PUTNAM HIGH YIELD ADVANTAGE FUND, N-30D, 1995-07-27

PUTNAM HIGH YIELD ADVANTAGE FUND
N-30D, 1995-07-27

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Putnam
High Yield
Advantage Fund

SEMIANNUAL REPORT
May 31, 1995

[Graphic - Scales logo]
B O S T O N * L O N D O N * T O K Y O

<PAGE>

Performance highlights

> The fund's class A shares continued to hold Morningstar's highest ranking of
five stars as of May 31, 1995. This ranking places the fund's risk-adjusted
return in the top 10% of all hybrid funds tracked by Morningstar.*

> As of May 31, 1995, the fund's 12-month dividend rates of 10.84% and 10.29%
at net asset value for class A and class B shares, respectively, were
substantially above the average of 9.40% for high current yield funds,
according to Lipper Analytical Services.+

SEMIANNUAL RESULTS AT A GLANCE

Class A Class B Class M(1)
Total return: NAV POP NAV CDSC NAV POP
..............................................................................
(change in value during
period plus reinvested
distributions)
6 months ended 5/31/95 9.69% 4.51% 9.36% 4.36% 9.87% 6.34 %
Class A Class B Class M(1)
Share value: NAV POP NAV NAV POP
...............................................................................
11/30/94 $9.07 $ 9.52 $9.05 -- --
12/1/94 -- -- -- $ 9.05 $ 9.35
5/31/95 9.41 9.88 9.39 9.41 9.73
Distributions: No. Income Total
...............................................................................
Class A 6 $0.510 $ 0.510
Class B 6 0.480 0.480
Class M 6 0.504 0.504
Class A Class B Class M(1)
Current return: NAV POP NAV NAV POP
...............................................................................
End of period
Current dividend
rate(2) 10.84% 10.32% 10.22% 10.71% 10.36 %
Current 30-day SEC
yield(3) 8.26 7.86 7.51 8.01 7.74

Performance data represent past results and will differ for each share class.
For performance over longer periods, see pages 8 and 9. POP assumes 4.75%
maximum sales charge, for class A shares and 3.25% for class M shares. CDSC
assumes 5% maximum contingent deferred sales charge. (1)Class M shares became
effective on 12/1/94. (2)Income portion of most recent distribution, annualized
and divided by NAV or POP at end of period. (3)Based only on investment income,
calculated using SEC guidelines.

*Morningstar rates a fund relative to funds with similar investment objectives,
based on the fund's 3-, 5-, and, if applicable, 10-year performance, adjusted
for risk factors and sales charges. Ratings are updated monthly. In each
category, the top 10% of funds receive 5 stars, the next 22.5% receive 4 stars,
and the next 35% receive 3 stars. For the 3- and 5-year periods ended 5/31/95,
there were 2,129 and 1,522 funds in the hybrid fund category and the fund's
class A shares received 4 and 5 stars, respectively. The Fund's Class B and
Class M shares are not rated by Morningstar. Past performance is not indicative
of future results.

+Lipper Analytical Services, Inc. and Morningstar, Inc. are independent
mutual-fund industry research and rating organizations. Lipper results vary
over time and do not reflect the effects of sales charges.

<PAGE>

From the Chairman

[Graphic - Picture of George Putnam]

Dear Shareholder:

((c))Karsh, Ottawa

During the first five months of calendar 1995, the fixed-income markets made
considerable progress in recovering from some of the most challenging
conditions on record. The improved environment for high-yield bonds is clearly
reflected in Putnam High Yield Advantage Fund's results for the six months
ended May 31, 1995.

The consensus seems to be that the market will continue to advance, but at a
slower pace. Concern that the Federal Reserve Board would raise interest rates
again has been laid to rest for now as the Fed lowered a key rate after the
close of the period. Some observers are even predicting further reductions
before year's end.

Whether the Fed continues to ease or not, interest rates in general are likely
to be lower than current levels by year's end. The inflation rate could
diminish further, too, making real rates of return look even better.

On the pages that follow, Fund Manager Jin Ho reviews the course of the
corporate high-yield market in the context of your fund's performance and
prospects.

Respectfully yours,

[Graphic - Signature of George Putnam]

George Putnam
Chairman of the Trustees
July 19, 1995

<PAGE>

Report from the Fund Manager
Jin W. Ho

"A 10,000-aspirin job." That Japanese expression for executive responsibility
may, at times, be an apt description of the portfolio manager's lot. It was
certainly true during 1994's bond-market difficulties. Fortunately in 1995,
fixed-income managers could put the painkillers aside as advancing markets
aided our efforts in virtually all sectors--including corporate high yield
bonds. Putnam High Yield Advantage Fund bounced back convincingly from calendar
1994's results by posting total returns of 9.69% and 9.36% at net asset value
for class A and class B shares, respectively, for the six months ended May 31,
1995.

In a market that, until May, was driven principally by demand that outstripped
supply, the fund's solid performance was due to several factors. First, given
the improved market environment, three of the four industry sectors that
detracted from the fund's performance in 1994--telecommunications, cable
television, and gaming--all rebounded strongly. Second, some of the fund's
holdings benefited from ongoing mergers and acquisitions activity--especially
in the health-care industry. Finally, in an effort to manage the fund with one
eye on the future and the other focused on today, we began taking profits,
albeit gradually, on the fund's cyclical holdings. (Cyclicals are securities of
companies whose fortunes rise and fall with the economic cycle and include
industries such as metals, chemicals, and papers.)

> MARKET OVERVIEW: LACK OF SUPPLY SUPPORTS RALLY

From the beginning of calendar 1995 until early May, the volume of new
high-yield issues was relatively light. During that period, heavy demand in the
market meant that any new issues were immediately caught up in something of a
"feeding frenzy." In the midst of a surging bond market, these supply and
demand dynamics drove up the prices of both new issues and existing securities.

<PAGE>

During May, when the supply of new issues increased dramatically in response to
the robust demand, a period of market "indigestion" began to occur. Supply
began to overwhelm demand, forcing new issues to be offered at lower, more
favorable prices. Prices of existing securities also retreated modestly from
their previously high levels.

We view these recent market developments as positive and necessary to restore
an appropriate balance between supply and demand, and to return the market to a
focus on fundamental credit and value considerations. Moreover, high-yield
security prices appear to be returning to levels that represent greater value
than earlier this year, and we expect investor demand to remain fairly
consistent. Although there can be no assurances, we believe these developments
bode well for the fund's performance going forward.

> CONSOLIDATION IN HEALTH-CARE INDUSTRY PROVIDES PERFORMANCE BOOST

Mergers and acquisitions (M&A) activity has increased in 1995. Although
deliberately attempting to position the fund to capitalize on such activity is
not part of our investment strategy, the fund does frequently benefit from
being in the right place at the right time. The "right place" during the six
months just passed was in the health-care industry.

Consolidation in the industry, with strategic alliances and acquisitions
between managed-care providers, health maintenance organizations, hospitals,
and the like, boosted the prices of many bonds significantly. Several companies
represented in the

[Beginning of Bar Chart]

TOP INDUSTRY SECTORS (5/31/95)*

Finance 9.6%

Cable Television 5.6%

Electric Utilities 5.1%

Cellular Communications 5.0%

Argriculture 3.9%

Forest products 3.7%

*Based on net assets. Sectors weightings will vary over time.

[End of Bar Chart]

<PAGE>

fund--including Healthtrust and Abbey Health Care--were acquired by financially
stronger corporations, producing substantial gains on those investments.

A major health-care holding--Continental Medical Systems--is the subject of a
proposed merger with Horizon Health Care. If the merger is completed,
Continental would be the beneficiary of Horizon's higher credit rating. In
anticipation of such a favorable outcome, Continental's high-yield bonds have
appreciated approximately 13% from the prices at which we purchased them
earlier this year.

> TAKING PROFITS ON CYCLICALS AS SECTOR BETS REBOUND

Calendar 1995's market rally has enabled us to take profits selectively on some
of the fund's cyclical positions. Many U.S.-based commodity producers in
industries such as chemicals, paper, and steel are continuing to post strong
cash flows and profits. These and other U.S. industries are benefiting from
continuing overseas export growth, brought about by the weak dollar. (A weak
dollar makes U.S. exports more affordable for foreign customers.)

