SMITH BREEDEN SERIES FUND, N-30D, 1997-11-21

SMITH BREEDEN SERIES FUND
N-30D, 1997-11-21

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<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT SECURITY VALUE
- --------------- -------- ------------
<C> <S> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 97.93%
FEDERAL HOME LOAN MORTGAGE CORP. -- 25.05% *
FHLMC GOLD:
$16,750,000 7.50%, due date to be announced.......................................................... $ 17,096,992
180,622 8.00%, due 5/01/25....................................................................... 186,940
8,194,327 8.50%, due 5/01/25 to 12/01/25........................................................... 8,585,978
------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP.
(COST $25,585,820)..................................................................... 25,869,910
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 0.43% *
FNMA INTEREST ONLY **:
1,495,854 9.00%, due 7/25/21....................................................................... 439,099
------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(COST $165,646)........................................................................ 439,099
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 72.08% *.....................................
GNMA ARM:
25,596,477 5.00%, due 1/20/27 to 9/20/27............................................................ 25,431,180
42,885,307 5.50%, 2/20/27 to 9/20/27................................................................ 42,824,134
645,226 7.00%, due 3/20/21....................................................................... 666,012
2,633,367 7.125%, due 7/20/17 to 9/20/22........................................................... 2,717,311
1,461,889 7.375%, due 5/20/22 to 4/01/24........................................................... 1,506,257
GNMA:
1,169,913 9.50%, due 7/15/09 to 4/15/25............................................................ 1,265,674
------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(COST $73,747,542)..................................................................... 74,410,568
------------
U.S. GOVERNMENT OBLIGATIONS -- 0.37%
U.S. TREASURY BILL ***
400,000 5.51%, due 5/29/97....................................................................... 386,430
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $385,355)........................................ 386,430
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(COST $99,884,363)..................................................................... 101,106,007
------------

<CAPTION>
NOTIONAL AMOUNT THREE-MONTH LIBOR INTEREST RATE SWAP CONTRACTS -- (0.13)%
- ---------------
<C> <S> <C>
$20,000,000 Contract dated 6/22/93 with Prudential Global Funding,
Expires 6/22/98, pay rate 5.458%......................................................... 78,261
20,000,000 Contract dated 8/31/93 with Salomon Swapco,
Expires 8/30/00, pay rate 5.34%.......................................................... 431,295
20,000,000 Contract dated 5/15/95 with Salomon Swapco,
Expires 5/15/05, pay rate 6.951%......................................................... (646,767)
------------
TOTAL THREE-MO. LIBOR INTEREST RATE SWAP CONTRACTS....................................... (137,211)
------------
THREE-MONTH LIBOR INTEREST RATE CAP CONTRACTS -- 0.58%
50,000,000 Contract with Salomon Swapco, expires 4/23/03,
Strike rate 7.50%........................................................................ 597,000
------------
TOTAL THREE-MO. LIBOR INTEREST RATE CAP CONTRACTS
(COST $1,565,832)...................................................................... 597,000
------------
</TABLE>

<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
SCHEDULE OF INVESTMENTS (CONTINUED) (UNAUDITED) SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
CONTRACTS SECURITY VALUE
- --------------- -------- ------------
<C> <S> <C>
OPTION CONTRACTS -- 0.05%
60 Call on 10 Year US Treasury Note futures, expires 12/97, strike price $110............... $ 26,250
72 Call on 10 Year US Treasury Note futures, expires 12/97, strike price $112............... 13,500
40 Put on 10 Year US Treasury Note futures, expires 12/97, strike price $106................ 1,250
80 Put on 10 Year US Treasury Note futures, expires 12/97, strike price $107................ 6,250
------------
TOTAL OPTION CONTRACTS (COST $84,885).................................................... 47,250
------------
TOTAL INVESTMENTS -- 98.43% (COST $101,535,080).......................................... 101,613,046
------------

<CAPTION>
FACE AMOUNT REPURCHASE AGREEMENTS -- 5.81%:
- ---------------
<C> <S> <C>
$ 6,000,000 Morgan Stanley 5.58 due 10/01/97 dated 9/24/97........................................... 6,000,000
------------
TOTAL REPURCHASE AGREEMENTS (COST $6,000,000)............................................ 6,000,000
------------
SHORT SALES -- (9.47%)
10,000,000 GNMA 6.5% due date to be announced....................................................... (9,778,125)
------------
TOTAL SHORT SALES (PROCEEDS $9,196,318).................................................. (9,778,125)
------------
CASH AND OTHER ASSETS LESS LIABILITIES -- 5.23%.......................................... 5,403,913
------------
NET ASSETS -- 100.00%.................................................................... $103,238,834
------------
------------
</TABLE>

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

* Mortgage-backed obligations are subject to principal paydowns as a result of
prepayments or refinancings of the underlying mortgage instruments. As a
result, the average life may be substantially less than the original
maturity. The interest rate shown is the rate in effect at September 30,
1997. ARMs have coupon rates which adjust periodically. The adjusted rate is
determined by adding a spread to a specified index.

