<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(LOCAL CURRENCY
000'S OMITTED)(1) SECURITY DESCRIPTION VALUE
- ------------------ ------------------------------------------------- -------------
<C> <S> <C>
CORPORATE OBLIGATIONS (20.0%)
FRANCE (2.7%)
FRF 23,000 Household Finance Corp., 6.25% due 04/30/07...... $ 3,991,026
FRF 13,500 Societe Generale, 6.00% due 03/12/07............. 2,298,467
-------------
6,289,493
-------------
GERMANY (4.7%)
ITL 5,595,000 Bayerische Landesbank Girozentrale, 10.75% due
03/01/03....................................... 3,971,764
DEM 12,000 Deutsche Pfandbriefe Hypobank, 5.625% due
02/07/03....................................... 6,950,562
-------------
10,922,326
-------------
UNITED KINGDOM (12.6%)
GBP 4,900 Alliance & Leicester Building Society PLC, 8.75%
due 12/07/06................................... 8,657,530
GBP 1,200 Alliance & Leicester Building Society PLC, 9.75%
due 04/02/08................................... 2,259,540
GBP 3,200 ASDA Group PLC, 8.375% due 04/24/07.............. 5,576,358
GBP 960 Halifax Building Society PLC, 9.375% due
05/15/21....................................... 1,859,971
GBP 3,400 Imperial Chemical Industries, 7.625% due
08/21/07....................................... 5,626,234
GBP 2,100 Royal Bank of Scotland PLC, 8.375% due
01/29/07....................................... 3,646,764
GBP 1,000 Woolwich, 9.50% due 08/07/21..................... 1,933,431
-------------
29,559,828
-------------
TOTAL CORPORATE OBLIGATIONS (COST
$46,257,894)............................... 46,771,647
-------------
GOVERNMENT OBLIGATIONS (56.9%)
AUSTRALIA (1.1%)
AUD 3,100 Government of Australia, 7.50% due 07/15/05...... 2,452,374
-------------
AUSTRIA (0.1%)
JPY 25,000 Republic of Austria, 3.75% due 02/03/09.......... 236,323
-------------
CANADA (3.2%)
Government of Canada
CAD 5,540 7.00% due 12/01/06............................. 4,362,153
CAD 3,184 9.00% due 06/01/25............................. 3,103,377
-------------
7,465,530
-------------
DENMARK (1.6%)
DKK 22,000 Kingdom of Denmark, 8.00% due 03/15/06........... 3,740,944
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
18
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(LOCAL CURRENCY
000'S OMITTED)(1) SECURITY DESCRIPTION VALUE
- ------------------ ------------------------------------------------- -------------
<C> <S> <C>
FINLAND (2.0%)
FIM 20,000 Republic of Finland, 9.50% due 03/15/04.......... $ 4,607,835
-------------
FRANCE (0.4%)
FRF 5,700 Government of France, 6.00% due 10/25/25......... 941,638
-------------
GERMANY (9.1%)
DEM 13,470 Federal Republic of Germany, Series 93, 7.125%
due 12/20/02................................... 8,378,577
DEM 8,800 Federal Republic of Germany, Series 92, 8.00% due
07/22/02....................................... 5,641,166
DEM 11,650 German Unity Fund, 8.00% due 01/21/02 (2)........ 7,408,110
-------------
21,427,853
-------------
ITALY (9.5%)
Republic of Italy
ITL 10,295,000 7.25% due 11/01/26............................. 6,408,535
ITL 25,475,000 9.50% due 12/01/99............................. 15,884,506
-------------
22,293,041
-------------
JAPAN (20.9%)
Government of Japan
JPY 5,380,050 Series 187, 3.30% due 06/20/06 (2)............. 49,045,649
-------------
SPAIN (2.4%)
ESP 767,400 Government of Spain, 7.90% due 02/28/02.......... 5,680,517
-------------
SWEDEN (4.2%)
Kingdom of Sweden
SEK 25,500 6.50% due 10/25/06............................. 3,454,232
SEK 43,200 8.00% due 08/15/07............................. 6,467,532
-------------
9,921,764
-------------
UNITED KINGDOM (2.4%)
GBP 2,970 Treasury Gilt, 8.00% due 06/07/21................ 5,636,778
-------------
TOTAL GOVERNMENT OBLIGATIONS (COST
$131,241,193).............................. 133,450,246
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(LOCAL CURRENCY
000'S OMITTED)(1) SECURITY DESCRIPTION VALUE
- ------------------ ------------------------------------------------- -------------
<C> <S> <C>
SUPRANATIONAL OBLIGATIONS (3) (1.4%)
European Investment Bank
ITL 1,700,000 10.875% due 12/14/05........................... $ 1,278,214
