NEW ENGLAND FUNDS TRUST II, N-30D, 1999-08-25

NEW ENGLAND FUNDS TRUST II
N-30D, 1999-08-25

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<PAGE>

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SEMIANNUAL REPORT
- --------------------------------------------------------------------------------

[Logo](R)
NEW ENGLAND FUNDS(R)
Where The Best Minds Meet(R)
- --------------------------------------------------------------------------------

New England Short Term
Corporate Income Fund

[graphic omitted]
Where
The Best
Minds
Meet(R)

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JUNE 30, 1999
- -------------
<PAGE>

AUGUST 1999
- --------------------------------------------------------------------------------

[Photo of Bruce R. Speca]

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"Most investment professionals I know agree that proper asset allocation is a
bedrock principle of sound investing."
- -------------------------------------------------------------------------------

Dear Shareholder,
Performance results for the New England Family of Funds were driven mainly by
two important changes that took place in our financial markets during the first
half of 1999. First, the long, upward climb of large-capitalization stocks
slowed dramatically as attention turned to stocks with more reasonable
valuations. Then, bond investors grew fearful that our persistently strong
economy would lead the Federal Reserve Board to impose higher interest rates.
Your manager's commentary on the following pages details how these trends
affected your fund's strategy and performance.

As I watch investments come in and out of favor, I'm reminded of the importance
of asset allocation - the practice of dividing your portfolio among different
kinds of stocks and bonds. The idea is to own more or less of each investment
type according to your feelings about risk and your investment time horizon.
Most investment professionals I know agree that proper asset allocation is a
bedrock principle of sound investing. In addition to broadening diversification,
it seeks to avoid exposure to narrow market segments and can help reduce
volatility.

While a diversified portfolio may have given solid returns during the past year,
many investors were disappointed when they compared those returns to the
performance of large-company growth stocks or to the soaring returns of Internet
stocks. Suddenly, investors were asking: Is asset allocation dead?

Certainly not! Like so much in life, market cycles are inevitable. Different
categories of investments will be popular at different times, and a sensible
asset allocation program can help you as market trends change.

I know it can be tempting to jump on a bandwagon and go after "easy money." But
I encourage you, instead, to maintain a rational, long-term perspective and to
consult your financial representative regularly to review and fine-tune your
investments, including a well-diversified asset allocation program.

Thank you for your continued interest. We look forward to helping you achieve
your long-term financial objectives.

Sincerely,

/s/ Bruce R. Speca

Bruce R. Speca
President and CEO
<PAGE>

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NEW ENGLAND SHORT TERM CORPORATE INCOME FUND
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INVESTMENT RESULTS THROUGH JUNE 30, 1999
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Putting Performance in Perspective
The charts comparing your Fund's performance to a benchmark index provide 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 below 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 and has no expenses that affect the results. It is
not possible to invest directly in an index. In addition, few investors could
purchase all of the securities necessary to match the index and would incur
transaction costs and other expenses even if they could.

GROWTH OF A $10,000 INVESTMENT IN CLASS A SHARES

[A chart in the form of a line graph appears here illustratng a $10,000
investment in the Fund compared to the Lehman Brothers Mutual Fund Short
(1-5) Investment Grade Debt Index since 10/31/91. The data for this chart are as
follows:]

OCTOBER 1991 THROUGH JUNE 1999

Lehman
Mutual Fund
Net Maximum Short(1-5)
Asset Sales Inv. Grade
Value(1) Charge(2) Debt Index(5)
- -------------------------------------------------------------------------------
10/91 $10,000 $ 9,700 $10,000
6/92 $10,371 $10,069 $10,688
6/93 $10,920 $10,595 $11,683
6/94 $11,068 $10,739 $11,849
6/95 $11,729 $11,380 $13,036
6/96 $12,392 $12,023 $13,805
6/97 $13,193 $12,800 $14,828
6/98 $13,890 $13,476 $15,965
6/99 $14,222 $13,800 $16,752

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 and C share
performance will differ from that shown based on differences in inception date,
fees and sales charges. All index and Fund performance assumes reinvestment of
distributions.
<PAGE>

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NEW ENGLAND SHORT TERM CORPORATE INCOME FUND
- --------------------------------------------------------------------------------

AVERAGE ANNUAL TOTAL RETURNS -- 6/30/99
- --------------------------------------------------------------------------------
SINCE
CLASS A (INCEPTION 10/18/91) 6 MONTHS 1 YEAR 5 YEARS INCEPTION
Net Asset Value(1), (4) 0.6% 2.4% 5.1% 4.7%
With Maximum Sales Charge(2), (4) -2.5 -0.7 4.5 4.3
- --------------------------------------------------------------------------------
SINCE
CLASS B (INCEPTION 9/13/93) 6 MONTHS 1 YEAR 5 YEARS INCEPTION
Net Asset Value(1), (4) 0.2% 1.6% 4.4% 3.7%
With CDSC3,(4) -4.7 -3.2 4.0 3.6
- --------------------------------------------------------------------------------
CLASS C (INCEPTION 12/7/98) 6 MONTHS SINCE INCEPTION
Net Asset Value(1), (4) 0.2% 0.5%
With CDSC(3), (4) -0.8 -0.5
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SINCE SINCE SINCE
FUND'S FUND'S FUND'S
CLASS A CLASS B CLASS C
COMPARATIVE PERFORMANCE 6 MONTHS 1 YEAR 5 YEARS INCEPTION INCEPTION INCEPTION
<S> <C> <C> <C> <C> <C> <C>
LB Mutual Fund Short (1-5)
Inv. Grade Debt Index(5) 0.9% 4.9% 7.2% 7.0% 6.1% 2.2%
Lipper Short Term Investment Grade Avg.(6) 1.2 4.0 5.8 5.6 5.0 1.2
Morningstar Short Term Bond Average(7) 0.5 3.8 6.0 5.8 4.9 1.0
- ------------------------------------------------------------------------------------------------------------
</TABLE>

NOTES TO CHARTS

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.

