<PAGE>
Strategic Income Portfolio as of April 30, 1997
PORTFOLIO OF INVESTMENTS
Bonds & Notes -- 88.7%
<TABLE>
<CAPTION>
Principal U.S. $ Value
- ----------------------------------------------------------------------------
<S> <C> <C>
Argentina -- 2.4% U.S. Dollar
- ----------------------------------------------------------------------------
Argentina Discount Bond (Brady), 6.375%
3/31/23 3,750,000 $ 3,103,125
- ----------------------------------------------------------------------------
Total Argentina (identified cost, $2,546,798) $ 3,103,125
- ----------------------------------------------------------------------------
Australia -- 0.6% Australian Dollar
- ----------------------------------------------------------------------------
State Electricity - Victoria, 9.25%, 9/18/03 1,000,000 $ 822,191
- ----------------------------------------------------------------------------
Total Australia (identified cost, $733,564) $ 822,191
- ----------------------------------------------------------------------------
Brazil -- 6.6% U.S. Dollar
- ----------------------------------------------------------------------------
Brazil Discount Bond (Brady), 6.875%,
4/15/24 10,500,000 $ 8,459,062
- ----------------------------------------------------------------------------
Total Brazil (identified cost, $6,472,627) $ 8,459,062
- ----------------------------------------------------------------------------
Colombia -- 1.8% U.S. Dollar
- ----------------------------------------------------------------------------
FEN, 9.375%, 6/15/06 2,200,000 $ 2,303,125
- ----------------------------------------------------------------------------
Total Colombia (identified cost, $2,233,000) $ 2,303,125
- ----------------------------------------------------------------------------
Ecuador -- 2.2% U.S. Dollar
- ----------------------------------------------------------------------------
Ecuador Discount Bond (Brady), 6.438%,
2/28/25 4,100,000 $ 2,749,563
- ----------------------------------------------------------------------------
Total Ecuador (identified cost, $2,483,844) $ 2,749,563
- ----------------------------------------------------------------------------
Ireland -- 4.7% Irish Punt
- ----------------------------------------------------------------------------
Irish Government, 9.25%, 7/11/03 3,500,000 $ 6,056,989
- ----------------------------------------------------------------------------
Total Ireland (identified cost, $6,052,161) $ 6,056,989
- ----------------------------------------------------------------------------
Morocco -- 1.4% Deutsche Mark
- ----------------------------------------------------------------------------
Snap Limited, 11.50%, 1/29/09 3,000,000 $ 1,827,053
- ----------------------------------------------------------------------------
Total Morocco (identified cost, $1,853,583) $ 1,827,053
- ----------------------------------------------------------------------------
New Zealand -- 3.7% New Zealand Dollar
- ----------------------------------------------------------------------------
New Zealand Government, 8.00%, 4/15/04 6,850,000 $ 4,768,445
- ----------------------------------------------------------------------------
Total New Zealand (identified cost, $4,740,584) $ 4,768,445
- ----------------------------------------------------------------------------
Norway -- 3.5% Norwegian Krone
- ----------------------------------------------------------------------------
Norway Government, 6.75%, 1/15/07 20,000,000 $ 2,928,173
Norway Government, 7.00%, 5/31/01 10,000,000 1,512,211
- ----------------------------------------------------------------------------
Total Norway (identified cost, $4,587,443) $ 4,440,384
- ----------------------------------------------------------------------------
Poland -- 6.9% Polish Zloty
- ----------------------------------------------------------------------------
Polish T-bill, 0.00%, 5/07/97 12,940,000 $ 4,074,985
Polish T-bill, 0.00%, 6/18/97 4,040,000 1,241,828
Polish T-bill, 0.00%, 7/30/97 11,510,000 3,453,728
- ----------------------------------------------------------------------------
Total Poland (identified cost, $9,041,328) $ 8,770,541
- ----------------------------------------------------------------------------
The Philippines -- 0.9% U.S. Dollar
- ----------------------------------------------------------------------------
JG Summit Cayman, 3.50%, 12/23/03 1,500,000 $ 1,095,000
- ----------------------------------------------------------------------------
Total The Philippines (identified cost, $1,178,795) $ 1,095,000
- ----------------------------------------------------------------------------
United Kingdom -- 1.7% U.S. Dollar
- ----------------------------------------------------------------------------
Diamond Cable Communications Co., 144A,
Sr. Disc. Notes, 10.75%, (0% until
2002), 2/15/07 2,000,000 $ 1,190,000
Newsquest Capital Corp., Sr. Sub.
