---

 

Item 1.     Reports to Shareholders.

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The chart that follows shows the allocation of the Fund’s holdings by asset category as of May 31, 2005.

THE HYPERION STRATEGIC MORTGAGE INCOME, INC.

* As a percentage of total investments.

1

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Dear Shareholder:

We welcome this opportunity to provide you with information about The Hyperion Strategic Mortgage Income Fund, Inc. (the “Fund”), for the semi-annual period ended May 31, 2005. The Fund is a closed-end bond fund whose shares are traded on the New York Stock Exchange (“NYSE”) under the symbol “HSM”.

Description of the Fund

The Fund is a diversified closed-end management investment company. The Fund’s primary investment objective is to provide a high level of current income by investing primarily in mortgage-backed securities that offer an attractive combination of credit quality, yield and maturity. The Fund’s secondary investment objective is to provide capital appreciation. Under normal market conditions, the Fund will invest at least 80% of its total assets in investment-grade mortgage-backed securities (“MBS”) including agency MBS, non-agency residential MBS (“RMBS”), and commercial MBS (“CMBS”), and may invest up to 20% of its total assets in U.S. Government securities, cash or other short-term instruments.

Portfolio Performance

For the six month period ended May 31, 2005, shareholders realized a total investment return of 5.54%, which assumes the reinvestment of dividends and is exclusive of brokerage commissions. Based on the NYSE closing price of $14.74 on May 31, 2005, the Fund’s shares had a current yield of 8.8%.

As of May 31, 2005, the Fund, inclusive of the effect of leverage, was managed with an average duration (a bond’s duration is the weighted average number of years until maturity of all its cash flows, including coupon payments and principal) of 3.1 years, as measured on a net asset basis.

Market Environment for the Semi Annual Period Ended May 31, 2005

Sometimes the markets respond to economic factors (fundamental valuation). Sometimes the pendulum swings to the other extreme and the markets respond to other market factors such as supply and demand and the relative ability and willingness of market participants to utilize leverage. So far in 2005, technical factors seemed to be dominating, both for credit spreads and the level of interest rates.

The economic numbers reflected an economy that continues to expand at a moderate pace. The consumer remains very healthy with home prices driving wealth thanks to stubbornly low long term interest rates and the advent of interest only and longer amortizing mortgages. Inflation indices have remained low thanks to the outsourcing of goods and services to low cost producers like China and India, a trend we expect to continue for the foreseeable future. Rising oil prices are definitely a problem for the economy and we believe that it will lead to a slowdown in the economy in 12 to 15 months.

We feel that the dominant factor that will drive the continued decline in long term interest rates is the consumer. With the consumer being over 67% of Gross National Product, interest rates should remain consumer-friendly, i.e. keep mortgage rates attractive for home ownership since the home is the largest asset for the consumer. As a result, the goal of monetary policy in a recession will be to drop interest rates low enough to cause a mortgage refinancing wave to put money in the pocket of the consumer to therefore spend back into the economy. As long as the consumer is such a dominant force of Gross Domestic Product, this cycle will continue to drive long term interest rates lower.

The yield curve, as measured by the difference in interest rates between the UST 10-Year and 2-Year narrowed from 114 basis points to 34 basis points. We believe that the yield curve will continue to flatten and potentially invert where the yield on shorter maturity assets are higher than that of longer maturity assets. We anticipate that the Fed will raise Fed Funds to 3.25% at the upcoming June 30 meeting and then at least once again during the fall to 3.50%. At that point a yield curve with the 2-Year at 3.70% and a 10-Year at 3.95% would not be inconsistent if the markets begin to believe that the Fed is near the end of the tightening cycle. The yield curve inversion scenario would play out if the Fed raises the Funds target beyond 3.50%.

2

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Portfolio Strategy for the Semi Annual Period Ended May 31, 2005

Credit sectors, especially corporate bonds, came under some pressure over the last few months. Much of the pressure was concentrated in the corporate sector with the BB rated sector widening dramatically, triggered by a ratings downgrade of General Motors and Ford. Weakness in the overall corporate sector spilled into the CMBS sector with the BBB-rated classes widening about 20 basis points. The residential credit sector escaped the underperformance as the combination of large sums of money pre-committed for RMBS investment and the beneficial impact of lower interest rates on home prices and structural deleveraging kept yield spreads firm.

As the credit curve has narrowed in the RMBS market, we have reduced AA through BBB rated bonds in the sub-prime sector by 7.7%. The proceeds were reinvested primarily into the premium-priced Agency MBS sector (+6.5%). The bonds that were sold were largely floaters and the bonds that were purchased have limited sensitivity to interest rates, so the overall effective duration of the portfolio did not change dramatically. These trades resulted in the AAA rated allocation rising from about 47% to 53.7%. This is temporary, as over time we expect to redeploy those funds back into BBB rated bonds across the RMBS, CMBS and ABS sectors should yield spreads widen.

The allocation of below BBB rated exposures fell slightly from 17.5% to 17.0% as deals were prepaid, called, or upgraded to investment-grade. There were no material changes within the below-investment-grade exposures. Within the below-investment-grade sectors, we remain heavily skewed toward RMBS. Over time, we hope to add to the CMBS sector through an allocation to rated B-Notes.

We remain nearly fully leveraged to take advantage of the steepness in the yield curve, but are maintaining greater than 75% of the leveraged portion of the Fund in floaters or hedged with interest swaps out to approximately 2.3 years.

The duration of the Fund has been running between 3.0 and 3.5 years. We expect the duration to drift up slightly should interest rates rise and mortgage prepayments slow, but are comfortable that the duration will not extend dramatically.

3

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Conclusion

We remain committed to the Fund and its shareholders. As always, we will continue to actively seek investment opportunities in the market and act on them in a timely fashion in an effort to achieve the Fund’s objectives. We welcome your questions and comments, and encourage you to contact our Shareholder Services Representatives at 1-800-HYPERION.

We appreciate the opportunity to serve your investment needs.

Sincerely,
/s/ CLIFFORD E. LAI
CLIFFORD E. LAI President, The Hyperion Strategic Mortgage Income Fund, Inc. President and Chief Executive Officer, Hyperion Capital Management, Inc.
/s/ JOHN H. DOLAN
JOHN H. DOLAN Vice President, The Hyperion Strategic Mortgage Income Fund, Inc. Chief Investment Officer, Hyperion Capital Management, Inc.

4

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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments – (Unaudited)
May 31, 2005
											Principal
					Interest						Amount				Value
					Rate				Maturity		(000s)				(Note 2)
U.S. GOVERNMENT & AGENCY OBLIGATIONS – 71.5%
U.S. Government Agency Pass-Through Certificates – 66.2%
	Federal Home Loan Mortgage Corporation
		Pool A14559				6.50	%		09/01/33		$	2,470			$	2,565,245
		Pool C68878				7.00			06/01/32			505	#			532,306
		Pool C69047				7.00			06/01/32			1,333				1,405,844
		Pool G01466				9.50			12/01/22			1,592				1,758,703
		Pool 555559				10.00			03/01/21			1,732				1,952,474
																8,214,572
	Federal National Mortgage Association
		Pool 694391				5.50			03/01/33			4,135	@			4,197,298
		Pool 753914				5.50			12/01/33			11,006	@			11,171,737
		Pool 754355				6.00			12/01/33			6,980	@			7,181,104
		Pool 761836				6.00			06/01/33			4,454	@			4,585,874
		Pool 763643				6.00			01/01/34			8,559	@			8,801,909
		Pool 255413				6.50			10/01/34			11,979	@			12,450,872
		Pool 323982				6.50			10/01/06			443				449,005
		Pool 795367				6.50			09/01/34			5,655	@			5,877,942
		Pool 809989				6.50			03/01/35			5,354	@			5,565,284
		Pool 626299				7.00			06/01/32			831				877,932
		Pool 635095				7.00			06/01/32			1,285				1,356,880
		Pool 641575				7.00			04/01/32			593				625,966
		Pool 645399				7.00			05/01/32			2,857	@			3,016,851
		Pool 645466				7.00			05/01/32			3,012	@			3,180,306
		Pool 650131				7.00			07/01/32			1,592				1,681,433
		Pool 398800				8.00			06/01/12			813				868,358
		Pool 827854				8.00			10/01/29			4,188				4,525,872
		Pool 636449				8.50			04/01/32			2,803				3,047,563
		Pool 823757				8.50			10/01/29			6,530				7,139,211
		Pool 458132				9.41			03/15/31			2,216				2,444,302
																89,045,699
Total U.S. Government Agency Pass-Through Certificates
			(Cost – $97,276,421)													97,260,271
U.S. Treasury Obligations – 5.3%
	United States Treasury Notes
						4.00			02/15/15			1,173				1,170,250
						4.25			11/15/14			6,500	@			6,617,306
Total U.S. Treasury Obligations
			(Cost – $7,655,311)													7,787,556
Total U.S. Government & Agency Obligations
			(Cost – $104,931,732)													105,047,827
ASSET-BACKED SECURITIES – 22.7%
Housing Related Asset-Backed Securities – 20.8%
	Asset Backed Funding Certificates
		Series 2005-AQ1, Class B1*(b)				5.75/6.25			06/25/35			1,000				856,321
		Series 2005-AQ1, Class B2*(b)				5.75/6.25			06/25/35			1,057				863,438
																1,719,759