** Represents an interest only stripped mortgage-backed security.

*** Security is segregated as collateral.

Portfolio Abbreviations:
ARM -- Adjustable-Rate Mortgage
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
GNMA -- Government National Mortgage Association

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

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

<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
STATEMENT OF ASSETS AND LIABILITIES
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Investments at market value (identified cost $101,535,080) (Note 1)....................................... $101,613,046
Cash...................................................................................................... 85,631
Repurchase agreement (cost $6,000,000) (Note 1)........................................................... 6,000,000
Receivables:
Subscriptions.......................................................................................... 61,658
Interest............................................................................................... 548,555
Securities sold........................................................................................ 29,311,385
Other assets.............................................................................................. 55,856
------------
TOTAL ASSETS........................................................................................... 137,676,131
------------

LIABILITIES:
Short sales at market value (Proceeds $9,196,318)......................................................... 9,778,125
Payables:
Variation margin on futures contracts (Note 2)......................................................... 38,062
Redemptions............................................................................................ 98,561
Securities purchased................................................................................... 24,348,250
Swap interest.......................................................................................... 26,913
Due to adviser (Note 3)................................................................................ 59,188
Accrued expenses....................................................................................... 88,198
------------
TOTAL LIABILITIES...................................................................................... 34,437,297
------------

NET ASSETS:
(Applicable to outstanding shares of 10,442,306 unlimited number of shares of beneficial interest
authorized; no stated par)............................................................................. $103,238,834
------------
------------
Net asset value, offering price and redemption price per share ($103,238,834410,442,306).................. $ 9.89
------------
------------

SOURCE OF NET ASSETS:
Paid in capital........................................................................................... $108,038,150
Overdistributed net investment income..................................................................... (573,182)
Accumulated net realized loss on investments.............................................................. (3,991,764)
Net unrealized depreciation of investments, interest rate swaps, short sales and futures contracts........ (234,370)
------------
NET ASSETS............................................................................................. $103,238,834
------------
------------
</TABLE>

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

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

<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest and discount earned, net of premium amortization and interest expense (Note 1)..................... $ 3,500,534

EXPENSES:
Advisory fees (Note 3)...................................................................................... 388,801
Accounting and pricing services fees........................................................................ 25,261
Custodian fees.............................................................................................. 17,785
Audit and tax preparation fees.............................................................................. 14,400
Legal fees.................................................................................................. 22,895
Transfer agent fees......................................................................................... 13,989
Registration fees........................................................................................... 10,437
Trustees fees and expenses.................................................................................. 34,400
Insurance................................................................................................... 8,614
Other....................................................................................................... 19,257
-----------
TOTAL EXPENSES BEFORE REIMBURSEMENT...................................................................... 555,839
EXPENSES REIMBURSED BY ADVISER (NOTE 3).................................................................. (122,584)
-----------
NET EXPENSES............................................................................................. 433,255
-----------
NET INVESTMENT INCOME.................................................................................... 3,067,279
-----------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments............................................................................ 1,597,495
Change in unrealized appreciation (depreciation) of investments, interest rate swaps, caps, and futures
contracts................................................................................................ (1,054,272)
-----------
Net realized and unrealized gain on investments............................................................. 543,223
-----------
Net increase in net assets resulting from operations........................................................ $ 3,610,502
-----------
-----------
</TABLE>

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

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

<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 MARCH 31, 1997
(UNAUDITED) (AUDITED)
------------------ --------------
<S> <C> <C>
OPERATIONS:
Net investment income............................................................... $ 3,067,279 $ 10,225,930
Net realized gain on investments.................................................... 1,597,495 846,686
Change in unrealized appreciation (depreciation) of investments, interest rate
swaps, caps and futures contracts................................................ (1,054,272) 1,887,652
------------------ --------------
Net increase in net assets resulting from operations................................ 3,610,502 12,960,268
------------------ --------------

DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income................................................ (2,963,547) (10,225,930)
Dividends in excess of net investment income........................................ -- (929,596)
------------------ --------------
Total distributions................................................................. (2,963,547) (11,155,526)
------------------ --------------

CAPITAL SHARE TRANSACTIONS:
Shares sold......................................................................... 18,539,448 59,328,830
Shares issued on reinvestment of distributions...................................... 1,415,524 2,816,807
Shares redeemed..................................................................... (36,351,702) (166,786,906)
------------------ --------------
Decrease in net assets resulting from capital
share transactions (a)........................................................... (16,396,730) (104,641,269)
------------------ --------------
TOTAL DECREASE IN NET ASSETS..................................................... (15,749,775) (102,836,527)

NET ASSETS:
Beginning of period................................................................. 118,988,609 221,825,136
------------------ --------------
End of period....................................................................... $103,238,834 $ 118,988,609
------------------ --------------
------------------ --------------
(a) Transactions in capital shares were as follows:
Shares sold...................................................................... 1,882,124 6,065,723
Shares issued on reinvestment of distributions................................... 144,195 289,222
Shares redeemed.................................................................. (3,690,432) (17,017,982)
------------------ --------------
Net decrease..................................................................... (1,664,113) (10,663,037)
Beginning balance................................................................ 12,106,419 22,769,456
------------------ --------------
Ending balance................................................................... 10,442,306 12,106,419
------------------ --------------
------------------ --------------
</TABLE>

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

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

<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The following average per share data, ratios and supplemental information have
been derived from information provided in the financial statements.

