<PAGE>
Strategic Income Portfolio as of October 31, 1997
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
Bonds & Notes -- 87.2%
Principal U.S. $ Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Argentina -- 3.2% U.S. Dollar
- --------------------------------------------------------------------------------
Argentina Discount Bond (Brady),
6.875%, 3/31/23 4,750,000 $ 3,764,375
- --------------------------------------------------------------------------------
Total Argentina (identified cost, $3,438,378) $ 3,764,375
- --------------------------------------------------------------------------------
Brazil -- 2.2% U.S. Dollar
- --------------------------------------------------------------------------------
Brazil Discount Bond (Brady),
6.688%, 4/15/24 3,500,000 $ 2,651,250
- --------------------------------------------------------------------------------
Total Brazil (identified cost, $2,419,632) $ 2,651,250
- --------------------------------------------------------------------------------
Bulgaria -- 1.2% U.S. Dollar
- --------------------------------------------------------------------------------
Bulgaria Discount Bond (Brady),
6.688%, 7/28/24 2,000,000 $ 1,393,750
- --------------------------------------------------------------------------------
Total Bulgaria (identified cost, $1,397,500) $ 1,393,750
- --------------------------------------------------------------------------------
Ecuador -- 2.4% U.S. Dollar
- --------------------------------------------------------------------------------
Ecuador Discount Bond (Brady),
6.688%, 2/28/25 4,100,000 $ 2,885,375
- --------------------------------------------------------------------------------
Total Ecuador (identified cost, $2,513,100) $ 2,885,375
- --------------------------------------------------------------------------------
Indonesia -- 0.5% U.S. Dollar
- --------------------------------------------------------------------------------
APP Global Finance III,
10.094%, 4/17/02/(1)/ 600,000 $ 543,000
- --------------------------------------------------------------------------------
Total Indonesia (identified cost, $549,583) $ 543,000
- --------------------------------------------------------------------------------
Ireland -- 5.2% Irish Punt
- --------------------------------------------------------------------------------
Irish Government, 9.25% , 7/11/03 3,500,000 $ 6,159,556
- --------------------------------------------------------------------------------
Total Ireland (identified cost, $6,052,161) $ 6,159,556
- --------------------------------------------------------------------------------
Morocco -- 1.5% Deutsche Mark
- --------------------------------------------------------------------------------
Snap Limited, 11.50% , 1/29/09 3,000,000 $ 1,814,709
- --------------------------------------------------------------------------------
Total Morocco (identified cost, $1,853,583) $ 1,814,709
- --------------------------------------------------------------------------------
Norway -- 3.9% Norwegian Krone
- --------------------------------------------------------------------------------
Norway Government, 6.75% , 1/15/07 20,000,000 $ 3,041,533
Norway Government, 7.00% , 5/31/01 10,000,000 1,510,792
- --------------------------------------------------------------------------------
Total Norway (identified cost, $4,587,443) $ 4,552,325
- --------------------------------------------------------------------------------
The Philippines -- 0.8% U.S. Dollar
- --------------------------------------------------------------------------------
JG Summit Cayman, 3.50% , 12/23/03 1,500,000 $ 937,500
- --------------------------------------------------------------------------------
Total The Philippines
(identified cost, $1,203,147) $ 937,500
- --------------------------------------------------------------------------------
United Kingdom -- 2.0% U.S. Dollar
- --------------------------------------------------------------------------------
Diamond Cable Communications Co., PLC,
144A, Sr. Disc. Notes, 10.75%
(0% until 2002), 2/15/07 2,000,000 $ 1,280,000
Newsquest Capital Corp., Sr. Sub. Note,
11.00% , 5/01/06 1,000,000 $ 1,110,000
- --------------------------------------------------------------------------------
Total United Kingdom
(identified cost, $2,287,751) $ 2,390,000
- --------------------------------------------------------------------------------
United States -- 64.3% U.S. Dollar
- --------------------------------------------------------------------------------
Corporate Bonds & Notes -- 5.7%
Applied Extrusion Inc., Sr. Notes,
11.50%, 4/01/02 1,000,000 $ 1,070,000
Dayton Hudson MTN, 9.52%, 6/10/15 350,000 421,817
