MONTGOMERY FUNDS II, N-30D, 1999-09-01

MONTGOMERY FUNDS II
N-30D, 1999-09-01

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[LOGO OF MONTGOMERY FUNDS]

------------------------
The Montgomery Funds(SM)
------------------------

Institutional Series
- -----------------------------

International Growth Portfolio
Emerging Markets Focus Portfolio
Macro Cap Systematic Value Portfolio
Small Cap Systematic Value Portfolio

Annual Report
June 30,1999

Invest wisely(R)
<PAGE>

- -------------------------------
Montgomery
Institutional Series
- -------------------------------
Annual Report
- -------------------------------
June 30, 1999

The Montgomery Funds are a comprehensive family of no-load mutual funds offering
U.S. equity, international and global, and U.S. fixed-income investment
strategies.

We currently manage more than $4.2 billion in the Funds on behalf of over
200,000 individual investors, helping them meet their financial goals through a
combination of professional portfolio management and high-quality customer
service.

- ---------------------
CONTENTS
- ---------------------

Performance Summary............................1

Portfolio Highlights and Investments
- -------------------------------------------------
International Growth Portfolio.................2
Emerging Markets Focus Portfolio...............6
Macro Cap Systematic Value Portfolio...........10
Small Cap Systematic Value Portfolio...........14

Financial Statements
- -------------------------------------------------
Statements of Assets and Liabilities...........20
Statements of Operations.......................21
Statements of Changes in Net Assets............22
Financial Highlights...........................23
Notes to Financial Statements..................28
Independent Auditors Report....................34
Tax Information................................35

[LOGO APPEARS HERE]
The Montgomery FundsSM
101 California Street
San Francisco, CA 94111-9361

<PAGE>

-------------------------------
Montgomery
Institutional Series
-------------------------------
Performance Summary
-------------------------------
June 30, 1999

AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/99
<TABLE>
<CAPTION>

Fund name (Fund number) Inception date One year Three years Five years Since inception
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
International Growth Portfolio (654) 6/30/98 1.80% -- -- 1.80%
- ------------------------------------------------------------------------------------------------------------------------
Emerging Markets Focus Portfolio (1481) 12/31/97 43.78% -- -- 21.79%
- ------------------------------------------------------------------------------------------------------------------------
Macro Cap Systematic Value Portfolio (1482) 8/31/98 -- -- -- 30.66%*
- ------------------------------------------------------------------------------------------------------------------------
Small Cap Systematic Value Portfolio (1480) 8/31/98 -- -- -- 16.69%*
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Cumulative total return since inception of Portfolio.

Past performance is no guarantee of future results. Net asset value, investment
return and principal value of an investment will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than their original cost. The
performance figures provided do not reflect the effect of (i) any securities
purchased or sold by the Portfolios after 6/30/99 but that were effective on
6/30/99 or (ii) any purchases or redemptions of Portfolio shares completed after
6/30/99 that were effective on 6/30/99.

There are certain risks associated with investing in foreign markets, such as
currency fluctuations and political and economic instability. There are also
additional risks associated with investing in small-cap companies. Investors are
encouraged to read the prospectus carefully before investing.

<PAGE>

- --------------------
Montgomery
Institutional Series
- --------------------
International Growth
Portfolio
- --------------------
Portfolio Highlights
- --------------------

INVESTMENT REVIEW

Q: How did the Portfolio perform during the year ended June 30, 1999?
A: Two very strong quarters of performance were not sufficient to offset two
weaker quarters, as market conditions proved very challenging for the
international growth style of investing during the period. As a result, the
Portfolio underperformed its benchmark for the year, returning 1.8% versus a
7.9% return for the Morgan Stanley Capital International Europe Australasia Far
East (MSCI EAFE) Index.

Q: What factors contributed to the underperformance during the period?

A: There were two events that detracted from the Portfolio s relative
performance during the course of the year: the August through September turmoil
in global financial markets and the rotation out of growth stocks and into
industrial cyclicals in 1999. Strong stock selection has enabled us to offset
the negative impact of the latter trend in recent months.

At the beginning of the financial year, the Portfolio s relative performance
suffered as global markets corrected sharply. Growth stocks were particularly
affected by this volatility. Although our fully invested positioning initially
hurt relative performance, it allowed us to take full advantage of the
subsequent recovery.

In maintaining our focus on good stock selection, the Portfolio enjoyed strong
outperformance against the benchmark during the final quarter of the financial
year. Stocks such as KAO Corp. (1.8% of net assets as of 6/30/99) and Equant
(1.7% of net assets as of 6/30/99), appreciated rapidly, contributing to the
Portfolio s outperformance during this period.

Q: There has been some excitement that Japan is finally beginning to emerge from
recession. Did you make any adjustments to the Portfolio in recognition of this?

A: We have made some adjustments to the Portfolio in recent months, but
primarily as a result of our bottom-up approach to investment analysis that
favors original research at the country, sector and company levels. For much of
the financial year, we maintained a strong overweight position in Europe. The
introduction of the euro and continuing efforts toward deregulation have created
a favorable long-term growth environment, and we have identified many dynamic
European companies with strong management teams that we believe will be solid
performers in 1999.

We are starting to see some signs of improvement in Japan. Although much of the
positive gross domestic product (GDP) surprise in the first quarter of 1999 was
the result of temporary fiscal stimuli, we did see evidence of improving
domestic consumption, which is an important confirmation of improving economic
fundamentals. We have added several companies to the Portfolio that are
undergoing positive fundamental change and whose earnings will benefit from
improving business momentum in Japan. We continue to watch Japan

- ---------------------------------------------
PORTFOLIO MANAGEMENT
- ---------------------------------------------
John Boich, CFA ...... Sr. Portfolio Manager
Oscar Castro, CFA .... Sr. Portfolio Manager

- ---------------------------------------------
PERFORMANCE
- ---------------------------------------------
Average annual total returns for the
period ended 6/30/99

- ---------------------------------------------
Montgomery Institutional Series:
International Growth Portfolio
Since inception (6/30/98)........1.80%
One year ........................1.80%

- ---------------------------------------------
MSCI EAFE Index
Since 6/30/98 ....................7.92%
One year .... ....................7.92%

- ---------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.

Date Micro Vap Russell Top 200
-------- ------------- ----------------
Jun-98 10000 10000
Jul-98 10230 10104
Aug-98 8790 8854
Sep-98 8369 8585
Oct-98 9109 9482
Nov-98 9639 9970
Dec-98 10110 10366
Jan-99 10480 10338
Feb-99 9940 10094
Mar-99 9780 10518
Apr-99 10071 10946
May-99 9841 10385
Jun-99 10180 10792

1 The Morgan Stanley Capital International EAFE Index is composed of
approximately 20 developed market countries in Europe, Australasia and the
Far East. The returns are presented net of dividend withholding taxes.

2
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- -------------------------------
Montgomery
Institutional Series
- -------------------------------
International Growth Portfolio
- -------------------------------
Portfolio Highlights

closely, as follow-through on pending policy initiatives will be vital if that
country is to maintain its current economic and market momentum.

Q: You appear to be more optimistic about the prospects for Japan; what are your
views on Europe?

A: There have been subtle improvements in the outlook for the European economies
in recent months. As a result, the consensus view is for an improvement in
economic growth in the region for the second half of 1999. This positive growth
outlook, however, is likely to be accompanied by the possibility of higher
interest rates as inflationary concerns increase. There are two countries that
we are particularly excited about France and the United Kingdom. Both have shown
encouraging signs of accelerating growth, and we believe that their equity
markets may perform well.

Q: How have you positioned the Portfolio to take advantage of trends in Asia and
Europe?

A: As mentioned, we have been increasing the Portfolio s exposure to Japan. We
have also added to our holdings in France and the United Kingdom. In both these
countries, we have identified companies in the industrial growth cyclical and
consumer durables sectors that are attractively valued and that we believe will
profit from accelerating economic growth.

Although we currently anticipate stronger growth in Japan and Europe, there are
risks, including the possibility of higher interest rates, that may change this
outlook. We believe that our stock selection process, which combines primary
original research, expert industry knowledge and the advantage of good insight,
should help offset unfavorable macroeconomic trends.

- -------------------------------------------
TOP TEN HOLDINGS
- -------------------------------------------
(as a percentage of total net assets)
Alstom................................ 2.6%
Orange PLC............................ 2.5%
Total S.A., Class B................... 2.4%
Vivendi............................... 2.2%
Cap Gemini S.A. ...................... 2.1%
Nissan Motor Company, Ltd. ........... 2.1%
Hitachi Ltd. ......................... 2.1%
Sony Corporation...................... 2.0%
Cable & Wireless Optus Ltd. .......... 2.0%
British Airways PLC................... 2.0%

- -------------------------------------------
TOP FIVE COUNTRIES
- -------------------------------------------
(as a percentage of total net assets)
United Kingdom....................... 22.7%
France............................... 16.6%
Japan................................ 15.1%
Netherlands.......................... 8.0%
Germany.............................. 5.6%

Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.

Investors should be aware that there are risks associated with investing in
funds of this type that invest in securities of foreign countries, such as
erratic market conditions, economic and political instability, and fluctuations
in currency exchange rates.

<PAGE>

- ---------------------------------
Montgomery
Institutional Series
- ---------------------------------
International Growth Portfolio
- ---------------------------------
Investments

PORTFOLIO INVESTMENTS

June 30, 1999
<TABLE>
<CAPTION>
Shares Value (Note 1)
COMMON STOCKS--87.5%
<S> <C> <C>
Australia -- 3.8%
362,407 Australia & New Zealand Banking Group
Ltd. (Non-U.S. Banks)......................... $ 2,654,731
1,324,900 Cable & Wireless Optus Ltd.
(Other Telephone/Communication)............... 3,005,319
-------------
5,660,050
Austria -- 1.5%
41,434 Bank Austria AG (Non-U.S. Banks).............. 2,181,908
Belgium -- 1.3%
47,000 Union Miniere S.A. (Metal Fabrications)....... 1,941,186
Finland -- 2.9%
45,300 Helsinki Telephone
(Other Telephone/Communication)............... 2,151,619
24,480 NokiaOyj (Telecommunication Equipment)....... 2,148,521
-------------
4,300,140
France -- 16.6%
122,400 Alstom+ (Electrical Products)................. 3,854,700
400 Alstom, ADR+ (Electrical Products)............ 12,800
23,000 Banque Nationale de Paris(Non-U.S.Banks)...... 1,918,883
20,145 Cap Gemini S.A. (EDP Services)................ 3,170,017
21,960 Coflexip (Metal Fabrications)................. 1,887,669
5,300 Groupe Danone (Packaged Foods)................ 1,368,123
15,080 Lafarge S.A. (Building Materials)............. 1,435,627
55,380 Lagardere S.C.A.(Aerospace/Defense)........... 2,064,284
41,700 Societe BIC S.A.(Consumer Specialties)........ 2,202,374

27,200 Total S.A., ClassB+ (Oil Refining/Marketing). 3,513,465
40,816 Vivendi+ (Non-U.S. Utilities)................ 3,310,442
-------------
24,738,384
Germany -- 3.9%
19,310 Mannesmann AG (Cellular Telephone)............ 2,885,095
48,965 Veba AG (Non-U.S. Utilities).................. 2,881,841
-------------
5,766,936
Japan -- 15.1%
323 East Japan Railway Company (Railroads). ...... 1,736,990
335,000 Fuji Heavy Industries Ltd. (Motor Vehicles)... 2,588,649
330,000 Hitachi Ltd.
(Diversified Electronic Products)............. 3,098,784
202 Japan Tobacco, Inc. (Tobacco)................. 2,239,431
94,000 KAO Corporation
(Package Goods/Cosmetics)..................... 2,644,163
229,000 Kirin Brewery Company, Ltd.
(Alcoholic Beverages)......................... 2,747,166
650,000 Nissan Motor Company, Ltd.
(Motor Vehicles).............................. 3,108,298
28,000 Sony Corporation
(Consumer Electronics/Appliances)............. 3,023,083
185,000 Sumitomo Rubber Industries, Ltd.
(Automotive Aftermarket)...................... 1,310,168
-------------
22,496,732
Netherlands -- 8.0%
27,000 Equant N.V.+
(Other Telephone/Communication)............... 2,541,375
47,300 ING Groep N.V.
(Diversified Financial Services).............. 2,564,069
56,445 Koninklijke KPN, N.V.
(Other Telephone/Communication)............... 2,651,833
30,300 United Pan-Europe Communications N.V.+
(Cable Television)............................ 1,645,651
91,858 Vendex N.V. (Department Store Chains)......... 2,456,553
-------------
11,859,481
Portugal -- 0.9%
10,400 Telecel-Comunicacoes Pessoais S.A.
(Cellular Telephone).......................... 1,342,310
Russia -- 1.7%
31,600 Global TeleSystems Group, Inc.
(Other Telephone/Communication)............... 2,558,612
Spain -- 4.3%
79,000 Argentaria S.A. (Non-U.S. Banks).............. 1,801,906
260,800 Banco Santander Central Hispano S.A.
(Non-U.S. Banks).............................. 2,719,808
40,138 Telefonica de Espana S.A., ORD+
(Other Telephone/Communication)............... 1,935,865
-------------
6,457,579
Sweden -- 1.6%
81,100 Enator AB (EDP Services)...................... 2,441,906
Switzerland -- 3.2%
812 Julius Baer Holding AG (Non-U.S. Banks)....... 2,318,206
6,262 Swisscom AG
(Other Telephone/Communication)............... 2,360,811
-----------
4,679,017
United Kingdom -- 22.7%
111,400 Abbey National PLC
(Diversified Financial Services).............. 2,094,692
131,500 Alliance & Leicester PLC
(Non-U.S. Banks).............................. 1,775,653
83,000 Barclays PLC (Non-U.S. Banks)................. 2,418,264
430,600 British Airways PLC (Airlines)................ 2,978,532
202,000 British American Tobacco PLC (Tobacco)........ 1,902,324
224,500 Diageo PLC (Alcoholic Beverages).............. 2,362,114
410,800 Enterprise Oil PLC (Oil and Gas Production)... 2,660,126
65,930 Glaxo Wellcome PLC
(Major Pharmaceuticals)....................... 1,832,516
</TABLE>
The accompanying notes are an integral part of these financial statements.

