NORTHEAST INVESTORS GROWTH FUND INC, N-30D, 1999-03-01

NORTHEAST INVESTORS GROWTH FUND INC
N-30D, 1999-03-01

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Northeast Investors Growth Fund
- --------------------------------------------------------------------------------

Dear Fellow Shareholders:

In the end, 1998 was one of our better years. As I write this letter, 1998
and the events that shaped its markets, seem like ancient history---so much are
we immersed in the day-to-day flow of events and resulting market volatility.

1998 was another record year for Northeast Investors Growth Fund as the
total return of 33.34% exceeded that of the S&P 500 Index (28.58%), and that
recorded for the Dow Jones Industrial Average (18.5%). Our record for the past
four years has been very satisfactory as well and is set forth below.

S&P 500 Northeast Investors Growth
------- --------------------------
1995 37.62% 36.46%
1996 22.96% 24.60%
1997 33.36% 37.28%
1998 28.58% 33.34%

In 1998, the size of the fund almost doubled, $109 million vs. $211 million
at year end. The number of shareholders increased by 2,809 to a new high of
6,580; the number of shares outstanding increased by 3,467,000 to 10,325,000,
and sales of the fund---new purchases of shares--- comfortably exceeded
redemptions. In addition, our expense ratio continued to decrease, and we hope
the continued growth in the asset base and a careful monitoring of the expenses
will see this ratio continue to decline.

On the investment side, our largest ten investments comprised just under
one-third of the assets. America Online, Inc. is our largest holding; our
original investment of $1,389,000 has grown to $9,600,000 at year-end.
Technology and technology-related investments represent about 21% of the fund's
portfolio; banking and financial services are about 27% of the holdings; drug
and health care investments account for about 16%. Going forward, we anticipate
adding to holdings in these areas as opportunities are found.

Looking back, the markets were particularly volatile in 1998. For example,
there were sixty-two trading days when the DJIA was either up or down at least
100 points. During the approximate 20% decline---from early July through
mid-October---we saw most of the gain in our market value eliminated, only to
have a complete market turnaround, beginning about mid-October, which ultimately
led to a strong close as reflected in our net asset value on December 31.

In many instances, we have taken advantage of the opportunities afforded by
this market volatility in making investment decisions and will continue trying
to do so in the future.

Going forward, we remain committed to investments in areas of growing
opportunities and with companies with deep roots and honorable managements. We
particularly favor investments in companies producing products that are known
and used in our everyday lives.

As in the past, I encourage shareholders to contact me with any questions
regarding the fund at any time. For those of you non-shareholders reading this
report for the first time, we hope you will join us in this endeavor as well.

Again, we are delighted with the results of the past year. In fact, we are
most pleased with the performance and direction of the fund since its inception
in 1980.

Ever sincerely,

/s/ William A. Oates, Jr.
William A. Oates, Jr.
President

January 23, 1999
<PAGE>

Northeast Investors Growth Fund
- --------------------------------------------------------------------------------

Portfolio Transactions (unaudited)

January 1, 1998-December 31, 1998
- ---------------------------------

Additions to Existing Holdings

<TABLE>
<CAPTION>
Additions Now Own
- --------------------------------------------------------------------------------
<S> <C> <C>
Abbott Laboratories 20,400 30,600
America Online, Inc. 49,400 60,000
American Express Company 19,700 28,800
American Home Products Corp. 17,400 29,200
BankBoston Corporation 66,000 126,000
Boston Scientific Corporation 17,100 34,000
Cabot Corporation 15,000 33,000
Chase Manhattan Corporation 17,300 23,800
Chevron Corporation 2,700 26,700
Chubb Corporation 44,200 59,200
Cisco Systems, Inc. 40,750 68,950
Coca-Cola Company 38,300 52,300
Eastman Kodak Company 6,800 14,300
Eli Lilly & Company 17,700 46,100
Fifth Third Bancorp 17,575 42,325
First Security Corporation 49,925 103,175
Fleet Financial Group, Inc. 43,200 65,600
Fort James Corporation 7,700 22,400
General Electric Company 25,100 64,100
General Motors Corporation 8,500 12,200
Glaxo Wellcome PLC-Spons ADR 8,000 19,900
Home Depot, Inc. 32,425 44,050
International Business Machines 4,600 16,400
Johnson & Johnson 9,200 26,200
Lucent Technologies, Inc. 10,700 30,400
Medtronic, Inc. 1,700 25,500
Mellon Bank Corporation 65,300 94,700
Merck & Company, Inc. 19,700 33,300
Microsoft Corporation 24,600 48,000
Monsanto Company 30,900 46,000
Morgan Stanley Dean Witter & Co. 31,200 43,410
National Bancorp of Alaska, Inc. 24,750 32,000
Pepsico, Inc. 10,000 40,000
Pfizer, Inc. 10,000 47,150
Pioneer Hi-Bred International, Inc. 53,500 63,500
Procter & Gamble Company 6,300 35,300
Saville Systems Ireland Spons ADR 4,600 19,200
State Street Corporation 16,700 45,200
St. Paul Companies, Inc. 30,100 37,900
Time Warner, Inc. 75,900 107,400
Triarc Companies 9,500 50,000
Warner Lambert Company 43,950 59,575
Washington Mutual, Inc. 146,450 164,050
Zions Bancorporation 67,100 107,100