ITL 2,537,000 12.20% due 02/18/03............................ 1,893,763
-------------
TOTAL SUPRANATIONAL OBLIGATIONS (COST
$2,975,598)................................ 3,171,977
-------------
SHORT-TERM INVESTMENTS (14.5%)
EURODOLLAR TIME DEPOSITS (14.4%)
State Street Bank & Trust Co. London
30,000,000 5.875% due 10/01/97............................ 30,000,000
3,686,000 4.50% due 10/01/97............................. 3,686,000
-------------
33,686,000
-------------
U.S. TREASURY OBLIGATIONS (0.1%)
400,000 United States Treasury Bills 4.87% due 11/13/97
(2)............................................ 397,550
-------------
TOTAL SHORT-TERM INVESTMENTS (COST
$34,083,550)............................... 34,083,550
-------------
TOTAL INVESTMENTS (COST $214,558,235) (92.8%).... 217,477,420
OTHER ASSETS IN EXCESS OF LIABILITIES (7.2%)..... 16,869,452
-------------
NET ASSETS (100.0%).............................. $ 234,346,872
-------------
-------------
</TABLE>
- ------------------------------
(1) -- Principal is in the local currency of the country in which the currency
is traded, which may not be the country of origin.
(2) -- Security is fully or partially segregated as collateral for futures
contracts.
(3) -- International agencies.
NOTE: Based on the cost of investments of $214,666,597 for federal income tax
purposes at September 30, 1997, the aggregate gross unrealized appreciation was
$3,502,544 and the aggregate gross unrealized depreciation was $691,721
resulting in net unrealized appreciation of investments of $2,810,823.
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $214,558,235 ) $217,477,420
Foreign Currency at Value (Cost $2,448,065 ) 2,492,629
Receivable for Investments Sold 19,415,912
Interest Receivable 5,061,502
Unrealized Appreciation of Forward Foreign
Currency Contracts 535,724
Variation Margin Receivable 84,845
Prepaid Expenses and Other Assets 2,232
------------
Total Assets 245,070,264
------------
LIABILITIES
Payable for Investments Purchased 6,508,167
Unrealized Depreciation of Forward Foreign
Currency Contracts 4,028,106
Advisory Fee Payable 69,616
Custody Fee Payable 50,747
Administrative Services Fee Payable 6,031
Accrued Trustees' Fees and Expenses 612
Administration Fee Payable 556
Fund Services Fee Payable 147
Accrued Expenses 59,410
------------
Total Liabilities 10,723,392
------------
NET ASSETS
Applicable to Investors' Beneficial Interests $234,346,872
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest Income (Net of Foreign Withholding Tax
of $278,071 ) $ 9,753,644
EXPENSES
Advisory Fee $ 650,545
Custodian Fees and Expenses 184,901
Administrative Services Fee 57,815
Professional Fees and Expenses 43,150
Printing Expenses 19,710
Fund Services Fee 6,587
Administration Fee 4,505
Trustees' Fees and Expenses 3,543
Miscellaneous 1,077
-----------
Total Expenses 971,833
-----------
NET INVESTMENT INCOME 8,781,811
NET REALIZED GAIN (LOSS) ON
Investment Transactions (including $1,039,013
net realized gain from futures contracts) (1,925,482)
Foreign Currency Transactions 18,390,030
-----------
Net Realized Gain 16,464,548
NET CHANGE IN UNREALIZED DEPRECIATION OF
Investments (including $206,962 net unrealized
appreciation from futures contracts) 1,318,101
Foreign Currency Contracts and Translation (5,303,822)
-----------
Net Change in Unrealized Depreciation (3,985,721)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $21,260,638
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 8,781,811 $ 11,244,228
Net Realized Gain on Investments and Foreign
Currency Transactions 16,464,548 12,170,665
Net Change in Unrealized Appreciation
(Depreciation) of Investments and Foreign
Currency Translation (3,985,721) 1,814,400
------------------ ------------------
Net Increase in Net Assets Resulting from
Operations 21,260,638 25,229,293
------------------ ------------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 151,112,076 116,826,143
Withdrawals (83,928,855) (262,275,340)
------------------ ------------------
Net Increase (Decrease) from Investors'
Transactions 67,183,221 (145,449,197)
------------------ ------------------