(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.
Returns would have been lower had sales charges been reflected.

(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 3.00% at the time of
purchase of Class A shares. Actual historical performance would have been
higher; the Fund's sales charge was increased from 1.00% to 3.00% on
December 1, 1998 when its objective and strategy changed. The Fund was
formerly Adjustable Rate U.S. Government Fund.

(3) With Contingent Deferred Sales Charge (CDSC) performance assumes
reinvestment of all distributions and, for Class B shares, assumes that a
maximum 5.00% sales charge is applied to redemptions. The sales charge will
decrease over time, declining to zero six years after the purchase of
shares. With CDSC performance for Class C shares assumes a maximum 1.00%
sales charge on redemptions within the first year of purchase.

(4) This fund waived certain fees and expenses during the period indicated and
the Fund's average annual total return would have been lower had these fees
not been waived.

(5) Lehman Brothers Mutual Fund Short (1-5) Investment Grade Debt Index is an
unmanaged index including all publicly issued, fixed-rate, nonconvertible
investment grade domestic corporate debt with maturities of 1 to 5 years.
The index performance has not been adjusted for ongoing management,
distribution and operating expenses and sales charges applicable to mutual
fund investments. It is not possible to invest directly in an index. Class A
since inception return is calculated from 10/31/91. Class B since inception
return is calculated from 9/30/93. Class C since inception return is
calculated from 12/31/98.

(6) Lipper Short Term Investment Grade Average is an average (calculated on the
basis of net asset value) of funds with similar investment objectives as
calculated by Lipper Inc., an independent mutual fund ranking service. Class
A since inception return is calculated from 10/31/91. Class B since
inception return is calculated from 9/30/93. Class C since inception return
is calculated from 12/31/98.

(7) Morningstar Short Term Bond Average is an average (calculated on the basis
of net asset value) of funds with similar investment objectives as
calculated by Morningstar, Inc., an independent mutual fund ranking service.
Class A since inception return is calculated from 10/31/91. Class B since
inception return is calculated from 9/30/93. Class C since inception return
is calculated from 12/31/98.
<PAGE>

QUESTIONS & ANSWERS WITH YOUR PORTFOLIO MANAGERS
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[Photo of Scott Nicholson]
[Photo of Richard Raczkowski]

Scott Nicholson
Richard Raczkowski
Back Bay Advisors, L.P.

Q. How did New England Short-Term Corporate Income Fund perform over the six
months ending June 30, 1999?

For the six-month period ending June 30, 1999, the Fund's Class A shares
generated a return, based on net asset value, of 0.6%, including a $0.04 rise
per share to $7.13 and the reinvestment of $0.21 per share in dividends. During
the same six-month period, funds in the Lipper Short-Term Investment Grade
Average had a return of 1.2%.

Q. What was the investment environment like in the bond market during the
period?

At the beginning of 1999, conditions in the bond market improved considerably
from late last year. We had overcome problems associated with the
well-publicized near collapse of certain hedge funds, a global liquidity crisis
had been averted and Asia started to show signs of recovery. In addition,
inflation remained under control in spite of the continued strength of the U.S.
economy. Investors turned their attention to the non-Treasury sectors of the
fixed-income market, which had been abandoned in the second half of 1998, as
investors fled to quality due to global economic uncertainty. As a result of
this increased demand for non-Treasury securities, corporate bonds,
mortgage-backed securities and other non-Treasury sectors recovered well.

However, as we moved into the second quarter of 1999, data emerged showing that
the U.S. economy had grown even stronger in the previous quarter. Investors
became concerned about the possible build-up of inflationary pressures. Even
though data has indicated inflation has been rather tame, market observers
expected the Federal Reserve Board to raise short-term interest rates to slow
growth in a pre-emptive strike against inflation. As a result, interest rates
across all maturities rose -- and bond prices fell. This rise in interest rates,
coupled with heavy new issuance, hurt corporate bond prices relative to
Treasuries in the second quarter. Market expectations of a Fed rate hike were
confirmed when the board raised a key short-term interest rate at the end of
June.

Q. What strategies did you pursue with the Fund during the period?

We continued the Fund's transition from an adjustable rate mortgage (ARM) fund
to a short-term corporate fund. This change was gradual to ensure that we were
adequately compensated for the ARM securities that we sold. We increased the
Fund's allocation to short-term corporate securities with a credit quality of A
or better, as rated by Standard and Poor's. At the end of the period, the change
in strategy was complete and the Fund held 70.5% of assets in corporate
securities, 14.4% in Yankees, 5.3% in U.S. government and Federal agencies and
8.3% in ARMs. Its duration -- or sensitivity to change in interest rates -- was
at a neutral position of 2.4 years at the end of June, and the Fund's average
maturity was 2.7 years.

We have also utilized Back Bay Advisors' strong credit research team to build a
diversified portfolio of corporate securities. In particular, we have added
select below-investment-grade securities that traded at compelling yields
relative to Treasuries.

In addition, signs of continued economic strength have led us to increase the
Fund's corporate exposure to cyclical industries -- those that rise and fall
with the economy. For example, the Fund benefited from its investment in YPF, an
Argentine oil company. Our analytical team recommended YPF based on the
company's strong fundamentals and its potential as an attractive acquisition
target. In fact, the company was purchased by Repsol, a Spanish oil company.
Another oil company held by the Fund, Occidental Petroleum, performed very well
due to a rebound in oil prices, a factor that also helped boost YPF.

Q. What is your outlook?

At the end of June, the market expected the Fed to raise short-term rates both
in June and in August, and had priced in this scenario. The Fed followed through
with one rate increase in June. However, much economic data will become
available between June and August, and we are not convinced that the U.S.
economy will continue to grow at a 4% annual clip, or that the Fed will follow
its June hike with one in August.
<PAGE>

PORTFOLIO MIX -- 6/30/99

Federal Agencies 2.4%
ARMs 8.3%
Corporate Bonds 70.5%
Treasury Notes 2.9%
Cash & Other 1.5%
Yankees* 14.5%

*Yankees are dollar-denominated foreign bonds.
Portfolio holdings and asset allocation will vary.