Portfolio Transactions (unaudited)

January 1, 1998-December 31, 1998
- ---------------------------------

New Holdings
Now Own
- --------------------------------------------------------------------------------
Bristol Myers Squibb Company 29,900
CVS Corporation 41,800
Cabot Industrial Trust 68,900
Dell Computer Corporation 43,400
Donaldson, Lufkin & Jenrette, Inc. 37,600
EMC Corporation 33,600
Entremed Corporation 22,200
Exxon Corporation 18,700
McGraw-Hill Companies, Inc. 21,400
MCI Worldcom, Inc. 29,800
J P Morgan & Company 24,500
Ohio Casualty Corporation 31,400
Philip Morris Companies, Inc. 19,900
Polaris Industries, Inc. 24,700
Staples, Inc. 68,400
Tellabs, Inc. 17,500
Vodafone Group PLC-Spons ADR 6,800
Wal-Mart Stores, Inc. 48,000
Yahoo! Inc. 9,800

Eliminations/Reductions of Holdings

Sold Now Own
- --------------------------------------------------------------------------------
AT&T Corporation 23,100 0
Astra AB Spons ADR A 33,466 0
Baker Hughes, Inc. 10,900 0
Bell & Howell Company 17,500 0
Hewlett-Packard Company 4,000 15,900
Beneficial Corporation 13,400 0
Compaq Computer 8,000 0
Crescent Real Estate Equities Company 15,750 0
Diebold, Inc. 12,950 0
Dow Jones & Company, Inc. 16,900 0
First Data Corporation 18,700 0
General Re Corporation 11,100 0
Ionics, Inc. 11,700 0
Isis Pharmaceuticals, Inc. 20,000 0
Minnesota Mining & Manufacturing Co. 6,000 0
Mirage Resorts, Inc. 16,500 0
Motorola, Inc. 8,000 0
Quaker Oats Company 16,050 0
Riggs National Corporation 41,000 0
Schlumberger Ltd. 11,800 0
Sealed Air Corporation 10,900 0
Thermo Electron Corporation 12,000 0
V. F. Corporation 15,200 0
</TABLE>

- --------------------------------------------------------------------------------
Page 2

<PAGE>

Ten Largest Investment Holdings (unaudited)

December 31, 1998
- --------------------------------------------------------------------------------

Ten Largest Investment Holdings
<TABLE>
<CAPTION>
Market (Continued) Market
Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <S> <C> <C>
America Online, Inc. $1,389,106 $9,600,000 Mellon Bank Corporation 5,600,692 6,510,625
Zions Bancorporation 3,925,416 6,680,362 Cisco Systems, Inc. 2,844,095 6,399,422
Time Warner, Inc. 3,193,793 6,665,513 Washington Mutual, Inc. 5,971,041 6,264,659
Microsoft Corporation 2,049,954 6,657,000 Pfizer, Inc. 2,684,695 5,893,750
General Electric Company 4,073,183 6,542,206 Merck & Company 3,509,593 4,911,750
</TABLE>

Tax Information

For Federal Income Tax purposes, the following infor m ation is furnished
with respect to the distributions of the Fund during its calendar year ended
December 31, 1998.