Despite the fact that cyclical manufacturers and exporters continue to record
solid financial results, we are anticipating that their sales volumes will
begin to slow during the next stage of the business cycle. Consequently, while
our outlook for corporate profits for the remainder of 1995 is favorable, we
are, nonetheless, beginning to position the fund for a more moderate level of
economic activity.

As we began to reduce the fund's cyclical holdings, we rotated assets into
high-yield market sectors which are considered to be "defensive" because of
their potential to lead the market in the face of a slowing economy. Defensive
high-yield sectors include such industries as cable television,
telecommunications, health care, utilities, and various consumer-oriented
industries.

We are gratified that the fund's investments in the cable TV,
telecommunications, and gaming sectors have rebounded from 1994's market
weakness. The regulatory and business-specific concerns that weighed down these
industries last year now appear to be moving in a better direction. Overall, we
believe this year's recovery in these sectors validates the credit and industry
research that caused us to make investments in these industries in the first
place.

<PAGE>

TOP 5 HOLDINGS (5/31/95)

Cencall Communications Corp. stepped-
coupon 0%, 2004
Cellular communications
...............................................................................
Xerox Credit Corp. 17.00%, 1996
Finance
...............................................................................
Viacom International 8.00%, 2006
Entertainment
...............................................................................
Paccar Financial Corp. 17.00%, 1996
Finance
...............................................................................
PSF Finance (L.P.) 12.00%, 2000
Agriculture--Pork farming and processing

These holdings represent 10.70% of the fund's net assets. Portfolio holdings
will vary over time.

> MARKET SIZE MAY HELP SHOULD ECONOMY SLOW FURTHER

The high-yield bond market is now approaching $300 billion in size. This means
that today's marketplace offers much greater opportunity for diversification
than was possible during the late 1980s. Consequently, we have a greater degree
of flexibility to structure a portfolio that will likely be appropriate for a
given economic outlook--whether slowing, accelerating or neutral-- than we did
when the market was much smaller. So, while the domestic economy may indeed
slow during the balance of this year, the sheer size of the high-yield market
enables us to diversify the fund among sectors that may have the best potential
for solid, consistent performance. While there can be no guarantees, this is
our goal for the remainder of 1995.

The view expressed about the securities mentioned in this report are
exclusively those of Putnam Management, and are not meant as investment advice.
Although the described holdings were viewed favorably as of May 31, 1995, there
is no guarantee the fund will continue to hold these securities in the future.
Putnam High Yield Advantage Fund is a portfolio managed for high current income
primarily through investments in high-yielding lower-rated fixed-income
securities, which pose a greater risk to principal than higher-rated
securities. High-yield securities are rated lower than investment grade
securities because there is a greater possibility that negative changes in the
issuer's business condition or in general economic conditions may hinder the
issuer's ability to pay principal and interest on the securities.

<PAGE>

Performance summary

Performance should always be considered in light of a fund's investment
strategy. Putnam High Yield Advantage Fund is designed for investors seeking
high current income, with capital growth as a secondary objective.

TOTAL RETURN FOR PERIODS ENDED 5/31/95

Class A Class B Class M
NAV POP NAV CDSC NAV POP
- --------------------------------------------------------------------------------
6 months 9.69% 4.51% 9.36% 4.36% 9.87% 6.34%
- --------------------------------------------------------------------------------
1 year 6.12 1.11 5.42 0.66 -- --
- --------------------------------------------------------------------------------
5 years 103.97 94.39 -- -- -- --
Annual average 15.32 14.22 -- -- -- --
- --------------------------------------------------------------------------------
Life of class A 143.31 131.71 -- -- -- --
Annual average 10.17 9.59 -- -- -- --
- --------------------------------------------------------------------------------
Life of class B -- -- 5.95 2.13 -- --
Annual average -- -- 5.71 2.05 -- --
- --------------------------------------------------------------------------------
Life of class M -- -- -- -- 9.87 6.34
Annual average -- -- -- --
- --------------------------------------------------------------------------------

TOTAL RETURN FOR PERIODS ENDED 6/30/95
(most recent calendar quarter)
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- --------------------------------------------------------------------------------
1 year 7.04% 1.94% 6.27% 1.48% -- --
- --------------------------------------------------------------------------------
5 years 100.90 91.33 -- -- -- --
Annual average 14.97 13.86 -- -- -- --
- --------------------------------------------------------------------------------
Life of class A 145.00 133.32 -- -- -- --
Annual average 10.15 9.57 -- -- -- --
- --------------------------------------------------------------------------------
Life of class B -- -- 6.62 2.81 -- --
Annual average -- -- 5.83 2.48 -- --
- --------------------------------------------------------------------------------
Life of class M -- -- -- -- 10.61 7.06
Annual average -- -- -- -- -- --
- --------------------------------------------------------------------------------

Fund performance data do not take into account any adjustment for taxes payable
on reinvested distributions or, for class A shares, distribution fees prior to
implementation of the class A distribution plan in 1990. The fund began
operations on 3/25/86, offering shares now known as class A. Effective 5/16/94,
the fund began offering class B shares. Class M shares became effective on
12/1/94. Performance data represent past results and will differ for each share
class. Investment returns and net asset value will fluctuate so an investor's
shares, when sold, may be worth more or less than their original cost.

<PAGE>

Terms and definitions
Net asset value (NAV) is the value of fund assets, minus any liabilities,
divided by the number of outstanding shares, not including any initial or
contingent deferred sales charge.

Public offering price (POP) is the price of a mutual fund share plus maximum
sales charge levied at time of purchase. POP performance figures shown here
assume maximum 4.75% sales charge for class A shares and 3.25% for class M
shares.

Class A shares are generally subject to an initial sales charge.

Class B shares may be subject to a sales charge upon redemption.

Class M shares have a lower initial sales charge and a higher 12b-1 fee than
class A shares and no sales charge on redemption.

Contingent deferred sales charge (CDSC) is a charge applied at the time of the
redemption of class B shares and assumes redemption at the end of the period.
Your fund's CDSC declines from a 5% maximum during the first year to 1% during
the sixth year. After the sixth year, the CDSC no longer applies.

PERFORMANCE OF COMPARATIVE BENCHMARKS
(For periods ended 5/31/95)

Lehman Bros. First Boston
Corporate High Yield
Bond Index Index
- --------------------------------------------------------------------------------
6 months 13.72% 11.22%
- --------------------------------------------------------------------------------
1 year 13.82 11.04
- --------------------------------------------------------------------------------
5 years 65.47 103.80
Annual average 10.60 15.31
- --------------------------------------------------------------------------------
Life of class A 130.79 162.87
Annual average 9.55 11.12
- --------------------------------------------------------------------------------
Life of class B 13.40 11.68
Annual average 12.30 10.72
- --------------------------------------------------------------------------------
Life of class M 13.72 11.22
Annual average
- --------------------------------------------------------------------------------

Lehman Brothers Corporate Bond Index is an unmanaged list of fixed-income
securities frequently used as a general measure of the performance of the
corporate bond market. Securities in the fund do not match those in the index
and may pose different risks.

First Boston High Yield Index is an unmanaged list of lower-rated,
high-yielding U.S. corporate bonds. It does not represent an investment return.
Securities in the fund do not match those in the index and may pose different
risks.

<PAGE>

A Putnam perspective on risk and reward

You've probably been told how important it is to understand the relationship
between an investment's potential rewards and its accompanying risks. Given the
cautionary nature of such instructions, it may take most investors a while to
realize that risk has a positive side.

Every risk signals a potential reward. Selecting only those investments that
offer the greatest degree of security generally leads to only modest rewards.
Furthermore, even insured or guaranteed investments may be subject to changes
in their rates of return or, in some cases, in their principal values.
Experienced investors know that no investment is truly risk free and are
therefore willing to take on some measure of risk in order to increase their
potential gains.

The greater the risk, the greater the potential reward.
Accepting an appropriate level of investment risk can give you a better chance
of outpacing inflation over time and seeking to maximize your investment's
return. How much risk? Your financial

> A RUNDOWN OF RISK TYPES

MARKET RISK Most important for stock funds, but relevant to all funds, this is
a measure of how sensitive a fund's holdings are to changes in general market
conditions. Remember, though, that securities that lose value quickly in market
declines may also show the strongest gains in more favorable environments.

