<PAGE>
- --------------------------------------------------------------------------------
ANNUAL REPORT AND PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
[LOGO]
NEW ENGLAND FUNDS
WHERE THE BEST MINDS MEET(TM)
- --------------------------------------------------------------------------------
New England Limited Term
U.S. Government Fund
[GRAPHIC OMITTED]
DECEMBER 31, 1996
<PAGE>
FEBRUARY 1997
- --------------------------------------------------------------------------------
Dear New England Funds Shareholder,
Taken together, 1995 and 1996 constituted the sixth strongest back-to-back years
for the U.S. stock market since 1915, as measured by percentage gain in the Dow
Jones Industrial Average (according to Bloomberg Business News).
Most New England Funds portfolio managers believe that the forces behind this
rally -- low inflation, relatively stable interest rates and strong corporate
profits -- will persist, at least for a time. Nevertheless, bull markets can
suddenly turn quiet; they can decline modestly; or they can reverse course
sharply. No one can predict what is ahead, nor can anyone guarantee whether the
market's strength will extend even further in 1997 and beyond.
Maintain a Long-Term Perspective
Whatever the market's direction, you should be prepared to consider any
short-term trends in the broader context of your long-term personal goals,
including the accumulation of financial assets. One way to manage this important
process is by diversifying your investments. While U.S. stocks have historically
been the strongest performers, you may, depending on your financial goals and
needs, also benefit from investing in various types of bond funds, and by
participating in growing overseas markets.
Remember that each investment has its own unique risks. What's more, no strategy
can assure a profit or protect against a loss. However, one time-tested approach
is to invest regularly and stay invested -- in good times and bad -- to avoid
the pitfall of guessing what the market might do in the short run.
Our Multiple-Adviser Approach Sets Us Apart
Many financial representatives recommend New England Funds to their clients
because of our distinctive multiple-adviser approach. For each fund, we
hand-pick a specific subadviser or subadvisers with significant experience and
demonstrated skill in selecting investments that are in tune with that fund's
stated objective. We call it matching the talent to the task.
Finally, it may interest you to learn that you are part of a major national
trend. In 1996, nearly 37 million U.S. households owned mutual funds, according
to the Investment Company Institute, an industry trade organization. Mutual
funds are now a cornerstone of retirement, college and other investment plans
for millions of Americans.
New England Funds has grown with the industry and is now over $6 billion in
size. We thank you for helping us reach this important milestone, and look
forward to serving your investment needs well into the future.
Sincerely,
/s/ Henry L.P. Schmelzer
----------------------------
Henry L.P. Schmelzer, President
For more information, including a prospectus for any New England Fund, please
contact your financial representative or call the Investor Services and
Marketing Group at 800-225-5478. Please read the prospectus carefully, including
the information on charges and expenses, before you invest.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND LIMITED TERM FUND U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
AWARD WINNING SERVICE -- TWO YEARS RUNNING
- --------------------------------------------------------------------------------
For two years running we're proud to announce that DALBAR, an independent
evaluator of mutual fund service, has awarded New England Funds its Quality
Tested Service Seal for "providing the highest tier of service excellence in the
mutual fund industry." New England Funds is one of just three mutual fund
companies to earn this distinction in each of the last two years -- another
reason why we are becoming known as the mutual fund company Where The Best Minds
Meet(TM).
INVESTMENT RESULTS THROUGH DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Putting Performance into Perspective
The graph comparing your Fund's performance to a benchmark index provides you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities index
measures the performance of a theoretical portfolio. Unlike a fund, the index is
unmanaged; there are no expenses that affect the results. In addition, few
investors could purchase all of the securities necessary to match the index.
And, if they could, they would incur transaction costs and other expenses.
- --------------------------------------------------------------------------------
NEW ENGLAND LIMITED TERM FUND U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in Class A Shares, since New England Limited Term U.S.
Government Fund's inception 1/3/89, compared to the Lehman Intermediate
Government Bond Index and the Cost of Living Index. The data points from the
graph are as follows:]
GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES
JANUARY 1989 THROUGH DECEMBER 1996
COMPARED TO LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX(4)
AND THE COST OF LIVING(5)
With
Net Maximum Lehman Cost
Asset Sales Intermediate of
Value(1) Charge(2) Government(4) Living(5)
1/3/89 $10,000 $ 9,700 $10,000 $10,000
1989 $11,041 $10,710 $11,269 $10,465
1990 $12,205 $11,839 $12,346 $11,104
1991 $13,891 $13,475 $14,086 $11,444
1992 $14,676 $14,236 $15,062 $11,776
1993 $15,618 $15,150 $16,293 $12,100
1994 $15,262 $14,805 $16,008 $12,424
1995 $17,248 $16,731 $18,317 $12,748
1996 $17,660 $17,130 $19,090 $13,172
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B, C and Y share
performance will be greater or less than that shown based on differences in
inception date, fees and sales charges. All Index and Fund performance assumes
reinvested distributions.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND LIMITED TERM FUND U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS -- 12/31/96
- --------------------------------------------------------------------------------
CLASS A (Inception 1/3/89) 1 YEAR 5 YEARS SINCE INCEPTION
Net Asset Value(1) 2.39% 4.92% 7.38%
With Max. Sales Charge(2) -0.65 4.28 6.97
Lipper Short US Gov't(6) 3.52 5.42 n/a
CLASS B (Inception 9/24/93) 1 YEAR 3 YEARS SINCE INCEPTION
Net Asset Value(1) 1.73% 3.49% 3.09%
With CDSC(3) -2.09 2.62 2.57
Lehman Intermediate Gov't
Bond Index(4) 4.22 5.42 5.05
Lipper Short US Gov't(6) 3.52 4.46 n/a
CLASS C (Inception 12/30/94) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 1.64% 6.35%
Lehman Intermediate Gov't
Bond Index(4) 4.22 9.20
CLASS Y (Inception 3/31/94) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 2.75% 5.57%
Lehman Intermediate Gov't
Bond Index(4) 4.22 6.65
These returns represent past performance. Investment return and principal value
will fluctuate so that shares, upon redemption, may be worth more or less than
original cost. Class Y shares are available only to certain institutional
investors.