<TABLE>
<CAPTION>
FOR THE
PERIOD
SIX MONTHS MARCH 31,
ENDED YEAR YEAR YEAR YEAR 1992 (1)
SEPTEMBER 30, ENDED ENDED ENDED ENDED TO
1997 MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
(UNAUDITED) 1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................ $ 9.83 $ 9.74 $ 9.90 $ 9.90 $ 10.00 $ 10.00
------------- ------------ ------------ ------------ ------------ -------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... 0.261 0.476 0.621 0.628 0.432 0.552
Net realized and
unrealized gain (loss)
on investments......... 0.059 0.146 (0.148) -- (0.070) 0.002
------------- ------------ ------------ ------------ ------------ -------------
Total from investment
operations........... 0.320 0.622 0.473 0.628 0.362 0.554
------------- ------------ ------------ ------------ ------------ -------------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.260 ) (0.476) (0.621) (0.628) (0.462) (0.554)
Dividends in excess of
investment income...... -- (0.056) (0.012) -- -- --
------------- ------------ ------------ ------------ ------------ -------------
Total distributions.... (0.260 ) (0.532) (0.633) (0.628) (0.462) (0.554)
------------- ------------ ------------ ------------ ------------ -------------
NET ASSET VALUE, END OF
PERIOD................... $ 9.89 $ 9.83 $ 9.74 $ 9.90 $ 9.90 $ 10.00
------------- ------------ ------------ ------------ ------------ -------------
TOTAL RETURN............... 3.30% 6.57% 4.95% 6.58% 3.67% 5.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period................. $103,238,834 $118,988,609 $221,825,136 $218,431,665 $218,167,491 $ 48,531,206
Ratio of expenses to
average net assets
(2).................... 0.78%* 0.78% 0.78% 0.78% 0.78% 0.78%
Ratio of net investment
income to average net
assets................. 5.62%* 5.04% 6.29% 6.33% 4.17% 4.53%
Portfolio turnover
rate................... 306% 556% 225% 47% 112% 3%
Ratio of expenses to
average net assets
before reimbursement of
expenses by the Adviser
(2).................... 1.01%* 0.93% 0.93% 0.92% 1.00% 2.58%
Ratio of net investment
income to average net
assets before
reimbursement of
expenses by the
Adviser................ 5.39%* 4.90% 6.13% 6.18% 3.95% 2.73%
</TABLE>

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

(1) Commencement of operations.

(2) Through March 31, 1995, expense ratios include both the direct expenses of
the Short Duration U.S. Government Fund, and the indirect expenses incurred
through the Fund's investment in the Institutional Short Duration U.S.
Government Fund (Note 1).

* Annualized

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

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

<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

The Smith Breeden Series Fund (the "Trust") is an open-end, diversified
management investment company registered under the Investment Company Act of
1940, as amended. The Fund offers shares in two series: the Smith Breeden Short
Duration U.S. Government Fund (the "Short Fund" or "Fund") and the Smith Breeden
Intermediate Duration U.S. Government Fund. Prior to April 1, 1995, the Short
Fund sought to achieve its investment objective by investing all of its assets
in the Smith Breeden Institutional Short Duration U.S. Government Fund (the
"Institutional Fund"), an open-end, diversified management investment company
having the same investment objective as the Fund. However, at the close of
business on March 31, 1995, pursuant to a plan of liquidation adopted March 1,
1995 by the Board of Trustees of the Institutional Short Fund, and approved by
the Board of Trustees of the Short Fund, the Short Fund redeemed in-kind its
shares of the Institutional Fund. The assets of the Institutional Fund were
transferred in proportion to the Short Fund's ownership of the Institutional
Fund in cancellation of its shares.

A. SECURITY VALUATION: Securities are valued at current market value provided by
a pricing service or by a bank or broker/dealer experienced in such matters,
when over-the-counter market quotations are readily available. Securities and
other assets for which market prices are not readily available are valued at
fair market value as determined in accordance with the procedures approved by
the Board of Trustees.

B. REPURCHASE AGREEMENTS: Repurchase agreements may be entered into with member
banks of the Federal Reserve System having total assets in excess of $500
million and securities dealers, provided that such banks or dealers meet the
credit guidelines of the Fund's Board of Trustees. In a repurchase agreement,
securities are acquired from a third party with the commitment that they will be
repurchased by the seller at a fixed price on an agreed upon date. The custodian
maintains control or custody of securities collateralizing repurchase agreements
until maturity of the repurchase agreements. The value of the collateral will be
monitored daily, and if necessary, additional collateral is received to ensure
that the market value of the underlying assets remains sufficient to protect the
Fund in the event of the seller's default. However, in the event of default or
bankruptcy of the seller, the right to the collateral may be subject to legal
proceedings.

C. REVERSE REPURCHASE AGREEMENTS: A reverse repurchase agreement involves the
sale of portfolio assets concurrently with an agreement to repurchase the same
assets at a later date at a fixed price. Assets will be maintained in a
segregated account with the custodian, which will be marked to market daily,
consisting of cash, U.S. Government securities or other liquid high-grade debt
obligations equal in value to the obligations under the reverse repurchase
agreements. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, the use of the proceeds
under the agreement may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the obligation to
repurchase the securities.

D. DOLLAR ROLL AGREEMENTS: A dollar roll is an agreement to sell securities for
delivery in the current month and simultaneously contract to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, principal and interest paid on these securities
are not received. Compensation under the dollar roll agreement is represented by
the difference between the current sales price and the forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale.

