<PAGE>
Emerging Markets Portfolio as of December 31, 1997
PORTFOLIO OF INVESTMENTS
(Expressed in United States Dollars)
Common Stocks -- 81.5%
Security Shares Value
- --------------------------------------------------------------------------------
Banks - Regional -- 2.6%
- --------------------------------------------------------------------------------
Bangkok Bank Co. Ltd. (Foreign) 50,000 $ 128,342
The largest commercial bank in Thailand
Bangkok Bank Co. Ltd. (Public) 50,000 91,979
The largest commercial bank in Thailand
Latvijas Unibanka GDR 50,000 262,500
Latvia's leading bank and the most actively traded
stock on the Riga stock exchange
- --------------------------------------------------------------------------------
$ 482,821
- --------------------------------------------------------------------------------
Banks and Money Services -- 2.0%
- --------------------------------------------------------------------------------
Far East Bank & Trust Co. Ltd. (Rights)* 3,125 $ 0
Fifth largest bank in the Philippines
State Bank of India GDR 20,000 364,000
India's largest commercial bank
- --------------------------------------------------------------------------------
$ 364,000
- --------------------------------------------------------------------------------
Beverages -- 8.4%
- --------------------------------------------------------------------------------
Pan American Beverages, Inc. ADR 17,000 $ 554,625
Coca Cola franchiser
Pyramids Brewers* 6,000 342,101
The largest brewer in Egypt
Suncrush Ltd. 107,000 258,587
Manufactures and distributes soft drinks
in terms of franchise agreements with
the Coca-Cola Company of Southern Africa
Vina Concha y Toro ADR 16,000 404,000
Wine producer/exporter
- --------------------------------------------------------------------------------
$ 1,559,313
- --------------------------------------------------------------------------------
Broadcasting and Cable -- 2.3%
- --------------------------------------------------------------------------------
Grupo Radio ADR 30,000 $ 427,500
Mexican radio broadcasting company
- --------------------------------------------------------------------------------
$ 427,500
- --------------------------------------------------------------------------------
Communications Equipment -- 3.1%
- --------------------------------------------------------------------------------
Grupo Televisa GDR 15,000 $ 580,313
Largest media company in the Spanish-speaking world
- --------------------------------------------------------------------------------
$ 580,313
- --------------------------------------------------------------------------------
Conglomerates -- 6.4%
- --------------------------------------------------------------------------------
Cheung Kong Holdings, Ltd. 30,000 $ 196,477
Property/infrastructure
Hutchison Whampoa 50,000 313,589
Hong Kong computer and
telecommunications conglomerate
John Keells Holdings GDR 1,633 17,147
A diversified conglomerate operating in tourism,
food & beverages, property development sectors
Quinenco SA ADR* 5,400 62,100
A large diversified company engaged in
industrial and financial services
Sabanci Holdings 55,000 338,686
The second largest congolmerate in Turkey
Swire Pacific, Ltd. Class B 250,000 253,258
Interests in aviation, property development,
property investment, trading, hotels and shipping
- --------------------------------------------------------------------------------
$ 1,181,257
- --------------------------------------------------------------------------------
Construction -- 1.5%
- --------------------------------------------------------------------------------
Solidere GDR 21,000 $ 275,625
Lebanese property developer
- --------------------------------------------------------------------------------
$ 275,625
- --------------------------------------------------------------------------------
Consumer Products -- 3.1%
- --------------------------------------------------------------------------------
Lever Brothers Pakistan Ltd. 18,300 $ 567,639
The largest and oldest consumer non-durables
company in Pakistan
- --------------------------------------------------------------------------------
$ 567,639
- --------------------------------------------------------------------------------
Drugs -- 4.4%
- --------------------------------------------------------------------------------
Pliva GDR 27,750 $ 489,788
The largest pharmaceutical producer
in Eastern Europe
Teva Pharmaceutical ADR 7,000 331,188
Israel's largest pharmaceutical company and the
second largest independent generic company in
the U.S.
