Putnam
Income
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
10-31-00
[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 will be
breathtaking in their scope. What will not change is the Trustees'
dedication to serving the best interests of our shareholders.
We welcome the challenges that lie ahead and are confident that Putnam
and your Board will continue to face those challenges successfully as
they have for more than 60 years. We look forward to helping you meet
your financial objectives for many years to come.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
December 20, 2000
REPORT FROM FUND MANAGEMENT
James M. Prusko and the
Core Fixed-Income Team
Bonds experienced two very different periods within Putnam Income Fund's
fiscal year, which ended October 31, 2000. During the first half,
investors coped with a backdrop of Federal Reserve Board interest-rate
increases and the U.S. Treasury's curtailment of Treasury security
supply. In the second part of the fiscal year, the bond market adjusted
to the perception that economic growth was slowing and the belief that
the Fed would hold the line on interest rates or perhaps even lower them
to head off recession. Against this challenging backdrop, your fund was
able to post positive returns at net asset value, although its emphasis
on higher-income producing bonds, and underperforming corporate
securities in particular, curbed its performance relative to the broader
bond market.
Total return for 12 months ended 10/31/00
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
-----------------------------------------------------------------------
4.39% -0.55% 3.46% -1.42% 3.53% 2.55% 4.05% 0.60%
-----------------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 6.
* MARKET ENVIRONMENT SHIFTS
As your fund began fiscal 2000, the U.S. economy was continuing its
expansion at a torrid rate. The rapid growth spooked bond investors, who
were wary of the effects that a hot economy might have on inflation.
Sharing this concern, the Fed increased short-term interest rates from
mid-1999 through May 2000, raising the benchmark federal funds rate from
4.75% to 6.50%. The Fed explained its actions as efforts to slow
economic growth and head off inflation. At the same time, the U.S.
Treasury announced it would use the federal budget surplus to buy back a
significant portion of outstanding Treasury securities and reduce its
auctioning of new issues. Because of the supply decline and concurrent
demand increase, Treasury securities significantly outperformed other
sectors of the bond market, including the corporates, agencies, and
mortgage-backed securities that your fund favors because they offer more
income than Treasuries.
[GRAPHIC OMITTED: worm chart TREASURY YIELD CURVES AT 10/31/99 AND 10/31/00]
TREASURY YIELD CURVES AT 10/31/99 AND 10/31/00
10/31/99 10/31/00
3
mo. 5.114% 6.384%
6
mo. 5.308% 6.392%
1
yr. 5.438% 6.162%
2
yr. 5.816% 5.910%
5 yr. 5.971% 5.805%
10 yr. 6.046% 5.749%
30 yr. 6.177% 5.787%
Footnote reads:
During the year, the yield curve on U.S. Treasury securities assumed an
inverted position, with short-term yields higher than long-term yields.
The graph does not represent performance of any Putnam fund and fund
performance will differ. Past performance is not indicative of future
results. Source: Bloomberg, Inc.
"For the first time since 1993, bonds are outperforming the stock
market. From January through October 20, the Lehman Brothers Aggregate
Bond Index is up 8.06% and U.S. Treasury bonds maturing in 20 years or
more have fared even better, gaining 15.53%. By comparison, the Nasdaq
Composite Index is off 14.40% for the year and the Standard & Poor's 500
stock index is down 4.92%."
-- Business Week, November 6, 2000
In the second quarter of 2000, the economic and market environments
began to change. First, economic reports showed that the Fed's rate
increases were starting to have their desired effect and that economic
growth was indeed slowing. There were other factors that led market
participants to believe that further slowing was ahead: oil prices were
on the rise, and the stock market started to falter. Investors perceived
that higher energy prices would act as a kind of tax on consumers,
leading them to spend less; it was consumer spending, after all, that
had helped spur the economy to post such robust results. A more subdued
stock market, it was believed, could slow economic growth by reducing or
eliminating the market's so-called wealth effect, in which strong gains
in the stock market put more money into consumers' pockets, stimulating
their spending as well as their confidence.
[GRAPHIC OMITTED: horizontal bar chart BOND MARKET PERFORMANCE BY SECTOR]
BOND MARKET PERFORMANCE BY SECTOR*
Comparison of total returns, 10/31/99 - 10/31/00
First Boston
High Yield Index -0.76%
Lehman Brothers
Mortgage-Backed
Securities Index 7.58%
Lehman Brothers
Corporate Bond Index 5.37%
Lehman Brothers
Long-term
Treasury Bond Index 11.46%
Footnote reads:
*Past performance is not indicative of future results. These indexes reflect
the general performance of market sectors in which the fund invests. The
fund's performance will differ. The indexes may include bonds different
from those in the fund. It is not possible to invest directly in an index.
Within this environment, the Fed held off implementing any additional
rate increases. As a result, many fixed-income sectors produced strong
total returns. Mortgage-backed securities (MBSs), in particular, posted
solid performance. Corporate bonds, on the other hand, continued to
falter. Their prices started to factor in fears that credit problems
would arise if the continued stifling effect of earlier Fed rate
increases and higher energy prices were to cause the economy to go into
recession.
* PORTFOLIO REALLOCATED
As the year progressed, we worked to reduce the fund's allocation to
corporate bonds -- from about 50% of the portfolio to about 44% --
reducing exposure to longer-maturity corporate issues in particular.
These securities were most susceptible to price downdrafts as credit
concerns arose. In turn, we increased the fund's stake in both
mortgage-backed securities while keeping approximately one third of the
portfolio in Treasuries. The Treasuries offered safety in case the fears
of recession prove to be true. The mortgage-backed securities provided
additional yield with less credit risk and fared well in a period of
relative interest-rate stability. Corporate bonds will probably
continue to lag behind Treasuries, as investors typically move towards
safer, higher-quality investments in a slowing economy.
[GRAPHIC OMITTED: horizontal bar chart CHANGES IN PORTFOLIO COMPOSITION]
CHANGES IN PORTFOLIO COMPOSITION*
10/31/99 10/31/00
Corporate bonds
and notes 50.6% 43.6%
U.S. government
and agency obligations 33.0% 32.7%
Collateralized
mortgage obligations 11.1% 18.2%
Short-term
investments 5.5% 0.8%
Other 2.8% 3.6%
Footnote reads:
*Based on total net assets as of indicated dates. Holdings will vary over time.
The fund also maintained a small allocation to higher-quality high-yield
corporate bonds, because they offered attractive yields and the prospect
of solid performance going forward. This sector has been particularly
hard hit by credit problems and fear of increasing defaults. However, it
should be noted that this position, as well as the other investments we
selected for the fund, helped produce very attractive yields during the
period. Moreover, high-yield bonds have been in the doldrums since the
devaluation of the Russian ruble in 1998 and the collapse of the
high-yield market. At this point, we believe high-yield bonds are
nearing a bottom. With yields averaging over 13%, near-record yield
spreads over Treasuries, and an expected leveling off of defaults next
year, high yield represents an attractive opportunity.