See notes to financial statements.

5

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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments – (Unaudited)
May 31, 2005
											Principal
					Interest						Amount				Value
					Rate				Maturity		(000s)				(Note 2)
ASSET-BACKED SECURITIES (continued)
	Equity One ABS, Inc.
		Series 2003-4, Class B2				7.84	%†		11/25/33		$	345			$	345,698
	First Franklin Mortgage Loan Asset Backed Certificates
		Series 2003-FFH1, Class M4(a)				6.59	†		09/25/33			4,740				4,898,890
		Series 2004-FFH1, Class B*(a)				6.59	†		03/25/34			1,550				1,480,664
		Series 2004-FF2, Class B*(a)				6.59	†		03/25/34			900				864,807
		Series 2004-FFH2C, Class B1*(a)				6.59	†		06/25/34			1,250				1,182,275
		Series 2004-FF8, Class B4*(a)				6.59	†		10/25/34			1,250				1,154,134
																9,580,770
	Green Tree Financial Corp.
		Series 1997-6, Class B1				7.17			01/15/29			4,614				743,171
		Series 1997-3, Class M1				7.53			03/15/28			2,000				1,220,000
																1,963,171
	Harborview Mortgage Loan Trust
		Series 2005-1, Class B4*(a)				4.84	†		03/19/35			629				532,405
		Series 2005-1, Class B5*(a)				4.84	†		03/19/35			914				592,806
		Series 2005-1, Class B6*(a)				4.84	†		03/19/35			1,144				257,340
		Series 2005-2, Class B4*(a)				4.84	†		05/19/35			1,489				1,261,131
																2,643,682
	Long Beach Mortgage Loan Trust
		Series 2002-5, Class M3(a)				6.34	†		11/25/32			2,500				2,546,865
	Mid-State Trust
		Series 2004-1, Class M2				8.11			08/15/37			1,712				1,744,551
	Structured Asset Investment Loan Trust
		Series 2004-4, Class B*(b)				5.00/5.50			04/25/34			1,500				1,318,529
		Series 2004-11, Class M9(b)				5.00/5.50			01/25/35			1,900				1,836,137
		Series 2004-7, Class B(a)				5.59	†		08/25/34			2,161				1,964,106
		Series 2004-8, Class B1(a)				5.59	†		09/25/34			1,000				965,152
		Series 2004-10, Class M7(a)				5.59	†		11/25/34			2,000				2,016,460
		Series 2004-2, Class B*(a)				6.09	†		03/25/34			1,074				980,466
																9,080,850
	Structured Asset Securities Corporation
		Series 2005-6, Class B5				5.34	†		05/25/35			500				432,734
		Series 2005-6, Class B6				5.34	†		05/25/35			500				329,688
		Series 2005-6, Class B7				5.34	†		05/25/35			350				112,000
																874,422
Total Housing Related Asset-Backed Securities
			(Cost – $30,995,414)													30,499,768
Non-Housing Related Asset-Backed Securities – 1.9%
	Airplanes Pass Through Trust
		Series 1R, Class A8
			(Cost – $2,562,285)			3.46	†		03/15/19			2,969				2,791,179
Total Asset-Backed Securities
			(Cost – $33,557,699)													33,290,947

See notes to financial statements.

6

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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments – (Unaudited)
May 31, 2005
											Principal
					Interest						Amount				Value
					Rate				Maturity		(000s)				(Note 2)
COMMERCIAL MORTGAGE-BACKED SECURITIES – 27.7%
	Bear Stearns Commercial Mortgage Securities
		Series 1999-C1, Class D				6.53	%		02/14/31		$	2,500			$	2,774,475
		Series 2000-WF1, Class E				7.90	†		02/15/32			2,000				2,277,640
																5,052,115
	Chase Commercial Mortgage Securities Corp.
		Series 2000-2, Class I*				6.65			07/15/32			1,000				623,300
	GE Capital Commercial Mortgage Corp.
		Series 2002-2A, Class G*				6.04			08/11/36			3,000				3,148,149
		Series 2000-1, Class G*				6.13			01/15/33			1,000				401,200
		Series 2002-2A, Class H*				6.31			08/11/36			2,000				2,093,180
		Series 2000-1, Class E				7.17	†		01/15/33			1,000				1,089,890
																6,732,419
	Government Lease Trust
		Series 1999-C1A, Class B3*				4.00			05/18/11			2,500				2,316,288
	JP Morgan Chase Commercial Mortgage Securities
		Series 2003-LN1, Class G*				5.48	†		10/15/37			1,600				1,637,291
	JP Morgan Commercial Mortgage Finance Corp.
		Series 1999-C7, Class F*				6.00			10/15/35			2,000				2,061,960
	Morgan Stanley Capital I
		Series 2001-TOP1, Class A4				6.66			02/15/33			4,500				4,972,275
		Series 1999-WF1, Class E				7.00	†		11/15/31			5,500				5,952,562
		Series 1999-FNV1, Class E				7.47	†		03/15/31			2,000				2,198,400
																13,123,237
	Nationslink Funding Corp.
		Series 1998-2, Class E				7.11			08/20/30			4,000				4,365,376
	UBS 400 Atlantic Street Mortgage Trust
		Series 2002-C1A, Class B3*				7.19			01/11/22			2,000				2,223,860
	Wachovia Bank Commercial Mortgage Trust
		Series 2004-WL4A, Class H*				4.07	†		10/15/15			700				701,184
		Series 2005-C16, Class H*				5.30	†		10/15/41			2,000				1,946,290
																2,647,474
Total Commercial Mortgage-Backed Securities
			(Cost – $39,828,053)													40,783,320
NON-AGENCY RESIDENTIAL MORTGAGE-BACKED SECURITIES – 25.3%
Subordinated Collateralized Mortgage Obligations – 25.3%
	Bank of America Alternative Loan Trust
		Series 2004-3, Class 30B4				5.50			04/25/34			1,002				844,763
		Series 2004-3, Class 30B5				5.50			04/25/34			702				435,981
																1,280,744
	Bank of America Mortgage Securities, Inc.
		Series 2004-A, Class B4				3.93	†		02/25/34			2,052				1,865,875
		Series 2002-H, Class B4				4.71	†		08/25/32			225				218,959
		Series 2002-H, Class B5				4.71	†		08/25/32			150				149,951
		Series 2002-H, Class B6				4.71	†		08/25/32			376				346,173

See notes to financial statements.