Notes, 11.00%, 5/01/06 1,000,000 1,045,000
- ----------------------------------------------------------------------------
Total United Kingdom (identified cost, $2,224,199) $ 2,235,000
- ----------------------------------------------------------------------------
United States -- 52.3% U.S. Dollar
- ----------------------------------------------------------------------------
Corporate Bonds & Notes -- 5.0%
Agricultural Minerals & Chemicals Inc.,
Sr. Notes, 10.75%, 9/30/03 1,000,000 $ 1,065,000
Applied Extrusion Inc., Sr. Notes,
11.50%, 4/01/02 1,000,000 1,045,000
Dayton Hudson Mountain, 9.52%, 6/10/15 350,000 392,060
Overhead Door Corp., Sr. Notes, 12.25%,
2/01/00 500,000 527,500
TRW Inc., Medium Term Notes, 9.35%,
6/04/20 1,900,000 2,240,100
United International-Series B, 0.00%,
11/15/99 1,500,000 1,087,500
- ----------------------------------------------------------------------------
Total Corporate Bonds & Notes (identified cost,
$6,070,158) $ 6,357,160
- ----------------------------------------------------------------------------
Mortgage Pass-Throughs -- 47.3%
Federal Home Loan Mortgage Corp.:
4.75%, with various maturities to 2003 33,735 $ 32,853
5.50%, with maturity at 2019 10,816 10,814
8.00%, with various maturities to 2021 4,184,693 4,282,177
8.50%, with various maturities to 2024 4,981,955 5,205,024
9.00%, with maturity at 2019 898,561 952,688
12.50%, with maturity at 2011 112,119 127,982
12.75%, with maturity at 2013 198,341 229,861
13.25%, with maturity at 2013 145,862 170,532
13.50%, with maturity at 2019 495,156 585,264
- ----------------------------------------------------------------------------
$ 11,597,195
- ----------------------------------------------------------------------------
Federal National Mortgage Association:
4.75%, with maturity at 1999 34,601 $ 34,216
5.00%, with maturity at 2003 127,554 123,767
5.50%, with various maturities to 2012 88,780 88,099
7.50%, with various maturities to 2018 2,482,565 2,511,417
8.00%, with various maturities to 2013 3,778,952 3,870,819
8.50%, with various maturities to 2026 3,416,488 3,585,293
9.00%, with various maturities to 2017 7,665,871 8,099,357
12.00%, with maturity at 2015 1,707,245 1,955,097
12.50%, with various maturities to 2019 5,500,218 6,412,614
12.75%, with maturity at 2014 177,994 208,993
13.00%, with various maturities to 2015 3,984,084 4,678,235
13.25%, with maturity at 2014 234,128 279,444
</TABLE>
See notes to financial statements
9
<PAGE>
Strategic Income Portfolio as of April 30, 1997
PORTFOLIO OF INVESTMENTS CONT'D
<TABLE>
<CAPTION>
Principal U.S. $ Value
- -------------------------------------------------------------------------------
<S> <C> <C>
United States (continued)
- -------------------------------------------------------------------------------
13.50%, with various maturities to 2015 2,187,464 $ 2,583,690
14.75%, with various maturities to 2012 2,646,817 3,251,672
- -------------------------------------------------------------------------------
$ 37,682,713
- -------------------------------------------------------------------------------
Government National Mortgage Association:
6.50%, with various maturities to 2007 1,142,604 $ 1,137,450
7.50%, with various maturities to 2017 1,415,903 1,433,589
8.00%, with maturity at 2017 4,505,632 4,649,506
9.00%, with maturity at 2016 1,169,909 1,244,500
13.50%, with various maturities to 2014 439,379 528,807
- -------------------------------------------------------------------------------
$ 8,993,852
- -------------------------------------------------------------------------------
Total Mortgage Pass-Throughs (identified cost,
$58,329,874) $ 58,273,760
- -------------------------------------------------------------------------------
United States Treasury Bond, 11.75%,
2/15/01/(1)/ (identified cost,
$2,603,438) 2,000,000 $ 2,345,620
- -------------------------------------------------------------------------------
Total United States (identified cost,
$67,003,470) $ 66,976,540
- -------------------------------------------------------------------------------
Total Bonds & Notes
(identified cost $111,151,396) $113,607,018
- -------------------------------------------------------------------------------
Short-Term
Investments -- 11.3% U.S. Dollar
Banque National De Paris, Euro
Time-deposit Cayman Islands, 5,500,000 $ 5,500,000
5.688%, 5/01/97
Postipanki-n.y. Cayman Time Deposit,
5.450%, 5/01/97 3,000,000 3,000,000
Skandinaviska Enskilada Banken Time
Deposit, 5.470%, 5/02/97 6,000,000 6,000,000
- -------------------------------------------------------------------------------
Total Short-Term Investments
(at amortized cost $14,500,000) $ 14,500,000
- -------------------------------------------------------------------------------
Total Investments -- 100%
(identified cost $125,651,396) $128,107,018
- -------------------------------------------------------------------------------
</TABLE>
/(1)/ Security has been segregated to cover margin requirements on open
financial futures contracts.