NOTES TO CHARTS AND PERFORMANCE UPDATE
(1)Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2)With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 3% at the time of
purchase of Class A shares.
(3)With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum 4%
sales charge is applied to a redemption of Class B shares. The sales charge
will decrease over time, declining to zero five years after the purchase of
shares.
(4)Lehman Intermediate Government Bond Index is an unmanaged index of bonds
issued by the U.S. Government and its agencies having maturities between one
and ten years. The Index's performance has not been adjusted for ongoing
management, distribution and operating expenses and sales charges applicable
to mutual fund investments.
(5)Cost of Living is based on the Consumer Price Index, a widely recognized
measure of the cost of goods and services in the United States, calculated by
the U.S. Bureau of Labor Statistics.
(6)Lipper Average is an average of the total return performance (calculated on
the basis of net asset value) of funds with similar investment objectives as
calculated by Lipper Analytical Services, an independent mutual fund ranking
service.
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND LIMITED TERM FUND U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGER
[photo of Eric Gutterson,
Back Bay Advisors, L.P.]
Q. What was the investment environment like in 1996 for New England Limited Term
U.S. Government Fund?
1996 was a difficult year for fixed income investments as long-term interest
rates ranged from a low of 5.95% to a high of 7.19% during the period. Because
bond prices and interest rates generally move in opposite directions, rising
rates pushed bond prices lower. Early in 1996, stronger than expected economic
reports caused long-term interest rates to move suddenly and sharply higher,
bringing the strong bond market rally of 1995 to a halt. In the second half,
fixed income markets strengthened as a number of reports indicated slower,
steady growth and continued low inflation. Strong demand fueled by foreign
investment in U.S. government securities during the second half also aided the
recovery, as did investors' changing expectations regarding the Federal Reserve
Board's position on monetary policy.
Q. How did the Fund perform?
For the 12-month period ended December 31, 1996, New England Limited Term U.S.
Government Fund generated a total return of 2.39% for Class A shares, based on
net asset value, compared to a total return of 4.22% for the Lehman Brothers
Intermediate Government Bond Index. The Fund lagged its benchmark index
primarily due to the timing of duration adjustments during a period of volatile
interest rates. Duration measures (in years) a bond's sensitivity to interest
rates. Essentially, the longer a bond's duration, the more its price reacts to
changes in interest rates -- rising when interest rates fall and declining when
interest rates rise. To maintain an attractive level of current income, which
also helped to stabilize share prices when interest rates were rising and bond
prices falling, we opted to remain fully invested in government securities
instead of shifting some assets to cash investments.
Q. How did you manage the Fund in the face of challenging investment conditions?
Because our outlook for the fixed income market was positive going into 1996, we
positioned the Fund to benefit from market gains resulting from expectations of
moderate economic growth and low levels of inflation. When stronger than
expected economic reports caused the market to reverse direction, we became more
conservative. Specifically, we shortened the Fund's duration from 3.6 years to
2.5 years by strategically buying shorter-term bonds to balance the Fund's
investments in bonds at the longer end of the Fund's permitted duration range.
We also increased our holdings in mortgage-backed securities, which tend to
perform well relative to Treasury securities during periods of rising interest
rates -- when mortgage holders are less likely to refinance and prepay their
mortgages. As always, the Fund was fully invested in the most creditworthy,
AAA-rated sectors of the investment universe.
As our outlook improved during the second half of the year, we extended the
Fund's duration back towards the four- year vicinity. We also de-emphasized
higher-income generating securities during the second half in an effort to
better balance the current income component of total return with potential share
price appreciation as interest rates declined.
The timing of our strategic moves was not precisely synchronized with changes in
market sentiment and direction. Still, by extending the Fund's duration when
market conditions improved, we managed to outperform the Fund's benchmark index
and regain a portion of the losses sustained earlier in the year.
Q. What is your investment outlook for the months ahead?
Demand is low for U.S. fixed income securities among domestic investors --
however, foreign interest remains strong. While this divergence means current
supply/demand relationships, on balance, could remain unchanged, it may
translate into continued short-term volatility for bonds as interest rates move
sharply within a relatively narrow range. In this environment, we are keeping
the Fund's average duration in line with that of its benchmark index.