7

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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments – (Unaudited)
May 31, 2005
										Principal
				Interest						Amount				Value
				Rate				Maturity		(000s)				(Note 2)
NON-AGENCY RESIDENTIAL MORTGAGE-BACKED SECURITIES (continued)
		Series 2003-10, Class 1B4			5.50	%		01/25/34		$	562			$	522,718
		Series 2002-10, Class 1B3			6.00			11/25/32			1,453				1,470,100
		Series 2002-9, Class 1B3			6.25			10/25/32			1,743				1,738,196
		Series 2002-9, Class 1B4			6.25			10/25/32			1,162				1,158,922
															7,470,894
	Cendant Mortgage Corp.
		Series 2002-4, Class B1			6.50			07/25/32			2,603				2,613,926
		Series 2002-4, Class B2			6.50			07/25/32			1,041				1,045,325
		Series 2002-4, Class B3			6.50			07/25/32			607				619,206
		Series 2002-4, Class B4			6.50			07/25/32			347				338,135
		Series 2002-4, Class B5			6.50			07/25/32			260				236,098
		Series 2002-4, Class B6*			6.50			07/25/32			347				260,331
															5,113,021
	First Horizon Mortgage Pass-Through Trust
		Series 2005-3, Class B4			5.50			06/25/35			460				405,894
	G3 Mortgage Reinsurance Ltd.
		Series 1, Class E*			23.10	†		05/25/08			4,277				4,790,449
	JP Morgan Mortgage Trust
		Series 2003-A1, Class B4			4.50	†		10/25/33			536				464,337
	Residential Finance Limited Partnership
		Series 2002-A, Class B7			8.79	†		10/10/34			1,941				1,978,598
	Residential Funding Mortgage Securities I, Inc.
		Series 2004-S1, Class B2			5.25			02/25/34			454				301,202
		Series 2003-S7, Class B3			5.50			05/25/33			322				250,705
		Series 2003-S7, Class B2			5.50			05/25/33			531				238,795
															790,702
	Resix Finance Limited Credit-Linked Note
		Series 2004-C, Class B7*			6.59	†		09/10/36			991				1,012,125
		Series 2004-B, Class B8*			7.84	†		02/10/36			804				828,292
		Series 2003-CB1, Class B8*			9.84	†		06/10/35			971				1,014,948
		Series 2004-B, Class B9*			11.30	†		02/10/36			1,232				1,281,148
		Series 2004-A, Class B10*			14.60	†		02/10/36			492				511,433
															4,647,946
	Structured Asset Mortgage Investments, Inc.
		Series 2002-AR1, Class B4			4.69	†		03/25/32			823				803,060
	Washington Mutual Mortgage Securities Corp.
		Series 2005-AR2, Class B10(a)			4.18	†		01/25/45			1,793				1,439,729
		Series 2002-AR12, Class B4			4.69	†		10/25/32			1,086				1,052,930
		Series 2002-AR12, Class B5			4.69	†		10/25/32			815				773,648
		Series 2002-AR12, Class B6			4.69	†		10/25/32			1,359				1,005,488
		Series 2002-AR10, Class B4*			4.96	†		10/25/32			1,259				1,226,618
		Series 2002-AR10, Class B5*			4.96	†		10/25/32			944				894,196
		Series 2002-AR10, Class B6*			4.96	†		10/25/32			1,575				1,165,803
		Series 2002-AR11, Class B5			5.13	†		10/25/32			736				714,143

See notes to financial statements.

8

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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.

Portfolio of Investments – (Unaudited)

May 31, 2005

Principal

Interest

Amount

Value

Rate

Maturity

(000s)

(Note 2)

NON-AGENCY RESIDENTIAL MORTGAGE-BACKED SECURITIES (continued)

Series 2002-AR11, Class B6

5.13

%†

10/25/32

$

1,227

$

876,052

9,148,607

Wells Fargo Mortgage Backed Securities Trust

Series 2002, Class B5

6.00

06/25/32

362

336,679

Total Subordinated Collateralized Mortgage Obligations

(Cost – $34,799,832)

37,230,931

Total Non-Agency Residential Mortgage Backed Securities

(Cost – $34,799,832)

37,230,931

Total Investments – 147.2%

(Cost – $213,117,316)

216,353,025

Liabilities in Excess of Other Assets – (47.2)%

(69,387,219

)

NET ASSETS – 100.0%

$

146,965,806

@		—		Portion or entire principal amount delivered as collateral for reverse repurchase agreements (Note 5).
†		—		Variable Rate Security: Interest rate is the rate in effect May 31, 2005.
*		—		Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may only be resold in transactions exempt from registration, normally to qualified institutional buyers.
#		—		Portion or entire principal amount is held as collateral for open futures contracts (Note 7).
(a)		—		Security is a “step up” bond where coupon increases or steps up at a predetermined date. At that date these coupons increase to LIBOR plus a predetermined margin
(b)		—		Security is a “step up” bond where coupon increases or steps up at a predetermined date. Rates shown are current coupon and next coupon rate when security steps up.

See notes to financial statements.

9

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Assets:
	Investments in securities, at market (cost $213,117,316) (Note 2)			$	216,353,025
	Cash				558,319
	Interest receivable				1,038,060
	Principal paydowns receivable				633,746
	Receivable from transfer agent				879
	Prepaid expenses and other assets				60,401
		Total assets			218,644,430
Liabilities:
	Reverse repurchase agreements (Note 5)				69,517,000
	Interest payable for reverse repurchase agreements (Note 5)				69,756
	Payable for investments purchased				1,721,730
	Unrealized depreciation on swap contracts (Note 7)				222,714
	Investment advisory fee payable (Note 3)				81,170
	Administration fee payable (Note 3)				28,981
	Directors’ fees payable				12,466
	Accrued expenses and other liabilities				24,807
		Total liabilities			71,678,624
Net Assets (equivalent to $14.49 per share based on 10,144,002 shares issued and outstanding)				$	146,965,806
Composition of Net Assets:
	Capital stock, at par value ($.01) (Note 6)			$	101,440
	Additional paid-in capital (Note 6)				144,148,737
	Accumulated undistributed net investment income				1,135,914
	Accumulated net realized loss				(1,433,280	)
	Net unrealized appreciation				3,012,995
	Net assets applicable to capital stock outstanding			$	146,965,806

See notes to financial statements.

10

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Investment Income (Note 2):
	Interest				$	7,732,177
Expenses:
	Investment advisory fee (Note 3)					477,201
	Administration fee (Note 3)					150,837
	Insurance					68,259
	Custodian					38,480
	Accounting and tax services					49,863
	Reports to shareholders					39,514
	Transfer agency					14,050
	Directors’ fees					34,904
	Legal					13,368
	Registration fees					8,381
	Miscellaneous					5,985
		Total operating expenses				900,842
			Interest expense on reverse repurchase agreements (Note 5)			891,352
		Total expenses				1,792,194
	Net investment income					5,939,983
Realized and Unrealized Gain (Loss) on Investments (Notes 2 and 7):
Net realized gain (loss) on:
	Investment transactions					508,811
	Futures transactions					(199,462	)
	Swap contracts					88,813
Net realized gain (loss) on investment transactions, futures transactions and swap contracts						398,162
Net change in unrealized appreciation/ depreciation on:
	Investments					(177,665	)
	Futures					323
	Swap contracts					(287,167	)
Net change in unrealized appreciation/ depreciation on investments, futures and swap contracts						(464,509	)
Net realized and unrealized loss on investments, futures and swap contracts						(66,347	)
Net increase in net assets resulting from operations					$	5,873,636

See notes to financial statements.

11

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				For the Six Months
				Ended				For the Year
				May 31, 2005				Ended
				(Unaudited)				November 30, 2004
Increase (Decrease) in Net Assets Resulting from Operations:
	Net investment income			$	5,939,983			$	12,144,805
	Net realized gain on investment transactions, futures transactions and swap contracts				398,162				2,397,402
	Net change in unrealized appreciation/ depreciation on investments, futures and swap contracts				(464,509	)			46,772
	Net increase in net assets resulting from operations				5,873,636				14,588,979
Dividends to Shareholders (Note 2):
	Net investment income				(6,572,854	)			(13,144,369	)
Capital Stock Transactions (Note 6):
	Net asset value of shares issued through dividend reinvestment (1,366 and 1,416 shares, respectively)				19,808				20,761
	Net increase from capital stock transactions				19,808				20,761
		Total increase (decrease) in net assets			(679,410	)			1,465,371
Net Assets:
	Beginning of period				147,645,216				146,179,845
	End of period (including undistributed net investment income of $1,135,914 and $1,107,938, respectively)			$	146,965,806			$	147,645,216

See notes to financial statements.