* A POSITIVE OUTLOOK
When we look toward the next few months, we believe the economy will
experience a mild slowdown, characterized by a flat stock market and
slower growth overseas. This scenario would be a positive development
for the credit markets, because they would rebound from the rather dire
economic scenario that is currently priced into securities prices. A
moderating economy would be especially beneficial to non-Treasury bonds,
whose yield differences, or spreads, are currently at fairly wide
levels. Any positive news would cause these yield spreads to narrow,
signaling the outperformance of non-Treasury sectors. We also believe it
is likely that the Fed will stand pat, and perhaps ease rates, a
development that would be positive for the bond markets, if economic
growth tapers off significantly. However, if we experience stagflation,
stagnant growth coupled with inflation, the Fed might be forced to keep
rates high, sacrificing continued economic expansion in order to keep
prices down. We will be watching events carefully to make sure your
fund is well positioned for all developments in the market.
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 10/31/00, 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. Putnam
Income Fund is designed for investors seeking high current income
consistent with prudent risk, mainly through fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 10/31/00
Class A Class B Class C Class M
(inception dates) (11/1/54) (3/1/93) (7/26/99) (12/14/94)
NAV POP NAV CDSC NAV CDSC NAV POP
------------------------------------------------------------------------------
1 year 4.39% -0.55% 3.46% -1.42% 3.53% 2.55% 4.05% 0.60%
------------------------------------------------------------------------------
5 years 23.82 17.97 19.29 17.51 19.10 19.10 22.61 18.57
Annual average 4.36 3.36 3.59 3.28 3.56 3.56 4.16 3.46
------------------------------------------------------------------------------
10 years 108.28 98.29 92.64 92.64 93.08 93.08 102.90 96.21
Annual average 7.61 7.09 6.78 6.78 6.80 6.80 7.33 6.97
------------------------------------------------------------------------------
Annual average
(life of fund) 8.27 8.15 7.23 7.23 7.45 7.45 7.78 7.70
------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/00
Lehman Brothers
Aggregate Consumer
Bond Index price index
------------------------------------------------------------------------------
1 year 7.30% 3.45%
------------------------------------------------------------------------------
5 years 35.94 13.14
Annual average 6.33 2.50
------------------------------------------------------------------------------
10 years 115.50 30.26
Annual average 7.98 2.68
------------------------------------------------------------------------------
Annual average
(life of fund) --* 4.15
------------------------------------------------------------------------------
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 4.75% and
3.25%, respectively. Class B share returns for the 1-, 5- and 10-year,
if 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.
*The Lehman Brothers Aggregate Bond Index was introduced on 12/31/75.
[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 10/31/90
Lehman Bros.
Fund's class A Aggregate Bond Consumer price
Date shares at POP Index index
10/31/90 9,425 10,000 10,000
10/31/91 11,238 11,581 10,292
10/31/92 12,571 12,720 10,622
10/31/93 14,377 14,230 10,914
10/31/94 13,779 13,708 11,199
10/31/95 16,015 15,853 11,513
10/31/96 16,989 16,780 11,858
10/31/97 18,499 18,272 12,105
10/31/98 19,013 19,978 12,277
10/31/99 18,995 20,084 12,592
10/31/00 $19,829 $21,550 $13,026
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 $19,264 and $19,308, 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 $20,290 ($19,621
at public offering price).
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 10/31/00
Class A Class B Class C Class M
------------------------------------------------------------------------------
Distributions
(number) 12 12 12 12
------------------------------------------------------------------------------
Income $0.420 $0.372 $0.377 $0.408
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Capital gains -- -- -- --
------------------------------------------------------------------------------
Total $0.420 $0.372 $0.377 $0.408
------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
------------------------------------------------------------------------------
10/31/99 $6.44 $6.76 $6.41 $6.43 $6.41 $6.63
------------------------------------------------------------------------------
10/31/00 6.29 6.60 6.25 6.27 6.25 6.46
------------------------------------------------------------------------------
Current return (end of period)
------------------------------------------------------------------------------
Current
dividend
rate1 6.68% 6.36% 5.95% 5.93% 6.53% 6.32%
------------------------------------------------------------------------------
Current
30-day SEC
yield2 7.37 7.02 6.61 6.61 7.12 6.88
------------------------------------------------------------------------------
1 Most recent distribution, excluding capital gains, annualized and
divided by NAV or POP at end of period.
2 Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 9/30/00 (most recent calendar quarter)
Class A Class B Class C Class M
(inception dates) (11/1/54) (3/1/93) (7/26/99) (12/14/94)
NAV POP NAV CDSC NAV CDSC NAV POP
------------------------------------------------------------------------------
1 year 4.56% -0.37% 3.63% -1.26% 3.59% 2.61% 4.22% 0.78%
------------------------------------------------------------------------------
5 years 25.86 19.87 21.11 19.30 21.11 21.11 24.46 20.50
Annual average 4.71 3.69 3.90 3.59 3.90 3.90 4.47 3.80
------------------------------------------------------------------------------
10 years 108.97 99.00 93.52 93.52 93.62 93.62 103.32 96.65
Annual average 7.65 7.12 6.82 6.82 6.83 6.83 7.35 7.00
------------------------------------------------------------------------------
Annual average
(life of fund) 8.28 8.17 7.25 7.25 7.47 7.47 7.80 7.72
------------------------------------------------------------------------------
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 4.75% maximum sales charge for class A
shares and 3.25% 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
The Lehman Brothers Aggregate Bond Index* is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage of
the original investment. Indexes are rebalanced monthly by market
capitalization.
First Boston High Yield Index* is a market-weighted index including
publicly traded bonds having a rating below BBB by Standard & Poor's and
Baa by Moody's.
The Lehman Brothers Corporate Bond Index* is an index of publicly
issued, fixed-rate, non-convertible investment-grade domestic corporate
debt securities frequently used as a general measure of the performance
of fixed-income securities.
Lehman Brothers Long-Term Treasury Bond Index* is composed of all bonds
covered by the Lehman Brothers U.S. Treasury Index with maturities of 10
or more years.
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 in 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
The Board of Trustees and Shareholders
Putnam Income Fund:
We have audited the accompanying statements of assets and liabilities of
Putnam Income Fund, including the fund's portfolio, as of October 31,
2000, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the years in the
two-year period then ended and financial highlights for each of the
years or periods in the two-year period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The
financial highlights for each of the years or periods in the three-year
period ended October 31, 1998, were audited by other auditors whose
report dated December 14, 1998 expressed an unqualified opinion on those
financial highlights.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform our audit to obtain reasonable assurance about
whether the financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as
of October 31, 2000 by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam Income Fund as of October 31, 2000, the
results of its operations, changes in its net assets and financial
highlights for each of the years or periods described above in
conformity with accounting principles generally accepted in the United
States of America.
