<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
PORTFOLIO OF INVESTMENTS (Unaudited)
Tax-Exempt Investments-- 100.0%
<TABLE>
<CAPTION>
Principal
Amount
Security (000 Omitted) Value
- --------------------------------------------------------------------------------
Assisted Living -- 9.2%
- --------------------------------------------------------------------------------
<S> <C> <C>
Arizona Health Facilities Authority, Care
Institute-Mesa Project, 7.625%, 1/1/26 $ 2,500 $ 2,503,150
Chester County, PA, IDA, Senior Life-Choice of
Paoli, (AMT), 8.05%, 1/1/24 2,000 2,141,660
Chester, PA, IDA, Senior Life-Choice of
Kimberton, (AMT), 8.50%, 9/1/25 1,000 1,095,390
Delaware, PA, IDA, Glen Riddle Project, (AMT),
8.625%, 9/1/25 1,600 1,768,992
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 1/1/13 1,000 249,900
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 7/1/13 1,000 238,910
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 1/1/14 1,000 228,410
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 7/1/14 1,000 218,360
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 1/1/15 1,000 208,760
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 7/1/15 1,000 199,580
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 1/1/16 1,000 190,800
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 7/1/16 1,000 182,410
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 1/1/17 1,000 174,390
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 7/1/17 1,000 166,720
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 1/1/18 1,000 159,390
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 7/1/18 1,000 152,380
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 1/1/19 1,000 145,680
Glen Cove Industrial Development Agency, NY,
The Regency at Glen Cove, 0.00%, 7/1/19 1,000 139,270
Illinois Development Finance Authority, Care
Institute, Inc., 7.80%, 6/1/25 3,740 3,864,430
Louisiana Housing Finance Agency, (HCC Assisted
Living Group 1) (AMT), 9.00%, 3/1/25 3,545 3,871,175
New Jersey Economic Development Authority,
The Chelsea at East Brunswick Project,
(AMT), 8.25%, 10/1/20 3,500 3,629,395
- --------------------------------------------------------------------------------
$21,529,152
- --------------------------------------------------------------------------------
Cogeneration -- 5.3%
- --------------------------------------------------------------------------------
Maryland Energy Cogeneration, AES Warrior Run
Project (AMT), 7.40%, 9/1/19 /(1)/ $ 3,500 $ 3,791,200
Palm Beach County, FL, Okeelanta Power L.P.
(AMT), 6.85%, 2/15/21 3,500 2,730,000
Palm Beach County, FL, Osceola Power Project
(AMT), 6.95%, 1/1/22 2,000 1,350,000
Pennsylvania Economic Development Financing
Authority, Northampton Generating Project
(AMT), 6.60%, 1/1/19 3,500 3,619,455
Pennsylvania Economic Development Financing
Authority, Northampton Generating Project
Subordinated, (AMT),
6.875%, 1/1/11 1,000 1,034,080
- --------------------------------------------------------------------------------
$12,524,735
- --------------------------------------------------------------------------------
Colleges and Universities -- 0.9%
- --------------------------------------------------------------------------------
New Hampshire Higher Educational and Health
Facilities Authority, Colby-Sawyer College,
7.50%, 6/1/26 $ 2,000 $ 2,155,200
- --------------------------------------------------------------------------------
$ 2,155,200
- --------------------------------------------------------------------------------
Economic Development Revenue -- 0.6%
- --------------------------------------------------------------------------------
Pittsfield Township, MI, 8.125%, 8/15/17 $ 1,350 $ 1,318,815
- --------------------------------------------------------------------------------
$ 1,318,815
- --------------------------------------------------------------------------------
Electric Utilities -- 2.3%
- --------------------------------------------------------------------------------
Intermountain Power Agency, UT, Variable Rate,
7/1/11 /(2)/ $ 2,500 $ 2,640,625
New York State Energy, Research and
Development Authority, Long Island Lighting Co.
