SMITH BREEDEN SERIES FUND, N-30D, 1998-11-30

SMITH BREEDEN SERIES FUND
N-30D, 1998-11-30

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SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
MARKET
FACE AMOUNT SECURITY VALUE
- --------------- ------------------------------------------------------------------------------ ---------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 121.7%
FREDDIE MAC -- 31.6% (1)
FG Gold
$ 7,704,581 6.00%, due 2/1/13 to 4/1/13 .................................................. $ 7,790,730
9,801,935 6.50%, due 5/1/13 to 6/1/13 .................................................. 10,014,854
5,850,882 8.50%, due 5/1/25 to 12/1/25 ................................................. 6,095,807
------------
23,901,391
------------
FANNIE MAE -- 17.8% (1)
FN Interest only (2)
1,102,900 9.00%, due 7/25/21 ........................................................... 192,050
FN
1,372,000 6.04%, due 5/1/13 to 3/1/28 .................................................. 1,428,650
9,253,648 6.50%, due 10/1/08 ........................................................... 9,433,197
900,004 7.033%, due 6/1/07 ........................................................... 976,535
1,342,263 7.043%, due 12/1/06 .......................................................... 1,456,208
------------
13,486,640
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 72.1% (1)
GNMA ARM
28,528,466 5.0%, due 1/20/28 to 6/20/28 ................................................. 28,651,809
1,571,081 6.875%, due 3/20/21 to 4/1/24 ................................................ 1,599,538
2,779,765 7.0%, due 7/20/17 to 9/20/22 ................................................. 2,831,347
GNMA
9,938,401 7.00%, due 3/15/28 to 8/15/28 ................................................ 10,256,751
10,000,000 7.00%, due date to be announced .............................................. 10,307,813
862,295 9.50%, due 7/15/09 to 4/15/25 ................................................ 928,969
------------
54,576,227
------------
U.S. TREASURY NOTES -- 0.2%
170,000 6.375% due 5/15/99 (3) ....................................................... 171,753
------------
171,753
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(COST $90,784,234)............................................................ 92,136,011
------------
NOTIONAL
AMOUNT THREE-MONTH LIBOR INTEREST RATE SWAP CONTRACTS -- (3.0%)
-----------
20,000,000 Contract dated 8/31/93 with Salomon Swapco,
Expires 8/30/00, pay rate 5.34% .............................................. (175,645)
20,000,000 Contract dated 5/15/95 with Salomon Swapco,
Expires 5/15/05, pay rate 6.951% ............................................. (2,113,327)
------------
(2,288,972)
------------
THREE-MONTH LIBOR INTEREST RATE CAP CONTRACTS -- 0.1%
50,000,000 Contract with Salomon Swapco, expires 4/23/03, Strike rate 7.50% ............. 74,500
------------
74,500
------------
CONTRACTS OPTION CONTRACTS -- 0.0%
-----------
20 Put on 10 Year US Treasury Note Futures, expires 11/98, strike price $112..... 313
20 Put on 10 Year US Treasury Bond Futures, expires 11/98, strike price $113..... 313
------------
626
------------
TOTAL INVESTMENTS -- 118.8% (COST $92,248,850)................................ 89,922,165
------------
</TABLE>

2
<PAGE>

SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
MARKET
FACE AMOUNT SECURITY VALUE
- ---------------- ------------------------------------------------------------ ----------------
<S> <C> <C>
REVERSE REPURCHASE AGREEMENTS -- (4.6%)
$(3,500,000) Merrill Lynch 5.55% due 10/7/98 dated 9/30/98 (4) .......... $ (3,500,000)
-------------
(3,500,000)
-------------
LIABILITIES LESS CASH AND OTHER ASSETS -- (14.2%) .......... (10,741,330)
-------------
NET ASSETS -- 100.0% ....................................... $ 75,680,835
=============
</TABLE>

- ---------
(1) 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. ARMs have coupon rates that adjust periodically. The interest rate
shown is the rate in effect at September 30, 1998. The adjusted rate is
determined by adding a spread to a specified index.

(2) Represents an interest only stripped mortgage-backed security.

(3) Security is held as collateral by Carr Futures, Inc.