<PAGE>

--------------------------------
Montgomery
Institutional Series
--------------------------------
International Growth
Portfolio
--------------------------------
Investments

<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C> <C>
COMMON STOCKS -- continued
United Kingdom -- continued
137,100 Great Universal Stores PLC
(Catalog/Specialty Distribution)... $ 1,516,052
69,200 HSBC Holdings PLC
(Diversified Financial Services)... 2,452,832
99,000 Lloyds TSB Group PLC
(Diversified Financial Services)... 1,347,736
254,300 Orange PLC (Cellular Telephone).... 3,724,663
131,865 Railtrack Group PLC (Railroads).... 2,697,915
201,400 Scottish & Southern Energy PLC
(Non-U.S. Utilities)............... 2,068,231
423,500 Somerfield PLC (Food Chains)....... 1,987,463
-----------
33,819,113
-----------
TOTAL COMMON STOCKS
(Cost $126,475,969).................................. 130,243,354
-----------
PREFERRED STOCKS -- 1.7%
Germany -- 1.7%
1,090 Porsche AG (Motor Vehicles)
(Cost $2,638,407).................. 2,566,083
-----------
TOTAL SECURITIES
(Cost $129,114,376................................... 132,809,437
-----------
</TABLE>

Principal Amount Value (Note 1)

REPURCHASE AGREEMENT -- 14.1%
$20,936,000 Agreement with PaineWebber Group,
Tri-Party, 5.050% dated 06/30/99,
to be repurchased at $20,938,897 on
07/01/99, collateralized by $20,977,627
market value of U.S. government and
mortgage-backed securities, having various
maturities and interest rates
(Cost $20,936,000)............... $ 20,936,000
------------
TOTAL INVESTMENTS -- 103.3%
(Cost $150,050,376*)............................... 153,745,437

OTHER ASSETS AND LIABILITIES -- (3.3)%
(Net).............................................. (4,914,422)
-------------
NET ASSETS -- 100.0%............................... $ 148,831,015
=============
* Aggregate cost for federal tax purposes is $150,098,394.
+ Non-income-producing security.

Abbreviations
ADR American Depositary Receipt
ORD Ordinary

5
The accompanying notes are an integral part of these financial statements.

<PAGE>

- --------------------
Montgomery
Institutional Series
- --------------------
Emerging Markets
Focus Portfolio
- --------------------
Portfolio Highlights

- -----------------------------------------------
PORTFOLIO MANAGEMENT
- -----------------------------------------------

Josephine Jimenez, CFA .. Sr. Portfolio Manager

- -----------------------------------------------
PERFORMANCE
- -----------------------------------------------

Average annual total returns
for the period ended 6/30/99

- -----------------------------------------------
Montgomery Institutional Series:
Emerging Markets Focus Portfolio

Since inception (12/31/97) ... 21.79%
One year ..................... 43.78%

- -----------------------------------------------
MSCI Emerging Markets Free Index

Since 12/31/97 ............... 2.93%
One year ..................... 28.71%

- -----------------------------------------------
Past performance is no guarantee of future
results. Net asset value, investment return and
principal value will fluctuate, so shares, when
redeemed, may be worth more or less than their
original cost.

Growth of a $10,000 Investment

[LINE GRAPH APPEARS HERE]

Montgomery
Institutional MSCI
Series: Emerging
Emerging Markets
Markets Free
Focus Fund Index/1/
------------- ----------
Dec-97 10,000 10,000
Jan-98 8,949 9,216
Feb-98 9,998 10,178
Mar-98 10,801 10,619
Apr-98 11,331 10,504
May-98 9,790 9,064
Jun-98 8,826 8,113
Jul-98 9,081 8,371
Aug-98 6,558 5,950
Sep-98 7,258 6,328
Oct-98 7,825 6,994
Nov-98 8,032 7,576
Dec-98 7,489 7,466
Jan-99 7,846 7,346
Feb-99 7,740 7,417
Mar-99 9,293 8,395
Apr-99 10,325 9,433
May-99 10,798 9,378
Jun-99 12,690 10,443

1 The Morgan Stanley Capital International Emerging Markets Free Index is an
unmanaged, capitalization-weighted composite index that covers individual
securities within the equity markets of approximately 25 emerging markets
countries.

INVESTMENT REVIEW

Q: How did the Portfolio perform during the year ended June 30, 1999?

A: We were very pleased with the Portfolio s performance over the past year. In
a challenging environment for emerging markets, the Portfolio consistently
outperformed its benchmark, the Morgan Stanley Capital International (MSCI)
Emerging Markets Free Index, returning 43.8% versus 28.7% for the index.

Q: What factors contributed to these excellent results?

A: While our asset allocation decisions and good stock selection during the year
played a significant role, strategy was primarily responsible for the Portfolio
s strong performance. Unlike the majority of emerging markets funds, the
Montgomery Emerging Markets Focus Portfolio can concentrate its investments in
as few as three markets and up to 50% of its assets in any one market. By using
this to our advantage and investing a considerable portion of assets in Greece
during the financial turmoil in emerging markets in the latter half of 1998, we
were able to avoid many of the problems facing regular emerging markets funds
that had to maintain a broader country exposure. Conversely, we were also able
to quickly exit the Greek market when market considerations warranted it, and
now have no exposure to Greece.

Our concentration in mainly large-cap and highly liquid investments, combined
with an opportunistic management style, has allowed us to move quickly to both
avoid problems and take advantage of attractive investments as they arise. For
example, we avoided the difficulties of many emerging markets funds by having no
exposure to Latin America when Brazil devalued the real in January 1999. But
following the currency devaluation, when we believed that share prices had
become very attractively valued, we were able to quickly establish positions in
Brazil and Mexico and fully participate in the subsequent rallies in those
markets. Likewise, by swiftly moving into positions in South Korea when there
were indications of a recovery in that market, we were also able to boost
overall Portfolio returns.

Q: How has the Portfolio s country and stock exposure changed over the course of
the year?

A: Due to the shifting fortunes of the emerging markets, the Port-folio s
country and stock exposure has changed significantly over the course of the
year. At the height of the difficulties experienced by emerging markets as
capital fled the asset class, the Portfolio was invested in just three markets.
We broadened our exposure as individual markets began to recover, and by the end
of March 1999 were able to identify sufficient opportunities to increase to
eight the number of countries in which the Portfolio was invested. (The
Portfolio s strategy permits a maximum of 10.) At the end of the financial year,
the Portfolio was invested in nine countries and 24 stocks, signaling our
confidence in the asset class as a whole.

Q: Which of the Portfolio s positions were you particularly pleased with over
the period?

A: We have been pleased with the performance of most of our holdings during the
year. As the Portfolio s performance suggests, the majority of holdings have
enjoyed

6
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--------------------
Montgomery
Institutional Series
--------------------
Emerging Markets
Focus Portfolio
--------------------
Portfolio Highlights

strong relative returns. We attribute this to a combination of three factors:
being able to position the Portfolio in the right countries at the right time,
our stock selection process and identifying the best-performing sectors. We use
macroeconomic analysis to single out what we believe will be the best-performing
markets and sectors, as well as primary original company research, to identify
the most attractive stocks.

Our success in identifying stocks with high capital appreciation potential in
attractive markets and sectors has meant that most of our stocks have made a
positive contribution to relative performance over the course of the year. Two
good examples of stocks that performed well because we had managed all three
ingredients country, stock and sector selections include Samsung (5.4% of net
assets as of 6/30/99) and Pacific Internet Ltd. (no longer a portfolio holding).
Samsung, a South Korean electronics conglomerate, benefited from both its
corporate restructuring efforts and the strong upward momentum of the Korean
markets as investors returned once the economy showed signs of recovery. Pacific
Internet Ltd., a Singapore-based Internet service provider (ISP), has gained due
to its position as one of the few publicly listed ISPs in the region.

There have been some exceptions to the rule, where a particular stock has
remained attractive even when the overall market is underperforming. One such
stock is Egyp-tian Mobile Phone Network (4.9% of net assets as of 6/30/99). This
company has continued to enjoy very strong returns in spite of a poor
performance by the Egyptian market as a whole, and we believe that this stock
remains attractive.

Q: Where do you see the greatest opportunities in the emerging markets looking
forward, and how is the Portfolio positioned to take advantage of these?

A: Although Asian markets have risen rapidly in recent months, we continue to
like the outlook for this region. We believe that there are still plenty of
attractively valued stocks, particularly ones that will benefit from the pickup
in consumer demand that is beginning in certain markets. We are also focusing on
Chinese companies that are likely to gain from that country s possible entry
into the World Trade Organization (WTO). We believe that China is likely to make
the necessary concessions for this to happen and want to identify attractive
companies at an early stage to fully participate in their appreciation.

In Latin America we continue to favor Brazil. Interest rates have fallen, and
inflation is running at a lower rate than even the most optimistic analysts had
predicted at the beginning of the year. In view of such rapidly improving
fundamentals, we expect Brazil to outperform.

We are less favorably disposed toward the markets of eastern Europe but believe
that there may be some opportunities in Poland and Hungary as those economies
recover. In Africa and the Middle East, the focus of the Portfolio is still
predominantly on commodities stocks that continue to benefit from an improvement
in the global economic outlook.

- ----------------------------------------------------------
TOP TEN HOLDINGS
- ----------------------------------------------------------
(as a percentage of total net assets)

Hyundai Motor Company ............................ 6.3%
Samsung Electronics Company ...................... 5.4%
Korea Electric Power Corporation, ADR ............ 5.4%
Zhejiang Southeast Electric Power Company, Ltd.... 5.1%
Gulf Indonesia Resources Ltd. .................... 5.0%
Egyptian Mobile Phone Network .................... 4.9%
Cosco Pacific Ltd. ............................... 4.9%
Korea Telecom Corporation, Sponsored ADR ......... 4.7%
Aracruz Celulose S.A., Sponsored ADR ............. 4.3%
Zhejiang Expressway Company, Ltd. ................ 3.8%

- ----------------------------------------------------------
TOP FIVE COUNTRIES
- ----------------------------------------------------------
(as a percentage of total net assets)

Korea ............................................ 21.8%
China/Hong Kong .................................. 19.4%
Brazil ........................................... 18.2%
Mexico ........................................... 10.1%
Indonesia ........................................ 7.2%

Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.

7
<PAGE>

- --------------------
Montgomery
Institutional Series
- --------------------
Emerging Markets
Focus Portfolio
- --------------------
Investments

PORTFOLIO INVESTMENTS

June 30, 1999

Shares Value (Note 1)

COMMON STOCKS -- 83.1%
Brazil -- 12.0%
5,000 Aracruz Celulose S.A., Sponsored
ADR (Paper)...................... $ 110,000
4,500 Cia Vale do Rio Doce, Sponsored
ADR (Other Metals/Minerals)...... 89,438
5,500 Electrobras, Sponsored ADR
(Non-U.S. Utilities)............. 51,906
970 Tele Centro Sul Participacoes
S.A., ADR
(Other Telephone/Communication).. 53,835
-------
305,179

China/Hong Kong -- 19.4%
150,000 Cosco Pacific Ltd.
(Marine Transportation).......... 124,705
62,000 Pacific Century International
(Multi-Line Insurance)........... 50,187
404,000 Shandong International Power
Development Company, Ltd.
(Non-U.S. Utilities)............. 93,211
484,000 Zhejiang Expressway Company, Ltd.
(Other Transportation)........... 96,073
296,000 Zhejiang Southeast Electric Power
Company, Ltd. (Non-U.S.
Utilities)....................... 130,832
-------
495,008

Egypt -- 4.9%
5,600 Egyptian Mobile Phone Network
(Cellular Telephone)............. 126,200

Indonesia -- 7.2%
11,000 Gulf Indonesia Resources Ltd.
(Oil and Gas Production)......... 126,500
125,000 PT Indah Kiat Pulp & Paper
Corporation (Paper).............. 57,762
-------
184,262

Korea -- 21.8%
6,800 Hyundai Motor Company
(Automotive Aftermarket)......... 161,261
6,700 Korea Electric Power Corporation,
ADR (Non-U.S. Utilities)......... 137,350
3,000 Korea Telecom Corporation,
Sponsored ADR
(Other Telephone/Communication).. 120,000
1,254 Samsung Electronics Company
(Diversified Electronic
Products)........................ 137,588
-------
556,199

Mexico -- 10.1%
18,000 Cemex S.A. de CV (Building
Materials)....................... 89,016
30,000 Grupo Financiero Banamex Accival
S.A. de CV (Non-U.S. Banks)..... 75,772

1,140 Telefonos de Mexico S.A., ADR
(Other Telephone/Communication).. $ 92,126
-------
256,914

Singapore -- 2.0%
8,000 City Developments Ltd.
(Real Estate).................... 51,223

South Africa -- 5.7%
3,550 Impala Platinum Holdings Ltd.
(Precious Metals)................ 89,301
2,400 Rustenburg Platinum Holdings
(Precious Metals)................ 55,998
-------
145,299
-------

TOTAL COMMON STOCKS
(Cost $1,520,595) 2,120,284
---------

PREFERRED STOCKS -- 6.2%
Brazil--6.2%
12,200,000 Banco do Brasil S.A.
(Non-U.S. Banks)................. 63,982
610,000 Petroleo Brasileiro S.A.
(Integrated Oil Companies)....... 94,456
---------

TOTAL PREFERRED STOCKS
(Cost $135,167)...................................... 158,438
---------

TOTAL SECURITIES
(Cost $1,655,762).................................... 2,278,722
---------

Principal Amount

REPURCHASE AGREEMENTS -- 7.1%
$ 90,500 Agreement with Paine Webber
Group, Tri-Party, 5.050% dated
06/30/99, to be repurchased
at $90,513 on 07/01/99,
collateralized by $90,680 market
value of U.S. government and
mortgage-backed securities,
having various maturities and
interest rates................... 90,500
90,500 Agreement with Prudential
Securities, Tri-Party, 5.100%
dated 06/30/99, to be repurchased
at $90,513 on 07/01/99,
collateralized by $92,310 market
value of U.S. government and
mortgage-backed securities,
having various maturities and
interest rates................... 90,500
---------

TOTAL REPURCHASE AGREEMENTS
(Cost $181,000)...................................... 181,000
---------

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

8
<PAGE>

--------------------
Montgomery
Institutional Series
--------------------
Emerging Markets
Focus Portfolio
--------------------
Investments

Value (Note 1)

TOTAL INVESTMENTS -- 96.4%
(Cost $1,836,762*) .......................... $ 2,459,722

OTHER ASSETS AND LIABILITIES -- 3.6%
(Net) ....................................... 91,285
---------

NET ASSETS -- 100.0% ......................... $ 2,551,007
=========

* Aggregate cost for federal tax purposes was $1,836,762.
+ Non-income-producing security.

