The George
Putnam
Fund of
Boston
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
7-31-00
[SCALE LOGO OMITTED]
FROM THE TRUSTEES
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]
Dear Shareholder:
It is a pleasure to greet you in our new roles as Chairman of the
Trustees and President of the Funds. As you know, both of us have been
members of the Board of Trustees for a number of years -- years during
which the global securities markets, the mutual fund industry, and
Putnam itself have experienced tremendous growth and change.
As we look to the future, we are certain that the changes that lie ahead
will be even more breathtaking in their scope. What will not change is
the Trustees' dedication to serving the best interests of our
shareholders.
We are pleased to announce that David L. King and Jeanne L. Mockard have
recently joined the fund's management team. David has been with Putnam
since 1983 and has 18 years of investment experience. Jeanne has been
with Putnam since 1985 and has 15 years of investment experience.
Respectfully yours,
/S/ JOHN A. HILL /S/GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
September 20, 2000
REPORT FROM FUND MANAGEMENT
David L. King
Jeanne L. Mockard
James M. Prusko and
the Core Fixed
Income Team
During its fiscal year 2000, The George Putnam Fund of Boston faced a
challenging investment environment that was largely hostile to
undervalued stocks and corporate bonds. For much of the year, investors'
avid pursuit of growth stocks was paralleled by their waning interest
in the stocks of traditional, old economy companies. A series of Federal
Reserve Board interest-rate increases made matters worse by hampering
corporate profitability and diminishing the value of outstanding
corporate bonds. Although the value investment style returned to favor
in the second half of the year and fund performance improved, gains were
not sufficient to overcome the lackluster performance between August
1999 and March 2000.
Total return for 12 months ended 7/31/00
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
----------------------------------------------------------------------
-5.09% -10.56% -5.82% -10.08% -5.82% -6.67% -5.52% -8.80%
----------------------------------------------------------------------
Past performance is not indicative of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 7.
* NEW EQUITY MANAGERS INTRODUCE REVISED PROCESS
During the period, the management team's equity side was significantly
strengthened and expanded. We believe the team's combined expertise will
enable us to take greater advantage of the market's numerous
opportunities and will prove to be a distinct benefit to our
shareholders. David and Jeanne possess a wealth of experience in all
facets of growth and income investing.
With the change in management we have also taken a fresh look at the
fund's process of selecting equities in light of recent changes in the
economy and stock market trends. Our stock selections are based on the
combined results of a new valuation model incorporating projected cash
flows and extensive fundamental research.
[GRAPHIC OMITTED: horizontal bar chart COMPARATIVE PORTFOLIO COMPOSITION]
COMPARATIVE PORTFOLIO COMPOSITION*
7/31/99 7/31/00
Common stocks 60.9% 62.7%
Corporate bonds
and notes 18.2% 18.5%
U.S. government
and agency
securities 15.8% 9.5%
Foreign government
bonds and notes 0.2% 0.3%
Collateralized
mortgage obligations 1.7% 5.2%
Convertible and
preferred securities 0.7% 0.4%
Cash and other 4.5% 3.5%
Footnote reads:
*Based on percentage of net assets. The balances of the portfolio on 7/31/99
and 7/31/00 were invested in cash and short-term securities. Portfolio
allocation will vary over time.
Although we have refined the equity investment process, your fund's
investment objective has not changed. It remains a conservative and
balanced portfolio, seeking a combination of growth and current income
with constant exposure to both the equity and fixed-income markets. With
its new process in place, we believe your fund can more easily take
advantage of attractive opportunities among large companies in all
sectors of the U.S. economy.
* HIGH QUALITY AND TAKEOVERS BOOST RETURNS
The negative influences affecting your fund's holdings had an impact on
many other stocks as well, and we turned some of those difficulties to
the fund's advantage in late 1999 and early 2000. As investors chased
technology stocks and abandoned nearly everything else, many blue-chip
stocks became undervalued. High-quality holdings selling at depressed
prices became something of a theme, and we opportunistically bought
shares of many fine companies, most possessing excellent fundamentals
and long histories of steady dividend payments, at significant
discounts.
As a result, we believe the quality of the portfolio has been upgraded
significantly. Berkshire Hathaway is a case in point. Berkshire is a
holding company operating numerous businesses, primarily insurance
(GEICO) and reinsurance (General RE) but also diamonds (Helzberg),
candies (See's), pilot training (Flight Safety International), and shoes
(H.H. Brown and Dexter). It also owns significant positions in many
leading companies, including American Express, Coca-Cola, and Gillette.
Under Warren Buffett's remarkable leadership, Berkshire Hathaway has had
consistently strong earnings growth and has attained legendary status
among investors. While this holding, as well as others mentioned in this
report, were viewed favorably at the end of the reporting period, all
are subject to review and adjustment in accordance with your fund's
investment strategy.
"If the travails of the six months just past have taught you anything
it's that balance should be your watchword as you take your investments
into the slower economy ahead."
-- Business Week, June 26, 2000
Emerson Electric is another example of a fine company we were able to
purchase at a steep discount. Emerson, once a television manufacturer,
has changed its product mix over the years and currently manufactures
power supply components for use by computer and telecommunications
companies. The power supply carries electricity from a wall receptacle
to a computer (or another device). These products are not advanced
technology, but they are essential to the functioning of many
technological products, and we believe Emerson will profit from
increasing demand. This exceptional company can boast 42 years of
continuous earnings growth.
Economic and market conditions during the period encouraged merger and
acquisition activity. Your fund benefited from the takeover of Union
Pacific Resources Group by Anadarko Petroleum. Prior to the takeover,
your fund owned shares of the former Union Pacific Resources (UPR), an
oil and gas exploration company that produces natural gas and crude oil.
The company had valuable assets that were not, in our opinion, being
managed effectively. Shares of UPR appreciated on news that the company
would be acquired by Anadarko Petroleum, one of the best managed
companies in the industry. Like UPR, Anadarko specializes in oil and gas
exploration, and we believe its expertise will enable it to handle UPR's
assets well. When the acquisition was completed, our shares of UPR
converted to shares of Anadarko, which we continue to hold at the time
of this report.
UTILITIES SECTOR UNDERGOING POSITIVE CHANGES
In 1999, the utilities sector had its worst performance, relative to the
market, in 36 years. However, as of August 2000, utilities make up the
best-performing large-cap sector in the S&P for this year. This
historically steady, low-growth sector is likely to see an increase in
profits coupled with slightly higher volatility as a result of
deregulation, which has brought new efficiencies and competitiveness to
the marketplace. Large, multifunctional companies are breaking into
discrete businesses that handle separate processes such as power
generation and distribution. Older companies are selling or borrowing
against their physical assets and are using increased cash flow to pay
down debt, buy back shares, and make strategic acquisitions. A wave of
consolidations is underway, and many utility providers are branching
into alternative power such as fuel cell technology or are investing in
media or telecommunications. Your fund has taken positions in many gas
and electric companies that we believe offer strong growth potential
over the long term.
Another profitable takeover story involved Mallinckrodt, a company that
manufactures a range of products for the health-care industry, including
respiratory care, pain relievers, and imaging agents for radiological,
cardiological, and nuclear medicine applications. The fund's shares of
Mallinckrodt appreciated on news that Tyco International would acquire
the company.
* ELECTRIC UTILITIES CONTRIBUTE TO PERFORMANCE
During the period, your fund emphasized electric utilities because they
were cheap and because we expect industry-wide consolidation to
continue, bringing with it more efficient cost structures and improved
shareholder value. Electric utilities companies, benefiting from
deregulation, are generating steady cash flows as they sell off or
borrow against their considerable physical assets. Dayton Power and
Light (DPL) is one of several electric utilities companies now held in
your fund's portfolio. DPL provides electric and natural gas service to
residential and commercial clients throughout Ohio. The company recently
received an infusion of capital from a prestigious leveraged buyout firm
and we believe this investment could contribute to improved financial
performance for DPL in the future. Leveraged buyout opportunities are
yet another catalyst contributing to improving returns in the industry.
Since the market correction in March, investors have taken a second look
at electric utilities' low price-to-earnings ratios and steady, average
annual earnings growth of about 10%. For many investors, electric
utilities have become an attractive hedge against the volatile Nasdaq
market.
* FIXED-INCOME SECURITIES SUFFER UNDER RATE INCREASES, TREASURY
BUY-BACK PROGRAM
Two important developments affected the fixed-income portion of your
fund during the period. The Fed's campaign to combat inflation by
raising short-term interest rates put significant pressure on the credit
sectors of the market. Furthermore, a huge budget surplus prompted the
Treasury Department to begin a campaign of buying back long-term
Treasury bonds. The resulting decline in long-term Treasury yields
combined with rising short-term interest rates to produce an inverted
yield curve.
Meanwhile, as investors pursued a dwindling supply of Treasuries,
corporate bonds had their worst year ever relative to Treasuries. In
fact, all other bond sectors severely lagged the Treasury sector. Your
fund's emphasis on corporates, which typically offer higher yields,
detracted from fund performance. We believe, however, that the
underperformance of these bonds is related primarily to the unusual
circumstance of the Treasury's buy-back program, and that fundamental
conditions for corporate bonds are actually more favorable than recent
performance indicates.
* SLOWING ECONOMY ENCOURAGES OPTIMISM
As we enter fiscal 2001, we expect the rate of economic growth to slow.
Recent data appear to confirm this, and therefore we also anticipate
that the Fed will soon complete its cycle of raising interest rates.
These signs are strongly positive for value sectors, and we believe a
slowing economy will be incrementally more beneficial for value than for
growth.
[GRAPHIC OMITTED: TOP 10 EQUITY HOLDINGS]
TOP 10 EQUITY HOLDINGS
ExxonMobil Corp.
Oil and gas
SBC Communications, Inc.
Regional Bells
Johnson & Johnson
Pharmaceuticals
Citigroup, Inc.
Financial
Bank of America Corp.
Banking
Royal Dutch Petroleum Co.
PLC ADR
Netherlands
Oil and gas
Fannie Mae
Financial
Verizon Communications
Regional Bells
Microsoft Corp.
Software
General Electric Co.
Conglomerates
Footnote reads:
These holdings represent 12.6% of the fund's net assets as of 7/31/00.
Portfolio holdings will vary over time.
We are acutely aware that maintaining a strict value discipline in a
growth-oriented market can be a little like swimming upstream, but it
can also serve as an anchor when the direction of the current changes or
when there is severe market turbulence. Your fund's broadly diversified
portfolio is among the most conservative and traditional of Putnam's
value fund offerings. You can expect your fund to be significantly less
volatile than the overall market, an attribute we believe cautious
investors can fully appreciate in light of recent and unprecedented
market instability. A classic value fund such as yours plays an
important role in a diversified investment program. As such, your fund
is well positioned to reward investors with positive performance and
less risk over the long term.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 7/31/00, there is no guarantee the fund will
continue to hold these securities in the future.
PERFORMANCE SUMMARY
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. The
George Putnam Fund of Boston is designed for investors seeking capital
growth and current income.
TOTAL RETURN FOR PERIODS ENDED 7/31/00
Class A Class B Class C Class M
(inception dates) (11/5/37) (4/27/92) (7/26/99) (12/1/94)
NAV POP NAV CDSC NAV CDSC NAV POP
------------------------------------------------------------------------------
1 year -5.09% -10.56% -5.82% -10.08% -5.82% -6.67% -5.52% -8.80%
------------------------------------------------------------------------------
5 years 69.96 60.17 63.73 61.73 63.64 63.64 65.93 60.10
Annual average 11.19 9.88 10.36 10.09 10.35 10.35 10.66 9.87
------------------------------------------------------------------------------
10 years 184.51 168.10 163.93 163.93 163.83 163.83 170.21 160.73
Annual average 11.02 10.36 10.19 10.19 10.19 10.19 10.45 10.06
------------------------------------------------------------------------------
Annual average
(life of fund) 9.70 9.60 8.65 8.65 8.88 8.88 8.92 8.86
------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/00
Standard & Lehman Bros.