INTEREST-RATE RISK Since bond prices fall as interest rates rise, this type of
risk is a particular concern for fixed-income investors. However, interest-rate
increases can also have a substantial negative effect on the stock market.

INFLATION RISK If your investments cannot keep pace with inflation, your money
will begin to lose its purchasing power. Stock investments are generally
considered among the best ways of addressing inflation risk over the long term.

<PAGE>

advisor's feedback and your time horizon can make all the difference in
determining how much risk is compatible with your investment goals and your
peace of mind.

> FITTING YOUR FUND SELECTION TO YOUR
RISK TOLERANCE

How do you find the right balance between investment risks and their potential
rewards. It's helpful to understand the types of risks that can apply to
different types of investments, and to look at your own portfolio with this
perspective.

For short-term goals, your first priority may be managing market risk.
Longer-term investors may be more concerned with inflation risk. And all
income-oriented investors should consider interest-rate, credit, and
prepayment risks carefully. Within each of Putnam's four investment categories,
you can select funds with differing levels of risk and reward potential to
customize your portfolio.

CREDIT AND PREPAYMENT RISK Credit risk is the concern that the security's
issuer will not be able to meet its payment, while prepayment risk involves the
premature payoff of a loan, with a resulting loss of interest income.
Professional management and in-depth research are invaluable in managing both
these risks.

LIQUIDITY RISK Not all investments can be readily converted into cash at their
perceived market values. Liquidity risk can affect the price of securities held
in the fund's portfolio and, thus, the fund's share prices.

This list covers only the most general types of risks; however, each investment
will also have its own specific risks. You will find a more detailed discussion
of these risk considerations in each fund's prospectus.

<PAGE>

PUTNAM GROWTH FUNDS

Asia Pacific Growth Fund
Capital Appreciation Fund*
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Health Sciences Trust
Investors Fund
Natural Resources Trust
New Opportunities Fund
OTC Emerging Growth Fund
Overseas Growth Fund
Vista Fund
Voyager Fund

PUTNAM GROWTH
AND INCOME FUNDS

Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
Utilities Growth and Income Fund

PUTNAM INCOME FUNDS

Adjustable Rate U.S. Government Fund
American Government Income Fund
Diversified Income Trust
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
Intermediate U.S. Government Income Fund
Preferred Income Fund
U.S. Government Income Trust

PUTNAM TAX-FREE
INCOME FUNDS

Intermediate Tax Exempt Fund
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund

State tax-free income funds+
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New Jersey,
New York, Ohio, and Pennsylvania

LIFESTAGES(SM) FUNDS

Putnam Asset Allocation Funds--three investment portfolios that spread your
money across a variety of stocks, bonds, and money
market investments to help maximize your return and reduce your risk.
The three portfolios:
Putnam Asset Allocation: Balanced Portfolio
Putnam Asset Allocation: Conservative Portfolio
Putnam Asset Allocation: Growth Portfolio

MOST CONSERVATIVE
INVESTMENTS++

Putnam money market funds:
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund

CDs and savings accountsS.

* Temporarily closed to new investors.

+ Not available in all states.

++ Relative to above.

S. Not offered by Putnam Investments. Certificates of deposit offer a fixed
rate of return and may be insured, up to certain limits, by federal/state
agencies. Savings accounts may also be insured up to certain limits.

Please call your financial advisor or Putnam at 1-800-225-1581 to obtain a
prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you invest or
send money.

<PAGE>

Portfolio of investments owned
May 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES (82.6%)*
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
- ----------------------------------------------------------------------------------
Advertising (0.9%)
- ----------------------------------------------------------------------------------
$3,500,000 Outdoor Systems, Inc. sr. notes 10-3/4s, 2003 $ 3,360,000
5,000,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 4,972,250
-----------
8,332,250
Agriculture (3.9%)
- ----------------------------------------------------------------------------------
6,367,000 PMI Holdings Corp. Ser. B, sub. disc. deb.
stepped-coupon zero % (11-1/2s, 9/1/00), 2005++ 3,406,345
5,000,000 PSF Finance (L.P.) sr. disc. note stepped-coupon
zero %, (12s, 9/15/96) 2003++ 4,200,000
12,000,000 PSF Finance (L.P.) sr. exch. note 12-1/4s, 2004 12,381,000
14,620,842 PSF Finance (L.P.) sr. notes 12s, 2000 15,242,228
-----------
35,229,573
Aluminum (1.1%)
- ----------------------------------------------------------------------------------
9,600,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes
12-3/4s, 2003 10,344,000
Automotive (0.7%)
- ----------------------------------------------------------------------------------
2,400,000 JPS Automotive Products sr. notes 11-1/8s, 2001 2,376,000
4,000,000 Key Plastics Corp. sr. notes 14s, 1999 4,200,000
-----------
6,576,000
Automotive Parts (0.7%)
- ----------------------------------------------------------------------------------
2,000,000 Aftermarket Tech sr. notes 144A 12s, 2004 2,130,000
4,470,000 Exide Corp. 144A sr. notes 10s, 2005 4,592,925
-----------
6,722,925
Broadcasting (3.1%)
- ----------------------------------------------------------------------------------
2,000,000 Granite Broadcasting Corp. sr. sub. deb. 12-3/4s,
2002 2,170,000
2,500,000 Granite Broadcasting 144A sr. sub. notes 10-3/8s,
2005 2,512,500
7,175,000 New City Broadcasting Corp. sr. sub. notes
11-3/8s, 2003 6,959,750
18,500,000 Panamsat (L.P.) sr. sub. notes stepped-coupon zero
% (11-3/8s, 8/1/98), 2003++ 13,135,000
4,346,000 Telemedia Broadcasting Corp. 144A deb. stepped-
coupon 6.4s, (16s, 6/15/99) 2004++ 3,867,940
-----------
28,645,190
Building and Construction (1.9%)
- ----------------------------------------------------------------------------------
2,500,000 Del. Webb Corp. sr. sub. deb. 9-3/4s, 2003 2,425,000
8,250,000 Presley Co. sr. notes 12-1/2s, 2001 6,950,625
4,800,000 Scotsman Group, Inc. sr. notes 9-1/2s, 2000 4,680,000
3,250,000 U.S. Home Corp. sr. notes 9-3/4s, 2003 3,176,875
-----------
17,232,500
Building Products (2.4%)
- ----------------------------------------------------------------------------------
9,000,000 Nortek, Inc. sr. sub. notes 9-7/8s, 2004 8,505,000
7,500,000 Southdown, Inc. sr. sub. notes Ser. B, 14s, 2001 8,400,000
5,000,000 Walter Industries Inc. sr. note Ser. B, 12.19s,
2000 5,087,500
-----------
21,992,500
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
Cable Television (5.6%)
- ----------------------------------------------------------------------------------
$11,000,000 Adelphia Communications Corp. sr. notes 12-1/2s,
2002 $10,890,000
3,650,000 Cablevision Systems Corp. sr. sub. reset deb.
10-3/4s, 2004 3,832,500
5,000,000 Century Communications Corp. sr. sub. deb.
11-7/8s, 2003 5,325,000
2,000,000 Comcast Corp. sr. sub. deb. 10-5/8s, 2012 2,120,000
2,000,000 Comcast Corp. sr. sub. notes 9-3/8s, 2002 1,980,000
11,309,692 Falcon Holdings Group, Inc. sr. sub. notes 11s,
2003++++ 10,404,917
3,500,000 Jones Intercable, Inc. sub. deb. 11-1/2s, 2004 3,850,000
10,000,000 Marcus Cable Co. (L.P.) sr. sub. disc. note
stepped-coupon zero % (13-1/2s, 8/1/99), 2004++ 6,150,000
3,000,000 Rogers Cablesyst 144A sr. notes Ser. DTC, 10s,
2005 3,060,000
2,500,000 Telecommunications Inc. deb. 8-3/4s, 2023 2,524,325
1,500,000 Videotron Hldgs sr. disc. notes stepped coupon
zero % (11-1/8s, 7/1/99), 2004++ 960,000
-----------
51,096,742
Cellular Communications (5.0%)
- ----------------------------------------------------------------------------------
5,550,000 Cellular, Inc. sr. sub. disc. notes stepped-coupon
zero % (11-3/4s, 9/1/98), 2003++ 4,141,688
48,470,000 Cencall Communications Corp. sr. disc. notes
stepped-coupon zero % (10-1/8s, 1/15/99), 2004++ 23,750,300
12,900,000 Centennial Cellular Corp. sr. notes 8-7/8s, 2001 12,384,000
6,318,000 Horizon Cellular Telephone Co. sr. sub. disc.
notes Ser. B, stepped-coupon zero % (11-3/8s,
10/1/97), 2000++ 4,991,220
-----------
45,267,208
Chemicals (3.4%)
- ----------------------------------------------------------------------------------
5,825,000 Foamex (L.P.) Capital Corp. sr. disc. note
stepped-coupon zero % (14s, 7/1/99), 2004++ 3,320,250
3,500,000 Foamex (L.P.) Capital Corp. sr. notes 11-1/4s,
2002 3,587,500
7,500,000 G-I Holdings, Inc. sr. notes zero %, 1998 5,100,000
12,500,000 Harris Chemical Corp. sr. sub. notes 10-3/4s, 2003 11,906,250
4,000,000 Harris Chemical sr. secd. disc. notes
stepped-coupon zero % (10-1/4s, 1/15/96), 2001++ 3,620,000
5,000,000 OSI Specialties Corp. sr. secd. disc. deb.
stepped-coupon zero % (11-1/2s, 4/15/99), 2004++ 3,575,000
-----------
31,109,000
Computer Equipment (0.6%)
- ----------------------------------------------------------------------------------
6,140,000 Computervision Corp. sr. sub. notes 11-3/8s, 1999 5,894,400