June 10, 1998 December 16, 1998
Net Investment Income $0.00 Net Investment Income $0.050
Short-Term Capital Gains 0.00 Short-Term Capital Gains 0.005
Long-Term Capital Gains 0.05 Long-Term Capital Gains 0.490

Under the Internal Revenue Code, 100% of ordinary income distri butions
paid to shareholders may be taken into account as a dividend for purposes of the
deduction for dividends received by corporations (section 243, as amended).
Pursuant to section 852 of the Internal Revenue Code, the Fund hereby designates
$5,154,688 as capital gain for taxable year ended December 31, 1998.

Average Annual Total Return (unaudited)

One year ended December 31, 1998 ........... 33.34%
Five years ended December 31, 1998 ......... 25.48%
Ten years ended December 31, 1998 .......... 19.30%

Net Asset Value Per Share (unaudited)

January- April- July- October-
March June September December
------- ---- --------- ---------
1998 High $18.03 $19.25 $20.27 $20.51
Low $15.01 $17.80 $15.68 $14.97

- --------------------------------------------------------------------------------
January- April- July- October-
March June September December
------- ---- --------- ---------
1997 High $13.65 $14.87 $16.19 $16.69
Low $12.06 $12.14 $14.80 $14.89

<PAGE>

Northeast Investors Growth Fund
- --------------------------------------------------------------------------------

Performance Graph-Ten Years (1988-1998)

The following graph compares the cumulative total shareholder return on the
Northeast Investors Growth Fund shares over the ten preceding fiscal years to
the cumulative total share return on the Standard & Poor's 500 Index, assuming
an investment of $10,000 in both at their closing prices on December 31, 1988
and reinvest ment of dividends and capital gains. For management's discussion of
the Growth Fund's fiscal year 1998 performance, including strategies and market
conditions which influenced such performance, see the President's letter to
shareholders.

<TABLE>
<CAPTION>
1988 1989 1990 1991 1992
<S> <C> <C> <C> <C> <C>
Northeast Investors Growth Fund $10,000 $13,273 $13,475 $18,448 $18,314
Standard & Poor's 500 Index $10,000 $13,170 $12,756 $16,634 $17,899
</TABLE>

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Northeast Investors Growth Fund $18,760 $18,747 $25,583 $31,876 $43,759 $58,349
Standard & Poor's 500 Index $19,692 $19,948 $27,453 $33,756 $45,017 $57,882
</TABLE>

- --------------------------------------------------------------------------------
Page 4
<PAGE>

Northeast Investors Growth Fund
- --------------------------------------------------------------------------------

Schedule of Investments-
December 31, 1998

<TABLE>
<CAPTION>
Common Stocks- Market Percent of
Number of Value Net
Name of Issuer Shares (Note B) Assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Automobile & Truck
- --------------------------------------------------------------------------------
General Motors Corporation ............ 12,200 $ 858,575 0.4%

Banks
- --------------------------------------------------------------------------------
BankBoston Corporation* ............... 126,000 4,906,125
Chase Manhattan Corporation ........... 23,800 1,624,350
Fifth Third Bancorp ................... 42,325 3,018,302
First American Corporation ............ 26,400 1,171,500
First Security Corporation ........... 103,175 2,411,716
Fleet Financial Group, Inc. ........... 65,600 2,931,500
J P Morgan & Company .................. 24,500 2,597,000
Mellon Bank Corporation ............... 94,700 6,510,625
National Bancorp of Alaska, Inc. ...... 32,000 1,080,000
Republic Security Corporation ......... 191,456 2,321,404
Washington Mutual, Inc. ............... 164,050 6,264,659
Zions Bancorporation .................. 107,100 6,680,362
----------
41,517,543 19.7%
Biotechnology
- --------------------------------------------------------------------------------
Entremed, Inc.^ ....................... 22,200 466,200
Pioneer Hi-Bred International, Inc .... 63,500 1,682,750
----------
2,148,950 1.0%
Chemical
- --------------------------------------------------------------------------------
Cabot Corporation ..................... 33,000 921,937
Monsanto Company ...................... 46,000 2,162,000
----------
3,083,937 1.5%
Computer & Data Processing
- --------------------------------------------------------------------------------
Dell Computer Corporation^ ............ 43,400 3,176,337
EMC Corporation^ ...................... 33,600 2,856,000
Hewlett-Packard Company ............... 15,900 1,089,150
International Business Machines ....... 16,400 3,023,750
----------
10,145,237 4.8%
Computer Software & Services
- --------------------------------------------------------------------------------
America Online, Inc.^ ................. 60,000 9,600,000
Microsoft Corporation^* ............... 48,000 6,657,000
Parametric Technology Corporation^ .... 36,200 592,775
Saville Systems Ireland Spons ADR^ .... 19,200 364,800
Yahoo!, Inc^ ......................... 9,800 2,321,987
----------
19,536,562 9.3%
Cosmetics & Toiletries
- --------------------------------------------------------------------------------
Gillette Company* ..................... 52,200 2,495,813 1.2%