Meanwhile, we believe the ingredients that foster better bond market performance
- -- slow economic growth, low inflation and gradually falling interest rates over
time -- could lie ahead. As we monitor market conditions, we'll continue to seek
a mix of government securities that can afford shareholders attractive
opportunities for price appreciation, a competitive stream of income and ample
protection from prepayments.
<PAGE>
TREASURY YIELD CURVE
- --------------------------------------------------------------------------------
The "yield curve" illustrates the yields available on U.S. Treasury securities
of varying maturities, ranging from three-month Treasury bills to 30-year
Treasury bonds. Under normal conditions, a security with a longer maturity will
offer a higher yield than a shorter term security, to compensate the bond holder
for tying up money for longer periods of time. The chart below illustrates the
yield curve at the beginning and at the end of 1996. As you can see, long-term
rates rose, with the 30-year bond rising to 6.64% from 5.95%.
THE YIELD CURVE: JANUARY - DECEMBER, 1996
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, illustrating the rise in the
yield curve of 3-month Treasury bills to 30-year Treasury bonds. The data from
the graph is as follows:]
1/01/96 12/31/96 CHANGE
------- -------- ------
3 MONTH 5.071 5.186 0.1151
6 MONTH 5.147 5.297 0.1504
1 YEAR 5.131 5.488 0.3566
2 YEAR 5.150 5.868 0.7177
3 YEAR 5.207 6.010 0.8028
5 YEAR 5.374 6.206 0.8323
10 YEAR 5.570 6.418 0.8475
30 YEAR 5.949 6.641 0.6916
- -----------------
Source: Bloomberg
What caused this rise? Over the year it became apparent that the economy was
growing at a faster pace than expected, though inflation remained under control.
(Inflation is the bond market's primary foe because it eats away at the value of
fixed-income investments). Wary of escalating inflation (which failed to
materialize), the markets drove up long term rates. Bond prices, which move in
the opposite direction from interest rates, declined after posting impressive
gains in 1995.
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
Investments as of December 31, 1996
BONDS AND NOTES--98.1% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
FACE
AMOUNT DESCRIPTION VALUE (a)
- ---------------------------------------------------------------------------------------------------
GOVERNMENT AGENCIES--69.4%(c)
<C> <S> <C>
$ 14,825,441 Federal Home Loan Mortgage Corp., 7.500%, 6/1/26 ....... $ 14,857,760
15,000,000 Federal Home Loan Mortgage Corp., 8.190%, 10/6/04 ...... 15,532,050
65,821 Federal Home Loan Mortgage Corp., 10.000%, 7/1/19 ...... 72,032
9,463,129 Federal Home Loan Mortgage Corp., 11.500%, with various
maturities to 2020 10,688,711
57,409,038 Federal National Mortgage Association, 7.000%, 12/1/25 . 56,170,725
20,000,000 Federal National Mortgage Association, 7.700%, 8/10/04 . 20,406,200
15,000,000 Federal National Mortgage Association, 9.150%, 4/10/98 . 15,600,000
20,157,212 Government National Mortgage Association, 7.500%, with
various maturities to 2026 ............................ 20,163,461
153,972 Government National Mortgage Association, 12.500%, with
various maturities to 2015 ............................ 181,266
1,456,424 Government National Mortgage Association, 16.000%, with
various maturities to 2013 ............................ 1,822,552
696,671 Government National Mortgage Association, 17.000%, with
various maturities to 2012 ............................ 864,534
9,298,587 Government Trust Certificates, 9.250%, 11/15/01 ........ 9,953,021
16,745,000 Private Export Funding Corp., 8.750%, 6/30/03 .......... 18,668,331
31,227,000 Private Export Funding Corp., 9.500%, 3/31/99 .......... 33,429,128
----------------
218,409,771
----------------
U.S. GOVERNMENT--28.7%
10,000,000 United States Treasury Bonds, 10.750%, 2/15/03 .......... 12,243,700
10,000,000 United States Treasury Bonds, 10.750%, 8/15/05 .......... 12,829,700
46,000,000 United States Treasury Notes, 9.125%, 5/15/99 ........... 49,155,140
15,500,000 United States Treasury Notes, 9.250%, 8/15/98 ........... 16,306,465
----------------
90,535,005
----------------
Total Bonds and Notes (Identified Cost $311,857,865) .... 308,944,776
----------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SHORT TERM INVESTMENTS--0.4%
<TABLE>
<CAPTION>
FACE
AMOUNT DESCRIPTION VALUE (a)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C>
$ 1,086,000 Household Finance Corp. 6.250%, 1/02/97 ................ $ 1,085,812
----------------
Total Short Term Investments (Identified
Cost $1,085,812) ....................................... 1,085,812
----------------
Total Investments--98.5% (Identified Cost
$312,943,677) (b) ...................................... 310,030,588
Other assets less liabilities ........................... 4,865,387
----------------
Total Net Assets--100% ................................... $314,895,975
================
(a) See Note 1a to the financial statements.