(4) Reverse repurchase agreement is collateralized by $3,596,998 face of GNMA
ARM 5.0% due 1/20/28

Portfolio Abbreviations:
ARM -- Adjustable-Rate Mortgage
FG -- Freddie Mac
FN -- Fannie Mae
GNMA -- Government National Mortgage Association

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>

SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)

SEPTEMBER 30, 1998

<TABLE>
<S> <C>
ASSETS
Investments at market value (identified cost $92,248,850) (Note 1)....................... $ 89,922,165
Cash .................................................................................... 174,394
Restricted cash held to cover checkwriting privilege .................................... 50,362
Receivables:
Variation margin on futures contracts (Note 2) ........................................ 63,481
Subscriptions ......................................................................... 180,437
Interest .............................................................................. 463,930
Securities sold ....................................................................... 10,259,201
Other assets ............................................................................ 45,072
-------------
TOTAL ASSETS .......................................................................... 101,159,042
-------------
LIABILITIES
Reverse repurchase agreement (proceeds $3,500,000) (Note 1).............................. 3,500,000
Payables:
Redemptions ........................................................................... 7,628
Securities purchased .................................................................. 21,861,438
Swap and other interest (Note 2) ...................................................... 27,691
Due to advisor (Note 3) ................................................................. 43,309
Accrued expenses ........................................................................ 38,141
-------------
TOTAL LIABILITIES ..................................................................... 25,478,207
-------------
NET ASSETS
(Applicable to outstanding shares of 7,640,219 unlimited number of shares of beneficial
interest authorized; no stated par) ................................................... $ 75,680,835
=============
Net asset value, offering price and redemption price per share ($75,680,835 / 7,640,219). $ 9.91
=============
SOURCE OF NET ASSETS
Paid in capital ......................................................................... $ 80,354,176
Overdistributed net investment income ................................................... (707,521)
Accumulated net realized loss on investments ............................................ (1,897,929)
Net unrealized depreciation of investments, interest rate swaps, interest rate caps,
short
sales and futures contracts ........................................................... (2,067,891)
-------------
NET ASSETS ............................................................................ $ 75,680,835
=============
</TABLE>

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>

SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)

FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998

<TABLE>
<S> <C>
INVESTMENT INCOME
Interest and discount earned, net of premium amortization and interest expense (Note 1) $2,032,770
EXPENSES
Advisory fees (Note 3) .................................................................. 261,320
Accounting and pricing services fees .................................................... 25,845
Custodian fees........................................................................... 11,305
Audit and tax preparation fees .......................................................... 12,237
Legal fees .............................................................................. 10,312
Transfer agent fees ..................................................................... 16,228
Registration fees ....................................................................... 5,500
Trustees fees and expenses .............................................................. 31,174
Insurance ............................................................................... 5,567
Other ................................................................................... 6,136
----------
TOTAL EXPENSES BEFORE REIMBURSEMENT ................................................... 385,624
Expenses reimbursed by advisor (Note 3) ............................................... (94,439)
----------
NET EXPENSES .......................................................................... 291,185
----------
NET INVESTMENT INCOME ................................................................. 1,741,585
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments ........................................................ 804,977
Change in unrealized appreciation (depreciation) of investments, interest rate swaps,
interest rate caps, and futures contracts ............................................. (865,744)
----------
Net realized and unrealized gain (loss) on investments .................................. (60,767)
----------
Net increase in net assets resulting from operations .................................... $1,680,818
==========
</TABLE>

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30, 1998 YEAR ENDED
(UNAUDITED) MARCH 31, 1998
-------------------- ---------------
<S> <C> <C>
OPERATIONS
Net investment income .................................................... $ 1,741,585 $ 5,485,507
Net realized gain on investments ......................................... 804,977 2,886,352
Change in unrealized appreciation (depreciation) of investments,
interest rate swaps, interest rate caps and futures contracts .......... (865,744) (2,022,049)
------------- -------------
Net increase in net assets resulting from operations ..................... 1,680,818 6,349,810
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ..................................... (1,741,585) (5,439,867)
Dividends in excess of net investment income ............................. (76,247) --
------------- -------------
Total distributions ...................................................... (1,817,832) (5,439,867)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Shares sold .............................................................. 21,429,120 46,118,603
Shares issued on reinvestment of distributions ........................... 945,704 2,600,980
Shares redeemed .......................................................... (24,984,830) (90,190,280)
------------- -------------
Decrease in net assets resulting from capital share transactions (a) ..... (2,610,006) (41,470,697)
------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ................................ (2,747,020) (45,560,754)
NET ASSETS
Beginning of period ...................................................... 78,427,855 118,988,609
------------- -------------
End of period ............................................................ $ 75,680,835 $ 78,427,855
============= =============
(a) Transactions in capital shares were as follows:
Shares sold .............................................................. 2,163,933 4,669,660
Shares issued on reinvestment of distributions ........................... 95,634 264,390
Shares redeemed .......................................................... (2,523,807) (9,136,010)
------------- -------------
Net decrease ............................................................. (264,240) (4,201,960)
Beginning balance ........................................................ 7,904,459 12,106,419
------------- -------------
Ending balance ........................................................... 7,640,219 7,904,459
============= =============
</TABLE>

