<PAGE>
Strategic Income Portfolio as of October 31, 1998
PORTFOLIO OF INVESTMENTS
Bonds & Notes-- 97.6%
Principal U.S. $ Value
- --------------------------------------------------------------------------------
Argentina -- 4.1% U.S. Dollar
- --------------------------------------------------------------------------------
Argentina Discount Bond (Brady),
6.625% , 3/31/23(1) 5,750,000 $ 4,003,438
Transener, 9.25% , 4/01/08(2) 2,000,000 1,660,000
- --------------------------------------------------------------------------------
Total Argentina (identified cost, $6,092,889) $ 5,663,438
- --------------------------------------------------------------------------------
Bulgaria -- 5.6% U.S. Dollar
- --------------------------------------------------------------------------------
Bulgaria Discount Bond (Brady),
6.688% , 7/28/24(1) 11,000,000 $ 7,706,875
- --------------------------------------------------------------------------------
Total Bulgaria (identified cost, $7,726,715) $ 7,706,875
- --------------------------------------------------------------------------------
Ecuador -- 2.9% U.S. Dollar
- --------------------------------------------------------------------------------
Ecuador Discount Bond (Brady),
6.625% , 2/28/25(1) 7,600,000 $ 3,923,500
- --------------------------------------------------------------------------------
Total Ecuador (identified cost, $4,204,575) $ 3,923,500
- --------------------------------------------------------------------------------
Greece -- 3.4% Greek Drachma
- --------------------------------------------------------------------------------
Hellenic Republic, 8.90%, 4/01/03 1,300,000,000 $ 4,617,120
- --------------------------------------------------------------------------------
Total Greece (identified cost, $4,280,940) $ 4,617,120
- --------------------------------------------------------------------------------
Hong Kong -- 1.0% U.S. Dollar
- --------------------------------------------------------------------------------
Guangdong Enterprises, 8.75%, 12/15/03(2) 3,000,000 $ 1,335,000
- --------------------------------------------------------------------------------
Total Hong Kong (identified cost, $2,741,780) $ 1,335,000
- --------------------------------------------------------------------------------
Indonesia -- 1.2% U.S. Dollar
- --------------------------------------------------------------------------------
APP Global Finance III, 9.407% ,
4/17/02(1)(3) 600,000 $ 270,000
Indah Kiat Finance Mauritius, Sr.
Unsec. Notes, 10.00% , 7/01/07 2,750,000 1,430,000
- --------------------------------------------------------------------------------
Total Indonesia (identified cost, $2,693,372) $ 1,700,000
- --------------------------------------------------------------------------------
Mexico -- 5.8% U.S. Dollar
- --------------------------------------------------------------------------------
Mexican Discount Bond (Brady), Series B,
w/ attached warrants, 6.477%,
12/31/19 3,000,000 $ 2,368,140
Mexican Discount Bond (Brady), Series D,
w/ attached warrants, 6.602%,
12/31/19 7,000,000 5,525,660
- --------------------------------------------------------------------------------
Total Mexico (identified cost, $8,091,821) $ 7,893,800
- --------------------------------------------------------------------------------
New Zealand -- 4.1% New Zealand Dollar
- --------------------------------------------------------------------------------
New Zealand Government, 7.00%, 7/15/09 9,500,000 $ 5,667,157
- --------------------------------------------------------------------------------
Total New Zealand (identified cost, $5,264,521) $ 5,667,157
- --------------------------------------------------------------------------------
Peru -- 2.3% U.S. Dollar
- --------------------------------------------------------------------------------
Peru FLIRB (Brady), 3.25%, 3/07/17 4,000,000 $ 2,040,000
Peru PDI (Brady), 4.00%, 3/07/17 2,000,000 1,150,000
- --------------------------------------------------------------------------------
Total Peru (identified cost, $2,860,436) $ 3,190,000
- --------------------------------------------------------------------------------
Philippines-- 2.1% U.S. Dollar
- --------------------------------------------------------------------------------
JG Summit Cayman, 3.50%, 12/23/03 2,500,000 $ 1,187,500
Philippine Par Bond (Brady),
6.50%, 12/01/17(1) 2,000,000 1,620,000
- --------------------------------------------------------------------------------
Total Philippines (identified cost, $3,650,533) $ 2,807,500
- --------------------------------------------------------------------------------
United Kingdom -- 1.1% Deutsche Mark
- --------------------------------------------------------------------------------
Colt Telecom Group PLC Notes,
7.625%, 7/31/08(2) 1,000,000 $ 531,449
Esprit Telecom Group PLC, 11.00%,6/15/08(2) 2,000,000 1,020,624