(b) Federal Tax Information: At December 31, 1996 the net
unrealized depreciation on investments based on cost
for federal income tax purposes of $312,943,677
was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess value over tax cost ........ $ 867,767
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost over value ..... (3,780,856)
----------------
Net unrealized depreciation ........................................ $ (2,913,089)
=================
(c) The Fund's investments in mortgage backed securities of the Federal Home Loan
Mortgage Corporation and Government National Mortgage Association are
interests in separate pools of mortgages. All separate investments in
securities of these issuers which have the same coupon rate have been
aggregated for the purpose of presentation in the schedule of investments.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments at value ..................................... $310,030,588
Cash ..................................................... 1,246
Receivable for:
Fund shares sold ....................................... 1,455,695
Accrued interest ....................................... 5,020,315
Prepaid registration expense ............................. 11,000
------------
316,518,844
LIABILITIES
Payable for:
Fund shares redeemed ................................... $1,029,245
Dividends declared ..................................... 320,352
Accrued expenses:
Management fees ........................................ 172,394
Deferred trustees' fees ................................ 6,911
Accounting and administrative .......................... 4,349
Other expenses ......................................... 89,618
----------
1,622,869
------------
NET ASSETS ................................................. $314,895,975
============
Net Assets consist of:
Capital paid in ........................................ $355,199,111
Distributions in excess of net investment income ....... (255,075)
Accumulated net realized losses ........................ (37,134,972)
Unrealized depreciation on investments ................. (2,913,089)
------------
NET ASSETS ................................................. $314,895,975
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($276,177,545 divided by 23,904,444 shares of beneficial
interest) ................................................ $11.55
======
Offering price per share (100/97 of $11.55) ................ $11.91*
======
Net asset value and offering price of Class B shares
($18,502,677 divided by 1,603,681 shares of beneficial
interest) ................................................ $11.54**
======
Net asset value and offering price of Class C shares
($14,902,768 divided by 1,290,913 shares of beneficial
interest) ................................................ $11.54
======
Net asset value and offering price of Class Y shares
($5,312,985 divided by 458,854 shares of beneficial
interest) ................................................ $11.58
======
Identified cost of investments ............................. $312,943,677
============
*Based upon single purchases of less than $100,000.
Reduced sales charges apply for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended December 31, 1996
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C> <C>
Interest ............................................... $ 29,203,979
Expenses
Management fees ...................................... $ 2,230,443
Service fees - Class A ............................... 1,105,672
Service and distribution fees - Class B .............. 182,790
Service and distribution fees - Class C .............. 93,928
Trustees' fees and expenses .......................... 23,515
Accounting and administrative ........................ 60,357
Custodian ............................................ 119,300
Transfer agent ....................................... 536,833
Audit and tax services ............................... 25,500
Legal ................................................ 24,394
Printing ............................................. 62,675
Registration ......................................... 42,488
Miscellaneous ........................................ 12,954
-------------
Total expenses ......................................... 4,520,849
--------------
Net investment income .................................. 24,683,130
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS AND FUTURES CONTRACTS
Realized gain (loss) on:
Investments - net .................................... (4,539,047)
Futures contracts - net .............................. (875,614)
Options contracts - net .............................. 16,099
-------------
Net realized loss on investments ..................... (5,398,562)
-------------
Unrealized depreciation on:
Investments - net .................................... (12,440,197)
-------------
Net loss on investment transactions .................... (17,838,759)
-------------
NET INCREASE IN NET ASSETS FROM OPERATIONS ............... $ 6,844,371
=============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
---------------- ----------------
FROM OPERATIONS
<S> <C> <C>
Net investment income .................................... $ 28,738,040 $ 24,683,130
Net realized loss on investments, options and futures
contracts .............................................. (3,099,077) (5,398,562)
Unrealized appreciation (depreciation) on investments .... 23,699,408 (12,440,197)
------------ ------------
Increase in net assets from operations ................... 49,338,371 6,844,371
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................................ (26,920,664) (22,194,536)
Class B ................................................ (963,746) (1,162,270)
Class C ................................................ (96,628) (582,457)
Class Y ................................................ (343,941) (389,325)
In excess of net investment income
Class C ................................................ (6,999) 0
------------ ------------
(28,331,978) (24,328,588)
------------ ------------
Decrease in net assets derived from capital share
transactions ........................................... (55,882,399) (58,854,951)
------------ ------------
Total decrease in net assets ............................. (34,876,006) (76,339,168)
NET ASSETS
Beginning of the year .................................... 426,111,149 391,235,143
------------ ------------
End of the year .......................................... $391,235,143 $314,895,975
============ ============
UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF)
NET INVESTMENT INCOME
Beginning of the year .................................... $ 400,474 67,682
============ ============
End of the year .......................................... $ 67,682 $ (255,075)
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year .... $12.86 $12.54 $12.49 $11.49 $12.10
----- ----- ----- ----- -----
Income From Investment Operations
Net Investment Income ................. 0.80 0.71 0.82 0.86 0.81
Net Realized and Unrealized Gain (Loss)
on Investments ...................... (0.11) 0.08 (1.10) 0.59 (0.54)
----- ----- ----- ----- -----
Total From Investment Operations ...... 0.69 0.79 (0.28) 1.45 0.27
----- ----- ----- ----- -----
Less Distributions
Dividends From Net Investment Income .. (0.80) (0.71) (0.72) (0.84) (0.82)
Distributions in Excess of Net
Investment Income ................... 0.00 (0.01) 0.00 0.00 0.00
Distributions From Net Realized Capital
Gains ............................... (0.21) (0.12) 0.00 0.00 0.00
----- ----- ----- ----- -----
Total Distributions ................... (1.01) (0.84) (0.72) (0.84) (0.82)
----- ----- ----- ----- -----
Net Asset Value, End of Year .......... $12.54 $12.49 $11.49 $12.10 $11.55
====== ====== ====== ====== ======
Total Return (%) (b) .................. 5.7 6.4 (2.3) 13.0 2.4
Ratio of Operating Expenses to
Average Net Assets (%) (a) .......... 1.16 1.14 1.18 1.22 1.25
Ratio of Net Investment Income to
Average Net Assets (%) .............. 6.24 5.64 6.80 7.18 7.13
Portfolio Turnover Rate (%) ........... 323 124 244 247 327
Net Assets, End of Year (000) ......... $477,396 $562,164 $412,399 $361,520 $276,178
</TABLE>
(a) Commencing May 18, 1989 through March 31, 1992 expenses were voluntarily
limited to 1.25% of average daily net assets.
