- 50,398
Payable for Investment Advisory Fees..... 35,530 11,411 --
Payable for Dividends.................... -- -- 19,210
Payable for Administrative Fees.......... 9,395 7,941 7,161
Payable for Custodian Fees............... 2,789 3,877 3,576
Payable to Custodian Bank................ -- 16,454 --
Payable for Directors' Fees.............. 751 704 632
Other Liabilities........................ 27,500 27,910 25,573
- -------------------------------------------------------------------------------
Total Liabilities....................... 442,767 470,091 106,550
- -------------------------------------------------------------------------------
NET ASSETS................................ $58,691,121 $32,942,846 $22,717,168
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital.......................... $48,497,914 $24,576,972 $23,015,379
Undistributed (Distributions in Excess
of) Net Investment Income............... 165,686 24,710 (31,812)
Accumulated Net Realized Gain (Loss)..... 4,381,570 3,266,416 (370,050)
Unrealized Appreciation.................. 5,645,951 5,074,748 103,651
- -------------------------------------------------------------------------------
NET ASSETS................................ $58,691,121 $32,942,846 $22,717,168
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INSTITUTIONAL CLASS SHARES
Shares Issued and Outstanding ($0.001 par
value) (Authorized 25,000,000).......... 4,676,780 2,095,162 2,286,889
Net Asset Value, Offering and Redemption
Price Per Share......................... $ 12.55 $ 15.72 $ 9.93
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

23
<PAGE>

STERLING PARTNERS' PORTFOLIOS
STATEMENT OF OPERATIONS
For the Year Ended October 31, 1996
<TABLE>
<CAPTION>
STERLING
STERLING STERLING PARTNERS'
PARTNERS' PARTNERS' SHORT-TERM
BALANCED EQUITY FIXED INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends................ $ 669,737 $ 623,893 $ --
Interest................. 1,673,384 61,623 1,503,129
- ----------------------------------------------------------------------------------------------
Total Income............ 2,343,121 685,516 1,503,129
- ----------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory
Fees--Note B
Basic Fee............... $462,951 $256,496 $ 121,012
Less: Fees Waived....... -- 462,951 (72,415) 184,081 (121,012) --
-------- -------- ---------
Administrative Fees--Note
C....................... 99,401 87,881 84,081
Custodian Fees--Note D... 13,159 10,035 8,442
Audit Fees............... 14,666 13,098 13,349
Printing Fees............ 13,629 16,085 13,633
Legal Fees............... 5,902 4,333 3,178
Registration and Filing
Fees.................... 14,502 14,961 15,616
Directors' Fees--Note G.. 3,610 3,125 2,873
Other Expenses........... 8,733 5,902 5,451
Expenses Reimbursed by
Adviser................. -- -- (12,908)
- ----------------------------------------------------------------------------------------------
Total Expenses.......... 636,553 339,501 133,715
Expense Offset--Note A... (4,896) (1,036) (655)
- ----------------------------------------------------------------------------------------------
Net Expenses............ 631,657 338,465 133,060
- ----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME..... 1,711,464 347,051 1,370,069
- ----------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
ON INVESTMENTS........... 4,827,174 4,140,929 (8,572)
NET CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION
ON INVESTMENTS........... 2,106,555 2,701,952 (86,140)
- ----------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVEST-
MENTS.................... 6,933,729 6,842,881 (94,712)
- ----------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERA-
TIONS................... $8,645,193 $7,189,932 $1,275,357
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

24
<PAGE>

STERLING PARTNERS' BALANCED PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31,
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income.............................. $ 1,711,464 $ 2,583,735
Net Realized Gain.................................. 4,827,174 3,426,488
Net Change in Unrealized Appreciation/Depreciation. 2,106,555 2,718,106
- --------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Opera-
tions............................................ 8,645,193 8,728,329
- --------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income.............................. (1,822,583) (2,532,840)
Net Realized Gain.................................. (3,417,915) (1,844,451)
- --------------------------------------------------------------------------------
Total Distributions............................... (5,240,498) (4,377,291)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Issued--Regular.................................... 10,461,361 20,677,998
--In Lieu of Cash Distributions................ 5,122,683 4,260,401
Redeemed........................................... (25,230,195) (29,030,268)
- --------------------------------------------------------------------------------
Net Decrease from Capital Share Transactions...... (9,646,151) (4,091,869)
- --------------------------------------------------------------------------------
Total Increase (Decrease).......................... (6,241,456) 259,169
Net Assets:
Beginning of Period................................ 64,932,577 64,673,408
- --------------------------------------------------------------------------------
End of Period (including undistributed net invest-
ment income of $165,686 and $273,713, respective-
ly)............................................... $ 58,691,121 $ 64,932,577
- --------------------------------------------------------------------------------
(1)Shares Issued and Redeemed:
Shares Issued...................................... 862,801 1,855,817
In Lieu of Cash Distributions...................... 448,253 391,431
Shares Redeemed.................................... (2,111,425) (2,580,432)
- --------------------------------------------------------------------------------
(800,371) (333,184)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