Poor's 500 Govt./Corp. Consumer
Index Bond Index* price index
------------------------------------------------------------------------------
1 year 8.97% 5.69% 3.60%
------------------------------------------------------------------------------
5 years 177.11 36.35 13.10
Annual average 22.60 6.40 2.49
------------------------------------------------------------------------------
10 years 408.18 112.25 32.44
Annual average 17.65 7.82 2.85
------------------------------------------------------------------------------
Annual average
(life of fund) 12.45 --* 4.02
------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 5.75% and
3.50%, respectively. Class B share returns for the 1-, 5-, 10-year
(where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. Returns
shown for class B and class M shares for periods prior to their
inception are derived from the historical performance of class A shares,
adjusted to reflect both the initial sales charge or CDSC, if any,
currently applicable to each class and in the case of class B and class
M shares the higher operating expenses applicable to such shares. For
class C shares, returns for periods prior to their inception are derived
from the historical performance of class A shares, adjusted to reflect
both the CDSC currently applicable to class C shares, which is 1% for
the first year and is eliminated thereafter, and the higher operating
expenses applicable to class C shares. All returns assume reinvestment
of distributions at NAV. Investment return and principal value will
fluctuate so that an investor's shares when redeemed may be worth more
or less than their original cost.
*Inception date of index was 12/31/72, after the fund's inception.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 7/31/90
Lehman Bros.
Fund's class A S&P 500 Govt./Corp. Consumer price
Date shares at POP Index Bond Index index
7/31/90 9,425 10,000 10,000 10,000
7/31/91 10,486 11,276 11,023 10,445
7/31/92 11,920 12,718 12,747 10,775
7/31/93 12,950 13,829 14,153 11,074
7/31/94 13,398 14,542 14,135 11,380
7/31/95 15,774 18,339 15,566 11,710
7/31/96 18,101 21,377 16,392 12,055
7/31/97 23,806 32,523 18,161 12,316
7/31/98 26,076 38,795 19,626 12,523
7/31/99 28,248 46,633 20,082 12,784
7/31/00 $26,810 $50,818 $21,225 $13,244
Footnote reads:
Past performance is no assurance of future results. At the end of the
same time period, a $10,000 investment in the fund's class B and class C
shares would have been valued at $26,393 and $26,383, respectively, and
no contingent deferred sales charges would apply; a $10,000 investment
in the fund's class M shares would have been valued at $27,021 ($26,073
at public offering price). See first page of performance section for
performance calculation method.
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 7/31/00
Class A Class B Class C Class M
------------------------------------------------------------------------------
Distributions (number) 4 4 4 4
------------------------------------------------------------------------------
Income $0.5865 $0.4565 $0.5195 $0.5005
------------------------------------------------------------------------------
Capital gains
Long-term 1.0600 1.0600 1.0600 1.0600
------------------------------------------------------------------------------
Short-term 0.1795 0.1795 0.1795 0.1795
------------------------------------------------------------------------------
Total $1.8260 $1.6960 $1.7590 $1.7400
------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
------------------------------------------------------------------------------
7/31/99 $18.49 $19.62 $18.33 $18.49 $18.33 $18.99
------------------------------------------------------------------------------
7/31/00 15.77 16.73 15.62 15.71 15.63 16.20
------------------------------------------------------------------------------
Current return (end of period)
------------------------------------------------------------------------------
Current dividend rate 1 3.80% 3.59% 3.07% 3.18% 3.33% 3.21%
------------------------------------------------------------------------------
Current 30-day SEC yeild 2 3.52 3.32 2.76 2.77 3.02 2.84
------------------------------------------------------------------------------
1 Most recent distribution, annualized and divided by NAV or POP at end
of period.
2 Based only on investment income, calculated using SEC guidelines.
<TABLE>
<CAPTION>
TOTAL RETURN FOR PERIODS ENDED 6/30/00 (most recent calendar quarter)
Class A Class B Class C Class M
(inception dates) (11/5/37) (4/27/92) (7/26/99) (12/1/94)
NAV POP NAV CDSC NAV CDSC NAV POP
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year -6.98% -12.35% -7.71% -11.88% -7.69% -8.52% -7.46% -10.70%
-------------------------------------------------------------------------------------
5 years 73.64 63.69 67.27 65.27 67.20 67.20 69.29 63.37
Annual average 11.67 10.36 10.84 10.57 10.83 10.83 11.10 10.32
-------------------------------------------------------------------------------------
10 years 188.57 171.97 167.84 167.84 167.61 167.61 173.97 164.45
Annual average 11.18 10.52 10.35 10.35 10.34 10.34 10.60 10.21
-------------------------------------------------------------------------------------
Annual average
(life of fund) 9.73 9.62 8.67 8.67 8.90 8.90 8.94 8.88
-------------------------------------------------------------------------------------
</TABLE>
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns and principal value will fluctuate so that an investor's shares
when sold may be worth more or less than their original cost. See first
page of performance section for performance calculation method.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
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.
Net asset value (NAV) is the value of all your fund's 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 the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 5.75% maximum sales charge for class A
shares and 3.50% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C shares and assumes redemption at the
end of the period. Your fund's class B 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. The CDSC for class C shares is 1% for
one year after purchase.
COMPARATIVE BENCHMARKS
Standard & Poor's 500 Index* is an index of common stocks frequently
used as a general measure of stock market performance.
The Lehman Brothers Government/Corporate Bond Index* is an index of
publicly issued U.S. Treasury obligations, debt obligations of U.S.
government agencies (excluding mortgage-backed securities), fixed-rate,
non-convertible, investment-grade corporate debt securities and U.S.
dollar-denominated, SEC-registered nonconvertible debt issued by foreign
governmental entities or international agencies used as a general
measure of the performance of fixed-income securities.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take into account brokerage fees or taxes. Securities
in the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss
for the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that
remain in the portfolio -- any change in unrealized gains or losses over
the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment income
ratios and portfolio turnover in one summary table, reflecting the five
most recent reporting periods. In a semiannual report, the highlight
table also includes the current reporting period. For open-end funds, a
separate table is provided for each share class.
REPORT OF INDEPENDENT ACCOUNTANTS
For the fiscal year ended July 31, 2000
To the Trustees and Shareholders of
The George Putnam Fund of Boston
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of The
George Putnam Fund of Boston (the "fund") at July 31, 2000, and the
results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with
accounting principles generally accepted in the United States. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the fund's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at July
31, 2000 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 7, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
July 31, 2000
COMMON STOCKS (62.7%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C> <C>
Aerospace and Defense (0.7%)
-------------------------------------------------------------------------------------------------------------------
661,270 Boeing Co. $ 32,402,230
63,250 United Technologies Corp. 3,692,219
----------------
36,094,449
Airlines (0.2%)
-------------------------------------------------------------------------------------------------------------------
157,020 Delta Air Lines, Inc. 8,430,011
Automotive (0.3%)
-------------------------------------------------------------------------------------------------------------------
309,470 Ford Motor Co. 14,409,697
40,580 Visteon Corp. 568,121
----------------
14,977,818
Banking (7.8%)
-------------------------------------------------------------------------------------------------------------------
1,188,460 Bank of America Corp. 56,303,293
598,370 Bank One Corp. 19,035,646
517,230 BB&T Corp. 12,898,423
1,385,552 Charter One Financial, Inc. 29,875,965
514,890 Chase Manhattan Corp. 25,583,597
746,670 Comerica, Inc. 38,080,170
241,030 First Union Corp. 6,221,587
1,020,410 Firstar Corp. 20,153,098
1,114,900 FleetBoston Financial Corp. 39,927,356
17,970 M & T Bank Corp. 8,489,702
113,840 Morgan (J.P.) & Co., Inc. 15,197,640
539,510 National City Corp. 9,576,303
715,540 PNC Bank Corp. 36,403,098
406,230 Synovus Financial Corp. 7,312,140
514,410 U.S. Bancorp 9,870,242
271,940 Washington Mutual, Inc. 8,736,073
1,055,980 Wells Fargo Co. 43,625,174
161,150 Zions Bancorp 7,050,313
----------------
394,339,820
Beverage (2.5%)
-------------------------------------------------------------------------------------------------------------------
222,320 Anheuser-Busch Cos., Inc. 17,896,760
88,550 Brown-Forman Corp. Class B 4,427,500
654,780 Coca-Cola Co. 40,146,199
447,400 Coca-Cola Enterprises, Inc. 8,584,488
653,580 Fortune Brands, Inc. 14,705,550
444,880 Pepsi Bottling Group, Inc. (The) 13,596,645
575,320 PepsiCo, Inc. 26,356,848
----------------
125,713,990
Cable Television (0.2%)
-------------------------------------------------------------------------------------------------------------------
240,480 Adelphia Communications Corp., Class A (NON) 8,476,920
Chemicals (1.5%)
-------------------------------------------------------------------------------------------------------------------
130,260 Avery Dennison Corp. 7,066,605
480,460 Dow Chemical Co. 13,813,225
569,350 du Pont (E.I.) de Nemours & Co., Ltd. 25,798,672
438,300 Engelhard Corp. 7,916,794
115,210 Minnesota Mining & Manufacturing Co. 10,376,101
222,210 PPG Industries, Inc. 9,041,169
----------------
74,012,566
Combined Utilities (0.2%)
-------------------------------------------------------------------------------------------------------------------
258,500 Constellation Energy Group 8,611,281
Commercial and Consumer Services (0.1%)
-------------------------------------------------------------------------------------------------------------------
1,263,170 Service Corp. International 3,236,873
Communications Equipment (0.7%)
-------------------------------------------------------------------------------------------------------------------
31,170 Corning, Inc. 7,291,832
348,280 Nortel Networks Corp. (Canada) 25,903,325
----------------
33,195,157
Computers (3.1%)
-------------------------------------------------------------------------------------------------------------------
134,850 Apple Computer, Inc. (NON) 6,852,066
357,230 Dell Computer Corp. (NON) 15,695,793
196,060 Gateway, Inc. (NON) 10,820,061
430,550 Hewlett-Packard Co. 47,010,678
407,000 IBM Corp. 45,762,063
272,400 Lexmark International Group, Inc. Class A (NON) 12,275,025
97,410 NCR Corp. (NON) 3,451,967
1,014,650 Parametric Technology Corp. (NON) 10,146,500
87,380 Seagate Technology, Inc. (NON) 4,429,074
----------------
156,443,227
Conglomerates (2.4%)
-------------------------------------------------------------------------------------------------------------------
9,510 Berkshire Hathaway, Inc. (NON) 17,355,750
244,100 Cooper Industries, Inc. 7,826,456
940,790 General Electric Co. 48,391,886
376,280 Honeywell International, Inc. 12,652,415
635,580 Tyco International, Ltd. 34,003,530
----------------
120,230,037
Consumer Finance (0.3%)
-------------------------------------------------------------------------------------------------------------------
399,550 Household International, Inc. 17,804,947
Consumer Goods (0.6%)
-------------------------------------------------------------------------------------------------------------------
537,490 Kimberly-Clark Corp. 30,872,082
Distribution (0.3%)
-------------------------------------------------------------------------------------------------------------------