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<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>
SIX MONTHS
ENDED YEAR YEAR
SEPTEMBER 30, ENDED ENDED
1998 MARCH 31, MARCH 31,
(UNAUDITED) 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD .............................. $ 9.92 $ 9.83 $ 9.74
--------- ---------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ............... 0.228 0.484 0.476
Net realized and unrealized gain
(loss) on investments .............. 0.003 0.114 0.146
---------- ----------- ------------
Total from investment operations..... 0.232 0.598 0.622
---------- ----------- ------------
LESS DISTRIBUTIONS
Dividends from net investment
income ............................. (0.228) (0.508) (0.476)
Dividends in excess of
investment income .................. (0.014) -- (0.056)
---------- ----------- ------------
Total distributions ................. (0.242) (0.508) (0.532)
---------- ----------- ------------
NET ASSET VALUE, END OF PERIOD ....... $ 9.91 $ 9.92 $ 9.83
---------- ----------- ------------
TOTAL RETURN ......................... 2.36% 6.24% 6.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ........... $75,680,835 $78,427,855 $118,988,609
Ratio of expenses to average net
assets (2) ......................... 0.78%* 0.78% 0.78%
Ratio of net investment income
to average net assets .............. 4.70%* 5.28% 5.04%
Portfolio turnover rate ............. 95% 626% 556%
Ratio of expenses to average net
assets before reimbursement
of expenses by the
Advisor (2) ........................ 1.03%* 1.00% 0.93%
Ratio of net investment income
to average net assets before
reimbursement of expenses by
the Advisor ........................ 4.44%* 5.06% 4.90%

<CAPTION>
FOR THE PERIOD
YEAR YEAR YEAR MARCH 31,
ENDED ENDED ENDED 1992(1)
MARCH 31, MARCH 31, MARCH 31, TO MARCH 31,
1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD .............................. $ 9.90 $ 9.90 $ 10.00 $ 10.00
----------- ----------- ----------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ............... 0.621 0.628 0.432 0.552
Net realized and unrealized gain
(loss) on investments .............. (0.148) -- (0.070) 0.002
------------ ------------ ------------ -----------
Total from investment operations..... 0.473 0.628 0.362 0.554
------------ ------------ ------------ -----------
LESS DISTRIBUTIONS
Dividends from net investment
income ............................. (0.621) (0.628) (0.462) (0.554)
Dividends in excess of
investment income .................. (0.012) -- -- --
------------ ------------ ------------ -----------
Total distributions ................. (0.633) (0.628) (0.462) (0.554)
------------ ------------ ------------ -----------
NET ASSET VALUE, END OF PERIOD ....... $ 9.74 $ 9.90 $ 9.90 $ 10.00
------------ ------------ ------------ -----------
TOTAL RETURN ......................... 4.95% 6.58% 3.67% 5.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ........... $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%
Ratio of net investment income
to average net assets .............. 6.29% 6.33% 4.17% 4.53%
Portfolio turnover rate ............. 225% 47% 112% 3%
Ratio of expenses to average net
assets before reimbursement
of expenses by the
Advisor (2) ........................ 0.93% 0.92% 1.00% 2.58%
Ratio of net investment income
to average net assets before
reimbursement of expenses by
the Advisor ........................ 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 Smith Breeden Short Duration U.S. Government Fund, and the indirect
expensesincurred through the Fund's investment in the Smith Breeden
Institutional Short Duration U.S. Government Fund.

* Annualized

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<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", formerly the Smith
Breeden Short Duration U.S. Government Series) and the Smith Breeden
Intermediate Duration U.S. Government Fund (formerly, the Smith Breeden
Intermediate Duration U.S. Government Series). The following is a summary of
accounting policies consistently followed by the Fund.