Abbreviations
ADR American Depositary Receipt

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

9
<PAGE>

- --------------------
Montgomery
Institutional Series
- --------------------
Macro Cap Systematic
Value Portfolio
- --------------------
Portfolio Highlights

- -----------------------------------------------------
PORTFOLIO MANAGEMENT
- -----------------------------------------------------

William Jacques .........Portfolio Manager
Douglas Stark ...........Portfolio Manager

- -----------------------------------------------------
PERFORMANCE
- -----------------------------------------------------

Cumulative total returns for the period ended 6/30/99

- -----------------------------------------------------
Montgomery Institutional Series:
Macro Cap Systematic
Value Portfolio

Since inception (8/31/98) ...... 30.66%

- -----------------------------------------------------
Russell Top 200 Value Index

Since 8/31/98 .................. 44.05%

- -----------------------------------------------------
S&P 500 Index

Since 8/31/98 .................. 44.97%

- -----------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.

[GRAPH APPEARS HERE]

Growth of a $10,000 Investment

Montgomery
Institutional Russell
Series: Macro Top 200
Cap Systematic Value S&P 500
Value Portfolio Index/1/ Index/2/
--------------- --------- ---------
Aug-98 10000 10000 10000
Sep-98 9840 10569 10647
Oct-98 10680 11455 11509
Nov-98 11020 12054 12207
Dec-98 11535 12485 12917
Jan-99 11855 12776 13449
Feb-99 11555 12642 13031
Mar-99 11766 12941 13555
Apr-99 12846 14143 14071
May-99 12505 13892 13745
Jun-99 13066 14405 14497

/1/ The Russell Top 200 Value Index measures the performance of companies with
lower price-to-book ratios and lower forecasted growth values in the
Russell Top 200 Index, an index composed of the 200 largest U.S. companies,
based on total market capitalization.

/2/ The Standard and Poor's 500 Index is composed of 500 widely held common
stocks listed on the NYSE, AMEX and OTC markets.

INVESTMENT REVIEW

Q: What is the Portfolio's strategy?

A: The Portfolio seeks long-term capital appreciation by investing in very
large, blue chip, value-oriented stocks from among the 200 largest-capitalized
stocks in the United States. The companies in the Portfolio share common
characteristics, including a lower price-to-earnings ratio and, in our opinion,
better than average growth and earnings potential versus other large-cap value
funds. Our proprietary stock valuation model helps us identify undervalued
stocks that we believe have reasonable growth prospects.

Q: A lot of funds invest in large-cap stocks. What makes this one different?

A: Most investors think that all large-cap stocks are efficiently priced and
that there is no difference between owning Coke or Pepsi, or Ford or GM. We
believe the contrary. Our research shows that there are big differences in
valuations of similar companies in the same industry. We believe that through
the use of our proprietary model, we can identify and exploit these differences
before they are recognized by the market and turn them into opportunities to
enhance returns.

Another observation that we find even more interesting is that many
institutional investors don't hold enough of these sleeping giants in their
portfolios to keep pace with their potential returns relative to the market. The
Macro Cap Systematic Value Portfolio offers investors exposure to an underowned
segment of the market, with the potential to add value. And because we focus on
the largest value stocks in the United States, the Portfolio often complements
other so-called large stock funds.

Q: Many fund managers spend time visiting companies, but you don't. Why not?

A: As systematic investors we believe that technology can be used to analyze
stocks rationally. We use quantitative tools to determine which companies offer
better value than others. When we examine stocks, we use our own computer model
to evaluate a handful of well-researched performance indicators that have stood
the test of time. The company data we analyze comes from industry recognized
sources that have solid reputations for accuracy and reliability. Of course, no
computer will completely replace the expertise of a trained, experienced
portfolio manager, which is why we review the Portfolio at every stage of the
investment process.

Q: What impact has this strategy had on Portfolio performance from its inception
to June 30, 1999?

A: The Portfolio returned 30.7% over the period, versus a return of 44.1% for
its benchmark, the Russell Top 200(R) Value Index. A promising gain came in the
final month of the financial year. This resulted from the fact that we remained
true to our investment strategy through one of the most difficult investment
environments for value stocks in the past 20 years.

10
<PAGE>

Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.

For the 18 months ended March 1999, a very small number of large-cap growth
companies and an assortment of Internet-related companies led the stock market.
During that period we witnessed an extraordinarily severe divergence in
performance between value stocks and growth stocks. Because the Portfolio was
launched during this unprecedented period, this affected performance.

Q: With the recent bull run benefiting large-cap stock funds, why do you
consider the Portfolio to be a good investment?

A: We think the Portfolio is an attractive investment for investors seeking
exposure to fundamentally undervalued companies that show promise of future
growth. These are the companies that lagged well behind the handful of large-cap
growth stocks that fueled the large-cap bull run. Now here's the good news: The
current valuation spread between expensive, popular stocks and the undervalued
securities that our strategy seeks to add to the Portfolio is the widest in
modern times. As this gap has begun to close, we believe that such stocks
represent a great opportunity for strong returns.

- --------------------
Montgomery
Institutional Series
- --------------------
Macro Cap Systematic
Value Portfolio
- --------------------
Portfolio Highlights

- ------------------------------------------------------
TOP TEN HOLDINGS
- ------------------------------------------------------
(as a percentage of total net assets)

Bank of America Corporation................ 4.6%
International Business Machines
Corporation............................... 4.4%
AT&T Corporation .......................... 4.3%
Bell Atlantic Corporation.................. 4.3%
Exxon Corporation.......................... 4.3%
Citigroup, Inc. ........................... 3.9%
BellSouth Corporation...................... 3.8%
Chase Manhattan Corporation................ 3.5%
Morgan Stanley Dean Witter & Company....... 2.9%
SBC Communications, Inc. .................. 2.9%

- ------------------------------------------------------
TOP FIVE INDUSTRIES
- ------------------------------------------------------
(as a percentage of total net assets)

Banks..................................... 19.7%
Telephone................................. 18.0%
Energy Reserves and Production............ 8.7%
Computer Hardware and Business Machines... 4.4%
Media..................................... 4.3%

11
<PAGE>

- --------------------
Montgomery
Institutional Series
- --------------------
Macro Cap Systematic
Value Portfolio
- --------------------
Investments

PORTFOLIO INVESTMENTS

June 30, 1999

Shares Value (Note 1)
COMMON STOCKS -- 95.9%
Airlines -- 1.0%
1,000 Delta Air Lines, Inc. ........... $ 57,625

Auto Parts: O.E.M. -- 1.1%
900 Johnson Controls, Inc. .......... 62,381

Banks -- 19.7%
3,700 Bank of America Corporation...... 271,256
2,900 Bank One Corporation............. 172,731
2,400 Chase Manhattan Corporation...... 207,900
4,900 Citigroup, Inc. ................. 232,750
1,900 First Union Corporation.......... 89,300
2,800 Fleet Financial Group, Inc. ..... 124,250
1,100 PCN Bank Corporation............. 63,388
300 U.S. Bancorp..................... 10,200
---------
1,171,775

Chemicals -- 1.7%
800 Allied Signal, Inc. ............. 50,400
1,000 Union Carbide Corporation........ 48,750
---------
99,150

Computer Hardware and Business Machines -- 4.4%
2,000 International Business Machines
Corporation...................... 258,500

Defense/Aerospace -- 0.7%
900 Boeing Company................... 39,769

Department Stores -- 2.2%
600 Federated Department Stores,
Inc. ............................ 31,763
2,200 Sears Roebuck & Company.......... 98,037
---------
129,800

Diversified Electronic Products -- 0.8%
500 Hewlett-Packard Company.......... 50,250

EDP Peripherals -- 1.2%
2,700 Seagate Technology+.............. 69,187

Electrical Utility -- 1.8%
1,400 GPU, Inc. ....................... 59,062
1,100 Peco Energy Company.............. 46,063
---------
105,125

Electronic Data Processing -- 1.2%
1,500 Apple Computer, Inc.+ ........... 69,563

Energy Reserves and Production -- 8.7%
1,100 Chevron Corporation.............. 104,706
800 Duke Energy Corporation.......... 43,500
3,300 Exxon Corporation................ 254,512
200 Mobil Corporation................ 19,800
1,900 Phillips Petroleum Company....... 95,594
---------
518,112

Financial Services -- 3.9%
2,000 Countrywide Credit Industries,
Inc. ............................ 85,500
1,200 Fannie Mae....................... 82,050
1,300 Household International, Inc. ... 61,587
---------
229,137

Food and Beverage -- 0.1%
100 General Mills, Inc. .............. 8,038

Forestry and Paper -- 1.7%
1,800 Kimberly-Clark Corporation....... 102,600

Grocery Stores -- 0.5%
600 Albertsons, Inc. ................. 30,938

Home Products -- 0.1%
200 Ralston-Ralston Purina Group...... 6,088

Information Services -- 0.2%
200 First Data Corporation............ 9,788

Integrated Oil Companies -- 1.8%
1,700 Texaco, Inc. .................... 106,250

Life and Health Insurance -- 1.4%
2,800 Conseco, Inc. ................... 85,225

Major Pharmaceuticals -- 0.6%
500 Merck & Company, Inc. ........... 37,000

Media -- 4.3%
2,600 CBS Corporation+................. 112,937
1,500 Gannett Company.................. 107,063
400 Tribune Company.................. 34,850
---------
254,850

Medical Products and Supplies -- 1.8%
1,100 Johnson & Johnson................ 107,800

Medical Services -- 0.8%
3,000 Healthsouth Corporation.......... 44,813

Motor Vehicles and Parts -- 3.7%
2,400 Ford Motor Company............... 135,450
1,300 General Motors Corporation....... 85,800
---------
221,250

Oil Services -- 1.5%
2,300 Coastal Corporation.............. 92,000

Packaged Foods -- 0.5%
600 H.J. Heinz Company. .............. 30,075

Paints/Coatings -- 1.3%
1,300 PPG Industry, Inc. .............. 76,781

Property and Casualty Insurance -- 2.8%
3,300 Allstate Corporation............. 118,387
400 American International Group,
Inc. ............................ 46,825
---------
165,212

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

<PAGE>

--------------------
Montgomery
Institutional Series
--------------------
Macro Cap Systematic
Value Portfolio
--------------------
Investments

Shares Value (Note 1)

COMMON STOCKS -- continued

Railroads -- 0.4%
800 Burlington Northern Santa Fe
Corporation...................... $ 24,800

Securities and Asset Management -- 3.3%
500 Bear Stearns Company, Inc. ...... 23,375
1,700 Morgan Stanley Dean Witter &
Company.......................... 174,250
---------
197,625

Speciality Chemicals -- 0.3%
400 Praxair, Inc. ................... 19,575

Telephone -- 18.0%
200 Ameritech Corporation............ 14,700
4,600 AT&T Corporation................. 256,737
3,900 Bell Atlantic Corporation........ 254,963
4,800 BellSouth Corporation............ 225,000
1,700 MCI WorldCom, Inc. .............. 146,625
3,000 SBC Communications, Inc. ........ 174,000
---------
1,072,025

Tobacco -- 2.4%
3,500 Philip Morris Companies, Inc. ... 140,656

TOTAL COMMON STOCKS
(Cost $5,162,519).............................. 5,693,763

U.S. TREASURY BILL -- 0.2%
$ 15,000 U.S. Treasury Bill, 4.510% due
09/23/99ss.
(Cost $14,849)............. $ 14,840
---------

TOTAL SECURITIES
(Cost $5,177,368).............................. 5,708,603

REPURCHASE AGREEMENTS -- 3.4%
102,000 Agreement with Paine Webber
Group, Tri-Party, 5.050% dated
06/30/9, to be repurchased at
$102,014 on 07/01/99,
collateralized by $102,203
market value of U.S. government
and mortgage-backed securities,
having various maturities and
interest rates................... 102,000
102,000 Agreement with Prudential
Securities, Tri-Party, 5.100%
dated 06/30/99, to be
repurchased at $102,014 on
07/01/99, collateralized by
$104,040 market value of U.S.
government and mortgage-backed
securities, having various
maturities and interest rates.... 102,000
---------

TOTAL REPURCHASE AGREEMENTS
(Cost $204,000)................................ 204,000
---------

TOTAL INVESTMENTS 99.5%
(Cost $5,381,368*)............................. 5,912,603

OTHER ASSETS AND LIABILITIES -- 0.5%
(Net).......................................... 27,598
---------

NET ASSETS -- 100.0%........................... $ 5,940,201
=========

* Aggregate cost for federal tax purposes $5,386,565.
+ Non-income-producing security.
ss. Security segregated as collateral for open futures.