- --------------------------------------------------------------------------------
Total United Kingdom (identified cost, $1,656,198) $ 1,552,073
- --------------------------------------------------------------------------------
United States -- 64.0% U.S. Dollar
- --------------------------------------------------------------------------------
Corporate Bonds & Notes -- 2.6%
Dayton Hudson Medium Term Notes,
9.52%, 6/10/15 350,000 $ 469,277
TRW Inc., Medium Term Notes,
9.35%, 6/04/20 1,900,000 2,388,129
United International Holdings, Inc.,
Sr. Disc. Notes, 10.75%,
(0% until 2/15/03), 2/15/08 1,500,000 675,000
- --------------------------------------------------------------------------------
Total Corporate Bonds & Notes (identified cost,
$3,364,038) $ 3,532,406
- --------------------------------------------------------------------------------
Mortgage Pass-Throughs -- 59.7%
Federal Home Loan Mortgage Corp.:
4.75%, with maturity at 2001 8,072 $ 7,997
5.50%, with maturity at 2019 147 147
8.00%, with various maturities to 2021 9,392,346 9,758,731
8.50%, with various maturities to 2019 1,904,435 2,002,583
9.00%, with maturity at 2019 580,278 613,511
9.25%, with various maturities to 2016 4,794,867 5,060,583
9.50%, with maturity at 2015 2,000,706 2,113,556
9.75%, with maturity at 2020 770,274 839,429
11.00%, with maturity at 2019 2,250,505 2,504,041
11.25%, with maturity at 2010 391,751 435,894
12.50%, with various maturities to 2019 2,526,726 2,943,477
12.75%, with maturity at 2013 151,213 174,408
13.25%, with maturity at 2013 118,473 138,161
13.50%, with maturity at 2019 324,219 381,905
- --------------------------------------------------------------------------------
$ 26,974,423
- --------------------------------------------------------------------------------
Federal National Government Loan:
9.00%, with maturity at 2021 1,950,110 $ 2,057,887
9.50%, with maturity at 2013 2,150,191 2,347,799
11.00%, with maturity at 2025 971,540 1,093,953
- --------------------------------------------------------------------------------
$ 5,499,639
- --------------------------------------------------------------------------------
See notes to financial statements
14
<PAGE>
Strategic Income Portfolio as of October 31, 1998
PORTFOLIO OF INVESTMENTS CONT'D
Principal U.S. $ Value
- --------------------------------------------------------------------------------
United States (continued)
- --------------------------------------------------------------------------------
Federal National Mortgage Association:
4.75%, with maturity at 1999 978 $ 975
5.00%, with maturity at 2003 74,809 74,357
5.50%, with maturity at 2012 6,293 6,298
7.00%, with maturity at 2014 4,584,533 4,745,330
7.50%, with various maturities to 2018 2,834,423 2,944,956
8.00%, with various maturities to 2019 2,704,873 2,821,288
8.50%, with various maturities to 2026 12,246,262 12,856,807
9.00%, with maturity at 2010 1,411,550 1,485,347
12.00%, with maturity at 2015 987,954 1,133,543
12.50%, with various maturities to 2027 6,364,133 7,384,449
12.75%, with maturity at 2014 113,489 134,175
13.00%, with various maturities to 2015 2,654,216 3,120,891
13.25%, with maturity at 2014 199,743 237,678
13.50%, with various maturities to 2015 1,502,364 1,769,551
14.75%, with various maturities to 2012 2,013,643 2,436,818
- --------------------------------------------------------------------------------
$ 41,152,463
- --------------------------------------------------------------------------------
Government National Mortgage Association:
6.50%, with various maturities to 2007 642,604 $ 651,071
7.50%, with various maturities to 2017 905,557 951,053
8.30%, with maturity at 2020 1,174,418 1,234,465
8.50%, with maturity at 2009 1,097,427 1,162,590
9.00%, with maturity at 2016 738,244 779,416
12.50%, with maturity at 2019 2,783,349 3,232,910
13.50%, with various maturities to 2014 240,556 289,298
- --------------------------------------------------------------------------------
$ 8,300,803
- --------------------------------------------------------------------------------
Total Mortgage Pass-Throughs (identified cost,
$82,089,886) $ 81,927,328
- --------------------------------------------------------------------------------
U.S. Treasury Bond -- 1.7%
United States Treasury Bond, 11.75%, 2/15/01(4)
(identified cost, $2,603,438) 2,000,000 $ 2,319,060
- --------------------------------------------------------------------------------
Total United States (identified cost, $88,057,362) $ 87,778,794
- --------------------------------------------------------------------------------
Total Bonds & Notes
(identified cost $137,321,142) $ 133,835,257
- --------------------------------------------------------------------------------
Preferred Stocks -- 0.4%
Hong Kong -- 0.4% U.S. Dollar