25
<PAGE>

STERLING PARTNERS' EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31,
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income................................ $ 347,051 $ 430,483
Net Realized Gain.................................... 4,140,929 2,237,512
Net Change in Unrealized Appreciation/Depreciation... 2,701,952 1,463,755
- --------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Opera-
tions.............................................. 7,189,932 4,131,750
- --------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income................................ (366,530) (412,329)
Net Realized Gain.................................... (2,251,608) (1,076,275)
- --------------------------------------------------------------------------------
Total Distributions................................. (2,618,138) (1,488,604)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Issued--Regular...................................... 7,389,338 8,462,828
--In Lieu of Cash Distributions.................. 2,561,496 1,471,882
Redeemed............................................. (13,548,762) (3,960,760)
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share Transac-
tions.............................................. (3,597,928) 5,973,950
- --------------------------------------------------------------------------------
Total Increase....................................... 973,866 8,617,096
Net Assets:
Beginning of Period.................................. 31,968,980 23,351,884
- --------------------------------------------------------------------------------
End of Period (including undistributed net investment
income of $24,710 and $44,189, respectively)........ $32,942,846 $31,968,980
- --------------------------------------------------------------------------------
(1)Shares Issued and Redeemed:
Shares Issued........................................ 512,923 665,503
In Lieu of Cash Distributions........................ 194,161 125,595
Shares Redeemed...................................... (947,380) (318,325)
- --------------------------------------------------------------------------------
(240,296) 472,773
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

26
<PAGE>

STERLING PARTNERS' SHORT-TERM FIXED INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31,
1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income................................. $ 1,370,069 $ 1,335,117
Net Realized Loss..................................... (8,572) (146,132)
Net Change in Unrealized Appreciation/Depreciation.... (86,140) 695,074
- ----------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations. 1,275,357 1,884,059
- ----------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income................................. (1,338,257) (1,354,608)
In Excess of Net Investment Income.................... (31,812) --
- ----------------------------------------------------------------------------------
Total Distributions.................................. (1,370,069) (1,354,608)
- ----------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Issued--Regular....................................... 5,687,848 6,891,367
--In Lieu of Cash Distributions..................... 1,151,331 1,252,521
Redeemed.............................................. (8,749,458) (8,333,106)
- ----------------------------------------------------------------------------------
Net Decrease from Capital Share Transactions......... (1,910,279) (189,218)
- ----------------------------------------------------------------------------------
Total Increase (Decrease)............................. (2,004,991) 340,233
Net Assets:
Beginning of Period................................... 24,722,159 24,381,926
- ----------------------------------------------------------------------------------
End of Period (including distributions in excess of
net investment income of $(31,812) and $(7,354),
respectively)........................................ $22,717,168 $24,722,159
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
(1)Shares Issued and Redeemed:
Shares Issued......................................... 572,484 701,034
In Lieu of Cash Distributions......................... 116,075 127,414
Shares Redeemed....................................... (882,706) (850,335)
- ----------------------------------------------------------------------------------
(194,147) (21,887)
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.