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

- ------------------------------------
Montgomery
Institutional Series
- ------------------------------------
Small Cap Systematic
Value Portfolio
- ------------------------------------
Portfolio Highlights

- -----------------------------------------
PORTFOLIO MANAGEMENT
- -----------------------------------------

William Jacques ...... Portfolio Manager
Douglas Stark ........ Portfolio Manager

- -----------------------------------------
PERFORMANCE
- -----------------------------------------
Cumulative total returns for the
period ended 6/30/99

- -----------------------------------------
Montgomery Institutional Series:
Small Cap Systematic
Value Portfolio
Since inception (8/31/98) ........16.69%

- -----------------------------------------
Russell 2000 Value Index
Since 8/31/98 ....................21.29%
- -----------------------------------------

Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.

Growth of a $10,000 Investment

Montgomery
Institutional
Series: Russell
Small Cap 2000
Systematic Value
Value Porfolio Index
-------------- -------
Aug-98 10,000 10,000
Sep-98 10,200 10,565
Oct-98 10,470 10,878
Nov-98 11,000 11,173
Dec-98 11,408 11,523
Jan-99 11,017 11,262
Feb-99 10,334 10,493
Mar-99 10,032 10,406
Apr-99 10,936 11,356
May-99 11,267 11,705
Jun-99 11,669 12,129

INVESTMENT REVIEW

Q: What is the Portfolio's strategy?

A: The Portfolio seeks long-term capital appreciation by investing in
undervalued companies with a small market capitalizations. We look for companies
with strong value-oriented characteristics, including a lower price-to-earnings
(P/E) ratio and better than average growth and earnings potential versus their
small-cap peers. In addition, companies should demonstrate above-average
economic viability as well as momentum for growth or recovery. Simply put, we
look for inexpensive small-cap stocks that have strong prospects for future
profitability.

Q: Aren t small-cap stocks riskier than large-caps? How do you manage the
Portfolio s risk exposure?

A: In general, smaller companies are more likely to experience financial
difficulties than the more established companies that populate the large-cap
universe. Our strategy is to focus on companies that we believe have strong
enough balance sheets to weather any changes in the economic climate, as smaller
companies are affected more acutely than larger ones. To avoid buying companies
that may be on the verge of financial difficulty, we watch for signals that
companies are in the early stages of growth or recovery. In addition, to further
minimize overall risk to the Portfolio, we impose a number of benchmark-relative
constraints, including percentage limits on individual stock, industry and
sector positions. These measures help avoid several value traps, including
overexposing the Portfolio to any one stock or industry or to unnecessary market
risk.

Q: How has the Portfolio performed since its inception on August 31, 1998?

A: The Portfolio has returned 16.7%, versus returns of 21.3% for the Russell
2000(R) Value Index and 33.3% for the Russell 2000 Index. Encouragingly, after
an extended period in which the Port-folio s discipline was out of favor, we
have seen a broadening of the market during the second quarter of 1999, which
includes a shift toward both lower P/E multiple stocks and smaller stocks. These
have contributed to better performance for small-cap value stocks and the
Portfolio as a whole.

Q: Given the recent superior performance of small-cap growth stocks, such as
Internet-related issues, why does the Portfolio focus on value stocks?

A: Security analysts often promote up-and-coming companies as the next
Microsoft, and the hype is reflected in their inflated stock prices. The
unfortunate reality is that most rising stars will eventually disappoint
investors. Our research supports our belief that the risks associated with
investing in small-cap growth stocks exceed the potential returns.

We have analyzed stocks in the Russell 2000 Value and Russell 2000 Growth
Indices since the inception of these benchmarks in January 1979. Based on this
analysis, we have discovered that over the more than 20-year period, small-cap
value stocks have
<PAGE>

---------------------------------
Montgomery
Institutional Series
---------------------------------
Small Cap Systematic
Value Portfolio
---------------------------------

outperformed small-cap growth stocks by 3.5% per year, and small-cap value
stocks have been less volatile than their growth counterparts. A comparison of a
recognized risk indicator standard deviation highlights this finding: For the
20-year period ended June 30, 1999, the standard deviation for the Russell 2000
Value is 16.6, and 22.3 for the Russell 2000(R) Growth. In recognition of this,
the strategy of the Portfolio is to seek long-term appreciation from less
volatile, small-cap value companies regardless of short-term market trends.

Q: What is your outlook for small-cap stocks, and why should investors consider
the Portfolio?

A: We believe in the research indicating that small-cap value stocks perform
very well over time. Consequently, it makes sense to invest in this sector of
the market to help achieve a well-diversified equity position. We believe that
the Portfolio offers investors a highly disciplined exposure to small-cap
companies with good growth prospects that are currently undervalued.

- ------------------------------------------------
Portfolio Highlights

- ------------------------------------------------
TOP TEN HOLDINGS
- ------------------------------------------------
(as a percentage of total net assets)
Tecumseh Products Company, Class A ...... 1.5%
Minnesota Power, Inc. ................... 1.3%
XL Capital, Ltd., Class A ............... 1.3%
Rayonier, Inc. .......................... 1.2%
Kaufman & Broad Home Corporation ........ 1.2%
Great Atlantic & Pacific Tea Company .... 1.1%
Rochester Gas & Electric Company ........ 1.1%
Ball Corporation ........................ 1.0%
Alaska Air Group, Inc. .................. 1.0%
Nortek, Inc. ............................ 1.0%

- ------------------------------------------------
TOP FIVE INDUSTRIES
- ------------------------------------------------
(as a percentage of total net assets)
Construction and Real Property 10.3%
Financial Services 5.7%
Banks 5.3%
Mining and Materials 4.7%
Electrical Utility 4.3%

Portfolio holdings are subject to change and should not be considered a
recommendation to buy individual securities.

There are risks associated with investing in small-cap companies, which tend to
be more volatile and less liquid than stocks of large companies, including the
increased risk of price fluctuations.
<PAGE>

- -------------------------------------
Montgomery
Institutional Series
- -------------------------------------
Small Cap Systematic
Value Portfolio
- -------------------------------------

Investments

PORTFOLIO INVESTMENTS

June 30, 1999

Shares Value (Note 1)

COMMON STOCKS -- 93.6%

Airlines -- 1.5%
300 Alaska Air Group, Inc.+................ $ 12,525
300 America West Holdings Corporation,
Class B+............................... 5,663
---------
18,188
Apparel and Textiles -- 1.4%
200 Kellwood Company....................... 5,425
200 Pillowtex Corporation.................. 3,263
200 Springs Industries, Inc. .............. 8,725
---------
17,413
Banks -- 5.3%
200 BancWest Corporation................... 7,425
100 Citizens Banking Corporation........... 3,003
105 Commerce Bancorp, Inc. ................ 4,489
300 Commercial Federal Corporation......... 6,956
220 Community Trust Bancorp, Inc. ......... 5,156
100 Corus Bancshares, Inc. ................ 3,178
400 Cullen/Frost Bankers, Inc. ............ 11,025
100 First Citizens Bancshares, Class A..... 8,094
100 National City Bancorporation........... 2,075
100 One Valley Bancorp, Inc. .............. 3,750
210 Provident Bankshares Corporation....... 4,876
100 UMB Financial Corporation.............. 4,263
---------
64,290
Chemicals -- 2.8%
100 Albemarle Corporation.................. 2,312
200 AptarGroup, Inc. ...................... 6,000
400 Gencorp, Inc. ......................... 10,100
100 Gentek, Inc. .......................... 1,388
200 Geon Corporation....................... 6,450
600 Octel Corporation+..................... 7,500
---------
33,750
Clothing Stores -- 0.2%
200 Cato Corporation, Class A.............. 2,325

Computer Hardware and Business Machines -- 1.3%
200 Banctec, Inc. ......................... 3,588
200 Gerber Scientific, Inc. ............... 4,412
200 Imation Corporation+................... 4,962
100 In Focus Systems, Inc.+................ 1,491
100 InaCom Corporation+.................... 1,263
---------
15,716
Computer Software -- 0.3%
100 Avant! Corporation+.................... 1,259
200 Personnel Group of America,
Inc.+.................................. 2,000
---------
3,259
Construction and Real Property -- 10.3%
200 Associated Estates Realty Corporation.. $ 2,363
100 Boykin Lodging Company................. 1,538
100 Camden Property Trust.................. 2,775
200 Capital Automotive..................... 2,650
300 Centertrust Retail Property, Inc. ..... 3,525
200 Centex Construction Products, Inc. .... 6,825
400 Cornerstone Realty Income Trust, Inc. . 4,300
100 Entertainment Properties Trust......... 1,763
100 Franchise Finance Corporation of
America................................ 2,200
100 Glenborough Realty Trust, Inc. ........ 1,750
400 Innkeepers USA Trust................... 4,000
600 Kaufman & Broad Home Corporation....... 14,925
100 Kilroy Realty Corporation.............. 2,431
200 Koger Equity, Inc. .................... 3,687
100 Lone Star Industries, Inc. ............ 3,756
400 MDC Holdings, Inc. .................... 8,600
100 NCI Building Systems, Inc.+............ 2,138
100 NVR, Inc.+............................. 5,219
100 Omega Healthcare Investors, Inc. ...... 2,581
100 Pacific Gulf Properties, Inc. ......... 2,263
100 Prime Group Realty Trust............... 1,719
400 Prime Retail, Inc. .................... 3,475
600 Prison Realty Trust, Inc. ............. 5,887
200 Quanex Corporation..................... 5,700
400 Ryland Group, Inc. .................... 11,875
200 SL Green Realty Corporation............ 4,087
200 Sunstone Hotel Investors, Inc. ........ 1,700
200 Toll Brothers, Inc.+................... 4,287
200 Webb Del Corporation................... 4,775
300 Wellsford Real Properties, Inc.+....... 3,225
---------
126,019

Consumer Durables -- 1.8%
200 Interface, Inc. ....................... 1,731
400 Kimball International, Inc., Class B... 6,775
500 LA-Z-Boy, Inc. ........................ 11,500
200 Recoton Corporation+................... 1,825
---------
21,831
Consumer Services -- 0.2%
200 Trans World Entertainment Corporation+. 2,238

Defense/Aerospace -- 0.7%
200 Precision Castparts Corporation........ 8,500

Department Stores -- 0.6%
200 Shopko Stores, Inc.+................... 7,250

Drugs -- 2.6%
200 Bindley Western Industries, Inc.+...... 4,612
300 Cambrex Corporation.................... 7,875

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

<PAGE>

-----------------------------------
Montgomery
Institutional Series
-----------------------------------
Small Cap Systematic
Value Portfolio
-----------------------------------
Investments

Shares Value (Note 1)

COMMON STOCKS -- continued
Drugs -- continued
600 Herbalife International, Class A....... $ 6,544
400 Roberts Pharmaceutical Corporation+.... 9,700
200 United Retail Group, Inc.+............. 3,044
--------
31,775
EDP Peripherals -- 0.1%
100 Avid Technology, Inc.+................. 1,603

Electrical Utility -- 4.3%
100 Central Hudson Gas & Electric Company.. 4,200
100 Commonwealth Energy System, Inc. ...... 4,200
800 Minnesota Power, Inc. ................. 15,900
500 Public Service Company of New
Mexico................................. 9,937
500 Rochester Gas & Electric Company....... 13,281
100 United Illuminating Company............ 4,244
--------
51,762

Electronic Equipment -- 4.1%
200 Allen Telecom, Inc.+................... 2,150
300 Belden, Inc. .......................... 7,181
100 Bio Rad Laboratory, Class A............ 2,612
300 Cypress Semiconductor Corporation...... 4,950
100 Esterline Technologies Corporation..... 1,438
200 Hutchinson Technology, Inc. ........... 5,537
300 Methode Electronics, Class A........... 6,862
100 MTS Systems Corporation................ 1,213
100 Park Electrochemical Corporation....... 2,875
600 Pioneer Standard Electronics, Inc. .... 7,219
100 Tektronix, Inc. ....................... 3,019
250 Vishay Intertechnology, Inc.+.......... 5,250
--------
50,306

Energy Reserves and Production -- 1.8%
300 Houston Exploration Company+........... 5,681
300 Newfield Exploration Company+.......... 8,532
200 Penn Virginia Corporation.............. 3,950
400 Vintage Petroleum, Inc.+............... 4,300
--------
22,463
Entertainment -- 0.6%
200 Carmike Cinemas, Inc., Class A+........ 3,187
300 Handleman Company+..................... 3,544
--------
6,731
Financial Services -- 5.7%
400 Advanta Corporation, Inc., Class A..... 7,250
500 Berkshire Realty Company............... 5,781
300 Brandywine Realty Trust................ 5,944
300 Burnham Pacific Property, Inc.+........ 3,694
200 Developers Divers Realty
Corporation............................ 3,325
300 Felcor Lodging Trust, Inc. ............ 6,225
200 Healthcare Realty Trust, Inc. ......... 4,200
200 Hilb, Rogal & Hamilton Company......... 4,475
100 Indymac Mortgage Holdings, Inc. ....... 1,600
200 IRT Property Company................... 1,975
300 LTC Properties, Inc. .................. 3,900
100 Prentiss Properties Trust.............. 2,350
100 Reckson Associates Realty
Corporation............................ 2,350
100 Redwood Trust, Inc. ................... 3,312
100 Resource America, Inc., Class A........ 1,447
300 Resource Bancshares Mortgage Group,
Inc. .................................. 3,056
100 Student Loan Corporation............... 4,450
200 Walden Residential Properties,
Inc. .................................. 4,300
--------
69,634

Food and Beverage -- 1.2%
200 Corn Products International, Inc. ..... 6,087
200 Pilgrims Pride Corporation............. 6,000
100 Universal Foods Corporation............ 2,113
--------
14,200