E. DISTRIBUTIONS AND TAXES: Dividends to shareholders are recorded on the
ex-dividend date. The Short Fund intends to continue to qualify for and elect
the special tax treatment afforded regulated investment companies under
Subchapter M of the Internal Revenue Code, thereby relieving the Fund of Federal
income taxes. To so qualify, the Fund intends to distribute substantially all of
its net investment income and net realized capital gains, if any, less any
available capital loss carryforward. As of March 31, 1997, the Fund had a net
capital loss carryforward of $3,170,133 with $589 expiring on March 31, 2001,
$75,461 expiring on March 31, 2002, $905,312 expiring on March 31, 2003,
$1,359,214 expiring on March 31, 2004, and $829,557 expiring on March 31, 2005.

F. DETERMINATION OF GAINS OR LOSSES ON SALES OF SECURITIES: Gains or losses on
the sale of securities are calculated for accounting and tax purposes on the
identified cost basis.

<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
G. SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Interest income is accrued
daily on both long-term bonds and short-term investments. Interest income also
includes net amortization from the purchase of fixed-income securities.
Discounts and premiums on securities purchased are amortized over the life of
the respective securities. Transactions are recorded on the first business day
following the trade date. Realized gains and losses from security transactions
are determined and accounted for on the basis of identified cost.

2. FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING:
Interest rate futures, swap, cap and option contracts are used for risk
management purposes in order to reduce fluctuations in net asset value relative
to the Fund's targeted option-adjusted duration.

A. FUTURES CONTRACTS: Upon entering into a futures contract, either cash or
securities in an amount (initial margin) equal to a certain percentage of the
contract value is required to be deposited in a segregated account. Subsequent
payments (variation margin) are made or received each day. The variation margin
payments are equal to the daily changes in the contract value and are recorded
as unrealized gains or losses. A realized gain or loss is recognized when the
contract is closed or expires equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.

The Short Fund had the following open futures contracts as of September 30, 1997

<TABLE>
<CAPTION>
NOTIONAL EXPIRATION UNREALIZED
TYPE AMOUNT POSITION MONTH GAIN/(LOSS)
----- ------------ --------- --------------- -----------
<S> <C> <C> <C> <C>
5 Year Treasury...................................... $ (3,400,000) Short December, 1997 $ (23,059)
10 Year Treasury..................................... 20,500,000 Long December, 1997 225,170
3 Month Eurodollar................................... 115,000,000 Long December, 1997 48,645
3 Month Eurodollar................................... (70,000,000) Short March, 1998 (89,565)
3 Month Eurodollar................................... (60,000,000) Short March, 1999 (91,270)
3 Month Eurodollar................................... 50,000,000 Long March, 2000 99,775
3 Month Eurodollar................................... 50,000,000 Long March, 2001 99,775
-----------
Total $ 269,471
-----------
-----------
</TABLE>

Futures transactions involve costs and may result in losses. The effective use
of strategies using futures depends on the Fund's ability to terminate futures
positions at times when the Fund's investment adviser deems it desirable to do
so. The use of futures also involves the risk of imperfect correlation among
movements in the values of the securities underlying the futures purchased and
sold by the Fund, of the futures contract itself, and of the securities which
are the subject of a hedge.

The aggregate market value of investments to cover margin requirements for the
open positions was $386,430.

B. INTEREST RATE SWAP CONTRACTS: The Fund may enter into over-the-counter
transactions swapping interest rates. Interest rate swaps represent an agreement
between counterparties to exchange cash flows based on the difference between
two interest rates, applied to a notional principal amount for a specified
period. The most common type of interest rate swap involves the exchange of
fixed-rate cash flows for variable-rate cash flows. Interest rate swaps do not
involve the exchange of principal between the parties. The Fund's interest rate
swap contracts have been entered into on a net basis, i.e., the two payment
streams are netted out, with the Short Fund receiving or paying, as the case may
be, only the net amount of the two payments. As of September 30, 1997, the Short
Fund had three open interest rate swap contracts. In each of the contracts, the
Short Fund has agreed to pay a fixed rate and receive a floating rate. The
floating rate on the contracts resets quarterly and is the three month London
Interbank Offered Rate ("LIBOR"). Interest rate swap contracts will not be
entered into unless the unsecured commercial paper, unsecured senior debt or the
claims-paying ability of the other party thereto is rated either AA or A-1 or
better by Standard & Poor's Corporation or Aa or P-1 or better by Moody's
Investors Service,

<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------

2. FINANCIAL INSTRUMENTS -- CONTINUED
Inc. (or is otherwise acceptable to either agency) at the time of entering into
such transaction. If there is a default by the other party to the swap
transaction, the Short Fund will be limited to contractual remedies pursuant to
the agreements related to the transaction. There is no assurance that interest
rate swap contract counterparties will be able to meet their obligations
pursuant to the swap contracts or that, in the event of default, the Short Fund
will succeed in pursuing contractual remedies. The Short Fund thus assumes the
risk that it may be delayed in, or prevented from, obtaining payments owed to it
pursuant to the swap contracts.

The Short Fund's interest payable on the interest rate swap contracts as of
September 30, 1997 was $26,913, and swap contract interest receivable was
$10,384. No collateral is required to be maintained on these contracts.