332,720 SYSCO Corp. 13,100,850
Electric Utilities (3.8%)
-------------------------------------------------------------------------------------------------------------------
820,050 Cinergy Corp. 21,321,300
624,050 CP&L Energy, Inc. 20,866,672
529,880 Dominion Resources, Inc. 24,076,423
667,792 DPL, Inc. 16,110,482
301,050 Duke Energy Corp. 18,571,022
527,510 Edison International 10,385,353
1,074,730 Entergy Corp. 29,152,051
270,500 NiSource, Inc. 5,257,844
327,200 PG&E Corp. 8,466,300
631,560 Reliant Energy, Inc. 21,157,260
604,630 TXU Corp. 18,894,688
----------------
194,259,395
Electrical Equipment (0.9%)
-------------------------------------------------------------------------------------------------------------------
622,580 Emerson Electric Co. 38,016,291
243,500 Rockwell International Corp. 8,537,719
----------------
46,554,010
Electronics (0.5%)
-------------------------------------------------------------------------------------------------------------------
93,020 Agilent Technologies, Inc. (NON) 3,790,565
519,290 Motorola, Inc. 17,169,026
145,980 W W Grainger 4,634,865
----------------
25,594,456
Energy (0.5%)
-------------------------------------------------------------------------------------------------------------------
107,230 Halliburton Co. 4,945,984
177,550 Schlumberger, Ltd. 13,127,603
196,840 Transocean Sedco Forex, Inc. 9,743,580
----------------
27,817,167
Financial (2.8%)
-------------------------------------------------------------------------------------------------------------------
341,890 American Express Co. 19,380,889
192,310 Associates First Capital Corp. 5,036,118
919,640 Citigroup, Inc. 64,892,098
1,035,360 Fannie Mae 51,638,580
----------------
140,947,685
Food (1.0%)
-------------------------------------------------------------------------------------------------------------------
465,200 Archer Daniels Midland Co. 4,361,250
367,950 Heinz (H.J.) Co. 14,695,003
140,970 Quaker Oats Co. (The) 9,480,233
594,800 Ralston-Ralston Purina Group 12,007,525
656,460 Sara Lee Corp. 12,103,481
----------------
52,647,492
Gaming & Lottery (--%)
-------------------------------------------------------------------------------------------------------------------
1,733 Fitzgeralds Gaming Corp. 17
Health Care Services (2.1%)
-------------------------------------------------------------------------------------------------------------------
563,160 Baxter International, Inc. 43,785,690
343,490 CIGNA Corp. 34,306,064
279,520 HCA-The Healthcare Corp. 9,503,680
28,660 HEALTHSOUTH Corp. (NON) 170,169
391,090 Mallinckrodt, Inc. 17,892,368
----------------
105,657,971
Insurance (2.5%)
-------------------------------------------------------------------------------------------------------------------
257,560 Allstate Corp. 7,098,998
449,010 American General Corp. 29,943,354
409,380 American International Group, Inc. 35,897,509
379,110 Hartford Financial Services Group 24,357,818
100,300 Jefferson-Pilot Corp. 6,118,300
567,080 Lincoln National Corp. 24,738,865
----------------
128,154,844
Investment Banking/Brokerage (1.0%)
-------------------------------------------------------------------------------------------------------------------
273,850 Bear Stearns Cos., Inc. (The) 14,753,669
109,970 Merrill Lynch & Co., Inc. 14,213,623
307,010 Paine Webber Group, Inc. 21,260,443
----------------
50,227,735
Lodging/Tourism (0.4%)
-------------------------------------------------------------------------------------------------------------------
249,810 Marriott International, Inc. Class A 9,992,400
353,740 Starwood Hotels & Resorts Worldwide, Inc. 12,071,378
----------------
22,063,778
Machinery (0.3%)
-------------------------------------------------------------------------------------------------------------------
474,000 Caterpillar, Inc. 16,145,625
Manufacturing (0.3%)
-------------------------------------------------------------------------------------------------------------------
225,490 Illinois Tool Works, Inc. 12,909,303
Media (0.3%)
-------------------------------------------------------------------------------------------------------------------
417,160 Disney (Walt) Productions, Inc. 16,138,878
Medical Technology (0.3%)
-------------------------------------------------------------------------------------------------------------------
110,200 Bausch & Lomb, Inc. 6,853,063
193,300 St. Jude Medical, Inc. (NON) 7,973,625
----------------
14,826,688
Metals (0.3%)
-------------------------------------------------------------------------------------------------------------------
463,650 Alcoa, Inc. 14,025,413
Natural Gas Utilities (0.8%)
-------------------------------------------------------------------------------------------------------------------
211,300 El Paso Energy Corp. 10,221,638
593,480 Sempra Energy 11,127,750
495,680 Williams Cos., Inc. 20,694,640
----------------
42,044,028
Oil & Gas (5.1%)
-------------------------------------------------------------------------------------------------------------------
253,140 Anadarko Petroleum Corp. 12,103,256
403,480 BP Amoco PLC ADR (United Kingdom) 21,107,048
218,920 Chevron, Inc. 17,294,680
591,260 Conoco, Inc. 13,229,443
736,470 Conoco, Inc. Class B 16,984,839
1,272,770 ExxonMobil Corp. 101,821,600
890,540 Royal Dutch Petroleum Co. PLC ADR (Netherlands) 51,873,955
537,930 Tosco Corp. 14,255,145
154,920 TotalFinaElf S.A. ADR (France) 11,396,303
----------------
260,066,269
Paper & Forest Products (1.0%)
-------------------------------------------------------------------------------------------------------------------
365,700 Boise Cascade Corp. 10,102,463
637,120 Owens-Illinois, Inc. (NON) 8,481,660
242,970 Smurfit-Stone Container Corp. (NON) 3,021,939
117,680 Temple Inland, Inc. 5,111,725
470,800 Weyerhaeuser Co. 21,509,675
----------------
48,227,462
Pharmaceuticals (5.2%)
-------------------------------------------------------------------------------------------------------------------
836,730 Abbott Laboratories 34,828,886
308,420 American Home Products Corp. 16,365,536
935,080 Bristol-Myers Squibb Co. 46,403,345
796,750 Johnson & Johnson 74,147,547
211,930 Merck & Co., Inc. 15,192,732
491,990 Pfizer, Inc. 21,217,069
857,920 Pharmacia Corp. 46,971,120
243,230 Schering-Plough Corp. 10,504,496
----------------
265,630,731
Photography/Imaging (0.4%)
-------------------------------------------------------------------------------------------------------------------
274,350 Eastman Kodak Co. 15,054,956
422,330 Xerox Corp. 6,282,159
----------------
21,337,115
Publishing (0.6%)
-------------------------------------------------------------------------------------------------------------------
73,390 Gannett Co., Inc. 3,953,886
205,650 McGraw-Hill, Inc. 12,223,322
511,510 Tribune Co. 16,624,075
----------------
32,801,283
Railroads (0.5%)
-------------------------------------------------------------------------------------------------------------------
348,990 Burlington Northern Santa Fe Corp. 8,528,443
407,890 Union Pacific Corp. 17,615,749
----------------
26,144,192
Real Estate (0.8%)
-------------------------------------------------------------------------------------------------------------------
480,820 Equity Office Properties Trust (R) 14,665,010
495,150 Equity Residential Properties Trust (R) 24,695,606
----------------
39,360,616
Regional Bells (3.3%)
-------------------------------------------------------------------------------------------------------------------
629,270 BellSouth Corp. 25,052,812
2,171,440 SBC Communications, Inc. 92,421,924
1,053,470 Verizon Communications 49,513,090
----------------
166,987,826
Restaurants (--%)
-------------------------------------------------------------------------------------------------------------------
100 AmeriKing, Inc. (NON) 1,000
Retail (1.7%)
-------------------------------------------------------------------------------------------------------------------
347,050 Albertsons, Inc. 10,476,572
637,310 CVS Corp. 25,133,913
556,560 Federated Department Stores, Inc. (NON) 13,392,225
590,160 Kmart Corp. (NON) 4,131,120
276,500 Lowe's Cos., Inc. 11,664,844
44 Mothers Work, Inc. (NON) 440
448,750 Sears, Roebuck & Co. 13,406,406
548,220 Staples, Inc. (NON) 7,572,289
----------------
85,777,809
Software (1.4%)
-------------------------------------------------------------------------------------------------------------------
403,650 BMC Software, Inc. (NON) 7,618,894
620,680 Computer Associates International, Inc. 15,400,623
697,500 Microsoft Corp. (NON) 48,694,219
----------------
71,713,736
Technology Services (0.8%)
-------------------------------------------------------------------------------------------------------------------
316,050 Automatic Data Processing, Inc. 15,664,228
638,440 Electronic Data Systems Corp. 27,452,920
----------------
43,117,148
Telecommunications (1.9%)
-------------------------------------------------------------------------------------------------------------------
558,330 ALLTEL Corp. 34,407,086
831,100 AT & T Corp. 25,712,156
287,690 AT&T Wireless Group (NON) 7,911,475
765,740 Sprint Corp. (Fon Group) 27,279,488
----------------
95,310,205
Textiles (0.2%)
-------------------------------------------------------------------------------------------------------------------
854,507 Shaw Industries, Inc. 10,948,371
Tobacco (0.7%)
-------------------------------------------------------------------------------------------------------------------
1,439,750 Philip Morris Cos., Inc. 36,353,688
Toys (0.1%)
-------------------------------------------------------------------------------------------------------------------
554,490 Hasbro, Inc. 6,307,324
Waste Management (0.3%)
-------------------------------------------------------------------------------------------------------------------
260,500 Republic Services, Inc. (NON) 4,363,375
603,430 Waste Management, Inc. 11,276,581
----------------
15,639,956
----------------
Total Common Stocks (cost $3,173,025,833) $ 3,181,279,244
CORPORATE BONDS AND NOTES (18.5%) (a)
PRINCIPAL AMOUNT VALUE
Advertising and Marketing Services (--%)
-------------------------------------------------------------------------------------------------------------------
$ 355,000 Lamar Media Corp. sr. sub. notes 9 1/4s, 2007 $ 349,675
Aerospace and Defense (1.1%)
-------------------------------------------------------------------------------------------------------------------
12,080,000 Boeing Co. deb. 6 5/8s, 2038 10,603,703
9,640,000 Litton Industries Inc. sr. notes 8s, 2009 9,705,359
15,720,000 Lockheed Martin Corp. bonds 8 1/2s, 2029 16,210,464
9,915,000 Norsk Hydro ASA notes 6.36s, 2009 (Norway) 9,055,469
4,225,000 Raytheon Co. notes 6.45s, 2002 4,146,838
6,640,000 Raytheon Co. deb. 6.4s, 2018 5,642,539
2,250,000 Sequa Corp. sr. notes 9s, 2009 2,193,750
----------------
57,558,122
Agriculture (--%)
-------------------------------------------------------------------------------------------------------------------
284,643 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 259,025
Airlines (1.1%)
-------------------------------------------------------------------------------------------------------------------
624,979 Airbus Industries 144A equipment trust 8.027s, 2020 617,444
8,733,261 Atlas Air, Inc. pass-through certificates Ser. 991A, 7.2s, 2019 8,017,133
220,000 Calair LLC 144A company guaranty 8 1/8s, 2008 202,950
1,935,261 Continental Airlines, Inc. pass-through certificates
Ser. 97CI, 7.42s, 2007 1,890,170
2,734,415 Continental Airlines, Inc. pass-through certificates
Ser. 974C, 6.8s, 2009 2,604,175
6,249,986 Continental Airlines, Inc. pass-through certificates
Ser. 981C, 6.541s, 2009 5,904,612
11,885,000 Continental Airlines, Inc. pass-through certificates
Ser. 98-2, 6.32s, 2008 10,766,384
9,840,000 Delta Air Lines, Inc. notes 8.3s, 2029 8,821,757
6,318,814 Northwest Airlines Corp. pass-through certificates
Ser. 1999-1A, 6.81s, 2020 5,663,743
1,690,000 Northwest Airlines, Inc. company guaranty 8.7s, 2007 1,563,149
1,310,000 Northwest Airlines, Inc. company guaranty 8.52s, 2004 1,251,312
720,000 Northwest Airlines, Inc. company guaranty 7 7/8s, 2008 648,914
6,975,000 United Air Lines Corp. deb. 9 3/4s, 2021 6,874,142
575,000 US Air, Inc. pass-through certificates Ser. 93-A2, 9 5/8s, 2003 543,335
----------------
55,369,220
Automotive (0.6%)
-------------------------------------------------------------------------------------------------------------------
6,760,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 6,221,363
5,400,000 Federal Mogul Corp. notes 7 1/2s, 2009 4,131,000
1,940,000 Federal Mogul Corp. notes 7 3/8s, 2006 1,571,400
4,310,000 Ford Motor Co. deb. 7.4s, 2046 3,938,909
10,375,000 Ford Motor Co. bonds 6 5/8s, 2028 8,810,035
180,000 Hayes Lemmerz International, Inc. company guaranty
Ser. B, 8 1/4s, 2008 152,550