(b) A sales charge is not reflected in Class A total return calculations.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------
SEPTEMBER 27(a)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------------------
1993 1994 1995 1996
------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ......... $12.76 $12.49 $11.48 $12.09
----- ----- ----- -----
Income From Investment Operations
Net Investment Income ........................ 0.17 0.71 0.76 0.73
Net Realized and Unrealized Gain (Loss) on
Investments ................................ (0.24) (1.08) 0.61 (0.54)
----- ----- ----- -----
Total From Investment Operations ............. (0.07) (0.37) 1.37 0.19
----- ----- ----- -----
Less Distributions
Dividends From Net Investment Income ......... (0.16) (0.64) (0.76) (0.74)
Distributions in Excess of Net Investment
Income ....................................... (0.01) 0.00 0.00 0.00
Distributions From Net Realized Capital Gains (0.03) 0.00 0.00 0.00
----- ----- ----- -----
Total Distributions .......................... (0.20) (0.64) (0.76) (0.74)
----- ----- ----- -----
Net Asset Value, End of Period ............... $12.49 $11.48 $12.09 $11.54
====== ====== ====== ======
Total Return (%)(c) .......................... (0.6) (2.9) 12.3 1.7
Ratio of Operating Expenses to Average Net
Assets (%) ................................. 1.96(b) 1.83 1.87 1.90
Ratio of Net Investment Income to Average Net
Assets (%) ................................. 4.30(b) 6.15 6.53 6.48
Portfolio Turnover Rate (%) .................. 124(b) 244 247 327
Net Assets, End of Period (000) .............. $6,221 $11,891 $18,056 $18,503
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge is not reflected in total return
calculations. Periods less than one year are not annualized.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C
---------------------------
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996
---- ----
<S> <C> <C>
Net Asset Value, Beginning of Year ............................ $11.48 $12.10
------ ------
Income From Investment Operations
Net Investment Income ......................................... 0.64 0.75
Net Realized and Unrealized Gain (Loss) on Investments ........ 0.64 (0.57)
------ ------
Total From Investment Operations .............................. 1.28 0.18
------ ------
Less Distributions
Dividends From Net Investment Income .......................... (0.65) (0.74)
Distributions in Excess of Net Investment Income .............. (0.01) 0.00
------ ------
Total Distributions ........................................... (0.66) (0.74)
----- -------
Net Asset Value, End of Year .................................. $12.10 $11.54
====== ======
Total Return (%) ............................................. 11.4 1.6
Ratio of Operating Expenses to Average Net Assets (%) ......... 1.87 1.90
Ratio of Net Investment Income to Average Net Assets (%) ...... 6.53 6.48
Portfolio Turnover Rate (%) ................................... 247 327
Net Assets, End of Year (000) ................................. $5,936 $14,903
</TABLE>
<TABLE>
<CAPTION>
CLASS Y
-------------------------------------------------
MARCH 31(a)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ---------------------------
1994 1995 1996
------------------ ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ............. $12.11 $11.51 $12.13
------ ------ ------
Income From Investment Operations
Net Investment Income ............................ 0.71 0.86 0.85
Net Realized and Unrealized Gain (Loss) on
Investments .................................... (0.74) 0.63 (0.54)
------ ------ ------
Total From Investment Operations ................. (0.03) 1.49 0.31
------ ------ ------
Less Distributions
Dividends From Net Investment Income ............. (0.57) (0.87) (0.86)
----- ------ ------
Total Distributions .............................. (0.57) (0.87) (0.86)
------ ------ ------
Net Asset Value, End of Period ................... $11.51 $12.13 $11.58
====== ====== ======
Total Return (%) (c) ............................. (0.8) 13.3 2.8
Ratio of Operating Expenses to Average Net Assets
(%) ............................................ 0.83(b) 0.87 0.90
Ratio of Net Investment Income to Average Net
Assets (%) ..................................... 7.15(b) 7.53 7.48
Portfolio Turnover Rate (%) ...................... 244(b) 247 327
Net Assets, End of Period (000) .................. $1,822 $5,723 $5,313
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not annualized.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. The Fund is a series of New England Funds Trust II, a Massachusetts business
trust (the "Trust"), and is registered under the Investment Company Act of 1940
(the "1940 Act"), as amended, as an open-end management investment company. The
Declaration of Trust permits the Trustees to issue an unlimited number of shares
of the Trust in multiple series (each series of shares a "Fund").