- --------------------------------------------------------------------------------
Page 5
<PAGE>

Northeast Investors Growth Fund
- --------------------------------------------------------------------------------

Common Stocks-continued
Market Percent of
Number of Value Net
Name of Issuer Shares (Note B) Assets
- --------------------------------------------------------------------------------
Diversified Operations
- --------------------------------------------------------------------------------
General Electric Company .............. 64,100 $ 6,542,206
Philip Morris Companies, Inc. ......... 19,900 1,069,625
Triarc Companies^ ..................... 50,000 800,000
-----------
8,411,831 4.0%
Drug Stores
- --------------------------------------------------------------------------------
CVS Corporation ....................... 41,800 2,299,000 1.1%

Electronics
- --------------------------------------------------------------------------------
Cisco Systems, Inc.^ .................. 68,950 6,399,422
Intel Corporation ..................... 37,400 4,434,238
Lucent Technologies, Inc. ............. 30,400 3,344,000
-----------
14,177,660 6.7%
Entertainment
- --------------------------------------------------------------------------------
Carnival Corporation .................. 29,800 1,430,400
Time Warner, Inc. ..................... 107,400 6,665,513
Walt Disney Company* .................. 155,000 4,611,250
-----------
12,707,163 6.0%
Financial Services
- --------------------------------------------------------------------------------
American Express Company .............. 28,800 2,944,800
Donaldson, Lufkin, & Jenrette, Inc .... 37,600 1,541,600
Eaton Vance Corporation ............... 123,400 2,575,975
H & R Block, Inc. ..................... 10,200 459,000
Morgan Stanley Dean Witter & Co. ...... 43,410 3,082,110
Paine Webber Group, Inc. .............. 34,500 1,332,562
State Street Corporation .............. 45,200 3,152,700
-----------
15,088,747 7.1%
Food & Beverage
- --------------------------------------------------------------------------------
Coca-Cola Company ..................... 52,300 3,504,100
Pepsico, Inc. ......................... 40,000 1,635,000
-----------
5,139,100 2.4%
Health Care
- --------------------------------------------------------------------------------
American Home Products Corporation .... 29,200 1,646,150
Johnson & Johnson ..................... 26,200 2,197,525
Warner Lambert Company ................ 59,575 4,479,295
-----------
8,322,970 3.9%
Household Products
- --------------------------------------------------------------------------------
Procter & Gamble Company* ............. 35,300 3,223,331 1.5%

- --------------------------------------------------------------------------------
Page 6 See Notes To Financial Statements
<PAGE>

Northeast Investors Growth Fund
- --------------------------------------------------------------------------------

Insurance
- --------------------------------------------------------------------------------
American International Group, Inc. .... 21,037.5 2,032,748
Chubb Corporation ..................... 59,200 3,833,200
Ohio Casualty Corporation ............. 31,400 1,291,325
St. Paul Companies .................... 37,900 1,317,025
----------
8,474,298 4.0%
Medical Supplies
- --------------------------------------------------------------------------------
Boston Scientific Corporation^ ........ 34,000 911,625
Medtronic, Inc. ....................... 25,500 1,894,172
----------
2,805,797 1.3%
Office Equipment
- --------------------------------------------------------------------------------
Staples, Inc.^ ........................ 68,400 2,988,225
Xerox Corporation ..................... 20,400 2,407,200
----------
5,395,425 2.6%
Paper & Forest Products
- --------------------------------------------------------------------------------
Fort James Corporation ................ 22,400 896,000 0.4%