The short-term corporate market should also benefit from an improved supply/
demand dynamic. Many corporate issuers came to market early in 1999 in order to
bolster their liquidity in anticipation of the Year 2000, and this increased
supply has made corporate bonds cheaper. We believe that this supply will trail
off toward the end of the year, raising the potential for corporate bonds to
post strong price performance.

The portfolio managers' commentary reflects the conditions and actions taken
during the reporting period, which are subject to change. A shift in opinion may
result in strategic and other portfolio changes.

The Fund invests in foreign securities. Investing in foreign securities involves
special risks. The Fund invests in mortgage or asset-backed securities which are
subject to pre-payment risk. The principal value and interest on Treasury
securities are guaranteed by the U.S. government if held to maturity. While
lower rated, higher yielding bonds may offer higher current income than
Treasuries, they also are associated with greater than average risk. Government
guarantees apply to individual securities only and not to prices and yields of
shares in a managed portfolio. Bond funds will fluctuate and shares, when
redeemed, may be worth more or less than their original cost. These risks may
increase share price volatility. See the Fund's prospectus for details.
<PAGE>

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PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------

Investments as of June 30, 1999
(unaudited)

BONDS AND NOTES -- 98.5% OF TOTAL NET ASSETS
RATINGS (C)
----------------
PRINCIPAL STANDARD
AMOUNT DESCRIPTION MOODY'S & POOR'S VALUE (A)
- -------------------------------------------------------------------------------
BANKS -- 2.9%
$ 1,500,000 BankAmerica Corp.,
6.625%, 6/15/2004 ............... Aa2 A+ $ 1,486,575
1,000,000 State Street Boston Corp.,
5.950%, 9/15/2 .................. A13 AA- 972,510
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2,459,085
-------------
BUSINESS SERVICES -- 1.8%
1,500,000 Ceridian Corp., 144A,
7.250%, 6/01/2004 ............... Baa3 BBB 1,499,235
-------------
COMMERCIAL SERVICES -- 2.9%
2,500,000 Aramark Services, Inc.,
6.750%, 8/01/2004 ............... Baa3 BBB- 2,451,450
-------------
CONSUMER GOODS & SERVICES -- 2.4%
2,000,000 Black & Decker Corp.,
6.625%, 11/15/2000 .............. Baa2 BBB 2,012,780
-------------
ELECTRIC UTILITIES -- 15.0%
2,000,000 Arizona Public Service Co.,
5.750%, 9/15/2000 ............... Baa1 A- 1,993,680
3,000,000 East Coast Power LLC, 144A,
6.737%, 3/31/2008 ............... Baa3 BBB- 2,919,390
2,500,000 Houston Lighting & Power Co.,
8.150%, 5/01/2002 ............... A3 A- 2,603,700
2,000,000 Kansas Gas & Electric Co.,
6.760%, 9/29/2003 ............... Baa1 BBB 1,997,540
3,000,000 Texas Utilities Co.,
5.940%, 10/15/2001 .............. Baa3 BBB 2,978,970
-------------
12,493,280
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FEDERAL AGENCIES -- 10.7%
1,517,388 Federal Home Loan Mortgage Corp.
5.668%, 10/15/2023 (d) .......... Aaa AAA 1,533,502
597,034 Federal Home Loan Mortgage Corp.
6.436%, 12/01/2022 (d) .......... Aaa AAA 601,488
665,328 Federal Home Loan Mortgage Corp.
7.395%, 3/01/2025 (d) ........... Aaa AAA 690,903
228,126 Federal Home Loan Mortgage Corp.
7.506%, 12/01/2025 (d) .......... Aaa AAA 231,478
342,768 Federal National Mortgage Association
5.633%, 9/01/2023 (d) ........... Aaa AAA 332,700
2,000,000 Federal National Mortgage Association
6.100%, 10/06/2000 .............. Aaa AAA 2,000,320
253,432 Federal National Mortgage Association
6.559%, 6/01/2019 (d) ........... Aaa AAA 250,799
795,937 Federal National Mortgage Association
6.677%, 1/01/2020 (d) ........... Aaa AAA 789,840
231,974 Federal National Mortgage Association
6.889%, 5/01/2020 (d) ........... Aaa AAA 236,286
1,117,275 Federal National Mortgage Association
6.994%, 1/01/2024 (d) ........... Aaa AAA 1,154,112
169,403 Federal National Mortgage Association
6.995%, 8/01/2017 (d) ........... Aaa AAA 173,082
537,680 Federal National Mortgage Association
7.075%, 5/01/2025 (d) ........... Aaa AAA 544,653
368,288 Federal National Mortgage Association
7.383%, 7/01/2023 (d) ........... Aaa AAA 372,030
-------------
8,911,193
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FINANCE -- 21.6%
1,000,000 CIT Group, Inc.,
5.570%, 12/08/2003 .............. Aa3 A+ 961,140
1,969,000 Finova Capital Corp.,
6.450%, 6/01/2000 ............... Baa1 A- 1,979,101
3,000,000 General Motors Acceptance Corp.,
5.480%, 12/16/2002 .............. A2 A 2,904,990
3,000,000 Goldman Sachs Group,
7.800%, 7/15/2002 ............... A1 A+ 3,103,800
3,000,000 Household Finance Corp.,
5.875%, 11/01/2002 .............. A2 A 2,938,380
2,500,000 Lehman Brothers Holdings, Inc.,
6.375%, 3/15/2001 ............... Baa1 A 2,484,925
1,000,000 Merrill Lynch & Co., Inc.,
5.750%, 11/04/2002 .............. Aa3 AA- 980,400
2,750,000 Transamerica Finance Corp.,
6.125%, 11/01/2001 .............. A3 A 2,737,708
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18,090,444
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GLASS -- 1.8%
1,500,000 Owens Illinois, Inc.,
7.850%, 5/15/2004 ............... Ba1 BB+ 1,500,960
-------------
INSURANCE -- 1.2%
1,000,000 Conseco, Inc.,
7.875%, 12/15/2000 .............. Ba1 BBB 1,015,280
-------------
OIL & GAS -- 2.3%
2,000,000 Occidental Petroleum Corp.,
6.400%, 4/01/2003 ............... Baa3 BBB 1,959,580
-------------
POLLUTION CONTROL -- 3.0%
2,500,000 WMX Technologies, Inc.,
7.125%, 6/15/2001 ............... Baa1 BBB+ 2,538,825
-------------
RETAIL - DEPARTMENT STORE -- 1.8%
1,400,000 Federated Department Stores, Inc.,
8.500%, 6/15/2003 ............... Baa2 BBB+ 1,486,436
-------------
RETAIL - FOOD & DRUG -- 9.1%
2,700,000 Dole Foods, Inc.,
6.750%, 7/15/2000 ............... Baa2 BBB- 2,707,587
3,000,000 Nabisco, Inc.,
6.125%, 2/01/2033 ............... Baa2 BBB 2,927,340
2,000,000 Rite Aid Corp.,
5.500%, 12/15/2000 .............. Baa1 BBB 1,976,840
-------------
7,611,767
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TELECOMMUNICATION -- 3.5%
3,000,000 Sprint Capital Corp.,
5.875%, 5/01/2004 ............... Baa1 BBB+ 2,901,540
-------------
TRANSPORTATION -- 1.2%
1,000,000 Union Pacific Corp.,
5.780%, 10/15/2001 .............. Baa3 BBB- 982,410
-------------
U.S. GOVERNMENT -- 2.9%
800,000 United States Treasury Notes,
7.500%, 11/15/2001 .............. Aaa AAA 833,376
1,500,000 United States Treasury Notes,
8.500%, 11/15/2000 .............. Aaa AAA 1,560,240
-------------
2,393,616
-------------
YANKEE BONDS -- 14.4%
1,500,000 Cemex S.A., 144A,
9.250%, 6/17/2002 ............... Ba2 BB+ 1,526,250
1,510,000 Multicanal S.A.,
9.250%, 2/01/2002 ............... Ba3 BB+ 1,328,800
2,000,000 PDVSA Finance, Ltd., 144A,
8.750%, 2/15/2004 ............... A3 BBB+ 1,997,440
3,000,000 Pemex Finance, Ltd., 144A,
5.720%, 11/15/2003 .............. -- AAA 2,935,710
2,000,000 Republic of Columbia,
7.250%, 2/15/2003 ............... Baa3 BBB- 1,750,000
2,500,000 YPF Sociedad Anonima,
8.000%, 2/15/2004 ............... Ba3 BBB- 2,464,875
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12,003,075
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Total Bonds and Notes
(Identified Cost $83,824,228) 82,310,956
-------------