Conglomerates (1.2%)
- ----------------------------------------------------------------------------------
2,750,000 Jordan Industries, Inc. sr. notes 10-3/8s, 2003 2,626,250
2,475,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes
13s, 1999 2,484,281
2,200,000 Sequa Corp. sr. notes 9-5/8s, 1999 2,216,500
4,000,000 Valcor, Inc. sr. note 9-5/8s, 2003 3,680,000
-----------
11,007,031
Consumer Non Durables (0.2%)
- ----------------------------------------------------------------------------------
2,000,000 Renaissance Cosmetics sr. notes Ser. B, 13-3/4s,
2001 1,940,000

Consumer Services (1.2%)
- ----------------------------------------------------------------------------------
5,000,000 Flagstar Corp. sr. notes 10-7/8s, 2002 4,625,000
1,500,000 Solon Automated Services, Inc. notes 12-3/4s, 2001 1,470,000
5,000,000 Solon Automated Services, Inc. sr. sub. deb.
13-3/4s, 2002 5,000,000
-----------
11,095,000
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
- ----------------------------------------------------------------------------------
Containers (0.9%)
- ----------------------------------------------------------------------------------
$7,705,000 Ivex Packaging Corp. sr. sub. notes 12-1/2s, 2002 $ 8,282,875
Electric Utilities (5.1%)
- ----------------------------------------------------------------------------------
8,035,000 Cleveland Electric Illuminating 1st mtge. 9-1/2s,
2005 8,095,263
5,700,000 First PV Funding deb. Ser. 86A, 10.3s 2014 5,885,250
6,000,000 Long Island Lighting Co. deb. 8.9s, 2019 5,383,560
4,000,000 Long Island Lighting Co. deb. 9s, 2022 3,671,880
11,900,000 Midland Funding Corp. II deb. Ser. A, 11-3/4s,
2005 12,316,500
2,000,000 Midland Funding Corp. II deb. Ser. B, 13-1/4s,
2006 2,085,000
8,000,000 Texas New Mexico Power Corp. secd. deb. 12-1/2s,
1999 8,786,640
-----------
46,224,093
Electronics (2.6%)
- ----------------------------------------------------------------------------------
10,050,000 Amphenol Corp. sr. sub. notes 12-3/4s, 2002 11,494,688
24,000,000 International Semi-Tech. Corp. sr. disc. notes
stepped-coupon zero % (11-1/2s, 8/15/00), 2003++ 12,360,000
-----------
23,854,688
Entertainment (2.6%)
- ----------------------------------------------------------------------------------
3,000,000 Time Warner Inc. notes zero %, 2002 2,936,250
21,725,000 Viacom International, Inc. sub. deb. 8s, 2006 21,154,719
-----------
24,090,969
Finance (9.6%)
- ----------------------------------------------------------------------------------
6,500,000 Bankers Life Holding Corp. sr. sub. notes Ser. B,
13s, 2002 7,507,500
5,000,000 IBM Credit Corp. med. term notes 15s, 1996 5,246,900
10,000,000 IBM Credit Corp. med. term notes 17s, 1996 10,825,000
15,000,000 Paccar Financial Corp. med. term notes 17s, 1996 16,237,500
12,500,000 Pepisco Inc. med. term notes 17s, 1996 13,347,500
5,000,000 Toyota Credit Corp. med. term notes 17s, 1996 5,387,500
7,500,000 Toyota Credit Corp. med. term notes 15s, 1995 7,863,825
20,000,000 Xerox Credit Corp. med. term notes 17s, 1996 21,450,000
-----------
87,865,725
Financial Services (0.4%)
- ----------------------------------------------------------------------------------
3,000,000 Comdata Network, Inc. sr. notes 12-1/2s, 1999 3,273,750

Food (1.3%)
- ----------------------------------------------------------------------------------
5,000,000 Mafco, Inc. sr. sub. notes 11-7/8s, 2002 5,025,000
650,000 Specialty Foods Acquisition Corp. sr. secd. disc.
deb. stepped-coupon zero %, (13s, 8/15/99), 2005++ 354,250
6,750,000 Specialty Foods Corp. sr. sub. notes 11-1/4s, 2003 6,750,000
-----------
12,129,250
Forest Products (3.7%)
- ----------------------------------------------------------------------------------
1,750,000 Gaylord Container Corp. sr. notes 11-1/2s, 2001 1,863,750
12,000,000 Gaylord Container Corp. sr. sub. disc. deb.
stepped-coupon zero % (12-3/4s, 5/15/96), 2005++ 11,700,000
5,500,000 Riverwood International Corp. sr. sub. notes
11-1/4s, 2002 6,050,000
5,820,000 Stone Container Corp. deb. sr. sub. notes 11-1/2s,
1999 6,052,800
3,000,000 Stone Container Corp. (Del.) 1st mtge. 10-3/4s,
2002 3,180,000
5,000,000 Stone Container Corp. (Del.) sr. notes 11-1/2s,
2004 5,350,000
-----------
34,196,550
</TABLE>

<PAGE>

Medical Supplies (0.3%)
- ----------------------------------------------------------------------------------
3,000,000 Wright Medical Technology, Inc. sr. secd. notes
Ser. B, 10-3/4s, 2000 2,970,000