27
<PAGE>

STERLING PARTNERS' BALANCED PORTFOLIO
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PE-
RIOD............................. $ 11.86 $ 11.13 $ 11.51 $ 10.71 $ 10.26
- --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............ 0.34 0.46 0.32 0.34 0.37
Net Realized and Unrealized Gain
(Loss).......................... 1.38 1.04 (0.25) 0.94 0.50
- --------------------------------------------------------------------------------
Total From Investment Opera-
tions.......................... 1.72 1.50 0.07 1.28 0.87
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income............ (0.36) (0.45) (0.32) (0.32) (0.37)
Net Realized Gain................ (0.67) (0.32) (0.13) (0.16) (0.05)
- --------------------------------------------------------------------------------
Total Distributions............. (1.03) (0.77) (0.45) (0.48) (0.42)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.... $ 12.55 $ 11.86 $ 11.13 $ 11.51 $ 10.71
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL RETURN...................... 15.52% 14.23% 0.66% 12.23% 8.65%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thou-
sands)........................... $58,691 $64,933 $64,673 $47,016 $39,129
Ratio of Expenses to Average Net
Assets........................... 1.03% 0.96% 1.01% 0.99% 1.09%
Ratio of Net Investment Income to
Average Net Assets............... 2.77% 3.96% 3.05% 3.08% 3.52%
Portfolio Turnover Rate........... 84% 130% 70% 49% 80%
Average Commission Rate #......... $0.0684 N/A N/A N/A N/A
- --------------------------------------------------------------------------------
Ratio of Expenses to Average Net
Assets Including Expense Offsets. 1.02% 0.96% N/A N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
# For fiscal years beginning on or after September 1, 1995, a portfolio is
required to disclose the average commission per share it paid for portfolio
trades on which commissions were charged.

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

28
<PAGE>

STERLING PARTNERS' EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD............................ $ 13.69 $ 12.54 $ 12.39 $ 11.01 $10.29
- -------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............. 0.15 0.21 0.16 0.15 0.17
Net Realized and Unrealized Gain.. 3.01 1.73 0.27 1.53 0.75
- -------------------------------------------------------------------------------
Total From Investment Operations. 3.16 1.94 0.43 1.68 0.92
- -------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income............. (0.16) (0.20) (0.15) (0.16) (0.16)
Net Realized Gain................. (0.97) (0.59) (0.13) (0.14) (0.04)
- -------------------------------------------------------------------------------
Total Distributions.............. (1.13) (0.79) (0.28) (0.30) (0.20)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD..... $ 15.72 $ 13.69 $ 12.54 $ 12.39 $11.01
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TOTAL RETURN+...................... 24.76% 16.61% 3.50% 15.46% 9.01%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(Thousands)....................... $32,943 $31,969 $23,352 $15,982 $9,725
Ratio of Expenses to Average Net
Assets............................ 0.99% 1.00% 0.99% 0.93% 1.04%
Ratio of Net Investment Income to
Average Net Assets................ 1.01% 1.64% 1.34% 1.30% 1.73%
Portfolio Turnover Rate............ 78% 135% 73% 55% 84%
Average Commission Rate#........... $0.0687 N/A N/A N/A N/A
- -------------------------------------------------------------------------------
Voluntary Waived Fees and Expenses
Assumed by the Adviser Per Share.. $ 0.03 $ 0.03 $ 0.04 $ 0.06 $ 0.09
Ratio of Expenses to Average Net
Assets Including Expense Offsets.. 0.99% 0.99% N/A N/A N/A
- -------------------------------------------------------------------------------
</TABLE>
+ Total return would have been lower had certain fees not been waived and
expenses assumed by the Adviser during the periods indicated.
# For fiscal years beginning on or after September 1, 1995, a portfolio is
required to disclose the average commission rate per share it paid for
portfolio trades on which commissions were charged.