KPMG LLP
Boston, Massachusetts
December 5, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
October 31, 2000
CORPORATE BONDS AND NOTES (43.6%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Aerospace and Defense (1.9%)
-------------------------------------------------------------------------------------------------------------------
$ 18,425,000 Boeing Co. deb. 6 5/8s, 2038 $ 16,377,614
9,325,000 Litton Industries Inc. sr. notes 8s, 2009 9,466,274
10,010,000 Lockheed Martin Corp. bonds 8 1/2s, 2029 10,694,784
9,835,000 Raytheon Co. deb. 6.4s, 2018 8,411,876
3,460,000 Sequa Corp. sr. notes 9s, 2009 3,356,200
-------------
48,306,748
Agriculture (--%)
-------------------------------------------------------------------------------------------------------------------
569,289 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 515,207
Airlines (2.0%)
-------------------------------------------------------------------------------------------------------------------
4,754,303 Airbus Industrie 144A 8.027s, 2020 4,813,208
1,971,522 Continental Airlines, Inc. pass-through certificates
Ser. 974C, 6.8s, 2009 1,901,592
11,705,360 Continental Airlines, Inc. pass-through certificates
Ser. 981C, 6.541s, 2009 11,204,371
13,605,000 Delta Air Lines, Inc. notes 8.3s, 2029 11,574,590
430,000 Northwest Airlines, Inc. company guaranty 8.7s, 2007 402,411
3,640,000 Northwest Airlines, Inc. company guaranty 8.52s, 2004 3,520,171
1,100,000 Northwest Airlines, Inc. company guaranty 7 7/8s, 2008 1,004,696
9,413,414 Northwest Airlines Inc. pass-thru certificate Ser. 1999-1A,
6.81s, 2020 8,685,286
9,850,000 United Air Lines Corp. deb. 9 3/4s, 2021 9,965,639
-------------
53,071,964
Automotive (1.2%)
-------------------------------------------------------------------------------------------------------------------
9,855,000 Chrysler Corp. deb. Ser. B, 7.45s, 2097 8,774,498
8,500,000 Federal Mogul Corp. notes 7 1/2s, 2009 2,125,000
2,590,000 Federal Mogul Corp. notes 7 3/8s, 2006 673,400
6,000,000 Ford Motor Co. deb. 7.4s, 2046 5,259,960
11,505,000 Ford Motor Co. bonds 6 5/8s, 2028 9,478,164
1,340,000 Lear Corp. sub. notes 9 1/2s, 2006 1,333,997
4,465,000 Visteon Corp. sr. notes 8 1/4s, 2010 4,422,653
-------------
32,067,672
Banking (6.5%)
-------------------------------------------------------------------------------------------------------------------
10,500,000 Abbey National Capital Trust I company guaranty
8.963s, 2049 10,409,070
9,145,000 Bank One Corp. sr. notes 7 5/8s, 2005 9,242,408
2,522,000 Bank United Corp. sub. notes 8 7/8s, 2007 2,486,692
16,685,000 Bank United Corp. notes Ser. A, 8s, 2009 16,078,834
16,885,000 Citicorp sub. notes 6 3/8s, 2008 15,888,110
8,470,000 Colonial Bank sub. notes 8s, 2009 7,761,993
5,525,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 5,247,369
7,285,000 First Citizens Bank Capital Trust I company guaranty
8.05s, 2028 6,038,099
15,924,000 First Union Capital II company guaranty Ser. A, 7.95s, 2029 14,186,851
2,360,000 First Union Institute Capital I bonds 8.04s, 2026 2,097,804
2,025,000 Firstar Bank Milwaukee sr. bank notes 6 1/4s, 2002 1,994,463
9,500,000 Fleet Boston Corp. sub. notes 7 3/8s, 2009 9,384,575
9,975,000 GS Escrow Corp. sr. notes 7 1/8s, 2005 9,235,753
10,620,000 Imperial Bank sub. notes 8 1/2s, 2009 9,619,771
21,315,000 Peoples Bank-Bridgeport sub. notes 7.2s, 2006 19,711,046
9,215,000 Royal Bank of Scotland Group PLC bonds Ser. 2,
8.817s, 2049 (United Kingdom) 9,586,641
8,635,000 Sovereign Bancorp, Inc. sr. notes 10 1/2s, 2006 8,764,525
8,515,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 8,309,022
320,000 Webster Capital Trust I 144A bonds 9.36s, 2027 274,643
1,555,000 Wilmington Trust Corp. sub. notes 6 5/8s, 2008 1,451,468
-------------
167,769,137
Broadcasting (--%)
-------------------------------------------------------------------------------------------------------------------
590,000 Allbritton Communications Co. sr. sub. notes Ser. B,
8 7/8s, 2008 542,800
118,400 AMFM Operating, Inc. deb. 12 5/8s, 2006 (PIK) 130,832
-------------
673,632
Cable Television (0.4%)
-------------------------------------------------------------------------------------------------------------------
755,000 Adelphia Communications Corp. sr. notes Ser. B,
8 3/8s, 2008 626,650
1,185,000 Adelphia Communications Corp. sr. notes 7 7/8s, 2009 936,150
1,100,000 CSC Holdings, Inc. sr. sub. deb. 10 1/2s, 2016 1,166,000
3,958,000 CSC Holdings, Inc. sr. sub. deb. 9 7/8s, 2013 4,037,160
4,795,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 3,500,350
1,080,000 TeleWest Communications PLC sr. disc. notes
stepped-coupon zero % (9 1/4s, 4/15/04), 2009
(United Kingdom) (STP) 486,000
-------------
10,752,310
Chemicals (0.5%)
-------------------------------------------------------------------------------------------------------------------
1,420,000 Equistar Chemicals LP notes 9 1/8s, 2002 1,428,520
9,130,000 Lyondell Petrochemical Co. sec. notes Ser. B, 9 7/8s, 2007 8,901,750
2,370,000 Lyondell Petrochemical Co. notes Ser. A, 9 5/8s, 2007 2,298,900
-------------
12,629,170
Coal (--%)
-------------------------------------------------------------------------------------------------------------------
1,590,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 190,800
Conglomerates (1.0%)
-------------------------------------------------------------------------------------------------------------------
11,810,000 Tyco International, Ltd. company guaranty 6 3/8s, 2005 11,386,021
15,130,000 Tyco International, Ltd. company guaranty 6 1/4s, 2003 14,707,419
-------------
26,093,440
Consumer Finance (1.6%)
-------------------------------------------------------------------------------------------------------------------
5,285,000 Associates Corp. sub. deb. 8.15s, 2009 5,411,946
5,135,000 Associates Corp. deb. 6.95s, 2018 4,740,427
1,385,000 Capital One Financial Corp. notes 7 1/4s, 2006 1,307,576
8,120,000 Capital One Financial Corp. notes 7 1/4s, 2003 8,042,535
3,000,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 (In default) (NON) 412,500
370,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 (In default) (NON) 50,875
1,480,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 (In default) (NON) 207,200
7,920,000 Ford Motor Credit Corp. notes 7 3/8s, 2009 7,689,924
