<PAGE>
Strategic Income Portfolio as of April 30, 1998
PORTFOLIO OF INVESTMENTS
Bonds & Notes -- 92.4%
Principal U.S. $ Value
- --------------------------------------------------------------------------------
Argentina -- 5.4% U.S. Dollar
- --------------------------------------------------------------------------------
Argentina Discount Bond (Brady),
6.875%, 3/31/23/(1)/ 4,750,000 $ 4,096,875
Telefonica Argentina, 9.125%, 5/07/08 1,500,000 1,507,500
Transener, 9.25%, 4/01/08 2,000,000 2,002,500
- --------------------------------------------------------------------------------
Total Argentina (identified cost, $6,927,279) $ 7,606,875
- --------------------------------------------------------------------------------
Brazil -- 5.1% U.S. Dollar
- --------------------------------------------------------------------------------
Brazil Discount Bond (Brady), 6.625%,
4/15/24/(1)/ 7,000,000 $ 5,884,410
Brazil IDU Bond (Brady), 6.875%, 1/01/01/(1)/ 1,400,000 1,366,582
- --------------------------------------------------------------------------------
Total Brazil (identified cost, $6,692,405) $ 7,250,992
- --------------------------------------------------------------------------------
Bulgaria -- 1.2% U.S. Dollar
- --------------------------------------------------------------------------------
Bulgaria Discount Bond (Brady), 6.563%,
7/28/24/(1)/ 2,000,000 $ 1,645,000
- --------------------------------------------------------------------------------
Total Bulgaria (identified cost, $1,565,860) $ 1,645,000
- --------------------------------------------------------------------------------
Ecuador -- 2.4% U.S. Dollar
- --------------------------------------------------------------------------------
Ecuador Discount Bond (Brady), 6.625%,
2/28/25/(1)/ 1,600,000 $ 1,177,008
Ecuador Par Bond (Brady), 3.50%, 2/28/25/(1)/ 4,000,000 2,182,520
- --------------------------------------------------------------------------------
Total Ecuador (identified cost, $3,210,120) $ 3,359,528
- --------------------------------------------------------------------------------
Hong Kong -- 5.3% U.S. Dollar
- --------------------------------------------------------------------------------
Cathay International Ltd., 13.00%, 4/15/08 2,000,000 $ 2,012,500
Guangdong Enterprises, 8.75%, 12/15/03 3,000,000 2,754,900
Guangdong Investment Ltd., 3.25%, 4/07/03/(4)/ 3,000,000 2,741,250
- --------------------------------------------------------------------------------
Total Hong Kong (identified cost, $7,723,871) $ 7,508,650
- --------------------------------------------------------------------------------
Indonesia -- 0.8% U.S. Dollar
- --------------------------------------------------------------------------------
APP Global Finance III, 9.969%, 4/17/02/(1)(2)/ 600,000 $ 456,600
Indah Kiat Finance Mauritius, Sr. Unsec. Notes,
10.00%, 7/01/07 750,000 611,250
- --------------------------------------------------------------------------------
Total Indonesia (identified cost, $1,207,897) $ 1,067,850
- --------------------------------------------------------------------------------
Morocco -- 1.2% Deutsche Mark
- --------------------------------------------------------------------------------
Snap Limited, 11.50%, 1/29/09 2,750,001 $ 1,673,553
- --------------------------------------------------------------------------------
Total Morocco (identified cost, $1,699,118) $ 1,673,553
- --------------------------------------------------------------------------------
Norway -- 3.1% Norwegian Krone
- --------------------------------------------------------------------------------
Norway Government, 6.75%, 1/15/07 20,000,000 $ 2,930,017
Norway Government, 7.00%, 5/31/01 10,000,000 1,419,445
- --------------------------------------------------------------------------------
Total Norway (identified cost, $4,587,443) $ 4,349,462
- --------------------------------------------------------------------------------
Philippines -- 2.3% U.S. Dollar
- --------------------------------------------------------------------------------
JG Summit Cayman, 3.50%, 12/23/03 2,500,000 $ 1,468,750
Philippine Par Bond (Brady), 6.50%, 12/01/17/(1)/ 2,000,000 1,780,000
- --------------------------------------------------------------------------------