- --------------------------------------------------------------------------------
Guangdong Investment Ltd., 3.25%, 1/07/03(2) 1,350,000 $ 580,500
- --------------------------------------------------------------------------------
Total Hong Kong (identified cost, $1,353,375) $ 580,500
- --------------------------------------------------------------------------------
Total Preferred Stocks
(identified cost $1,353,375) $ 580,500
- --------------------------------------------------------------------------------
Short-Term Investments -- 2.0%
Principal U.S. $ Value
- --------------------------------------------------------------------------------
U.S. Dollar
- --------------------------------------------------------------------------------
Banque National De Paris, Euro Time-deposit
Cayman Islands, 5.500%, 11/02/98 2,700,000 $ 2,700,000
- --------------------------------------------------------------------------------
Total Short-Term Investments
(at amortized cost $2,700,000) $ 2,700,000
- --------------------------------------------------------------------------------
Total Investments -- 100.0%
(identified cost $141,374,517) $ 137,115,757
- --------------------------------------------------------------------------------
(1) Variable rate security. Rate indicated is the rate at October 31, 1998.
(2) 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. It is the
Portfolio's intention to hold this security until maturity.
(3) Security valued at fair value using methods determined in good faith by or
at the direction of the Trustees.
(4) Security (or a portion thereof) has been segregated to cover margin
requirements on open financial futures contracts.
See notes to financial statements
15
<PAGE>
Strategic Income Portfolio as of October 31, 1998
FINANCIAL STATEMENTS
Statement of Assets & Liabilities
As of October 31, 1998
Assets
- --------------------------------------------------------------------------------
Investments, at value (identified cost, $141,374,517) $137,115,757
Cash 41,753
Receivable for investments sold 277,981
Interest receivable 2,341,426
Deferred organization expenses 1,558
- --------------------------------------------------------------------------------
Total assets $139,778,475
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Payable for daily variation margin on open
financial futures contracts $ 262,750
Written options, at value 78,125
Payable for open forward foreign currency contracts 974,112
Other accrued expenses 17,545
- --------------------------------------------------------------------------------
Total liabilities $ 1,332,532
- --------------------------------------------------------------------------------
Net Assets applicable to investors' interest in Portfolio $138,445,943
- --------------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------------
Net proceeds from capital contributions and withdrawals $144,086,160
Net unrealized depreciation (computed on the basis
of identified cost) (5,640,217)
- --------------------------------------------------------------------------------
Total $138,445,943
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended
October 31, 1998
Investment Income
- --------------------------------------------------------------------------------
Interest $ 12,415,668
Dividends 21,947
- --------------------------------------------------------------------------------
Total investment income $ 12,437,615
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Investment adviser fee $ 713,908
Administration fee 204,036
Trustees fees and expenses 9,901
Custodian fee 111,418
Legal and accounting services 81,019
Amortization of organization expenses 4,696
Miscellaneous 3,215
- --------------------------------------------------------------------------------
Total expenses $ 1,128,193
- --------------------------------------------------------------------------------
Net investment income $ 11,309,422
- --------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss)
- --------------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified cost basis) $ (4,354,064)
Financial futures contracts 469,230
Foreign currency transactions 5,075,540
- --------------------------------------------------------------------------------
Net realized gain $ 1,190,706
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)--
Investments (identified cost basis) $ (6,116,587)
Financial futures contracts (1,207,370)
Options 110,000
Foreign currency and forward foreign currency
exchange contracts (4,037,921)
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) $(11,251,878)
- --------------------------------------------------------------------------------
Net realized and unrealized loss $(10,061,172)
- --------------------------------------------------------------------------------
Net increase in net assets from operations $ 1,248,250