1,600,000 Ford Motor Credit Corp. notes 6.55s, 2002 1,584,480
8,450,000 Ford Motor Credit Corp. sr. notes 5.8s, 2009 7,424,255
5,985,000 Household Finance Corp. notes 6 1/2s, 2008 5,582,329
10,000 Household Finance Corp. sr. unsub. 5 7/8s, 2009 8,928
-------------
42,462,975
Containers (0.1%)
-------------------------------------------------------------------------------------------------------------------
2,000,000 Consumers International sr. notes 10 1/4s, 2005 600,000
1,750,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 1,242,500
-------------
1,842,500
Distribution (0.3%)
-------------------------------------------------------------------------------------------------------------------
7,665,000 Pepsi Bottling Group, Inc. (The) sr. notes Ser. B, 7s, 2029 7,052,260
Electric Utilities (2.5%)
-------------------------------------------------------------------------------------------------------------------
5,760,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 5,574,125
9,240,000 CILCORP, Inc. sr. notes 8.7s, 2009 9,610,475
5,975,000 CMS Energy Corp. sr. notes Ser. B, 6 3/4s, 2004 5,497,000
9,370,000 DPL, Inc. sr. notes 8 1/4s, 2007 9,202,277
7,084,000 EIP Funding - PNM deb. 10 1/4s, 2012 7,813,156
5,144,000 Niagara Mohawk Power Corp. sr. notes Ser. G, 7 3/4s, 2008 5,140,142
199,499 Northeast Utilities System notes Ser. A, 8.58s, 2006 203,142
2,391,846 Northeast Utilities System notes Ser. B, 8.38s, 2005 2,395,697
3,865,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 3,659,305
15,866,000 TXU Electrical Capital company guaranty 8.175s, 2037 15,088,725
-------------
64,184,044
Electronics (--%)
-------------------------------------------------------------------------------------------------------------------
758,000 Avnet, Inc. FRN 7.646s, 2001 757,953
Energy (0.3%)
-------------------------------------------------------------------------------------------------------------------
2,790,000 Pride Petroleum Services, Inc. sr. notes 9 3/8s, 2007 2,817,900
280,000 RBF Finance Co. company guaranty 11 3/8s, 2009 319,900
3,600,000 RBF Finance Co. company guaranty 11s, 2006 4,104,000
-------------
7,241,800
Entertainment (1.0%)
-------------------------------------------------------------------------------------------------------------------
12,970,236 Blackstone Hotel Acquisition Co. sr. mtge. loan FRN
3.449s, 2003 (United Kingdom) 18,830,189
7,855,000 Walt Disney Co. med. term notes 5.62s, 2008 7,126,370
100,000 United Artists Theatre sr. sub. notes 9 3/4s, 2008
(In default) (NON) 1,875
-------------
25,958,434
Financial (6.2%)
-------------------------------------------------------------------------------------------------------------------
3,490,000 Advanta Corp. notes Ser. C, 7.47s, 2001 3,428,925
195,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 187,223
2,400,000 Advanta Corp. notes Ser. C, 6.94s, 2001 2,351,952
945,000 Advanta Corp. notes Ser. D, 6.925s, 2002 851,133
1,660,000 Advanta Corp. med-term notes Ser. D, 6.92s, 2002 1,495,013
11,995,000 AFLAC, Inc. sr. notes 6 1/2s, 2009 11,104,491
13,995,000 American General Institute 144A company guaranty
8 1/8s, 2046 13,061,254
11,310,000 Conseco Finance Corp. med-term notes Ser. A, 6 1/2s, 2002 7,351,500
2,600,000 Conseco Financial Corp. sr. sub. notes 10 1/4s, 2002 1,794,000
15,825,000 Conseco Financing Trust II company guaranty 8.7s, 2026 6,171,750
17,040,000 Executive Risk Capital Trust company guaranty Ser. B,
8.675s, 2027 16,207,426
1,405,000 Fremont General Corp. sr. notes Ser. B, 7.7s, 2004 807,875
8,070,000 Goldman Sachs Group, Inc. (The) notes Ser. B, 7.35s, 2009 7,883,906
5,055,000 Hartford Life, Inc. deb. 7.65s, 2027 4,825,402
10,120,000 Liberty Mutual Insurance 144A notes 7.697s, 2097 7,370,295
8,495,000 Markel Capital Trust I company guaranty Ser. B, 8.71s, 2046 5,340,297
9,560,000 Newcourt Credit Group Inc. company guaranty Ser. A,
7 1/8s, 2003 9,436,294
13,975,000 Principal Financial Group 144A notes 7.95s, 2004 (Australia) 14,118,943
14,840,000 Provident Companies, Inc. bonds 7.405s, 2038 10,959,934
5,720,000 Riggs Capital Trust company guaranty Ser. A, 8 5/8s, 2026 3,983,035
18,991,000 Sun Life Canada Capital Trust 144A 8.526s, 2049 16,268,450
12,495,000 TIG Capital Trust I 144A bonds 8.597s, 2027 8,503,597
10,580,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 7,284,647
-------------
160,787,342
Gaming & Lottery (0.5%)
-------------------------------------------------------------------------------------------------------------------
3,155,000 International Game Technology sr. notes 8 3/8s, 2009 3,060,350
1,590,000 International Game Technology sr. notes 7 7/8s, 2004 1,550,250
2,160,000 Mohegan Tribal Gaming, Auth. sr. sub. notes 8 3/4s, 2009 2,106,000
1,375,000 Mohegan Tribal Gaming, Auth. sr. notes 8 1/8s, 2006 1,326,875
5,400,000 Park Place Entertainment, Inc. sr. sub. notes 9 3/8s, 2007 5,440,500
-------------
13,483,975
Health Care (0.7%)
-------------------------------------------------------------------------------------------------------------------
25,000 Columbia/HCA Healthcare Corp. med. term notes
8.85s, 2007 25,156
2,880,000 Columbia/HCA Healthcare Corp. med. term notes
8.7s, 2010 2,851,200
70,000 Columbia/HCA Healthcare Corp. notes 7 1/4s, 2008 65,013
1,430,000 HCA - The Healthcare Co. debs. 7.19s, 2015 1,201,200
7,020,000 Omega Healthcare Investors, Inc. notes 6.95s, 2002 6,037,200
6,985,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 6,958,806
-------------
17,138,575
Homebuilding (0.2%)
-------------------------------------------------------------------------------------------------------------------
4,135,000 D.R. Horton, Inc. company guaranty 8s, 2009 3,659,475
1,660,000 Lennar Corp. company guaranty Ser. B, 9.95s, 2010 1,693,200
-------------
5,352,675
Investment Banking/Brokerage (1.4%)
-------------------------------------------------------------------------------------------------------------------
6,570,000 Bear Stearns Companies, Inc. (The) sr. unsecd. notes
7 5/8s, 2009 6,386,106
9,465,000 Countrywide Home Loan Corp. company guaranty
6.935s, 2007 9,077,408
12,220,000 Countrywide Home Loan Corp. company guaranty
med term notes 6 1/4s, 2009 11,020,363
9,140,000 Salomon, Inc. sr. notes 7.3s, 2002 9,181,861
1,620,000 Salomon, Inc. sr. notes 6 3/4s, 2003 1,608,368