Metals and Mining (1.4%)
- ----------------------------------------------------------------------------------
1,750,000 Geneva Steel Co. sr. notes 11-1/8s, 2001 1,531,250
4,000,000 Haynes International, Inc. sr. notes Ser. B,
11-1/4s, 1998 3,840,000
10,750,000 Haynes International, Inc. sr. sub. notes 13-1/2s,
1999 7,525,000
-----------
12,896,250
Motion Picture Distribution (1.9%)
- ----------------------------------------------------------------------------------
500,000 AMC Entertainment, Inc. sr. sub. deb. 11-7/8s,
2000 545,000
5,500,000 AMC Entertainment, Inc. sr. sub. deb. 12-5/8s,
2002 6,063,750
2,750,000 Cinemark USA sr. notes 12s, 2002 2,980,313
8,000,000 Plitt Theatres, Inc. sr. sub. notes 10-7/8s, 2004 7,920,000
-----------
17,509,063
Nursing Homes (0.7%)
- ----------------------------------------------------------------------------------
5,625,000 Multicare Cos., Inc. sr. sub. notes 12-1/2s, 2002 6,356,250
Oil and Gas (1.8%)
- ----------------------------------------------------------------------------------
4,000,000 Chesapeake Energy 144A sr. notes 10-1/2s, 2002 4,040,000
3,700,000 Chesapeake Energy Corp. sr. exch. notes 12s, 2001 3,894,250
480,000 Maxus Energy Corp. notes 9-3/8s, 2003 456,000
5,700,000 Transtexas Gas Corp. sr. notes 10-1/2s, 2000 6,160,813
2,000,000 Triton Energy sr. sub. notes zero %, 1997 1,630,000
-----------
16,181,063
Paging (1.6%)
- ----------------------------------------------------------------------------------
6,500,000 Mobile Telecommunications Tech. sr. notes 13-1/2s,
2002 6,971,250
7,300,000 Pagemart, Inc. sr. disc. notes stepped-coupon zero %
(12-1/4s, 11/1/98), 2003++ 4,672,000
3,500,000 Paging Network, Inc. sr. sub. notes 8-7/8s, 2006 3,228,750
-----------
14,872,000
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
- ----------------------------------------------------------------------------------
Publishing (1.6%)
- ----------------------------------------------------------------------------------
$ 5,000,000 General Media Corp. sr. secd. notes 10-5/8s, 2000 $ 4,050,000
15,000,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes
zero %, 1998 10,425,000
-----------
14,475,000
Real Estate (1.9%)
- ----------------------------------------------------------------------------------
596,000 Chelsea Piers 144A Ser. B, stepped-coupon zero %
(11s, 6/15/99), 2009++ 537,890
10,707,000 Chelsea Piers Ser. B stepped-coupon zero %
(12-1/2s, 6/15/99), 2004++ 9,555,998
7,500,000 HMH Properties Inc. 144A sr. notes 9-1/2s, 2005 7,350,000
-----------
17,443,888
Recreation (2.5%)
- ----------------------------------------------------------------------------------
3,535,000 Arizona Charlies Corp. 1st mtge. Ser. B, 12s, 2000 2,828,000
14,500 Capital Gaming International, Inc. notes zero %,
1995 6,380
740,000 Capitol Queen Corp. 1st mtge note Ser. B, 12s,
2000 651,200
4,000,000 Grand Casino Resorts, Inc. notes 12-1/2s, 2000 4,320,000
2,590,000 Pioneer Finance Corp. gtd. 1st mtge. 13-1/2s, 1998 2,072,000
4,000,000 Players International 144A sr. notes 10-7/8s, 2005 4,050,000
1,500,000 Stratosphere Corp. 1st mtge 14-1/4s, 2002 1,560,000
2,000,000 Trump Castle Funding Corp. mtge. 11-3/4s, 2003 1,330,000
3,078,000 Trump Castle Funding Corp. sr. sub. notes 11-1/2s,
2000 3,078,000
3,567,153 Trump Taj Mahal Funding, Inc. deb. Ser. A, 11.35s,
1999++++ 2,675,365
-----------
22,570,945
Retail (1.3%)
- ----------------------------------------------------------------------------------
4,000,000 County Seat Stores Inc. sr. sub. notes 12s, 2001 3,980,000
2,888,000 Duane Reade Corp. sr. notes 12s, 2002 2,462,020
4,143,000 Finlay Enterprises, Inc. sr. disc. deb.
stepped-coupon zero % (12s, 5/1/98), 2005++ 2,755,095
2,750,000 Loehmanns' Holdings, Inc. sr. sub. notes 13-3/4s,
1999 2,708,750
-----------
11,905,865
School Buses (0.8%)
- ----------------------------------------------------------------------------------
6,750,000 Blue Bird Body Co. sub. deb. Ser. B, 11-3/4s, 2002 6,918,750

Specialty Consumer Products (1.6%)
- ----------------------------------------------------------------------------------
8,150,000 Playtex Family Products Corp. sr. sub. notes 9s,
2003 7,783,250
7,000,000 Selmer Co., Inc. 144A sr. sub. notes 11s, 2005 6,965,000
-----------
14,748,250
Supermarkets (1.1%)
- ----------------------------------------------------------------------------------
1,175,000 Dominick's Finer Foods sr. sub. notes 10-7/8s,
2005 1,189,688
18,250,000 Grand Union Co. sr. sub. notes 12-1/4s, 2002 (In
Default)+ ++ 5,475,000
3,730,000 Stater Brothers sr. notes 11s, 2001 3,748,650
-----------
10,413,338
Telephone Services (0.8%)
- ----------------------------------------------------------------------------------
11,300,000 MFS Communications sr. disc. notes stepped-coupon
zero % (9-3/8s, 1/15/99), 2004++ 7,684,000