1,430,000 Lear Corp. sub. notes 9 1/2s, 2006 1,433,575
1,260,000 Navistar International Corp. sr. notes Ser. B, 7s, 2003 1,215,900
3,070,000 Visteon Corp. sr. notes 8 1/4s, 2010 3,065,487
----------------
30,540,219
Banking (2.6%)
-------------------------------------------------------------------------------------------------------------------
7,345,000 Abbey National Capital Trust I company guaranty 8.963s, 2049 7,338,977
11,800,000 Bank One Corp. sr. notes 7 5/8s, 2005 11,792,920
4,250,000 BankAmerica Corp. sr. notes 5 7/8s, 2009 3,782,883
1,808,000 Bank United Corp. sub. notes 8 7/8s, 2007 1,685,436
10,470,000 Bank United Corp. notes Ser. A, 8s, 2009 9,256,736
8,515,000 Bayer Hypo-Vereinsbank 144A bonds 8.741s, 2031 (Denmark) 7,978,810
11,255,000 Citicorp sub. notes 6 3/8s, 2008 10,454,995
6,105,000 Colonial Bank sub. notes 8s, 2009 5,429,665
4,050,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 3,739,122
6,045,000 First Citizens Bank Capital Trust I company guaranty 8.05s, 2028 4,985,372
2,605,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 2,468,394
11,366,000 First Union Capital II company guaranty Ser. A, 7.95s, 2029 10,336,013
2,035,000 Firstar Bank Milwaukee sr. bank notes 6 1/4s, 2002 1,980,055
7,500,000 FleetBoston Financial Corp. sub. notes 7 3/8s, 2009 7,260,525
6,685,000 GS Escrow Corp. sr. notes 7 1/8s, 2005 6,074,793
2,130,000 Imperial Bank sub. notes 8 1/2s, 2009 1,908,787
1,455,000 Merita Bank, Ltd. sub. notes 6 1/2s, 2006 (Finland) 1,384,447
5,420,000 NB Capital Trust IV company guaranty 8 1/4s, 2027 5,156,642
3,240,000 Norwest Corp. med. term sr. notes Ser. J, 6 3/4s, 2027 2,818,087
11,290,000 Peoples Bank-Bridgeport sub. notes 7.2s, 2006 10,341,301
3,810,000 Sovereign Bancorp, Inc. sr. notes 10 1/2s, 2006 3,810,000
4,615,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 4,438,384
2,195,000 State Street Institution 144A company guaranty 7.94s, 2026 2,009,281
2,910,000 Webster Capital Trust I 144A bonds 9.36s, 2027 2,487,090
1,035,000 Wilmington Trust Corp. sub. notes 6 5/8s, 2008 932,318
----------------
129,851,033
Beverage (0.1%)
-------------------------------------------------------------------------------------------------------------------
7,300,000 Pepsi Bottling Group, Inc. (The) sr. notes Ser. B, 7s, 2029 6,634,678
Broadcasting (0.3%)
-------------------------------------------------------------------------------------------------------------------
920,000 Allbritton Communications Co. sr. sub. notes
Ser. B, 8 7/8s, 2008 848,700
33,700 AMFM Operating, Inc. deb. 12 5/8s, 2006 38,755
75,800 Capstar Broadcasting sub. deb. 12s, 2009 (PIK) 87,170
1,690,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 1,732,250
14,935,000 News America Holdings, Inc. deb. 7 3/4s, 2045 13,230,618
335,000 News America Holdings, Inc. deb. 7.7s, 2025 307,483
----------------
16,244,976
Cable Television (0.2%)
-------------------------------------------------------------------------------------------------------------------
1,010,000 Adelphia Communications Corp. sr. notes 7 7/8s, 2009 838,300
605,000 Adelphia Communications Corp. sr. notes Ser. B, 8 3/8s, 2008 520,300
4,250,000 CSC Holdings, Inc. sr. sub. deb. 9 7/8s, 2013 4,335,000
1,420,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 1,109,375
1,155,000 NTL Communications Corp. sr. notes Ser. B, 11 1/2s, 2008 1,183,875
1,200,000 NTL, Inc. sr. notes, stepped-coupon Ser. B, zero %
(9 3/4s, 4/1/03), 2008 (United Kingdom) (STP) 768,000
40,000 Rogers Cablesystems, Ltd. notes 11s, 2015 (Canada) 44,000
600,000 TeleWest Communications PLC sr. disc. notes zero %,
(9 1/4s, 4/15/04), 2009 (United Kingdom) (STP) 341,250
----------------
9,140,100
Chemicals (0.1%)
-------------------------------------------------------------------------------------------------------------------
595,000 Equistar Chemicals LP notes 9 1/8s, 2002 596,190
3,000,000 Lyondell Petrochemical Co. sec. notes Ser. B, 9 7/8s, 2007 3,000,000
1,600,000 Lyondell Petrochemical Co. notes Ser. A, 9 5/8s, 2007 1,600,000
----------------
5,196,190
Coal (--%)
-------------------------------------------------------------------------------------------------------------------
760,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 114,000
Commercial and Consumer Services (--%)
-------------------------------------------------------------------------------------------------------------------
548,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 531,560
711,000 Unicco Service Co. company guaranty Ser. B, 9 7/8s, 2007 675,450
----------------
1,207,010
Computers (0.1%)
-------------------------------------------------------------------------------------------------------------------
6,755,000 IBM Corp. deb. 7 1/8s, 2096 6,454,065
Conglomerates (0.2%)
-------------------------------------------------------------------------------------------------------------------
12,095,000 Tyco International, Ltd. company guaranty 6 1/4s, 2003 11,620,392
Consumer Finance (0.9%)
-------------------------------------------------------------------------------------------------------------------
1,705,000 Capital One Financial Corp. notes 7 1/4s, 2006 1,575,909
795,000 Capital One Financial Corp. notes 7 1/4s, 2003 762,055
870,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 (In default) (NON) 110,925
1,060,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 (In default) (NON) 116,600
5,655,000 Finova Capital Corp. notes 7.4s, 2007 4,693,650
6,250,000 Finova Capital Corp. notes 6 1/4s, 2002 5,625,000
10,000,000 Ford Motor Credit Corp. notes 7 3/8s, 2009 9,663,600
1,160,000 Ford Motor Credit Corp. notes 6.55s, 2002 1,141,660
7,845,000 Ford Motor Credit Corp. sr. notes 5.8s, 2009 6,864,375
2,920,000 Household Finance Corp. notes 6 1/2s, 2008 2,665,055
8,575,000 Household Finance Corp. sr. unsub. 5 7/8s, 2009 7,479,973
4,680,000 Providian National Bank sr. notes 6 3/4s, 2002 4,582,235
----------------
45,281,037
Consumer Services (--%)
-------------------------------------------------------------------------------------------------------------------
649,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 666,848
Electric Utilities (0.9%)
-------------------------------------------------------------------------------------------------------------------
3,840,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 3,616,051
6,405,000 CILCORP, Inc. sr. notes 8.7s, 2009 6,529,275
2,200,000 CMS Energy Corp. sr. notes 8 1/8s, 2002 2,175,448
3,145,000 CMS Energy Corp. pass-through certificates 7s, 2005 2,903,055
100,000 CMS Energy Corp. sr. notes Ser. B, 6 3/4s, 2004 93,000
3,330,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 3,262,368
720,472 Northeast Utilities System notes Ser. A, 8.58s, 2006 725,299
1,921,590 Northeast Utilities System notes Ser. B, 8.38s, 2005 1,918,400
4,461,000 Public Service Co. of New Mexico deb. 10 1/4s, 2012 4,854,059
6,455,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 6,061,116
11,435,000 TXU Electrical Capital company guaranty 8.175s, 2037 11,712,070
----------------
43,850,141
Energy (0.3%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Cliffs Drilling Co. company guaranty Ser. B, 10 1/4s, 2003 995,000
3,260,000 Leviathan Gas Corp. company guaranty Ser. B, 10 3/8s, 2009 3,349,650
1,105,000 Petro Geo-Services ADR notes 7 1/2s, 2007 (Norway) 1,060,181
9,595,000 Petro Geo-Services sr. notes 7 1/8s, 2028 (Norway) 8,108,735
2,000,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 2,000,000
380,000 RBF Finance Co. company guaranty 11 3/8s, 2009 411,350
1,030,000 RBF Finance Co. company guaranty 11s, 2006 1,112,400
----------------
17,037,316
Entertainment (0.1%)
-------------------------------------------------------------------------------------------------------------------
510,000 SFX Entertainment, Inc. company guaranty 9 1/8s, 2008 522,750
530,000 SFX Entertainment, Inc. 144A company guaranty
Ser. B, 9 1/8s, 2008 540,600
1,000,000 United Artists Theatre sr. sub. notes 9 3/4s, 2008 (In default) (NON) 20,000
5,375,000 Walt Disney Co. med. term notes 5.62s, 2008 4,779,880
----------------
5,863,230
Financial (2.9%)
-------------------------------------------------------------------------------------------------------------------
2,270,000 Advanta Corp. notes Ser. C, 7.47s, 2001 2,079,070
280,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 263,228
1,890,000 Advanta Corp. notes Ser. C, 6.94s, 2001 1,796,162
200,000 Advanta Corp. med. term notes Ser. D, 6.92s, 2002 176,368
805,000 Advanta Corp. notes Ser. D, 6.925s, 2002 709,938
7,810,000 AFLAC, Inc. sr. notes 6 1/2s, 2009 7,138,340
1,500,000 AMBAC Indemnity Corp. deb. 9 3/8s, 2011 1,638,390
12,745,000 American General Institute 144A company guaranty
8 1/8s, 2046 12,240,935
3,500,000 Associates First Capital Corp. sub. deb. 8.15s, 2009 3,524,815
3,165,000 Associates First Capital Corp. deb. 6.95s, 2018 2,912,085
3,770,000 Associates First Capital Corp. sr. notes 6 1/4s, 2008 3,408,947
1,900,000 Conseco Financial Corp. sr. sub. notes 10 1/4s, 2002 1,387,000
10,235,000 Conseco Financing Trust II company guaranty 8.7s, 2026 4,810,450
4,970,000 Conseco, Inc. med-term notes 6 1/2s, 2002 3,528,700
8,550,000 Executive Risk Capital Trust company guaranty
Ser. B, 8.675s, 2027 8,341,466
970,000 Fremont General Corp. sr. notes Ser. B, 7.7s, 2004 494,700
9,620,000 Goldman Sachs Group, Inc. (The) notes Ser. B, 7.35s, 2009 9,295,036
2,625,000 Hartford Life, Inc. deb. 7.65s, 2027 2,532,128
12,510,000 Heller Financial, Inc. notes 7 3/8s, 2009 11,914,524
6,905,000 Liberty Mutual Insurance 144A notes 7.697s, 2097 5,100,793
4,625,000 Markel Capital Trust I company guaranty Ser. B, 8.71s, 2046 3,458,945
4,205,000 Money Store, Inc. notes 8.05s, 2002 4,232,038
6,235,000 Newcourt Credit Group Inc. company guaranty
Ser. A, 7 1/8s, 2003 6,163,859
4,185,000 Presidential Life Corp. sr. notes 7 7/8s, 2009 3,599,100
9,580,000 Principal Financial Group 144A notes 7.95s, 2004 (Australia) 9,580,096
15,700,000 Provident Companies, Inc. bonds 7.405s, 2038 11,821,315
2,735,000 Safeco Capital Trust I company guaranty 8.072s, 2037 2,332,162
12,445,000 Sun Life Canada Capital Trust 144A company guaranty
8.526s, 2049 11,102,682
7,545,000 TIG Capital Trust I 144A bonds 8.597s, 2027 5,540,897
5,345,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 4,150,499
----------------
145,274,668
Gaming & Lottery (0.2%)
-------------------------------------------------------------------------------------------------------------------
2,145,000 International Game Technology 144A sr. notes 8 3/8s, 2009 2,064,563
1,160,000 International Game Technology sr. notes 7 7/8s, 2004 1,119,400
120,000 Mohegan Tribal Gaming, Auth. sr. sub. notes 8 3/4s, 2009 115,500
910,000 Mohegan Tribal Gaming, Auth. sr. notes 8 1/8s, 2006 871,325
3,740,000 Park Place Entertainment, Inc. sr. sub. notes 9 3/8s, 2007 3,758,700
840,000 Park Place Entertainment, Inc. sr. notes 8 1/2s, 2006 840,143
----------------
8,769,631
Health Care (0.3%)
-------------------------------------------------------------------------------------------------------------------
930,000 Columbia/HCA Healthcare Corp. med. term notes 9s, 2014 897,450
75,000 Columbia/HCA Healthcare Corp. med. term notes 8.85s, 2007 74,250
1,220,000 Columbia/HCA Healthcare Corp. med. term notes 8.7s, 2010 1,192,550
60,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 54,300
300,000 Hudson Respiratory Care, Inc. sr. sub. notes 9 1/8s, 2008 213,000
480,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 360,000
2,320,000 Omega Healthcare Investors, Inc. notes 6.95s, 2007 (R) 1,635,600
5,100,000 Omega Healthcare Investors, Inc. notes 6.95s, 2002 (R) 4,437,000
4,700,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 4,606,000
140,000 Tenet Healthcare Corp. sr. notes Ser. B, 8 1/8s, 2008 131,950
1,825,000 Tenet Healthcare Corp. sr. notes 8s, 2005 1,777,094
----------------
15,379,194
Homebuilding (0.1%)
-------------------------------------------------------------------------------------------------------------------
2,710,000 D.R. Horton, Inc. company guaranty 8s, 2009 2,439,000
1,090,000 Lennar Corp. 144A sr. notes 9.95s, 2010 1,100,900
500,000 Lennar Corp. sr. notes 7 5/8s, 2009 446,250
----------------
3,986,150
Industrial (0.2%)
-------------------------------------------------------------------------------------------------------------------
12,520,000 Union Oil Company of California company guaranty
7 1/2s, 2029 11,820,382
Investment Banking/Brokerage (0.2%)
-------------------------------------------------------------------------------------------------------------------
6,615,000 Countrywide Home Loan Corp. company guaranty
6.935s, 2007 6,238,077
5,100,000 Merrill Lynch & Co., Inc. med. term notes 6.13s, 2003 4,963,065
----------------
11,201,142
Lodging/Tourism (0.1%)
-------------------------------------------------------------------------------------------------------------------