Forestry and Paper -- 2.3%
300 Rayonier, Inc. ........................ 14,944
100 Republic Group, Inc. .................. 1,800
200 Rock-Tenn Company, Class A............. 3,337
100 Shorewood Packaging Corporation+....... 1,844
300 United Stationers, Inc.+............... 6,609
--------
28,534

Gas and Water Utilities -- 3.3%
100 Connecticut Energy Corporation......... 3,856
200 Eastern Enterprises.................... 7,950
200 Energen Corporation.................... 3,725
100 New Jersey Resources Corporation....... 3,744
300 Oneok, Inc. ........................... 9,525
300 Peoples Energy Corporation............. 11,306
--------
40,106

Grocery Stores -- 1.1%
400 Great Atlantic & Pacific Tea
Company................................ 13,525

Heavy Electrical Equipment -- 1.4%
300 Anixter International, Inc.+........... 5,475
300 Hughes Supplies, Inc. ................. 8,906
100 Lincoln Electric Holdings, Inc. ....... 2,075
--------
16,456

Heavy Machinery -- 1.2%
200 Columbus McKinnon Corporation.......... 4,750
300 Trinity Industries, Inc. .............. 10,050
--------
14,800

Home Products -- 0.8%
100 Block Drug Company, Class A............ 4,184
200 Libbey, Inc. .......................... 5,800
--------
9,984

Hotels/Resorts -- 1.0%
300 Meristar Hospitality Corporation....... 6,731
500 Park Place Entertainment Corporation... 4,844
--------
11,575
Industrial Parts -- 3.9%
100 Commercial Intertech Corporation....... 1,594

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

17
<PAGE>

- -----------------------------------
Montgomery
Institutional Series
- -----------------------------------
Small Cap Systematic
Value Portfolio
- -----------------------------------
Investments

Shares Value (Note 1)

COMMON STOCKS -- continued
Industrial Parts -- continued
400 Hexcel Corporation+..................... $ 4,050
100 Mark IV Industries, Inc. ............... 2,113
400 Nortek, Inc. ........................... 12,525
200 SPS Technologies, Inc.+................. 7,500
300 Tecumseh Products Company, Class A...... 18,159
100 Thomas Industries, Inc. ................ 2,050
-------
47,991

Industrial Services -- 3.2%
100 Aaron Rents, Inc. ...................... 2,225
100 Avis Rent A Car, Inc.+.................. 2,913
500 Budget Group, Inc.+..................... 6,156
100 CDI Corporation......................... 3,406
100 Cort Business Services Corporation+..... 2,394
200 Dollar Thrifty Automotive Group, Inc.+.. 4,650
100 Rental Service Corporation+............. 2,863
500 Rollins Truck Leasing Corporation....... 5,562
200 Unifirst Corporation.................... 3,675
100 XTRA Corporation+....................... 4,594
-------
38,438

Information Services -- 0.3%
300 Pomeroy Computer Resources, Inc.+....... 4,191

Leisure -- 1.4%
300 GTECH Holdings Corporation+............. 7,069
100 Oneida, Ltd. ........................... 2,812
100 Polaris Industries, Inc. ............... 4,350
100 Russ Berrie & Company, Inc. ............ 2,475
-------
16,706

Life and Health Insurance -- 1.3%
306 Delphi Financial Group, Class A+........ 10,978
150 Reinsurance Group of America, Inc. ..... 5,287
-------
16,265

Media -- 0.7%
100 Gaylord Entertainment Company........... 3,000
100 Liberty Corporation..................... 5,450
-------
8,450

Medical Products and Supplies -- 0.5%
100 Maxxim Medical, Inc.+................... 2,331
200 Sola International, Inc.+............... 3,888
-------
6,219

Medical Services -- 1.1%
100 Alterra Healthcare Corporation+......... 1,375
400 Carematrix Corporation+................. 4,962
200 Quest Diagnostics, Inc.+................ 5,475
200 Rural/Metro Corporation+................ 1,888
-------
13,700

Mining and Materials -- 4.7%
300 Ball Corporation........................ 12,675
200 Clevelands-Cliffs, Inc. ................ 6,475
200 Commercial Metals Company............... 5,700
300 Intermet Corporation.................... 4,519
100 Mueller Industries, Inc.+............... 3,394
400 Orgeon Steel Mills, Inc. ............... 5,325
400 RTI International Metals, Inc.+......... 5,875
100 Ryerson Tull, Inc. ..................... 2,256
200 Silgan Holdings. Inc.+.................. 3,994
100 Superior Telecom, Inc. ................. 2,500
300 USEC, Inc. ............................. 4,462
-------
57,175

Motor Vehicles and Parts -- 1.3%
200 Borg-Warner Automotive, Inc. ........... 11,000
100 Coachmen Industries, Inc. .............. 2,325
100 Tower Automotive, Inc.+................. 2,544
-------
15,869

Oil Refining/Marketing -- 1.6%
300 Equitable Resources, Inc. .............. 11,325
246 Pennzoil-Quaker State Company........... 3,690
300 Tesoro Petroleum Corporation+........... 4,781
-------
19,796

Oil Services -- 0.9%
200 Oceaneering International, Inc.+........ 3,225
500 Seitel, Inc. ........................... 8,094
-------
11,319

Property and Casualty Insurance -- 3.1%
200 Acceptance Insurance Companies, Inc.+... 3,013
200 Capital Re Corporation.................. 3,213
100 Fidelity National Financial, Inc. ...... 2,100
300 First American Financial Corporation.... 5,362
300 Frontier Insurance Group, Inc. ......... 4,612
100 Harleysville Group, Inc. ............... 2,047
200 Highlands Insurance Group, Inc.+........ 2,100
274 XL Capital, Ltd., Class A............... 15,498
-------
37,945

Publishing -- 1.2%
300 McClatchy Company, Class A.............. 9,937
100 World Color Press, Inc.+................ 2,750
100 Ziff-Davis, Inc.+....................... 1,544
-------
14,231

Railroads -- 0.5%
100 ABC Rail Products Corporation+.......... 2,050
100 Varlen Corporation...................... 4,031
-------
6,081

Restaurants -- 0.4%
200 NPC International, Inc.+................ 3,075
200 Ryan's Family Steak Houses, Inc.+....... 2,319
-------
5,394

Savings and Loan Associations -- 1.0%
300 Bank United Corporation, Class A........ 12,047

Securities and Asset Management -- 0.9%
200 Dain Rauscher Corporation............... 10,825

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

<PAGE>

-----------------------------------
Montgomery
Institutional Series
-----------------------------------
Small Cap Systematic
Value Portfolio
-----------------------------------
Investments

Shares Value (Note 1)

COMMON STOCKS -- continued

Semiconductor -- 0.9%
200 Marshall Industries+.................... $ 7,188
100 Siliconix, Inc.+........................ 3,328
--------
10,516

Specialty Stores -- 1.5%
300 Haverty Furniture Companies,Inc. ....... 10,556
200 Zales Corporation+...................... 8,000
--------
18,556

Telephone -- 0.8%
200 Alliant Communications, Inc. ........... 9,250

Thrifts -- 2.4%
100 Alliance Bancorp........................ 2,331
100 Andover Bancorp, Inc. ................... 3,144
100 Bay View Capital Corporation............ 2,050
400 Downey Financial Corporation............ 8,775
100 First Republic Bank+.................... 2,894
300 Firstfed Financial Corporation+......... 5,775
100 MAF Bancorp, Inc. ...................... 2,422
100 WSFS Financial Corporation.............. 1,465
--------
28,856

Tobacco -- 0.7%
300 Universal Corporation................... 8,531

Trucking, Shipping, Airfreight -- 0.7%
300 Consolidated Freightways Corporation+... 3,853
100 U.S. Freightways Corporation............ 4,603
--------
8,456

Wireless Telecommunications -- 0.7%
300 Cellular Communications of
Puerto Rico, Inc.+...................... 8,541

TOTAL COMMON STOCKS
(Cost $1,061,920)..................................... 1,139,581

Principal Amount Value (Note 1)

REPURCHASE AGREEMENTS -- 3.0%
$ 18,500 Agreement with Paine Webber Group,
Tri-Party, 5.050% dated 06/30/99,
to be repurchased at $18,503 on
07/01/99, collateralized by $18,537
market value of U.S. government and
mortgage-backed securities, having
various maturities and interest rates.... $ 18,500

18,500 Agreement with Prudential Securities,
Tri-Party, 5.100% dated 06/30/99,
to be repurchased at $18,503 on
07/01/99, collateralized by $18,870
market value of U.S. government and
mortgage-backed securities, having
various maturities and interest rates.... 18,500
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $37,000)......................................... 37,000
---------
TOTAL INVESTMENTS -- 96.6%
(Cost $1,098,920*)..................................... 1,176,581

OTHER ASSETS AND LIABILITIES -- 3.4%
(Net).................................................. 41,116
---------
NET ASSETS -- 100.0%................................... $ 1,217,697
=========
* Aggregate cost for federal tax purposes $1,100,418.
+ Non-income-producing security.

19
The accompanying notes are an integral part of these financial statements.
<PAGE>

- -----------------------------------
Montgomery
Institutional Series
- -----------------------------------
Statements of
Assets and Liabilities
- -----------------------------------
June 30, 1999

<TABLE>
<CAPTION>
Emerging Macro Cap Small Cap
International Markets Systematic Systematic
Growth Focus Value Value
Assets: Portfolio Portfolio Portfolio Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments in securities, at value (note 1)
Securities ........................................................ $132,809,437 $ 2,278,722 $ 5,708,603 $ 1,139,581
Repurchase agreements ............................................. 20,936,000 181,000 204,000 37,000
----------- --------- --------- ---------
Total Investments ................................................... 153,745,437 2,459,722 5,912,603 1,176,581
Cash ................................................................ -- -- 1,887 4,137
Foreign currency, at value (Cost $473,718 and $259,178, respectively) 473,718 261,894 -- --
Forward foreign-currency exchange contracts:
Net unrealized appreciation of forward foreign-currency exchange
contracts (note 3) ............................................... -- 3 -- --
Receivables:
Dividends .......................................................... 360,955 4,842 6,039 2,455
Interest ........................................................... 2,937 26 29 12
Variation margin on futures contracts (note 4) ..................... 2,450 -- -- --
Expenses absorbed by Manager ....................................... 151,790 63,989 56,358 85,932
Shares of beneficial interest sold ................................. 46,291 5,189 -- --
Investment securities sold ......................................... 1,081,959 -- 633,294 111,036
Deferred organization costs (note 1) ................................. 24,016 14,485 -- --
Other assets ......................................................... -- 12 5,326 --
----------- --------- --------- ---------
Total Assets ........................................................ 155,887,103 2,810,162 6,617,986 1,380,153
----------- --------- --------- ---------
Liabilities:
- ----------------------------------------------------------------------------------------------------------------------------
Forward foreign-currency exchange contracts:
Net unrealized depreciation of forward foreign-currency exchange
contracts (note 3) ............................................... 62,116 -- -- --
Payables:
Shares of beneficial interest redeemed ............................. 124,071 5,119
Investment securities purchased .................................... 5,567,107 133,803 628,079 101,164
Management fees .................................................... 204,869 22,808 22,955 25,272
Administration fees ................................................ 7,482 178 319 132
Share marketing plan fees (note 3) (Class B and C shares only) ..... -- 95 -- --
Custodian fees ..................................................... 29,105 10,022 1,214 1,656
Trustees fees and expenses ........................................ 4,403 801 986 16,911
Accounting fees .................................................... 13,778 -- -- --
Cash overdrafts payable to custodian ............................... 974,070 8,993 -- --
Transfer agency and servicing fees ................................. 295 5,324 -- --
Other accrued liabilities and expenses ............................. 68,792 72,012 24,232 17,321
----------- --------- --------- ---------
Total Liabilities ................................................... 7,056,088 259,155 677,785 162,456
----------- --------- --------- ---------
Net Assets .......................................................... $148,831,015 $ 2,551,007 $ 5,940,201 $ 1,217,697
Investments at identified cost ...................................... $150,050,376 $ 1,836,762 $ 5,381,368 $ 1,098,920

Net Assets Consist of:
- ----------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(distributions in excess of net
investment income/accumulated net investment loss) ................ $ 318,558 $ -- $ 19,184 $ 5,761
Accumulated net realized gain/(loss) on securities sold, forward
foreign-currency exchange contracts, futures contracts and
foreign-currency transactions...................................... 1,946,140 (1,532,721) 406,587 29,983
Net unrealized appreciation of investments, forward foreign-currency
exchange contracts, foreign-currency transactions, equity swaps
and other assets................................................... 3,636,443 625,720 535,873 77,661
Shares of beneficial interest ....................................... 146,175 1,940 4,545 1,047
Additional paid-in capital .......................................... 142,783,699 3,456,068 4,974,012 1,103,245
----------- ---------- ---------- ---------
Net Assets ......................................................... $148,831,015 $ 2,551,007 $ 5,940,201 $ 1,217,697

Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------
Number of Portfolio shares outstanding ............................. 14,617,450 193,991 454,486 104,736
Net asset value, offering and redemption price per share
outstanding ...................................................... $ 10.18 $ 13.15 $ 13.07 $ 11.63
------------ ------------ ----------- -----------
</TABLE>
20

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

-------------------------------
Montgomery
Institutional Series
-------------------------------
Statements of Operations
-------------------------------
Year Ended June 30, 1999

<TABLE>
<CAPTION>
Emerging Emerging Macro Cap Small Cap
International Markets Markets Systematic Systematic
Growth Focus Focus Value Value
Net Investment Income: Portfolio Portfolio* Portfolio** Portfolio Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment Income:
Interest ................................................. $ 516,936 $ 4,003 $ 32,941 $ 8,829 $ 4,030
Dividends (net of foreign withholding taxes) ............. 1,373,266 6,022 84,542 57,015 18,159
----------- ---------- ---------- ---------- ----------