SHORT TERM INVESTMENT -- 0.3%

$ 260,000 UBS Finance Delaware, Inc. 5.500%, 7/01/1999 $ 260,000
-------------
Total Short Term Investment
(Identified Cost $260,000) 260,000
-------------
Total Investments-- 98.8%
(Identified Cost $84,084,228) (b) 82,570,956
Other assets less liabilities 977,864
-------------
Total Net Assets-- 100% $ 83,548,820
=============
(a) See Note 1a of Notes to Financial Statements.

(b) Federal Tax Information: At June 30, 1999 the net
unrealized depreciation on investments based on cost
for federal income tax purposes of $84,084,228 was as
follows:

Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost $ 88,962

Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value (1,602,234)

-------------
Net unrealized depreciation $ (1,513,272)
=============

At December 31, 1998 the Fund had a capital loss carryover of approximately
$15,735,913 of which $5,625,994 expires on December 31, 2002, $6,075,626
expires on December 31, 2003, $2,134,629 expires on December 31, 2004 and
$455,288 expires on December 31, 2005, and $1,444,376 expires on December
31, 2006. This may be available to offset future realized capital gains, if
any, to the extent provided by regulations.

(c) The ratings shown are believed to be the most recent ratings available at
June 30, 1999. Securities are generally rated at the time of issuance. The
rating agencies may revise their ratings from time to time. As a result,
there can be no assurance that the same ratings would be assigned if the
securities were rated at June 30, 1999. The Fund's subadviser independently
evaluates the Fund's portfolio securities and in making investment
decisions does not rely solely on the ratings of agencies.

(d) Variable rate mortgage backed securities. The interest rates change on
these instruments monthly based on changes in a designated base rate. The
rates shown were those in effect at June 30, 1999.

144A Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $10,878,025 or 13.0% of the
net assets.

See accompanying notes to financial statements.
<PAGE>

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STATEMENT OF ASSETS & LIABILITIES
- --------------------------------------------------------------------------------

June 30, 1999
(unaudited)

ASSETS
Investments at value (Identified Cost
$84,084,228) ................................... $ 82,570,956
Cash ............................................. 2,344
Receivable for:
Fund shares sold ................................. 27,456
Dividends and interest ........................... 1,259,553
-------------
83,860,309

LIABILITIES
Payable for:
Fund shares redeemed ............................. $124,308
Dividends declared ............................... 116,265
Accrued expenses:
Deferred trustees' fees .......................... 12,915
Accounting and administrative .................... 6,166
Other expenses ................................... 51,835
--------
311,489
-------------
NET ASSETS ......................................... $ 83,548,820
=============
Net assets consist of:
Capital paid in .................................. $ 101,963,741
Undistributed net investment income .............. 3,125
Accumulated net realized gains (losses) .......... (16,904,774)
Unrealized appreciation (depreciation) on
investments .................................... (1,513,272)
-------------