- --------------------------------------------------------------------------------
$ 820,976
- --------------------------------------------------------------------------------
Electric Utilities -- 3.5%
- --------------------------------------------------------------------------------
BSES, Ltd. ADR* 22,000 $ 382,360
Generator and distributor of electricity to the
Bombay region
Manila Electric Class B 83,000 274,617
The largest electricity distributor in the country
supplying power to metro Manila and the
Calabarzon area
- --------------------------------------------------------------------------------
$ 656,977
- --------------------------------------------------------------------------------
See notes to financial statements
14
<PAGE>
Emerging Markets Portfolio as of December 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
Security Shares Value
- --------------------------------------------------------------------------------
Foods -- 4.5%
- --------------------------------------------------------------------------------
Carulla SA ADR 165,000 $ 598,124
Columbian grocery and supermarket chain
Grupo Minsa SA ADR 10,000 73,115
Mexican corn flour and tortilla producer
International Foods Hostess* 7,300 163,593
Manufacturer and producer of sweet snack
cake products
- --------------------------------------------------------------------------------
$ 834,832
- --------------------------------------------------------------------------------
Investment Services -- 1.3%
- --------------------------------------------------------------------------------
HSBC Holdings PLC 9,600 $ 236,624
International bank and financial services company
- --------------------------------------------------------------------------------
$ 236,624
- --------------------------------------------------------------------------------
Lodging and Gaming -- 0.7%
- --------------------------------------------------------------------------------
Asian Hotel Corp.* 1,100,000 $ 133,603
Hotel company
- --------------------------------------------------------------------------------
$ 133,603
- --------------------------------------------------------------------------------
Manufacturing -- 2.0%
- --------------------------------------------------------------------------------
First Tractor Co. (Hampshire) 400,000 $ 241,321
China's second largest tractor producer
Tata Engineering and Locomotion GDR 14,720 122,544
India's largest auto producer and distributor
- --------------------------------------------------------------------------------
$ 363,865
- --------------------------------------------------------------------------------
Metals - Industrial -- 2.9%
- --------------------------------------------------------------------------------
Tubos de Acero de Mexico* 25,000 $ 540,625
Manufacturer of stainless steel pipes used
mainly for the oil and gas industries
- --------------------------------------------------------------------------------
$ 540,625
- --------------------------------------------------------------------------------
Natural Gas Utilities -- 1.4%
- --------------------------------------------------------------------------------
Mosenergo 144A ADR 7,000 $ 259,000
Gas power utilities
- --------------------------------------------------------------------------------
$ 259,000
- --------------------------------------------------------------------------------
Oil and Gas - Equipment and Services -- 6.1%
- --------------------------------------------------------------------------------
JSC Surgutneftegaz ADR 60,000 $ 607,499
Russia's largest oil producer
YPF Sociedad Anonima ADR 15,200 $ 519,650
Exploration, development and production of oil and
natural gas
- --------------------------------------------------------------------------------
$ 1,127,149
- --------------------------------------------------------------------------------
Oil and Gas - Exploration
and Production -- 0.9%
- --------------------------------------------------------------------------------
PTT Exploration and Production 13,500 $ 159,979
The exploration and production arm of the
Petroleum Authority of Thailand (PTT)
- --------------------------------------------------------------------------------
$ 159,979
- --------------------------------------------------------------------------------
Oil and Gas - Integrated -- 2.6%
- --------------------------------------------------------------------------------
Mol Magyar Olayes Gazi GDR 20,000 $ 488,000
Interests in oil and gas exploration and
production, gas wholesale distribution, storage and
transmission, oil refining and marketing
- --------------------------------------------------------------------------------
$ 488,000
- --------------------------------------------------------------------------------
REITS -- 1.1%
- --------------------------------------------------------------------------------
New World Development 60,000 $ 207,511
Property developer
- --------------------------------------------------------------------------------
$ 207,511
- --------------------------------------------------------------------------------
Retail - Food and Drug -- 7.0%
- --------------------------------------------------------------------------------
Blue Square Stores* 45,000 $ 430,366
Supermarket and specialty store chain
Compania Brasileira de Distrib. GDR 30,000 581,250
Supermarket chain
Supersol Ltd. ADR 20,000 281,250
One of Israel's two largest publicly traded
supermarket chains
- --------------------------------------------------------------------------------
$ 1,292,866
- --------------------------------------------------------------------------------
Sanitation -- 2.4%
- --------------------------------------------------------------------------------
Saneamento Basico (Sabesp) 1,885,000 $ 447,583
Brazil's largest water and sanitation utility
- --------------------------------------------------------------------------------
$ 447,583
- --------------------------------------------------------------------------------
Telephone Utilities -- 8.5%
- --------------------------------------------------------------------------------
PT Indosat 150,000 $ 278,435
Has largest market share of international
telecommunications business
Telecomunicacoes Brasileiras ADR 2,750 320,203
Telecommunications holding company
See notes to financial statements
15
<PAGE>
Emerging Markets Portfolio as of December 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
(Expressed in United States Dollars)
Security Shares Value
- --------------------------------------------------------------------------------
Telephone Utilities (continued)
- --------------------------------------------------------------------------------
Telefonica del Peru ADR 12,000 $ 279,000
Peru's primary operator of the public telephone system
Telefonos de Mexico ADR 8,000 448,500
Largest telecom operator with interests in local
and long distance telecommunications
Videsh Sanchar Nigam Ltd., GDR 17,500 245,438
India's monopoly International Telephone
service provider.