Total Income ............................................. 1,890,202 10,025 117,483 65,844 22,189
----------- ---------- ---------- ---------- ----------
Expenses:
Custodian fee ............................................ 71,794 4,212 16,363 2,802 5,417
Transfer agency and servicing fees ....................... 5,572 18,109 60,612 13,289 17,867
Management fee (note 2) .................................. 591,014 6,229 46,263 27,801 10,072
Administration fee (note 2) .............................. 39,401 385 2,353 2,330 571
Share marketing plan fee (note 3):
Class B shares ........................................ -- 9 76 -- --
Class C shares ........................................ -- 165 872 -- --
Legal and audit fees ..................................... 40,596 4,819 44,999 19,939 17,413
Trustees fees ........................................... 8,363 479 9,300 4,075 13,353
Shareholder servicing fees (note 3) ...................... -- 867 8,399 7,140 1,813
Registration fees ........................................ 19,507 -- 36,773 14,554 13,201
Accounting expenses ...................................... 52,548 281 -- 851 276
Tax expense .............................................. -- -- 3,338 -- --
Printing fees ............................................ 9,829 2,636 -- 7,012 7,011
Amortization of organization expenses (note 1) ........... 5,984 1,000 4,132 -- --
Other .................................................... 16,517 10,059 57,662 6,868 11,191
Interest expense ......................................... -- 11 1,716 -- --
----------- ---------- ----------- ---------- ----------
Total Expenses ........................................... 861,125 49,261 292,858 106,661 98,185
----------- ---------- ----------- ---------- ----------
Fees deferred and/or expenses absorbed by Manager (note 2) (151,790) (39,463) (216,217) (61,684) (85,933)
----------- ---------- ----------- ---------- ----------
Net Expenses ............................................. 709,335 9,798 76,641 44,977 12,252
----------- ---------- ----------- ---------- ----------
Net Investment Income .................................... 1,180,867 227 40,842 20,867 9,937
----------- ---------- ----------- ---------- ----------

Net Realized and Unrealized Gain on Investments:
- -----------------------------------------------------------------------------------------------------------------------------
Net realized gain/(loss) from:
Securities transactions ............................... 1,946,140 290,010 (1,795,863) 384,000 30,985
Futures contracts ..................................... -- -- -- 22,587 --
Forward foreign-currency exchange contracts ........... -- -- (16,272) -- --
Foreign-currency transactions and other assets ........ (862,852) (8,823) (83,837) -- --
----------- ---------- ----------- ---------- ----------
Net Realized Gain on Investments ......................... 1,083,288 281,187 (1,895,972) 406,587 30,985

Net change in unrealized exchange contracts of:
Securities ............................................ 3,695,061 399,661 13,977 531,235 77,661
Forward foreign-currency exchange contracts ........... (62,116) 3 -- -- --
Futures contracts ..................................... -- -- -- 4,638 --
Foreign-currency transactions and other assets ........ 3,498 2,481 430 -- --
----------- ---------- ----------- ---------- ----------
Net Unrealized Appreciation of Investments ............... 3,636,443 402,145 14,407 535,873 77,661
----------- ---------- ----------- ---------- ----------
Net Realized and Unrealized Gain on Investments .......... 4,719,731 683,332 (1,881,565) 942,460 108,646
----------- ---------- ----------- ---------- ----------
Net Increase in Net Assets Resulting from Operations ..... $ 5,900,598 $ 683,559 $(1,840,723) $ 963,327 $ 118,583
----------- ---------- ----------- ---------- ----------

Foreign withholding taxes ................................ $ 181,537 $ 1,472 $ 1,575 $ -- $ --
----------- ---------- ----------- ---------- ----------
</TABLE>

* For the three-months ended June 30, 1999. The Portfolio changed its fiscal
year end from March 31 to June 30.

** Fiscal year ended March 31, 1999.

21
<PAGE>

- -------------------------------
Montgomery
Institutional Series
- -------------------------------
Statements of
Changes in Net Assets
- -------------------------------
Year Ended June 30, 1999

<TABLE>
<CAPTION>
Emerging Macro Cap Small Cap
International Markets Systematic Systematic
Growth Focus Value Value
Increase/(Decrease) in Net Assets from Operations: Portfolio Portfolio* Portfolio Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
Net investment income/(loss)............................................... $ 1,180,867 $ 227 $ 20,867 $ 9,937
Net realized gain/(loss) on securities, forward foreign-currency exchange
contracts, futures contracts, foreign-currency transactions and other
assets during the period.................................................. 1,083,288 281,187 406,587 30,985
Net unrealized appreciation/(depreciation) of securities, forward
foreign-currency exchange contracts, foreign-currency transactions and
other assets during the period............................................. 3,636,443 402,145 535,873 77,661
--------- --------- --------- ---------
Net Increase/(Decrease) in Net Assets Resulting from Operations 5,900,598 683,559 963,327 118,583

Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income................... -- -- (1,738) (4,189)
Distributions to shareholders from net realized gains on investments....... -- -- -- (1,002)

Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 4)..... 142,930,417 103,468 4,978,612 1,104,305
----------- --------- --------- ---------
Net Increase/(Decrease) in Net Assets 148,831,015 787,027 5,940,201 1,217,697

Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of Period........................................................ -- 1,763,980 -- --
End of Period $ 148,831,015 $2,551,007 $5,940,201 $1,217,697
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) $ 318,558 $ -- $ 19,184 $ 5,761

Y e a r E n d e d M a r c h 3 1 , 1 9 9 9 Emerging Emerging
Markets Markets
Focus Focus
Increase/(Decrease) in Net Assets from Operations: Portfolio** Portfolio***
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/(loss)............................................... $ 40,842 $ 35,459
Net realized gain/(loss) on securities, forward foreign-currency exchange
contracts, futures contracts, foreign-currency transactions and other
assets during the period.................................................. (1,895,972) (23,089)
Net unrealized appreciation/(depreciation) of securities, forward
foreign-currency exchange contracts, foreign-currency transactions and
other assets during the period............................................ 14,407 209,168
--------- ---------
Net Increase/(Decrease) in Net Assets Resulting from Operations (1,840,723) 221,538

Distributions to Shareholders:
- -----------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income...................
Class A Shares............................................................ (72,049) --
Class B Shares............................................................ (168) --
Class C Shares............................................................ (1,738) --

Beneficial Interest Transactions:
- -----------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 4).....
Class A Shares............................................................ 1,734,616 1,576,045
Class B Shares............................................................ 17,057 220
Class C Shares............................................................ (16,325) 145,507
Net Increase/(Decrease) in Net Assets (179,330) 1,943,310

Net Assets:
- -----------------------------------------------------------------------------------------------------------
Beginning of Period........................................................ 1,943,310 --
End of Period $ 1,763,980 $1,943,310
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) $ (69,929) $ 37,012
</TABLE>

* For the three-month period ended June 30, 1999. The Portfolio changed its
fiscal year end from March 31 to June 30.

** Fiscal year ended March 31, 1999.

*** For the period from the commencement of operations on December 31, 1997 to
March 31, 1998.

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

-------------------------------
Montgomery
Institutional Series
-------------------------------
Financial Highlights
-------------------------------

<TABLE>
<CAPTION>
International Growth Portfolio
Selected Per-Share Data for the Year Ended: Fiscal Year Ended June 30,
--------------------------------
1999(a)
<S> <C>
Net Asset Value -- Beginning of Period $ 10.00
Net investment income 0.08
Net realized and unrealized gain on investments 0.10
Net increase in net assets resulting from investment operations 0.18
Net Asset Value -- End of Period $ 10.18
Total Return* 1.80%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period(in 000s) $148,831
Ratio of net investment income/(loss) to average net assets 1.50%
Net investment income/(loss) before deferral of fees by Manager $ 0.07
Portfolio turnover rate 155%
Expense ratio including interest and tax expense 0.90%
Expense ratio before deferral of fees by Manager, including interest and tax expense 1.09%
Expense ratio excluding interest and tax expense 0.90%

</TABLE>
(a) The International Growth Portfolio commenced operations on June 30, 1998.

* Total return represents aggregate total return for the period indicated.

23
<PAGE>

- -------------------------------
Montgomery
Institutional Series
- -------------------------------
Financial Highlights
- -------------------------------
<TABLE>
<CAPTION>
Emerging Markets Focus Portfolio

Institutional Shares(a)
Selected Per-Share Data for the Year or Period Ended: Three Months Ended June 30, Fiscal Year Ended March 31,
--------------------------- ---------------------------
1999(c) 1999++ 1998(b)++
<S> <C> <C> <C>
Net Asset Value -- Beginning of Period $ 9.63 $ 11.43 $ 10.00
Net investment income 0.04 0.12 0.27
Net realized and unrealized gain/(loss) on investments 3.48 (1.76) 1.16
Net increase/(decrease) in net assets resulting from investment operations 3.52 (1.64) 1.43
Distributions:
Dividends from net investment income -- (0.16) --
Total distributions -- (0.16) --
Net Asset Value -- End of Period $ 13.15 $ 9.63 $ 11.43
Total Return* 36.55% (14.04)% 14.40%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000s) $ 2,551 $ 1,655 $ 1,789
Ratio of net investment income/(loss) to average net assets 0.05%+ 1.24% 10.46%+
Net investment income/(loss) before deferral of fees by Manager $ (0.10) $ (0.52) $ (0.07)
Portfolio turnover rate 200% 437% 71%
Expense ratio including interest and tax expense 1.73%+ 2.10% 2.10%+
Expense ratio before deferral of fees by Manager, including interest and tax 8.82%+ 8.68% 15.34%+
expense
Expense ratio excluding interest and tax expense 1.73%+ 2.10% 2.10%+

Class B Shares
Selected Per-Share Data for the Year or Period Ended: Period Ended May 28, Fiscal Year Ended March 31,
-------------------- ---------------------------
1999(d) 1999++ 1998(b)++
<S> <C> <C> <C>
Net Asset Value -- Beginning of Period $ 9.92 $ 11.84 $ 10.00
Net investment income/(loss) 0.00(S) 0.04 0.25
Net realized and unrealized gain/(loss) on investments 1.60
(1.86) 1.59
Net increase/(decrease) in net assets resulting from investment operations 1.60 (1.82) 1.84
Distributions:
Dividends from net investment income -- (0.10) --
Total distributions -- (0.10) --
Net Asset Value -- End of Period $11.52 $ 9.92 $ 11.84
Total Return* -- (15.13)% 18.40%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000s) -- $ 17 $ 0++
Ratio of net investment income/(loss) to average net assets (0.19)%+ 0.49% 9.71%+
Net investment income/(loss) before deferral of fees by Manager $ (0.15) $ (0.17) $ (0.07)
Portfolio turnover rate 437% 71%
Expense ratio including interest and tax expense 2.85%+ 2.85% 2.85%+
Expense ratio before deferral of fees by Manager, including interest and tax 5.42%+ 9.43% 16.09%+
expense
Expense ratio excluding interest and tax expense 2.85%+ 2.85% 2.85%+
</TABLE>

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

-------------------------------
Montgomery
Institutional Series
-------------------------------
Financial Highlights
-------------------------------
<TABLE>
<CAPTION>

Emerging Markets Focus Portfolio (cont'd)
Class C Shares
Selected Per-Share Data for the Year or Period Ended: Period Ended May 28, Fiscal Year Ended March 31,
-------------------- ----------------------------
1999(d) 1999++ 1998(b)++
<S> <C> <C> <C>
Net Asset Value -- Beginning of Period $ 9.93 $ 11.83 $ 10.00
Net investment income/(loss) 0.04 0.04 0.26
Net realized and unrealized gain/(loss) on investments 1.56 (1.84) 1.57
Net increase/(decrease) in net assets resulting from investment operations 1.60 (1.80) 1.83
Distributions:
Dividends from net investment income -- (0.10) --
Total distributions -- (0.10) --
Net Asset Value -- End of Period $ 11.53 $ 9.93 $ 11.83
Total Return* -- (14.98) 18.30%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000s) -- $ 92 $ 154
Ratio of net investment income/(loss) to average net assets (0.20)%+ 0.49% 9.71%+
Net investment income/(loss) before deferral of fees by Manager $ (0.11) $ (0.17) (0.07)
Portfolio turnover rate -- 437% 71%
Expense ratio including interest and tax expense 2.85%+ 2.85% 2.85%+
Expense ratio before deferral of fees by Manager, including interest and tax 5.42%+ 9.43% 16.09%+
expense
Expense ratio excluding interest and tax expense 2.85%+ 2.85% 2.85%+
</TABLE>

(a) Formerly named Class A shares.

(b) The Emerging Markets Focus Portfolio commenced operations on December 31,
1997.

(d) The Emerging Markets Focus Portfolio s Class B and C shares ceased
operations on May 28, 1999.

* Total return represents aggregate total return for the periods indicated.

+ Annualized.

++ Represents an amount less than $1,000.

$ Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results of operations.

(S) Amount represents less than $0.01 per share.

25
<PAGE>

- -------------------------------
Montgomery
Institutional Series
- -------------------------------
Financial Highlights
- -------------------------------
<TABLE>
<CAPTION>

Macro Cap Systematic Value Portfolio
Selected Per-Share Data for the Period Ended: Period Ended June 30,
------------------------
1999(a)
<S> <C>
Net Asset Value -- Beginning of Period $ 10.00
Net investment income/(loss) 0.05
Net realized and unrealized gain/(loss) on investments 3.02
Net increase/(decrease) in net assets resulting from investment operations 3.07
Distributions:
Dividends from net investment income 0.00++
Net Asset Value End of Period $ 13.07
Total Return* 30.66%
Net assets, end of period (in 000s) $ 5,940
Ratio of net investment income/(loss) to average net assets 0.52%+
Net investment income/(loss) before deferral of fees by Manager $ (0.11)
Portfolio turnover rate 97%
Expense ratio including interest and tax expense 1.35%+
Expense ratio before deferral of fees by Manager, including interest and tax expense 3.20%+
Expense ratio excluding interest and tax expense 1.35%+
</TABLE>

(a) The Macro Cap Systematic Value Portfolio commenced operations on August 31,
1998.