Total Philippines (identified cost, $3,582,718) $ 3,248,750
- --------------------------------------------------------------------------------
United Kingdom -- 0.5% U.S. Dollar
- --------------------------------------------------------------------------------
Newsquest Capital Corp., Sr. Sub. Note,
11.00%, 5/01/06 595,000 $ 669,375
- --------------------------------------------------------------------------------
Total United Kingdom (identified cost, $611,894) $ 669,375
- --------------------------------------------------------------------------------
United States -- 65.1% U.S. Dollar
- --------------------------------------------------------------------------------
Corporate Bonds & Notes -- 3.5%
Applied Extrusion Inc., Sr. Notes, 11.50%,
4/01/02 1,000,000 $ 1,065,000
Dayton Hudson Medium Term Notes,
9.52%, 6/10/15 350,000 441,588
TRW Inc., Medium Term Notes, 9.35%, 6/04/20 1,900,000 2,435,344
United International Holdings, 10.75%, (0%
until 2/15/03), 2/15/08 1,500,000 948,750
- --------------------------------------------------------------------------------
Total Corporate Bonds & Notes (identified cost, $4,325,507) $ 4,890,682
- --------------------------------------------------------------------------------
Mortgage Pass-Throughs -- 60.0%
Federal Home Loan Mortgage Corp.:
4.75%, with various maturities to 2003 19,729 $ 19,204
5.50%, with maturity at 2019 866 863
8.00%, with various maturities to 2021 11,008,187 11,433,105
8.50%, with various maturities to 2019 2,329,263 2,469,510
9.00%, with maturity at 2019 703,128 754,420
9.25%, with maturity at 2010 2,007,590 2,131,564
9.50%, with maturity at 2015 2,318,056 2,475,779
11.00%, with maturity at 2019 2,680,070 2,981,846
12.50%, with various maturities to 2019 2,959,596 3,453,481
12.75%, with maturity at 2013 154,367 179,160
13.25%, with maturity at 2013 119,637 140,535
13.50%, with maturity at 2019 370,015 439,333
- --------------------------------------------------------------------------------
$ 26,478,800
- --------------------------------------------------------------------------------
Federal National Mortgage Association:
4.75%, with maturity at 1999 4,996 $ 4,960
5.00%, with maturity at 2003 88,298 86,435
5.50%, with various maturities to 2012 14,883 14,744
7.50%, with various maturities to 2018 3,838,924 3,948,198
8.00%, with various maturities to 2013 4,676,592 4,857,232
8.25%, with maturity at 2007 2,992,893 3,099,755
8.50%, with various maturities to 2026 13,045,669 13,747,131
9.00%, with maturity at 2010 1,598,722 1,697,937
12.00%, with maturity at 2015 1,217,663 1,403,854
12.50%, with various maturities to 2019 7,391,528 8,605,460
12.75%, with maturity at 2014 139,247 164,963
See notes to financial statements
10
<PAGE>
Strategic Income Portfolio as of April 30, 1998
PORTFOLIO OF INVESTMENTS CONT'D
Principal U.S. $ Value
- --------------------------------------------------------------------------------
United States (continued)
- --------------------------------------------------------------------------------
Federal National Mortgage Association (cont'd):
13.00%, with various maturities to 2015 3,041,733 $ 3,594,592
13.25%, with maturity at 2014 230,635 277,132
13.50%, with various maturities to 2015 1,706,227 2,020,861
14.75%, with various maturities to 2012 2,167,682 2,670,041
- --------------------------------------------------------------------------------
$ 46,193,295
- --------------------------------------------------------------------------------
Government National Mortgage Association:
6.50%, with various maturities to 2007 767,604 $ 770,478
7.50%, with various maturities to 2017 1,235,522 1,291,373
8.00%, with maturity at 2008 2,861,171 2,984,430
8.50%, with maturity at 2009 1,315,642 1,378,099
9.00%, with maturity at 2016 914,105 977,136
12.50%, with maturity at 2019 3,267,669 3,813,242
13.50%, with various maturities to 2014 302,076 364,403
- --------------------------------------------------------------------------------
$ 11,579,161
- --------------------------------------------------------------------------------
Total Mortgage Pass-Throughs (identified cost, $84,235,374) $ 84,251,256
- --------------------------------------------------------------------------------