- --------------------------------------------------------------------------------
See notes to financial statements
16
<PAGE>
Strategic Income Portfolio as of October 31, 1998
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
Increase (Decrease) Year Ended Year Ended
in Net Assets October 31,1998 October 31, 1997
- --------------------------------------------------------------------------------
From operations--
Net investment income $ 11,309,422 $ 10,516,988
Net realized gain 1,190,706 6,359,975
Net change in unrealized
appreciation (depreciation) (11,251,878) (2,306,661)
- --------------------------------------------------------------------------------
Net increase in net assets
from operations $ 1,248,250 $ 14,570,302
- --------------------------------------------------------------------------------
Capital transactions --
Contributions $ 63,230,486 $ 36,154,026
Withdrawals (47,288,792) (61,875,128)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
from capital transactions $ 15,941,694 $ (25,721,102)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets $ 17,189,944 $ (11,150,800)
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
At beginning of year $121,255,999 $ 132,406,799
- --------------------------------------------------------------------------------
At end of year $138,445,943 $ 121,255,999
- --------------------------------------------------------------------------------
See notes to financial statements
17
<PAGE>
Strategic Income Portfolio as of October 31, 1998
FINANCIAL STATEMENTS CONT'D
Supplementary Data
<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratios to average daily net assets
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses 0.83% 0.86% 0.86% 0.84% 0.82%(2)
Net investment income 8.31% 8.06% 8.62% 9.08% 8.41%(2)
Portfolio Turnover 71% 77% 71% 78% 71%
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's omitted) $ 138,446 $ 121,256 $ 132,407 $ 152,583 $ 236,469
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from the start of business, March 1, 1994, to October 31,
1994.
(2) Annualized.
See notes to financial statements
18
<PAGE>
Strategic Income Portfolio as of October 31, 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.
19
<PAGE>
Strategic Income Portfolio as of October 31, 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 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.
L 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 year ended October 31, 1998, the fee
was equivalent to 0.52% of the Portfolio's average net assets for such
period and amounted to $713,908. 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
$204,036 for the year ended October 31, 1998.
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, 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.
20
<PAGE>
Strategic Income Portfolio as of October 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
3 Line of Credit
----------------------------------------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR or
EVM and its affiliates in an $80 million ($130 million effective November
12, 1998) 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,
1998, the Portfolio had invested approximately 25.5% of its net assets or
approximately $35,367,000 in high yield securities. Purchases and sales of
investments, other than short-term obligations, for the year ended October
31, 1998 were as follows:
Purchases
-----------------------------------------------------------------------------
Investments (non-U.S. Government) $ 80,779,353
U.S. Government Securities 48,266,943
-----------------------------------------------------------------------------
$ 129,046,296
-----------------------------------------------------------------------------
Sales
-----------------------------------------------------------------------------
Investments (non-U.S. Government) $ 56,894,687
U.S. Government Securities 31,190,852
-----------------------------------------------------------------------------
$ 88,085,539
-----------------------------------------------------------------------------
5 Financial Instruments
----------------------------------------------------------------------------
The Portfolio regularly trades in financial instruments with off-balance
sheet risk in the normal course of its investing activities to assist in
managing exposure to various market risks. These financial instruments
include written options, forward foreign currency contracts and financial
futures contracts and may involve, to a varying degree, elements of risk in
excess of the amounts recognized for financial statement purposes. The
notional or contractual amounts of these instruments represent the
investment the Portfolio has in particular classes of financial instruments
and does not necessarily represent the amounts potentially subject to risk.