- --------------------------------------------------------------------------------
$ 1,571,576
- --------------------------------------------------------------------------------
Transportation -- 0.6%
- --------------------------------------------------------------------------------
Brisa Automotive Estradas* 3,250 $ 116,579
The second largest listed toll motorway in Europe
- --------------------------------------------------------------------------------
$ 116,579
- --------------------------------------------------------------------------------
Trucks and Parts -- 2.2%
- --------------------------------------------------------------------------------
Uzel Mikina Sanayii AS* 24,733 $ 418,095
The largest tractor producer in Turkey
- --------------------------------------------------------------------------------
$ 418,095
- --------------------------------------------------------------------------------
Total Common Stocks
(identified cost $14,348,907) $15,114,308
- --------------------------------------------------------------------------------
Preferred Stocks -- 4.5%
Electric Utilities -- 1.9%
- --------------------------------------------------------------------------------
Eletrobras 7,000,000 $ 357,511
The only utility serving the entire country of
Brazil through its various subsidiaries which
are due to be privatized over the next five years
- --------------------------------------------------------------------------------
$ 357,511
- --------------------------------------------------------------------------------
Oil and Gas - Integrated -- 1.4%
- --------------------------------------------------------------------------------
Petroleo Brasiliero SA 1,100,000 $ 257,247
Brazil's sole integrated oil company, a monopoly
in exploration, production, refining, transportion,
importing and exporting of oil and natural gas
- --------------------------------------------------------------------------------
$ 257,247
- --------------------------------------------------------------------------------
Telephone Utilities -- 1.2%
- --------------------------------------------------------------------------------
Telec de Minas Gerias 1,800,000 $ 227,409
Third largest telecommunications system by
access lines in state of Minas Gerias (Brazil)
- --------------------------------------------------------------------------------
$ 227,409
- --------------------------------------------------------------------------------
Total Preferred Stocks
(identified cost $894,542) $ 842,167
- --------------------------------------------------------------------------------
Warrants -- 0.0%
Lodging and Gaming -- 0.0%
- --------------------------------------------------------------------------------
Belle Corp. (Warrants) 240,000 $ 0
Philippine gaming and property company with
hotel interests, golf resorts, casinos,
jai-lai, and lottery franchises
- --------------------------------------------------------------------------------
$ 0
- --------------------------------------------------------------------------------
Total Investments -- 86.0%
(identified cost $15,243,449) $15,956,475
- --------------------------------------------------------------------------------
Other Assets, Less Liabilities -- 14.0% $ 2,597,130
- --------------------------------------------------------------------------------
Net Assets -- 100% $18,553,605
- --------------------------------------------------------------------------------
ADR -- American Depository Receipt
GDR -- Global Depository Receipt
* Non-income producing security.