U.S. Treasury Bond -- 1.6%
United States Treasury Bond, 11.75%, 2/15/01/(3)/
(identified cost, $2,603,438) 2,000,000 $ 2,311,240
- --------------------------------------------------------------------------------
Total United States (identified cost, $91,164,319) $ 91,453,178
- --------------------------------------------------------------------------------
Total Bonds & Notes
(identified cost $128,972,924) $ 129,833,213
- --------------------------------------------------------------------------------
Short-Term Investments -- 7.6%
U.S. Dollar
- --------------------------------------------------------------------------------
Banque National De Paris, Euro Time-deposit
Cayman Islands, 5.500%, 5/01/98 6,200,000 $ 6,200,000
Postipanki, NY Cayman Time Deposit,
5.500%, 5/01/98 4,502,032 4,502,032
- --------------------------------------------------------------------------------
Total Short-Term Investments
(at amortized cost $10,702,032) $ 10,702,032
- --------------------------------------------------------------------------------
Total Investments -- 100.0%
(identified cost $139,674,956) $ 140,535,245
- --------------------------------------------------------------------------------
/(1)/ Variable rate security. Rate indicated is the rate at April 30, 1998.
/(2)/ Security valued at fair value using methods determined in good faith by or
at the direction of the Trustees.
/(3)/ Security (or a portion thereof) has been segregated to cover margin
requirements on open financial futures contracts.
/(4)/ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration normally to qualified institutional buyers.
See notes to financial statements
11
<PAGE>
Strategic Income Portfolio as of April 30, 1998
FINANCIAL STATEMENTS
Statement of Assets & Liabilities
As of April 30, 1998
Assets
- --------------------------------------------------------------------------------
Investments, at value (Note 1A) (identified
cost, $139,674,956) $ 140,535,245
Cash 5,175
Receivable for investments sold 2,097,252
Interest receivable 1,623,881
Receivable for open forward foreign currency
contracts (Note 1H) 371,479
Deferred organization expenses (Note 1J) 3,919
- --------------------------------------------------------------------------------
Total assets $ 144,636,951
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Payable for investments purchased $ 7,255,900
Payable for daily variation margin on open
financial futures contracts (Note 1E) 180
Payable to affiliate for Trustees' fees (Note 2) 837
Accrued expenses 39,961
- --------------------------------------------------------------------------------
Total liabilities $ 7,296,878
- --------------------------------------------------------------------------------
Net Assets applicable to investors' interest
in Portfolio $ 137,340,073
- --------------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------------
Net proceeds from capital contributions
and withdrawals $ 136,310,030
Net unrealized appreciation of investments
(computed on the basis of identified cost) 1,030,043
- --------------------------------------------------------------------------------
Total $ 137,340,073
- --------------------------------------------------------------------------------
Statement of Operations
For the Six Months Ended
April 30, 1998
Investment Income (Note 1B)
- --------------------------------------------------------------------------------
Interest income $ 5,597,181
- --------------------------------------------------------------------------------
Total income $ 5,597,181
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Investment adviser fee (Note 2) $ 332,476
Administration fee (Note 2) 97,531
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 4,838
Custodian fee 58,624
Legal and accounting services 35,804
Amortization of organization expenses (Note 1J) 2,335
Miscellaneous 827
- --------------------------------------------------------------------------------
Total expenses $ 532,435
- --------------------------------------------------------------------------------
Net investment income $ 5,064,746
- --------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
- --------------------------------------------------------------------------------