(AMT), 7.15%, 9/1/19 2,500 2,711,825
- --------------------------------------------------------------------------------
$ 5,352,450
- --------------------------------------------------------------------------------
Escrowed / Prerefunded -- 7.3%
- --------------------------------------------------------------------------------
Colorado Health Facilities Authority, Liberty
Heights Project, 0.00%, 7/15/20 $ 5,575 $ 1,615,245
Colorado Health Facilities Authority, Liberty
Heights Project, 0.00%, 7/15/24 17,000 3,969,160
Colorado Health Facilities Authority, Liberty
Heights Project, 0.00%, 7/15/22 13,445 3,496,910
Cuyahoga County, OH, Judson Retirement
Community, 8.875%, 11/15/19 1,500 1,694,970
Dawson Ridge Metropolitan District #1, Douglas
County, CO, (AMT), 0.00%, 10/1/22 10,000 2,496,900
Dawson Ridge, Metropolitan District #1, Douglas
County, CO, 0.00%, 10/1/22 3,500 873,915
</TABLE>
See notes to financial statements
9
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
PORTFOLIO OF INVESTMENTS (Unaudited) CONT'D
<TABLE>
<CAPTION>
Principal
Amount
Security (000 Omitted) Value
- --------------------------------------------------------------------------------
Escrowed / Prerefunded (continued)
- --------------------------------------------------------------------------------
<S> <C> <C>
Illinois Development Finance Authority,
Regency Park Project, 0.00%, 7/15/25 $ 3,295 $ 709,348
Montgomery County, PA, United Hospitals,
8.375%, 11/1/11 1,000 1,111,460
Montgomery County, PA, United Hospitals,
7.50%, 11/1/15 1,000 1,075,070
- --------------------------------------------------------------------------------
$ 17,042,978
- --------------------------------------------------------------------------------
Hospitals -- 8.6%
- --------------------------------------------------------------------------------
Hidalgo County, TX, Health Services Corp.,
Mission Hospital, Inc., 6.875%, 8/15/26/(1)/ $ 2,500 $ 2,672,575
Louisiana PFA, General Health Systems Project,
6.80%, 11/1/16(1) 3,000 3,252,780
Massachusetts HEFA, Milford-Whitinsville
Hospital, 7.75%, 7/15/17 3,000 3,284,820
Philadelphia, PA, (Graduate Health System),
6.625%, 7/1/21 2,205 2,294,126
Prince George's, MD, Greater Southeast
Healthcare System, 6.375%, 1/1/23/(1)/ 2,650 2,715,614
San Bernadino, CA, San Bernadino Community
Hospital, 7.875%, 12/1/08 1,000 1,046,260
San Bernadino, CA, San Bernadino Community
Hospital, 7.875%, 12/1/19 1,325 1,386,295
Scranton-Lackawanna, PA, Health and Welfare
Authority, Moses Taylor Hospital,
8.50%, 7/1/20/(1)/ 1,500 1,754,340
Wells County, IN, Caylor-Nickel Medical
Center, 8.75%, 4/15/12 1,500 1,751,010
- --------------------------------------------------------------------------------
$ 20,157,820
- --------------------------------------------------------------------------------
Housing -- 11.2%
- --------------------------------------------------------------------------------
Colorado Housing and Finance Authority, Single
Family Housing, (AMT), 7.65%, 12/1/25 $ 4,735 $ 5,333,314
Cuyahoga County, OH, Rolling Hills Apartment
Project, 8.00%, 1/1/28 2,450 2,449,731
Florence, KY Housing Facilities,
7.625%, 5/1/27 2,430 2,464,385
Lucas County, OH, County Creek Project (AMT),
8.00%, 7/1/26 3,780 3,733,468
Maricopa County, AZ, IDA, Place Five and The
Greenery Projects, 6.625%, 1/1/27 2,500 2,625,525
Maricopa County, AZ, IDA, Place Five and The
Greenery Projects, 8.625%, 1/1/11 1,725 1,757,620
Santa Fe, NM, 1st Interstate Plaza Project,
8.00%, 7/1/13 3,388 3,650,738
Santa Fe, NM, Crow Hobbs Project,
8.50%, 9/1/16 3,300 3,637,260
Texas Department of Housing and Community
Affairs, NHP Foundation-Asmara Project,
6.40%, 1/1/27 $ 550 $ 575,372
- --------------------------------------------------------------------------------
$ 26,227,413
- --------------------------------------------------------------------------------
Industrial Development Revenue / Pollution