Overhead Door Corp., Sr. Notes,
12.25%, 2/01/00 1,500,000 1,558,125
TRW Inc., Medium Term Notes,
9.35%, 6/04/20 1,900,000 2,432,266
United International-Series B,
0.00%, 11/15/99 1,500,000 1,245,000
- --------------------------------------------------------------------------------
Total Corporate Bonds & Notes
(identified cost, $6,165,695) $ 6,727,208
- --------------------------------------------------------------------------------
Mortgage Pass-Throughs -- 56.6%
Federal Home Loan Mortgage Corp.:
4.75%, with various maturities to 2003 24,292 $ 23,795
5.50%, with maturity at 2019 3,273 3,293
8.00%, with various maturities to 2021 9,418,342 9,861,664
8.50%, with various maturities to 2019 2,679,237 2,866,629
9.00%, with maturity at 2019 803,984 871,583
9.25%, with maturity at 2010 2,199,386 2,351,495
12.50%, with maturity at 2011 108,926 126,230
12.75%, with maturity at 2013 157,544 183,817
13.25%, with maturity at 2013 144,461 170,204
13.50%, with maturity at 2019 417,207 496,891
- --------------------------------------------------------------------------------
$ 16,955,601
- --------------------------------------------------------------------------------
Federal National Mortgage Association:
4.75%, with maturity at 1999 15,378 $ 15,383
5.00%, with maturity at 2003 106,659 104,889
5.50%, with various maturities to 2012 48,537 48,519
7.50%, with various maturities to 2018 4,268,264 4,422,837
8.00%, with various maturities to 2013 3,544,195 3,712,349
8.25%, with maturity at 2007 3,419,514 3,569,268
8.50%, with various maturities to 2026 5,953,380 6,383,078
9.00%, with maturity at 2010 1,835,874 1,970,099
12.00%, with maturity at 2015 1,367,404 1,584,668
12.50%, with various maturities to 2019 8,389,207 9,858,347
12.75%, with maturity at 2014 175,976 210,147
13.00%, with various maturities to 2015 3,453,864 4,109,676
13.25%, with maturity at 2014 232,442 280,774
13.50%, with various maturities to 2015 1,897,416 2,263,990
14.75%, with various maturities to 2012 2,380,057 2,943,082
- --------------------------------------------------------------------------------
$ 41,477,106
- --------------------------------------------------------------------------------
Government National Mortgage Association:
6.50%, with various maturities to 2007 942,604 $ 953,636
</TABLE>
See notes to financial statements
13
<PAGE>
Strategic Income Portfolio as of October 31, 1997
PORTFOLIO OF INVESTMENTS CONT'D
<TABLE>
<CAPTION>
Principal U.S. $ Value
- --------------------------------------------------------------------------------
United States (continued)
- --------------------------------------------------------------------------------
<S> <C> <C>
Government National Mortgage Association
(continued):
7.50%, with various maturities to 2017 1,329,260 $ 1,398,413
9.00%, with maturity at 2016 1,069,231 1,158,067
12.50%, with maturity at 2019 3,766,600 4,443,232
13.50%, with various maturities to 2014 329,690 402,100
- --------------------------------------------------------------------------------
$ 8,355,448
- --------------------------------------------------------------------------------
Total Mortgage Pass-Throughs
(identified cost, $66,035,145) $ 66,788,155
- --------------------------------------------------------------------------------
U.S. Treasury Bond -- 2.0%
United States Treasury Bond, 11.75%,
2/15/01/(2)/ (identified cost, $2,603,438) 2,000,000 $ 2,357,180
- --------------------------------------------------------------------------------
Total United States
(identified cost, $74,804,278) $ 75,872,543
- --------------------------------------------------------------------------------
Total Bonds & Notes
(identified cost $101,106,556) $ 102,964,383
- --------------------------------------------------------------------------------
Short-Term
Investments -- 12.8% U.S. Dollar
Banque National De Paris, Euro
Time-deposit Cayman Islands,
5.625%, 11/03/97 4,100,000 $ 4,100,000
Postipanki, NY Cayman Time Deposit,
5.620%, 11/03/97 5,000,000 5,000,000
Skandinaviska Enskilada Banken Time
Deposit, 5.625%, 11/03/97 6,002,730 6,002,730
- --------------------------------------------------------------------------------
Total Short-Term Investments
(at amortized cost $15,102,730) $ 15,102,730
- --------------------------------------------------------------------------------
Total Investments -- 100.0%
(identified cost $116,209,286) $ 118,067,113
- --------------------------------------------------------------------------------
</TABLE>
/(1)/ Variable rate security.
/(2)/ Security (or a portion thereof) has been segregated to cover margin
requirements on open financial futures contracts.