See notes to financial statements
16
<PAGE>
Emerging Markets Portfolio as of December 31, 1997
PORTFOLIO OF INVESTMENTS
(Expressed in United States Dollars)
Country Concentration of Portfolio
Percentage
Country of Net Assets Value
- -------------------------------------------------------------------------------
Argentina 2.8% $ 519,650
Brazil 11.8% 2,191,203
Canada 1.5% 281,250
Chile 2.5% 466,100
Colombia 3.2% 598,124
Croatia 2.7% 489,788
Egypt 2.7% 505,694
Hong Kong 7.8% 1,448,780
Hungary 2.6% 488,000
India 6.0% 1,114,342
Indonesia 1.5% 278,435
Israel 4.1% 761,554
Latvia 1.4% 262,500
Lebanon 1.5% 275,625
Mexico 14.1% 2,624,678
Netherlands 1.4% 259,000
Pakistan 3.1% 567,639
Peru 1.5% 279,000
Portugal 0.6% 116,579
Russia 3.3% 607,499
South Africa 1.4% 258,587
Sri Lanka 0.8% 150,750
Thailand 2.1% 380,300
The Philippines 1.5% 274,617
Turkey 4.1% 756,781
See notes to financial statements
17
<PAGE>
Emerging Markets Portfolio as of December 31, 1997
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
As of December 31, 1997
(Expressed in United States Dollars)
Assets
- --------------------------------------------------------------------------------
Investments, at value (Note 1A)
(identified cost, $15,243,449) $15,956,475
Cash 1,920,589
Foreign currency, at value
(identified cost, $484,825) 429,110
Receivable for investments sold 237,714
Dividends receivable 38,449
Tax reclaim receivable 11
Deferred organization expenses (Note 1D) 7,298
- --------------------------------------------------------------------------------
Total assets $18,589,646
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Accrued expenses $ 36,041
- --------------------------------------------------------------------------------
Total liabilities $ 36,041
- --------------------------------------------------------------------------------
Net Assets applicable to investors' interest in Portfolio $18,553,605
- --------------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------------
Net proceeds from capital contributions and withdrawals $17,899,892
Net unrealized appreciation of investments (computed on
the basis of identified cost) 653,713
- --------------------------------------------------------------------------------
Total $18,553,605
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended
December 31, 1997
(Expressed in United States Dollars)
Investment Income (Note 1H)
- --------------------------------------------------------------------------------
Dividends (net of foreign taxes, $8,524) $ 272,694
Interest income 1,196
- --------------------------------------------------------------------------------
Total income $ 273,890
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Investment adviser fee (Note 2) $ 143,776
Administration fee (Note 2) 47,925
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 4,387
Custodian fee (Note 1C) 94,104
Legal and accounting services 43,831
Amortization of organization expenses (Note 1D) 3,804
Miscellaneous 8,791
- --------------------------------------------------------------------------------
Total expenses $ 346,618
- --------------------------------------------------------------------------------
Deduct --
Waiver of investment adviser fee (Note 2) $ 36,117
Reduction of custodian fee (Note 1C) 34,907
Waiver of administration fee (Note 2) 17,039
- --------------------------------------------------------------------------------
Total expense reductions $ 88,063
- --------------------------------------------------------------------------------
Net expenses $ 258,555
- --------------------------------------------------------------------------------
Net investment income $ 15,335
- --------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
- --------------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ (488,881)
Foreign currency and forward foreign
currency exchange contract transactions (104,132)
- --------------------------------------------------------------------------------
Net realized loss on investment transactions $ (593,013)
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investments (identified cost basis) $(1,123,223)
Foreign currency and forward foreign
currency exchange contract transactions (59,177)
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $(1,182,400)
- --------------------------------------------------------------------------------
Net realized and unrealized loss on investments $(1,775,413)
- --------------------------------------------------------------------------------
Net decrease in net assets from operations $(1,760,078)
- --------------------------------------------------------------------------------
See notes to financial statements
18
<PAGE>
Emerging Markets Portfolio as of December 31, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets (Expressed in United States Dollars)
Increase (Decrease) Year Ended Year Ended
in Net Assets December 31, 1997 December 31, 1996
- --------------------------------------------------------------------------------
From operations --
Net investment income $ 15,335 $ 11,410
Net realized gain (loss) on
investment transactions (593,013) 139,702
Net change in unrealized
appreciation (depreciation)
of investments (1,182,400) 1,561,355
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ (1,760,078) $ 1,712,467
- --------------------------------------------------------------------------------
Capital transactions --
Contributions $ 26,595,739 $ 11,229,400
Withdrawals (16,940,583) (5,870,609)
- --------------------------------------------------------------------------------
Net increase in net assets from
capital transactions $ 9,655,156 $ 5,358,791
- --------------------------------------------------------------------------------
Net increase in net assets $ 7,895,078 $ 7,071,258
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
At beginning of year $ 10,658,527 $ 3,587,269
- --------------------------------------------------------------------------------
At end of year $ 18,553,605 $ 10,658,527
- --------------------------------------------------------------------------------
See notes to financial statements
19
<PAGE>
Emerging Markets Portfolio as of December 31, 1997
FINANCIAL STATEMENTS CONT`D
Supplementary Data (Expressed in United States Dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1996 1995 1994*
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ratios to average daily net assets++
- ----------------------------------------------------------------------------------------------------------------------
Net expenses /(1)/ 1.53% 1.54% 2.58% 0.00%
Net expenses after custodian fee reduction 1.35% 1.32% 2.58% --
Net investment income (loss) 0.08% 0.14% (1.00)% 0.00%
Portfolio Turnover 160% 125% 98% 0%
- -----------------------------------------------------------------------------------------------------------------------
Average commission rate (per share) /(2)/ $0.0007 $0.0029 $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $18,554 $10,659 $3,587 $1,195
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
++ The operating expenses of the Portfolio reflect an allocation of expenses to
the Administrator and a waiver of investment adviser fees. Had such actions
not been taken, the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C>
Expenses /(1)/ 1.81% 2.24% 5.24% 2.21%+
Expenses after custodian fee reduction 1.63% 2.02% 5.24% --
Net investment loss (0.20)% (0.56)% (3.66)% (2.21)%+
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
* For the period from the start of business, November 30, 1994, to December
31, 1994.