A. SECURITY VALUATION: Portfolio securities are valued at the 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. REPURCHASE AGREEMENTS: Repurchase agreements may be entered into with member
banks of the Federal Reserve System with 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
Fund's custodian maintains control or custody of the securities collateralizing
the repurchase agreement until maturity. The value of the collateral is
monitored daily, and, if necessary, additional collateral is received to ensure
that the market value of the collateral 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.

C. REVERSE REPURCHASE AGREEMENTS: A reverse repurchase agreement involves the
sale of portfolio assets together with an agreement to repurchase the same
assets later at a fixed price. Additional assets are maintained in a segregated
account with the custodian, and are marked to market daily. The segregated
assets may consist 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 Fund's 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 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. 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
earnings on the cash proceeds of the initial sale.

E. DISTRIBUTIONS AND TAXES: Dividends to shareholders are recorded on the
ex-dividend date. The 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, 1998, the Fund had a net
capital loss carryforward of $1,792,811, with $963,255 expiring on March 31,
2004, and $829,556 expiring on March 31, 2005.

F. SECURITIES TRANSACTIONS, INVESTMENT INCOME AND OPERATING EXPENSES:
Securities transactions are recorded on the trade date. Interest income is
accrued daily, and 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. Gains or losses on the sale of
securities are calculated for accounting and tax purposes on the identified
cost basis.

Expenses are accrued daily. Common expenses incurred by the Trust are generally
allocated among the funds comprising the Trust based on the ratio of net assets
of each fund to the combined net assets of the Trust. Other expenses are
charged to each fund on a specific identification basis.

8
<PAGE>

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

1. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
G. ACCOUNTING ESTIMATES: The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expense during the reporting period. Actual results could differ from those
estimates.

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 the Fund's net
asset value relative to its targeted option-adjusted duration.

A. FUTURES CONTRACTS: On entering into a futures contract, either cash or
securities in an amount equal to a certain percentage of the contract value
(initial margin) must be deposited with the futures broker. Subsequent payments
(variation margin) are made or received each day. The variation margin payments
equal 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 Fund had the following open futures contracts as of September 30, 1998:

<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
- ---------------------------- ----------- ---------- ----------------- ------------
<S> <C> <C> <C> <C>
5 Year Treasury ............ 30 Long December, 1998 $ 103,928
10 Year Treasury ........... 40 Long December, 1998 29,285
3 Month Eurodollar ......... 64 Long December, 1998 55,112
3 Month Eurodollar ......... 76 Short March, 1999 (281,530)
3 Month Eurodollar ......... 16 Short June, 1999 (4,297)
3 Month Eurodollar ......... 16 Short September, 1999 (5,322)
3 Month Eurodollar ......... 4 Long December, 1999 4,432
3 Month Eurodollar ......... 4 Long March, 2000 4,632
3 Month Eurodollar ......... 4 Long June, 2000 4,582
3 Month Eurodollar ......... 4 Long September, 2000 4,432
3 Month Eurodollar ......... 4 Long December, 2000 4,182
3 Month Eurodollar ......... 4 Long March, 2001 4,082
3 Month Eurodollar ......... 4 Long June, 2001 3,932
3 Month Eurodollar ......... 54 Long September, 2001 276,082
3 Month Eurodollar ......... 4 Long December, 2001 3,732
3 Month Eurodollar ......... 4 Long March, 2002 3,632
3 Month Eurodollar ......... 4 Long June, 2002 3,382
3 Month Eurodollar ......... 4 Long September, 2002 3,282
3 Month Eurodollar ......... 4 Long December, 2002 3,232
3 Month Eurodollar ......... 4 Long March, 2003 3,182
3 Month Eurodollar ......... 4 Long June, 2003 3,182
3 Month Eurodollar ......... 4 Long September, 2003 3,282
3 Month Eurodollar ......... 4 Long December, 2003 3,382
3 Month Eurodollar ......... 4 Long March, 2004 3,382
3 Month Eurodollar ......... 4 Long June, 2004 3,382
3 Month Eurodollar ......... 4 Long September, 2004 3,482
3 Month Eurodollar ......... 4 Long December, 2004 3,582
3 Month Eurodollar ......... 4 Long March, 2005 3,682
3 Month Eurodollar ......... 4 Long June, 2005 3,682
3 Month Eurodollar ......... 4 Long September, 2005 3,782
----------
Total $ 258,794
==========
</TABLE>

9
<PAGE>

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

2. FINANCIAL INSTRUMENTS -- CONTINUED
Futures transactions involve costs and may result in losses. The effective use
of futures depends on the Fund's ability to close futures positions at times
when the Fund's Advisor 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, 1998 was $171,753.