-------------
37,274,106
Lodging/Tourism (0.4%)
-------------------------------------------------------------------------------------------------------------------
10,325,000 HMH Properties, Inc. company guaranty Ser. B, 7 7/8s, 2008 9,486,094
Media (1.2%)
-------------------------------------------------------------------------------------------------------------------
20,099,000 News America Holdings, Inc. deb. 7 3/4s, 2045 17,423,220
14,025,000 Time Warner Entertainment, Inc. sr. notes 8 3/8s, 2033 14,602,269
-------------
32,025,489
Medical Services (--%)
-------------------------------------------------------------------------------------------------------------------
585,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/2s,
2007 (In default) (NON) 5,119
600,000 Integrated Health Services, Inc. sr. sub. notes Ser. A, 9 1/4s,
2008 (In default) (NON) 5,250
550,000 Mariner Post-Acute Network, Inc. sr. sub. notes
stepped-coupon Ser. B, zero % (10 1/2s, 11/1/02), 2007
(In default) (STP) (NON) 5,500
1,275,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 (In default) (NON) 12,750
120,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 (In default) (NON) 6,300
-------------
34,919
Metals (0.2%)
-------------------------------------------------------------------------------------------------------------------
6,535,000 AK Steel Corp. company guaranty 7 7/8s, 2009 5,881,500
171,400 Anker Coal Group, Inc. company guaranty Ser. B,
14 1/4s, 2007 (PIK) 82,272
-------------
5,963,772
Natural Gas Utilities (1.5%)
-------------------------------------------------------------------------------------------------------------------
15,275,000 KN Capital Trust III company guaranty 7.63s, 2028 12,835,000
8,725,000 Maritime & NE Pipeline 144A sec. notes 7.7s, 2019 (Canada) 8,373,732
7,940,000 Osprey Trust 144A sec. notes 8.31s, 2003 8,020,591
8,655,000 Sonat, Inc. notes 7 5/8s, 2011 8,593,723
-------------
37,823,046
Oil & Gas (3.6%)
-------------------------------------------------------------------------------------------------------------------
9,155,000 Amerada Hess Corp. bonds 7 7/8s, 2029 9,205,078
6,791,390 Express Pipeline Ltd. 144A sub. notes Ser. B, 7.39s,
2019 (Canada) 5,733,835
4,240,000 Leviathan Gas Corp. company guaranty Ser. B, 10 3/8s, 2009 4,452,000
22,335,000 Louis Dreyfus Natural Gas notes 6 7/8s, 2007 21,288,829
13,210,000 Norsk Hydro ASA notes 6.36s, 2009 (Norway) 12,324,402
1,010,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 1,022,625
840,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 835,800
9,100,000 Phillips Petroleum Co. notes 8 3/4s, 2010 9,924,824
1,330,000 Pioneer Natural Resources Co. company guaranty
9 5/8s, 2010 1,403,150
4,902,000 Port Arthur Finance Corp. company guaranty 12 1/2s, 2009 4,852,980
750,000 Seagull Energy sr. sub notes 8 5/8s, 2005 751,875
19,020,000 Union Oil Company of California company guaranty
7 1/2s, 2029 18,335,600
3,530,000 Union Pacific Resources Group, Inc. notes 7.3s, 2009 3,488,134
-------------
93,619,132
Paper & Forest Products (1.0%)
-------------------------------------------------------------------------------------------------------------------
16,195,000 Abitibi-Consolidated Inc. deb. 8 1/2s, 2029 14,876,079
90,000 Boise Cascade Co. med. term notes Ser. A, 7.43s, 2005 87,508
5,375,000 Georgia Pacific Corp. bonds 7 3/4s, 2029 4,753,005
4,490,000 Norampac, Inc. sr. notes 9 1/2s, 2008 (Canada) 4,484,388
580,000 Pacifica Papers, Inc. sr. notes 10s, 2009 (Canada) 572,750
-------------
24,773,730
Pharmaceuticals (0.2%)
-------------------------------------------------------------------------------------------------------------------
1,625,000 ICN Pharmaceuticals, Inc. sr. notes Ser. B, 9 1/4s, 2005 1,604,688
2,800,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 2,786,000
-------------
4,390,688
Power Producers (0.1%)
-------------------------------------------------------------------------------------------------------------------
700,000 Calpine Corp. sr. notes 8 3/4s, 2007 699,370
1,660,000 Calpine Corp. sr. notes 7 7/8s, 2008 1,574,184
250,000 Midland Funding II Corp. deb. Ser. B, 13 1/4s, 2006 281,530
314 Midland Funding I Corp. deb. Ser. C-94, 10.33s, 2002 320
1,169,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands) 1,169,000
-------------
3,724,404
Railroads (0.6%)
-------------------------------------------------------------------------------------------------------------------
5,289,000 CSX Corp. deb. 7.95s, 2027 5,103,462
11,375,000 Norfolk Southern Corp. sr. notes 6.2s, 2009 10,394,020
-------------
15,497,482
Real Estate (0.6%)
-------------------------------------------------------------------------------------------------------------------
2,110,000 Avalon Properties, Inc. notes 7 3/8s, 2002 2,099,978
9,075,000 EOP Operating L.P. notes 6.8s, 2009 8,416,972
6,050,000 EOP Operating L.P. notes 6 3/8s, 2002 5,963,425
-------------
16,480,375
Regional Bells (0.3%)
-------------------------------------------------------------------------------------------------------------------
7,875,000 GTE Corp. deb. 6.46s, 2008 7,451,640
Retail (0.7%)
-------------------------------------------------------------------------------------------------------------------
6,478,000 Federated Department Stores, Inc. notes 6.3s, 2009 5,406,604
6,889,000 K mart Corp. notes 8 3/8s, 2004 5,938,180
680,000 K mart Corp. notes 8 1/8s, 2006 573,077
1,320,000 K mart Corp. deb. 7.95s, 2023 917,585
660,000 K mart Corp. med. term notes Ser. D, 7.55s, 2004 579,678
4,760,000 Saks, Inc. company guaranty 8 1/4s, 2008 2,618,000
2,760,000 Southland Corp. sr. sub. deb. 5s, 2003 2,438,570
1,000,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 820,000
-------------
19,291,694
Semiconductor (--%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Micron Technology, Inc notes 6 1/2s, 2005 850,000
Shipping (0.1%)
-------------------------------------------------------------------------------------------------------------------
2,830,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 2,451,488
1,500,000 Pegasus Shipping Hellas, Ltd. company guaranty Ser. A,
11 7/8s, 2004 (In default) (NON) 508,125
-------------
2,959,613
Software (--%)
-------------------------------------------------------------------------------------------------------------------