The measurement of the risks associated with these instruments is meaningful
only when all related and offsetting transactions are considered. A summary
of obligations under these financial instruments at October 31, 1998, is as
follows:
Forward Foreign Currency Exchange Contracts
----------------------------------------------------------------------------
Sales
----------------------------------------------------------------------------
Net Unrealized
Settlement In Exchange For Appreciation
Date(s) Deliver (in U.S. dollars) (Depreciation)
----------------------------------------------------------------------------
11/24/98- Deutsche Mark
2/01/99 10,717,920 $ 6,490,744 $ (198,888)
2/22/99 Hong Kong Dollar
40,000,000 5,136,536 (128,711)
11/05/98 Japanese Yen
727,000,000 6,240,531 (106,234)
12/11/98 New Taiwan Dollar
143,600,000 4,427,452 (427,452)
11/09/98- New Zealand Dollar
11/16/98 9,500,000 5,025,699 (74,662)
1/25/99- Republic of Korea Won 5,016,603 (16,603)
2/26/99 6,677,000,000
11/24/98- Singapore Dollar
12/18/98 9,000,000 5,551,970 (375,600)
----------------------------------------------------------------------------
$ 37,889,535 $(1,328,150)
----------------------------------------------------------------------------
21
<PAGE>
Strategic Income Portfolio as of October 31, 1998
NOTES TO FINANCIAL STATEMENTS CONT'D
Purchases
----------------------------------------------------------------------------
Net Unrealized
Settlement Deliver Appreciation
Date(s) In Exchange For (in U.S. dollars) (Depreciation)
----------------------------------------------------------------------------
12/11/98 New Taiwan Dollar
143,600,000 $4,427,452 $ 89,084
1/08/99 Philippine Peso
133,950,000 3,260,407 260,407
11/05/98- Singapore Dollar
11/24/98 9,000,000 5,543,531 4,547
----------------------------------------------------------------------------
$13,231,390 $ 354,038
----------------------------------------------------------------------------
Futures Contracts
----------------------------------------------------------------------------
Net
Unrealized
Expiration Appreciation
Date Contracts Position (Depreciation)
----------------------------------------------------------------------------
12/21/98 115 Municipal Bond Futures Long $ (101,130)
12/31/98 159 US 30 year Bond Futures Long (23,289)
12/21/98 12 Japanese 10 year Bond Futures Short (327,838)
----------------------------------------------------------------------------
$ (452,257)
----------------------------------------------------------------------------
Written Call Options
----------------------------------------------------------------------------
Number of Contracts Premiums
----------------------------------------------------------------------------
Outstanding, beginning of year 0 $ 0
----------------------------------------------------------------------------
Options written 160 188,125
----------------------------------------------------------------------------
Outstanding, end of year 160 $ 188,125
----------------------------------------------------------------------------
At October 31, 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
----------------------------------------------------------------------------
The cost and unrealized appreciation/depreciation in value of the
investments owned at October 31, 1998, as computed on a federal income tax
basis, were as follows:
Aggregate cost $142,051,843
----------------------------------------------------------------------------
Gross unrealized appreciation $ 1,486,185
Gross unrealized depreciation (6,422,271)
----------------------------------------------------------------------------
Net unrealized depreciation (4,936,086)
----------------------------------------------------------------------------
22
<PAGE>
Strategic Income Portfolio as of October 31, 1998
INDEPENDENT ACCOUNTANTS' REPORT
To the Trustees and Investors
of Strategic Income Portfolio:
- --------------------------------------------------------------------------------
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and supplementary data present fairly, in all material
respects, the financial position of Strategic Income Portfolio (the "Portfolio")
at October 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the supplementary data for each of the four years then ended, and for the period
from the start of business, March 1, 1994, to October 31, 1994, in conformity
with generally accepted accounting principles. These financial statements and
supplementary data (hereafter referred to as "financial statements") are the
responsibility of the Portfolio's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 11, 1998
23
<PAGE>
Strategic Income Portfolio as of October 31, 1998
INVESTMENT MANAGEMENT
Strategic Income Portfolio
Officers Independent Trustees
James B. Hawkes Jessica M. Bibliowicz
President and Trustee President and Chief Operating Officer,
John A. Levin & Co.
Mark S. Venezia Director, Baker, Fentress & Company
Vice President and
Portfolio Manager Donald R. Dwight
President, Dwight Partners, Inc.
James L. O'Connor
Treasurer Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Alan R. Dynner Banking, Emeritus, Harvard University
Secretary Graduate School of Business Administration
Norton H. Reamer
Chairman and Chief Executive Officer,
United Asset Management Corporation
Lynn A. Stout
Professor of Law,
Georgetown University Law Center
John L. Thorndike
Formerly Director, Fiduciary
Company Incorporated
Jack L. Treynor
Investment Adviser and Consultant
24