Control Revenue -- 26.8%
- --------------------------------------------------------------------------------
ABIA Development Corp., Austin Cargoport
Development, L.L.C.Project (AMT),
9.25%, 10/1/21 $ 2,815 $ 3,102,102
Camden County, NJ, Holt Hauling and Warehousing
System, Inc. Project (AMT), 9.875%, 1/1/21 2,000 2,350,120
Carbon County, UT, (Laidlaw Environmental
Services Inc.), 7.45%, 7/1/17 3,900 4,036,110
Florence County, SC, Stone Container Company,
7.375%, 2/1/07 1,895 2,014,631
Hancock County, KY, Southwire Co., (AMT),
7.75%, 7/1/26 2,700 2,868,021
Kansas City, MO, IDA, AFCO Cargo
(AMT), 8.50%, 1/1/17 4,095 4,588,201
Kimball, NE, Economic Development Authority,
Clean Harbors Inc. (AMT), 10.75%, 9/1/26 3,000 3,256,260
Michigan Strategic Fund, (S.D. Warren Co.)
(AMT), 7.375%, 1/15/22 3,500 3,761,940
Mobile, AL, Mobile Energy
Project, 6.95%, 1/1/20 1,000 1,097,120
Morgantown, KY, IMCO Recyclying Inc.,
7.45%, 5/1/22 3,400 3,538,618
New Albany, IN, IDA, K-Mart Co.,
7.40%, 6/1/06 1,095 1,176,895
New Hampshire Business Finance Authority, Crown
Paper Co. (AMT), 7.875%, 7/1/26 2,750 3,020,930
New Hampshire, Public Service Co.
of NH, 7.65%, 5/1/21 3,420 3,577,081
New Jersey EDA, (777 Pattison Ave., Inc.),
(AMT), 8.95%, 12/15/18 500 552,530
New Jersey EDA, Holt Hauling and Warehousing
System, Inc., 7.90%, 3/1/27 4,000 4,320,200
Ohio Solid Waste Revenue, Republic Engineered
Steels Inc., (AMT), 9.00%, 6/1/21 4,000 4,159,080
Osceola County, IDA, Community Pooled
Loan-93, 7.75%, 7/1/17 2,000 2,112,920
Perry County, KY, TJ International Inc.,
6.55%, 4/15/27 2,000 2,119,840
Philadelphia, PA, (Refrigerated Enterprises)
(AMT), 9.05%, 12/1/19 500 554,455
</TABLE>
See notes to financial statements
10
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
PORTFOLIO OF INVESTMENTS (Unaudited) CONT'D
<TABLE>
<CAPTION>
Principal
Amount
Security (000 Omitted) Value
- --------------------------------------------------------------------------------
Industrial Development Revenue / Pollution
Control Revenue (continued)
- --------------------------------------------------------------------------------
<S> <C> <C>
Riverdale Village, IL, ACME Metals,
Inc. Project (AMT), 7.95%, 4/1/25 $ 3,345 $ 3,589,921
Robbins, IL, Resource Recovery,
8.375%, 10/15/16 3,500 3,746,925
Skowhegan, ME, S. D. Warren Co.,
6.65%, 10/15/15 3,000 3,084,270
- --------------------------------------------------------------------------------
$ 62,628,170
- --------------------------------------------------------------------------------
Insured-Water and Sewer -- 1.3%
- --------------------------------------------------------------------------------
Detroit, MI, Sewer Revenue, (FGIC),
Variable Rate, 7/1/23/(2)/ $ 3,000 $ 3,165,000
- --------------------------------------------------------------------------------
$ 3,165,000
- --------------------------------------------------------------------------------
Lease Revenue / Certificates of Participation -- 1.9%
- --------------------------------------------------------------------------------
Hardeman County, TN, Correctional
Facilities Corp., 7.75%, 8/1/17 $ 4,000 $ 4,373,120
- --------------------------------------------------------------------------------
$ 4,373,120
- --------------------------------------------------------------------------------
Lease Revenue / Certificates of Participation -- 1.1%
- --------------------------------------------------------------------------------
Los Angeles, CA, COP, Disney Parking
Project, 0.00%, 9/1/19 $ 9,190 $ 2,517,601
- --------------------------------------------------------------------------------
$ 2,517,601
- --------------------------------------------------------------------------------
Life Care -- 10.7%
- --------------------------------------------------------------------------------
Delaware County, PA, White Horse Village,
7.30%, 7/1/14 $ 3,500 $ 3,694,635