Textiles (0.7%)
- ----------------------------------------------------------------------------------
6,375,000 Day International Group 144A sr. sub. notes
11-1/8s, 2005 6,470,625
- ----------------------------------------------------------------------------------
Total Corporate Bonds and Notes
(cost $752,050,750) $756,186,466
- ----------------------------------------------------------------------------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
UNITS (4.2%)*
NUMBER OF UNITS VALUE
- ----------------------------------------------------------------------------------
<C> <S> <C>
5,000 Australis Media units stepped-coupon zero %,
(14s, 5/15/2000), 2003++ $ 2,550,000
3,450 Commodore Media Inc, 144A units 7-1/2s, 2003 3,036,000
26,955 Echostar Communication Corp. units
stepped-coupon zero % (12-7/8s, 6/1/99), 2004++ 14,555,700
3,260 Heartland Wireless Communication 144A units 13s,
2003 3,471,900
5,400 In Flight Phone Corp. Units 144A stepped-coupon
zero % (14s, 5/15/98), 2002++ 3,537,000
5,000 Intermedia Communications of Florida 144A units
13-1/2s, 2005 5,025,000
5,974 Premium Standard Farms 144A exch. pfd. units
12-1/2s, 2000 657,140
270 Santa Fe Hotel, Inc. units 11s, 2000 2,111,100
3,660 Total Renal Care units stepped-coupon zero %
(12s, 8/15/99), 2004++ 3,294,000
- ----------------------------------------------------------------------------------
Total Units (cost $37,199,949) $38,237,840
- ----------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
YANKEE BONDS AND NOTES (3.1%)*
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------
<C> <S> <C>
$1,085,000 Banco de Galicia, Inc.144A global notes 9s, 2003 $ 797,475
4,000,000 CF Cable TV., Inc. sr. notes 11-5/8s, 2005 4,260,000
2,095,000 Cinemark Mexico 144A notes 12s, 2003 1,948,350
13,500,000 Fresh Del Monte Produce Corp. sr. notes, Ser. B,
10s, 2003 11,475,000
4,000,000 Ispat Mexicana, SA 144A deb. 10-3/8s, 2001 3,440,000
6,000,000 Repap New Brunswick sr. notes 10-5/8s, 2005 6,112,500
- ----------------------------------------------------------------------------------
Total Yankee Bonds and Notes
(cost $28,663,119) $28,033,325
- ----------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
COMMON STOCKS (2.6%)*
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------
<C> <S> <C>
2,400 Cablevision Systems Corp. Class A $ 143,700
1 Capital Gaming International, Inc. 144A 2
75,850 Chesapeake Energy Corp. 2,057,431
220,900 Comcast Corp. Special Class A 3,865,750
11,001 Computervision Corp.+ 61,881
27,453 Computervision Corp.(acquired 8/21/92,
cost $247,077)+++ + 113,244
60,000 Dr Pepper Bottling Holdings, Inc. Class A 210,000
1 Lear Seating Corp. 21
420,000 Nextel Communications, Inc. Class A+ 5,670,000
2,141 PMI Holdings Corp. 144A 428,200
1,730 Premium Holdings L.P. 144A 172,970
7,097 Pyramid Communications, Inc. New Class B 144A+ 170,317
85,200 Specialty Foods Corp.+ 255,600
15,710 Taj Mahal Holding Corp. Class A 157,100
500,000 Tele-Communications Inc. Class A+ 10,562,500
19,703 UCC Investors Holding, Inc. (acquired 3/28/94,
cost $275,842)+++ 226,585
- ----------------------------------------------------------------------------------
Total Common Stocks
(cost $23,588,703) $24,095,301
- ----------------------------------------------------------------------------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
PREFERRED STOCKS (1.8%)*
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------
<C> <S> <C>
50,000 California Federal Bank Ser. B, $10.625, exch.
pfd. $ 5,275,000
50,000 First Nationwide Bank $11.50, pfd. 5,350,000
229,055 Pyramid Communications, Inc. Ser. C, $3.125 exch.
pfd. 5,611,851
- ----------------------------------------------------------------------------------
Total Preferred Stocks $16,236,851
(cost $15,579,229)
- ----------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
EUROBONDS (1.2%)*
PRINICPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------
<S> <C> <S> <C>
USD 2,000,000 Brazil (Republic of) 4s, 2024 $ 902,500
USD 6,111,000 Brazil (Republic of) bonds 8-3/4s, 2001 4,919,355
USD 2,500,000 Brazil (Republic of) Floating Rate
Notes (FRN) 6.6875s, 2005 1,518,750
USD 280,000 Brazil (Republic of) FRN Ser. EI-L,
7-1/4s, 2006 170,100
USD 1,000,000 Bulgaria (Republic of) FRB 6.063s, 2011 411,250
USD 500,000 Bulgaria IAB (Republic of) FRN 7.5625s,
2011 205,625
USD 4,250,000 Ecuador (Government of) (FRN) 7-1/4s,
2025 2,220,625
USD 950,000 South Africa (Government of) 9-5/8s,
1999 961,875
Total Foreign Bonds and Notes
(cost $10,979,806) $11,310,080
- ----------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
BRADY BONDS (2.1%)*
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------
<C> <S> <C>
$ 1,500,000 Argentina (Republic of) FRN 7-1/8s, 2023 $ 916,875
1,750,000 Argentina (Republic of) notes 4-1/4s,
2005 1,157,188
8,500,000 Argentina (Republic of) bonds 4s, 2023 4,250,000
3,150,000 Bulgaria (Government of) disc. 7.563s,
2024 1,519,875
12,650,000 Mexican (Government of) bonds 6-1/4s,
2019 7,052,375
5,400,000 Poland (Government of) 144A FRN
6.8125s, 2024 3,881,250
1,450,000 Poland (Government of) deb. 3-1/4s, 2014 750,375
Total Brady Bonds
(cost $18,696,876) $19,527,938
- ------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
WARRANTS (0.5%)*+
NUMBER OF WARRANTS EXPIRATION
DATE VALUE
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C>
92,500 Becker Gaming Corp. 144A 11/15/00 $ 92,500
32,988 Capital Gaming International, Inc. 2/1/99 32,988
13,320 Casino Magic Finance Corp. 10/14/96 666
23,278 Cinemark Mexico USA, Inc. 8/1/03 215,671
5,000 County Seat Holdings, Inc. 10/15/98 100,000
12,730 Dial Call Communication 144 12/15/98 16,549
5,825 Foamex (L.P.) Capital Corp. 144A 7/1/99 87,375
344,600 Gaylord Container Corp. 144A 7/31/96 2,929,100
750 General Media Corp. 144A 12/31/00 7,500
5,000 OSI Specialties Corp. 144A 4/15/99 100,000
33,580 Pagemart, Inc. 144A 12/31/03 319,010
21,000 President Riverboat Casinos, Inc. 9/23/96 1,050
30,905 President Riverboat Casinos, Inc. 144A 9/30/99 123,620
4,000 Renaissance Cosmetics 144A 8/15/01 70,000
55,000 Southdown, Inc. 144A 10/31/96 192,500
102 Telemedia Broadcasting Corp. 144A 4/1/04 76,793
668 Wright Medical Technology, Inc. 144A 6/30/03 110,251
- ------------------------------------------------------------------------------------------
Total Warrants
(cost $2,464,319) $4,475,573
- ------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
CONVERTIBLE BONDS AND NOTES (0.1%)*
(cost $1,000,000)
PRINCIPAL AMOUNT VALUE
<C> <S> <C>
- ---------------------------------------------------------------------------------
$1,000,000 Sahara Mission 144A cv. sub. notes 12s, 1995 $ 1,000,000
- ---------------------------------------------------------------------------------
</TABLE>

<TABLE>
<C> <S> <C>
SHORT-TERM INVESTMENTS (3.0%)
(cost $27,082,566)
- ---------------------------------------------------------------------------------
$27,078,000 Interest in $523,899,000 repurchase agreement
dated May 31, 1995 with Goldman, Sachs & Co.
due June 1, 1995 with respect to various U.S.
Treasury obligations-maturity value of
$27,082,566 for an effective yield of 6.07% $ 27,082,566
- ---------------------------------------------------------------------------------
Total Investments $926,185,940
(cost $917,305,317)***
- ---------------------------------------------------------------------------------
</TABLE>

* Percentages indicated are based on net assets of $915,536,041, which
correspond to a net asset value for class A, class B and class M shares of
$9.41, $9.39 and $9.41, respectively.

++ The interest rate and date shown parenthetically represent the new interest
rate to be paid and the date the fund will begin receiving interest at this
rate.

++++ Income may be received in cash or additional securities at the discretion
of the issuer.

+ Non-income-producing security.

+++ Restricted, excluding 144A securities, as to public resale. At the date of
acquisition, these securities were valued at cost. There were no
outstanding unrestricted securities of the same class as those held. Total
market value of restricted securities owned at May 31, 1995 was $339,829 or
less than 0.1% of net assets.

*** The aggregate identified cost on a tax cost basis is $917,995,892,
resulting in gross unrealized appreciation and depreciation of $37,103,694
and $28,913,646, respectively, or net unrealized appreciation of
$8,190,048.

144A after the name of a security represents those 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.

The accompanying notes are an integral part of these financial statements.

<PAGE>

Statement of assets and liabilities
May 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
Assets
<S> <C>
- ------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $917,305,517)
(Note 1) $926,185,940
- ------------------------------------------------------------------------------------------
Cash 893,362
- ------------------------------------------------------------------------------------------
Receivable for securities sold 12,592,693
- ------------------------------------------------------------------------------------------
Dividends, interest and other receivables 19,935,192
- ------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 10,268,711
- ------------------------------------------------------------------------------------------
Total assets $969,875,898
- ------------------------------------------------------------------------------------------
Liabilities
- ------------------------------------------------------------------------------------------
Distribution payable to shareholders 8,960
- ------------------------------------------------------------------------------------------
Payable for securities purchased 49,708,002
- ------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 2,443,163
- ------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,400,530
- ------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,787
- ------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 568
- ------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 203,877
- ------------------------------------------------------------------------------------------
Payable for distribution fees 422,460
- ------------------------------------------------------------------------------------------
Other accrued expenses 149,510
- ------------------------------------------------------------------------------------------
Total liabilities 54,339,857
- ------------------------------------------------------------------------------------------
Net assets $915,536,041
- ------------------------------------------------------------------------------------------
Represented by
- ------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,016,305,158
- ------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 426,469
- ------------------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions (Note 1) (110,076,009)
- ------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 8,880,423
- ------------------------------------------------------------------------------------------
Total--Representing net assets applicable to capital shares outstanding $915,536,041
- ------------------------------------------------------------------------------------------
Computation of net asset value and offering price
- ------------------------------------------------------------------------------------------
Net asset value and redemption price of class A shares
($772,664,101 divided by 82,084,118 shares) $9.41
- ------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.41)* $9.88
- ------------------------------------------------------------------------------------------
Net asset value and offering price of class B shares
($131,980,367 divided by 14,054,250 shares)+ $9.39
- ------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares
($10,891,573 divided by 1,157,939 shares) $9.41
- ------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.41)* $9.73
- ------------------------------------------------------------------------------------------
</TABLE>
* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.

+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.

The accompanying notes are an integral part of these financial statements.