* Total return represents aggregate total return for the period indicated.

+ Annualized.

++ Amount represents less than $0.01 per share.

26
<PAGE>

-------------------------------
Montgomery
Institutional Series
-------------------------------
Financial Highlights
-------------------------------

<TABLE>
<CAPTION>
Small Cap Systematic Value Portfolio
Selected Per-Share Data for the Period Ended: Period Ended June 30,
------------------------
1999(a)
<S> <C>
Net Asset Value--Beginning of Period $ 10.00
Net investment income/(loss) 0.09
Net realized and unrealized gain/(loss) on investments 1.59
Net increase/(decrease) in net assets resulting from investment operations 1.68
Distributions:
Dividends from net investment income (0.04)
Distributions from net realized capital gains (0.01)
Total distributions (0.05)
Net Asset Value--End of Period $ 11.63
Total Return* 16.69%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000s) $ 1,218
Ratio of net investment income/(loss) to average net assets 1.00%+
Net investment income/(loss) before deferral of fees by Manager $ (0.70)
Portfolio turnover rate 84%
Expense ratio including interest and tax expense 1.48%+
Expense ratio before deferral of fees by Manager, including interest and tax expense 11.87%+
Expense ratio excluding interest and tax expense 1.48%+
</TABLE>

(a) The Small Cap Systematic Value Portfolio commenced operations on August 31,
1998.

* Total return represents aggregate total return for the period indicated.

+ Annualized.

27
<PAGE>

- -------------------------------
The Montgomery
Funds II
- -------------------------------
Notes
- -------------------------------
to Financial Statements

The Montgomery Funds II ("the Trust") is registered under the Investment Company
Act of 1940, as amended ("the 1940 Act"), as a diversified, open-end management
investment company. The Trust was organized as a Delaware business trust on
September 8, 1993, and commenced operations with the Montgomery Institutional
Series: Emerging Markets Portfolio. As of June 30, 1999, the Trust had seven
publicly offered series: Montgomery U.S. Asset Allocation Fund, Montgomery
Global Long-Short Fund, Montgomery Institutional Series: International Growth
Portfolio, Montgomery Institutional Series: Emerging Markets Focus Portfolio,
Montgomery Institutional Series: Macro Cap Systematic Value Portfolio,
Montgomery Institutional Series: Emerging Markets Portfolio, and the Montgomery
Institutional Series: Small Cap Systematic Value Portfolio. Prior to the public
offerings of shares of each Fund, a limited number of shares were sold in
private placement offerings. Otherwise, no Fund had any significant operations
prior to the date on which it commenced operations (i.e., commenced selling
shares to the public). Information presented in these financial statements
pertains only to Montgomery Institutional Series: International Growth
Portfolio, Montgomery Institutional Series: Emerging Markets Focus Portfolio,
Montgomery Institutional Series: Macro Cap Systematic Value Portfolio, and
Montgomery Institutional Series: Small Cap Systematic Value Portfolio
(individually, a "Fund" and, collectively, the "Funds"). The financial
statements for the other Funds in the Trust have been presented under separate
covers.

Montgomery Institutional Series: Emerging Markets Focus Portfolio, which
commenced operations on December 31, 1997, has changed its fiscal year end from
March 31 to June 30. The Fund s most recent audited financial statements covered
the fiscal year ended March 31, 1999.

On May 28, 1999, Classes B and C of the Montgomery Institutional Series:
Emerging Markets Focus Portfolio were closed. On May 28, 1999, Class A shares of
the Institutional Series: Emerging Markets Focus Portfolio converted to
Institutional Class shares which was designated as no-load.

1. SIGNIFICANT ACCOUNTING POLICIES:

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

a. Portfolio Valuation
Portfolio securities are valued using current market valuations: either the last
reported sale price or, in the case of securities for which there is no reported
last sale and in the case of fixed-income securities, the mean between the
closing bid and ask prices.

Portfolio securities that are traded primarily on foreign securities exchanges
or for which market quotations are readily available are generally valued at the
last reported sale price on the respective exchanges or markets; except that
when an occurrence subsequent to the time that a value was so established is
likely to have changed said value, the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Trustees or its delegates. Securities traded on the over-the-counter
market or on the NASDAQ national market are valued at the mean between the last
available bid and ask prices prior to the time of valuation.

Securities for which market quotations are not readily available (including
restricted securities that are subject to limitations as to their sale) are
valued at fair value as determined in good faith by or under the supervision of
the Trust s officers in accordance with methods authorized by the Trust s Board
of Trustees. Short-term securities with maturities of 60 days or less are
carried at amortized cost, which approximates market value.

b. Repurchase Agreements
Each Fund may engage in repurchase agreement transactions either individually or
jointly through a joint repurchase account with other series of the Trust and
affiliated series of another registered investment company, pursuant to a joint
repurchase agreement. Under the terms of a typical repurchase agreement, a Fund
takes possession of a government debt obligation as collateral. The Fund also
agrees with the counterparty to allow the counterparty to repurchase, and the
Fund to resell, the obligation at a specified date and price, thereby
determining the yield during the Fund s holding period. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund s holding period. The value of the collateral is at least equal at all
times to the total amount of the repurchase obligation, including interest. In
the event of counterparty default, the Fund has the right to use the collateral
to offset losses incurred. There could be potential loss to the Fund in the
event the Fund is delayed or prevented from exercising its rights to dispose of
the collateral securities, including the risk of a possible decline in the value
of the underlying securities, during the period the Fund seeks to assert its
rights.The Fund s Manager, acting under the supervision of the Board of
Trustees, reviews the value of the collateral and the creditworthiness of those
banks and dealers with which the Fund enters into repurchase agreements, to
evaluate potential risks. The Funds may also participate on an individual or
joint basis in tri-party repurchase agreements that involve a counterparty and a
custodian bank.

c. Forward Foreign-Currency Exchange Contracts Certain Funds may engage in
forward foreign-currency exchange contracts ("forward contracts") as a hedge in
connection with portfolio purchases and sales of securities denominated in
foreign currencies. A forward contract is a commitment to purchase or sell a
foreign currency at the settlement date at a negotiated rate.

Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies, and unrealized gain (loss) is recorded daily. Realized
and unrealized gains and losses that represent the difference between the value
of the forward contract to buy and the forward contract to sell are included in
net realized and unrealized gain (loss) from foreign-currency-related
transactions.

28
<PAGE>

-------------------------------
The Montgomery
Funds II
-------------------------------
Notes
-------------------------------
to Financial Statements

Certain risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their contracts. Additionally,
when utilizing forward contracts to hedge, a Fund gives up the opportunity to
profit from favorable exchange rate movements during the term of the contract.

d. Foreign Currency
The accounting records of the Funds are maintained in U.S. dollars. Investment
securities and all other assets and liabilities of the Funds denominated in a
foreign currency are translated into U.S. dollars at the exchange rate each day.
Purchases and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the exchange rate in effect on the date of the
respective transactions.

The Funds do not isolate the portion of the fluctuations on investments
resulting from changes in foreign-currency exchange rates from the fluctuations
in market prices of investments held. Such fluctuations are included with the
net realized gain (loss) and unrealized appreciation (depreciation) from
investments.

e. Futures Contracts
Certain Funds may enter into futures contracts. Upon entering into a futures
contract, a Fund is required to deposit with the custodian on behalf of the
broker an amount of cash or cash equivalents equal to a certain percentage of
the contract amount. This is known as the "initial margin". Subsequent payments
("variation margin") are made or received by a Fund each day, depending on the
daily fluctuation of the value of the contract. When futures contracts are
closed, the difference between the opening value at the date of purchase and the
value at closing is recorded as realized gain (loss) in the Statement of
Operations.

There are several risks in connection with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk a Fund
may not be able to enter into a closing transaction because of an illiquid
secondary market.

f. Dividends and Distributions
Dividends from net investment income of each Fund are declared and paid
annually. Distributions of net realized capital gains (including net short-term
capital gains) earned by a Fund are distributed at least annually. Additional
distributions of net investment income and capital gains for each Fund may be
made in order to avoid the application of a 4% non-deductible excise tax on
certain undistributed amounts of ordinary income and capital gains. Income
distributions and capital-gain distributions are determined in accordance with
income-tax regulations, which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments of
income and gains on various investment securities held by a Fund, timing
differences and differing characterization of distributions made by a Fund.

Permanent differences incurred during the period ended June 30, 1999, resulting
from differences in book and tax accounting, that have been reclassified at
year-end to undistributed net investment income, accumulated net realized gain
(loss) and paid-in capital were as follows:

Undistributed
Net Accumulated
Investment Net Realized Paid-in
Fund Income Gain (Loss) Capital
- --------------------------------------------------------------------------------
International Growth Portfolio .......... $(862,309) $862,852 $ (543)
Emerging Markets Focus Portfolio .......... 69,702 27,621 (97,323)
Macro Cap Systematic Value Portfolio ...... 55 -- (55)
Small Cap Systematic Value Portfolio ...... 13 -- (13)

Permanent book-tax differences, if any, are not included in ending
undistributed net investment income (loss) for the purposes of calculating
net investment income (loss) per share in the financial highlights.

g. Securities Transactions and Investment Income
Securities transactions are recorded on a trade date basis (date the order to
buy or sell is executed). Interest income is accrued daily and includes
amortization of premium and accretion of discount on investments. Realized gain
and loss from securities transactions are recorded on the specific identified
cost basis. Dividend income is recorded on the ex-dividend date, except that
certain dividends from foreign securities are recorded as soon as the Funds are
informed of the ex-dividend date. Each Fund's investment income and realized and
unrealized gains and losses are allocated among its classes based on the
relative net assets of each class of shares.

The Funds may be subject to foreign taxes on income, gains on investments or
currency repatriation, a portion of which may be recoverable. The Funds will
accrue such taxes and recoveries as applicable, based on their current
interpretation of tax rules and regulations that exist in the markets in which
they invest.

h. Federal Income Taxes
Each Fund has elected and qualified, and it is the intention of each Fund to
continue to qualify, as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended ("the Code"), by complying with the
provisions available to certain investment companies, as defined in applicable
sections of the Code, and to make distributions of taxable income to
shareholders sufficient to relieve each Fund of all or substantially all federal
income taxes. Therefore, no federal income- or excise-tax provision has been
provided.

29
<PAGE>

- -------------------------------
The Montgomery
Funds II
- -------------------------------
Notes
- -------------------------------
to Financial Statements

i. Organization Costs

Expenses incurred in connection with the organization of the Montgomery
Institutional Series: International Growth Portfolio and the Montgomery
Institutional Series: Emerging Markets Focus Portfolio are amortized on a
straight-line basis over a period of five years from the commencement of
operations.

j. Expenses
General expenses of the Trust are allocated to the Funds based on relative net
assets. Operating expenses directly attributable to a Fund or a class of shares
are charged to that Fund's or class's operations. Expenses of each Fund not
directly attributable to the operations of any Fund or class of shares are
prorated among the classes based on the relative average net assets of each Fund
or class of shares.

2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES:

a. Montgomery Asset Management, LLC, is the Funds' Manager (the "Manager"). The
Manager, a Delaware limited liability company, is an investment adviser
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended. The Manager is a subsidiary of Commerzbank AG.

Pursuant to Investment Management Agreements (the "Agreements") between the
Manager and the Trust with respect to each Fund, the Manager provides each Fund
with advice on buying and selling securities, manages the investments of each
Fund including the placement of orders for portfolio transactions, furnishes
each Fund with office space and certain administrative services, and provides
the personnel needed by the Trust with respect to the Manager's responsibilities
under the Agreements. Under Operating Expense Agreements with the Trust, the
Manager has agreed to reduce some or all of its management fee or absorb Fund
expenses if necessary to keep each Fund's annual operating expenses, exclusive
of Rule 12b-1 fees, dividend expense, interest, extraordinary expenses and
taxes, at or below the following percentages of each Fund's average net assets:
0.90% for the International Growth Portfolio; 1.60% for the Emerging Markets
Focus Portfolio; 0.80% for the Macro Cap Systematic Value Portfolio; and 1.15%
for the Small Cap Systematic Value Portfolio. Any reductions or absorptions made
to a Fund by the Manager are subject to recovery within the following three
years, provided a Fund is able to effect such reimbursement and remain in
compliance with applicable expense limitations. The Operating Expense Agreements
have rolling 10-year terms, extendable for one year at the end of each fiscal
year. Montgomery Asset Management, LLC, serves as the Funds' Administrator (the
"Administrator"). The Administrator performs services with regard to various
aspects of each Funds' administrative operations.

As compensation, each Fund has accrued a monthly management and administration
fee (accrued daily) based on the average daily net assets of each Fund. The
following effective management fee annual rates include current-year accrued
fees and recoupment of prior-year deferrals, but do not include the effect of
current-year fee deferrals or expense absorptions:

<TABLE>
<CAPTION>
Management
Contractual Effective Fee Including Effective
Management Management Effect of Fees Administration
Fund Fee Fee Reduced Fee
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Growth Portfolio ........ 0.75% 0.75% 0.56% 0.05%
Emerging Markets Focus Portfolio ...... 1.12 1.12 -- 0.07
Macro Cap Systematic Value Portfolio .. 0.83 0.83 -- 0.07
Small Cap Systematic Value Portfolio .. 1.22 1.22 -- 0.07

</TABLE>
+ Annualized.

Included in other expense are absorbed expenses recouped from the previous year
of $9,798 for Emerging Markets Focus Portfolio.

