Strategic Income Portfolio
Portfolio of Investments
October 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Principal U.S. $ Value
- ------------------------------------------------------------------------------------------------
Bonds & Notes -- 90.8%
- ------------------------------------------------------------------------------------------------
ARGENTINA, 4.2% U.S. Dollars
Argentina Discount Bond (Brady), 6.4375%, 3/31/23
(identified cost $5,119,445) 7,700,000 $ 5,563,250
---------------
AUSTRALIA, 0.6% Australian Dollars
State Electricity - Victoria, 9.25%, 9/18/03
(identified cost $733,564) 1,000,000 $ 851,231
---------------
BRAZIL, 7.3% U.S. Dollars
Brazil Discount Bond (Brady), 6.5%, 4/15/24
(identified cost $7,844,804) 13,200,000 $ 9,718,500
---------------
COLOMBIA, 2.7% U.S. Dollars
FEN, 9.375%, 6/15/06
(identified cost $3,552,500) 3,500,000 $ 3,609,375
---------------
CZECH REPUBLIC, 4.6% Czech Korunas
CEZ (Czech Electric Company), 14.375%, 1/27/01
(identified cost $6,022,084) 159,710,000 $ 6,137,439
---------------
DENMARK, 1.4% Danish Krone
Denmark Government, 8%, 3/15/06
(identified cost $1,869,421) 10,000,000 $ 1,849,713
---------------
ECUADOR 1.4% U.S. Dollars
Ecuador Discount Bond (Brady), 6.50%, 2/28/25
(identified cost $1,625,211) 2,900,000 $ 1,901,313
---------------
IRELAND, 10.3% Irish Pound
Irish Government, 8%, 8/18/06 3,000,000 $ 5,243,751
Irish Government, 9.25%, 7/11/03 4,500,000 8,411,749
---------------
Total Ireland (identified cost $12,681,571) $ 13,655,500
---------------
NEW ZEALAND, 4.2% New Zealand Dollars
New Zealand Government, 6.5%, 2/15/00 4,000,000 $ 2,769,047
New Zealand Government, 8%, 11/15/06 3,800,000 2,819,933
---------------
Total New Zealand (identified cost $5,317,623) $ 5,588,980
---------------
NORWAY, 5.3% Norwegian Krones
Norway Government, 6.75%, 1/15/07 20,000,000 $ 3,121,289
Norway Government, 7.0%, 5/31/01 24,000,000 3,914,686
---------------
Total Norway (identified cost $6,814,190) $ 7,035,975
---------------
POLAND, 6.4% Polish Zloty
Polish Government T-Bill, 0%, 11/6/96 4,640,000 $ 1,645,932
Polish Government T-Bill, 0%, 12/18/96 3,670,000 1,274,691
Polish Government T-Bill, 0%, 1/1/97 5,860,000 2,021,571
Polish Government T-Bill, 0%, 1/29/97 10,420,000 3,545,081
---------------
Total Poland (identified cost $8,560,401) $ 8,487,275
---------------
UNITED STATES, 42.2% U.S. Dollars
Corporate Bonds & Notes, 5.4%
Agricultural Minerals & Chemicals,
Sr. Notes, 10.75%, 9/30/03 1,000,000 $ 1,065,000
Applied Extrusion, Sr. Notes, 11.5%, 4/1/02 1,000,000 1,045,000
Dayton Hudson Medium Term Note, 9.5%, 6/10/15 665,000 767,769
Dayton Hudson Medium Term Note, 9.52%, 6/10/15 350,000 404,583
Overhead Door Corp., Sr. Notes, 12.25%, 2/1/00 500,000 540,000
TRW Inc., Medium Term Note, 9.35%, 6/4/20 1,900,000 2,288,417
United International Holdings Inc.,
Sr. Sec. Disc. Notes, 0%, 11/15/99 1,500,000 1,035,000
---------------
Total United States Corporate Bonds & Notes
(identified cost $6,740,638) $ 7,145,769
---------------
Mortgage Pass-Throughs, 34.9% U.S. Dollars
Federal Home Loan Mortgage Corp.