Kansas City, MO, IDA, Kingswood United
Methodist Manor, 9.00%, 11/15/13 4,000 4,429,399
Saint Tammany, LA, Public Finance, Christwood
Project, 9.00%, 11/15/25 3,955 4,335,708
Tax Exempt Securities Trust, 8.50%, 12/1/36 2,382 2,526,587
Tax Exempt Securities Trust, 8.81%, 12/1/36 2,000 2,197,200
Tax Exempt Securities Trust, 7.00%, 12/1/36 1,330 1,400,796
Tax Exempt Securities Trust, 8.70%, 12/1/36 1,000 1,088,640
Tax Exempt Securities Trust, 7.00%, 12/1/36 1,100 1,100,000
Tax Exempt Securities Trust, 8.875%, 12/1/36 600 600,000
Tax Exempt Securities Trust, 6.75%, 12/1/36 2,580 2,663,669
Tax Exempt Securities Trust, 8.375%, 12/31/36 860 914,722
- --------------------------------------------------------------------------------
$ 24,951,356
- --------------------------------------------------------------------------------
Miscellaneous -- 1.6%
- --------------------------------------------------------------------------------
Atlanta, GA, Downtown Development Authority,
Central Atlanta Hospitality Childcare,
Inc., 8.00%, 1/1/26 $ 3,765 $ 3,846,211
- --------------------------------------------------------------------------------
$ 3,846,211
- --------------------------------------------------------------------------------
Nursing Homes -- 6.5%
- --------------------------------------------------------------------------------
Greene County, OH, IDA, Fairview Extended Care,
10.125%, 1/1/11 $ 1,220 $ 1,446,676
Kansas City, MO, IDA, Beverly Enterprises,
8.00%, 12/1/02 2,175 2,315,048
Massachusetts HEFA, Fairview Extended Care,
10.125%, 1/1/11 1,790 2,028,285
Massachusetts IFA, AGE,Institute of
Massachusetts, 8.05%, 11/1/25 2,500 2,642,950
Mississippi Business Finance Corp.,
Magnolia Healthcare, 7.99%, 7/1/25 1,200 1,258,164
Westmoreland, PA, (Highland Health
Systems, Inc.), 9.25%, 6/1/22 3,500 3,922,590
Wilkins Area, PA, IDA, (Fairview Extended Care),
10.25%, 1/1/21 1,250 1,487,100
- --------------------------------------------------------------------------------
$ 15,100,813
- --------------------------------------------------------------------------------
Special Tax Revenue -- 1.7%
- --------------------------------------------------------------------------------
Cottonwood Water & Sanitation District,
General Obligation, 7.75%, 12/1/20 $ 3,800 $ 3,944,552
- --------------------------------------------------------------------------------
$3,944,552
- --------------------------------------------------------------------------------
Transportation -- 2.0%
- --------------------------------------------------------------------------------
Eagle County, CO, Airport Terminal Project,
7.50%, 5/1/21 $ 500 $ 530,760
San Joaquin Hills, CA, Toll Road Revenue Bonds,
0.00%, 1/1/25 10,000 2,139,000
San Joaquin Hills, CA, Toll Road Revenue Bonds,
0.00%, 1/1/26 10,000 2,022,000
- --------------------------------------------------------------------------------
$ 4,691,760
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
11
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
PORTFOLIO OF INVESTMENTS (Unaudited) CONT'D
<TABLE>
<CAPTION>
Principal
Amount
Security (000 Omitted) Value
- --------------------------------------------------------------------------------
Utilities -- 1.0%
- --------------------------------------------------------------------------------
<S> <C> <C>
Southern California Public Power Authority,
Variable Rate, 7/1/12/(2)/ $ 2,000 $ 2,257,500
- --------------------------------------------------------------------------------
$ 2,257,500
- --------------------------------------------------------------------------------
Total Tax-Exempt Investments -- 100%
(identified cost $216,107,640) $233,784,646
- --------------------------------------------------------------------------------
</TABLE>
AMT - Interest earned from these securities may be considered a tax preference
item for purpose of the Federal Alternative Minimum Tax.