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 Fund receiving or paying, as the
case may be, only the net amount of the two payments. As of September 30, 1998,
the Fund had two open interest rate swap contracts. In each of the contracts,
the 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
Inter-Bank Offered Rate ("LIBOR"). The Fund will not enter into interest rate
swap contracts unless the unsecured commercial paper, unsecured senior debt or
the claims-paying ability of the counterparty 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, Inc. (or is otherwise acceptable to either agency) at the
time of entering into such a transaction. If the counterparty to the swap
transaction defaults, the Fund will be limited to contractual remedies pursuant
to the agreements governing the transaction. There is no assurance that
interest rate swap contract counterparties will be able to meet their
obligations under the swap contracts or that, in the event of default, the Fund
will succeed in pursuing contractual remedies. The Fund thus assumes the risk
that it may be delayed in, or prevented from, receiving payments owed to it
under the swap contracts. Should interest rates move unexpectedly, the Fund may
not achieve the anticipated benefits of the interest rate swaps, and may
realize a loss. The Fund records gains and losses under interest rate swap
contracts as realized gains or losses on investments.

The Fund's interest payable on the interest rate swap contracts as of September
30, 1998 was $27,151, and swap contract interest receivable was $8,454. No
collateral is required under 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 Fund had one interest rate
cap contract open at September 30, 1998.

3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES

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

The Advisor has voluntarily agreed to reimburse normal business expenses of the
Fund through August 1, 1999 so that total direct and indirect operating
expenses do not exceed 0.78% of its average net assets. This voluntary
agreement may be terminated or modified at any time by the Advisor in its sole
discretion except that the Advisor has agreed to limit expenses of the Fund to
0.78% through August 1, 1999. For the six months ended September 30, 1998, the
Advisor received $261,320 in fees and reimbursed the Fund $94,439.

10
<PAGE>

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

3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES -- CONTINUED
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 Advisor, out of the advisory fee to
dealers and other persons at the annual rate of up to 0.25% of the 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
Advisor shall determine the amount of such payments and the purposes for which
they are made.

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

4. INVESTMENT TRANSACTIONS

During the six months ended September 30, 1998 purchases and proceeds from
sales of securities, other than short-term investments, aggregated $92,925,589
and $81,318,416 respectively for the Fund. The cost of the Fund's securities
for federal income tax purposes at September 30, 1998, is $92,248,850. Net
unrealized depreciation of investments, short sales and futures contracts
consists of:

<TABLE>
<S> <C>
Gross unrealized appreciation ........ $ 2,266,954
Gross unrealized depreciation ........ (4,334,845)
-------------
Net unrealized depreciation .......... $ (2,067,891)
=============
</TABLE>