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

29
<PAGE>

STERLING PARTNERS' SHORT-TERM FIXED INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
FEBRUARY 10,
1992** TO
YEARS ENDED OCTOBER 31, OCTOBER 31,
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD...................... $ 9.96 $ 9.74 $ 10.12 $ 10.07 $ 10.00
- --------------------------------------------------------------------------------
Income From Investment Opera-
tions
Net Investment Income....... 0.56 0.54 0.49 0.53 0.30
Net Realized and Unrealized
Gain (Loss)................ (0.03) 0.23 (0.38) 0.06 0.07
- --------------------------------------------------------------------------------
Total From Investment Oper-
ations.................... 0.53 0.77 0.11 0.59 0.37
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income....... (0.55) (0.55) (0.48) (0.53)+ (0.30)
In Excess of Net Investment
Income..................... (0.01) -- # -- -- --
Net Realized Gain........... -- -- -- (0.01) --
Return of Capital........... -- -- (0.01) -- --
- --------------------------------------------------------------------------------
Total Distributions........ (0.56) (0.55) (0.49) (0.54) (0.30)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERI-
OD.......................... $ 9.93 $ 9.96 $ 9.74 $ 10.12 $ 10.07
- --------------------------------------------------------------------------------
TOTAL RETURN++............... 5.51% 8.16% 1.16% 5.98% 3.75%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(Thousands)................. $22,717 $24,722 $24,382 $20,256 $12,101
Ratio of Expenses to Average
Net Assets.................. 0.55% 0.55% 0.53% 0.50% 0.50%*
Ratio of Net Investment
Income to Average Net
Assets...................... 5.66% 5.55% 5.00% 5.24% 5.00%*
Portfolio Turnover Rate...... 48% 58% 100% 78% 122%
- --------------------------------------------------------------------------------
Voluntary Waived Fees and Ex-
penses Assumed by the Ad-
viser Per Share............. $ 0.06 $ 0.04 $ 0.05 $ 0.05 $ 0.03
Ratio of Expenses to Average
Net Assets Including Expense
Offsets..................... 0.55% 0.55% N/A N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Commencement of Operations.
+ Because of the differences between book and tax basis accounting,
approximately $0.025 of the Portfolio's distributions for the year ended
October 31, 1993 were return of capital for Federal income tax purposes.
++ Total return would have been lower had certain fees not been waived and
assumed by the Adviser during the periods indicated.
# Value is less than $0.01 per share.

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

30
<PAGE>

STERLING PARTNERS' PORTFOLIOS

NOTES TO FINANCIAL STATEMENTS

UAM Funds, Inc. and UAM Funds Trust, (collectively the "UAM Funds") are
registered under the Investment Company Act of 1940, as amended. The Sterling
Partners' Balanced Portfolio, Sterling Partners' Equity Portfolio and the
Sterling Partners' Short Term Fixed Income Portfolio (the "Portfolios"), are
portfolios of UAM Funds, Inc., are diversified, open-end management investment
companies. At October 31, 1996, the UAM Funds were composed of forty active
portfolios. The financial statements of the remaining portfolios are presented
separately. The objectives of the Portfolios are as follows:

The STERLING PARTNERS' BALANCED PORTFOLIO seeks to provide maximum long-
term total return consistent with reasonable risk to principal, by
investing in a balanced portfolio of common stocks and fixed income
securities.

The STERLING PARTNERS' EQUITY PORTFOLIO seeks to provide maximum long-term
total return consistent with reasonable risk to principal, by investing
primarily in common stocks.

The STERLING PARTNERS' SHORT-TERM FIXED INCOME PORTFOLIO seeks to provide a
high level of current income consistent with the maintenance of principal
and liquidity by investing primarily in investment grade fixed income
securities with an average weighted maturity between 1 and 3 years.

A. SIGNIFICANT ACCOUNTING POLICIES: The following significant accounting
policies are in conformity with generally accepted accounting principles. Such
policies are consistently followed by the Portfolios in the preparation of its
financial statements. Generally accepted accounting principles may require
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results may differ from
those estimates.

1. SECURITY VALUATION: Equity securities listed on a securities exchange
and unlisted securities for which market quotations are readily available
are valued at the last quoted sales price as of the close of the exchange
on the day the valuation is made. Price information on listed securities is
taken from the exchange where the security is primarily traded. In
addition, listed and unlisted securities not traded on the valuation date
for which market quotations are readily available are valued at the average
between the bid and asked price. Fixed income securities are stated on the
basis of valuations provided by brokers and/or a pricing service which uses
information with respect to transactions in fixed income securities,
quotations from dealers, market transactions in comparable securities and
various relationships between securities in determining value. Short-term
investments that have remaining maturities of sixty days or less at time of
purchase are valued at amortized cost, if it approximates market value. The
value of other assets and securities for which no quotations are readily
available is determined in good faith at fair value using methods
determined by the Board of Directors.