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Increase (Decrease) in Cash:
Cash flows provided by (used for) operating activities:
	Net increase in net assets resulting from operations			$	5,873,636
	Adjustments to reconcile net increase in net assets from operations to net cash used for operating activities:
		Purchases of long-term portfolio investments			(61,275,460	)
		Proceeds from disposition of long-term portfolio investments, principal paydowns, and securities sold short			64,214,200
		Purchases of short-term portfolio investments, net			1,500,000
		Increase in interest receivable			(37,746	)
		Decrease in receivable for investments sold			1,720,460
		Increase in receivable due from transfer agent			(879	)
		Increase in prepaid expenses and other assets			(46,484	)
		Decrease in variation margin payable			(100,972	)
		Increase in interest payable for reverse repurchase agreements			27,801
		Decrease in payable for investments purchased			(952,444	)
		Increase in investment advisory fee payable			3,159
		Increase in administration fee payable			317
		Decrease in accrued expenses and other liabilities			(105,997	)
		Net accretion on investments			(1,051,973	)
		Unrealized appreciation on investments			464,509
		Net realized gain on investment transactions			(508,811	)
	Net cash provided by operating activities				9,723,316
Cash flows provided by (used for) financing activities:
	Net cash provided by reverse repurchase agreements				(2,984,750	)
	Dividends paid to shareholders, net of reinvestments				(6,553,925	)
	Net cash provided used for financing activities				(9,538,675	)
Net increase in cash					184,641
Cash at beginning of period					373,678
Cash at end of period				$	558,319
Interest payments for the six months ended May 31, 2005, totaled $863,551.
Noncash financing activities not included herein consist of reinvestment of dividends of $19,808.

See notes to financial statements.

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			For the
			Six Months				For the Year				For the Year				For the Period
			Ended				Ended				Ended				Ended
			May 31, 2005				November 30,				November 30,				November 30,
			(Unaudited)				2004				2003				2002@
Per Share Operating Performance:
Net asset value, beginning of period			$	14.56			$	14.41			$	14.10			$	14.25	*
Net investment income				0.59				1.20				1.22				0.37
Net realized and unrealized gain (loss) on investments, short sales, futures transactions and swap contracts				(0.01	)			0.25				0.39				(0.17	)
Net increase in net asset value resulting from operations				0.58				1.45				1.61				0.20
Dividends from net investment income				(0.65	)			(1.30	)			(1.30	)			(0.32	)
Offering costs charged to additional paid-in-capital				—				—				—				(0.03	)
Net asset value, end of period			$	14.49			$	14.56			$	14.41			$	14.10
Market price, end of period			$	14.7400			$	14.6100			$	14.6700			$	13.6800
Total Investment Return+				5.54%	(1)			9.10%				17.55%				(6.66)%	(1)
Ratios to Average Net Assets/ Supplementary Data:
Net assets, end of period (000’s)			$	146,966			$	147,645			$	146,180			$	142,921
Operating expenses				1.23%	(2)			1.25%				1.28%				1.23%	(2)
Interest expense				1.21%	(2)			0.58%				0.51%				0.99%	(2)
	Total expenses			2.44%	(2)			1.83%				1.79%				2.22%	(2)
Net expenses				2.44%	(2)			1.83%				1.79%				2.19%	(2)
Net investment income				8.09%	(2)			8.23%				8.54%				7.48%	(2)
Portfolio turnover rate				28%	(1)			65%				78%				70%	(1)

+	Total investment return is calculated assuming a purchase of common stock at the current market price on the first day and a sale at the current market price on the last day of the period reported. For the period ended November 30, 2002, total investment return is based on a beginning period price of $15.00 (initial offering price). Total investment return for subsequent periods is computed based upon the New York Stock Exchange market price of the Fund’s shares. Dividends and distributions, if any, are assumed for purposes of this calculation, to be reinvested at the prices obtained under the Fund’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions and is not annualized.
(1)	Not Annualized
(2)	Annualized
@	Commenced operations on July 26, 2002
*	Initial public offering of $15.00 per share less underwriting discount of $0.75 per share.

See notes to financial statements.

14

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The Hyperion Strategic Mortgage Income Fund, Inc. (the “Fund”), which was incorporated under the laws of the State of Maryland on May 17, 2002, is registered under the Investment Company Act of 1940 (the “1940 Act”) as a diversified, closed-end management investment company. The Fund commenced operations on July 26, 2002. Prior to July 26, 2002, the Fund had no operations other than the sale of 7,018 shares for $100,000 to Hyperion Capital Management, Inc. (the “Advisor”).

The Fund’s investment objective is to provide a high level of current income by investing primarily in mortgage-backed securities. No assurance can be given that the Fund’s investment objective will be achieved.

2.     Significant Accounting Policies

The preparation of 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Valuation of Investments: Where market quotations are readily available, securities held by the Fund are valued based upon the current bid price, except preferred stocks, which are valued based upon the closing price. Securities may be valued by independent pricing services that have been approved by the Board of Directors. The prices provided by a pricing service take into account broker dealer market price quotations for institutional size trading in similar groups of securities, security quality, maturity, coupon and other security characteristics as well as any developments related to the specific securities. The Fund values mortgage-backed securities (“MBS”) and other debt securities for which market quotations are not readily available (approximately 27% of the investments in securities held by the Fund at May 31, 2005) at their fair value as determined in good faith, utilizing procedures approved by the Board of Directors of the Fund, on the basis of information provided by dealers in such securities. Some of the general factors which may be considered in determining fair value include the fundamental analytic data relating to the investment and an evaluation of the forces which influence the market in which these securities are purchased and sold. Determination of fair value involves subjective judgment, as the actual market value of a particular security can be established only by negotiations between the parties in a sales transaction. Debt securities having a remaining maturity of sixty days or less when purchased and debt securities originally purchased with maturities in excess of sixty days but which currently have maturities of sixty days or less are valued at amortized cost.

The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry or region. The values of MBS can be significantly affected by changes in interest rates or in the financial condition of an issuer or market.

Options Written or Purchased: The Fund may write or purchase options as a method of hedging potential declines in similar underlying securities. When the Fund writes or purchases an option, an amount equal to the premium received or paid by the Fund is recorded as a liability or an asset and is subsequently adjusted to the current market value of the option written or purchased. Premiums received or paid from writing or purchasing options which expire unexercised are treated by the Fund on the expiration date as realized gains or losses. The difference between the premium and the amount paid or received on effecting a closing purchase or sale transaction, including brokerage commissions, also is treated as a realized gain or loss. If an option is exercised, the premium paid or received is added to the proceeds from the sale or cost of the purchase in determining whether the Fund has realized a gain or a loss on the investment transaction.

The Fund, 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 security underlying the written option.

The Fund purchases or writes options to hedge against adverse market movements or fluctuations in value caused by changes in interest rates. The Fund bears the risk in purchasing an option, to the extent of the premium paid, that it will expire without being exercised. If this occurs, the option expires worthless and the premium paid for the option is recognized as a realized loss. The risk associated with writing call options is that the Fund may forego the opportunity for a profit if the market value of the underlying position increases and the option is exercised. The Fund will only write call options on positions held in its portfolio. The risk in writing a put option is that the Fund may incur a loss if the market value of the

15

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underlying position decreases and the option is exercised. In addition, the Fund bears the risk of not being able to enter into a closing transaction for written options as a result of an illiquid market.

Short Sales: The Fund may make short sales of securities as a method of hedging potential declines in similar securities owned. The Fund may have to pay a fee to borrow the particular securities and may be obligated to pay to the lender an amount equal to any payments received on such borrowed securities. A gain, limited to the amount at which the Fund sold the security short, or a loss, unlimited as to dollar amount, will be realized upon the termination of a short sale if the market price is less or greater than the proceeds originally received.