Total Increase (Decrease) in Net Assets 88,443,859 (120,219,904)
NET ASSETS
Beginning of Fiscal Year 145,903,013 266,122,917
------------------ ------------------
End of Fiscal Year $ 234,346,872 $ 145,903,013
------------------ ------------------
------------------ ------------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 11, 1994
(COMMENCEMENT OF
FOR THE FISCAL FOR THE FISCAL OPERATIONS) TO
YEAR ENDED YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 1995
------------------ ------------------ ----------------
<S> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.52% 0.51% 0.55%(a)
Net Investment Income 4.72% 5.34% 5.73%(a)
Portfolio Turnover 346% 330% 288%(b)
</TABLE>
- ------------------------
(a) Annualized.
(b) Not annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Non-U.S. Fixed Income Portfolio (the "Portfolio") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a no-load,
non-diversified, open-end management investment company which was organized as a
trust under the laws of the State of New York. The Portfolio's investment
objective is to provide a high total return, consistent with moderate risk of
capital, from a portfolio of international fixed income securities. The
Portfolio commenced operations on October 11, 1994. The Declaration of Trust
permits the Trustees to issue an unlimited number of beneficial interests in the
Portfolio.
Investments in international markets may involve certain considerations and
risks not typically associated with investments in the United States. Future
economic and political developments in foreign countries could adversely affect
the liquidity or value, or both, of such securities in which the Portfolio is
invested. The ability of the issuers of the debt securities held by the
Portfolio to meet their obligations may be affected by economic and political
developments in a specific industy or region.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the Portfolio:
a) Portfolio securities with a maturity of 60 days or more, including
securities that are listed on an exchange or traded over the counter, are
valued using prices supplied daily by an independent pricing service or
services that (i) are based on the last sale price on a national
securities exchange, or in the absence of recorded sales, at the readily
available bid price on such exchange or at the quoted bid price in the
over-the-counter market, if such exchange or market constitutes the
broadest and most representative market for the security and (ii) in other
cases, take into account various factors affecting market value, including
yields and prices of comparable securities, indication as to value from
dealers and general market conditions. If such prices are not supplied by
the Portfolio's independent pricing services, such securities are priced
in accordance with procedures adopted by the Trustees. All portfolio
securities with a remaining maturity of less than 60 days are valued by
the amortized cost method.
Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of the domestic market and
may also take place on days on which the domestic market is closed. If
events materially affecting the value of foreign securities occur between
the time when the exchange on which they are traded closes and the time
when the Portfolio's net assets are calculated, such securities will be
valued at fair value in accordance with procedures established by and
under the general supervision of the Portfolio's Trustees.
b) The books and records of the Portfolio are maintained in U.S. dollars. The
market values of investment securities, other assets and liabilities and
forward contracts stated in foreign currencies are translated at the
prevailing exchange rates at the end of the period. Purchases, sales,
income and expenses are translated at the exchange rates prevailing on the
respective dates of such transactions. Translation gains and losses
resulting from changes in the exchange rates during the reporting period
and gains and losses realized upon settlement of foreign currency
transactions are reported in the Statement of Operations.