See notes to financial statements
10
<PAGE>
Strategic Income Portfolio as of April 30, 1997
FINANCIAL STATEMENTS
Statement of Assets & Liabilities
<TABLE>
<CAPTION>
As of April 30, 1997
Assets
- --------------------------------------------------------------------------------
<S> <C>
Investments, at value (Note 1A)
(identified cost $125,651,396) $128,107,018
Cash 76,339
Foreign currency, at value
(identified cost, $5,735) 812
Receivable for investments sold 2,044,141
Interest receivable 1,343,665
Receivable for variation margin on open financial futures contracts 21,935
Receivable for open forward foreign currency contracts 3,621,210
Deferred organization expenses (Note 1J) 8,628
- --------------------------------------------------------------------------------
Total assets $135,223,748
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Payable for investments purchased $ 4,748,323
Payable to affiliate for Trustees' fees 638
Accrued expenses 39,689
- --------------------------------------------------------------------------------
Total liabilities $ 4,788,650
- --------------------------------------------------------------------------------
Net Assets applicable to investors' interest in Portfolio $130,435,098
- --------------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------------
Net proceeds from capital contributions and withdrawals $124,539,001
Unrealized appreciation of investments, futures, and forward
currency contracts (computed on basis of identified cost) 5,896,097
- --------------------------------------------------------------------------------
Total $130,435,098
- --------------------------------------------------------------------------------
</TABLE>
Statement of Operations
<TABLE>
<CAPTION>
For the Six Months Ended
April 30, 1997
Investment Income
- --------------------------------------------------------------------------------
<S> <C>
Interest income $ 6,028,441
- --------------------------------------------------------------------------------
Total income $ 6,028,441
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Investment adviser fee (Note 2) $ 348,842
Administration fee (Note 2) 99,129
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 4,407
Custodian fee 89,068
Legal and accounting services 36,889
Amortization of organization expenses (Note 1J) 2,335
Miscellaneous 2,317
- --------------------------------------------------------------------------------
Total expenses $ 582,987
- --------------------------------------------------------------------------------
Net investment income $ 5,445,454
- --------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
- --------------------------------------------------------------------------------
Net realized gain (loss)(identified cost basis)--
Investment transactions $ 670,688
Financial futures contracts 275,479
Foreign currency and forward foreign currency
exchange transactions 4,604,783
- --------------------------------------------------------------------------------
Net realized gain on investments $ 5,550,950
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)--
Investments (identified cost basis) $ (2,471,467)
Financial futures contracts (147,034)
Foreign currency and forward foreign
exchange contracts 596,276
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ (2,022,225)
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 3,528,725
- --------------------------------------------------------------------------------
Net increase in net assets from operations $ 8,974,179
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
11
<PAGE>
Strategic Income Portfolio as of April 30, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Six Months Ended Year Ended
in Net Assets April 30, 1997 October 31, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
From operations --
Net investment income $ 5,445,454 $ 11,982,292
Net realized gain on investments 5,550,950 9,573,199
Net change in unrealized
appreciation (depreciation)
of investments (2,022,225) 3,820,588
- --------------------------------------------------------------------------------
Net increase in net assets
from operations $ 8,974,179 $ 25,376,079
- --------------------------------------------------------------------------------
Capital transactions --
Contributions $ 9,999,692 $ 10,557,996
Withdrawals (20,945,572) (56,110,565)
- --------------------------------------------------------------------------------
Net decrease in net assets from
capital transactions $(10,945,880) $(45,552,569)
- --------------------------------------------------------------------------------
Total decrease in net assets $ (1,971,701) $(20,176,490)
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
At beginning of period $132,406,799 $152,583,289
- --------------------------------------------------------------------------------
At end of period $130,435,098 $132,406,799
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
12
<PAGE>
Strategic Income Portfolio as of April 30, 1997
FINANCIAL STATEMENTS CONT'D
Supplementary Data
<TABLE>
<CAPTION>
Year Ended October 31,
Six Months Ended ------------------------------------------------
April 30, 1997 1996 1995 1994*
- --------------------------------------------------------------------------------------------------------------------------
Ratios to average daily net assets
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expenses 0.88%+ 0.86% 0.84% 0.82%+
Net investment income 8.24%+ 8.62% 9.08% 8.41%+
Portfolio Turnover 26% 71% 78% 71%
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) $130,435 $132,407 $152,583 $236,469
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
* For the period from the start of business, March 1, 1994, to October 31, 1994.