Petroleum, Coal & Gas
- --------------------------------------------------------------------------------
Chevron Corporation ................... 26,700 2,214,431
Exxon Corporation ..................... 18,700 1,367,438
Mobil Corporation ..................... 7,000 609,875
Royal Dutch Petroleum ................. 40,000 1,915,000
----------
6,106,744 2.9%
Pharmaceuticals
- --------------------------------------------------------------------------------
Abbott Laboratories ................... 30,600 1,499,400
Bristol Myers Squibb Company .......... 29,900 4,000,994
Eli Lilly & Company ................... 46,100 4,097,138
Glaxo Wellcome PLC-Spons ADR .......... 19,900 1,383,050
Merck & Company, Inc.* ................ 33,300 4,911,750
Pfizer, Inc.* ......................... 47,150 5,893,750
----------
21,786,082 10.3%
Precision Instruments
- --------------------------------------------------------------------------------
Eastman Kodak Company ................. 14,300 1,029,600 0.5%

Publishing & Printing
- --------------------------------------------------------------------------------
McGraw-Hill Companies, Inc. ........... 21,400 2,180,125
New York Times Company-Class A ........ 35,000 1,214,063
----------
3,394,188 1.6%

- --------------------------------------------------------------------------------
Page 7
<PAGE>

Northeast Investors Growth Fund
- --------------------------------------------------------------------------------

Recreation & Leisure
- --------------------------------------------------------------------------------
Polaris Industries, Inc. .............. 24,700 967,931 0.5%

Retail
- --------------------------------------------------------------------------------
Home Depot, Inc. ...................... 44,050 2,695,309
Wal-Mart Stores, Inc. ................. 48,000 3,909,000
----------
6,604,309 3.1%

Telecommunications
- --------------------------------------------------------------------------------
MCI WorldCom, Inc.^ .................. 29,800 2,138,150
Tellabs, Inc.^ ........................ 17,500 1,199,844
Vodafone Group PLC-Spons ADR .......... 6,800 1,095,650
----------
4,433,644 2.1%
- --------------------------------------------------------------------------------
Total Common Stocks (Cost-$131,547,000) $213,516,581 101.1%
- --------------------------------------------------------------------------------

Repurchase Agreement Face
- --------------------------------------------------------------------------------
Investors Bank & Trust Company Repurchase Agreement,
4.25% due January 4, 1999 ............$1,617,128 1,617,128 .8%
------------ -----
Total Repurchase Agreement (Cost-$1,617,128)+ 1,617,128
------------
Total Investments (Cost-$133,164,128) $215,133,709 101.9%
============ =====
</TABLE>

+ Acquired on December 31, 1998. Collateralized by $1,698,137 of various
U.S. government mortgage-backed securities, due through 04/01/2022. The maturity
value is $1,617,892. As an operating policy, the Fund, through the custodian
bank, secures receipt of adequate collateral supporting repurchase agreements
- -(see Note F)
* Pledged to collateralize short-term borrowings (See Note G)
^ Non-income producing.
ADR stands for American Depository Receipt representing ownership of
foreign securities.

- --------------------------------------------------------------------------------
Page 8 The accompanying notes are an integral part of the financial statements.

<PAGE>

Northeast Investors Growth Fund
- --------------------------------------------------------------------------------

Statement of Assets
and Liabilities

December 31, 1998

Assets
Investments-at market value
(cost $133,164,128) - Notes B, D & F ............. $ 215,133,709
Dividends and interest receivable ................ 226,310
Receivable for shares of beneficial
interest sold ................................. 1,362,839
-----------
Total Assets ................................ 216,722,858
Liabilities
Payable for securities purchased ................. 5,063,415
Payable for shares of beneficial interest
repurchased ................................... 251,358
Accrued expenses ................................. 57,872
Accrued investment advisory fee-
Note C ......................................... 91,364
-----------
Total Liabilities ........................... 5,464,009
-----------
Net Assets ....................................... $ 211,258,849
=============

Net Assets Consist of - Note B:
Capital paid-in .................................. 129,403,302
Undistributed net investment
income ........................................ 31,789
Distributions in excess of net
realized gains ................................ (144,285)
Net unrealized appreciation of
investments .................................... 81,968,043
-----------

Net Assets, for 10,325,119 shares
outstanding ................................... $ 211,258,849
=============
Net Asset Value, offering price
and redemption price per share
($211,258,849 / 10,325,119 shares) ............ $20.47
=====

Statement of Operations

Year Ended December 31, 1998

Investment Income

Dividends ........................................ $ 1,892,251
Interest ......................................... 21,670
-------------
Total Income ................................ 1,913,921