24
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
Although the net assets of the Portfolio are presented at the exchange
rates and market values prevailing at the end of the period, the Portfolio
does not isolate the portion of the results of operations arising as a
result of changes in foreign exchange rates from the fluctuations arising
from changes in the market prices of securities during the period.
c) Securities transactions are recorded on a trade date basis. Interest
income, which includes the amortization of premiums and discounts, if any,
is recorded on an accrual basis. For financial and tax reporting purposes,
realized gains and losses are determined on the basis of specific lot
identification.
d) The portfolio may enter into forward and spot foreign currency contracts
to protect securities and related receivables and payables against
fluctuations in future foreign currency rates. A forward contract is an
agreement to buy or sell currencies of different countries on a specified
future date at a specified rate. Risks associated with such contracts
include the movement in the value of the foreign currency relative to the
U.S. dollar and the ability of the counterparty to perform.
The market value of the contract will fluctuate with changes in currency
exchange rates. Contracts are valued daily based on procedures established
by and under the general supervision of the Portfolio's Trustees and the
change in the market value is recorded by the Portfolio as unrealized
appreciation or depreciation of forward foreign currency contract
translations. At September 30, 1997, the Portfolio had open forward
currency contracts as follows:
SUMMARY OF OPEN FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
U.S. DOLLAR NET UNREALIZED
VALUE AT APPRECIATION/
PURCHASE CONTRACTS COST/PROCEEDS 9/30/97 (DEPRECIATION)
- ------------------------------------------------- ------------- ----------- --------------
<S> <C> <C> <C>
British Pound 14,875, expiring 10/01/97.......... $ 24,045 $ 24,029 $ (16)
Canadian Dollar 6,415,037, expiring 11/12/97..... 4,640,653 4,650,984 10,331
German Mark 9,707,145, expiring 11/12/97......... 5,534,290 5,512,185 (22,105)
Italian Lira 29,500,000,000, expiring 11/12/97... 16,758,630 17,075,443 316,813
Italian Lira 900,000, expiring 10/01/97.......... 523 522 (1)
Italian Lira 1,920,000, expiring 10/02/97........ 1,113 1,113 0
Japanese Yen 812,000,000, expiring 11/12/97...... 6,772,987 6,768,075 (4,912)
Netherlands Guilder 563,382, expiring 11/12/97... 284,741 284,014 (727)
Netherlands Guilder 9,395,969 for Finnish Markka
25,021,467 expiring 11/12/97.................... 4,746,050 4,736,721 (9,329)
Spanish Peseta 1,904,691,300, expiring
11/12/97........................................ 12,809,895 12,775,399 (34,496)
</TABLE>
25
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. DOLLAR NET UNREALIZED
VALUE AT APPRECIATION/
PURCHASE CONTRACTS COST/PROCEEDS 9/30/97 (DEPRECIATION)
- ------------------------------------------------- ------------- ----------- --------------
<S> <C> <C> <C>
Spanish Peseta 238,000, expiring 10/01/97........ $ 1,598 $ 1,595 $ (3)
Spanish Peseta 1,156,000, expiring 10/02/97...... 7,750 7,750 0
Swedish Krona 49,347,808, expiring 10/01/97...... 6,516,896 6,508,167 (8,729)
<CAPTION>
SALES CONTRACTS
- -------------------------------------------------
<S> <C> <C> <C>
Australian Dollar 3,172,834, expiring 11/12/97... 2,322,515 2,299,902 22,613
British Pound 23,282,050, expiring 11/12/97...... 36,772,210 37,543,519 (771,309)
British Pound 7,438, expiring 10/02/97........... 12,015 12,015 0
Canadian Dollar 16,959,431, expiring 11/12/97.... 12,282,239 12,295,804 (13,565)
Danish Krone 25,604,578, expiring 11/12/97....... 3,721,595 3,816,848 (95,253)
French Franc 44,445,205, expiring 11/12/97....... 7,298,063 7,513,214 (215,151)
German Mark 61,394,366, expiring 11/12/97........ 34,133,681 34,862,681 (729,000)
German Mark 9,707,145, expiring 10/02/97......... 5,519,188 5,496,100 23,088
Italian Lira 82,685,080,437 expiring 11/12/97.... 46,620,484 47,860,488 (1,240,004)
Italian Lira 4,500,000, expiring 10/01/97........ 2,614 2,608 6
Italian Lira 2,500,000,000, expiring 10/02/97.... 1,449,275 1,448,729 546