390,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 70,200
Technology (0.5%)
-------------------------------------------------------------------------------------------------------------------
2,970,000 Amkor Technologies, Inc. sr. notes 9 1/4s, 2006 2,880,900
1,030,000 Flextronics International, Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 991,375
10,225,000 IBM Corp. deb. 7 1/8s, 2096 9,332,664
-------------
13,204,939
Telecommunications (1.8%)
-------------------------------------------------------------------------------------------------------------------
1,625,000 Flag Ltd. sr. notes 8 1/4s, 2008 (Bermuda) 1,365,000
4,860,000 Global Crossing Holdings, Ltd. company guaranty 9 5/8s,
2008 (Bermuda) 4,641,300
1,786,000 Global Crossing Holdings, Ltd. company guaranty 9 1/2s,
2009 (Bermuda) 1,701,165
11,600,000 Nextel Communications, Inc. sr. notes 9 3/8s, 2009 11,252,000
3,880,000 Price Communications Wireless, Inc. 144A sr. notes Ser. B,
9 1/8s, 2006 3,860,600
9,965,000 Sprint Capital Corp. company guaranty 6 1/8s, 2008 8,850,614
9,405,000 Sprint Capital Corp. company guaranty 5.7s, 2003 8,999,550
5,065,000 U S West, Inc. notes 5 5/8s, 2008 4,440,789
1,740,000 Williams Communications Group, Inc. sr. notes 10 7/8s, 2009 1,465,950
--------------
46,576,968
Telephone (0.2%)
-------------------------------------------------------------------------------------------------------------------
1,360,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 544,000
3,560,000 Hyperion Telecommunications Corp., Inc. sr. notes
Ser. B, 12 1/4s, 2004 3,061,600
4,160,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 436,800
--------------
4,042,400
Textiles (0.1%)
-------------------------------------------------------------------------------------------------------------------
1,280,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 1,254,400
320,000 Kasper A.S.L., Ltd. sr. notes 12 3/4s, 2004 128,000
--------------
1,382,400
Tobacco (0.4%)
-------------------------------------------------------------------------------------------------------------------
6,198,000 Philip Morris Cos., Inc. notes 7 1/4s, 2003 6,124,306
4,530,000 Philip Morris Cos., Inc. notes 7 1/8s, 2004 4,408,777
--------------
10,533,083
Transportation Services (1.1%)
-------------------------------------------------------------------------------------------------------------------
14,691,270 Federal Express Corp. pass thru certificates Ser. 1998-1A,
6.72s, 2022 13,610,580
14,265,000 Hertz Corp. sr. notes 6 1/2s, 2006 13,507,101
--------------
27,117,681
Waste Management (0.5%)
-------------------------------------------------------------------------------------------------------------------
2,050,000 Allied Waste Industries, Inc. company guaranty Ser. B,
7 7/8s, 2009 1,763,000
9,370,000 Browning-Ferris Industries, Inc. deb. 7.4s, 2035 6,676,125
4,250,000 Waste Management, Inc. notes 6 5/8s, 2002 4,111,238
--------------
12,550,363
Water Utilities (0.2%)
-------------------------------------------------------------------------------------------------------------------
5,820,000 Azurix Corp. sr. notes Ser. B, 10 3/8s, 2007 5,587,200
--------------
Total Corporate Bonds and Notes
(cost $1,244,157,696) $1,131,044,031
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (32.7%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
U.S. Government Agency Mortgage Obligations (17.6%)
-------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Association
$ 1,555,077 7 1/2s, December 1, 2029 $ 1,554,641
233,537 6s, March 1, 2029 219,114
1,278,508 Federal National Mortgage Association Graduated
Payment Mortgages 8s, December 1, 2008 1,313,079
Federal National Mortgage Association Pass-Through
Certificates
147,885 11s, with due dates from August 1, 2013 to
October 1, 2015 162,720
40,076,466 8s, with due dates from June 1, 2024 to August 1, 2030 40,583,432
93,470,664 7 1/2s, with due dates from February 1, 2015 to
May 1, 2030 94,129,944
79,859,002 7s, with due dates from January 1, 2013 to April 1, 2030 78,263,226
465,361 6 1/2s, with due dates from September 1, 2010 to
October 1, 2010 455,835
1,923,387 5 1/2s, August 15, 2014 1,812,176
Government National Mortgage Association Pass-Through
Certificates
167,716 11s, with due dates from January 15, 2010 to July 15, 2013 181,668
12,669,893 9 1/2s, November 15, 2028 13,389,008
140,359 9s, with due dates from October 15, 2004 to May 15, 2009 147,419
12,447,421 8 1/2s, with due dates from October 15, 2017 to
November 15, 2017 12,807,823
119,972,502 8s, with due dates from November 15, 2016 to
November 15, 2028 122,061,757
849,915 7 1/2s, October 20, 2030 853,306
59,113,610 7s, with due dates from January 15, 2023 to
December 15, 2028 58,410,658
31,217,873 6 1/2s, with due dates from September 15, 2024 to
November 15, 2028 30,142,204
--------------
456,488,010
U.S. Treasury Obligations (15.1%)
-------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
$ 68,560,000 6 1/4s, May 15, 2030 $ 73,016,400
14,320,000 6 1/8s, August 15, 2029 14,830,078
5,520,000 6 1/8s, November 15, 2027 (SEG) 5,639,011
U.S. Treasury Notes
140,100,000 6 3/4s, May 15, 2005 145,244,509
61,130,000 6 1/2s, February 15, 2010 63,985,994
25,700,000 6s, September 30, 2002 25,715,934
57,605,000 5 3/4s, August 15, 2010 57,550,851
17,747,000 U.S. Treasury Interest Strip 6 3/4s, May 15, 2026 3,935,930
--------------
389,918,707
--------------
Total U.S. Government and Agency Obligations
(cost $847,650,760) $ 846,406,717
<CAPTION>
COLLATERALIZED MORTGAGE OBLIGATIONS (18.2%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 3,750,000 Chase Commercial Mortgage Securities Corp. Ser. 00-1,
Class E, 8.42s, 2010 $ 3,824,764
Commercial Mortgage Asset Trust
40,460,000 Ser. 99-C1, Class A3, 6.64s, 2010 39,276,229
157,694,924 Ser. 99-C1, Class X, Interest Only (IO), 1.169s, 2020 9,868,253
Countrywide Home Loan
8,905,000 Ser. 98-A12, Class A14, 8s, 2028 9,069,186
6,994,010 Ser. 98-3, Class A5, 6 3/4s, 2028 6,607,154
9,610,000 Countrywide Mortgage Backed Securities, Inc. Ser. 93-C,
Class A8, 6 1/2s, 2024 8,905,491
Criimi Mae Commercial Mortgage Trust
21,055,000 Ser. 98-C1, Class A2, 7s, 2011 19,210,582
10,100,000 Ser. 98-C1, Class B, 7s, 2011 8,451,680
CS First Boston Mortgage Securities Corp.