See notes to financial statements
14
<PAGE>
Strategic Income Portfolio as of October 31, 1997
FINANCIAL STATEMENTS
Statement of Assets & Liabilities
<TABLE>
<CAPTION>
As of October 31, 1997
Assets
- ------------------------------------------------------------------------------------------
<S> <C>
Investments, at value (Note 1A) (identified cost, $116,209,286) $ 118,067,113
Cash 70,312
Receivable for investments sold 23,925
Interest receivable 1,520,911
Receivable for daily variation margin on open financial
futures contracts (Note 5) 70,961
Receivable for open forward foreign currency contracts (Note 1H) 2,956,076
Deferred organization expenses (Note 1J) 6,254
- ------------------------------------------------------------------------------------------
Total assets $ 122,715,552
- ------------------------------------------------------------------------------------------
Liabilities
- ------------------------------------------------------------------------------------------
Payable for investments purchased $ 1,434,281
Payable to affiliate for Trustees' fees (Note 2) 689
Accrued expenses 24,583
- ------------------------------------------------------------------------------------------
Total liabilities $ 1,459,553
- ------------------------------------------------------------------------------------------
Net Assets applicable to investors' interest in Portfolio $ 121,255,999
- ------------------------------------------------------------------------------------------
Sources of Net Assets
- ------------------------------------------------------------------------------------------
Net proceeds from capital contributions and withdrawals $ 115,644,338
Net unrealized appreciation of investments (computed on the
basis of identified cost) 5,611,661
- ------------------------------------------------------------------------------------------
Total $ 121,255,999
- ------------------------------------------------------------------------------------------
<CAPTION>
Statement of Operations
For the Year Ended
October 31, 1997
Investment Income (Note 1B)
- ------------------------------------------------------------------------------------------
<S> <C>
Interest income $ 11,644,406
- ------------------------------------------------------------------------------------------
Total income $ 11,644,406
- ------------------------------------------------------------------------------------------
Expenses
- ------------------------------------------------------------------------------------------
Investment adviser fee (Note 2) $ 679,210
Administration fee (Note 2) 195,786
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 8,729
Custodian fee 164,817
Legal and accounting services 67,135
Amortization of organization expenses (Note 1J) 4,709
Miscellaneous 7,032
- ------------------------------------------------------------------------------------------
Total expenses $ 1,127,418
- ------------------------------------------------------------------------------------------
Net investment income $ 10,516,988
- ------------------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
- ------------------------------------------------------------------------------------------
Net realized gain (loss)--
Investment transactions $ 1,249,916
Financial futures contracts (308,110)
Foreign currency transactions 5,418,169
- ------------------------------------------------------------------------------------------
Net realized gain on investments $ 6,359,975
- ------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investment transactions (identified cost basis) $ (3,069,262)
Financial futures contracts 891,508
Foreign currency transactions (128,907)
- ------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments $ (2,306,661)
- ------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 4,053,314
- ------------------------------------------------------------------------------------------
Net increase in net assets from operations $ 14,570,302
- ------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
15
<PAGE>
Strategic Income Portfolio as of October 31, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended Year Ended
in Net Assets October 31, 1997 October 31, 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
From operations --
Net investment income $ 10,516,988 $ 11,982,292
Net realized gain on investments 6,359,975 9,573,199
Net change in unrealized
appreciation (depreciation)
of investments (2,306,661) 3,820,588
- -------------------------------------------------------------------------------------
Net increase in net assets
from operations $ 14,570,302 $ 25,376,079
- -------------------------------------------------------------------------------------
Capital transactions --
Contributions $ 36,154,026 $ 10,557,996
Withdrawals (61,875,128) (56,110,565)
- -------------------------------------------------------------------------------------
Net decrease in net assets from
capital transactions $ (25,721,102) $ (45,552,569)
- -------------------------------------------------------------------------------------
Net decrease in net assets $ (11,150,800) $ (20,176,490)
- -------------------------------------------------------------------------------------
Net Assets
- -------------------------------------------------------------------------------------
At beginning of year $ 132,406,799 $ 152,583,289
- -------------------------------------------------------------------------------------
At end of year $ 121,255,999 $ 132,406,799
- -------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
16
<PAGE>
Strategic Income Portfolio as of October 31, 1997
FINANCIAL STATEMENTS CONT'D
Supplementary Data
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------------------------------------
1997 1996 1995 1994*
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to average daily net assets
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expenses 0.86% 0.86% 0.84% 0.82%+
Net investment income 8.06% 8.62% 9.08% 8.41%+
Portfolio Turnover 77% 71% 78% 71%
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) $ 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
17
<PAGE>
Strategic Income Portfolio as of October 31, 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 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. 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
18
<PAGE>
Strategic Income Portfolio as of October 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
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.