<PAGE>

Statement of operations
May 31, 1995 (Unaudited)
<TABLE>
<S> <C>
- ------------------------------------------------------
Investment income
- ------------------------------------------------------
Interest $ 44,231,314
- ------------------------------------------------------
Dividends 551,560
- ------------------------------------------------------
Total investment income 44,782,874
- ------------------------------------------------------
Expenses:
- ------------------------------------------------------
Compensation of Manager (Note 2) 2,586,001
- ------------------------------------------------------
Investor servicing and custodian fees
(Note 2) 443,329
- ------------------------------------------------------
Compensation of Trustees (Note 2) 13,122
- ------------------------------------------------------
Reports to shareholders 35,578
- ------------------------------------------------------
Auditing 26,236
- ------------------------------------------------------
Legal 13,872
- ------------------------------------------------------
Postage 71,309
- ------------------------------------------------------
Administrative services (Note 2) 7,935
- ------------------------------------------------------
Distribution fees--class A (Note 2) 880,227
- ------------------------------------------------------
Distribution fees--class B (Note 2) 357,604
- ------------------------------------------------------
Distribution fees--class M (Note 2) 8,634
- ------------------------------------------------------
Registration fees 72,573
- ------------------------------------------------------
Other expenses 8,319
- ------------------------------------------------------
Total expenses 4,524,739
- ------------------------------------------------------
Net investment income 40,258,135
- ------------------------------------------------------
Net realized loss on investments
(Notes 1 and 3) (27,848,859)
- ------------------------------------------------------
Net realized loss on written options (33,513)
- ------------------------------------------------------
Net unrealized appreciation of
investments during the period 62,082,724
- ------------------------------------------------------
Net gain on investments 34,200,352
- ------------------------------------------------------
Net increase in net assets resulting
from operations $ 74,458,487
- ------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.

<PAGE>

Statement of changes in net assets
<TABLE>
<CAPTION>
Six months ended Year ended
May 31 November 30
1995* 1994
<S> <C> <C>
- ------------------------------------------------------------------
Increase (Decrease) in net assets
- ------------------------------------------------------------------
Operations:
- ------------------------------------------------------------------
Net investment income $ 40,258,135 $ 71,407,025
- ------------------------------------------------------------------
Net realized loss on
investments and written
options (27,882,372) (8,794,847)
- ------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of
investments 62,082,724 (86,312,209)
- ------------------------------------------------------------------
Net increase (decrease) in
net assets resulting from
operations 74,458,487 (23,700,031)
- ------------------------------------------------------------------
Distributions to shareholders from:
- ------------------------------------------------------------------
Net investment income:
- ------------------------------------------------------------------
Class A (39,161,707) (73,482,433)
- ------------------------------------------------------------------
Class B (3,725,687) (935,321)
- ------------------------------------------------------------------
Class M (176,786) --
- ------------------------------------------------------------------
Increase from capital share
transactions 194,030,427 45,756,866
- ------------------------------------------------------------------
Total increase (decrease) in
net assets 225,424,734 (52,360,919)
- ------------------------------------------------------------------
Net assets
- ------------------------------------------------------------------
Beginning of period 690,111,307 742,472,226
- ------------------------------------------------------------------
End of period (including
undistributed net
investment income of
$426,469 and $3,232,514,
respectively) $915,536,041 $690,111,307
- ------------------------------------------------------------------
</TABLE>
*Unaudited.

The accompanying notes are an integral part of these financial statements.

<PAGE>

Financial Highlights
(For a share outstanding throughout the year)

<TABLE>
<CAPTION>
For the
period For the
December 1, period
1994 May 16, 1994
(commencement (commencement
of Six of
operations) months operations)
to ended to
May 31* May 31* November 30
----------------------------------------
1995 1995 1994
----------- ---------- -----------
Class M Class B
----------- -------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.05 $ 9.05 $ 9.83
- ----------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------
Net investment income .50 .45 .48
- ----------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments .36 .37 (.77)
- ----------------------------------------------------------------------------------
Total from investment operations .86 .82 (.29)
- ----------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------
From net investment income (.50) (.48) (.49)
- ----------------------------------------------------------------------------------
In excess of net investment income (a) -- -- --
- ----------------------------------------------------------------------------------
From net realized gain on investments -- -- --
- ----------------------------------------------------------------------------------
Paid in Capital (a) -- -- --
- ----------------------------------------------------------------------------------
Total distributions (.50) (.48) (.49)
- ----------------------------------------------------------------------------------
Net asset value, end of period $ 9.41 $ 9.39 $ 9.05
- ----------------------------------------------------------------------------------
Total investment return at net asset
value (%) (b) 9.87(c) 9.36(c) (3.12)(c)
- ----------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $10,892 $131,980 $37,017
- ----------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) .66(c) .91(c) 1.02(c)
- ----------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 4.97(c) 4.80(c) 7.47(c)
- ----------------------------------------------------------------------------------
Portfolio turnover (%) 39.94(c) 39.94(c) 69.61(c)
- ----------------------------------------------------------------------------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Six months
ended May
31* Year ended November 30
---------- -------------------------------------------------
1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
Class A
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.07 $10.41 $ 9.74 $ 9.30 $ 7.38 $ 9.69
- -------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------
Net investment income .51 .98 1.13 1.23 1.14 1.18
- -------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments .34 (1.30) .70 .42 1.98 (2.09)
- -------------------------------------------------------------------------------------------------------------
Total from investment operations .85 (.32) 1.83 1.65 3.12 (.91)
- -------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------
From net investment income (.51) (1.02) (1.15) (1.21) (1.15) (1.33)
- -------------------------------------------------------------------------------------------------------------
In excess of net investment income (a) -- -- (.01) -- -- --
- -------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- -- -- -- (.07)
- -------------------------------------------------------------------------------------------------------------
Paid in Capital (a) -- -- -- -- (.05) --
- -------------------------------------------------------------------------------------------------------------
Total distributions (.51) (1.02) (1.16) (1.21) (1.20) (1.40)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.41 $ 9.07 $10.41 $ 9.74 $ 9.30 $ 7.38
- -------------------------------------------------------------------------------------------------------------
Total investment return at net asset
value (%) (b) 9.69(c) (3.43) 19.88 18.44 45.46 (10.26)
- -------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $772,664 $653,094 $742,472 $484,520 $369,150 $248,111
- -------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) .54(c) 1.03 .96 1.14 1.33 1.37
- -------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 5.19(c) 10.87 11.04 12.40 13.38 13.92
- -------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 39.94(c) 69.61 50.89 68.29 74.45 63.29
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* Unaudited.

(a) See Note 1 to the Financial Statements.

(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.

<PAGE>

Notes to financial statements
May 31, 1995 (Unaudited)
Note 1
Significant accounting policies

The fund is registered under the Investment Company Act of 1940, as amended, as
a diversified, open-end management investment company. The fund seeks high
current income through a diversified portfolio of high-yielding, lower-rated
corporate bonds with potential for capital growth.

The fund offers class A, class B and class M shares. The fund commenced its
public offering of Class M shares on December 1, 1994. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares do not pay a
front-end sales charge, but 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 six years of purchase. Class M shares are sold with
a maximum sales charge of 3.25% and pay a distributions fee that is lower than
class B shares and higher than class A shares. 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 distribution fees applicable to
such class. Each votes as a class only with respect to its own distribution
plan or other matters on which a class vote is required by law or determined by
the Trustees. In addition, the Trustees declare separate dividends on each
class of shares. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated.

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.

A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported--as in the case of some
securities traded over-the-counter--at the last reported bid price, except that
certain U.S. government obligations are stated at the mean between the bid and
asked prices. Securities whose market quotations are not readily available are
stated at fair value on the basis of valuations furnished by pricing services
approved by the Trustees, which determine valuations for normal,
institutional-size trading units of such securities using methods based on
market transactions for comparable securities and various relationships between
securities that are generally recognized by institutional traders. Short-term
investments having remaining maturities of 60 days or less are stated at
amortized cost, which approximates market value, and other investments are
stated at fair value following procedures approved by the Trustees.

B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account, along with the cash of other registered
investment companies managed by Putnam Investment Management, Inc., the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc., and certain
other accounts. These balances may be invested in one or

<PAGE>

more repurchase agreements and/or short-term money market instruments.

C) Repurchase agreements The fund, through its custodian, receives delivery of
the underlying securities, the market value of which at the time of purchase is
required to be in an amount at least equal to the resale price, including
accrued interest. The fund's Manager is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.