At July 31, 1997, the concentration of the Portfolio's investments in various
states determined as a percentage of total investments is as follows:
Pennsylvania 10%
Others, representing less than 10% individually 90%
(1) Security (or a portion thereof) has been segregated to cover margin
requirements on open financial futures contracts.
(2) Security has been issued as an inverse floater bond.
See notes to financial statements
12
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
FINANCIAL STATEMENTS (Unaudited)
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
As of July 31, 1997
Assets
- --------------------------------------------------------------------------------
<S> <C>
Investments, at value (Note 1A)
(identified cost, $216,107,640) $233,784,646
Cash 2,519,299
Interest receivable 3,378,120
Deferred organization expenses (Note 1D) 8,526
- --------------------------------------------------------------------------------
Total assets $239,690,591
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Payable for investments purchased $ 856,681
Payable for daily variation margin on open
financial futures contracts (Note 1E) 37,500
Payable to affiliate -
Trustees' fees (Note 2) 956
Accrued expenses 22,162
- --------------------------------------------------------------------------------
Total liabilities $ 917,299
- --------------------------------------------------------------------------------
Net Assets applicable to investors'
interest in Portfolio $238,773,292
- --------------------------------------------------------------------------------
Sources of Net Assets
- --------------------------------------------------------------------------------
Net proceeds from capital
contributions and withdrawals $221,375,604
Net unrealized appreciation of investments
(computed on the basis of identified cost) 17,397,688
- --------------------------------------------------------------------------------
Total $238,773,292
- --------------------------------------------------------------------------------
<CAPTION>
Statement of Operations
For the Six Months Ended
July 31, 1997
Investment Income (Note 1B)
- --------------------------------------------------------------------------------
<S> <C>
Interest income $ 7,583,522
- --------------------------------------------------------------------------------
Total income $ 7,583,522
- --------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------
Investment adviser fee (Note 2) $ 621,102
Compensation of Trustees not members of the
Investment Adviser's organization (Note 2) 5,940
Custodian fee (Note 1H) 55,962
Legal and accounting services 25,133
Amortization of organization expenses (Note 1D) 726
Miscellaneous 32,357
- --------------------------------------------------------------------------------
Total expenses $ 741,220
- --------------------------------------------------------------------------------
Deduct --
Reduction of custodian fee (1H) $ 14,928
- --------------------------------------------------------------------------------
Total expense reductions $ 14,928
- --------------------------------------------------------------------------------
Net expenses $ 726,292
- --------------------------------------------------------------------------------
Net investment income $ 6,857,230
- --------------------------------------------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
- --------------------------------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified $ 94,218
cost basis)
Financial futures contracts (1,212,846)
- --------------------------------------------------------------------------------
Net realized loss on investments $ (1,118,628)
- --------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
Investments (identified cost basis) $ 12,778,228
Financial futures contracts 63,426
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) $ 12,841,654
- --------------------------------------------------------------------------------
Net realized and unrealized gain on investments $ 11,723,026
- --------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 18,580,256
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
13
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended
July 31, Year Ended
Increase (Decrease) 1997 January 31,
in Net Assets (Unaudited) 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
From operations --
Net investment income $ 6,857,230 $ 8,918,825
Net realized loss on investments (1,118,628) (1,259,590)
Change in unrealized
appreciation (depreciation) 12,841,654 2,904,425
- --------------------------------------------------------------------------------
Net increase in net assets
from operations $ 18,580,256 $ 10,563,660
- --------------------------------------------------------------------------------
Capital transactions --
Contributions $ 60,248,452 $ 118,977,124
Withdrawals (20,755,875) (20,917,792)
- --------------------------------------------------------------------------------
Net increase in net assets from
capital transactions $ 39,492,577 $ 98,059,332
- --------------------------------------------------------------------------------
Net increase in net assets $ 58,072,833 $ 108,622,992