8,080,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 7,332,600
Manufacturing (--%)
-------------------------------------------------------------------------------------------------------------------
620,000 Continental Global Group sr. notes Ser. B, 11s, 2007 198,400
380,000 Day International Group, Inc. company guaranty 9 1/2s, 2008 319,200
490,000 Flextronics International, Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 472,850
----------------
990,450
Media (0.6%)
-------------------------------------------------------------------------------------------------------------------
12,795,000 TCI Communications, Inc. deb. 8 3/4s, 2015 13,601,341
16,185,000 Time Warner Entertainment, Inc. sr. notes 8 3/8s, 2033 16,655,174
----------------
30,256,515
Medical Services (--%)
-------------------------------------------------------------------------------------------------------------------
530,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/2s, 2007 (In default) (NON) 9,938
280,000 Integrated Health Services, Inc. sr. sub. notes
Ser. A, 9 1/4s, 2008 (In default) (NON) 5,250
1,280,000 Mariner Post-Acute Network, Inc. sr. sub. notes
Ser. B, 9 1/2s, 2007 (In default) (NON) 6,400
260,000 Mariner Post-Acute Network, Inc. sr. sub. notes
stepped-coupon Ser. B, zero % (10 1/2s, 11/1/02), 2007
(In default) (NON) (STP) 1,300
1,388,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 (In default) (NON) 72,870
----------------
95,758
Metals (0.1%)
-------------------------------------------------------------------------------------------------------------------
1,300,000 AK Steel Corp. sr. notes 9 1/8s, 2006 1,287,000
5,215,000 AK Steel Corp. company guaranty 7 7/8s, 2009 4,810,838
128,550 Anker Coal Group, Inc. company guaranty
Ser. B, 14 1/4s, 2007 57,848
1,895,000 National Steel Corp. 1st mtge. Ser. D, 9 7/8s, 2009 1,672,338
----------------
7,828,024
Oil & Gas (1.3%)
-------------------------------------------------------------------------------------------------------------------
9,530,000 Amerada Hess Corp. bonds 7 7/8s, 2029 9,352,456
3,507,970 Express Pipeline, Ltd. 144A sub. notes
Ser. B, 7.39s, 2019 (Canada) 3,054,740
10,345,000 KN Capital Trust III company guaranty 7.63s, 2028 9,220,499
11,195,000 Louis Dreyfus Natural Gas notes 6 7/8s, 2007 10,098,674
5,790,000 Maritime & NE Pipeline 144A sec. notes 7.7s, 2019 (Canada) 5,528,755
650,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 646,750
630,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 614,250
5,550,000 Osprey Trust 144A sec. notes 8.31s, 2003 5,570,480
490,000 Parker and Parsley Inc. sr. notes 8 1/4s, 2007 458,121
6,155,000 Phillips Petroleum Co. notes 8 3/4s, 2010 6,544,119
410,000 Pioneer Natural Resources Co. company guaranty 9 5/8s, 2010 426,400
3,510,000 Port Arthur Finance Corp. company guaranty 12 1/2s, 2009 3,510,000
415,000 Seagull Energy sr. sub notes 8 5/8s, 2005 400,475
6,175,000 Sonat, Inc. notes 7 5/8s, 2011 6,055,205
2,425,000 Union Pacific Resources Group, Inc. notes 7.3s, 2009 2,331,031
841,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands) 849,410
----------------
64,661,365
Paper & Forest Products (0.5%)
-------------------------------------------------------------------------------------------------------------------
12,025,000 Abitibi-Consolidated Inc. deb. 8 1/2s, 2029 11,444,313
60,000 Boise Cascade Co. med. term notes Ser. A, 7.43s, 2005 57,432
6,450,000 Georgia Pacific Corp. bonds 7 3/4s, 2029 5,905,943
3,150,000 Norampac, Inc. sr. notes 9 1/2s, 2008 (Canada) 3,087,000
990,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 879,219
430,000 Pacifica Papers, Inc. sr. notes 10s, 2009 (Canada) 435,375
1,000,000 Riverwood International Corp. company guaranty 10 1/4s, 2006 985,000
60,000 Tembec Industries, Inc. company guaranty 8 5/8s, 2009 (Canada) 59,100
----------------
22,853,382
Pharmaceuticals (0.1%)
-------------------------------------------------------------------------------------------------------------------
1,040,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 1,027,000
1,730,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 1,704,050
----------------
2,731,050
Power Producers (--%)
-------------------------------------------------------------------------------------------------------------------
1,300,000 Calpine Corp. sr. notes 8 3/4s, 2007 1,280,903
460,000 Calpine Corp. sr. notes 7 7/8s, 2008 435,768
----------------
1,716,671
Railroads (0.3%)
-------------------------------------------------------------------------------------------------------------------
8,205,000 CSX Corp. deb. 7.95s, 2027 7,986,501
7,730,000 Norfolk Southern Corp. sr. notes 6.2s, 2009 6,939,221
----------------
14,925,722
Real Estate (0.2%)
-------------------------------------------------------------------------------------------------------------------
6,680,000 EOP Operating L.P. notes 6.8s, 2009 6,101,512
3,375,000 EOP Operating L.P. notes 6 3/8s, 2002 3,305,846
----------------
9,407,358
Restaurants (0.1%)
-------------------------------------------------------------------------------------------------------------------
5,100,000 Tricon Global Restaurants, Inc. sr. notes 7.65s, 2008 4,552,056
Retail (0.4%)
-------------------------------------------------------------------------------------------------------------------
4,380,000 Federated Department Stores, Inc. notes 6.3s, 2009 3,727,117
4,540,000 Kmart Corp. notes 8 3/8s, 2004 4,338,424
320,000 Kmart Corp. notes 8 1/8s, 2006 296,054
680,000 Kmart Corp. deb. 7.95s, 2023 535,384
310,000 Kmart Corp. med. term notes 7.55s, 2004 285,144
6,490,000 Saks, Inc. company guaranty 8 1/4s, 2008 5,220,881
4,185,000 Sears Roebuck Acceptance Corp. notes 6 1/2s, 2028 3,305,564
1,710,000 Southland Corp. sr. sub. deb. 5s, 2003 1,522,191
695,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 571,638
2,575,000 Tanger Properties, Ltd. company guaranty 7 7/8s, 2004 2,364,906
----------------
22,167,303
Semiconductor (0.1%)
-------------------------------------------------------------------------------------------------------------------
2,415,000 Amkor Technologies, Inc. sr. notes 9 1/4s, 2006 2,396,888
Shipping (--%)
-------------------------------------------------------------------------------------------------------------------
1,380,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 1,173,000
600,000 Pegasus Shipping company guaranty 11 7/8s, 2004 (In default) (NON) 213,750
----------------
1,386,750
Software (--%)
-------------------------------------------------------------------------------------------------------------------
280,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 47,600
Telecommunications (1.0%)
-------------------------------------------------------------------------------------------------------------------
3,080,000 Global Crossing Holdings, Ltd. company guaranty
9 5/8s, 2008 (Bermuda) 3,003,000
3,385,000 Global Crossing Holdings, Ltd. company guaranty
9 1/2s, 2009 (Bermuda) 3,283,450
3,900,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 1,755,000
610,000 Logix Communications Enterprises sr. notes 12 1/4s, 2008 152,500
7,243,000 Nextel Communications, Inc. sr. notes 9 3/8s, 2009 6,917,065
4,950,000 Price Communications Wireless, Inc. 144A sr. notes 9 1/8s, 2006 4,925,250
1,000,000 Primus Telecommunications Group, Inc. sr. notes 12 3/4s, 2009 610,000
4,730,000 Sprint Capital Corp. company guaranty 6.9s, 2019 4,240,918
2,640,000 Sprint Capital Corp. company guaranty 6 7/8s, 2028 2,279,983
19,695,000 Sprint Capital Corp. company guaranty 6 1/8s, 2008 17,571,879
4,100,000 U S West Communications, Inc. notes 5 5/8s, 2008 3,530,797
686,000 Viatel, Inc. sr. notes 11 1/2s, 2009 418,460
1,095,000 Williams Communications Group, Inc. sr. notes 10 7/8s, 2009 1,040,250
----------------
49,728,552
Telephone (0.2%)
-------------------------------------------------------------------------------------------------------------------
840,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 588,000
5,030,000 GTE Corp. deb. 6.46s, 2008 4,665,929
2,570,000 Hyperion Telecommunications Corp., Inc. sr. notes
Ser. B, 12 1/4s, 2004 2,518,600
----------------
7,772,529
Textiles (--%)
-------------------------------------------------------------------------------------------------------------------
825,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 820,875
255,000 Kasper A.S.L., Ltd. sr. notes 12 3/4s, 2004 145,350
----------------
966,225
Tobacco (0.3%)
-------------------------------------------------------------------------------------------------------------------
8,915,000 Imperial Tobacco Global company guaranty 7 1/8s, 2009
(Netherlands) 7,951,110
4,360,000 Philip Morris Cos., Inc. notes 7 1/4s, 2003 4,256,101
2,925,000 Philip Morris Cos., Inc. notes 7 1/8s, 2004 2,792,439
----------------
14,999,650
Transportation (0.2%)
-------------------------------------------------------------------------------------------------------------------
10,277,542 Federal Express Corp. pass-through certificates
Ser. 1998-1A, 6.72s, 2022 9,561,916
Utilities (0.1%)
-------------------------------------------------------------------------------------------------------------------
3,490,116 Salton Sea Funding Corp. company guaranty Ser. E, 8.3s, 2011 3,431,586
Waste Management (0.3%)
-------------------------------------------------------------------------------------------------------------------
1,440,000 Allied Waste Industries, Inc. company guaranty
Ser. B, 7 7/8s, 2009 1,267,200
7,514,000 Browning-Ferris Industries, Inc. deb. 7.4s, 2035 5,184,652
460,000 Waste Management, Inc. company guaranty 6 7/8s, 2009 410,601
2,250,000 Waste Management, Inc. notes 6 5/8s, 2002 2,162,430
4,560,000 WMX Technologies, Inc. notes 7.7s, 2002 4,454,390
----------------
13,479,273
Water Utilities (0.1%)
-------------------------------------------------------------------------------------------------------------------
3,960,000 Azurix Corp. 144A notes 10 3/8s, 2007 3,643,200
----------------
Total Corporate Bonds and Notes (cost $1,019,750,998) $ 936,600,867
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (9.5%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (7.9%)
-------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation
$ 1,136,595 8 3/4s, with due dates from May 1, 2009 to June 1, 2009 $ 1,158,872
190,094 6s, June 1, 2029 174,615
10,611,000 Federal National Mortgage Association 8s, TBA,
August 25, 2030 10,640,817
Federal National Mortgage Association
pass-through certificates
98,528 11s, with due dates from October 1, 2015 to March 1, 2016 106,686
70,927 8 3/4s, July 1, 2009 72,272
15,668,118 8s, with due dates from November 1, 2024 to June 1, 2028 15,718,413
80,597,649 7 1/2s, with due dates from November 1, 2029 to July 1, 2030 79,435,427
122,396,115 7s, with due dates from August 1, 2022 to June 1, 2030 118,205,276
2,210,686 6 1/2s, with due dates from July 1, 2010 to May 1, 2011 2,133,687
1,601,633 6s, September 1, 2029 1,469,706
1,024,539 5 1/2s, August 15, 2014 949,471
Government National Mortgage Association
pass-through certificates
712 15s, September 15, 2011 839
9,279,175 8 1/2s, with due dates from October 15, 2017 to
November 15, 2017 9,508,658
94,197,067 8s, with due dates from January 15, 2022 to
December 15, 2027 95,033,840
16,485 7 1/2s, September 15, 2005 16,446
51,944,817 7s, with due dates from January 15, 2023 to
December 15, 2028 50,602,929
13,883,187 6 1/2s, with due dates from September 15, 2024 to
August 15, 2027 13,167,049
39,807 6 1/2s, March 15, 2002 39,511
----------------
398,434,514
U.S. Treasury Obligations (1.6%)
-------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
15,480,000 6 1/2s, November 15, 2026 16,411,277
24,960,000 6 1/4s, May 15, 2030 26,590,138
23,315,000 6 1/8s, November 15, 2027 23,613,665
U.S. Treasury Notes
4,935,000 6 1/2s, February 15, 2010 5,097,707
8,245,000 6 1/8s, December 31, 2001 (SEG) 8,211,525
12,141,000 U. S. Treasury Strip, Interest Only (IO), zero %, May 15, 2026 2,669,806
----------------
82,594,118
----------------
Total U.S. Government and Agency Obligations
(cost $481,243,572) $ 481,028,632
COLLATERALIZED MORTGAGE OBLIGATIONS (5.2%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
Commercial Mortgage Asset Trust
$ 23,920,000 Ser. 99-C1, Class A3, 6.64s, 2010 $ 22,638,038
106,782,034 Ser. 99-C1, Class X, IO, 1.17s, 2020 6,598,796
Countrywide Home Loan
5,768,800 Ser. 98-A12, Class A14, 8s, 2028 5,799,447
4,920,000 Ser. 98-3, Class A5, 6 3/4s, 2028 4,548,694
6,795,000 Countrywide Mortgage Backed Securities, Inc. Ser. 93-C,
Class A8, 6 1/2s, 2024 6,150,426
Criimi Mae Commercial Mortgage Trust
18,065,000 Ser. 98-C1, Class A2, 7s, 2011 15,981,880
4,850,000 Ser. 98-C1, Class B, 7s, 2011 3,904,250
CS First Boston Mortgage Securities Corp.