Japanese Yen 6,755,932,743, expiring 11/12/97.... 56,297,300 56,311,154 (13,854)
Netherlands Guilder 10,512,405, expiring
11/12/97........................................ 5,158,197 5,299,542 (141,345)
Spanish Peseta 2,946,870,655, expiring
11/12/97........................................ 19,258,013 19,765,643 (507,630)
Spanish Peseta 578,000, expiring 10/01/97........ 3,890 3,875 15
Spanish Peseta 1,876,515,792, expiring
10/01/97........................................ 12,616,929 12,579,709 37,220
Swedish Krona 77,035,137, expiring 11/12/97...... 10,080,188 10,175,773 (95,585)
--------------
NET UNREALIZED DEPRECIATION ON FORWARD FOREIGN
CURRENCY CONTRACTS.............................. $ (3,492,382)
--------------
--------------
</TABLE>
e) Futures -- A futures contract is an agreement to purchase/sell a specified
quantity of an underlying instrument at a specified future date or to
make/receive a cash payment based on the value of a securities index. The
price at which the purchase and sale will take place is fixed when the
Portfolio enters into the contract. Upon entering into such a contract,
the Portfolio is required to pledge to the broker an amount of cash and/or
securities equal to the minimum "initial margin" requirements of the
exchange. Pursuant to the contract, the Portfolio agrees to receive from
or pay to the broker an amount of cash equal to the daily fluctuation in
the value of the contract. Such receipts or payments are known as
"variation margin" and are recorded by the Portfolio as unrealized gains
or losses. When the contract
26
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
is closed the Portfolio records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time when it was closed. The Portfolio invests in futures
contracts solely for the purpose of hedging its existing portfolio
securities, or securities the Portfolio intends to purchase, against
fluctuations in value caused by changes in prevailing market interest
rates or securities movements. The use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures
contracts, interest rates and the underlying hedged assets. Futures
transactions during the fiscal year ended September 30, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL AMOUNT
CONTRACTS OF CONTRACTS
--------- ----------------
<S> <C> <C>
Contracts open at beginning of year.............. 14 $ 1,121,505
Contracts opened - long positions................ 723 92,688,456
Contracts opened - short positions............... 285 32,815,778
Contracts closed - long positions................ (695) (85,848,971)
Contracts closed - short positions............... (217) (25,899,749)
--------- ----------------
Contracts open at end of year.................... 110 $ 14,877,019
--------- ----------------
--------- ----------------
</TABLE>
SUMMARY OF OPEN CONTRACTS AT SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NET UNREALIZED
NUMBER OF APPRECIATION/
CONTRACTS LONG (DEPRECIATION)
-------------- --------------
<S> <C> <C>
Ten-Year Spanish Government Note, expiring
December 1997................................... 34 $ 47,456
Ten-Year Italian Government Note, expiring
December 1997................................... 3 10,571
Ten-Year Japan Government Note, expiring December
1997............................................ 5 68,020
-------------- --------------
Totals........................................... 42 $ 126,047
-------------- --------------
-------------- --------------
</TABLE>
<TABLE>
<CAPTION>
NET UNREALIZED
NUMBER OF APPRECIATION/
CONTRACTS SHORT (DEPRECIATION)
--------------- --------------
<S> <C> <C>
Ten-Year Long Gilt, expiring December 1997....... (68) $ (296,209)
--------------- --------------
--------------- --------------
</TABLE>
f) The Portfolio intends to be treated as a partnership for federal income
tax purposes. As such, each investor in the Portfolio will be taxed on its
share of the Portfolio's ordinary income and capital gains. It is intended
that the Portfolio's assets will be managed in such a way that an investor
in the Portfolio will be able to satisfy the requirements of Subchapter M
of the Internal Revenue Code. The Portfolio earns foreign income which may
be subject to foreign withholding taxes at various rates.