Participation Certificates:
4.75%, with various maturities to 2003 40,582 $ 39,776
5.5%, with maturity at 2019 22,409 22,429
8%, with various maturities to 2021 4,438,216 4,591,223
8.5%, with various maturities to 2024 5,428,489 5,711,766
9%, with maturity at 2019 996,142 1,061,484
12.5%, with maturity at 2011 126,267 143,651
12.75%, with maturity at 2013 201,306 229,027
13%, with maturity at 2013 146,828 171,027
13.5%, with maturity at 2019 552,700 649,918
---------------
$ 12,620,301
---------------
Federal National Mortgage Association
Mortgage-Backed Securities:
4.75%, with maturity at 1999 65,853 $ 65,200
5%, with maturity at 2003 156,521 153,070
5.5%, with various maturities to 2012 133,861 133,327
7.5%, with maturity at 2002 939,228 958,609
8%, with various maturities to 2013 4,029,758 4,177,277
8.5%, with various maturities to 2026 3,637,468 3,823,635
9%, with various maturities to 2017 8,292,458 8,814,032
12.75%, with maturity at 2014 197,178 230,626
13%, with various maturities to 2015 1,408,664 1,643,333
13.25%, with maturity at 2014 303,799 360,103
13.5%, with various maturities to 2015 1,235,267 1,438,421
14.75%, with various maturities to 2012 2,942,240 3,555,441
---------------
$ 25,353,074
---------------
Government National Mortgage Association: U.S. Dollars
6.5%, with various maturities to 2007 1,292,604 $ 1,298,318
8%, with maturity at 2017 4,781,543 4,978,231
9%, with maturity at 2016 1,240,467 1,323,852
13.5%, with various maturities to 2014 562,280 673,444
---------------
$ 8,273,845
---------------
Total Mortgage Pass-Throughs (identified cost, $45,801,731) $ 46,247,220
---------------
U.S. Treasury Bond, 11.75%, 2/15/01+ U.S. Dollars
(identified cost, $2,603,438) 2,000,000 $ 2,422,180
---------------
Total United States (identified cost, $55,145,807) $ 55,815,169
---------------
Total Bonds & Notes (identified cost, $115,286,631) $ 120,213,720
---------------
- ------------------------------------------------------------------------------------------------
Short-Term Obligations -- 3.8%
- ------------------------------------------------------------------------------------------------
Banque National De Paris, Euro Time-Deposit U.S. Dollars
Cayman Islands, 5.50%, 11/1/96
(at amortized cost) 5,000,000 $ 5,000,000
---------------
Total Investments (identified cost, $120,286,631) $ 125,213,720
Other Assets, less Liabilities, 5.4% 7,193,079
---------------
Net Assets, 100% $ 132,406,799
===============
+Security pledged as collateral on financial futures contracts.
The accompanying notes are an integral part of the financial statements
</TABLE>
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
October 31, 1996
<S> <C>
Assets:
Investments, at value (Note 1A) (identified
cost, $120,286,631) $ 125,213,720
Cash 659
Foreign currency, at value (identified cost, $7,952) 7,744
Receivable for investments sold 1,896,365
Interest receivable 2,359,131
Deferred organization expenses (Note 1J) 10,963
Receivable for foreign
forward currency exchange contracts 2,971,260
-------------
Total assets $ 132,459,842
Liabilities:
Payable for daily variation margin on open
financial futures contracts (Note 1E) $ 29,359
Payable to affiliate --
Trustees' fees 681
Accrued expenses 23,003
-------------
Total liabilities 53,043
-------------
Net Assets applicable to investors'
interest in Portfolio $ 132,406,799
=============
Sources of Net Assets:
Net proceeds from capital contributions
and withdrawals $ 124,488,477
Unrealized appreciation of investments, futures,
options and foreign currency (computed on the
basis of identified cost) 7,918,322
-------------
Total $ 132,406,799
=============
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended October 31, 1996
<S> <C>
Investment Income:
Interest Income -- $ 13,181,562
Expenses --
Investment adviser fee (Note 2) $ 744,744
Administration fee (Note 2) 208,657
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 8,663
Custodian fees 138,046
Legal and accounting services 87,414
Amortization of organization expenses (Note 1J) 4,721
Miscellaneous 7,025
-------------
Total expenses 1,199,270
-------------
Net investment income $ 11,982,292
-------------
Realized and Unrealized Gain (Loss) on Investments,
Futures, Options and Foreign Currency:
Net realized gain (loss) (identified cost basis)
(including net loss due to foreign currency rate
fluctuations of $775,003) --
Investment transactions $ 9,066,256
Financial futures contracts (115,205)
Written options 23,385
Foreign currency and forward foreign
currency exchange contracts 598,763
-------------
Net realized gain on investments,
futures, options and foreign currency $ 9,573,199
Change in unrealized appreciation (depreciation) --
Investments $ (2,027,026)
Financial futures contracts 426,241
Foreign currency and forward foreign
currency exchange contracts 5,421,373
-------------
Net change in unrealized appreciation
of investments, futures, options and
foreign currency $ 3,820,588
-------------
Net realized and unrealized gain on investments,
futures, options and foreign currency 13,393,787
-------------
Net increase in net assets resulting from operations $ 25,376,079
=============
The accompanying notes are an integral part of the financial statements
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
Year Ended October 31,