Expenses
Investment advisory fee-
Note C ....................................... $ 834,910
Administrative expenses
and salaries .................................... 171,450
Interest-Note G .................................. 117,847
Printing, postage
and stationery ............................... 68,424
Computer and
related expenses ............................. 44,894
Auditing fees .................................... 35,335
Registration and
filing fees .................................. 32,836
Custodian fees ................................... 29,730
Legal fees ...................................... 18,485
Trustees fees-Note C ............................ 8,000
Insurance ........................................ 2,375
Other expenses ................................... 20,553
-------------
Total Expenses ................................. 1,384,839
-------------
Net Investment Income .......................... 529,082
-------------

Realized and Unrealized Gain
on Investments - Note B:
Net realized gain from investment
transactions .................................. 5,367,820
Change in unrealized appreciation
of investments ................................ 37,027,890
-------------
Net Gain on Investments .......................... 42,395,710
-------------
Net Increase in Net Assets Resulting
from Operations ............................... $ 42,924,792
=============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. Page 9

<PAGE>

Northeast Investors Growth Fund
- --------------------------------------------------------------------------------

Statements of Changes
in Net Assets

<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in Net Assets
From Operations:
Net investment income ............................................. $ 529,082 $ 353,060
Net realized gain from investment transactions .................... 5,367,820 4,479,634
Change in unrealized appreciation of investments .................. 37,027,890 20,578,841
------------- -------------
Net Increase in Net Assets Resulting from
Operations ................................................. 42,924,792 25,411,535
Distributions to Shareholders:
From net investment income ...................................... (486,335) (354,587)
From net realized gains on investments .......................... (5,203,325) (4,924,443)
------------- -------------
Total Distributions .......................................... (5,689,660) (5,279,030)

From Net Fund Share Transactions-Note E .............................. 65,434,064 28,182,395
------------- -------------
Total Increase in Net Assets .................................... 102,669,196 48,314,900
Net Assets:
Beginning of Period ............................................. 108,589,653 60,274,753
------------- -------------
End of Period (including undistributed net investment income
of $31,789 and $0, respectively) ........................... $ 211,258,849 $ 108,589,653
============= =============
</TABLE>

- --------------------------------------------------------------------------------
Page 10 The accompanying notes are an integral part of the financial statements.

<PAGE>

Northeast Investors Growth Fund
- --------------------------------------------------------------------------------

Notes to the Financial Statements
for the period ended December 31, 1998

Note A-Organization

Northeast Investors Growth Fund (the "Fund") is a diversified, no-load,
open-end, series-type management investment company registered under the
Investment Company Act of 1940, as amended. The Fund presently consists of one
portfolio and is organized as a Massachusetts business trust.

Note B-Significant Accounting Policies

Significant accounting policies of the Fund are as follows:

Valuation of Investments: Investments in securities traded on national
securities exchanges are valued based upon closing prices on the exchanges.
Securities traded in the over-the-counter market and listed securities with no
sales on the date of valuation are valued at closing bid prices. Repurchase
agreements are valued at cost with earned interest included in interest
receivable. Other short-term investments, when held by the Fund, are valued at
cost plus earned discount or interest which approximates market value.

Security Transactions: Investment security transactions are recorded on the
date of purchase or sale. Net realized gain or loss on sales of investments is
determined on the basis of identified cost.

Federal Income Taxes: No provision for federal income taxes is necessary
since the Fund has elected to qualify under subchapter M of the Internal Revenue
Code and its policy is to distribute all of its taxable income, including net
realized capital gains, within the prescribed time periods.

State Income Taxes: Because the Fund has been organized by an Agreement and
Declaration of Trust executed under the laws of the Commonwealth of
Massachusetts, it is not subject to state income or excise taxes.

Distributions and Income: Income and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments for capital loss carryovers and losses deferred due to wash
sales. Permanent book and tax differences relating to shareholder distributions
will result in reclassifications to paid-in-capital. The Fund's distributions
and dividend income are recorded on the ex-dividend date. Interest income, which
consists of interest from repurchase agreements, is accrued as earned.

Net Asset Value: In determining the net asset value per share, rounding
adjustments are made for fractions of a cent to the next higher cent.

Use of Estimates: 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.

Note C-Investment Advisory and Service Contract

The Fund has its investment advisory and service contract with Northeast
Management & Research Company, Inc. (the "Advisor"). Under the contract, the
Fund pays the Advisor an annual fee at a maximum rate of 1% of the first
$10,000,000 of the Fund's average daily net assets, 3/4 of 1% of the next
$20,000,000 and 1/2 of 1% of the average daily net assets in excess of
$30,000,000, in monthly installments on the basis of the average daily net
assets during the month preceding payment. All trustees except Messrs. John R.
Furman and John C. Emery are officers or directors of the Advisor. The
compensation of all disinterested trustees of the Fund is borne by the Fund.