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
19
<PAGE>
Strategic Income Portfolio as of October 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
investments). Such percentages are reduced as average daily net assets exceed
certain levels. For the year ended October 31, 1997, the fee was equivalent to
0.52% of the Portfolio's average net assets for such period and amounted to
$679,210. 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 $195,786 for the year ended
October 31, 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
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 year ended October 31, 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 $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 October 31, 1997, the Portfolio had invested
approximately 16.7% of its net assets or approximately $20,253,000 in high
yield securities. Purchases and sales of investments, other than short-term
obligations, for the year ended October 31, 1997 were as follows:
<TABLE>
<CAPTION>
Purchases
------------------------------------------------------------------------------
<S> <C>
Investments (non-U.S. Government) $46,252,396
U.S. Government Securities 43,636,016
------------------------------------------------------------------------------
$89,888,412
------------------------------------------------------------------------------
Sales
------------------------------------------------------------------------------
Investments (non-U.S. Government) $84,545,598
U.S. Government Securities 12,274,628
------------------------------------------------------------------------------
$96,820,226
------------------------------------------------------------------------------
</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.
20
<PAGE>
Strategic Income Portfolio as of October 31, 1997
NOTES TO FINANCIAL STATEMENTS CONT'D
A summary of obligations under these financial instruments at October 31, 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>
11/24/97 Australian Dollar
2,000,000 $ 1,461,960 $ 55,580
11/5/97- Belgian Franc
11/17/97 721,805,951 23,745,222 3,473,632
11/24/97 British Pound Sterling
1,184,016 1,932,314 (47,078)
12/17/97 Indonesian Rupiah
5,301,750,000 1,707,488 259,122
11/28/97 Irish Punt
2,070,000 3,034,620 (72,842)
11/14/97- Japanese Yen
1/28/98 652,000,000 5,508,447 50,977
12/2/97 Singapore Dollar
3,000,000 1,982,161 91,285
11/20/97- Thai Baht
12/26/97 103,200,000 3,038,041 527,882
- --------------------------------------------------------------------------------
$42,410,253 $4,338,558
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Purchases
- --------------------------------------------------------------------------------
Net Unrealized
Settlement Deliver Appreciation
Date In Exchange For (in U.S. dollars) (Depreciation)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
11/24/97 Australian Dollar
2,000,000 $ 1,386,420 $ 19,960
11/5/97- Belgian Franc
11/28/97 607,265,306 16,849,206 208,547
11/17/97 Deutsche Mark
3,400,000 1,910,112 59,944
12/17/97- Indonesian Rupiah
12/26/97 14,301,750,000 5,470,246 (1,566,209)
11/14/97 Indian Rupee
127,750,000 3,500,000 6,403
12/02/97 Singapore Dollar
3,000,000 2,002,002 (111,127)
- --------------------------------------------------------------------------------
$31,117,986 $(1,382,482)
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures Contracts
- --------------------------------------------------------------------------------
Net Unrealized
Expiration Appreciation
Date Contracts Position (Depreciation)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/97 109 US 5 year Treasury Long $ 202,015
Note Futures
12/97 200 US 30 year Long 894,256
Bond Futures
12/97 10 German 10 year Short (2,643)
Bond Futures
12/97 62 French 10 year Short (2,278)
Bond Futures
12/97 8 Japanese 10 year Short (262,239)
Bond Futures
12/97 27 Italian 10 year Short (73,998)
Bond Futures
- --------------------------------------------------------------------------------
$ 755,113
- --------------------------------------------------------------------------------
</TABLE>
At October 31, 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
------------------------------------------------------------------------------
The cost and unrealized appreciation/depreciation in value of the investments
owned at October 31, 1997, as computed on a federal income tax basis, were as
follows:
<TABLE>
<S> <C>
Aggregate cost $117,099,817
------------------------------------------------------------------------------
Gross unrealized appreciation $ 1,392,633
Gross unrealized depreciation (425,337)
------------------------------------------------------------------------------
Net unrealized appreciation $ 967,296
------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Strategic Income Portfolio as of October 31, 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 of
Strategic Income Portfolio (the Portfolio), including the portfolio of
investments, as of October 31, 1997, the related statement of operations for the
year then ended, the statement of changes in net assets for the two years ended
October 31, 1997, and the supplementary data for 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
October 31, 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 October 31, 1997, the results of its operations for the year
then ended, the changes in its net assets for each of the two years ended
October 31, 1997, and the supplementary data for 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
December 5, 1997
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<PAGE>
Strategic Income Portfolio as of October 31, 1997
INVESTMENT MANAGEMENT
<TABLE>
<CAPTION>
Strategic Income Portfolio
Officers Independent Trustees
<S> <C>
James B. Hawkes Donald R. Dwight
President and Trustee President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
Mark S. Venezia
Vice President Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
James L. O'Connor Banking, Harvard University Graduate School of
Treasurer Business Administration
Alan R. Dynner Norton H. Reamer
Secretary President and Director, United Asset
Management Corporation
John L. Thorndike
Formerly Director, Fiduciary Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
</TABLE>
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