At October 31, 1996, the following Portfolio had available an approximate
capital loss carryover for Federal income tax purposes, which will expire
on the dates indicated:

<TABLE>
<CAPTION>
EXPIRATION DATE OCTOBER 31,
-----------------------------
STERLING PARTNERS' PORTFOLIO 2002 2003 TOTAL
---------------------------- --------- --------- ---------
<S> <C> <C> <C>
Short-Term Fixed Income....................... $ 222,000 $ 145,000 $ 367,000
</TABLE>

31
<PAGE>

STERLING PARTNERS' PORTFOLIOS

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

3. REPURCHASE AGREEMENTS: In connection with transactions involving
repurchase agreements, the Portfolio's custodian bank takes possession of
the underlying securities, the value of which exceeds the principal amount
of the repurchase transaction, including accrued interest. To the extent
that any repurchase transaction exceeds one business day, the value of the
collateral is monitored on a daily basis to determine the adequacy of the
collateral. In the event of default on the obligation to repurchase, the
Portfolio has the right to liquidate the collateral and apply the proceeds
in satisfaction of the obligation. In the event of default or bankruptcy by
the other party to the agreement, realization and/or retention of the
collateral or proceeds may be subject to legal proceedings.

Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, the UAM Funds may transfer their daily uninvested cash balances
into a joint trading account which invests in one or more repurchase
agreements. This joint repurchase agreement is covered by the same
collateral requirements as discussed above.

4. DISTRIBUTIONS TO SHAREHOLDERS: Each Portfolio will normally distribute
substantially all of its net investment income to shareholders quarterly
for the Sterling Partners' Equity and Sterling Partners' Balanced
Portfolios, and monthly for the Sterling Partner's Short-Term Fixed Income
Portfolio. Any realized net capital gains will be distributed annually. All
distributions are recorded on ex-dividend date.

The amount and character of income and capital gain distributions to be
paid are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles. These differences
are primarily due to differing book and tax treatments in the timing of the
recognition of gains or losses on investments and in-kind transactions.

Permanent book and tax basis differences relating to shareholder
distributions resulted in reclassifications as follows:

<TABLE>
<CAPTION>
UNDISTRIBUTED ACCUMULATED PAID
NET INVESTMENT NET REALIZED IN
STERLING PARTNERS' PORTFOLIO INCOME GAIN CAPITAL
---------------------------- -------------- ------------ --------
<S> <C> <C> <C>
Balanced............................... $ 3,092 $(429,397) $426,305
Equity................................. -- (859,487) 859,487
Short-Term Fixed Income................ (24,458) 23,509 949
</TABLE>

Current year permanent book-tax differences are not included in ending
undistributed net investment income for the purpose of calculating net
investment income per share in the financial highlights.

5. OTHER: Security transactions are accounted for on trade date, the date
the trade was executed. Costs used in determining realized gains and losses
on the sale of investment securities are based on the specific
identification method. Dividend income is recorded on the ex-dividend date.
Interest income is recognized on the accrual basis. Discounts and premiums
on securities purchased are amortized using the effective yield basis over
their respective lives. Most expenses of the UAM Funds can be directly
attributed to a particular portfolio. Expenses which cannot be directly
attributed are apportioned among the portfolios of the UAM Funds based on
their relative net assets. Additionally, certain expenses are apportioned
among the portfolios of the UAM Funds and AEW Commercial Mortgage
Securities Fund, Inc. ("AEW"), an affiliated closed-

32
<PAGE>

STERLING PARTNERS' PORTFOLIOS

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

end management investment company, based on their relative net assets.
Custodian fees for the Portfolios have been increased to include expense
offsets for custodian balance credits.

B. ADVISORY SERVICES: Under the terms of an investment advisory agreement,
Sterling Capital Management Company (the "Adviser"), a wholly-owned subsidiary
of United Asset Management Corporation ("UAM"), provides investment advisory
services to the Portfolio at a fee calculated at an annual rate of 0.75% of
average daily net assets for the Sterling Partners' Balanced and Sterling
Partners' Equity Portfolios and 0.50% of average daily net assets for the
Sterling Partners' Short-Term Fixed Income Portfolio. The Adviser has
voluntarily agreed to waive a portion of its advisory fees and to assume
expenses, if necessary, in order to keep the total annual operating expenses,
after the effect of expense offset arrangements, from exceeding 1.11%, 0.99%
and 0.55% of average daily net assets for the Sterling Partners' Balanced
Portfolio, Sterling Partners' Equity Portfolio and the Sterling Partners'
Short Term Fixed Income Portfolio, respectively.