Net realized gain (loss)--
Investment transactions (identified cost basis) $ 270,766
Financial futures contracts 749,696
Foreign currency transactions 3,553,169
- --------------------------------------------------------------------------------
Net realized gain on investment transactions $ 4,573,631
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investments (identified cost basis) $ (997,539)
Financial futures contracts (1,002,525)
Foreign currency and forward foreign currency
exchange contracts (2,581,554)
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ (4,581,618)
- --------------------------------------------------------------------------------
Net realized and unrealized loss on investments $ (7,987)
- --------------------------------------------------------------------------------
Net increase in net assets from operations $ 5,056,759
- --------------------------------------------------------------------------------
See notes to financial statements
12
<PAGE>
Strategic Income Portfolio as of April 30, 1998
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Six Months Ended Year Ended
in Net Assets April 30, 1998 October 31, 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
From operations --
Net investment income $ 5,064,746 $ 10,516,988
Net realized gain on
investment transactions 4,573,631 6,359,975
Net change in unrealized
appreciation (depreciation)
of investments (4,581,618) (2,306,661)
- ----------------------------------------------------------------------------------
Net increase in net assets
from operations $ 5,056,759 $ 14,570,302
- ----------------------------------------------------------------------------------
Capital transactions --
Contributions $ 30,905,717 $ 36,154,026
Withdrawals (19,878,402) (61,875,128)
- ----------------------------------------------------------------------------------
Net increase (decrease) in net assets
from capital transactions $ 11,027,315 $ (25,721,102)
- ----------------------------------------------------------------------------------
Net increase (decrease) in net assets $ 16,084,074 $ (11,150,800)
- ----------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------
At beginning of period $ 121,255,999 $ 132,406,799
- ----------------------------------------------------------------------------------
At end of period $ 137,340,073 $ 121,255,999
- ----------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
13
<PAGE>
Strategic Income Portfolio as of April 30, 1998
FINANCIAL STATEMENTS CONT'D
Supplementary Data
<TABLE>
<CAPTION>
Year Ended October 31,
Six Months Ended -------------------------------------------------------
April 30, 1998 1997 1996 1995 1994*
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratios to average daily net assets
- -----------------------------------------------------------------------------------------------------------------------
Expenses 0.82%+ 0.86% 0.86% 0.84% 0.82%+
Net investment income 7.78%+ 8.06% 8.62% 9.08% 8.41%+
Portfolio Turnover 34% 77% 71% 78% 71%
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $137,340 $121,256 $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
14
<PAGE>
Strategic Income Portfolio as of April 30, 1998
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 an independent matrix pricing
system applied by the advisor which takes into account closing bond
valuations, yield differentials, anticipated prepayments and interest rates
provided by dealers. Financial futures contracts listed on commodity exchanges
and exchange-traded options are valued at closing settlement prices.
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.
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. That portion of unrealized gains and losses on
investments that result from fluctuations in foreign currency exchange rates
are not separately disclosed.
15
<PAGE>
Strategic Income Portfolio as of April 30, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
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, 1998, the fee was equivalent to
0.51% (annualized) of the Portfolio's average net assets for such period and
amounted to $332,476. 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 $97,531
for the six months ended April 30, 1998.