Note D-Purchases and Sales of Investments

The cost of purchases and proceeds from sales of investments, other than
short-term securities, aggregated $94,638,786 and $27,569,771, respectively, for
the year ended December 31, 1998.

- --------------------------------------------------------------------------------
Page 11

<PAGE>

Northeast Investors Growth Fund
- --------------------------------------------------------------------------------

Note E-Shares of Beneficial Interest

At December 31, 1998, there was an unlimited number of shares of beneficial
interest authorized with no par value. Transactions in shares of beneficial
interest were as follows:

<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
---------------------------- ------------------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold ..................................... 6,132,271 $ 111,339,313 2,382,373 $67,324,344
Shares resulting from 3 for 1 stock split ....... 3,977,737
Shares issued to shareholders in reinvestment of
distributions from net investment income and
realized gains from security transactions .. 274,986 5,161,310 310,254 4,955,941
---------- -------------- ---------- -----------
6,407,257 116,500,623 6,670,364 72,280,285

Shares repurchased .............................. (2,939,702) (51,066,559) (1,466,724) (44,097,890)
---------- -------------- ---------- -----------
Net Increase ................................. 3,467,555 $ 65,434,064 5,203,640 $28,182,395
========== ============= ========== ===========
</TABLE>

Note F-Repurchase Agreement

On a daily basis, the Fund invests uninvested cash balances into repurchase
agreements secured by U.S. Government obligations. Securities pledged as
collateral for repurchase agreements are held by the Fund's custodian bank until
maturity of the repurchase agreement. Provisions of the agreement ensure that
the market value of the collateral is sufficient in the event of default.
However, in the event of default or bankruptcy by the other party to the
agreement, realization and/or retention of the collateral may be subject to
legal proceedings.

Note G-Short-term Borrowings

Short-term bank borrowings, which do not require maintenance of
compensating balances, are generally on a demand basis and are at rates equal to
adjusted money market interest rates in effect during the period in which such
loans are outstanding. At December 31, 1998, the Fund had unused lines of credit
amounting to $10,000,000.

The following information relates to aggregate short-term borrowings during
the year ended December 31, 1998:

Average amount outstanding (total of daily outstanding principal balances
divided by number of days during the year)..................... $1,599,763

Weighted average interest rate (actual interest expense on short-term
borrowing divided by average short-term borrowings outstanding) ..... 6.72%

Note H-Other Tax Information

For federal income tax purposes, the cost of investments owned at December
31, 1998 was $133,164,128. At December 31, 1998, gross unrealized appreciation
of investments was $84,775,140 and gross unrealized depreciation was $2,805,559,
resulting in net unrealized appreciation of $81,969,581.

Note I-Securities Lending

The Fund may seek additional income by lending portfolio securities to
qualified institutions. The Fund will receive cash or securities as collateral
in an amount equal to at least 102% of the current market value of any loaned
securities plus accrued interest. By reinvesting any cash collateral it receives
in these transactions, the Fund could realize additional gains and losses. If
the borrower fails to return the securities and the value of the collateral has
declined during the term of the loan, the Fund will bear the loss. At December
31, 1998, the value of securities loaned and the value of collateral were
$21,723,294 and $22,433,200, respectively. During the year ended December 31,
1998, income from securities lending amounted to $9,153 and is included in
interest income.

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Page 12
<PAGE>

Northeast Investors Growth Fund
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Financial Highlights

<TABLE>
<CAPTION>
Years Ended December 31
Per Share Data 1998 1997 1996 1995 1994 1993 1992~ 1991~ 1990~ 1989~
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value:
Beginning of period ....... $ 15.84 $ 12.15 $ 10.59 $ 8.13 $ 8.37 $ 9.70 $ 10.37 $ 7.81 $ 7.89 $ 6.09
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income From Investment
Operations:
Net investment income ....... 0.05 .06 .05 .07 .06 .07 .07 .09 .09 .08
Net realized and
unrealized gain (loss)
on investments ............ 5.18 4.46 2.54 2.90 (.07) .16 (.15) 2.77 .03 1.91
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations ................ 5.23 4.52 2.59 2.97 (.01) .23 (.08) 2.86 .12 1.99
Less Distributions:
Net investment income ..... (.05) (.06) (.05) (.07) (.06) (.07) (.07) (.12) (.09) (.09)
Capital gains ............. (0.55) (.77) (.98) (.44) (.17) (1.49) (.52) (.18) (.11) (.10)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------