11
<PAGE>

SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
MARKET
FACE AMOUNT SECURITY VALUE
- ------------- ------------------------------------------------------------------------ ----------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 105.9%
FREDDIE MAC -- 22.7% (1)
FH GOLD
$1,955,222 6.00%, due 4/1/13 ...................................................... $ 1,977,085
10,000,000 6.50%, due date to be announced ........................................ 10,175,391
-------------
12,152,476
-------------
FANNIE MAE -- 19.3% (1)
FN
1,950,000 6.20%, due 9/1/08 ...................................................... 2,037,373
4,867,675 6.50%, due 6/1/13 ...................................................... 4,971,041
734,963 6.98%, due 6/1/07 ...................................................... 794,163
2,500,000 7.00%, due date to be announced ........................................ 2,567,773
-------------
10,370,350
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 59.6% (1)
GNMA
7,995,491 7.00%, due 3/15/26 to 1/15/28 .......................................... 8,251,621
5,000,000 7.50%, due 9/15/28 ..................................................... 5,181,374
GNMA ARM
7,891,179 5.00%, due 1/1/28 to 6/20/28 ........................................... 7,918,249
7,368,952 5.50%, due 11/20/27 to 6/20/28 ......................................... 7,422,319
1,824,262 6.875%, due 3/20/16 to 4/20/22 ......................................... 1,861,307
1,314,840 7.00%, due 8/20/17 to 8/20/18 .......................................... 1,339,234
-------------
31,974,104
-------------
U.S. TREASURY NOTES -- 4.3%
2,100,000 5.625%, due 12/13/02 ................................................... 2,203,195
55,000 5.875%, due 7/31/99 (2) ................................................ 55,559
40,000 6.375%, due 5/15/99 (2) ................................................ 40,412
-------------
2,299,166
-------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (COST $56,027,488)........... 56,796,096
-------------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 13.7% (1)
2,000,000 First Union-Lehman Brothers-Bank of America Commercial Mortage Trust
6.56%, due 11/18/08 .................................................... 2,098,770
5,000,000 Nomura Asset Securities Corporation Commercial Mortgage Trust 6.59%, due
3/15/30 ................................................................ 5,244,411
-------------
7,343,181
-------------
TOTAL INVESTMENTS (COST $63,178,392)--119.6%............................ 64,139,277
-------------
LIABILITIES LESS CASH AND OTHER ASSETS -- (19.6%) ...................... (10,516,043)
-------------
NET ASSETS -- 100.0% ................................................... $ 53,623,234
=============
</TABLE>

- ---------
(1) 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. ARMs have coupon rates that adjust periodically. The interest rate
shown is the rate in effect at September 30, 1998. The adjusted rate is
determined by adding a spread to a specific index.

(2) Security is held as collateral by Carr Futures, Inc.
Portfolio Abbreviations:
ARM -- Adjustable-Rate Mortgage
FH -- Freddie Mac
FN -- Fannie Mae
GNMA -- Government National Mortgage Association

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>

SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)

SEPTEMBER 30, 1998

<TABLE>
<S> <C>
ASSETS
Investments at market value (identified cost $63,178,392) (Note 1)...................... $ 64,139,277
Cash ................................................................................... 1,504,406
Receivables:
Subscriptions ........................................................................ 384,891
Interest ............................................................................. 298,966
Securities sold ...................................................................... 12,627,350
Other assets............................................................................ 24,229
------------
TOTAL ASSETS ......................................................................... 78,979,119
------------
LIABILITIES
Payables:
Variation margin on futures contracts (Note 2) ....................................... 93,937
Securities purchased ................................................................. 25,158,906
Redemptions .......................................................................... 47,847
Distributions ........................................................................ 6,729
Due to advisor (Note 3) ................................................................ 29,768
Accrued expenses ....................................................................... 18,698
------------
TOTAL LIABILITIES .................................................................... 25,355,885
------------
NET ASSETS
(Applicable to outstanding shares of 5,392,632; unlimited number of shares of beneficial
interest authorized; no stated par) .................................................. $ 53,623,234
============
Net asset value, offering price and redemption price per share ($53,623,234 / 5,392,632) $ 9.94
============
SOURCE OF NET ASSETS
Paid in capital ........................................................................ $ 53,783,733
Overdistributed net investment income .................................................. (130,528)
Accumulated net realized loss on investments ........................................... (386,916)
Net unrealized appreciation of investments ............................................. 356,945
------------
NET ASSETS ........................................................................... $ 53,623,234
============
</TABLE>

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>

SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)

FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998

<TABLE>
<S> <C>
INVESTMENT INCOME
Interest and discount earned, net of premium amortization (Note 1) ... $1,377,656
EXPENSES
Advisory fees (Note 3) ............................................... 158,986
Accounting and pricing services fees ................................. 21,192
Custodian fees ....................................................... 8,440
Audit & tax preparation fees ......................................... 6,813
Legal fees ........................................................... 5,742
Transfer agent fees .................................................. 15,327
Registration fees .................................................... 10,000
Trustees fees and expenses ........................................... 17,627
Insurance ............................................................ 2,575
Other ................................................................ 4,877
----------
TOTAL EXPENSES BEFORE REIMBURSEMENT ................................ 251,579
Expenses reimbursed by advisor (Note 3) ............................ (51,710)
----------
NET EXPENSES ....................................................... 199,869
----------
NET INVESTMENT INCOME .............................................. 1,177,787
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments ..................................... 66,127
Change in unrealized appreciation of investments ..................... 294,406
----------
Net realized and unrealized gain on investments ...................... 360,533
----------
Net increase in net assets resulting from operations ................. $1,538,320
==========
</TABLE>