See notes to financial statements
13
<PAGE>
Strategic Income Portfolio as of April 30, 1997
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 Valuation -- 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 to 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 Portfolio 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 or losses on
investment transactions attributable to changes in foreign currency exchange
rates are recorded for financial statement purposes as net realized gains and
losses on investments.
14
<PAGE>
Strategic Income Portfolio as of April 30, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
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 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 Expenses -- 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 of the Portfolio. Pursuant to the custodian agreement, IBT receives
a fee reduced by credits which are determined based on the average daily 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
operating expenses on the Statement of Operations.
L Use of Estimates -- The preparation of the 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 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 six months ended April 30, 1997, the fee was equivalent to
0.53% (annualized) of the Portfolio's average net assets for such period and
amounted to $348,842. 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 $99,129
for the six months ended April 30, 1997.
Except as to 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. Trustees of the Portfolio
15
<PAGE>
Strategic Income Portfolio as of April 30, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
that are not affiliated with the Investment Adviser 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 six months ended April 30, 1997, no
significant amounts have been deferred. Certain of the officers and Trustees
of the Portfolios are officers and directors/trustees of the above
organizations.
3 Line of Credit
------------------------------------------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR or
EVM and its affiliates in a $120 million unsecured line of credit agreement
with a group of banks. 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 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 period.
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. The Portfolio regularly invests in lower rated and comparable quality
unrated high yield securities. These investments have different risks than
investments in debt securities rated investment grade and held by the
Portfolio. Risk of loss upon default by the borrower is significantly greater
with respect to such debt securities than with other debt securities because
these securities are generally unsecured and are more sensitive to adverse
economic conditions, such as recession or increasing interest rates, than are
investment grade issuers. At April 30, 1997, the Portfolio had invested
approximately 18% of its net assets or approximately $23,515,000 in high yield
securities. Purchases and sales of investments, other than short-term
obligations, for the six months ended April 30, 1997 were as follows:
<TABLE>
<CAPTION>
Purchases
------------------------------------------------------------------------------
<S> <C>
Investments (non-U.S. Government) $ 31,149,916
U.S. Government Securities 16,845,338
------------------------------------------------------------------------------
$ 47,995,254
------------------------------------------------------------------------------
Sales
------------------------------------------------------------------------------
Investments (non-U.S. Government) $ 49,898,608
U.S. Government Securities -
------------------------------------------------------------------------------
$ 49,898,608
------------------------------------------------------------------------------
</TABLE>
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 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.