NET ASSETS ......................................... $ 83,548,820
=============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($79,792,233 / 11,190,154 shares of beneficial interest) $ 7.13
=======

Offering price per share (100 / 99 of $7.13) ....... $ 7.20*
=======

Net asset value and offering price of Class B shares
($3,433,159 / 482,139 shares of beneficial interest) $ 7.12**
=======

Net asset value and offering price of Class C shares
($323,428 / 45,430 shares of beneficial interest) .. $ 7.12**
=======

* 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.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------

Six Months Ended June 30, 1999
(unaudited)

INVESTMENT INCOME
Interest $ 2,904,206

Expenses
Management fees ................................. $ 247,904
Service fees - Class A .......................... 107,687
Service and distribution fees - Class B ......... 18,107
Service and distribution fees - Class C ......... 2,040
Trustees' fees and expenses ..................... 5,013
Accounting and administrative ................... 18,323
Custodian ....................................... 41,677
Transfer agent .................................. 68,722
Audit and tax services .......................... 15,285
Legal ........................................... 1,493
Printing ........................................ 5,652
Registration .................................... 25,738
Miscellaneous ................................... 6,251
---------
Total expenses .................................... 563,892
Less expenses waived by the investment
adviser and subadviser .......................... (233,151) 330,741
--------- -------------
Net investment income ............................. 2,573,465

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS

Realized gain (loss) on investments-- net ........ (797,052)
Unrealized appreciation (depreciation) on
investments-- net .............................. (1,259,375)
-------------
Net gain (loss) on investment transactions ....... (2,056,427)
-------------
NET INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS ........................................ $ 517,038
=============

See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(unaudited)

SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1998 1999
-------------- --------------

FROM OPERATIONS
Net investment income ................. $ 10,720,940 $ 2,573,465
Net realized gain (loss) on investment
transactions .......................... (2,163,351) (797,052)
Unrealized appreciation (depreciation) on
investment transactions ............... (1,383,310) (1,259,375)
-------------- --------------
Increase (decrease) in net assets from
operations ............................ 7,174,279 517,038
-------------- --------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ............................... (9,320,304) (2,485,072)
Class B ............................... (145,098) (90,822)
Class C ............................... (340) (10,356)
-------------- --------------
(9,465,742) (2,586,250)
-------------- --------------
INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM CAPITAL SHARE TRANSACTIONS (100,934,285) (11,044,720)
-------------- --------------
Total increase (decrease) in net assets . (103,225,748) (13,113,932)
-------------- --------------
NET ASSETS
Beginning of the period ............... 199,888,500 96,662,752
-------------- --------------
End of the period ..................... $ 96,662,752 $ 83,548,820
============== ==============

UNDISTRIBUTED NET INVESTMENT INCOME
End of the period ..................... $ 15,910 $ 3,125
============== ==============
<PAGE>

<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------

(unaudited)
<CAPTION>
CLASS A
-------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
------------------------------------------------------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period . $ 7.45 $ 7.20 $ 7.37 $ 7.37 $ 7.39 $ 7.30
-------- -------- -------- -------- -------- --------
Income From Investment Operations
Net Investment Income (Loss) ............. 0.37 0.47 0.43 0.47(c) 0.38 0.21
Net Realized and Unrealized Gain
(Loss) on Investments .................... (0.31) 0.14 (0.01) (0.02) (0.09) (0.17)
-------- -------- -------- -------- -------- --------
Total From Investment Operations ......... 0.06 0.61 0.42 0.45 0.29 0.04
-------- -------- -------- -------- -------- --------
Less Distributions
Dividends From Net Investment Income ..... (0.31) (0.44) (0.42) (0.43) (0.38) (0.21)
-------- -------- -------- -------- -------- --------
Total Distributions ...................... (0.31) (0.44) (0.42) (0.43) (0.38) (0.21)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of the Period ....... $ 7.20 $ 7.37 $ 7.37 $ 7.39 $ 7.30 $ 7.13
======== ======== ======== ======== ======== ========
Total Return (%)(a) ...................... 0.8 8.6 5.8 6.2 4.0 0.6
Ratio of Operating Expenses to
Average Net Assets (%)(b) ............... 0.60 0.66 0.70 0.70 0.70 0.70(c)
Ratio of Net Investment Income to
Average Net Assets (%) .................. 4.85 6.29 6.39 6.27 5.93 5.74(c)
Portfolio Turnover Rate (%) .............. 17 73 54 49 105 157
Net Assets, End of the Period (000) ...... $489,637 $331,112 $222,809 $196,928 $ 92,669 $ 79,792

(a) A sales charge is not reflected in total return calculations.
(b) The ratio of operating expenses to average net assets without giving effect to this expense limitation described
in Note 4 to the Financial Statements
would have been (%) .................. 0.88 0.89 0.94 0.98 1.05 1.22
(c) Computed on an annualized basis.

See accompanying notes to financial statements.
</TABLE>

<PAGE>

(unaudited)
<CAPTION>
CLASS B
-------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
------------------------------------------------------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period . $ 7.45 $ 7.20 $ 7.37 $ 7.36 $ 7.38 $ 7.29
-------- -------- -------- -------- -------- --------
Income From Investment Operations
Net Investment Income (Loss) ............. 0.29 0.41 0.37 0.41(c) 0.33 0.19
Net Realized and Unrealized Gain
(Loss) on Investments .................... (0.29) 0.14 (0.02) (0.02) (0.09) (0.17)
-------- -------- -------- -------- -------- --------
Total From Investment Operations ......... 0.00 0.55 0.35 0.39 0.24 0.02
-------- -------- -------- -------- -------- --------
Less Distributions
Dividends From Net Investment Income ..... (0.25) (0.38) (0.36) (0.37) (0.33) (0.19)
-------- -------- -------- -------- -------- --------
Total Distributions ...................... (0.25) (0.38) (0.36) (0.37) (0.33) (0.19)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of the Period ....... $ 7.20 $ 7.37 $ 7.36 $ 7.38 $ 7.29 $ 7.12
======== ======== ======== ======== ======== ========
Total Return (%)(a) ...................... 0.1 7.8 4.9 5.4 3.4 0.2
Ratio of Operating Expenses to
Average Net Assets (%)(b) ............... 1.35 1.41 1.45 1.45 1.45 1.45(c)
Ratio of Net Investment Income to
Average Net Assets (%) .................. 4.10 5.54 5.64 5.52 5.18 5.00(c)
Portfolio Turnover Rate (%) .............. 17 73 54 49 105 157
Net Assets, End of the Period (000) ...... $ 2,056 $ 2,368 $ 2,821 $ 2,961 $ 3,761 $ 3,433