4,540,000 Ser. 99-C1, Class E, 8.18s, 2009 4,535,287
7,230,000 Ser. 00-C1, Class A2, 7.545s, 2010 7,410,750
7,923,599 DLJ Commercial Mortgage Corp. Ser. 98-CG1,
Class A1A, 6.11s, 2007 7,715,605
Fannie Mae Strip
7,312 Ser. 92-15, Class L, IO, 10.376s, 2022 247,223
14,350,089 Ser. 279, Class 2, IO, 9s, 2026 3,926,095
2,217,731 Ser. 281, Class 2, IO, 9s, 2026 606,757
3,022,714 Ser. 176, Class 2, IO, 8s, 2022 808,576
16,138,641 Ser. 203, Class 2, IO, 8s, 2023 4,468,386
8,352,216 Ser. 217, Class 2, IO, 8s, 2023 2,234,218
8,629,069 Ser. 237, Class 2, IO, 8s, 2023 2,405,353
1,615,488 Ser. 251, Class 2, IO, 8s, 2023 447,288
15,924,412 Ser. 218, Class 2, IO, 7.5s, 2023 4,508,599
48,685,055 Ser. 215, Class 2, IO, 7s, 2023 13,510,103
20,646,201 Ser. 222, Class 2, IO, 7s, 2023 5,826,100
507,151 Ser. 276, Class 2, 6.5s, 2024 145,014
14,087,100 Ser. 92-207, Class S, IO, 5.906s, 2022 3,011,118
24,812,907 Ser. 97-91, Class FB, IO, 4.738s, 2023 4,357,767
7,681,000 First Union National Bank Commercial Mortgage
Ser. 00-C1, Class E, 8.499s, 2010 7,852,322
Federal National Mortgage Association
419,000 Ser. 2028, Class SG, 8.898s, 2023 204,917
18,584,262 Ser. 147, Class IO, 8s, 2023 5,162,940
36,230,865 Ser. 252, Class 2, IO, 7 1/2s, 2023 10,472,984
4,588,676 Ser. 2090, Class SA, IO, 2.18s, 2028 263,132
12,071,000 Ser. 2183, Class SG, 3.96s, 2014 9,973,664
1,600,439 Ser. 2090, Class SC, IO, 2.18s, 2028 91,775
59,653,149 Ser. 2191, Class MS, IO, 1.783s, 2027 3,075,866
3,313,755 Ser. 180, Class Principal Only (PO), zero %, 2026 2,397,295
6,526,093 Ser. 203, Class PO, zero %, 2029 4,233,803
7,870,000 GE Capital Mortgage Services, Inc. Ser. 98-11,
Class 2A4, 6 3/4s, 2028 7,475,949
General Growth Properties-Homart
1,825,000 Ser. 99-C1, Class G, 9.12s, 2003 1,825,000
2,162,000 Ser. 99-C1, Class F, 8.87s, 2003 2,162,000
9,611,000 General Growth Properties-Ivanhoe Ser. 99-C1,
Class F, 9.12s, 2004 9,611,000
GMAC Commercial Mortgage Securities Inc.
9,305,000 Ser. 98-C2, Class D, 6 1/2s, 2010 8,537,935
34,435,000 Ser. 99-C-1, Class A2, 6.175s, 2033 32,523,588
Government National Mortgage Association
26,160,704 Ser. 00-17, Class SB, 9.15s, 2026 26,959,129
3,946,604 Ser. 99-38, Class SL, 8.9s, 2026 3,761,607
102,401,812 Ser. 98-2, Class SA, IO, 1.88s, 2028 6,256,111
1,389,972 Ser. 99-46, Class SQ, IO, 1.83s, 2027 60,706
18,449,734 Ser. 98-2, Class EA, PO, zero %, 2028 12,949,407
4,509,060 Ser. 99-31, Class MP, PO, zero %, 2029 3,347,977
3,155,351 Headlands Mortgage Securities, Inc. Ser. 98-1, Class X2,
2.871s, 2028 581,768
Housing Securities Inc.
633,579 Ser. 91-B, Class B6, 9s, 2006 630,015
2,089,959 Ser. 93-F, Class F9M2, 7s, 2023 1,990,191
361,541 Ser. 94-1, Class AB1, 6 1/2s, 2009 316,211
LB Commercial Conduit Mortgage Trust
5,118,000 Ser. 99-C2, Class B, 7.425s, 2009 5,153,258
7,652,000 Ser. 99-C1, Class D, 7.02s, 2009 7,250,564
18,421,000 Ser. 99-C1, Class A2, 6.78s, 2009 18,024,762
Merrill Lynch Mortgage Investors, Inc.
4,805,000 Ser. 98-C2, Class E, 6.96s, 2028 4,278,372
6,338,974 Ser. 98-C2, Class A1, 6.22s, 2030 6,229,944
12,555,570 Ser. 96-C2, Class IO, 2.656s, 2028 825,921
77,832,176 Ser. 98-C2, Class IO, 1.076s, 2030 5,269,238
Morgan Stanley Dean Witter Capital 1
2,300,000 Ser. 00-LIFE, Class B, 7.781s, 2010 2,356,781
5,900,000 Ser. 00-LIF2, Class A2, 7.2s, 2010 5,903,688
3,115,039 Ser. 98-HF1, Class A1, 6.19s, 2007 3,054,685
7,028,806 Mortgage Capital Funding, Inc. Ser. 98-MC1, Class A1,
6.417s, 2007 6,912,392
Prudential Home Mortgage Securities
1,353,794 Ser. 92-25, Class B3, 8s, 2022 1,352,737
497,566 Ser. 94-31, Class B3, 8s, 2009 490,103
318,712 Ser. 94-31, Class B4, 8s, 2009 300,884
7,580,000 Residential Funding Mortgage Sec. I Ser. 98-S13, Class A21,
6 3/4s, 2028 7,196,983
8,635,000 Salomon Brothers Mortgage Securities VII Ser. 00-C1,
Class A2, 7.52s, 2009 8,814,781
3,508,650 Sears Mortgage Securities Ser. 93-7, Class T7, 7s, 2007 3,493,001
Structured Asset Security Corp.