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30, 1998 YEAR ENDED
(UNAUDITED) MARCH 31, 1998
-------------------- ---------------
<S> <C> <C>
OPERATIONS
Net investment income .................................................... $ 1,177,787 $ 2,175,424
Net realized gain on investments ......................................... 66,127 1,835,038
Change in unrealized appreciation (depreciation) of investments .......... 294,406 (73,907)
------------ -------------
Net increase in net assets resulting from operations ..................... 1,538,320 3,936,555
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ..................................... (1,173,866) (2,175,424)
Dividends in excess of net investment income ............................. -- (10,140)
Distributions from net realized gains on investments ..................... (576,410) (880,968)
------------ -------------
Total distributions ...................................................... (1,750,276) (3,066,532)
------------ -------------
CAPITAL SHARE TRANSACTIONS
Shares sold .............................................................. 20,521,081 34,884,833
Shares issued on reinvestment of distributions ........................... 1,689,928 1,570,705
Shares redeemed .......................................................... (7,017,698) (36,419,207)
------------ -------------
Increase in net assets resulting from capital share transactions (a) ..... 15,193,311 36,331
------------ -------------
TOTAL INCREASE IN NET ASSETS ........................................... 14,981,355 906,354
NET ASSETS
Beginning of period ...................................................... 38,641,879 37,735,525
------------ -------------
End of period ............................................................ $ 53,623,234 $ 38,641,879
============ =============
(a) Transactions in capital shares were as follows:
Shares sold .............................................................. 2,061,375 3,494,156
Shares issued on reinvestment of distributions ........................... 170,082 157,456
Shares redeemed .......................................................... (704,317) (3,664,130)
------------ -------------
Net increase (decrease) .................................................. 1,527,140 (12,518)
Beginning balance ........................................................ 3,865,492 3,878,010
------------ -------------
Ending balance ........................................................... 5,392,632 3,865,492
============ =============
</TABLE>

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
15
<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
ENDED YEAR YEAR
SEPTEMBER 30, ENDED ENDED
1998 MARCH 31, MARCH 31,
(UNAUDITED) 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ............................ $ 10.00 $ 9.73 $ 10.01
--------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ............. 0.317 0.590 0.599
Net realized and unrealized
(loss) gain on investments ....... 0.064 0.419 ( 0.024)
---------- ----------- -----------
Total from investment
operations ....................... 0.381 1.009 0.575
---------- ----------- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income ........................... ( 0.307) ( 0.561) ( 0.604)
Dividends in excess of net
investment income ................ -- -- --
Distributions from net realized
gains on investments ............. ( 0.130) ( 0.178) ( 0.251)
Distributions in excess of net
realized gains on
investments ...................... -- -- --
---------- ----------- -----------
Total distributions .............. ( 0.437) ( 0.739) ( 0.855)
---------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD ............................ $ 9.94 $ 10.00 $ 9.73
---------- ----------- -----------
TOTAL RETURN ....................... 3.35% 10.65% 5.92%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ......... $53,623,234 $38,641,879 $37,735,525
Ratio of expenses to average
net assets (2) ................... 0.88%* 0.88% 0.88%
Ratio of net investment income
to average net assets ............ 5.26%* 5.61% 6.19%
Portfolio turnover rate ........... 211% 583% 409%
Ratio of expenses to average
net assets before
reimbursement of expenses
by the Advisor ................... 1.11%* 1.13% 1.16%
Ratio of net investment income
to average net assets before
reimbursement of expenses
by the Advisor ................... 5.03%* 5.36% 5.92%