---------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From operations --
Net investment income $ 11,982,292 $ 16,533,049
Net realized gain (loss) on investments, futures,
options and foreign currency 9,573,199 (11,886,837)
Change in unrealized appreciation
of investments, futures, options and foreign currency 3,820,588 15,637,070
------------- -------------
Net increase in net assets resulting from operations $ 25,376,079 $ 20,283,282
------------- -------------
Capital transactions --
Contributions $ 10,557,996 $ 7,892,611
Withdrawals (56,110,565) (112,061,370)
------------- -------------
Net decrease in net assets resulting
from capital transactions $ (45,552,569) $(104,168,759)
------------- -------------
Total decrease in net assets $ (20,176,490) $ (83,885,477)
Net Assets:
At beginning of year 152,583,289 236,468,766
------------- -------------
At end of year $ 132,406,799 $ 152,583,289
============= =============
<CAPTION>
- ----------------------------------------------------------------------------------------------
Supplementary Data
Year Ended October 31,
------------------------------------------
1996 1995 1994*
---------- ----------- ----------
<S> <C> <C> <C>
Ratios (as a percentage of average net assets):
Expenses 0.86% 0.84% 0.82%+
Net investment income 8.62% 9.08% 8.41%+
Portfolio Turnover 97% 78% 71%
+Computed on an annualized basis.
*For the period from the start of business, March 1, 1994, to October 31, 1994.
The accompanying notes are an integral part of the financial statements
</TABLE>
NOTES TO FINANCIAL STATEMENTS
(1) Significant Accounting Policies
Strategic Income Portfolio (the "Portfolio") is registered under the
Investment Company Act of 1940 as a non-diversified open-end
investment company. The Portfolio, which was organized as a trust
under the laws of the State of New York in 1992, seeks to provide a
high level of income by investing in a global portfolio consisting
primarily of high grade debt securities. The Declaration of Trust
permits the Trustees to issue beneficial 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 Valuations - Debt securities (other than mortgage-
backed, "pass-through," securities and short-term obligations
maturing in sixty days or less), including listed securities and
securities for which price quotations are available and forward
contracts, will normally be valued on the basis of market valuations
furnished by pricing services. Mortgage backed, "pass through,"
securities are valued using a matrix pricing system which takes into
account yield differentials, anticipated prepayments and interest
rates. Financial futures contracts listed on commodity exchanges and
exchange-traded options are valued at closing settlement price.
Short-term obligations and money-market securities maturing in sixty
days or less are valued at amortized cost which approximates value.
Non-U.S. dollar denominated short-term obligations are valued at
amortized cost as calculated in the base currency and translated
into U.S. dollars at the current exchange rate. Investments for
which market quotations are unavailable are valued at fair value
using methods determined in good faith by or at the direction of the
Trustees.
B. Income - Interest income is determined on the basis of interest
accrued and discount earned, adjusted for amortization of discount
when required for federal income tax purposes.
C. Gains and Losses From Investment Transactions - Realized gains
and losses from investment transactions are recorded on the basis of
identified cost. For book purposes, gains and losses are not recognized
until disposition. For federal tax purposes, the Fund is subject to
special tax rules that may affect the amount, timing, and character of
gains recognized on certain of the Portfolio's investments. The Portfolio
has elected, under Section 1092 of the Internal Revenue Code (the "Code"),
to utilize mixed straddle accounting for certain designated classes of
activities involving domestic options and domestic financial futures
contracts in determining recognized gains and losses. Under this
method, Section 1256 positions (financial futures contracts and
options on investments or financial futures contracts) and non-
Section 1256 positions (bonds, etc.) are marked-to-market on a daily
basis resulting in the recognition of taxable gains and losses on a
daily basis. Such gains or losses are categorized as short-term or
long-term based on aggregation rules provided in the Code.
D. Income Taxes - The Portfolio is treated as a partnership for
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 ultimately responsible for
the payment of any taxes. 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 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.
E. Financial Futures Contracts - Upon entering into a financial
futures contract, the Portfolio is required to deposit an amount
("initial margin"), either in cash or securities, equal to a certain
percentage of the purchase price indicated in the financial futures
contract. Subsequent payments are made or received by the Portfolio
("variation margin") 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 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 and 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 fluctuations in foreign currency exchange rates are not
separately disclosed.