16
<PAGE>
Strategic Income Portfolio as of April 30, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
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
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 the six months ended April 30, 1998,
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 $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 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, 1998, the Portfolio had invested
approximately 19.7% of its net assets or approximately $27,038,000 in high
yield securities. Purchases and sales of investments, other than short-term
obligations, for the six months ended April 30, 1998 were as follows:
Purchases
-----------------------------------------------------------------------------
Investments (non-U.S. Government) $35,521,060
U.S. Government Securities 27,365,826
-----------------------------------------------------------------------------
$62,886,886
-----------------------------------------------------------------------------
Sales
-----------------------------------------------------------------------------
Investments (non-U.S. Government) $26,838,583
U.S. Government Securities 12,623,309
-----------------------------------------------------------------------------
$39,461,892
-----------------------------------------------------------------------------
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, 1998 is
as follows:
Forward Foreign Currency Exchange Contracts
------------------------------------------------------------------------------
Sales
------------------------------------------------------------------------------
Net Unrealized
Settlement In Exchange For Appreciation
Date Deliver (in U.S.dollars) (Depreciation)
------------------------------------------------------------------------------
5/29/98 Belgian Franc
44,186,341 $ 1,187,805 $ (9,448)
5/6/98- Japanese Yen
7/17/98 1,031,300,000 8,168,070 292,021
6/11/98 New Taiwan Dollar
130,800,000 4,000,000 43,318
5/18/98 Republic of Korea Won
3,250,000,000 2,169,559 (215,587)
6/30/98 Singapore Dollar
4,800,000 3,000,938 (21,174)
5/29/98- Swiss Franc
6/4/98 6,559,513 4,527,532 127,906
------------------------------------------------------------------------------
$23,053,904 $217,036
------------------------------------------------------------------------------
17
<PAGE>
Strategic Income Portfolio as of April 30, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
Purchases
-----------------------------------------------------------------------------
Net Unrealized
Settlement Deliver Appreciation
Date In Exchange For (in U.S.dollars) (Depreciation)
------------------------------------------------------------------------------
6/4/98 Greek Drachma
1,000,000,000 $ 3,395,586 $(230,703)
5/18/98 Republic of Korea Won
3,250,000,000 2,000,000 385,146
------------------------------------------------------------------------------
$ 5,395,586 $ 154,443
------------------------------------------------------------------------------
Futures Contracts
------------------------------------------------------------------------------
Net
Unrealized
Expiration Appreciation
Date Contracts Position (Depreciation)
------------------------------------------------------------------------------
6/98 12 Japanese 10 year Bond Futures Short $(181,355)
------------------------------------------------------------------------------
$(181,355)
------------------------------------------------------------------------------
At April 30, 1998, 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, 1998, as computed on a federal income tax basis, were as
follows:
Aggregate cost $140,399,441
------------------------------------------------------------------------------
Gross unrealized appreciation $ 1,840,993
Gross unrealized depreciation (1,705,189)
------------------------------------------------------------------------------
Net unrealized appreciation $ 135,804
------------------------------------------------------------------------------
18
<PAGE>
Strategic Income Portfolio as of April 30, 1998
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Investors
of Strategic Income Portfolio
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities of
Strategic Income Portfolio (the Portfolio), including the portfolio of
investments, as of April 30, 1998, the related statement of operations for the
six months then ended, the statement of changes in net assets for the six months
ended April 30, 1998 and the year ended October 31, 1997, and the supplementary
data for the six months ended April 30, 1998 and each of the three years ended
October 31, 1997, 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, 1998 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, 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, 1998, the results of its operations for the six month
period then ended, the changes in its net assets for the six months then ended
and the year ended October 31, 1997, and the supplementary data for the six
months ended April 30, 1998, each of the three years ended October 31, 1997, 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
May 29, 1998
19
<PAGE>
Strategic Income Portfolio as of April 30, 1998
INVESTMENT MANAGEMENT
Strategic Income Portfolio
Officers Independent Trustees
James B. Hawkes Donald R. Dwight
President and Trustee President, Dwight Partners, Inc.
Mark S. Venezia Samuel L. Hayes, III
Vice President and Jacob H. Schiff Professor of Investment
Portfolio Manager Banking, Harvard University Graduate
School of Business Administration
James L. O'Connor
Treasurer Norton H. Reamer
Chairman and Chief Executive Officer,
Alan R. Dynner United Asset Management Corporation
Secretary
John L. Thorndike
Formerly Director, Fiduciary Company
Incorporated
Jack L. Treynor
Investment Adviser and Consultant
20