Total Distributions ......... (0.60) (.83) (1.03) (.51) (.23) (1.56) (.59) (.30) (.20) (.19)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------

Net asset value:
End of period ............. $ 20.47 $ 15.84 $ 12.15 $ 10.59 $ 8.13 $ 8.37 $ 9.70 $ 10.37 $ 7.81 $ 7.89
======== ======== ======== ======== ======== ======== ======== ======== ======== ========

Total Return ................ 33.34% 37.28% 24.60% 36.46% (.07%) 2.44% (.73%) 36.91% 1.52% 32.73%
Ratios & Supplemental Data
Net assets end of
period (000's omitted) .... $211,259 $108,590 $ 60,275 $ 48,337 $ 35,459 $ 38,694 $ 42,609 $ 40,873 $ 27,189 $ 27,205
Ratio of operating
expenses to average
net assets ................ 0.94% .97% 1.21% 1.37% 1.53% 1.45% 1.42% 1.50% 1.74% 1.77%
Ratio of net investment
income to average
net assets ...... ......... .44% .45% .47% .74% .74% .62% .71% 1.02% 1.19% 1.11%
Portfolio turnover rate ..... 18.54% 16.36% 25.27% 26.53% 25.55% 35.14% 28.91% 15.63% 37.18% 22.97%
</TABLE>

~ Audited by other Auditors

# All per share data as of December 31, 1996 and earlier has been restated to
reflect a 3 for 1 stock split effective September 25, 1997.

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Page 13
<PAGE>

Report of PricewaterhouseCoopers LLP
Independent Accountants

To the Shareholders and Trustees of
Northeast Investors Growth Fund:

In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Northeast Investors Growth Fund
(hereafter referred to as the "Fund") at December 31, 1998, and the results of
its operations, the changes in its net assets and the financial highlights for
the periods indicated, in comformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial highlights") are the responsiblity of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments owned at December 31, 1998 by correspondence with
the custodian and brokers, provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 1999

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<PAGE>

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<PAGE>

NORTHEAST
INVESTORS GROWTH FUND
A NO-LOAD FUND

[NE LOGO]

Nineteenth Annual Report

For the Year Ended

December 31, 1998

Trustees
- --------------------------------------------------------------------------------
William A. Oates, Jr. John R. Furman
Ernest E. Monrad John C. Emery
Robert B. Minturn, Jr.

Officers
- --------------------------------------------------------------------------------
William A. Oates, Jr., President
Ernest E. Monrad, Assistant Treasurer
Robert B. Minturn, Jr., Vice President & Clerk
Gordon C. Barrett, Vice President & Treasurer
Bruce H Monrad, Vice President
Richard J Semple, Vice President

Investment Advisor
- --------------------------------------------------------------------------------
Northeast Management & Research Company, Inc.
50 Congress Street
Boston, Massachusetts 02109

Custodian
- --------------------------------------------------------------------------------
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02205

Legal Counsel
- --------------------------------------------------------------------------------
Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111

Transfer Agent
- --------------------------------------------------------------------------------
Northeast Investors Growth Fund
50 Congress Street
Boston, Massachusetts 02109

Independent Accountants
- --------------------------------------------------------------------------------
PricewaterhouseCoopers L.L.P
One Post Office Square
Boston, Massachusetts 02109

This report is prepared for the information of the shareholders of Northeast
Investors Growth Fund and must not be given to others unless preceded or
accompanied by a copy of the current Prospectus by which all offerings of the
Fund shares are made. It should be noted in reading this report and the letter
to shareholders that the record of past performance is not a representation as
to the Fund's future performance, and that the Fund's investments are subject to
market risks.

Shares of the Fund are sold to investors at net asset value by

Northeast Investors Growth Fund
50 Congress Street
Boston, Massachusetts 02109
(800) 225-6704

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The share price for Northeast Investors Growth Fund is quoted daily in the
Mutual Funds section of most major newspapers under the heading NEINV GR or
Noeast Gr
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