3,114,000 Ser. 99-C1, Class E, 7.922s s, 2009 3,053,215
16,870,000 Ser. 00-C1, Class A2, 7.545s, 2010 16,901,631
5,953,310 DLJ Commercial Mortgage Corp. Ser. 98-CG1,
Class A1A, 6.11s, 2007 5,703,550
Federal Home Loan Mortgage Corp.
9,827,365 Ser. 147 Class IO, 8s, 2023 2,914,428
1,728,000 Ser. 2028, Class SG, IO, 7.738s, 2023 861,300
889,522 Ser. 2113, Class ZM, 6 1/2s, 2028 706,336
1,059,797 Ser. 180, Class PO, zero %, 2026 729,935
Federal National Mortgage Association
42,309 Ser. 92-184, Class J, IO, 1146.03s, 2022 1,650,045
30,486 Ser. 92-181, Class PJ, IO, 1007.5s, 2022 1,030,428
8,876,044 Ser. 00-4, Class SX, 8.45s, 2023 8,383,701
6,102,111 Ser. 237, Class 2, IO, 8s, 2023 1,820,145
11,187,180 Ser. 218, Class 2, IO, 7.5s, 2023 3,377,130
45,294,010 Ser. 252, Class 2, IO, 7.5s, 2023 13,871,291
10,176,082 Ser. 276, Class 2, IO, 6.5s, 2024 3,014,664
4,343,656 Ser. 97-91, Class SL, IO, 2.76s, 2023 391,608
17,952,489 Ser. 97-92, Class SM, IO, 2.475s, 2022 1,441,809
15,884,341 Ser. 99-51, Class S, IO, 2.374s, 2029 1,191,326
5,959,538 Ser. 98-66, Class SB, IO, 1.53s, 2028 283,078
927,929 Ser. 301, Class 1, Principal Only (PO), zero %, 2029 580,536
5,000,000 GE Capital Mortgage Services, Inc. Ser. 98-11,
Class 2A4, 6 3/4s, 2028 4,654,200
General Growth Properties-Homart
1,325,000 Ser. 99-C1, Class G, 8.089s, 2003 1,327,743
1,520,000 Ser. 99-C1, Class F, 7.839s, 2003 1,523,147
6,621,000 General Growth Properties-Ivanhoe Ser. 99-C1,
Class F, 8.39s, 2004 6,629,276
16,130,000 GMAC Commercial Mortgage Securities Inc. Ser. 99-C1,
Class A2, 6.175s, 2033 14,844,011
Government National Mortgage Association
1,317,815 Ser. 99-30, Class SG, 15.39s, 2025 1,219,803
9,552,742 Ser. 00-17, Class SB, 13.2s, 2026 9,266,160
17,043,888 Ser. 99-46, Class SQ, IO, 1.824s, 2027 751,635
Housing Securities, Inc.
342,035 Ser. 91-B, Class B6, 9s, 2006 340,111
1,121,286 Ser. 93-F, Class F9M2, 7s, 2023 1,068,846
178,349 Ser. 94-1, Class AB1, 6 1/2s, 2009 153,371
3,495,000 LB Commercial Conduit Mortgage Trust Ser. 99-C2,
Class B, 7.425s, 2009 3,442,814
Merrill Lynch Mortgage Investors, Inc.
3,465,000 Ser. 96-C2, Class E, 6.96s, 2028 2,970,155
4,336,037 Ser. 98-C2, Class A1, 6.22s, 2030 4,203,246
52,425,690 Ser. 98-C2, Class IO, 1.57s, 2030 3,604,266
1,996,936 Morgan Stanley Capital I Ser. 98-HF1, Class A1, 6.19s, 2007 1,931,412
1,535,000 Morgan Stanley Dean Witter Capital 1 Ser. 00,
Class B, 7.638s, 2010 1,536,919
5,059,462 Mortgage Capital Funding, Inc. Ser. 98-MC1,
Class A1, 6.417s, 2007 4,903,923
15,410,000 PNC Mortgage Acceptance Corp. Ser. 00-C1,
Class A2, 7.61s, 2010 15,470,195
1,898,804 Prudential Home Mortgage Securities Ser. 92-25,
Class B3, 8s, 2022 1,820,972
Prudential Home Mortgage Securities 144A
253,872 Ser. 94-31, Class B3, 8s, 2009 245,938
1,113,722 Ser. 95-D, Class 5B, 7.54s, 2024 1,023,754
3,725,000 Residential Funding Mortgage Sec. I Ser. 98-S13,
Class A21, 6 3/4s, 2028 3,466,113
Ryland Mortgage Securities Corp.
1,706,785 Ser. 94-7C, Class B1, 7.359s, 2025 1,656,029
1,205,528 Ser. 94-7C, Class B2, 7.359s, 2025 1,143,368
6,030,000 Salomon Brothers Mortgage Securities VII Ser. 00-C1,
Class A2, 7.52s, 2009 6,013,041
572,891 Sears Mortgage Securities Ser. 93-7, Class T7, 7s, 2007 568,273
Structured Asset Security Corp.
4,776,736 Ser. 98-RF2, Class A, 8.58s, 2028 4,848,387
12,496,907 Ser. 99-RF1, Class A, 7.876s, 2028 12,430,517
22,386,829 Ser. 98-RF3, IO, 6.10s, 2028 4,172,345
10,775,383 TIAA Retail Commercial Mortgage Trust Ser. 99-1,
Class A, 7.17s, 2032 10,647,425
----------------
Total Collateralized Mortgage Obligations
(cost $263,098,609) $ 261,405,082
ASSET-BACKED SECURITIES (0.6%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 3,082,000 Advanta Mortgage Loan Trust Ser. 00-1, Class A4, 8.61s, 2028 $ 3,157,417
4,658,870 First Plus Ser. 98-A, Class A, 8 1/2s, 2023 3,463,579
16,559,000 Ford Credit Auto Owner Trust Ser. 00-C, Class A3, 7.13s, 2002 16,584,832
39,284,143 Lehman Manufactured Housing Ser. 98-1, Class 1 IO, 0.82s, 2028 974,431
6,693,127 Mach One CDO, Ltd. Ser. 00-1, Class A, 6.7s, 2030 6,226,700
----------------
Total Asset-Backed Securities (cost $32,236,222) $ 30,406,959
PREFERRED STOCKS (0.4%) (a)
NUMBER OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
6,243 AmeriKing, Inc. $3.25 Cumulative Preferred (cum. pfd.) (PIK) $ 49,944
9,400 Centaur Funding Corp. 144A 9.08% cum. pfd. (Cayman Islands) 9,874,503
16,637 CGA Group, Ltd. 144A Ser. A, $13.75 pfd. (PIK) 449,199
6,155 Chevy Chase Preferred Capital Corp. Ser. A, $5.19 pfd. 289,285
3,597 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 379,484
265 Fresenius Medical Capital Trust I Ser. D, 9.00%
company guaranty, pfd. (Germany) 259,700
2,105 Fresenius Medical Capital Trust II 7.875%
company guaranty, pfd. (Germany) 1,883,974
27,755 Golden State Bancorp Ser. A, $2.281 pfd. 645,304
102 Paxson Communications Corp. 144A 13.25% cum. pfd. (PIK) 989,400
5,325 Webster Preferred Capital Corp. Ser. A, 7.375% cum. pfd. 5,218,500
----------------
Total Preferred Stocks (cost $19,989,375) $ 20,039,293
FOREIGN GOVERNMENT BONDS AND NOTES (0.3%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 1,605,000 Ontario (Province of) sr. unsub. 5 1/2s, 2008 $ 1,440,086
16,135,000 Quebec (Province of) sr. unsub. 5 3/4s, 2009 14,479,549
----------------
Total Foreign Government Bonds and Notes
(cost $17,574,060) $ 15,919,635
MUNICIPAL BONDS AND NOTES (0.1%) (a) (cost $7,374,329)
PRINCIPAL AMOUNT RATING VALUE
-------------------------------------------------------------------------------------------------------------------
$ 7,380,000 Mashantucket Pequot Tribe 144A bonds,
Ser. A, Financial Security Assurance (FSA),
6.57s, 9/1/13 Aaa $ 6,511,374
CONVERTIBLE BONDS AND NOTES (--%) (a) (cost $392,658)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 500,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 $ 386,250
UNITS (--%) (a) (cost $768,967)
NUMBER OF UNITS VALUE
-------------------------------------------------------------------------------------------------------------------
220 PSF Holdings LLC Class A units (NON) $ 220,250
CONVERTIBLE PREFERRED STOCKS (--%) (a) (cost $123,290)
NUMBER OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
87 World Access, Inc. 144A Ser. D, zero %, cv. pfd. $ 84,390
WARRANTS (--%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
-------------------------------------------------------------------------------------------------------------------
3 Anker Coal Group, Inc. 144A 10/28/09 $ 1
16,000 CGA Group, Ltd. 144A 2/11/07 160
180 McCaw International, Ltd. 4/15/07 720
685 Raintree Resort 144A 12/1/04 6
280 Telehub Communications Corp. 7/31/05 140
625 UIH Australia/Pacific, Inc. 144A 5/15/06 18,750
----------------
Total Warrants (cost $112,487) $ 19,777
SHORT-TERM INVESTMENTS (2.8%) (a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 25,000,000 Metlife Funding effective yield of 6.48%, August 28, 2000 $ 24,878,500
25,000,000 Windmill Funding Corp. effective yield of 6.52%, August 7, 2000 24,972,833
92,434,000 Interest in $600,000,00 joint repurchase agreement dated
July 31, 2000 with S.B.C. Warburg, Inc. due August 1, 2000
with respect to various U.S. Treasury obligations --
maturity value of $92,450,921 for an effective yield
of 6.59% 92,434,000
----------------
Total Short-Term Investments (cost $142,285,333) $ 142,285,333
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $5,157,975,733) (b) $ 5,076,187,086
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $5,071,479,891.
(b) The aggregate identified cost on a tax basis is $5,174,426,585,
resulting in gross unrealized appreciation and depreciation of
$305,275,322 and $403,514,821, respectively, or net unrealized
depreciation of $98,239,499.
(NON) Non-income-producing security.
(STP) 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.
(PIK) Income may be received in cash or additional securities at the
discretion of the issuer.
(SEG) A portion of this securities was pledged and segregated with the
custodian to cover margin requirements for futures contracts at July 31,
2000.
(R) Real Estate Investment Trust.
144A after the name of a security represents those 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.
ADR after the name of a foreign holding stands for American
Depositary Receipts representing ownership of foreign securities on
deposit with a domestic custodian bank.
TBA after the name of a security represents to be announced securities.