27
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH AFFILIATES
a) The Portfolio has an Investment Advisory Agreement with Morgan Guaranty
Trust Company of New York ("Morgan"). Under the terms of the agreement,
the Portfolio pays Morgan at an annual rate of 0.35% of the Portfolio's
average daily net assets. For the fiscal year ended September 30, 1997,
such fees amounted to $650,545.
b) The Portfolio has retained Funds Distributor, Inc. ("FDI"), a registered
broker-dealer, to serve as co-administrator and exclusive placement agent.
Under a Co-Administration Agreement between FDI and the Portfolio, FDI
provides administrative services necessary for the operations of the
Portfolio, furnishes office space and facilities required for conducting
the business of the Portfolio and pays the compensation of the officers
affiliated with FDI. The Portfolio has agreed to pay FDI fees equal to its
allocable share of an annual complex-wide charge of $425,000 plus FDI's
out-of-pocket expenses. The amount allocable to the Portfolio is based on
the ratio of the Portfolio's net assets to the aggregate net assets of the
Portfolio and certain other investment companies subject to similar
agreements with FDI. For the fiscal year ended September 30, 1997, the fee
for these services amounted to $4,505.
c) The Portfolio has an Administrative Services Agreement (the "Services
Agreement") with Morgan under which Morgan is responsible for overseeing
certain aspects of the administration and operation of the Portfolio.
Under the Services Agreement, the Portfolio has agreed to pay Morgan a fee
equal to its allocable share of an annual complex-wide charge. This charge
is calculated based on the aggregate average daily net assets of the
Portfolio and certain other portfolios for which Morgan acts as investment
advisor (the "Master Portfolios") and JPM Series Trust in accordance with
the following annual schedule: 0.09% on the first $7 billion of their
aggregate average daily net assets and 0.04% of their aggregate average
daily net assets in excess of $7 billion less the complex -wide fees
payable to FDI. The portion of this charge payable by the Portfolio is
determined by the proportionate share that its net assets bear to the net
assets of the Master Portfolios, other investors in the Master Portfolios
for which Morgan provides similar services, and JPM Series Trust. For the
fiscal year ended September 30, 1997, the fee for these services amounted
to $57,815.
d) The Portfolio has a Fund Services Agreement with Pierpont Group, Inc.
("Group") to assist the Trustees in exercising their overall supervisory
responsibilities for the Portfolio's affairs. The Trustees of the
Portfolio represent all the existing shareholders of Group. The
Portfolio's allocated portion of Group's costs in performing its services
amounted to $6,587 for the fiscal year ended September 30, 1997.
e) An aggregate annual fee of $75,000 is paid to each Trustee for serving as
a Trustee of The JPM Pierpont Funds, The JPM Institutional Funds, the
Master Portfolios and JPM Series Trust. The Trustees' Fees and Expenses
shown in the financial statements represents the Portfolio's allocated
portion of the total fees and expenses. Prior to April 1, 1997 the
aggregate annual Trustee Fee was $65,000. The Portfolio's Chairman and
Chief Executive Officer also serves as Chairman of Group and received
compensation and employee benefits from Group in his role as Group's
Chairman. The allocated portion of such compensation and benefits included
in the Fund Services Fee shown in the financial statements was $1,300.
28
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the fiscal year
ended September 30, 1997 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
- ----------------- ------------
<S> <C>
$ 580,308,643 $528,981,330
- ----------------- ------------
- ----------------- ------------
</TABLE>
4. CREDIT AGREEMENT
The Portfolio is party to a revolving line of credit agreement (the "Agreement")
as discussed more fully in Note 4 of the Fund's Notes to the Financial
Statements which are included elsewhere in this report.
5. SUBSEQUENT EVENT
The Portfolio expects to receive a substantial redemption request in January,
1998 as more fully discussed in Note 5 to the Fund's Financial Statements which
are included elsewhere in this report.
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The Non-U.S. Fixed 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 the supplementary data present fairly, in all material
respects, the financial position of The Non-U.S. Fixed Income Portfolio (the
"Portfolio") at September 30, 1997, 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 two years in the
period then ended and for the period October 11, 1994 (commencement of
operations) through September 30, 1995, 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 September 30, 1997 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
New York, New York
November 25, 1997
30