Financial Futures Contracts: A futures contract is an agreement between two parties to buy and sell a financial instrument for a set price on a future date. Initial margin deposits are made upon entering into futures contracts and can be either cash or securities. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by “marking-to-market” on a daily basis to reflect the market value of the contract at the end of each day’s trading. Variation margin payments are made or received, depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund’s basis in the contract.

The Fund invests in financial futures contracts to hedge against fluctuations in the value of portfolio securities caused by changes in prevailing market interest rates. Should interest rates move unexpectedly, the Fund may not achieve the anticipated benefits of the financial futures contracts and may realize a loss. 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. The Fund is at risk that it may not be able to close out a transaction because of an illiquid market.

Swap agreements: The Fund may enter into interest rate swap agreements to manage its exposure to interest rates. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. The Fund will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Swaps are marked to market based upon quotations from market makers and the change, if any, along with an accrual for periodic payments due or owed is recorded as unrealized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of realized gain/loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or that there may be unfavorable changes in the fluctuation of interest rates. See Note 7 for a summary of all open swap agreements as of May 31, 2005.

When-Issued Purchases and Forward Commitments: The Fund may purchase securities on a “when-issued” basis and may purchase or sell securities on a “forward commitment” basis in order to hedge against anticipated changes in interest rates and prices and secure a favorable rate of return. When such transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date, which can be a month or more after the date of the transaction. At the time the Fund makes the commitment to purchase securities on a when-issued or forward commitment basis it will record the transaction and thereafter reflect the value of such securities in determining its net asset value. At the time the Fund enters into a transaction on a when-issued or forward commitment basis, the Advisor will identify collateral consisting of cash or liquid securities equal to the value of the when-issued or forward commitment securities and will monitor the adequacy of such collateral on a daily basis. On the delivery date, the Fund will meet its obligations from securities that are then maturing or sales of the securities identified as collateral by the Advisor and/or from then available cash flow. When-issued securities and forward commitments may be sold prior to the settlement date. If the Fund disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it can incur a gain or loss due to market fluctuation. There is always a risk that the securities may not be delivered and that the Fund may incur a loss. Settlements in the ordinary course are not treated by the Fund as when-issued or forward commitment transactions and, accordingly, are not subject to the foregoing limitations even though some of the risks described above may be present in such transactions.

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Securities Transactions and Investment Income: Securities transactions are recorded on the trade date. Realized gains and losses from securities transactions are calculated on the identified cost basis. Interest income is recorded on the accrual basis. Discounts and premiums on securities are accreted and amortized, respectively, using the effective yield to maturity method.

Taxes: It is the Fund’s intention to continue to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income or excise tax provision is required.

Dividends and Distributions: The Fund declares and pays dividends monthly from net investment income. Distributions of realized capital gains in excess of capital loss carryforwards are distributed at least annually. Dividends and distributions are recorded on the ex-dividend date. Dividends from net investment income and distributions from realized gains from investment transactions have been determined in accordance with Federal income tax regulations and may differ from net investment income and realized gains recorded by the Fund for financial reporting purposes. These differences, which could be temporary or permanent in nature, may result in reclassification of distributions; however, net investment income, net realized gains and net assets are not affected.

Cash Flow Information: The Fund invests in securities and distributes dividends and distributions which are paid in cash or are reinvested at the discretion of shareholders. These activities are reported in the Statement of Changes in Net Assets. Additional information on cash receipts and cash payments is presented in the Statement of Cash Flows. Cash, as used in the Statement of Cash Flows, is the amount reported as “Cash” in the Statement of Assets and Liabilities, and does not include short-term investments.

Accounting practices that do not affect reporting activities on a cash basis include carrying investments at value and accreting discounts and amortizing premiums on debt obligations.

Repurchase Agreements: The Fund, through its custodian, receives delivery of the underlying collateral, the market value of which at the time of purchase is required to be in an amount at least equal to the resale price, including accrued interest. The Advisor is responsible for determining that the value of these underlying securities is sufficient at all times. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings commence with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.

3.     Investment Advisory Agreements and Affiliated Transactions

Pursuant to a transaction whereby Brascan Financial (U.S.) Corporation purchased all stock ownership of the holding company indirectly owning the Advisor as described in the proxy statement to stockholders dated March 18, 2005 (the “Transaction”) the Fund entered into a new Investment Advisory Agreement (the “New Investment Advisory Agreement”) with the Advisor on April 28, 2005. The Advisor is responsible for the management of the Fund’s portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee at an annual rate of 0.65% of the Fund’s average weekly net assets. Previously the Advisor advised the Fund pursuant to an Investment Advisory Agreement dated June 18, 2002. During the six months ended May 31, 2005, the Advisor earned $477,201 in investment advisory fees.

Pursuant to the Transaction, the Advisor entered into a new Sub-Advisory Agreement the “New Investment Sub-Advisory Agreement”) with Hyperion/GMAC Capital Advisors, LLC (“Hyperion/GMAC” or the “Sub-Advisor”) on April 28, 2005. Hyperion/GMAC is to assist in managing the Fund’s investments in CMBS and to provide such investment research and advice regarding CMBS as may be necessary for the operation of the Fund. The monthly fee paid to Hyperion/GMAC by the Advisor is equal to a percentage of the portion of the Fund’s average weekly net assets that are invested in CMBS. The fee is determined by the credit rating of the CMBS at the time of purchase, and ranges from 1.00% for unrated CMBS to 0.13% for AAA/Aaa rated CMBS. Previously, Hyperion/GMAC sub-advised the Fund pursuant to an Investment Sub-Advisory Agreement dated December 9, 2008.

The Fund has entered into an Administration Agreement with Hyperion Capital Management, Inc. (the “Administrator”). The Administrator entered into a sub-administration agreement with State Street Bank and Trust Company (the “Sub-Administrator”). The Administrator and Sub-Administrator perform administrative services necessary for the operation of

17

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the Fund, including maintaining certain books and records of the Fund and preparing reports and other documents required by federal, state, and other applicable laws and regulations, and providing the Fund with administrative office facilities. For these services, the Fund pays to the Administrator a monthly fee at an annual rate of 0.20% of the Fund’s average weekly net assets. During the six months ended May 31, 2005, the Administrator earned $150,837 in administration fees. The Administrator is responsible for any fees due the Sub-Administrator.

Certain officers and/or directors of the Fund are officers and/or directors of the Advisor and /or Administrator.

4.     Purchases and Sales of Investments

Purchases and sales of investments, excluding short-term securities, U.S. Government securities and reverse repurchase agreements, for the six months ended May 31, 2005, were $13,894,544 and $23,869,434, respectively. Purchases and sales of U.S. Government securities, for the six months ended May 31, 2005, were $47,380,916 and $40,144,907, respectively. For purposes of this footnote, U.S. Government securities may include securities issued by the U.S. Treasury, Federal Home Loan Mortgage Corporation, and the Federal National Mortgage Association.

5.     Borrowings

The Fund may enter into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them at a mutually agreed upon date and price. Under the 1940 Act, reverse repurchase agreements will be regarded as a form of borrowing by the Fund unless, at the time it enters into a reverse repurchase agreement, it establishes and maintains a segregated account with its custodian containing securities from its portfolio having a value not less than the repurchase price (including accrued interest). The Fund has established and maintained such an account for each of its reverse repurchase agreements.

Reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Fund’s obligation to repurchase the securities, and the Fund’s use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision.