For the period ended June 30, 1999, the Manager has deferred fees and/or
absorbed expenses and has deferred management fees and absorbed expenses subject
to recoupment as follows:

Deferred
Management
Fees and
Absorbed
Expenses
Expenses Subject to
Fund Fees Reduced Absorbed Recoupment
- -----------------------------------------------------------------------------
International Growth Portfolio ............ $ 151,790 -- $ 151,790
Emerging Markets Focus Portfolio .......... 6,229 $ 33,234 245,882
Macro Cap Systematic Value Portfolio ...... 27,801 33,883 61,684
Small Cap Systematic Value Portfolio ...... 10,072 75,861 85,933

b. Certain officers and Trustees of the Trust are, with respect to the
Trusts Manager and/or principal underwriter, "affiliated persons" as
defined in the 1940 Act. Each Trustee who is not an affiliated person will
receive an annual retainer and quarterly meeting fee totaling $55,000 per
annum, as well as reimbursement for expenses, for services as a Trustee of
all Trusts advised by the Manager ($15,000 of which will be allocated to
The Montgomery Funds II).

c. Certain Funds are parties to agreements with financial intermediaries and
recordkeepers related to the Funds' participation in various purchase,
marketplace and retirement programs. The Funds that participate in the programs
make payments to the financial intermediaries and recordkeepers for certain
services provided to shareholders who own shares of the Funds through such
programs. These fees are paid to shareholder servicing and recordkeeping and are
reflected in the Funds' financial statement as "servicing fees". The Manager,
out of its own resources, may make additional payments to financial
intermediaries and recordkeepers in connection with the Funds' participation in
these programs.

3. SHARE MARKETING PLAN:

Class B and Class C shares of Emerging Focus have adopted a Share Marketing Plan
(the "Plan") pursuant to Rule 12b-1 under the 1940 Act (the "Rule"). Pursuant to
that Rule, the Trusts' Board of Trustees has approved, and each Class has
entered into, the Plan with Funds' Distributor, Inc., the Funds' distributor
(the "Distributor"), as the distribution coordinator for the Class B and Class C
shares. Under the Plan the Fund will pay distribution fees to the Distributor at
an annual rate of up to 0.75% of the Class's aggregate average daily net assets
attributable to its Class B and

30
<PAGE>

-------------------------------
The Montgomery
Funds II
-------------------------------
Notes
-------------------------------
to Financial Statements

Class C shares, to reimburse the Distributor for its distribution costs with
respect to that class ("the Class").

The Plan provides that the Distributor may use the distribution fees received
from the Class to pay for the distribution expenses of that Class, including,
but not limited to, (i) incentive compensation paid to the directors, officers
and employees of, agents for and consultants to the Manager or any other
broker-dealer or financial institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct-mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses, statements of additional information
and reports of the Funds to prospective investors in that Class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Funds and that Class; and (iv) costs involved in obtaining whatever
information, analysis and reports with respect to marketing and promotional
activities that the Funds may, from time to time, deem advisable with respect to
the distribution of that Class. Distribution fees are accrued daily, paid
monthly and charged as expenses of the Class as accrued.

4. SECURITIES TRANSACTIONS:

a. The aggregate amount of purchases and sales of long-term securities,
excluding long-term U.S. government securities, during the period ended June 30,
1999, were:

Fund Purchases Sales
- --------------------------------------------------------------------------------
International Growth Portfolio ......... $236,937,481 $109,781,707
Emerging Markets Focus Portfolio ....... 1,235,023 987,093
Macro Cap Systematic Value Portfolio ... 8,857,038 4,078,522
Small Cap Systematic Value Portfolio ... 1,881,574 850,639

b. At June 30, 1999, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost and aggregate gross
unrealized depreciation for all securities in which there was an excess of tax
cost over value were as follows:

<TABLE>
<CAPTION>
Tax Basis Net Tax Basis
Fund Tax Basis Unrealized Unrealized Cost for Federal
Unrealized Appreciation Depreciation Appreciation Tax Purposes
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Growth Portfolio ............... $7,963,866 $4,316,823 $3,647,043 $150,098,394
Emerging Markets Focus Portfolio ............. 630,145 7,185 622,960 1,836,762
Macro Cap Systematic Value Portfolio ......... 621,930 95,892 526,038 5,386,565
Small Cap Systematic Value Portfolio ......... 114,083 37,920 76,163 1,100,418
</TABLE>

c.The schedule of forward foreign-currency exchange contracts at June 30, 1999,
was as follows:

<TABLE>
<CAPTION>
Foreign-Currency Net Unrealized
Amount Settlement Date In Exchange for (US$) Depreciation
- -----------------------------------------------------------------------------------------------------------------
International Growth Portfolio:
Forward Foreign-Currency Exchange Contracts to Receive
<S> <C> <C> <C> <C>
37,663,947 Japanese Yen 07/01/99 $ 311,359 $ 463
237,829 Swedish Krona 07/01/99 28,082 (4)
354,047 British Pound 07/02/99 558,496 (3,377)
343,285 European Union Euro 07/02/99 354,457 (3,658)
296,953 European Union Euro 07/15/99 306,966 (2,815)
2,132,318 European Union Euro 07/30/99 2,410,216 (4,969)
---------- ---------
Total $3,969,576 $(14,360)
========== =========

Forward Foreign-Currency Exchange Contracts to Deliver

1,102,000,000 Japanese Yen 12/17/99 $9,314,450 $(47,756)
---------- ---------
Total $9,314,450 $(47,756)
========== =========
Net Unrealized Depreciation $(62,116)
=========
</TABLE>

31
<PAGE>

- -------------------------------
The Montgomery
Funds II
- -------------------------------
Notes
- -------------------------------
to Financial Statements

<TABLE>
<CAPTION>
Foreign-Currency Net Unrealized
Amount Settlement Date In Exchange for (US$) Appreciation
- ------------------------------------------------------------------------------------------------------------------------------------

Emerging Markets Focus Portfolio:
Forward Foreign-Currency Exchange Contracts to Receive
<S> <C> <C> <C> <C>
393,296 Hong Kong Dollar 07/06/99 $ 50,694 $ (5)
Forward Foreign-Currency Exchange Contracts to Deliver
644,784 Hong Kong Dollar 07/02/99 $ 83,118 $ 8
------------ -------
Net Unrealized Appreciation $ 133,812 $ 3
============ =======
</TABLE>

d. The schedule of futures contracts at June 30, 1999, was as follows:

Fund Number of Contracts Value Unrealized Appreciation
- --------------------------------------------------------------------------------
Macro Cap Systematic Value Portfolio:
S&P 500 E-Mini, September 1999.............. 2 $138,175 $4,638

e. Under an unsecured Revolving Credit Agreement with Deutsche Bank, New York,
each of the Funds of The Montgomery Funds II, along with other series of the
Montgomery Funds, The Montgomery Funds II and The Montgomery Funds III, may, for
one year starting August 13, 1998, borrow (consistent with applicable law and
its investment policies) up to one-third of its net asset value (or such lower
limit applicable to such Fund), provided that the aggregate funds borrowed do
not exceed $175,000,000. The Funds pay their pro rata shares of the quarterly
commitment fee of 0.08% per annum of the unutilized credit line balance. At June
30, 1999, there were no loans outstanding under this agreement. For the period
ended June 30, 1999, the Funds had no borrowings under the agreement.

5. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:

The Trust has authorized an unlimited number of shares of beneficial interest
which have a par value of $0.01. Transactions in shares of beneficial interest
for the periods indicated below were:

<TABLE>
<CAPTION>
INTERNATIONAL GROWTH PORTFOLIO
Year Ended 6/30/99#
Shares Dollars
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Sold 16,146,917 $ 158,087,488
Issued as reinvestment of dividends
Redeemed (1,529,467) (15,157,071)
- ------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 14,617,450 $ 142,930,417
- ------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS FOCUS PORTFOLIO
Period Ended 6/30/99* Year Ended 3/31/99
Institutional Class Shares Dollars Shares Dollars
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 213,213 $ 2,396,514 $
Issued as reinvestment of dividends
Redeemed (19,222) (228,809)
- ------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 193,991 $ 2,167,705 -- $
- ------------------------------------------------------------------------------------------------------------------
Class A**
- ------------------------------------------------------------------------------------------------------------------
Sold 21,917 $ 244,594 746,596 $ 7,655,077
Issued as reinvestment of dividends -- -- 8,306 63,151
Redeemed (193,761) (2,162,372) (739,577) (5,983,612)
- ------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (171,844) $ (1,917,778) 15,325 $ 1,734,616
- ------------------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------------------
Sold 58 $ 595 1,641 $ 17,057
Issued as reinvestment of dividends
Redeemed (1,721) (17,872)
- ------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (1,663) $ (17,277) 1,641 $ 17,057
- ------------------------------------------------------------------------------------------------------------------
Class C
- ------------------------------------------------------------------------------------------------------------------
Sold 6,236 $ 66,128 38,800 $ 342,778
Issued as reinvestment of dividends
Redeemed (15,534) (195,310) (42,510) (359,103)
- ------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (9,298) $ (129,182) (3,710) $ (16,325)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

# The International Growth Portfolio commenced operations on June 30, 1998.

* The Emerging Markets Focus Portfolio changed its fiscal year end from March
31 to June 30.

** On May 28, 1999, Class A shares of the Institutional Series: Emerging
Markets Focus Portfolio converted to Institutional Class shares.

32
<PAGE>

-------------------------------
The Montgomery
Funds II
-------------------------------
Notes
-------------------------------
to Financial Statements

MACRO CAP SYSTEMATIC VALUE PORTFOLIO
Period Ended 6/30/99+
Institutional Class Shares Dollars
- -------------------------------------------------------------------
Sold 505,277 $ 5,583,481
Issued as reinvestment of dividends 159 1,747
Redeemed (50,950) (606,616)
- -------------------------------------------------------------------
Net increase/(decrease) 454,486 $ 4,978,612
- -------------------------------------------------------------------

SMALL CAP SYSTEMATIC VALUE PORTFOLIO
Period Ended 6/30/99+
Institutional Class Shares Dollars
- -------------------------------------------------------------------
Sold 220,131 $ 2,392,033
Issued as reinvestment of dividends 473 5,140
Redeemed (115,868) (1,292,868)
- -------------------------------------------------------------------
Net increase/(decrease) 104,736 $ 1,104,305
- -------------------------------------------------------------------

+ The Macro Cap Systematic Value and Small Cap Systematic Value Portfolios
commenced operations on August 31, 1998.

At June 30, 1999, shareholders of the Funds with ownership of 10% or greater of
the aggregate shares outstanding were as follows:

Fund Number of Percentage
Shareholders
- -------------------------------------------------------------------
International Growth Portfolio 2 75%
Emerging Markets Focus Portfolio 2 70%
Macro Cap Systematic Value Portfolio 1 97%
Small Cap Systematic Value Portfolio 1 90%

6. FOREIGN SECURITIES:

Certain Funds purchase securities on foreign securities exchanges. Securities of
foreign companies and foreign governments involve risks and considerations not
typically associated with investing in U.S. companies and the U.S. government.
These risks include revaluation of currencies, less-reliable information about
issuers, different securities transactions clearance and settlement practices,
and potential future adverse political and economic developments. These risks
are heightened for investments in emerging markets countries. Moreover,
securities of many foreign companies and foreign governments and their markets
may be less liquid and their prices more volatile than those of securities of
comparable U.S. companies and the U.S. government.

7. CAPITAL LOSS CARRYFORWARDS:

At June 30, 1999, the following Fund had available for federal tax purposes
unused capital losses as follows:

Expiring in Expiring in
Fund 2006 2007
- -----------------------------------------------------------------------

Emerging Markets Focus Portfolio ......... $1,150,764 $381,957

33
<PAGE>

- -------------------------------
The Montgomery
Funds II
- -------------------------------
Independent
Auditors' Report
- -------------------------------

To the Board of Trustees and the Shareholders of The Montgomery Funds II:

In our opinion, the accompanying statements of assets and liabilities, including
the portfolios investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Montgomery Institutional Series:
International Growth Portfolio, Montgomery Institutional Series: Emerging
Markets Focus Portfolio, Montgomery Institutional Series: Macro Cap Systematic
Value Portfolio and Montgomery Institutional Series: Small Cap Systematic Value
Portfolio (four portfolios of The Montgomery Funds II) (collectively the
"Funds") at June 30, 1999, the results of each of their operations, the changes
in each of their net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at June
30, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.

PricewaterhouseCoopers LLP
San Francisco, CA
August 18, 1999

34
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The Montgomery
Funds II
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Tax Information
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Year Ended June 30, 1999
(Unaudited)

In accordance with the Code, the following Funds are designating the following
amount of long-term capital gain dividends:

Macro Cap Systematic Value Portfolio ................................ $16,335

The following Funds are designating the following percentages of distributions
made from net investment income, as stated in these financial statements as net
investment income dividends that qualify for the dividends-received deduction
with regard to the Funds' corporate shareholders:

Macro Cap Systematic Value Portfolio ...................................... 100%
Small Cap Systematic Value Portfolio ...................................... 100%

For the fiscal period ended June 30, 1999, foreign income and foreign taxes paid
relating to foreign sources and possessions of the United States on a per-share
basis were as follows:

Foreign Foreign
Fund Income Taxes
- ---------------------------------------------------------
International Growth Portfolio ....... $0.1064 $0.0124
Emerging Markets Focus Portfolio ..... 0.0134 0.0076

The above figures may differ from those cited elsewhere in this report due to
differences in the calculation of income and capital gains for Securities and
Exchange Commission (book) purposes and Internal Revenue Service (tax) purposes.

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[THE MONTGOMERY FUNDS LOGO APPEARS HERE]
Invest wisely/R/
The Montgomery Funds/TM/
101 California Street
San Francisco, CA 94111-9361

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800.627.7933

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www.montgomeryasset.com
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