C. ADMINISTRATION SERVICES: Effective April 15, 1996, UAM Fund Services, Inc.
(the "Administrator"), a wholly-owned subsidiary of UAM, provides and oversees
administrative, fund accounting, dividend disbursing and transfer agent
services to the UAM Funds and AEW under a Fund Administration Agreement (the
"Agreement"). Pursuant to the Agreement, the Administrator is entitled to
receive annual fees, computed daily and payable monthly, of 0.19% of the first
$200 million of the combined aggregate net assets; plus 0.11% of the next $800
million of the combined aggregate net assets; plus 0.07% of the next $2
billion of the combined aggregate net assets; plus 0.05% of the combined
aggregate net assets in excess of $3 billion. The fees are allocated among the
portfolios of the UAM Funds and AEW on the basis of their relative net assets
and are subject to a graduated minimum fee schedule per portfolio which rises
from $2,000 per month, upon inception of a portfolio, to $70,000 annually
after two years. For portfolios with more than one class of shares, the
minimum annual fee increases to $90,000. In addition, the Administrator
receives a Portfolio-specific monthly fee of 0.06%, 0.06% and 0.04% of average
daily net assets for Sterling Partners' Balanced Portfolio, Sterling Partners'
Equity Portfolio and Sterling Partners' Short-Term Fixed Portfolio,
respectively. Also effective April 15, 1996, the Administrator has entered
into a Mutual Funds Service Agreement with Chase Global Funds Services Company
("CGFSC"), an affiliate of The Chase Manhattan Bank, under which CGFSC agrees
to provide certain services, including but not limited to, administration,
fund accounting, dividend disbursing and transfer agent services. Pursuant to
the Mutual Funds Service Agreement, the Administrator pays CGFSC a monthly
fee. For the period April 15, 1996 to October 31, 1996, UAM Fund Services,
Inc. earned the following amounts from the Portfolios as Administrator and
paid the following portion to CGFSC:

<TABLE>
<CAPTION>
PORTION
ADMINISTRATION PAID TO
STERLING PARTNERS' PORTFOLIOS FEES CGFSC
- ----------------------------- -------------- -------
<S> <C> <C>
Balanced................................................ $62,275 $42,376
Equity.................................................. 52,322 40,917
Short-Term Fixed Income................................. 46,496 41,362
</TABLE>

33
<PAGE>

STERLING PARTNERS' PORTFOLIOS

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

the combined aggregate net assets; plus 0.12% of the next $800 million of the
combined aggregate net assets; plus 0.08% of the combined aggregate net assets
in excess of $1 billion but less than $3 billion; plus 0.06% of the combined
aggregate net assets in excess of $3 billion. The fees were allocated among
the portfolios of the UAM Funds and AEW on the basis of their relative net
assets and were subject to a graduated minimum fee schedule per portfolio
which rose from $2,000 per month, upon inception of a portfolio, to $70,000
annually after two years. For the period November 1, 1995 to April 15, 1996,
CGFSC earned the following amounts from the Portfolios as Administrator:

<TABLE>
<CAPTION>
ADMINISTRATION
STERLING PARTNERS' PORTFOLIOS FEES
- ----------------------------- --------------
<S> <C>
Balanced......................................................... $37,126
Equity........................................................... 35,559
Short-Term Fixed Income.......................................... 37,585
</TABLE>

D. CUSTODIAN: Effective July 17, 1996, The Chase Manhattan Bank (the "Bank"),
an affiliate of CGFSC, is custodian for the Portfolios' assets held in
accordance with the custodian agreement. For the period July 17, 1996 to
October 31, 1996, the amount charged to the Portfolios by the Bank aggregated
the following:

<TABLE>
<CAPTION>
CUSTODIAN
STERLING PARTNERS' PORTFOLIOS FEES
- ----------------------------- ---------
<S> <C>
Balanced.............................................................. $1,590
Equity................................................................ 2,548
Short-Term Fixed Income............................................... 2,478
As of October 31, 1996, all of these amounts are unpaid.
</TABLE>

E. DISTRIBUTION SERVICES: UAM Fund Distributors, Inc. (the "Distributor"), a
wholly-owned subsidiary of UAM, distributes the shares of the Portfolios. The
Distributor does not receive any fee or other compensation with respect to the
Portfolios.