The Fund offers Class A, Class B, Class C and Class Y shares. The Fund
commenced its public offering of Class B shares on September 27, 1993, Class C
shares on December 30, 1994 and of Class Y shares on March 31, 1994. Class A
shares are sold with a maximum front end sales charge of 3.00%. Class B shares
do not pay a front end sales charge, but pay a higher ongoing distribution fee
than Class A shares for eight years (at which point they automatically convert
to Class A shares), and are subject to a contingent deferred sales charge if
those shares are redeemed within five years of purchase. Class C shares do not
pay a front end or contingent deferred sales charge and do not convert to any
class of shares, but they do pay a higher ongoing distribution fee than Class
A shares. Class Y shares do not pay a front end sales charge, a contingent
deferred sales charge or distribution fees. They are intended for
institutional investors with a minimum of $1,000,000 to invest. Expenses of
the Fund are borne pro-rata by the holders of all classes of shares, except
that each class bears expenses unique to that class (including the Rule 12b-1
service and distribution fees applicable to such class), and votes as a class
only with respect to its own Rule 12b-1 Plan. Shares of each class would
receive their pro-rata share of the net assets of the Fund, if the Fund were
liquidated. In addition, the Trustees approve separate dividends on each class
of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. SECURITY VALUATION. The Fund's investment subadviser, Back Bay Advisors,
L.P. ("Back Bay Advisors"), under the supervision of the Fund's trustees,
determines the value of the Fund's portfolio of securities, using valuations
provided by a pricing service selected by Back Bay Advisors and other
information with respect to transactions in securities, including quotations
from securities dealers. Valuations of securities and other assets owned by
the Fund for which market quotations are readily available are based on those
quotations. Short-term obligations that will mature in 60 days or less are
stated at amortized cost, which, when combined with accrued interest or
discount earned, approximates market value. All other securities and assets
are valued at their fair value as determined in good faith by Back Bay
Advisors under the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Interest income is recorded on the accrual basis. Interest income for the Fund
is increased by the accretion of discount. In determining net gain or loss on
securities sold, the cost of securities has been determined on the identified
cost basis.
C. OPTIONS AND FUTURES. CALLS AND PUTS. The Fund may write (sell) call and
put options on securities to manage its exposure to interest rates and the
bond market. Buying futures, writing puts, and buying calls tend to increase
the Fund's exposure to the underlying instrument. Selling futures, buying
puts, and writing calls tend to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments. When a Fund writes a call or put
option, an amount equal to the premium received by the Fund is included in the
Fund's statement of assets and liabilities as an asset and as an equivalent
liability. The amount of the liability is subsequently marked-to-market to
reflect the current market value of the option written. The current value of a
written option is the closing price on the principal exchange on which such
option is traded. If an option which the Fund has written either expires on
its stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is extinguished. If a call option which
the Fund has written is exercised, the Fund realizes a capital gain or loss
from the sale of the underlying security and the proceeds from such sale are
increased by the premium originally received. If a put option which the Fund
has written is exercised, the amount of the premium originally received will
reduce the cost of the security which the Fund purchases upon exercise of the
option.
The premium paid by a fund for the purchase of a call or a put option is
included in the asset section of the Fund's statement of assets and
liabilities as an investment and subsequently adjusted to the current market
value of the option. The current value of a purchased option is the closing
price on the principal exchange on which such option is traded. If an option
which the Fund has purchased expires on the stipulated expiration date, the
Fund will realize a loss in the amount of the cost of the option. If the Fund
enters into a closing sale transaction, the Fund will realize a gain or loss,
depending on whether the sales proceeds from the closing sale transaction are
greater or less than the cost of the option. If the Fund exercises a purchased
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. If the Fund exercises a purchased call option, the cost of
the security which the Fund purchases upon exercise will be increased by the
premium originally paid.
The risk in writing a call option is that the Fund relinquishes the
opportunity to profit if the market price of the underlying security increases
and the option is exercised. In writing a put option, the Fund assumes the
risk of incurring a loss if the market price decreases and the option is
exercised. In addition, there is the risk the Fund may not be able to enter
into a closing transaction because of an illiquid secondary market.
D. INTEREST RATE FUTURES CONTRACTS. The Fund may purchase or sell interest
rate futures contracts to hedge against changes in the values of securities
the Fund owns or expects to purchase. An interest rate futures contract is an
agreement between two parties to buy and sell a security for a set price (or
to deliver an amount of cash) on a future date. Upon entering into such a
contract, the purchasing Fund is required to pledge to the broker an amount of
cash, U.S. Government securities or other high quality debt securities equal
to the minimum "initial margin" requirements of the exchange, currently up to
$3,000 per contract. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily fluctuation in value
of the contract.
Such receipts or payments are known as "variation margin," and are recorded by
the Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it was
closed.
The potential risk to the Fund is that the change in value of futures
contracts primarily corresponds with the value of underlying instruments which
may not correspond to the change in the value of the hedged instruments. In
addition, there is a risk that the Fund may not be able to close out its
futures positions due to an illiquid secondary market.
E. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
As of December 31, 1996 the Fund had a net tax basis capital loss carryforward
as follows:
Expiring December 31, 2002 ............................... $30,053,756
December 31, 2003 ............................... 1,001,295
December 31, 2004 ............................... 3,925,924
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily
to shareholders of record and are paid monthly.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. These differences
relate primarily to differing treatments for income recognition for mortgage-
backed securities. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassification to paid in capital.
G. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery
of the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to
100% of the repurchase price. Back Bay Advisors is responsible for determining
that the value of the collateral is at all times at least equal to the
repurchase price. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for
the Fund for the year ended December 31, 1996 were as follows:
PURCHASES SALES
- ----------------------------------------- -----------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
- ------------------------ ----------- --------------- -----------
$1,059,928,613 $52,227,361 $1,152,040,504 $15,700,000
Investments in written options and futures contracts for the Fund for the year
ended December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
WRITTEN OPTIONS
--------------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- --------
<S> <C> <C>
Open at December 31, 1995 ................................. 0 $ 0
Contracts opened .......................................... 8,470 2,506,040
Contracts closed .......................................... (8,470) (2,506,040)
----- ------------
Open at December 31, 1996 ................................. 0 $ 0
===== ============
SALES OF FUTURES CONTRACTS
-----------------------------
AGGREGATE
NUMBER OF FACE VALUE
CONTRACTS OF CONTRACTS
Open at December 31, 1995 ................................. 0 $ 0
Contracts opened .......................................... 4,910 531,589,415
Contracts closed .......................................... (4,910) (531,589,415)
----- -----------
Open at December 31, 1996 ................................. 0 $ 0
===== ============
</TABLE>
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management L.P.
("NEFM") at the annual rate of 0.65% of the first $200 million of the Fund's
average daily net assets, 0.625% of the next $300 million and 0.60% of such
assets in excess of $500 million. NEFM pays the Fund's investment subadviser,
Back Bay Advisors at the rate of 0.325% of the first $200 million of the
Fund's average daily net assets, 0.3125% of the next $300 million and 0.30% of
such assets in excess of $500 million. Certain officers and directors of NEFM
are also officers or trustees of the Fund. NEFM and Back Bay Advisors are
wholly owned subsidiaries of New England Investment Companies, L.P. ("NEIC"),
which is a subsidiary of Metropolitan Life Insurance Company ("MetLife"). Fees
earned by NEFM and Back Bay Advisors under the management agreement in effect
during the year ended December 31, 1996 are as follows:
FEES EARNED
$1,115,222 New England Funds Management, L.P.
$1,115,221 Back Bay Advisors, L.P.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds L.P. ("New
England Funds"), the Fund's distributor, is a wholly owned subsidiary of NEIC
and performs certain accounting and administrative services for the Fund. The
Fund reimburses New England Funds for all or part of New England Funds'
expenses of providing these services which include the following: (i) expenses
for personnel performing bookkeeping, accounting, internal auditing and
financial reporting functions and clerical functions relating to the Fund,
(ii) expenses for services required in connection with the preparation of
registration statements and prospectuses, shareholder reports and notices,
proxy solicitation material furnished to shareholders of the Fund or
regulatory authorities and reports and questionnaires for SEC compliance, and
(iii) registration, filing and other fees in connection with requirements of
regulatory authorities. For the year ended December 31, 1996 these expenses
amounted to $60,357 and are shown separately in the financial statements as
accounting and administrative.
C. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act,
the Trust has adopted Service and Distribution Plans relating to the Fund's
Class A shares (the "Class A Plan") and Class B shares (the "Class B Plan")
and Class C shares (the "Class C Plan").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee
at the annual rate of up to 0.25% of the average daily net assets attributable
to the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers who may be affiliated with New England Funds)
incurred by New England Funds in providing personal services to investors in
Class A shares and/or the maintenance of shareholder accounts. Also under the
Class A Plan, the Fund pays New England Funds a monthly distribution fee at
the annual rate of up to 0.10% of the average daily net assets attributable to
the Fund's Class A shares as reimbursement for expenses (including certain
payments to securities dealers who may be affiliated with New England Funds)
incurred by New England Funds in connection with the marketing or sale of
Class A shares.
For the year ended December 31, 1996, the Fund paid New England Funds $789,782
in service fees and $315,890 in distribution fees under the Class A Plan. If
the expenses of New England Funds that are otherwise reimbursable, as service
fees or distribution fees, respectively, under the Class A Plan incurred in
any year exceed the amounts of such fees payable by the Fund under the Class A
Plan, the unreimbursed amounts (together with unreimbursed amounts from prior
years) may be carried forward for reimbursement in future years in which the
Class A Plan remains in effect. The amount of unreimbursed expense carried
forward into 1997 is $2,272,723 (reimbursable as distribution fees).
Under the Class B and Class C Plans, the Fund pays New England Funds monthly
service fees at the annual rate of up to 0.25% of the average daily net assets
attributable to the Fund's Class B shares and Class C shares, as compensation
for services provided and expenses (including certain payments to securities
dealers who may be affiliated with New England Funds) incurred by New England
Funds in providing personal services to investors in Class B and Class C
shares and/or the maintenance of shareholder accounts. For the year ended
December 31, 1996, the Fund paid New England Funds $45,698 and $23,482 in
service fees under the Class B and Class C Plans, respectively.