C. INTEREST RATE CAP CONTRACTS: The purchase of an interest rate cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate caps. The Short Fund had one interest
rate cap contract open at September 30, 1997.

3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES

Smith Breeden Associates, Inc. (the "Adviser"), a registered investment adviser,
provides the Short Fund with investment management services. As compensation for
these services, the Short Fund pays the Adviser a fee computed daily and payable
monthly at an annual rate equal to 0.70% of the Fund's average daily net asset
value.

The Adviser has voluntarily agreed to reimburse normal business expenses of the
Short Fund through August 1, 1998 so that total direct and indirect operating
expenses do not exceed 0.78% of its average net assets. This voluntary agreement
may be terminated at any time by the Adviser in its sole discretion except that
the Adviser has agreed to limit expenses of the Fund to 0.78% through August 1,
1998. For the six-months ended September 30, 1997, the Adviser received $388,801
in fees and reimbursed the Short Fund $122,584.

Pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("1940 Act"),
the Fund adopted, effective August 1, 1994, a Distribution and Services Plan
(the "Plan"). The purpose of the Plan is to permit the Adviser to compensate
investment dealers and other persons involved in servicing shareholder accounts
for services provided and expenses incurred in promoting the sale of shares of
the Short Fund, reducing redemptions, or otherwise maintaining or improving
services provided to shareholders by such dealers or other persons. The Plan
provides for payments by the Adviser, out of the advisory fee paid to it by the
Short Fund, to dealers and other persons at the annual rate of up to 0.25% of
the Short Fund's average net assets, subject to the authority of the Trustees of
the Short Fund, to reduce the amount of payments permitted under the Plan or to
suspend the Plan for such periods as they may determine. Subject to these
limitations, the amount of such payments and the purposes for which they are
made shall be determined by the Adviser.

Certain officers and trustees of the Fund are also officers and directors of the
Adviser.

4. INVESTMENT TRANSACTIONS

During the six-months ended September 30, 1997, purchases and proceeds from
sales of securities, other than short-term investments, aggregated $341,692,189
and $339,717,944 respectively for the Fund. The cost of the Short Fund's
securities for federal income tax purposes at September 30, 1997, is
$101,535,080. Net unrealized depreciation of investments, short sales and
futures contracts consists of:

<TABLE>
<S> <C>
Gross unrealized appreciation................................. $ 2,254,120
Gross unrealized depreciation................................. (2,488,490)
-----------
Net unrealized depreciation................................... $ (234,370)
-----------
-----------
</TABLE>

<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT SECURITY VALUE
- ----------- -------- -----------
<C> <S> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 90.42%
FEDERAL HOME LOAN MORTGAGE CORP. -- 32.77%*
FHLMC GOLD:
$ 2,000,000 7.50%, due date to be announced.............................................................. $ 2,045,000
10,972,600 7.50%, due 7/01/27 to 9/01/27................................................................ 11,173,938
1,500,000 7.50%, due date to be announced.............................................................. 1,537,969
595,203 8.00%, due 10/19/24.......................................................................... 616,978
-----------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP. (COST $15,167,806).................................... 15,373,885
-----------
FEDERAL NATIONAL MORTGAGE ASSOC. -- 24.57%*
FNMA:
3,600,000 7.00%, due date to be announced.............................................................. 3,581,577
3,123,347 7.00%, due 8/1/23 to 6/01/24................................................................. 3,130,833
3,500,000 7.50%, due date to be announced.............................................................. 3,552,500
1,169,792 9.50%, due 7/01/16 to 5/01/22................................................................ 1,260,569
-----------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOC. (COST $11,205,712).................................... 11,525,479
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOC. -- 32.94%*
GNMA:
57,779 7.00%, due 3/15/26........................................................................... 57,862
1,354,463 8.00%, due 11/15/06 to 12/15/26.............................................................. 1,413,339
GNMA ARM:
8,783,602 5.50%, due 11/1/26 to 9/20/27................................................................ 8,807,538
1,837,315 6.00%, due 1/20/27........................................................................... 1,866,191
561,519 6.875%, due 11/20/17 to 12/20/17............................................................. 579,436
1,018,469 7.125%, due 8/20/17 to 8/20/18............................................................... 1,051,893
1,623,045 7.375%, due 6/20/16 to 4/20/22............................................................... 1,675,711
-----------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOC. (COST $15,197,385)................................. 15,451,970
-----------
UNITED STATES TREASURY BILLS -- 0.14%**
70,000 5.51%, due 5/28/98***........................................................................ 67,625
-----------
TOTAL UNITED STATES TREASURY BILLS (COST $67,437)............................................ 67,625
-----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (COST $41,638,340)................................ 42,418,959
-----------
TOTAL INVESTMENTS (COST $41,638,340) -- 90.42%............................................... 42,418,959
-----------

<CAPTION>
REPURCHASE AGREEMENTS -- 16.41%:
<C> <S> <C>
7,700,000 Morgan Stanley, 5.58%, due 10/1/97 dated 9/24/97............................................. 7,700,000
-----------
TOTAL REPURCHASE AGREEMENTS (COST $7,700,000)................................................ 7,700,000
-----------
SHORT SALES -- (3.28%)
1,500,000 FHLMC GOLD 8.00%, due date to be announced................................................... (1,537,969)
-----------
TOTAL SHORT SALES (PROCEEDS $1,537,969)...................................................... (1,537,969)
-----------
CASH AND OTHER ASSETS LESS LIABILITIES -- (3.55%)............................................ (1,666,976)
-----------
NET ASSETS -- 100.00%........................................................................ $46,914,014
-----------
-----------
</TABLE>