(a) A contingent deferred sales charge is not reflected in total return calculations.
(b) The ratio of operating expenses to average net assets without giving effect to this expense limitation described
in Note 4 to the Financial Statements
would have been (%) .................. 1.63 1.65 1.69 1.73 1.80 1.97
(c) Computed on an annualized basis.

See accompanying notes to financial statements.
</TABLE>

<PAGE>

(unaudited)
<CAPTION>
CLASS C
--------------------------------------
DECEMBER 7, 1998(A) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------------- ----------
<S> <C> <C>
Net Asset Value, Beginning of the Period ................................ $ 7.28 $ 7.29
------ ------
Income From Investment Operations
Net Investment Income ................................................... 0.01 0.19
Net Realized and Unrealized Gain (Loss) on
Investments ............................................................ 0.01(b) (0.17)
------ ------
Total From Investment Operations ........................................ 0.02 0.02
------ ------
Less Distributions
Dividends From Net Investment Income .................................... (0.01) (0.19)
------ ------
Total Distributions ..................................................... (0.01) (0.19)
------ ------
Net Asset Value, End of the Period ...................................... $ 7.29 $ 7.12
====== ======
Total Return (%) (c) .................................................... 0.3 0.2
Ratio of Operating Expenses to Average Net Assets (%) (d)(e) ............ 1.45 1.45
Ratio of Net Investment Income to Average Net Assets (%) (e) ............ 5.18 5.00
Portfolio turnover rate ................................................. 105 157
Net Assets, End of the Period (000) ..................................... $ 233 $ 323

(a) Commencement of operations.
(b) The amount shown for a share outstanding does not correspond with the aggregate net gain/(loss) on investments for
the period ended December 31, 1998, due to the timing of purchases and redemptions of Fund shares in relation to
fluctuating values of the investments of the Fund.
(c) A contingent deferred sales charge is not reflected in total return calculations.
(d) The ratio of operating expenses to average net assets without giving
effect to this expense limitation described in Note 4 to the
Financial Statements would have been (%)(e) ......................... 1.80 1.97
(e) Computed on an annualized basis.

See accompanying notes to financial statements.
</TABLE>

<PAGE>

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

For the Period Ended June 30, 1999
(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES. 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, as amended (the "1940 Act"), as an open-end
management investment company. The Fund seeks a high level of current income
consistent with preservation of capital. The Declaration of Trust permits the
Trustees to issue an unlimited number of shares of the Trust in multiple series
(each series of shares is a "Fund").

The Fund offers Class A, Class B and Class C shares. 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 six years of purchase (or five years if purchased before May
1, 1997). Class C shares do not pay a front end sales charge and do not convert
to any class of shares, but they do pay a higher ongoing distribution fee than
Class A shares and may be subject to a contingent deferred sales charge if those
shares are redeemed within one year. Expenses of the Fund are borne pro rata by
the holders of each class 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. Debt securities (other than short-term obligations with a
remaining maturity of less than sixty days) are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of Trustees,
which service determines valuations for normal, institutional-size trading units
of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. Short-term obligations with a remaining
maturity of less than sixty days are stated at amortized cost, which
approximates market value. All other securities and assets are valued at their
fair value as determined in good faith by the Fund's adviser and subadviser,
under the supervision of the Fund's Trustees.

B. SECURITY TRANSACTIONS AND RELATED INCOME. Security transactions are accounted
for on the trade date. Interest income is recorded on the accrual basis.
Interest income is increased by the accretion of original issue discount and/or
market discount. In determining net gain or loss on securities sold, the cost of
securities has been determined on the identified cost basis.

C. 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.

D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily to
shareholders of record at the time 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 primarily relate to
the expiration of capital loss carryforwards. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassification to paid in capital.

E. 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, including interest. The subadviser 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. For the six months ended June 30, 1999
purchases and sales of securities (excluding short-term investments) were as
follows:
PURCHASES SALES
------------------------------- --------------------------------
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
--------------- ----------- --------------- -----------
$5,285,625 $62,833,698 $53,484,710 $23,136,899

3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays gross
management fees to its investment adviser, New England Funds Management, L.P.
("NEFM"), at the annual rate of 0.55% of the first $200 million of the Fund's
average daily net assets, 0.51% of the next $300 million and 0.47% of such
assets in excess of $500 million reduced by the payment to the Fund's investment
subadviser, Back Bay Advisors L.P. ("Back Bay") at the rate of 0.275% of the
first $200 million of the Fund's average daily net assets, 0.255% of the next
$300 million and 0.235% 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 are wholly owned subsidiaries of Nvest Companies, L.P. ("Nvest")
which is a subsidiary of Metropolitan Life Insurance Company ("MetLife"). Fees
earned by NEFM and Back Bay under the management and subadvisory agreements in
effect during the six months ended June 30, 1999 are as follows:

Fees Earned (a)
---------------
NEFM $ 123,952
Back Bay 123,952

(a) Before reduction pursuant to voluntary expense limitations. See Note 4.

The effective annualized management fee for the six months ended June 30, 1999
was 0.55%.