F. PURCHASES AND SALES: For the year ended October 31, 1996 purchases and
sales of investment securities other than long-term U.S. Government securities
and short-term securities were:

<TABLE>
<CAPTION>
STERLING PARTNERS' PORTFOLIOS PURCHASES SALES
- ----------------------------- ----------- -----------
<S> <C> <C>
Balanced............................................... $41,721,993 $42,254,129
Equity................................................. 25,800,779 31,449,705
Short-Term Fixed Income................................ 4,328,808 4,825,789
</TABLE>

Purchases and sales of long-term U.S. Government securities were $8,670,097
and $19,964,213, respectively, for the Sterling Partners' Balanced Portfolio,
and $7,183,186 and $6,205,304, respectively, for the Sterling Partner's Short-
Term Fixed Income Portfolio. The Sterling Partners' Balanced Portfolio and the
Sterling Partners' Equity Portfolio sales figures include $6,737,469 and
$6,733,596 of in-kind transactions which resulted in realized gains of
$426,305 and $859,487, respectively. There were no purchases or sales of long-
term U.S. Government securities for the Sterling Partners' Equity Portfolio.

34
<PAGE>

STERLING PARTNERS' PORTFOLIOS

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

G. DIRECTORS' FEES: Each Director, who is not an officer or affiliated person,
receives $2,000 per meeting attended, which is allocated proportionally among
the active portfolios of UAM Funds and AEW, plus a quarterly retainer of $150
for each active portfolio of the UAM Funds and AEW, and reimbursement of
expenses incurred in attending Board meetings.

H. LINE OF CREDIT: The Portfolios, along with certain other portfolios of UAM
Funds, collectively entered into an agreement which enables them to
participate in a $100 million unsecured line of credit with several banks.
Borrowings will be made solely to temporarily finance the repurchase of
Capital shares. Interest is charged to each participating Portfolio based on
its borrowings at a rate per annum equal to the Federal Funds rate plus 0.75%.
In addition, a commitment fee of 1/10th of 1% per annum, payable at the end of
each calendar quarter, is accrued by each participating Portfolio based on its
average daily unused portion of the line of credit. During the period ended
October 31, 1996 the Portfolios had no borrowings under the agreement.

I. OTHER: At October 31, 1996, the percentage of total shares outstanding held
by record shareholders owning 10% or greater of the aggregate total shares
outstanding for each Portfolio were:

<TABLE>
<CAPTION>
NO. OF %
STERLING PARTNERS' PORTFOLIOS SHAREHOLDERS OWNERSHIP
- ----------------------------- ------------ ---------
<S> <C> <C>
Equity................................................... 1 11.9%
Short-Term Fixed Income.................................. 1 11.7
</TABLE>

35
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
UAM Funds, Inc. and Shareholders of
Sterling Partners' Balanced Portfolio
Sterling Partners' Equity Portfolio
Sterling Partners' Short-Term Fixed Income Portfolio

In our opinion, the accompanying statement of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of the Sterling
Partners' Balanced Portfolio, Sterling Partners' Equity Portfolio, and
Sterling Partners' Short-Term Fixed Income Portfolio (the "Portfolios").
Portfolios of the UAM Funds, Inc., at October 31, 1996, and the results of
each of their operations, the changes in each of their 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 Portfolios' 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, 1996 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP

Boston, Massachusetts
December 9, 1996

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

FEDERAL INCOME TAX INFORMATION (UNAUDITED):

The Sterling Partners' Balanced and Sterling Partners' Equity Portfolios
hereby designates $1,635,000 and $1,095,000, respectively, as a long-term
capital gain dividend for the purpose of the dividend paid deduction on its
federal income tax return.

For the year ended October 31, 1996, the percentage of dividends that qualify
for the 70% dividend received deduction for corporate shareholders for the
Sterling Partners' Balanced and Sterling Partners' Equity Portfolios is 14.6%
and 34.1%, respectively.

36
<PAGE>

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

UAM FUNDS
TS&W PORTFOLIOS

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

OFFICERS AND DIRECTORS

Norton H. Reamer William H. Park
Director, President Vice President
and Chairman

John T. Bennett, Jr. Michael E. DeFao
Director Secretary

Philip D. English Karl O. Hartmann
Director Assistant Secretary

William A. Humenuk Gary L. French
Director Treasurer

Peter M. Whitman, Jr. Robert R. Flaherty
Director Assistant Treasurer

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

INVESTMENT ADVISER
Thompson, Siegel & Walmsley, Inc.
5000 Monument Avenue
Richmond, VA 23230-0883