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

** The interest rate shown is the discount rate paid at the time of purchase by
the Fund.

*** Security is segregated as collateral.

Portfolio Abbreviations:
ARM -- Adjustable-Rate Mortgage
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
GNMA -- Government National Mortgage Association
- --------------------------------------------------------------------------------

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

<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Investments at market value (identified cost $41,638,340) (Note 1).......................................... $42,418,959
Repurchase agreement (cost $7,700,000) (Note 1)............................................................. 7,700,000
Cash........................................................................................................ 1,115,801
Receivables:
Subscriptions............................................................................................ 99,338
Interest................................................................................................. 254,582
Securities sold.......................................................................................... 7,742,344
Other assets................................................................................................ 18,907
-----------
TOTAL ASSETS............................................................................................. 59,349,931
-----------

LIABILITIES:
Short sales at market value (Proceeds $1,537,969)........................................................... 1,537,969
Payables:
Variation margin on futures contracts (Note 2)........................................................... 18,017
Securities purchased..................................................................................... 10,707,900
Redemptions.............................................................................................. 1,025
Distributions............................................................................................ 129,867
Due to advisor (Note 3).................................................................................. 26,514
Accrued expenses............................................................................................ 14,625
-----------
TOTAL LIABILITIES........................................................................................ 12,435,917
-----------

NET ASSETS:
(Applicable to outstanding shares of 4,662,311; unlimited number of shares of beneficial interest
authorized; no stated par)............................................................................... $46,914,014
-----------
-----------
Net asset value, offering price and redemption price per share ($46,914,01444,662,311)...................... $ 10.06
-----------
-----------

SOURCE OF NET ASSETS:
Paid in capital............................................................................................. $46,377,488
Overdistributed net investment income....................................................................... (130,006)
Accumulated net realized loss on investments................................................................ (171,473)
Net unrealized appreciation of investments.................................................................. 838,005
-----------
NET ASSETS............................................................................................... $46,914,014
-----------
-----------
</TABLE>

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

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

<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest and discount earned, net of premium amortization (Note 1)........................................... $1,350,905

EXPENSES:
Advisory fees (Note 3)....................................................................................... 145,889
Accounting and pricing services fees......................................................................... 16,913
Custodian fees............................................................................................... 6,276
Audit & tax preparation fees................................................................................. 3,270
Transfer agent fees.......................................................................................... 12,447
Registration fees............................................................................................ 8,333
Trustees fees and expenses................................................................................... 8,158
Insurance.................................................................................................... 4,355
Other........................................................................................................ 9,478
----------
TOTAL EXPENSES BEFORE REIMBURSEMENT....................................................................... 215,119
EXPENSES REIMBURSED BY ADVISER (NOTE 3)................................................................... (31,716)
----------
NET EXPENSES.............................................................................................. 183,403
----------
NET INVESTMENT INCOME..................................................................................... 1,167,502
----------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments............................................................................. 659,229
Change in unrealized appreciation of investments............................................................. 701,559
----------
Net realized and unrealized gain on investments.............................................................. 1,360,788
----------
Net increase in net assets resulting from operations......................................................... $2,528,290
----------
----------
</TABLE>

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

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

<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 MARCH 31, 1997
(UNAUDITED) (AUDITED)
------------------ --------------
<S> <C> <C>
OPERATIONS:
Net investment income................................................................ $ 1,167,502 $ 2,303,301
Net realized (loss) gain on investments.............................................. 659,229 (82,705)
Change in unrealized appreciation (depreciation) of investments...................... 701,559 (93,993)
------------------ --------------
Net increase in net assets resulting from operations................................. 2,528,290 2,126,603
------------------ --------------

DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income................................................. (1,167,502) (2,260,030)
Dividends in excess of net investment income......................................... (5,696) --
Distributions from net realized gains on investments................................. -- (943,662)
------------------ --------------
Total distributions.................................................................. (1,173,198) (3,203,692)
------------------ --------------

CAPITAL SHARE TRANSACTIONS:
Shares sold.......................................................................... 8,159,400 1,730,791
Shares issued on reinvestment of distributions....................................... 419,570 935,335
Shares redeemed...................................................................... (755,573) (300,452)
------------------ --------------
Increase in net assets resulting from capital share transactions (a)................. 7,823,397 2,365,674
------------------ --------------
TOTAL INCREASE IN NET ASSETS...................................................... 9,178,489 1,288,585

NET ASSETS:
Beginning of period.................................................................. 37,735,525 36,446,940
------------------ --------------
End of period........................................................................ $ 46,914,014 $ 37,735,525
------------------ --------------
------------------ --------------
(a) Transactions in capital shares were as follows:
Shares sold....................................................................... 817,963 174,344
Shares issued on reinvestment of distributions.................................... 42,086 94,439
Shares redeemed................................................................... (75,748) (30,101)
------------------ --------------
Net increase...................................................................... 784,301 238,682
Beginning balance................................................................. 3,878,010 3,639,328
------------------ --------------
Ending balance.................................................................... 4,662,311 3,878,010
------------------ --------------
------------------ --------------
</TABLE>

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

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

<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The following average per share data, ratios and supplemental information
have been derived from information provided in the financial statements.