(Note 1)
----------------------------------------------------------------------
Futures Contracts Outstanding at July 31, 2000
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
----------------------------------------------------------------------
US Treasury
10 year Notes
(Short) $ 16,366,563 $ 15,554,014 Sep-00 $ (812,549)
US Treasury
5 year Notes
(Short) 138,884,375 135,661,775 Sep-00 (3,222,600)
US Treasury
20 year Bonds
(Short) 90,682,704 87,491,704 Sep-00 (3,191,000)
----------------------------------------------------------------------
$(7,226,149)
----------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 2000
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $5,157,975,733) (Note 1) $5,076,187,086
-------------------------------------------------------------------------------------------
Foreign currency (cost $1,740) 1,481
-------------------------------------------------------------------------------------------
Dividends, interest and other receivables 30,625,864
-------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 4,570,777
-------------------------------------------------------------------------------------------
Receivable for securities sold 97,163,327
-------------------------------------------------------------------------------------------
Total assets 5,208,548,535
Liabilities
-------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 2,866,167
-------------------------------------------------------------------------------------------
Payable for variation margin 73,524
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 10,311
-------------------------------------------------------------------------------------------
Payable for securities purchased 115,109,862
-------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 9,135,101
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 6,454,472
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 1,234,923
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 80,793
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,469
-------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,839,376
-------------------------------------------------------------------------------------------
Other accrued expenses 261,646
-------------------------------------------------------------------------------------------
Total liabilities 137,068,644
-------------------------------------------------------------------------------------------
Net assets $5,071,479,891
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $5,276,401,535
-------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 2,979,175
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (118,885,714)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (89,015,105)
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $5,071,479,891
Computation of net asset value and offering price
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($3,030,281,188 divided by 192,145,650 shares) $15.77
-------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $15.77)* $16.73
-------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($1,175,947,225 divided by 75,276,888 shares)** $15.62
-------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($20,642,249 divided by 1,313,697 shares)** $15.71
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($223,245,836 divided by 14,283,526 shares) $15.63
-------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $15.63)* $16.20
-------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share
($621,363,393 divided by 39,315,818 shares) $15.80
-------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000
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.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year ended July 31, 2000
<S> <C>
Investment income:
-------------------------------------------------------------------------------------------
Interest $ 164,745,914
-------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $388,816) 82,705,975
-------------------------------------------------------------------------------------------
Total investment income 247,451,889
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 28,176,855
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 9,774,983
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 88,415
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 31,427
-------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 8,649,069
-------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 14,152,046
-------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 127,505
-------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,940,604
-------------------------------------------------------------------------------------------
Other 1,594,407
-------------------------------------------------------------------------------------------
Total expenses 64,535,311
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (1,823,510)
-------------------------------------------------------------------------------------------
Net expenses 62,711,801
-------------------------------------------------------------------------------------------
Net investment income 184,740,088
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (118,987,959)
-------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Notes 1) 3,721,816
-------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 32,947
-------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (141,841)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
futures contracts during the year (421,090,211)
-------------------------------------------------------------------------------------------
Net loss on investments (536,465,248)
-------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(351,725,160)
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year ended July 31
---------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 184,740,088 $ 175,875,061
--------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and
foreign currency transactions (115,233,196) 450,083,884
--------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (421,232,052) (152,022,435)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (351,725,160) 473,936,510
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income
Class A (119,663,388) (109,146,841)
--------------------------------------------------------------------------------------------------
Class B (38,122,667) (33,139,561)
--------------------------------------------------------------------------------------------------
Class C (340,503) --
--------------------------------------------------------------------------------------------------
Class M (7,594,187) (7,053,301)
--------------------------------------------------------------------------------------------------
Class Y (26,741,220) (17,057,113)
--------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (260,498,942) (235,789,968)
--------------------------------------------------------------------------------------------------
Class B (111,069,452) (93,908,591)
--------------------------------------------------------------------------------------------------
Class C (705,260) --
--------------------------------------------------------------------------------------------------
Class M (19,910,206) (19,043,436)
--------------------------------------------------------------------------------------------------
Class Y (55,204,857) (31,362,904)
--------------------------------------------------------------------------------------------------
Increase (decrease) from capital
share transactions (Note 4) (554,176,297) 1,248,141,716
--------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (1,545,752,139) 1,175,576,511
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 6,617,232,030 5,441,655,519
--------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $2,979,175 and $9,972,484, respectively) $5,071,479,891 $6,617,232,030
--------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS A
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $18.49 $18.82 $18.95 $15.82 $14.90
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .55(c) .57(c) .60 .60(c) .63
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (1.44) .90 1.08 4.11 1.50
------------------------------------------------------------------------------------------------
Total from
investment operations (.89) 1.47 1.68 4.71 2.13
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.58) (.55) (.60) (.67) (.58)
------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.25) (1.25) (1.21) (.91) (.63)
------------------------------------------------------------------------------------------------
Total distributions (1.83) (1.80) (1.81) (1.58) (1.21)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.77 $18.49 $18.82 $18.95 $15.82
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (5.09) 8.33 9.53 31.52 14.75
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $3,030,281 $3,937,264 $3,387,620 $2,607,562 $1,515,260
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .93 .93 1.00 1.06 .95
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.32 3.10 3.11 3.51 4.07
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 140.92 127.68 126.19 134.80 119.44
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through brokerage service and expense offset
arrangements. (Note 2)
(c) Per share net investment income (loss) has been determined on the
basis of the weighted average number of shares outstanding during the
period.
(d) Net investment income (loss) was less than $0.01 per share.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS B
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $18.33 $18.67 $18.82 $15.74 $14.83
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .42(c) .43(c) .46 .46(c) .51
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (1.43) .90 1.07 4.08 1.50
------------------------------------------------------------------------------------------------
Total from
investment operations (1.01) 1.33 1.53 4.54 2.01
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.45) (.42) (.47) (.55) (.47)
------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.25) (1.25) (1.21) (.91) (.63)
------------------------------------------------------------------------------------------------
Total distributions (1.70) (1.67) (1.68) (1.46) (1.10)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.62 $18.33 $18.67 $18.82 $15.74
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (5.82) 7.55 8.72 30.46 13.97
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,175,947 $1,641,515 $1,305,897 $888,666 $435,278
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.68 1.68 1.75 1.81 1.71
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.57 2.35 2.37 2.74 3.31
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 140.92 127.68 126.19 134.80 119.44
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through brokerage service and expense offset
arrangements. (Note 2)
(c) Per share net investment income (loss) has been determined on the
basis of the weighted average number of shares outstanding during the
period.
(d) Net investment income (loss) was less than $0.01 per share.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS C
------------------------------------------------------------------------------------------------
For the period
Per-share Year ended July 26, 1999+
operating performance July 31 to July 31
------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $18.49 $18.76
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income (loss)(c) .42 --(d)
------------------------------------------------------------------------------------------------
Net realized and unrealized
loss on investments (1.44) (.27)
------------------------------------------------------------------------------------------------
Total from
investment operations (1.02) (.27)
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.51) --
------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.25) --
------------------------------------------------------------------------------------------------
Total distributions (1.76) --
------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.71 $18.49
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (5.82) (1.44)*
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $20,642 $565
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.68 .03*
------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) 2.60 (.03)*
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 140.92 127.68
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through brokerage service and expense offset
arrangements. (Note 2)
(c) Per share net investment income (loss) has been determined on the
basis of the weighted average number of shares outstanding during the
period.
(d) Net investment income (loss) was less than $0.01 per share.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS M
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $18.33 $18.67 $18.82 $15.74 $14.84
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .46(c) .47(c) .51 .53(c) .55
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (1.42) .90 1.06 4.06 1.50
------------------------------------------------------------------------------------------------
Total from
investment operations (.96) 1.37 1.57 4.59 2.05
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.49) (.46) (.51) (.60) (.52)
------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.25) (1.25) (1.21) (.91) (.63)
------------------------------------------------------------------------------------------------
Total distributions (1.74) (1.71) (1.72) (1.51) (1.15)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.63 $18.33 $18.67 $18.82 $15.74
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (5.52) 7.80 8.98 30.83 14.26
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $223,246 $293,336 $276,962 $187,475 $49,541
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.43 1.43 1.50 1.56 1.50
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.82 2.61 2.62 3.05 3.50
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 140.92 127.68 126.19 134.80 119.44
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through brokerage service and expense offset
arrangements. (Note 2)
(c) Per share net investment income (loss) has been determined on the
basis of the weighted average number of shares outstanding during the
period.
(d) Net investment income (loss) was less than $0.01 per share.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS Y
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $18.53 $18.85 $18.98 $15.85 $14.92
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .60(c) .62(c) .64 .64(c) .68
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (1.46) .91 1.09 4.11 1.50
------------------------------------------------------------------------------------------------
Total from
investment operations (.86) 1.53 1.73 4.75 2.18
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.62) (.60) (.65) (.71) (.62)
------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.25) (1.25) (1.21) (.91) (.63)
------------------------------------------------------------------------------------------------
Total distributions (1.87) (1.85) (1.86) (1.62) (1.25)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.80 $18.53 $18.85 $18.98 $15.85
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (4.89) 8.63 9.79 31.78 15.09
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $621,363 $744,552 $471,176 $356,251 $207,508
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .68 .68 .75 .81 .70
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.57 3.33 3.37 3.74 4.33
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 140.92 127.68 126.19 134.80 119.44
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through brokerage service and expense offset
arrangements. (Note 2)
(c) Per share net investment income (loss) has been determined on the
basis of the weighted average number of shares outstanding during the
period.
(d) Net investment income (loss) was less than $0.01 per share.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
July 31, 2000
Note 1
Significant accounting policies
The George Putnam Fund of Boston (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund seeks to provide a balanced
investment comprised of a well-diversified portfolio of stocks and bonds
which will produce both capital growth and current income.
The fund offers class A, class B, class C, class M and class Y shares.
Class A shares are sold with a maximum front-end sales charge of 5.75%.
Class B shares, which convert to class A shares after approximately
eight years, do not pay a front-end sales charge but pay a higher
ongoing distribution fee than class A shares, and are subject to a
contingent deferred sales charge, if those shares are redeemed within
six years of purchase. Class C shares are subject to the same fees and
expenses as class B shares, except that class C shares have a one-year
1.00% contingent deferred sales charge and do not convert to class A
shares. Class M shares are sold with a maximum front end sales charge of
3.50% and pay an ongoing distribution fee that is higher than class A
shares but lower than class B and class C shares. Class Y shares, which
are sold at net asset value, are generally subject to the same expenses
as class A, class B, class C and class M shares, but do not bear a
distribution fee. Class Y shares are sold to defined contribution plans
that invest at least $150 million in a combination of Putnam funds and
other accounts managed by affiliates of Putnam Investment Management,
Inc. ("Putnam Management"), the fund's manager, a wholly-owned
subsidiary of Putnam Investments, Inc.
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 distribution fees applicable to such class). Each class
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. Shares of each class would receive their pro-rata share of the
net assets of the fund, if that fund were liquidated. In addition, the
Trustees declare 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 preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities of the financial statements and the reported
amounts of increases and decreases in net assets from operations during
the reporting period. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sales price on its principal exchange, or if no sales
are reported -- as in the case of some securities traded
over-the-counter -- the last reported bid price. Securities quoted in
foreign currencies are translated into U.S. dollars at the current
exchange rate. Short-term investments having remaining maturities of 60
days or less are stated at amortized cost, which approximates market
value. Market quotations are not considered to be readily available for
certain debt obligations; such investments are stated at fair value on
the basis of valuations furnished by a pricing service or dealers,
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 variable
relationships between securities that are generally recognized by
institutional traders.
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 and certain other accounts managed by
Putnam Management. These balances may be invested in one or more
repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, 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.
Collateral for certain tri-party repurchase agreements is held at the
counterparty's custodian in a segregated account for the benefit of the
fund and the counterparty. Putnam Management 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). Gains or losses on securities sold are determined
on the identified cost basis.
Interest income is recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date except that certain dividends from
foreign securities are recorded as soon as the fund is informed of the
ex-dividend date. Discounts on zero coupon bonds, original issue
discount bonds, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield-to-maturity basis. Any premium resulting
from the purchase of corporate bonds is amortized on a yield-to-maturity
basis. Securities purchased or sold on a forward commitment or delayed
delivery basis may be settled a month or more after the trade date;
interest income is accrued based on the terms of the security. Losses
may arise due to changes in the market value of the underlying
securities or if the counterparty does not perform under the contract.