18

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At May 31, 2005, the Fund had the following reverse repurchase agreements outstanding:

							Maturity
Face Value				Description			Amount
$	2,102,000			CS First Boston 3.08%, dated 05/27/05, maturity date 06/06/05			$	2,103,798
	6,954,000			Goldman Sachs 3.09%, dated 05/23/05, maturity date 06/20/05				6,970,713
	12,087,000			Goldman Sachs 3.09%, dated 05/23/05, maturity date 06/23/05				12,119,161
	4,446,000			Goldman Sachs 3.07%, dated 05/31/05, maturity date 06/21/05				4,453,962
	10,690,000			Lehman Brothers 3.09%, dated 05/19/05, maturity date 06/23/05				10,722,115
	6,500,000			Lehman Brothers 2.95%, dated 05/26/05, maturity date 06/02/05				6,503,728
	5,692,000			Merrill Lynch 3.08%, dated 05/12/05, maturity date 06/23/05				5,712,453
	4,050,000			Morgan Stanley 3.10%, dated 05/06/05, maturity date 06/13/05				4,063,253
	3,090,000			Morgan Stanley 3.10%, dated 05/17/05, maturity date 06/16/05				3,097,983
	5,406,000			Wachovia Capital Markets 3.09%, dated 05/12/05, maturity date 06/08/05				5,418,528
	8,500,000			Wachovia Capital Markets 3.09%, dated 05/23/05, maturity date 06/21/05				8,521,158
$	69,517,000
					Maturity Amount, Including Interest Payable		$	69,686,852
					Market Value of Assets Sold Under Agreements		$	71,772,368
					Weighted Average Interest Rate			3.08	%

The average daily balance of reverse repurchase agreements outstanding during the six months ended May 31, 2005, was approximately $69,026,444 at a weighted average interest rate of 2.55%. The maximum amount of reverse repurchase agreements outstanding at any time during the period was $73,979,250 as of December 3, 2004, which was 33.16% of total assets.

6.     Capital Stock

There are 50 million shares of $0.01 par value common stock authorized. Of the 10,144,002 shares outstanding at May 31, 2005, the Advisor owned 7,018 shares.

In connection with the initial public offering of the Fund’s Shares, the Advisor made an undertaking to pay any offering costs in excess of $0.03 per common share. The Advisor has advised the Fund that such excess amounted to $482,964.

7.     Financial Instruments

The Fund 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, futures contracts and swap agreements 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 Fund 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. During the period, the Fund had segregated sufficient cash and/or securities to cover any commitments under these contracts.

There was no written option activity for the six months ended May 31, 2005.

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As of May 31, 2005, the following swap agreements were outstanding:

										Net Unrealized
				Expiration						Appreciation/
Notional Amount				Date				Description		(Depreciation)
$	10,000,000				1/23/06			Agreement with Goldman Sachs Capital Markets, LP, dated 01/21/04 to pay semi-annually the notional amount multiplied by 2.005% and to receive quarterly the notional amount multiplied by 3 month USD-LIBOR-BBA.		$	67,077
	11,000,000				12/15/14			Agreement with Morgan Stanley Capital Services, Inc., dated 12/13/04 to pay semi-annually the notional amount multiplied by 4.555% and to receive quarterly the notional amount multiplied by 3 month USD-LIBOR-BBA.			(289,791	)
										$	(222,714	)

8.     Federal Income Tax Information

The below information is based upon financial data and book/tax differences as of May 31, 2005. As a result, the amounts provided may change based upon year-end information. Income and capital gain distributions are determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principles.

At May 31, 2005, the tax character of the $6,572,854 of distributions paid was entirely from ordinary income. During the year ended November 30, 2004, the tax character of the $13,144,369 of distributions paid was also entirely from ordinary income.

At May 31, 2005, the components of net assets (excluding paid-in-capital) on a tax basis were as follows:

Undistributed Tax ordinary income		$	938,364
Accumulated capital loss			(1,433,280	)
Tax basis unrealized appreciation/(depreciation)		$	3,210,545
Total		$	2,715,629

The differences between book and tax basis unrealized appreciation/(depreciation) is primarily attributable to the differing treatment of swap interest income/(expense) for tax purposes.

Federal Income Tax Basis: The federal income tax basis of the Fund’s investments at May 31, 2005 was $213,117,316. Net unrealized appreciation was $3,235,709 (gross unrealized appreciation — $5,781,967; gross unrealized depreciation — $2,546,258). At May 31, 2005, the Fund had a capital loss carryforward of $1,433,280, of which $1,070,268 expires on November 30, 2011 and $363,012 expires on November 30, 2013, available to offset any future gains, to the extent provided by regulations.

Capital Account Reclassification: At May 31, 2005, the Fund’s undistributed net investment income was increased by $660,847 with an offsetting decrease in accumulated net realized loss. These adjustments were primarily the result of current period paydown reclassifications and swap interest income (expense) reclassifications.

9.     Subsequent Events

Dividend: The Fund’s Board of Directors declared the following regular monthly dividends:

Dividend				Record				Payable
Per Share				Date				Date
$	0.1080				06/21/05				06/30/05
$	0.0900				07/19/05				07/28/05

10.     Contractual Obligations

The Fund enters into contracts that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

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PROXY RESULTS (Unaudited)

During the six months ended May 31, 2005, The Hyperion Strategic Mortgage Fund, Inc. shareholders voted on the following proposals at a shareholders’ meeting on April 19, 2005. The description of each proposal and number of shares voted are as follows:

Shares Voted

Shares Voted

Shares Voted

For

Against

Abstain

1. To elect to the Fund’s Board of Directors

Clifford E. Lai:

9,776,394

0

101,224

Shares Voted

Shares Voted

Shares Voted

for

Against

Abstain

2. To elect to the Fund’s Board of Directors

Leo M. Walsh, Jr:

9,787,719

0

89,899

Shares Voted

Shares Voted

Shares Voted

For

Against

Abstain

3. Approval of New Investment Advisory Agreement:

9,672,842

86,249

118,527

Shares Voted

Shares Voted

Shares Voted

For

Against

Abstain

4. Approval of New Investment Sub-Advisory Agreement:

9,656,585

98,669

122,364

Shares Voted

Shares Voted

Shares Voted

for

Against

Abstain

5. To select PricewaterhouseCoopers LLP as the independent auditors:

9,721,791

53,248

102,579

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On February 23, 2005, the Board of Directors held a meeting called for the purpose of considering the New Investment Advisory Agreement and, after careful review, determined that approving the New Investment Advisory Agreement was in the best interests of the stockholders. At the meeting, senior officers of the Advisor discussed the Transaction and discussed the need to approve the New Investment Advisory Agreement due to the change of control of the Advisor. The Board of Directors considered a wide range of information, including information of the type they regularly consider when determining to continue the Fund’s advisory agreement. In determining that the New Investment Advisory Agreement was in the best interests of the stockholders, the Board of Directors considered all factors deemed to be relevant to the Fund, including, but not limited to:

•	the expectation that the operation of the Advisor and the Fund’s day-to-day management, including the Fund’s portfolio manager, will remain unchanged for the foreseeable future;
•	the Advisor and its personnel (including particularly those personnel with responsibilities for providing services to the Fund), resources and investment process will remain unchanged;
•	the Advisor will also have access to the resources and personnel of Brascan;
•	the financial viability of the Advisor will remain unchanged;
•	the terms of the New Investment Advisory Agreement, including the fee, will not change;
•	the nature, extent and quality of the services that the Advisor has been providing to the Fund will remain unchanged;
•	the investment performance of the Fund and of similar funds managed by other advisers over various periods;
•	the Advisory fee rate payable to the Advisor by the Fund and by other client accounts managed by the Advisor, and payable by similar funds managed by other advisers;
•	the total expense ratio of the Fund and of similar funds managed by other advisers;
•	compensation payable by the Fund to affiliates of the Advisor for other services; and
•	the profitability of the Advisor and its affiliates and the extent to which economies of scale would be realized as the Fund grows.

The Board considered the level and depth of knowledge of the Advisor. In evaluating the quality of services provided by the Advisor, the Board took into account its familiarity with the Advisor’s management through board meetings, conversations and reports.