/(1)/ The expense ratios for the years ended December 31, 1995 and thereafter
have been adjusted to reflect a change in reporting requirements. The new
reporting guidelines require the Portfolio to increase its expense ratio
by the effect of any expense offset arrangements with its service
providers. The expense ratios for the period ended December 31, 1994 have
not been adjusted to reflect this change.
/(2)/ Average commission rate paid is computed by dividing the total dollar
amount of commissions paid during the fiscal year by the total number of
shares purchased and sold during the fiscal year for which commissions
were charged. For fiscal years beginning on or after September 1, 1995, a
Fund is required to disclose its average commission rate per share for
security trades on which commissions were charged.
See notes to financial statements
20
<PAGE>
Emerging Markets Portfolio as of December 31, 1997
NOTES TO FINANCIAL STATEMENTS
(Expressed in United States Dollars)
1 Significant Accounting Policies
------------------------------------------------------------------------------
Emerging Markets Portfolio (the Portfolio) is registered under the Investment
Company Act of 1940 as a diversified, open-end investment company which was
organized as a trust under the laws of the State of New York. The Declaration
of Trust permits the Trustees to issue interests in the Portfolio. The
following is a summary of significant accounting policies of the Portfolio.
The policies are in conformity with generally accepted accounting principles.
A Investment Valuation -- Marketable securities, including options, that are
listed on foreign or U.S. securities exchanges or in the NASDAQ National
Market System are valued at closing sale prices, on the exchange where such
securities are principally traded. Futures positions on securities or
currencies are generally valued at closing settlement prices. Unlisted or
listed securities for which closing sales prices are not available are valued
at the mean between the latest bid and asked prices. Short term debt
securities with a remaining maturity of 60 days or less are valued at
amortized cost. Other fixed income and debt securities, including listed
securities and securities for which price quotations are available, will
normally be valued on the basis of valuations furnished by a pricing service.
Investments for which valuations or market quotations are unavailable are
valued at fair value using methods determined in good faith by or at the
direction of the Trustees.
B Federal Taxes -- The Portfolio has elected to be treated as a partnership
for United States Federal tax purposes. No provision is made by the Portfolio
for federal or state taxes on any taxable income of the Portfolio because each
investor in the Portfolio is individually responsible for the payment of any
taxes on its share of such income. Since some of the Portfolio's investors are
regulated investment companies that invest all or substantially all of their
assets in the Portfolio, the Portfolio normally must satisfy the applicable
source of income and diversification requirements (under the Internal Revenue
Code) in order for its investors to satisfy them. The Portfolio will allocate,
at least annually among its investors, each investor's distributive share of
the Portfolio's net investment income, net realized capital gains, and any
other items of income, gain, loss, deduction or credit. Withholding taxes on
foreign dividends and capital gains have been provided for in accordance with
the Portfolio's understanding of the applicable countries' tax rules and
rates.