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
At beginning of period $ 180,700,459 $ 72,077,467
- --------------------------------------------------------------------------------
At end of period $ 238,773,292 $ 180,700,459
- --------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
14
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
FINANCIAL STATEMENTS CONT'D
Supplementary Data
<TABLE>
<CAPTION>
Six Months Ended Year Ended January 31,
July 31, 1997 ------------------------
(Unaudited) 1997 1996*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ratios to average daily net assets++
- -------------------------------------------------------------------------------------------------------------
Expenses 0.73%+ 0.34% 0.06%+
Expenses after custodian fee reduction 0.71%+ 0.30% 0.06%+
Net investment income 6.73%+ 6.96% 6.95%+
Portfolio Turnover 4% 41% 32%
- --------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) $238,773 $180,700 $72,077
- --------------------------------------------------------------------------------------------------------------
</TABLE>
++ The operating expenses of the Portfolio may reflect a reduction of the
Investment Adviser fee. Had such action not been taken, the ratios would have
been as follows:
<TABLE>
<S> <C> <C>
Expenses 0.71% 0.71%+
Expenses after custodian fee reduction 0.67% 0.71%+
Net investment income 6.59% 6.30%+
- --------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
* For the period from the start of business, August 7, 1995 to January 31, 1996.
See notes to financial statements
15
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1 Significant Accounting Policies
------------------------------------------------------------------------------
High Yield Municipals Portfolio (the Portfolio) is registered under the
Investment Company Act of 1940, as a non-diversified open-end management
investment company. The Portfolio, which was organized as a trust under the
laws of the State of New York on May 1, 1995, seeks to provide high current
income exempt from regular federal income tax. The Declaration of Trust
permits the Trustees to issue 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 -- Municipal bonds are normally valued on the basis of
valuations furnished by a pricing service. Taxable obligations, if any, for
which price quotations are readily available are normally valued at the mean
between latest bid and asked prices. Futures contracts listed on commodity
exchanges are valued at closing settlement prices. Short-term obligations
maturing in sixty days or less, are valued at amortized cost, which
approximates value. Investments for which valuations or 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,
adjusted for amortization of premium or discount when required for federal
income tax purposes.
C 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 the income and diversification
requirements (under the Internal Revenue 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 taxable
(if any) and tax-exempt investment income, net realized capital gains, and any
other items of income, gain, loss, deduction or credit. Interest income
received by the Portfolio on investments in municipal bonds, which is
excludable from gross income under the Internal Revenue Code, will retain its
status as income exempt from Federal income tax when allocated to the
Portfolio's investors. The portion of such interest, if any, earned on private
activity bonds issued after August 7, 1986 may be considered a tax preference
item for investors.
D Deferred Organization Expenses -- Costs incurred by the Portfolio in
connection with its organization are being amortized on the straight-line
basis over five years.
E Financial Futures Contracts -- Upon the entering of a financial futures
contract, the Portfolio is required to deposit ("initial margin") either in
cash or securities an amount equal to a certain percentage of the purchase
price indicated in the financial futures contract. Subsequent payments are
made or received by the Portfolio ("margin maintenance") 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 only to
hedge against anticipated futures changes in interest rates. Should interest
rates move unexpectedly, the Portfolio may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss.
F Legal Fees -- Legal fees and other related expenses incurred as part of
negotiations of the terms and requirements of capital infusions, or that are
expected to result in the restructuring of or a plan of reorganization for an
investment are recorded as realized losses. Ongoing expenditures to protect or
enhance an investment are treated as operating expenses.
G When-issued and Delayed Delivery Transactions -- The Portfolio may engage in
when-issued and delayed delivery transactions. The Portfolio records
when-issued securities on trade date and maintains security positions such
that sufficient liquid assets will be available to make payments for the
securities purchased. Securities purchased on when-issued or delayed delivery
basis are marked to market daily and begin accruing interest on settlement
date.