D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis and dividend income
is recorded on the ex-dividend date. Discount on zero coupon bonds, original
issue discount bonds and stepped-coupon bonds is accreted according to the
effective yield method. Certain securities held by the fund pay interest in the
form of cash or additional securities; interest on such securities is recorded
on the accrual basis at the lower of coupon rate or market value of the
securities to be received, and is allocated to the cost of the securities
received on the payment date.

E) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is also
the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax subject to Section 4982 of the Internal Revenue
Code of 1986. Therefore, no provision has been made for federal taxes on
income, capital gains or unrealized appreciation of securities held and excise
tax on income and capital gains.

At November 30, 1994, the fund had a capital loss carryover of approximately
$82,133,637, available to offset future capital gains, if any. To the extent
that the capital loss carryover is used to offset realized gains, it is
unlikely that the gains so offset will be distributed to shareholders, since
any such distribution might be taxable as ordinary income.

Loss Carryover Expiration

$49,757,478 November 30, 1998
15,408,761 November 30, 1999
16,967,398 November 30, 2002

F) Distributions to shareholders Distributions to shareholders are recorded by
the fund on the ex-dividend date. At certain times, the fund may pay
distributions at a level rate even though, as a result of market conditions or
investment decisions, the fund may not achieve projected investment results for
a given period.

The amount and character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences include treatment of losses
on wash sales transactions and post-October losses. Reclassifications are made
to the fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations.

Note 2
Management fee, administrative services, and other transactions

Compensation of Putnam Investment Management, Inc., the fund's Manager, a
wholly-owned subsidiary of Putnam Investments, Inc., for management and
investment advisory services is paid quarterly based on the average net assets
of the fund for the quarter. Such fee is based on the following annual rates:
0.70% of the first $500 million of average net assets, 0.60% of the next $500
million, 0.55% of the next

<PAGE>

$500 million and 0.50% of any amount over $1.5 billion, subject, under current
law, to reduction in any year to the extent that expenses (exclusive of
brokerage, interest and taxes) of the fund exceed 2.5% of the first $30 million
of average net assets, 2.0% of the next $70 million and 1.5% of any amount over
$100 million and by the amount of certain brokerage commissions and fees (less
expenses) received by affiliates of the Manager on the fund's portfolio
transactions.

The fund also reimburses the Manager for the compensation and related expenses
of certain officers of the fund and their staff who provide administrative
services to the fund. The aggregate amount of all such reimbursements is
determined annually by the Trustees.

Trustees of the fund receive an annual Trustee's fee of $1,500 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Manager and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings. Custodial
functions for the fund are provided by Putnam Fiduciary Trust Company (PFTC), a
subsidiary of Putnam Investments, Inc. Investor servicing agent functions are
provided by Putnam Investor Services, a division of PFTC.

Investor servicing and custodian fees reported in the Statement of operations
for the six months ended May 31, 1995 have been reduced by credits allowed by
PFTC.

The fund has adopted distribution plans (the "Plans") with respect to its class
A, class B and class M shares pursuant to Rule 12b-1 under the Investment
Company Act of 1940. The purpose of the Plans is to compensate Putnam Mutual
Funds Corp., a subsidiary of Putnam Investments Inc., for services provided and
expenses incurred by it in distributing shares of the fund. The Trustees have
approved payment by the fund at an annual rate of 0.25%, 1.00% and 0.50% of the
average net assets attributable to class A, class B and class M shares,
respectively.

For the six months ended May 31, 1995, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $259,167 and $10,379 from the sale of
class A and M shares, respectively and $102,211 in contingent deferred sales
charges from redemptions of class B shares. A deferred sales charge of up to 1%
is assessed on certain redemptions of class A shares purchased as part of an
investment of $1 million or more. For the six months ended May 31, 1995, Putnam
Mutual Funds Corp., acting as underwriter received $1,565 on class A
redemptions.

Note 3
Purchases and sales of securities

During the six months ended May 31, 1995, gross purchases and gross sales of
investment securities other than short-term investments aggregated $476,858,917
and $270,093,653 respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities sold,
the cost of securities has been determined on the identified cost basis.

Note 4
Capital shares

At May 31, 1995, there was an unlimited number of shares of beneficial interest
authorized. Transactions in capital shares were as follows:

<PAGE>

Six months Year ended
ended May 31 November 30
------------ ------------
1995 1994
------------ ------------
Class A Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Shares sold 18,401,621 $168,231,428 35,660,670 $ 358,899,704
Shares issued in
connection with
reinvestment of
dividends 1,703,730 15,553,314 3,581,537 35,469,811
- --------------------------------------------------------------------------------
20,105,351 183,784,742 39,242,207 394,369,515
Shares
repurchased (10,053,633) (92,072,346) (38,551,619) (387,466,479)
- --------------------------------------------------------------------------------
Net increase 10,051,718 $ 91,712,396 690,588 $ 6,903,036
- --------------------------------------------------------------------------------

May 16, 1994
(commencement of
Six months operations) to
ended May 31 November 30
------------ ------------
1995 1994
------------ ------------
Class B Shares Amount Shares Amount
- ------------------------------------------------------------------------
Shares sold 10,724,449 $95,590,910 4,486,855 $42,572,031
- ------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
dividends 143,815 1,320,796 42,903 401,973
10,868,264 99,911,707 4,529,758 42,974,004
- ------------------------------------------------------------------------
Shares
repurchased (905,006) (8,292,363) (438,766) (4,120,174)
- ------------------------------------------------------------------------
Net increase 9,963,258 $91,619,344 4,090,922 $38,853,830
- ------------------------------------------------------------------------

December 1, 1994
(commencement of
operations) to
May 31
1995
----------------
Class M Shares Amount
- ---------------------------------------------
Shares sold 1,210,838 $11,193,139
- ---------------------------------------------
Shares issued in
connection with
reinvestment of
dividends 11,258 104,378
1,222,096 11,297,517
- ---------------------------------------------
Shares
repurchased (64,267) (598,832)
- ---------------------------------------------
Net increase 1,157,827 $10,698,687
- ---------------------------------------------

<PAGE>

Our commitment to quality service

> CHOOSE AWARD-WINNING SERVICE.

Putnam Investor Services has won the DALBAR Quality Tested Service Seal every
year since the award's 1990 inception. DALBAR, an independent research firm,
ran more than 10,000 tests of 38 shareholder service components. In every
category, Putnam outperformed the industry standard.

> HELP YOUR INVESTMENT GROW.

Set up a systematic program for investing with as little as $25 a month from a
Putnam money market fund or your checking or savings account.*

> SWITCH FUNDS EASILY.

You can move money from one account to another with the same class of shares
without a service charge. (This privilege is subject to change or termination.)

> ACCESS YOUR MONEY QUICKLY.

You can get checks sent regularly or redeem shares any business day at the
then-current net asset value, which may be more or less than the original cost
of the shares.

For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a helpful
Putnam representative.

> To make an additional investment in this or any other Putnam fund, contact
your financial advisor or call our toll-free number: 1-800-225-1581.

*Regular investing, of course, does not guarantee a profit or protect against a
loss in a declining market.

<PAGE>

Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109

MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109

CUSTODIAN
Putnam Fiduciary Trust Company

LEGAL COUNSEL
Ropes & Gray

TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike

OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
Edward H. D'Alelio
Vice President
Jin W. Ho
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer

This report is for the information of shareholders of Putnam High Yield
Advantage Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales charges,
investment objectives, and operating policies of the fund, and the most recent
copy of Putnam's Quarterly Performance Summary. For more information or to
request a prospectus, call toll-free: 1-800-225-1581.

Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board or any other agency,
and involve risk, including the possible loss of principal amount invested.

<PAGE>

(logo) Putnam Investments
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109

Bulk Rate
U.S. Postage
PAID
Putnam Investments
18994-060/327/702

<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS:

(1) Bold and italic typefaces are displayed in normal type.

(2) Headers (e.g., the name of the fund) are omitted.

(3) Certain tabular and columnar headings and symbols are displayed
differently in this filing.

(4) Bullet points and similar graphic signals are omitted.

(5) Page numbering is omitted.

(6) Trademark symbol replaced with (TM)