<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR MARCH 31,
ENDED ENDED ENDED 1992 (1)
MARCH 31, MARCH 31, MARCH 31, TO MARCH 31,
1996 1995 1994 1993
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ............................ $ 9.83 $ 10.01 $ 10.62 $ 10.00
---------- ---------- --------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ............. 0.660 0.664 1.050 0.826
Net realized and unrealized
(loss) gain on investments ....... 0.277 ( 0.049) ( 0.601) 0.621
----------- ----------- ---------- ---------
Total from investment
operations ....................... 0.937 0.615 0.449 1.447
----------- ----------- ---------- ---------
LESS DISTRIBUTIONS
Dividends from net investment
income ........................... ( 0.656) ( 0.664) ( 1.044) ( 0.826)
Dividends in excess of net
investment income ................ -- ( 0.108) -- --
Distributions from net realized
gains on investments ............. ( 0.101) -- ( 0.015) --
Distributions in excess of net
realized gains on
investments ...................... -- ( 0.022) -- --
----------- ----------- ---------- ---------
Total distributions .............. ( 0.757) ( 0.794) ( 1.059) ( 0.826)
----------- ----------- ---------- ---------
NET ASSET VALUE, END OF
PERIOD ............................ $ 10.01 $ 9.83 $ 10.01 $ 10.62
----------- ----------- ---------- ---------
TOTAL RETURN ....................... 9.69% 6.10% 4.11% 14.93%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ......... $36,446,940 $34,797,496 $6,779,666 $2,923,913
Ratio of expenses to average
net assets (2) ................... 0.90% 0.90% 0.90% 0.82%
Ratio of net investment income
to average net assets ............ 6.49% 6.20% 7.74% 8.18%
Portfolio turnover rate ........... 193% 557% 84% 42%
Ratio of expenses to average
net assets before
reimbursement of expenses
by the Advisor ................... 1.14% 2.33% 2.34% 17.52%
Ratio of net investment income
to average net assets before
reimbursement of expenses
by the Advisor ................... 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 Smith Breeden Institutional
Intermediate Duration U.S. Government Fund.

* Annualized

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>

SMITH BREEDEN INTERMEDIATE 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 (formerly the Smith Breeden Short Duration U.S.
Government Series) and the Smith Breeden Intermediate Duration U.S. Government
Fund (the "Fund", formerly, the Smith Breeden Intermediate Duration U.S.
Government Series). The following is a summary of accounting policies
consistently followed by the Fund.

F. SECURITIES TRANSACTIONS, INVESTMENT INCOME AND OPERATING EXPENSES: Interest
income is accrued daily, and 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. Securities transactions
are recorded on the trade date. Gains or losses on the sale of securities are
calculated for accounting and tax purposes on the identified cost basis.

17
<PAGE>

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

2. FINANCIAL INSTRUMENTS

A. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN
TRADING: The Fund uses interest rate futures contracts for risk management
purposes in order to reduce fluctuations in the Fund's net asset value relative
to its targeted option-adjusted duration. On entering into a futures contract,
either cash or securities in an amount equal to a certain percentage of the
contract value (initial margin) must be deposited with the futures broker.
Subsequent payments (variation margin) are made or received by the Fund each
day. The variation margin payments equal 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 Fund had the following open futures contracts as of September 30, 1998:

Futures transactions involve costs and may result in losses. The effective use
of futures depends on the Fund's ability to close futures positions at times
when the Fund's Advisor 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, 1998 was $95,972.

3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES

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

The Advisor has voluntarily agreed to reduce or otherwise limit other expenses
of the 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 Advisor in
its sole discretion except that the Advisor has agreed to limit expenses of the
Fund to 0.88% through August 1, 1999. For the six months ended September 30,
1998, the Advisor received fees of $158,986 and reimbursed the Fund $51,710.

The Fund has adopted a Distribution and Services Plan (the "Plan") under Rule
12b-1 under the Investment Company Act of 1940. The purpose of the Plan is to
permit the Advisor 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 Advisor, out of the
advisory fee to dealers and other persons at the annual rate of up to 0.25% of
the 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

18
<PAGE>

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

3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES -- CONTINUED
to suspend the Plan for such periods as they may determine. Subject to these
limitations, the Advisor shall determine the amount of such payments and the
purposes for which they are made.

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

4. INVESTMENT TRANSACTIONS

During the six months ended September 30, 1998, purchases and proceeds from
sales of securities, other than short-term investments, aggregated $127,839,324
and $96,770,266, respectively. The purchases and proceeds shown above do not
include dollar roll agreements which are considered borrowings by the Fund. The
cost of securities for federal income tax purposes is $63,178,392. Net
unrealized appreciation of investments, short sales and futures contracts
consist of:

<TABLE>
<S> <C>
Gross unrealized appreciation ........ $ 962,089
Gross unrealized depreciation ........ (605,144)
----------
Net unrealized appreciation .......... $ 356,945
==========
</TABLE>