<TABLE>
<CAPTION>
SIX MONTHS FOR THE PERIOD
ENDED YEAR YEAR YEAR YEAR MARCH 31,
SEPTEMBER 30, ENDED ENDED ENDED ENDED 1992 (1)
1997 MARCH 31, MARCH 31, MARCH 31, MARCH 31, TO MARCH 31,
(UNAUDITED) 1997 1996 1995 1994 1993
------------- ----------- ----------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................ $ 9.73 $ 10.01 $ 9.83 $ 10.01 $ 10.62 $ 10.00
------------- ----------- ----------- ----------- ---------- --------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... 0.284 0.599 0.660 0.664 1.050 0.826
Net realized and unrealized
(loss) gain on investments.. 0.328 (0.024) 0.277 (0.049) (0.601) 0.621
------------- ----------- ----------- ----------- ---------- --------------
Total from investment
operations................ 0.612 0.575 0.937 0.615 0.449 1.447
------------- ----------- ----------- ----------- ---------- --------------
LESS DISTRIBUTIONS
Dividends from net investment
income...................... (0.280) (0.604) (0.656) (0.664) (1.044) (0.826)
Dividends in excess of net
investment income........... -- -- -- (0.108) -- --
Distributions from net
realized gains on
investments................. -- 0.000 (0.101) -- (0.015) --
Distributions in excess of net
realized gains on
investments................. -- -- -- (0.022) -- --
------------- ----------- ----------- ----------- ---------- --------------
Total distributions......... (0.280) (0.604) (0.757) (0.794) (1.059) (0.826)
------------- ----------- ----------- ----------- ---------- --------------
NET ASSET VALUE, END OF
PERIOD........................ $ 10.06 $ 9.73 $ 10.01 $ 9.83 $ 10.01 $ 10.62
------------- ----------- ----------- ----------- ---------- --------------
TOTAL RETURN.................... 6.33% 5.92% 9.69% 6.10% 4.11% 14.93%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period..... $ 46,914,014 $37,735,525 $36,446,940 $34,797,496 $6,779,666 $ 2,923,913
Ratio of expenses to average
net assets (2).............. 0.88%* 0.88% 0.90% 0.90% 0.90% 0.82%
Ratio of net investment income
to average net assets....... 5.69%* 6.19% 6.49% 6.20% 7.74% 8.18%
Portfolio turnover rate....... 162% 409% 193% 557% 84% 42%
Ratio of expenses to average
net assets before
reimbursement of expenses by
the Adviser................. 1.04%* 1.16% 1.14% 2.33% 2.34% 17.52%
Ratio of net investment income
to average net assets before
reimbursement of expenses by
the Adviser................. 5.53%* 5.92% 6.26% 4.77% 6.30% (8.52%)
</TABLE>

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

(1) Commencement of operations.

(2) Through August 1, 1994, expense ratios include both the direct expenses of
the Intermediate Duration U.S. Government Fund, and the indirect expenses
incurred through the Fund's investment in the Institutional Intermediate
Duration U.S. Government Fund (Note 5).

* Annualized

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

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

<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

A. SECURITY VALUATION: Portfolio securities are valued at current market value
provided by a pricing service or by a bank or broker/dealer experienced in such
matters, when over-the-counter market quotations are readily available.
Securities and other assets for which market prices are not readily available
are valued at fair market value as determined in accordance with procedures
approved by the Board of Trustees.

B. DISTRIBUTIONS AND TAXES: Dividends to shareholders are recorded on the
ex-dividend date. The Intermediate Fund intends to continue to qualify for and
elect the special tax treatment afforded regulated investment companies under
Subchapter M of the Internal Revenue Code, thereby relieving the Fund of Federal
income taxes. To so qualify, the Fund intends to distribute substantially all of
its net investment income and net realized capital gains, if any, less any
available capital loss carryforward. As of March 31, 1997, the Fund had no
capital loss carryforward.

C. REPURCHASE AGREEMENTS: The Intermediate Fund may enter into repurchase
agreements with member banks of the Federal Reserve System having total assets
in excess of $500 million and securities dealers, provided that such banks or
dealers meet the credit guidelines of the Fund's Board of Trustees. In a
repurchase agreement, the Fund acquires securities from a third party with the
commitment that they will be repurchased by the seller at a fixed price on an
agreed upon date. The Intermediate Fund's custodian maintains control or custody
of these securities collateralizing the repurchase agreements until maturity of
the repurchase agreements. The value of the collateral is monitored daily, and
if necessary, additional collateral is received to ensure that the market value
of the underlying assets remains sufficient to protect the Fund in the event of
the seller's default. However, in the event of default or bankruptcy of the
seller, the Fund's right to the collateral may be subject to legal proceedings.

D. REVERSE REPURCHASE AGREEMENTS: A reverse repurchase agreement involves the
sale by the Intermediate Fund of portfolio assets concurrently with an agreement
by the Fund to repurchase the same assets at a later date at a fixed price. The
Fund will maintain a segregated account with its custodian, which will be marked
to market daily, consisting of cash, U.S. Government securities or other liquid
high-grade debt obligations equal in value to its obligations under reverse
repurchase agreements. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Fund's use
of the proceeds of the agreement may be restricted pending a determination by
the other party, or its trustee or receiver, whether to enforce the Fund's
obligation to repurchase the securities.