The Board compared the advisory fees and total expense ratio of the Fund with various comparative data that it had been provided with in approving the Fund’s previous Investment Advisory Agreement. The Board considered the Fund’s recent performance results and noted that the Board reviews on a quarterly basis information about the Fund’s performance results, portfolio composition and investment strategies. The Board noted that the Fund’s advisory fee was equal to the median of advisory fees paid by its peer group of funds and that the Fund’s total advisory and administrative fees were only one basis point higher than the median of the Fund’s peer group. The Board also considered that the Fund outperformed its peer group for the year ended October 31, 2004. The Board also took into consideration the financial condition and profitability of the Advisor and Brascan and any indirect benefits derived by the Advisor from the Advisor’s relationship with the Fund.

In considering the approval of the New Investment Advisory Agreement, the Board, including the Disinterested Directors, did not identify any single factor as controlling. Based on the Board’s evaluation of all factors that it deemed to be relevant, the Board, including the Disinterested Directors, concluded that the Advisor has demonstrated that it possesses the capability and resources necessary to perform the duties required of it under the New Investment Advisory Agreement; performance of the Fund is reasonable in relation to the performance of funds with similar investment objectives; and the proposed Advisory fee is fair and reasonable, given the nature, extent and quality of the services to be rendered by the Advisor. The Board further determined that the change in control of the Advisor did not present any material change in the type and quality of service it would provide to the Fund.

The directors also considered the provisions of Section 15(f) of the 1940 Act, which provides, in relevant part, that affiliated persons may receive compensation if (1) for a period of three years after the Transaction at least 75 percent of the directors of the Fund are independent of the Advisor and (2) an “unfair burden” is not imposed on the Fund as a result of the Transaction. The Advisor has agreed not to seek any increase in the advisory fees for a period of at least two years and has agreed to pay incremental costs associated with the 2005 Annual Meeting of Stockholders due to the Transaction. In addition, it is expected that at least 75 percent of the Fund’s directors will be Disinterested Directors.

After carefully reviewing all of these factors, the Board, including the Disinterested Directors, unanimously approved the New Investment Advisory Agreement and recommended that the Fund’s stockholders vote to approve the New Investment Advisory Agreement.

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On February 23, 2005, the Board of Directors held a meeting called for the purpose of considering the New Investment Sub-Advisory Agreement and, after careful review, determined that approving the New Investment Sub-Advisory Agreement was in the best interests of the stockholders. At the meeting, senior officers of the Advisor discussed the Transaction and discussed the need to approve the New Investment Sub-Advisory Agreement due to the change of control of the Sub-Advisor. The Board of Directors considered a wide range of information, including information of the type they regularly consider when determining to continue the Fund’s sub-advisory agreement. In determining that the New Investment Sub-Advisory Agreement was in the best interests of the stockholders, the Board of Directors considered all factors deemed to be relevant to the Fund, including, but not limited to:

•	the expectation that the operation of the Sub-Advisor and the day-to-day management of the Fund’s portfolio that is invested in CMBS will remain unchanged for the foreseeable future;
•	the Sub-Advisor and its personnel (including particularly those personnel with responsibilities for providing services to the Fund), research and credit analysis resources and investment process will remain unchanged;
•	the Sub-Advisor will also have access to the resources and personnel of Brascan Corporation;
•	the owners and financial viability of the Sub-Advisor will remain unchanged;
•	the terms of the New Investment Sub-Advisory Agreement will be not change;
•	the fees under the New Investment Sub-Advisory Agreement will stay the same and the Advisor will continue to pay the fees to the Sub-Advisor;
•	the nature, extent and quality of the services that the Sub-Advisor has been providing to the Fund will remain unchanged;
•	the profitability of the Sub-Advisor and the extent to which economies of scale would be realized as the Fund grows will remain unchanged; and
•	the investment performance and level of fees of the Fund compared with similar funds managed by other advisors over various periods; (CMBS portion of Fund’s portfolio).

The Board considered the level and depth of knowledge of the Sub-Advisor. In evaluating the quality of services provided by the Sub-Advisor, the Board took into account its familiarity with the Sub-Advisor’s management through board meetings, conversations and reports.

The Board compared the sub-advisory fees and total expense ratio of the Fund with various comparative data that it had been provided with in approving the Fund’s previous Investment Sub-Advisory Agreement. The Board considered the Fund’s recent performance results and noted that the Board reviews on a quarterly basis information about the Fund’s performance results, portfolio composition and investment strategies. The Board noted that the Fund’s advisory fee was equal to the median of advisory fees paid by its peer group of funds and that the Fund’s total advisory and administrative fees were only one basis point higher than the median of the Fund’s peer group. The Board also considered that the Fund outperformed its peer group for the year ended October 31, 2004. The Board also took into consideration the financial condition and profitability of the Sub-Advisor and Brascan and any indirect benefits derived by the Sub-Advisor from the Sub-Advisor’s relationship with the Fund.

In considering the approval of the New Investment Sub-Advisory Agreement, the Board, including the Disinterested Directors, did not identify any single factor as controlling. Based on the Board’s evaluation of all factors that it deemed to be relevant, the Board, including the Disinterested Directors, concluded that the Sub-Advisor has demonstrated that it possesses the capability and resources necessary to perform the duties required of it under the New Investment Sub-Advisory Agreement; performance of the Fund (CMBS portion) is reasonable in relation to the performance of funds with similar investment objectives; and the proposed Sub-Advisory fee to be paid by the Advisor is fair and reasonable, given the nature, extent and quality of the services to be rendered by the Sub-Advisor. The Board further determined that the change in control of the Sub-Advisor did not present any material change in the type and quality of service it would provide to the Fund.

After carefully reviewing all of these factors, the Board, including the Disinterested Directors, unanimously approved the New Investment Sub-Advisory Agreement and recommended that the Fund’s stockholders vote to approve the New Investment Sub-Advisory Agreement.

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		Position(s) Held with				Number of
		Fund and Term of				Portfolios in Fund
Name, Address		Office and Length of		Principal Occupation(s) During Past 5 Years		Complex Overseen
and Age		Time Served		and Other Directorships Held by Director		by Director
Disinterested Directors
Class II Director to serve until 2007 Annual Meeting of Stockholders:
Rodman L. Drake c/o One Liberty Plaza, 36th floor, New York, New York 10006-1404 Age 62 [02-02-43]		Chairman Elected December 9, 2003 Director since July 1989, Member of the Audit Committee, Chairman of Nominating and Compensation Committee Elected for Three Year Term		Chairman (since December 2003) and Director of several investment companies advised by the Advisor (1989-Present); Co-founder, Baringo Capital LLC (2002-Present); Director, Jackson Hewitt Tax Services Inc. (“JTX”) (2004- Present); Director, Animal Medical Center (2002-Present); Director, Hotelevision, Inc. (1999-2003); Director and/or Lead Director, Parsons Brinckerhoff, Inc. (1995-Present); Director, Absolute Quality Inc. (2000-Present); Trustee of Excelsior Funds (33) (1994- Present); President, Continuation Investments Group Inc. (1997-2001).			5
Class I Director to serve until 2006 Annual Meeting of Stockholders:
Robert F. Birch c/o One Liberty Plaza, 36th floor, New York, New York 10006-1404 Age 69 [03-12-36]		Director since December 1998, Member of the Audit Committee, Member of Nominating and Compensation Committee, Member of Executive Committee Elected for Three Year Term		Director of several investment companies advised by the Advisor or by its affiliates (1998- Present); Chairman and President, New America High Income Fund (1992-Present); Director, Brandywine Funds (3) (2001 to Present).			5
Interested Director Nominee Class III Director to serve until 2006 Annual Meeting of Stockholders:
Clifford E. Lai* c/o One Liberty Plaza, 36th floor, New York, New York 10006-1404 Age 52 [05-16-53]		Director since December 2003 Elected until 2005 Member of Executive Committee Elected for Three Year Term		President (1998-Present) and Chief Investment Officer (1993-2002) of Hyperion Capital Management, Inc. (the “Advisor”); Co- Chairman (2003-Present) and Board of Managers (1995-Present) of Hyperion-GMAC Capital Advisors, LLC (formerly Lend Lease Hyperion Capital, LLC); President and Director of several investment companies advised by the Advisor (1995-Present).			3