Non-cash dividends, if any, are recorded at the fair market value of the
securities received.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The
fund does not isolate that portion of realized or unrealized gains or
losses resulting from changes in the foreign exchange rate on
investments from fluctuations arising from changes in the market prices
of the securities. Such gains and losses are included with the net
realized and unrealized gain or loss on investments. Net realized gains
and losses on foreign currency transactions represent net realized
exchange gains or losses on closed forward currency contracts,
disposition of foreign currencies and the difference between the amount
of investment income and foreign withholding taxes recorded on the
fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net unrealized appreciation and depreciation of assets and
liabilities in foreign currencies arise from changes in the value of
open forward currency contracts and assets and liabilities other than
investments at the period end, resulting from changes in the exchange
rate. Investments in foreign securities involve certain risks, including
those related to economic instability, unfavorable political
developments, and currency fluctuations, not present with domestic
investments.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term
investments). The U.S. dollar value of forward currency contracts is
determined using current forward currency exchange rates supplied by a
quotation service. The market value of the contract will fluctuate with
changes in currency exchange rates. The contract is "marked to market"
daily and the change in market value is recorded as an unrealized gain
or loss. When the contract is closed, the fund records a realized gain
or loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed. The fund
could be exposed to risk if the value of the currency changes
unfavorably, if the counterparties to the contracts are unable to meet
the terms of their contracts or if the fund is unable to enter into a
closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns. The potential risk to the fund is that the change in value of
futures and options contracts may not correspond to the change in value
of the hedged instruments. In addition, losses may arise from changes in
the value of the underlying instruments, if there is an illiquid
secondary market for the contracts, or if the counterparty to the
contract is unable to perform. When the contract is closed, the fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed. Realized gains and losses on purchased options are
included in realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed unit
price at a future date beyond customary settlement time. Although the
unit price has been established, the principal value has not been
finalized. However, the amount of the commitments will not fluctuate
more than .01% from the principal amount. The fund holds, and maintains
until settlement date, cash or high-grade debt obligations in an amount
sufficient to meet the purchase price, or the fund may enter into
offsetting contracts for the forward sale of other securities it owns.
Income on the securities will not be earned until settlement date. TBA
purchase commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the
risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the
underlying securities, according to the procedures described under
"Security valuation" above. Although the fund will generally enter into
TBA purchase commitments with the intention of acquiring securities for
their portfolio or for delivery pursuant to options contracts it has
entered into, the fund may dispose of a commitment prior to settlement
if Putnam Management deems it appropriate to do so.
I) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale
commitments are not received until the contractual settlement date.
During the time a TBA sale commitment is outstanding, equivalent
deliverable securities, or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover"
for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures
described under "Security valuation" above. The contract is
"marked-to-market" daily and the change in market value is recorded by
the fund as an unrealized gain or loss. If the TBA sale commitment is
closed through the acquisition of an offsetting purchase commitment, the
fund realizes a gain or loss. If the fund delivers securities under the
commitment, the fund realizes a gain or a loss from the sale of the
securities based upon the unit price established at the date the
commitment was entered into.
J) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
ended July 31, 2000, the fund had no borrowings against the line of
credit.
K) Federal taxes It is the policy of the fund to distribute all of its
taxable 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 under Section
4982 of the Internal Revenue Code of 1986, as amended. Therefore, no
provision has been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on income
and capital gains.
At July 31, 2000, the fund had a capital loss carryover of approximately
$32,545,000 available to offset future capital gains, if any, which will
expire on July 31, 2008.
L) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid at least annually. 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 temporary and permanent
differences of losses on wash sale transactions, foreign currency gains
and losses, post-October loss deferrals, nontaxable dividends, defaulted
bond interest, unrealized gains and losses on certain futures contracts,
paydown gains and losses on mortgage-backed securities, market discount
and interest on payment-in-kind securities. 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. For the year ended July 31, 2000, the fund reclassified
$728,568 to increase undistributed net investment income and $196,265 to
increase paid-in-capital, with an increase to accumulated net realized
losses of $924,833. The calculation of net investment income per share
in the financial highlights table excludes these adjustments.
Note 2
Management fee, administrative
services, and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.65% of the
first $500 million of average net assets, 0.55% of the next $500
million, 0.50% of the next $500 million, 0.45% of the next $5 billion,
0.425% of the next $5 billion, 0.405% of the next $5 billion, 0.39% of
the next $5 billion and 0.38% thereafter.
The fund reimburses Putnam Management an allocated amount 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.
Custodial functions for the fund's assets 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.
Under the subcustodian contract between the subcustodian bank and PFTC,
the subcustodian bank has a lien on the securities of the fund to the
extent permitted by the fund's investment restrictions to cover any
advances made by the subcustodian bank for the settlement of securities
purchased by the fund. At July 31, 2000, the payable to the subcustodian
bank represents the amount due for cash advance for the settlement of a
security purchased.
For the year ended July 31, 2000, fund expenses were reduced by
$1,823,510 under expense offset arrangements with PFTC and brokerage
service arrangements. Investor servicing and custodian fees reported in
the Statement of operations exclude these credits. The fund could have
invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered
into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $2,946
has been allocated to the fund, and an additional fee for each Trustees
meeting attended. Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Compensation of Trustees in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B, class C 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 Retail Management, Inc., a wholly-owned subsidiary of
Putnam Investments Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plans provide for payments by
the fund to Putnam Retail Management, Inc. at an annual rate up to
0.35%, 1.00%, 1.00% and 1.00% of the average net assets attributable to
class A, class B, class C and class M shares, respectively. The Trustees
have approved payment by the fund at an annual rate of 0.25%, 1.00%,
1.00% and 0.75% of the average net assets attributable to class A, class
B, class C and class M shares, respectively.
For the year ended July 31, 2000, Putnam Retail Management, Inc., acting
as underwriter received net commissions of $1,104,157 and $24,993 from
the sale of class A and class M shares, respectively, and received
$3,528,355 and $14,186 in contingent deferred sales charges from
redemptions of class B and class C shares, respectively. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended July 31, 2000, Putnam Retail Management,
Inc., acting as underwriter received $85,998 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended July 31, 2000, cost of purchases and proceeds from
sales of investment securities other than U.S. government obligations
and short-term investments aggregated $6,632,285,264 and $7,131,794,661,
respectively. Purchases and sales of U.S. government obligations
aggregated $1,423,366,571 and $1,936,861,598, respectively.
Note 4
Capital shares
At July 31, 2000, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended July 31, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 48,396,764 $ 803,147,003
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 21,399,667 354,500,796
---------------------------------------------------------------------------
69,796,431 1,157,647,799
Shares
repurchased (90,615,063) (1,484,068,506)
---------------------------------------------------------------------------
Net decrease (20,818,632) $ (326,420,707)
---------------------------------------------------------------------------
Year ended July 31, 1999
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 71,350,723 $1,305,654,213
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 17,951,127 321,277,356
---------------------------------------------------------------------------
89,301,850 1,626,931,569
Shares
repurchased (56,386,152) (1,037,171,935)
---------------------------------------------------------------------------
Net increase 32,915,698 $ 589,759,634
---------------------------------------------------------------------------
Year ended July 31, 2000
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 15,255,730 $ 254,308,810
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 8,560,716 140,755,068
---------------------------------------------------------------------------
23,816,446 395,063,878
Shares
repurchased (38,117,467) (614,767,009)
---------------------------------------------------------------------------
Net decrease (14,301,021) $(219,703,131)
---------------------------------------------------------------------------
Year ended July 31, 1999
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 32,951,628 $598,596,843
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,725,747 119,388,554
---------------------------------------------------------------------------
39,677,375 717,985,397
Shares
repurchased (20,061,741) (363,849,605)
---------------------------------------------------------------------------
Net increase 19,615,634 $354,135,792
---------------------------------------------------------------------------
Year ended July 31, 2000
---------------------------------------------------------------------------
Class C Shares Shares
---------------------------------------------------------------------------
Shares sold 1,466,937 $24,475,924
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 62,168 1,016,777
---------------------------------------------------------------------------
1,529,105 25,492,701
Shares
repurchased (245,991) (3,958,787)
---------------------------------------------------------------------------
Net increase 1,283,114 $21,533,914
---------------------------------------------------------------------------
For the period July 26, 1999
(commencement of operations)
to July 31, 1999
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 30,583 $571,827
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
---------------------------------------------------------------------------
30,583 571,827
Shares
repurchased -- --
---------------------------------------------------------------------------
Net increase 30,583 $571,827
---------------------------------------------------------------------------
Year ended July 31, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 3,284,577 $ 54,757,342
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,656,440 27,222,018
---------------------------------------------------------------------------
4,941,017 81,979,360
Shares
repurchased (6,659,619) (107,991,397)
---------------------------------------------------------------------------
Net decrease (1,718,602) $(26,012,037)
---------------------------------------------------------------------------
Year ended July 31, 1999
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 5,924,357 $107,923,821
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,446,021 25,658,426
---------------------------------------------------------------------------
7,370,378 133,582,247
Shares
repurchased (6,206,656) (112,934,440)
---------------------------------------------------------------------------
Net increase 1,163,722 $ 20,647,807
---------------------------------------------------------------------------
Year ended July 31, 2000
---------------------------------------------------------------------------
Class Y Shares Amount
---------------------------------------------------------------------------
Shares sold 17,786,628 $299,853,993
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4.984,958 81,946,077
---------------------------------------------------------------------------
22,771,586 381,800,070
Shares
repurchased (23,642,911) (385,374,406)
---------------------------------------------------------------------------
Net decrease (871,325) $ (3,574,336)
---------------------------------------------------------------------------
Year ended July 31, 1999
---------------------------------------------------------------------------
Class Y Shares Amount
---------------------------------------------------------------------------
Shares sold 21,650,266 $402,853,725
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,696,088 48,420,017
---------------------------------------------------------------------------
24,346,354 451,273,742
Shares
repurchased (9,159,570) (168,247,086)
---------------------------------------------------------------------------
Net increase 15,186,784 $283,026,656
---------------------------------------------------------------------------
FEDERAL TAX INFORMATION
(Unaudited)
The fund has designated 37.38% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 2001 will show the tax status of
all distributions paid to your account in calendar 2000.
FUND INFORMATION
WEB SITE
www.putnaminvestments.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management, Inc.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
John A. Hill, Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam, III
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Thomas V. Reilly
Vice President
Deborah F. Kuenstner
Vice President
David L. King
Vice President and Fund Manager
Jeanne L. Mockard
Vice President and Fund Manager
James M. Prusko
Vice President and Fund Manager
Richard A. Monaghan
Vice President
Richard G. Leibovitch
Vice President
John R. Verani
Vice President
This report is for the information of shareholders of The George Putnam
Fund of Boston. 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 and
Putnam Quarterly Ranking Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' Web site:
www.putnaminvestments.com.
Not FDIC Insured, May Lose Value, No Bank Guarantee
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
---------------------
PRST STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminvestments.com
AN021-63665 001/880/242/505 9/00
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
---------------------------------------------------------------------------
The George Putnam Fund of Boston
Supplement to Semiannual Report dated 7/31/00
The following information has been prepared to provide class Y shareholders
with a performance overview specific to their holdings. Class Y shares are
offered exclusively to defined contribution plans investing $150 million or
more in one or more of Putnam's funds or private accounts. Performance of
class Y shares, which incur neither a front-end load, distribution fee, nor
contingent deferred sales charge, will differ from performance of class A,
B, C, and M shares, which are discussed more extensively in the semiannual
report.
ANNUAL RESULTS AT A GLANCE
---------------------------------------------------------------------------
Total return: NAV
Six months ended 7/31/00 -1.13%
1 year -4.89
5 years 72.03
Annual average 11.46
Life of class (since 11/5/37) 33,847.17
Annual average 9.73%
---------------------------------------------------------------------------
Share value: NAV
1/31/00 $15.95
7/31/00 $15.80
---------------------------------------------------------------------------
Capital gains
Distributions: No. Income Short-term Long-term Total
1/31/00-7/31/00 2 $0.320000 $0.00 $0.00 $0.320000
---------------------------------------------------------------------------
Please note that past performance does not indicate future results. Returns
shown for class Y shares for periods prior to their inception are derived
from the historical performance of class A shares, adjusted to reflect the
initial sales charge currently applicable to class A shares. These returns
have not been adjusted to reflect differences in operating expenses which,
for class Y shares, are lower than the operating expenses applicable to
class A shares. All returns assume reinvestment of distributions at net
asset value. Performance data reflects an expense limitation previously
in effect. Without the expense limitation, total returns would have been
lower. Investment return and principal value will fluctuate so your shares,
when redeemed, may be worth more or less than their original cost. See full
report for information on comparative benchmarks. If you have questions,
please consult your fund prospectus or call Putnam toll free at
1-800-752-9894.