B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. Nvest Services Company, Inc. ("NSC")
is a wholly owned subsidiary of Nvest and performs certain accounting and
administrative services for the Fund. The Fund reimburses NSC for all or part of
NSC's expenses of providing these services which include the following: (i)
expenses for personnel performing bookkeeping, accounting, financial reporting
functions and clerical functions relating to the Fund, and (ii) expenses for
services required in connection with the preparation of registration statements
and prospectuses, registration of shares in various states, shareholder reports
and notices, proxy solicitation material furnished to shareholders of the Fund
or regulatory authorities and reports and questionnaires for SEC compliance. For
the six months ended June 30, 1999 these expenses amounted to $18,323 and are
shown separately in the financial statements as accounting and administrative.

C. SERVICE AND DISTRIBUTION EXPENSE. Pursuant to Rule 12b-1 under the 1940 Act,
the Trust has adopted a Service Plan relating to the Fund's Class A shares (the
"Class A Plan") and Service and Distribution Plans relating to the Fund's Class
B and Class C shares (the "Class B and Class C Plans").

Under the Class A Plan, the Fund pays New England Funds L.P. ("New England
Funds"), the Fund's distributor (a wholly owned subsidiary of Nvest), a monthly
service fee at the annual rate of 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.
For the six months ended June 30, 1999, the Fund paid New England Funds $107,687
in fees under the Class A Plan. If the expenses of New England Funds that are
otherwise reimbursable under the Class A Plan incurred in any year exceed the
amounts payable by the Fund under the Class A Plan, the unreimbursed amount
(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 expenses as of June 30, 1999 is $1,929,283.

Under the Class B and Class C Plans, the Fund pays New England Funds a monthly
service fee at the annual rate of 0.25% 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 providing personal services to investors in Class B and Class C shares
and/or the maintenance of shareholder accounts. For the six months ended June
30, 1999, the Fund paid New England Funds $4,527 and $510 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 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 six months ended June 30, 1999, the Fund paid New England Funds $13,580
and $1,530 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
six months ended June 30, 1999 amounted to $41,080.

D. TRANSFER AGENT FEES. NSC is the transfer and shareholder servicing agent to
the Fund and Boston Financial Data Services serves as a sub-transfer agent for
the Fund. For the six months ended June 30, 1999, the Fund paid NSC $85,179 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 NEFM,
New England Funds, Nvest, NSC or their affiliates. Each other Trustee receives a
retainer fee at the annual rate of $40,000 and meeting attendance fees of $3,500
for each meeting of the Board of Trustees attended. Each committee member
receives an additional retainer fee at the annual rate of $6,000 while each
committee chairman receives a retainer fee (beyond the $6,000 fee) at the annual
rate of $4,000. These fees are allocated to the various New England Funds based
on a formula that takes into account, among other factors, the relative net
assets of each fund.

A deferred compensation plan is available to the trustees on a voluntary 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. Deferred amounts remain in the Fund until distributed in
accordance with the Plan.

4. EXPENSE LIMITATIONS. Commencing June 1, 1995 and until further notice to the
Fund, Back Bay and NEFM have voluntarily agreed to reduce management fees in
order to limit the Fund's expenses to an annual rate of 0.70% of the Fund's
Class A average daily net assets and, 1.45% of Class B and Class C average daily
net assets. From May 1, 1995 through May 31, 1995 expenses were voluntarily
limited to 0.65% of Class A average net assets and 1.40% of Class B average net
assets. From April 1, 1992 through April 30, 1995 expenses were voluntarily
limited to 0.60% of Class A average net assets and 1.35% of Class B average net
assets. As a result of the Fund's expenses exceeding the applicable voluntary
expense limitation during the six months ended June 30, 1999, Back Bay reduced
its management fee of $123,952 by $116,576 and NEFM reduced its management fee
of $123,952 by $116,575.

5. CAPITAL SHARES. At June 30, 1999 there was an unlimited number of shares of
beneficial interest authorized, divided into three classes, Class A, Class B and
Class C capital shares. Transactions in capital shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
---------------------------- ---------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Shares sold ......................................... 9,823,863 $ 72,248,743 775,506 $ 5,616,174
Shares issued in connection with the reinvestment of:
Dividends from net investment income .............. 744,999 5,472,019 259,643 1,873,451
----------- ------------- ---------- ------------
10,568,862 77,720,762 1,035,149 7,489,625
Shares repurchased .................................. (24,534,160) (179,732,109) (2,538,536) (18,391,648)
----------- ------------- ---------- ------------
Net increase (decrease) ............................. (13,965,298) $(102,011,347) (1,503,387) $(10,902,023)
----------- ------------- ---------- ------------

<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
---------------------------- ---------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
------- ----------- ------------- ---------- ------------
Shares sold ......................................... 261,970 $ 1,920,476 70,024 $ 505,699
Shares issued in connection with the reinvestment of:
Dividends from net investment income .............. 17,255 126,641 10,993 79,176
----------- ------------- ---------- ------------
279,225 2,047,117 81,017 584,875
Shares repurchased .................................. (164,137) (1,203,273) (114,929) (827,905)
----------- ------------- ---------- ------------
Net increase (decrease) ............................. 115,088 $ 843,844 (33,912) $ (243,030)
----------- ------------- ---------- ------------

<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
---------------------------- ---------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
------- ----------- ------------- ---------- ------------
Shares sold ......................................... 31,970 $ 233,136 69,078 $ 498,199
Shares issued in connection with the reinvestment of:
Dividends from net investment income .............. 11 82 1,368 9,840
----------- ------------- ---------- ------------
31,981 233,218 70,446 508,039
Shares repurchased .................................. 0 0 (56,997) (407,706)
----------- ------------- ---------- ------------
Net increase (decrease) ............................. 31,981 $ 233,218 13,449 $ 100,333
----------- ------------- ---------- ------------
Decrease derived from capital shares transactions ... (13,818,229) $(100,934,285) (1,523,850) $(11,044,720)
----------- ------------- ---------- ------------
</TABLE>

6. SECURITY LENDING. The Fund has entered into an agreement with a third party
to lend its securities. The loans are collateralized at all times with cash or
securities with a market value at least equal to the market value of the
securities on loan. The Fund receives fees for lending its securities. At June
30, 1999 the Fund had no securities on loan.