G. Written Options - The Portfolio may write call or put options for
which premiums are received and are recorded as liabilities, and are
subsequently adjusted to the current value of the options written.
Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are
exercised or are closed are offset against the proceeds or amount
paid on the transaction to determine the realized gain or loss. If a
put option is exercised, the premium reduces the cost basis of the
securities purchased by the Portfolio. The Portfolio as a writer of
an option may have no control over whether the underlying securities
may be sold (call) or purchased (put) and as a result bears the
market risk of an unfavorable change in the price of the securities
underlying the written option.
H. 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. Risks 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.
I. Reverse Repurchase Agreements - The Portfolio may enter into
reverse repurchase agreements. Under such an agreement, the
Portfolio temporarily transfers possession, but not ownership, of a
security to a counterparty, in return for cash. At the same time,
the Portfolio agrees to repurchase the security at an agreed-upon
price and time in the future. The Portfolio may enter into reverse
repurchase agreements for temporary purposes, such as to fund
withdrawals, or for use as hedging instruments where the underlying
security is denominated in a foreign currency. As a form of
leverage, reverse repurchase agreements may increase the risk of
fluctuation in the market value of the Portfolio's assets or in its
yield. Liabilities to counterparties under reverse repurchase
agreements are recognized in the statement of assets and liabilities
at the same time at which cash is received by the Portfolio. The
securities underlying such agreements continue to be treated as
owned by the Portfolio and remain in the Portfolio of investments.
Interest charged on amounts borrowed by the Portfolio under reverse
repurchase agreements is accrued daily and offset against interest
income for financial statement purposes.
J. Deferred Organization Expense - Costs incurred by the Portfolio
in connection with its organization are being amortized on the
straight-line basis over five years.
K. Expense Reduction - Investors Bank & Trust Company (IBT) serves
as custodian to the Portfolio. Pursuant to the custodian agreement,
IBT receives a fee reduced by credit which is determined based on
the average cash balance the Portfolio maintains with IBT. All
significant credit balances used to reduce the Portfolio's custodian
fees are reflected as a reduction of operation expenses on the
Statement of Operations.
L. 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 expenses
during the reporting period. Actual results could differ from those
estimates.
M. Other - Investment transactions are accounted for on a trade date
basis.
(2) Investment Adviser Fee and Other
Transactions with Affiliates
The investment adviser fee is earned by Boston Management and
Research (BMR), a wholly-owned subsidiary of Eaton Vance Management
(EVM), as compensation for management and investment advisory
services rendered to the Portfolio. The fee is based upon a
percentage of average daily net assets plus a percentage of gross
investment income (i.e., income other than gains from the sale of
investments). Such percentages are reduced as average daily net
assets exceed certain levels. For the year ended October 31, 1996,
the fee was equivalent to 0.54% (annualized) of the Portfolio's
average net assets for such period and amounted to $744,744. An
administration fee, computed at an effective annual rate of 0.15% of
average daily net assets was also paid to BMR for administrative
services and office facilities. Such fee amounted to $208,657 for
the year ended October 31, 1996.
Except for Trustees of the Portfolio who are not members of EVM's or
BMR's organization, officers and Trustees receive remuneration for
their services to the Portfolio out of such investment adviser fee.
Certain officers of the Portfolio and Trustees of the Trust are
officers and directors/trustees of the above organizations. Trustees
of the Portfolio may elect to defer receipt of all or a portion of
their annual fees in accordance with the terms of the Trustees
Deferred Compensation Plan. For the year ended October 31, 1996, no
significant amounts have been deferred.
(3) Line of Credit
The Portfolio participates with other portfolios and funds managed
by BMR or EVM in a $120 million unsecured line of credit agreement
with a bank. Borrowings will be made by the Portfolio solely to
facilitate the handling of unusual and/or unanticipated short-term
cash requirements. Interest is charged to each portfolio or fund
based on its borrowings at the bank's base rate or at an amount
above either the bank's adjusted certificate of deposit rate, a
Eurodollar rate, or a federal funds effective rate. In addition, a
fee computed at an annual rate of 0.15% on the daily unused portion
of the facility 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.
(4) Investment Transactions
The Portfolio invests primarily in foreign government and U.S.
Government debt securities. The ability of the issuers of the debt
securities to meet their obligations may be affected by economic
developments in a specific industry or country. Purchases and sales
of investments, other than short-term obligations, for the year
ended October 31, 1996 were as follows:
Purchases -
Investments (non-U.S. Government) $ 88,108,189
U.S. Government Securities 34,398,490
------------
$122,506,679
============
Sales -
Investments (non-U.S. Government) $146,483,894
U.S. Government Securities 1,284,688
------------
$147,768,582
============
(5) 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.