H 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
balances the Portfolio maintains with IBT. All significant credit balances
used to reduce the Portfolio's custodian fees are reported as a reduction of
expenses in the Statement of Operations.
16
<PAGE>
High Yield Municipals Portfolio as of July 31, 1997
NOTES TO FINANCIAL STATEMENTS (Unaudited) CONT'D
I 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 revenue and expense during the reporting period. Actual results
could differ from those estimates.
J Other -- Investment transactions are accounted for on a trade date basis.
K Interim Financial Information -- The interim financial statements relating
to July 31, 1997 and for the six months then ended have not been audited by
independent certified public accountants, but in the opinion of the
Portfolio's management reflect all adjustments consisting only of normal
recurring adjustments, necessary for the fair presentation of the financial
statements.
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 sales of securities). For
the six months ended July 31, 1997, the fee was equivalent to 0.60%
(annualized) of the Portfolio's average net assets for such period and
amounted to $621,102. 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. Certain of the officers and Trustees of the Portfolio are
officers and directors/trustees of the above organizations. Trustees of the
Portfolio that are not affiliated with the Investment Adviser may elect to
defer receipt of all or a percentage of their annual fees in accordance with
the terms of the Trustees Deferred Compensation Plan. For the period ended
July 31, 1997, no significant amounts have been deferred.
3 Investments
------------------------------------------------------------------------------
Purchases and sales of investments, other than U.S. Government securities and
short-term obligations, aggregated $51,038,720 and $8,436,955, respectively,
for the six months ended July 31, 1997.
4 Federal Income Tax Basis of Investments
------------------------------------------------------------------------------
The cost and unrealized appreciation/depreciation in value of the investments
owned at July 31, 1997, as computed on a federal income tax basis, were as
follows:
<TABLE>
<S> <C>
Aggregate cost $216,107,640
------------------------------------------------------------------------------
Gross unrealized appreciation $18,611,032
Gross unrealized depreciation 934,026
------------------------------------------------------------------------------
Net unrealized appreciation $17,677,006
------------------------------------------------------------------------------
</TABLE>
5 Line of Credit
------------------------------------------------------------------------------
The Portfolio participates with other portfolios and funds managed by BMR and
EVM and its affiliates in a $120 million unsecured line of credit agreement
with a group of banks. Borrowings will be made by the Portfolio solely to
facilitate the handling of unusual and/or unanticipated short-term cash
requirements. Interest is charged to each participating portfolio or fund
based on its borrowings at the bank's base rate or at an amount above either
the bank's adjusted certificate of deposit rate, Eurodollar rate, or a federal
funds effective rate. In addition, a fee computed at an annual rate of 0.15%
on the daily unused portion of the 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
six-months ended July 31, 1997.
6 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 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 do 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 July 31, 1997 is as follows:
<TABLE>
<CAPTION>
Futures
Contracts Net Unrealized
Expiration Appreciation
Date Contracts Position (Depreciation)
------------------------------------------------------------------------------
<S> <C> <C> <C>
9/97 100 U.S. Treasury Bonds Short $(279,318)
</TABLE>
17
<PAGE>
High Yield Municipals Portfolio of July 31, 1997
INVESTMENT MANAGEMENT
High Yield Municipals Portfolio
Officers Independent Trustees
Thomas J. Fetter Donald R. Dwight
President President, Dwight Partners, Inc.
Chairman, Newspapers of New England, Inc.
James B. Hawkes
Vice President and Trustee Samuel L. Hayes, III
Jacob H. Schiff Professor of Investment
Thomas Metzold Banking, Harvard University Graduate School of
Vice President and Business Administration
Portfolio Manager
Norton H. Reamer
James L. O'Connor President and Director, United Asset
Treasurer Management Corporation
Alan R. Dynner John L. Thorndike
Secretary Formerly Director, Fiduciary Company
Incorporated
Jack L. Treynor
Investment Adviser and Consultant
18