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Officers of the Trust

		Position(s)		Term of Office and		Principal Occupation(s)
Name, Address and Age		Held with Fund		Length of Time Served		During Past 5 Years
Clifford E. Lai* c/o One Liberty Plaza, 36th floor, New York, New York 10006-1404 Age 52 [05-16-53]		President		Elected Annually Since June 2002		Please see “Information Concerning Nominees/ Directors.”
John Dolan* c/o One Liberty Plaza, 36th floor, New York, New York 10006-1404 Age 51 [08-19-53]		Vice President		Elected Annually Since June 2002		Chief Investment Strategist (1998-Present) and Chief Investment Officer (2002-Present) of the Advisor.
Daniel S. Kim*+ c/o One Liberty Plaza, 36th floor, New York, New York 10006-1404 Age 37 [3-13-68]		Chief Comliance Officer (“CCO”) & Secretary		Elected Annually CCO September 2004 and Secretary Since January 2005		Director and CCO (September 2004-Present), and Secretary (since January 2005) of the Adviser; Secretary (since January 2005) and CCO (September 2004-Present) of several investment companies advised by the Advisor; Secretary (since January 2005) and CCO (September 2004-Present) Hyperion GMAC Capital Advisors, LLC; Assistant General Counsel and CCO (May 2001-August 2004) Oak Hill Capital Management; Assistant General Counsel (May 2001-August 2004) of Oak Hill Advisors, LP; Lawyer (January 2001-April 2001) Arkin, Kaplan & Cohen; Law student preparing for the New York State Bar (January 2000-January 2001).
Thomas F. Doodian* c/o One Liberty Plaza, 36th floor, New York, New York 10006-1404 Age 46 [05-22-59]		Treasurer		Elected Annually Since June 2002		Managing Director, Chief Operating Officer (1998-Present) and Director of Finance and Operations of the Advisor (1995-Present); Treasurer of several investment companies advised by the Advisor (1996-Present); Treasurer of Hyperion GMAC Capital Advisors, LLC (formerly, Lend Lease Hyperion Capital Advisors, LLC) (1996-Present)

*	Interested person as defined by the Investment Company Act of 1940 (the “1940 Act”) because of affiliations with Hyperion Capital Management, Inc., the Fund’s Advisor.

+	Joseph Tropeano served as the Fund’s secretary until January 2005.

The Fund’s Statement of Additional Information includes additional information about the directors and is available, without charge, upon request by calling 1-800-497-3746.

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DIVIDEND REINVESTMENT PLAN

A Dividend Reinvestment Plan (the “Plan”) is available to shareholders of the Fund pursuant to which they may elect to have all distributions of dividends and capital gains automatically reinvested by American Stock Transfer & Trust Company (the “Plan Agent”) in additional Fund shares. Shareholders who do not participate in the Plan will receive all distributions in cash paid by check mailed directly to the shareholder of record (or if the shares are held in street or other nominee name, then to the nominee) by the Fund’s Custodian, as Dividend Disbursing Agent.

The Plan Agent serves as agent for the shareholders in administering the Plan. After the Fund declares a dividend or determines to make a capital gain distribution, payable in cash, if (1) the market price is lower than net asset value, the participants in the Plan will receive the equivalent in Fund shares valued at the market price determined as of the time of purchase (generally, the payment date of the dividend or distribution); or if (2) the market price of the shares on the payment date of the dividend or distribution is equal to or exceeds their net asset value, participants will be issued Fund shares at the higher of net asset value or 95% of the market price. This discount reflects savings in underwriting and other costs that the Fund otherwise will be required to incur to raise additional capital. If net asset value exceeds the market price of the Fund shares on the payment date or the Fund declares a dividend or other distribution payable only in cash (i.e., if the Board of Directors precludes reinvestment in Fund shares for that purpose), the Plan Agent will, as agent for the participants, receive the cash payment and use it to buy Fund shares in the open market, on the New York Stock Exchange or elsewhere, for the participants’ accounts. If, before the Plan Agent has completed its purchases, the market price exceeds the net asset value of the Fund’s shares, the average per share purchase price paid by the Plan Agent may exceed the net asset value of the Fund’s shares, resulting in the acquisition of fewer shares than if the dividend or distribution had been paid in shares issued by the Fund. The Fund will not issue shares under the Plan below net asset value.

Participants in the Plan may withdraw from the Plan upon written notice to the Plan Agent. When a participant withdraws from the Plan or upon termination of the Plan by the Fund, certificates for whole shares credited to his or her account under the Plan will be issued and a cash payment will be made for any fraction of a share credited to such account.

There is no charge to participants for reinvesting dividends or capital gain distributions, except for certain brokerage commissions, as described below. The Plan Agent’s fees for handling the reinvestment of dividends and distributions are paid by the Fund. There are no brokerage commissions charged with respect to shares issued directly by the Fund. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent’s open market purchases in connection with the reinvestment of dividends and distributions.

The automatic reinvestment of dividends and distributions will not relieve participants of any federal income tax that may be payable on such dividends or distributions.

A brochure describing the Plan is available from the Plan Agent, by calling 1-212-936-5100.

If you wish to participate in the Plan and your shares are held in your name, you may simply complete and mail the enrollment form in the brochure. If your shares are held in the name of your brokerage firm, bank or other nominee, you should ask them whether or how you can participate in the Plan. Shareholders whose shares are held in the name of a brokerage firm, bank or other nominee and are participating in the Plan may not be able to continue participating in the Plan if they transfer their shares to a different brokerage firm, bank or other nominee, since such shareholders may participate only if permitted by the brokerage firm, bank or other nominee to which their shares are transferred.

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SUB-ADVISOR


HYPERION GMAC CAPITAL ADVISORS, LLC
One Liberty Plaza
165 Broadway, 36th Floor
New York, New York 10006-1404

CUSTODIAN AND FUND ACCOUNTING AGENT


STATE STREET BANK and TRUST COMPANY
225 Franklin Street
Boston, Massachusetts 02116

TRANSFER AGENT


AMERICAN STOCK TRANSFER & TRUST
COMPANY
Investor Relations Department
59 Maiden Lane
New York, NY 10038
For Shareholder Services:
(800) 937-5449

INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM


PRICEWATERHOUSECOOPERS LLP
300 Madison Avenue
New York, New York 10017

LEGAL COUNSEL


SULLIVAN & WORCESTER LLP
1666 K Street, Northwest
Washington, D.C. 20006

Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940 that periodically the Fund may purchase its shares in the open market at prevailing market prices.

Quarterly Portfolio Schedule: The Fund will file Form N-Q with the Securities and Exchange Commission for the first and third quarters of each fiscal year. The Fund’s Forms N-Q will be available on the Securities and Exchange Commission’s website at http://www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the Securities and Exchange Commission’s Public Reference Room in Washington, D.C. and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Once filed, the most recent Form N-Q will be available without charge, upon request, by calling 1-800-HYPERION or on the Fund’s website at http://www.hyperioncapital.com.

Proxy Voting Policies and Procedures

A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling 1-800-497-3746 and on the Securities and Exchange Commission’s website at http://www.sec.gov.

Proxy Voting Record

The Fund has filed with the Securities and Exchange Commission its proxy voting record for the 12-month period ending June 30 on Form N-PX. Once filed, the most recent Form N-PX will be available without charge, upon request, by calling 1-800-497-3746 or on the Securities and Exchange Commission’s website at http://www.sec.gov.

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	Rodman L. Drake* Chairman Robert F. Birch* Director Clifford E. Lai Director and President John Dolan Vice President Thomas F. Doodian Treasurer Daniel Kim** Secretary
	—————————
	* Audit Committee Members
	** Elected January 2005
	The financial information included herein is taken from records of the Fund without audit by the Fund’s independent auditors, who do not express an opinion thereon.
	This report is for shareholder information. This is not a prospectus intended for use in the purchase or sale of Fund shares.
	The Hyperion Strategic Mortgage
	Income Fund, Inc.
	One Liberty Plaza
	165 Broadway, 36th Floor
	New York, NY 10006-1404

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