E. DOLLAR ROLL AGREEMENTS: The Intermediate Fund may enter into dollar rolls in
which the Fund sells securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type and
coupon) securities on a specified future date. During the roll period, the Fund
foregoes principal and interest paid on these securities. The Fund is
compensated by the difference between the current sales price and the forward
price for the future purchase (often referred to as the "drop") as well as by
the interest earned on the cash proceeds of the initial sale.

F. DETERMINATION OF GAINS OR LOSSES ON SALES OF SECURITIES: Gains or losses on
the sale of securities are calculated for accounting and tax purposes on the
identified cost basis.

G. SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Interest income is accrued
daily on both long-term bonds and short-term investments. Interest income also
includes net amortization from the purchase of fixed-income securities.
Discounts and premiums on securities purchased are amortized over the life of
the respective securities. Transactions are recorded on the first business day
following the trade date. Realized gains and losses from security transactions
are determined and accounted for on the basis of identified cost.

<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------

2. FINANCIAL INSTRUMENTS

A. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN
TRADING: The Intermediate Fund uses interest rate futures contracts for risk
management purposes in order to reduce fluctuation of the Fund's net asset value
relative to its targeted option-adjusted duration. Upon entering into a futures
contract, the Fund is required to deposit either cash or securities in an amount
(initial margin) equal to a certain percentage of the contract value. Subsequent
payments (variation margin) are made or received by the Fund each day. The
variation margin payments are equal to the daily changes in the contract value
and are recorded as unrealized gains or losses. The Fund recognizes a realized
gain or loss when the contract is closed or expires equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed.

The Intermediate Fund had the following open futures contracts as of September
30, 1997:

<TABLE>
<CAPTION>
NOTIONAL EXPIRATION UNREALIZED
TYPE AMOUNT POSITION MONTH GAIN/(LOSS)
----- ---------- --------- --------------- -----------
<S> <C> <C> <C> <C>
5 Year Treasury........................................ $ (300,000) Short December, 1997 $(2,920)
10 Year Treasury....................................... 4,800,000 Long December, 1997 52,846
10 Year Treasury....................................... 900,000 Long March, 1998 7,460
-----------
Total $57,386
-----------
-----------
</TABLE>

Futures transactions involve costs and may result in losses. The effective use
of futures strategies depends on the Fund's ability to terminate futures
positions at times when the Fund's investment adviser deems it desirable to do
so. The use of futures also involves the risk of imperfect correlation among
movements in the values of the securities underlying the futures purchased and
sold by the Fund, of the futures contract itself, and of the securities which
are the subject of a hedge.

The aggregate market value of investments pledged to cover margin requirements
for the open positions at September 30, 1997 was $67,625.

3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES

Smith Breeden Associates, Inc. (the "Adviser"), a registered investment adviser,
provides the Fund with investment management services. As compensation for these
services, the Intermediate Fund pays the Adviser a fee computed daily and
payable monthly, at an annual rate equal to 0.70% of the Fund's average daily
net asset value.

The Adviser has voluntarily agreed to reduce or otherwise limit other expenses
of the Intermediate Fund (excluding advisory fees and litigation,
indemnification and other extraordinary expenses) to 0.88% of the Fund's average
daily net assets. This voluntary agreement may be terminated or modified at any
time by the Adviser in its sole discretion except that the Adviser has agreed to
limit expenses of the Fund to 0.88% through August 1, 1998. For the six-months
ended September 30, 1997, the Adviser received fees of $145,889 and reimbursed
the Fund $31,716.

Effective August 1, 1994, the Fund adopted a Distribution and Services Plan (the
"Plan") pursuant to Rule 12b-1 under the 1940 Act. The purpose of the Plan is to
permit the Adviser to compensate investment dealers and other persons involved
in servicing shareholder accounts for services provided and expenses incurred in
promoting the sale of shares of the Fund, reducing redemptions, or otherwise
maintaining or improving services provided to shareholders by such dealers or
other persons. The Plan provides for payments by the Adviser, out of its
advisory fee, to dealers and other persons at the annual rate of up to 0.25% of
the Intermediate Fund's average net assets subject to the authority of the
Trustees of the Fund to reduce the amount of payments permitted under the Plan
or to suspend the Plan for such periods as they may determine. Subject to these
limitations, the amount of such payments and the purposes for which they are
made shall be determined by the Adviser.

Certain officers and trustees of the Fund are also officers and directors of the
Adviser.

4. INVESTMENT TRANSACTIONS

During the six-months ended September 30, 1997, purchases and proceeds from
sales of securities, other than short-term investments, aggregated $66,560,069
and $65,365,098, respectively. The purchases and proceeds shown above do not
include dollar roll agreements which are considered borrowings by the
Intermediate Fund. The cost of securities for federal income tax purposes is
$41,638,340. Net unrealized appreciation of investments, short sales and futures
contracts consist of:

<TABLE>
<S> <C>
Gross unrealized appreciation.................................... $840,396
Gross unrealized depreciation.................................... (2,391)
--------
Net unrealized appreciation...................................... $838,005
--------
--------
</TABLE>