7. LINE OF CREDIT. The Fund along with the other portfolios that comprise the
New England Funds (the "Funds") participate in a $100,000,000 committed line of
credit provided by Citibank, N.A., under a credit agreement (the "Agreement")
dated March 4, 1999. Advances under the Agreement are taken primarily for
temporary or emergency purposes. Borrowings under the Agreement bear interest at
a rate tied to one of several short-term rates that may be selected from time to
time. In addition, the Funds are charged a facility fee equal to 0.08% per annum
on the unused portion of the line of credit. The annual cost of maintaining the
line of credit and the facility fee is apportioned pro rata among the
participating Funds. There were no borrowings as of or during the period ended
June 30, 1999.

<PAGE>

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
GLOSSARY FOR MUTUAL FUND INVESTORS
- --------------------------------------------------------------------------------

TOTAL RETURN - The change in value of a mutual fund investment over a specific
time period, assuming all earnings are reinvested in additional shares of the
fund. Expressed as a percentage.

INCOME DISTRIBUTIONS - Payments to shareholders resulting from the net interest
or dividend income earned by a fund's portfolio.

CAPITAL GAINS DISTRIBUTIONS - Payments to shareholders of profits earned from
selling securities in a fund's portfolio. Capital gains distributions are
usually paid once a year.

YIELD - The rate at which a fund pays income. Yield calculations for 30-day
periods are standardized among mutual funds, based on a formula developed by the
Securities and Exchange Commission.

MATURITY - Refers to the period of time before principal repayment on a bond is
due. A bond fund's "average maturity" refers to the weighted average of the
maturities of all the individual bonds in the portfolio.

DURATION - A measure, stated in years, of a bond's sensitivity to interest
rates. Duration is a means to directly compare the volatility of different
instruments. As a general rule, for every 1% move in interest rates, a bond is
expected to fluctuate in value as indicated by its duration. For example, if
interest rates fall by 1%, a bond with a duration of 4 years should rise in
value 4%. Conversely, the bond should decline 4% if interest rates rise 1%.

TREASURIES - Negotiable debt obligations of the U.S. government, secured by its
full faith and credit. The income from Treasury securities is exempt from state
and local income taxes, but not from federal income taxes. There are three types
of Treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years)
and Bonds (maturity of 10-30 years).

MUNICIPAL BOND - A debt security issued by a state or municipality to finance
public expenditures. Interest payments are exempt from federal taxes and, in
most cases, from state and local income taxes. The two main types are general
obligation (GO) bonds, which are backed by the full faith and credit and taxing
powers of the municipality; and revenue bonds, supported by the revenues from a
municipal enterprise, such as airports and toll bridges. A small portion of
income may be subject to federal and/or alternative minimum tax. Capital gains,
if any, are subject to a capital gains tax.

<PAGE>

- --------------------------------------------------------------------------------
NEW ENGLAND FUNDS
- --------------------------------------------------------------------------------

LARGE-CAP EQUITY FUNDS
Capital Growth Fund
Growth Fund
Growth and Income Fund
(formerly Growth Opportunities Fund)
Balanced Fund
Value Fund

ALL-CAP EQUITY FUNDS
Star Advisers Fund
Star Worldwide Fund
International Equity Fund
Bullseye Fund
Equity Income Fund

SMALL-CAP EQUITY FUNDS
Star Small Cap Fund

GOVERNMENT INCOME FUNDS
Limited Term U.S. Government Fund
Government Securities Fund

TAX-FREE INCOME FUNDS
Municipal Income Fund
Intermediate Term Tax Free
Fund of California
Massachusetts Tax Free Income Fund

MONEY MARKET FUNDS
Cash Management Trust,
Money Market Series
Tax Exempt Money Market Trust

CORPORATE INCOME FUNDS
Short Term Corporate Income Fund
(Formerly Adjustable Rate U.S. Government Fund)
Bond Income Fund
High Income Fund
Strategic Income Fund

TO LEARN MORE, AND FOR A FREE PROSPECTUS, CONTACT YOUR FINANCIAL REPRESENTATIVE.

VISIT OUR WORLD WIDE WEB SITE AT WWW.MUTUALFUNDS.COM
NEW ENGLAND FUNDS, L.P., DISTRIBUTOR
399 BOYLSTON STREET
BOSTON, MA 02116
TOLL FREE 800-225-5478
This material is authorized for distribution to
prospective investors when it is preceded or accompanied
by the Fund's current prospectus, which contains
information about distribution charges, management and
other items of interest. Investors are advised to read
the prospectus carefully before investing.

New England Funds, L.P., And other firms selling shares of
New England Funds are members of the National Association of
Securities Dealers, Inc. (NASD). As a service to investors,
the NASD has asked that we inform you of the availability of
a brochure on its Public Disclosure Program. The program
provides access to information about securities firms and
their representatives. Investors may obtain a copy by
contacting the NASD at 800-289-9999 or by visiting their web
site at www.NASDR.Com.

- --------------------------------------------------------------------------------
Y2K Readiness Report: New England Funds has kept pace with
the Y2K challenge. Mission critical systems have been tested
and non-mission critical systems are scheduled for
completion by September 30, 1999. Y2K is a top priority at
New England Funds. For more information on our Y2K
readiness, please visit our Web site at www.mutualfunds.com.

This material represents Year 2000 Readiness Disclosure pursuant to the
Year 2000 Information and Readiness Disclosure Act.
- --------------------------------------------------------------------------------

<PAGE>

------------------
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NEW ENGLAND FUNDS(R) U.S. POSTAGE
Where The Best Minds Meet(R) PAID
BROCKTON, MA
PERMIT NO. 770
------------------

---------------------
399 Boylston Street

Boston, Massachusetts

02116
---------------------

SI58-0699

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