Also under the Class B and Class C Plans, the Fund pays New England Funds a
monthly distribution fee at the annual rate of up to 0.75% of the average
daily net assets attributable to the Fund's Class B and Class C shares, as
compensation for services provided and expenses (including certain payments to
securities dealers who may be affiliated with New England Funds) incurred by
New England Funds in connection with the marketing or sale of Class B and
Class C shares. For the year ended December 31, 1996, the Fund paid New
England Funds $137,092 and $70,446 in distribution fees under the Class B and
Class C Plans, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors in shares of the Fund during the year ended
December 31, 1996 amounted to $492,140.
D. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent to the Fund. For the year ended December 31, 1996, the Fund
paid New England Funds $389,541 as compensation for its services in that
capacity.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation
directly to its officers or trustees who are directors, officers or employees
of New England Funds, NEFM, NEIC or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as
follows:
Annual Retainer $2,301
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Annual Retainer $185
A deferred compensation plan is available to the trustees on a voluntarily
basis. Each participating trustee will receive an amount equal to the value
that such deferred compensation would have had, had it been invested in the
Fund on the normal payment date.
4. CAPITAL SHARES. At December 31, 1996 there was an unlimited number of
shares of beneficial interest authorized, divided into four classes, Class A,
Class B, Class C and Class Y capital stock. Transactions in capital shares
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
---------------------------------- ----------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Shares sold .................... 3,171,114 $ 37,607,305 3,730,062 $ 43,600,272
Shares issued in connection with the
reinvestment of:
Distributions from net
investment income .......... 1,847,952 21,921,032 1,533,282 17,879,364
---------- -------------- ---------- ---------------
5,019,066 59,528,337 5,263,344 61,479,636
Shares repurchased ............. (11,030,290) (130,336,285) (11,224,787) (130,751,712)
---------- -------------- ---------- ---------------
Net decrease ................... (6,011,224) $ (70,807,948) (5,961,443) $ (69,272,076)
---------- -------------- ---------- ---------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
---------------------------------- ----------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
Shares sold .................... 633,142 $ 7,488,380 499,018 $ 5,811,793
Shares issued in connection with the
reinvestment of:
Distributions from net
investment income .......... 66,179 785,645 81,083 943,106
---------- ----------------- ---------- -----------------
699,321 8,274,025 580,101 6,754,899
Shares repurchased ............. (240,815) (2,850,637) (470,314) (5,466,085)
---------- ----------------- ---------- -----------------
Net increase ................... 458,506 $ 5,423,388 109,787 $ 1,288,814
---------- ----------------- ---------- -----------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
---------------------------------- ----------------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
Shares sold .................... 763,855 $ 9,083,684 2,452,099 $ 28,487,303
Shares issued in connection with the
reinvestment of:
Distributions from net
investment income .......... 6,338 76,069 37,778 439,187
---------- ----------------- ---------- -----------------
770,193 9,159,753 2,489,877 28,926,490
Shares repurchased ............. (279,634) (3,318,226) (1,689,523) (19,647,316)
---------- ----------------- ---------- -----------------
Net increase ................... 490,559 $ 5,841,527 800,354 $ 9,279,174
---------- ----------------- ---------- -----------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
---------------------------------- ----------------------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
Shares sold .................... 335,944 $ 3,928,529 120,869 $ 1,421,313
Shares issued in connection with the
reinvestment of:
Distributions from net
investment income .......... 28,675 341,684 33,402 390,110
---------- ----------------- ---------- -----------------
364,619 4,270,213 154,271 1,811,423
Shares repurchased ............. (51,079) (609,579) (167,273) (1,962,286)
---------- ----------------- ---------- -----------------
Net increase (decrease) ........ 313,540 $ 3,660,634 (13,002) $ (150,863)
---------- ----------------- ---------- -----------------
Decrease derived from capital
shares transactions ............ (4,748,619) $ (55,882,399) (5,064,304) $ (58,854,951)
========== =============== ========== ===============
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Trustees of New England Funds Trust II and the Shareholders of
the NEW ENGLAND LIMITED TERM U.S. GOVERNMENT FUND
We have audited the accompanying statement of assets and liabilities,
including the schedule of portfolio investments, of New England Limited Term
U.S. Government Fund as of December 31, 1996, and the related statement of
operations for the year then ended, and the statements of changes in net
assets for each of the two years in the period then ended, and financial
highlights for each of the periods indicated herein. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1996, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
New England Limited Term U.S. Government Fund as of December 31, 1996 the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods indicated herein, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 10, 1997
<PAGE>
--------------
(Logo) BULK RATE
NEW ENGLAND FUNDS U.S. POSTAGE
Where The Best Minds Meet(TM) PAID
BROCKTON, MA
PERMIT NO. 770
--------------
---------------------
399 Boylston Street
Boston, Massachusetts
02116
---------------------
- --------------------- ---------------------
[Logo] [Logo]
QUALITY QUALITY
TESTED SERVICE TESTED SERVICE
1995 1996
- --------------------- ---------------------
DALBAR DALBAR
HONORS COMMITMENT TO: HONORS COMMITMENT TO:
INVESTORS INVESTORS
- --------------------- ---------------------
LT56-1296
[recycle symbol] Printed On Recycled Paper