C Expense Reduction -- Investors Bank & Trust Company serves as custodian of
the Portfolio. Pursuant to the custodian agreement, IBT receives a fee reduced
by credits which are determined based on the average daily cash balances the
Portfolio maintains with IBT. All significant credit balances used to reduce
the Portfolio's custodian fees are reported as a reduction of expenses on the
Statement of Operations.
D Deferred Organization Expenses -- Costs incurred by the Portfolio in
connection with its organization, including registration costs, are being
amortized on the straight-line basis over five years.
E Futures Contracts -- Upon the entering of a financial futures contract, the
Portfolio is required to deposit (initial margin) either cash or securities in
an amount equal to a certain percentage of the purchase price indicated in the
financial futures contract. Subsequent payments are made or received by the
Portfolio (margin maintenance) each day, dependent on the daily fluctuations
in the value of the underlying security, and are recorded for book purposes as
unrealized gains or losses by the Portfolio. The Portfolio's investment in
financial futures contracts is designed only to hedge against anticipated
future changes in interest or currency exchange rates. Should interest or
currency exchange rates move unexpectedly, the Portfolio may not achieve the
anticipated benefits of the financial futures contracts and may realize a
loss. If the Portfolio enters into a closing transaction, the Portfolio will
realize, for book purposes, a gain or loss equal to the difference between the
value of the financial futures contract to sell and financial futures contract
to buy.
F Foreign Currency Translation -- Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investment securities and income and expenses are
converted into U.S. dollars based upon currency exchange rates prevailing on
the respective dates of such transactions. Recognized gains or losses on
investment transactions attributable to foreign currency rates are recorded
for financial statement purposes as net realized gains and losses on
investments. That portion of unrealized gains and losses on investments that
result from fluctuation in foreign currency exchange rates are not separately
disclosed.
21
<PAGE>
Emerging Markets Portfolio as of December 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
(Expressed in United States Dollars)
G Forward Foreign Currency Exchange Contracts -- The Portfolio may enter into
forward foreign currency exchange contracts for the purchase or sale of a
specific foreign currency at a fixed price on a future date. Risk may arise
upon entering these contracts from the potential inability of counterparties
to meet the terms of their contracts and from movements in the value of a
foreign currency relative to the U.S. dollar. The Portfolio will enter into
forward contracts for hedging purposes as well as non-hedging purposes. The
forward foreign currency exchange contracts are adjusted by the daily exchange
rate of the underlying currency and any gains or losses are recorded for
financial statement purposes as unrealized until such time as the contracts
have been closed or offset.
H Other -- Investment transactions are accounted for on the date the
investments are purchased or sold. Dividend income is recorded on the ex-
dividend date. However, if the ex-dividend date has passed, certain dividends
from securities are recorded as the Portfolio is informed of the ex-dividend
date. Interest income is recorded on the accrual basis.
I Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of income and expense during the reporting period. Actual results could differ
from those estimates.
2 Investment Adviser Fee and Other Transactions with Affiliates
------------------------------------------------------------------------------
The investment adviser fee is earned by Lloyd George Management (Bermuda)
Limited (the Adviser) as compensation for management and investment advisory
services rendered to the Portfolio. Under the advisory agreement, the Adviser
receives a monthly fee of 0.0625% (0.75% annually) of the average daily net
assets of the Portfolio up to $500,000,000, and at reduced rates as daily net
assets exceed that level. For the year ended December 31, 1997, the adviser
fee was 0.75% of average net assets. To enhance the net income of the
Portfolio the Adviser made a waiver of $36,117 of investment adviser fees. In
addition, an administrative fee is earned by Eaton Vance Management (EVM) for
managing and administrating the business affairs of the Portfolio. Under the
administration agreement, EVM earns a monthly fee in the amount of 1/48th of
1% (equal to 0.25% annually) of the average daily net assets of the Portfolio
up to $500,000,000, and at reduced rates as daily net assets exceed that
level. For the year ended December 31, 1997, the administration fee was 0.25%
of average net assets. To enhance the net income of the Portfolio, the
administrator waived fees in the amount of $17,039. Except as to Trustees of
the Portfolio who are not members of the Adviser or EVM's organization,
officers and Trustees receive remuneration for their services to the Portfolio
out of such investment adviser and administrative fees. Certain of the
officers and Trustees of the Portfolio are officers and directors/trustees of
the above organizations.
3 Investment Transactions
------------------------------------------------------------------------------
Purchases and sales of investments, other than short-term obligations,
aggregated $34,351,810 and $26,970,319, respectively.