<TABLE>
<CAPTION>
A summary of obligations under these financial instruments at
October 31, 1996 is as follows:
Forward Foreign Currency Exchange Contracts
Sales
- ------
In Exchange For Net Unrealized
Settlement (in United States Appreciation
Date Deliver Dollars) (Depreciation)
- ------------------ -------------------------------------- ---------------- --------------
<S> <C> <C> <C> <C>
11/25/96 Australian Dollar 4,000,000 $ 3,145,400 $ (23,233)
11/5/96-11/29/96 Belgian Franc 1,112,959,031 38,049,468 2,304,779
11/5/96-1/22/97 Swiss Franc 12,184,273 9,980,904 250,731
11/22/96-12/24/96 Japanese Yen 726,000,000 6,814,064 408,016
12/10/96 New Zealand Dollars 809,921 556,739 (13,202)
---------------- --------------
$ 58,546,575 $ 2,927,091
================ ==============
<CAPTION>
Purchases
- ----------
In Exchange For Net Unrealized
Settlement (in United States Appreciation
Date Deliver Dollars) (Depreciation)
- ------------------ -------------------------------------- ---------------- --------------
<S> <C> <C> <C>
11/25/96-11/29/96 Belgian Franc 209,500,272 $ 6,812,444 $ (80,640)
1/27/97 Canadian Dollar 3,750,000 2,801,958 10,008
1/31/97 Czech Koruna 169,905,000 6,237,335 (33,434)
11/6/96-12/6/96 Indonesian Rupiah 23,750,000,000 10,049,138 98,232
11/26/96 Indian Rupee 73,260,000 2,000,000 40,555
11/13/96-3/25/97 Philippine Peso 252,505,000 9,500,000 13,497
11/08/96 Thai Baht 63,700,000 2,500,000 (4,049)
---------------- --------------
$ 39,900,875 $ 44,169
================ ==============
<CAPTION>
Futures Contracts
Net Unrealized
Appreciation
Expiration Date Contracts Position (Depreciation)
- --------------- --------- ---------- --------------
<S> <C> <C> <C>
12/96 47 U.S. 5 year Treasury Bond Futures Short $ (58,345)
12/96 39 U.S. 10 year Treasury Bond Futures Short (43,443)
12/96 28 U.S. 30 year Treasury Bond Futures Short (117,411)
12/96 22 Australian 10 year Bond Futures Long 110,629
12/96 70 Canadian 10 year Bond Futures Long 328,220
12/96 107 French 10 year Bond Futures Short (420,629)
12/96 97 German 10 year Bond Futures Long 297,127
12/96 4 Japanese 10 year Bond Futures Short (164,969)
--------------
$ (68,821)
==============
At October 31, 1996, the Portfolio had sufficient cash and/or securities
to cover margin requirements on open futures contracts.
</TABLE>
Written Option Transactions
Transactions in written options for the period ended
October 31, 1996 were as follows:
Number
of Contracts Premiums
------------- ------------
Outstanding, beginning of year -- --
Options written 3,000 $23,385
Options exercised -- --
Options expired (3,000) ($23,385)
----- -------
Outstanding, end of year -- --
===== =======
(6) Federal Income Tax Basis of Investments
The cost and unrealized appreciation/depreciation in value of the
investments owned at October 31, 1996, as computed on a federal
income tax basis, were as follows:
Aggregate cost $ 120,786,543
=============
Gross unrealized appreciation $ 4,520,011
Gross unrealized depreciation 92,834
-------------
Net unrealized appreciation $ 4,427,177
=============
Report of Independent Accountants
To the Trustees and Investors of Strategic
Income Portfolio:
We have audited the accompanying statement of assets and liabilities
of Strategic Income Portfolio, including the portfolio of
investments, as of October 31, 1996, the related statement of
operations for the year then ended and the statements of changes in
net assets for each of the two years then ended, and supplementary
data for each of the two years then ended and for the period from
March 1, 1994 (start of business) to October 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 October
31, 1996 by correspondence with the custodian and brokers. 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, the financial statements and supplementary data
referred to above present fairly, in all material respects, the
financial position of Strategic Income Portfolio as of October 31,
1996, the results of its operations for the year then ended, the
changes in its net assets for each of the two years then ended, and
the supplementary data for each of the two years then ended and for
the period from March 1, 1994 (start of business) to October 31,
1994, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 2, 1996