A summary of obligations under these financial instruments at April 30, 1997
is as follows:
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Sales
------------------------------------------------------------------------------
Net Unrealized
Settlement In Exchange For Appreciation
Date Deliver (in U.S. dollars) (Depreciation)
------------------------------------------------------------------------------
<S> <C> <C> <C>
7/1/97 Australian Dollar
4,000,000 $ 3,129,200 $ 4,461
11/5/97- Belgian Franc
11/17/97 721,805,951 23,745,222 3,275,994
5/5/97 Czech Koruna
63,360,188 2,036,729 (5,457)
5/2/97 Deutsche Mark
15,385,467 8,904,459 32,174
5/19/97 British Pound Sterling
4,000,000 6,488,600 3,777
7/24/97 Irish Punt
4,140,000 6,450,120 257,146
</TABLE>
16
<PAGE>
Strategic Income Portfolio as of April 30, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
Forward Foreign Currency Exchange Contracts (continued)
<TABLE>
<CAPTION>
Sales
------------------------------------------------------------------------------
Net Unrealized
Settlement In Exchange For Appreciation
Date Deliver (in U.S. dollars) (Depreciation)
------------------------------------------------------------------------------
<S> <C> <C> <C>
6/3/97- Japanese Yen
6/27/97 643,870,496 5,324,981 214,515
7/23/97 Republic of Korea Won
2,206,250,000 2,515,678 --
8/1/97 New Zealand Dollar
6,848,378 4,739,078 3,835
------------------------------------------------------------------------------
$63,334,067 $3,786,445
------------------------------------------------------------------------------
<CAPTION>
Purchases
------------------------------------------------------------------------------
Net Unrealized
Settlement Deliver Appreciation
Date In Exchange For (in U.S. dollars) (Depreciation)
------------------------------------------------------------------------------
<S> <C> <C> <C>
5/2/97 - Deutsche Mark
5/9/97 30,210,467 $17,487,877 $ (62,270)
5/19/97 British Pound Sterling
4,000,000 6,554,400 (69,577)
5/6/97- Indonesian Rupiah
12/17/97 23,301,750,000 9,476,156 (70,122)
7/18/97 Indian Rupee
126,525,000 3,500,000 13,835
7/23/97 Republic of Korea Won
2,206,250,000 2,500,000 15,678
5/1/97 New Zealand Dollar
6,848,378 4,751,952 (3,773)
5/19/97 Philippine Peso
53,156,000 2,000,000 10,994
------------------------------------------------------------------------------
$46,270,385 $ (165,235)
------------------------------------------------------------------------------
<CAPTION>
Futures Contracts
------------------------------------------------------------------------------
Net Unrealized
Expiration Appreciation
Date Contracts Position (Depreciation)
------------------------------------------------------------------------------
<S> <C> <C> <C>
6/97 17 US Treasury
Bond Futures Short $ (14,442)
6/97 59 Canadian 10 year
Bond Futures Long (133,715)
6/97 77 German 10 Year
Bond Futures Long (94,621)
6/97 62 French 10 Year
Bond Futures Short 25,970
6/97 6 Japanese 10 year
Bond Futures Short 13,806
6/97 27 Italian 10 year
Bond Futures Short (12,854)
------------------------------------------------------------------------------
$ (215,856)
------------------------------------------------------------------------------
</TABLE>
At April 30, 1997, the Portfolio had sufficient cash and/or securities to
cover potential obligations arising from open futures and forward contracts,
as well as margin requirements on open futures contracts.
6 Federal Income Tax Basis of Investments (Unaudited)
------------------------------------------------------------------------------
The cost and unrealized appreciation/depreciation in value of the investments
owned at April 30, 1997, as computed on a federal income tax basis, were as
follows:
<TABLE>
<S> <C>
Aggregate cost $ 125,712,579
------------------------------------------------------------------------------
Gross unrealized appreciation $ 3,010,721
Gross unrealized depreciation (616,282)
------------------------------------------------------------------------------
Net unrealized appreciation $ 2,394,439
------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Strategic Income Portfolio as of April 30, 1997
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders
of Strategic Income Portfolio
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Strategic Income Portfolio (the Portfolio) as
of April 30, 1997, the related statement of operations for the six month period
then ended, the statement of changes in net assets for the six months ended
April 30, 1997 and the year ended October 31, 1996, and the supplementary data
for the six months ended April 30, 1997, each of the two years ended October 31,
1996, 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 April
30, 1997 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 the
Portfolio, as of April 30, 1997, the results of its operations for the six month
period then ended, the changes in its net assets for the six months ended April
30, 1997 and the year ended October 31, 1996, and the supplementary data for the
six months ended April 30, 1997, each of the two years ended October 31, 1996,
and for the period from March 1, 1994 (start of business) to October 31, 1994,
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND LLP
Boston, Massachusetts
June 2, 1997
18
<PAGE>
Strategic Income Portfolio
Officers
James B. Hawkes
President and Trustee
Mark S. Venezia
Vice President
James L. O'Connor
Treasurer
Thomas Otis
Secretary
Independent Trustees
Donald R. Dwight
President, Dwight Partners, Inc.
Chairman, Newspapers of New England, 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
John L. Thorndike
Formerly Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
19