4 Federal Income Tax Basis of Investments
------------------------------------------------------------------------------
The cost and unrealized appreciation (depreciation) in value of the
investments owned at December 31, 1997, as computed on a federal income tax
basis, are as follows:
Aggregate cost $15,243,449
------------------------------------------------------------------------------
Gross unrealized appreciation $ 1,986,952
Gross unrealized depreciation (1,273,926)
------------------------------------------------------------------------------
Net unrealized appreciation $ 713,026
------------------------------------------------------------------------------
5 Line of Credit
------------------------------------------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR and
EVM and its affiliates in a committed $100 million unsecured line of credit
agreement with a group of banks. The Portfolio may temporarily borrow from the
line of credit to satisfy redemption requests or settle investment
transactions. Interest is charged to each portfolio or fund based on its
borrowings at an amount above the Eurodollar rate or federal funds rate. In
addition, a fee computed at an annual rate of 0.10% on the daily unused
portion of the line of credit is allocated among the participating portfolios
and funds at the end of each quarter. The Portfolio did not have any
significant borrowings or allocated fees during the year ended December 31,
1997.
22
<PAGE>
Emerging Markets Portfolio as of December 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
(Expressed in United States Dollars)
6 Risks Associated with Foreign Investments
------------------------------------------------------------------------------
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, there is generally less publicly
available information about foreign companies, particularly those not subject
to the disclosure and reporting requirements of the U.S. securities laws.
Foreign issuers are generally not bound by uniform accounting, auditing, and
financial reporting requirements and standards of practice comparable to those
applicable to domestic issuers. Investment in foreign securities also involves
the risk of possible adverse changes in investment or exchange control
regulations, expropriation or confiscatory taxation, limitation on the removal
of funds or other assets of the Portfolio, political or financial instability
or diplomatic and other developments which could affect such investments.
Foreign stock markets, while growing in volume and sophistication, are
generally not as developed as those in the United States, and securities of
some foreign issuers (particularly those located in developing countries) may
be less liquid and more volatile than securities of comparable U.S. companies.
In general, there is less overall governmental supervision and regulation of
foreign securities markets, broker-dealers, and issuers than in the United
States.
7 Financial Instruments
------------------------------------------------------------------------------
The Portfolio regularly trades in financial instruments with off-balance sheet
risk in the normal course of its investing activities to assist in managing
exposure to various market risks. These financial instruments include written
options, forward foreign currency exchange contracts and financial futures
contracts and may involve, to a varying degree, elements of risk in excess of
the amounts recognized for financial statement purposes. The notional or
contractual amounts of these instruments represent the investment the
Portfolio has in particular classes of financial instruments and does not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered. At December 31, 1997,
there were no outstanding obligations under these financial instruments.
23
<PAGE>
Emerging Markets Portfolio as of December 31, 1997
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders
of Emerging Markets Portfolio:
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Emerging Markets Portfolio (the Portfolio) as
of December 31, 1997, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years then
ended and the supplementary data for each of the three years then ended and for
the period from the start of business November 30, 1994, to December 31, 1994.
These financial statements and supplementary data are the responsibility of the
Portfolio's management. Our responsibility is to express an opinion on these
financial statements and supplementary data based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and supplementary
data are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and supplementary data present fairly,
in all material respects, the financial position of the Emerging Markets
Portfolio at December 31, 1997, and the results of its operations, the changes
in its net assets and its supplementary data for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 6, 1998
24
<PAGE>
Emerging Markets Portfolio as of December 31, 1997
INVESTMENT MANAGEMENT
Emerging Markets Portfolio
Officers
Hon. Robert Lloyd George
President, Trustee
James B. Hawkes
Vice President, Trustee
Scobie Dickinson Ward
Vice President, Assistant
Secretary and
Assistant Treasurer
William Walter Raleigh Kerr
Vice President,
Assistant Treasurer
James L. O'Connor
Vice President, Treasurer
Alan R. Dynner
Secretary
Trustees
Hon. Edward K. Y. Chen
Professor and Director, Center for
Asian Studies, University of Hong Kong
Donald R. Dwight
President, Dwight Partners, Inc.
Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Banking, Harvard University Graduate School of
Business Administration
Norton H. Reamer
President and Director, United Asset
Management Corporation
25