4,108,291 Ser. 98-RF1, Class A, 8.667s, 2027 4,256,569
7,747,510 Ser. 98-RF2, Class A, 8.58s, 2028 7,992,041
16,908,131 Ser. 99-RF1, Class A, IO, 7.873s, 2028 17,098,348
30,518,816 Ser. 98-RF3, IO, 6.1s, 2028 5,687,944
16,025,490 TIAA Retail Commercial Mortgage Trust Ser. 99-1,
Class A, 7.17s, 2032 16,129,656
--------------
Total Collateralized Mortgage Obligations
(cost $466,852,641) $ 472,167,522
<CAPTION>
ASSET-BACKED SECURITIES (1.5%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 4,705,000 Advanta Mortgage Loan Trust Ser. 00-1, Class A4,
8.61s, 2028 $ 4,820,131
14,340,000 Conseco Finance Securitization Corp. Ser. 00-5, Class A6,
7.96s, 2032 14,429,625
8,887,481 First Plus 144A Ser. 98-A, Class A, 8 1/2s, 2023 6,668,388
3,455,000 Ford Credit Auto Owner Trust Ser. 00-C, Class A3,
7.13s, 2002 3,461,461
65,322,668 Lehman Manufactured Housing Ser. 98-1, Class 1 IO,
0.82s, 2028 1,607,550
9,168,206 Mach One CDO, Ltd. Ser. 00-1, Class A, 6.7s, 2030 8,764,232
--------------
Total Asset-Backed Securities (cost $42,774,667) $ 39,751,387
<CAPTION>
PREFERRED STOCKS (1.2%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 9,671 AmeriKing, Inc. 3.25 cum. pfd. (PIK) $ 9,671
14,090 Centaur Funding Corp 144A 9.08% cum. pfd.
(Cayman Islands) 14,629,506
24,956 CGA Group, Ltd. 144A 13.75 pfd. (PIK) 598,944
2,855 Chevy Chase Preferred Corp. Ser. A, 5.188 pfd. 144,178
16,398 CSC Holdings, Inc. Ser. M, 11.125 cum. pfd. (PIK) 1,758,686
480,000 Fresenius Medical Capital Trust I 9.00% company
guaranty, pfd. (Germany) 470,400
2,490,000 Fresenius Medical Capital Trust II 7.875% company
guaranty, pfd. (Germany) 2,334,375
10,470 Webster Capital Corp. Ser. A, 7.375% cum. pfd. 10,365,300
--------------
Total Preferred Stocks (cost $30,312,702) $ 30,311,060
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (0.7%) (a) (cost $20,879,307)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 20,975,000 Quebec (Province of) sr. unsub. 5 3/4s, 2009 $ 19,229,880
<CAPTION>
CONVERTIBLE BONDS AND NOTES (--%) (a) (cost $612,389)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 780,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 $ 658,125
<CAPTION>
COMMON STOCKS (--%) (a) (NON)
NUMBER OF SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
150 AmeriKing, Inc. $ 150
3,544 Fitzgeralds Gaming Corp. 35
441 PSF Holdings LLC Class A 572,663
--------------
Total Common Stocks (cost $1,536,007) $ 572,848
<CAPTION>
CONVERTIBLE PREFERRED STOCKS (--%) (a) (cost $169,600)
NUMBER OF SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
129 World Access, Inc. 144A Ser. D, zero %, cv. pfd. $ 38,676
<CAPTION>
WARRANTS (--%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
4 Anker Coal Group, Inc. 144A 10/28/09 $ 1
24,000 CGA Group, Ltd. 144A 2/11/07 240
315 McCaw International, Ltd. 4/15/07 6,300
1,285 Raintree Resort 144A 12/1/04 12
390 Telehub Communications Corp. 144A 7/31/05 195
835 UIH Australia/Pacific, Inc. 5/15/06 12,525
--------------
Total Warrants (cost $182,922) $ 19,273
<CAPTION>
SHORT-TERM INVESTMENTS (0.8%) (a) (cost $21,619,000)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 21,619,000 Interest in $800,000,000 joint repurchase
agreement dated October 31, 2000 with
Warburg Securities due November 1, 2000
with respect to various U.S. Treasury obligations
-- maturity value of $21,622,969 for an effective
yield of 6.61% $ 21,619,000
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $2,676,747,691) (b) $2,561,818,519
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $2,591,260,284.
(b) The aggregate identified cost on a tax basis is $2,678,017,458,
resulting in gross unrealized appreciation and depreciation of
$26,048,441 and $142,247,380, respectively, or net unrealized
depreciation of $116,198,939.
(NON) Non-income producing security.
(STP) The interest or dividend rate and date shown parenthetically
represent the new interest or dividend rate to be paid and the date the
fund will begin receiving interest or dividend income at this rate.
(PIK) Income may be received in cash or additional securities at the
discretion of the issuer.
(SEG) A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at October
31, 2000.
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.
The rates shown on Floating Rate Notes (FRN) are the current
interest rates shown at October 31, 2000, which are subject to change
based on the terms of the security.
------------------------------------------------------------------------------
Forward Currency Contracts to Sell at October 31, 2000
Market Aggregate Face Delivery Unrealized
Value Value Date Depreciation
------------------------------------------------------------------------------
British Pound $18,398,499 $18,395,688 12/20/00 $(2,811)
------------------------------------------------------------------------------
Futures Contracts Outstanding at October 31, 2000
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
------------------------------------------------------------------------------
U.S. Agency 10yr
(Short) $29,493,593 $29,153,215 Dec-00 $(340,378)
U.S. Treasury Bond
(Short) 10,084,219 10,161,118 Dec-00 76,899
U.S. Treasury Note
10yr (Short) 68,478,125 68,360,551 Dec-00 (117,574)
------------------------------------------------------------------------------
$(381,053)
------------------------------------------------------------------------------
Swap Contracts outstanding at October 31, 2000
Unrealized
Notional Termination Appreciation/
Amount Date (Depreciation)
------------------------------------------------------------------------------
Agreement with
Lehman Brothers,
Inc. dated August
31, 2000 to
receive (pay)
monthly the
notional amount
multiplied by the
return of the
Lehman Brothers
US Credit Index
and receive the
notional amount
multiplied by one
month LIBOR
adjusted by a
specified spread. $40,307,971 Mar-01 $ 58,574
Agreement with
Lehman Brothers,
Inc. dated
September 29,
2000 to receive
(pay) monthly the
notional amount
multiplied by the
return of the
Lehman Brothers
US Credit Index
and receive the
notional amount
multiplied by one
month LIBOR
adjusted by a
specified spread. $44,608,478 Apr-01 $ 64,824
Agreement with
Morgan Stanley
Group, Inc. dated
September 28,
2000 to pay
semi-annually the
notional amount
multiplied by
6.94% and receive
quarterly the
notional amount
multiplied by
three months
LIBOR. $28,000,000 Oct-10 $(125,267)
Agreement with
Lehman Brothers,
Inc. dated
October 31, 2000
to receive (pay)
monthly the
notional amount
multiplied by the
return of the
Lehman Brothers
US Credit Index
and receive the
notional amount
multiplied by one
month LIBOR
adjusted by a
specified spread. $15,000,269 May-01 --
------------------------------------------------------------------------------
$ (1,869)
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2000
<S> <C>
Assets
---------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $2,676,747,691) (Note 1) $2,561,818,519
---------------------------------------------------------------------------------------------
Cash 11,145,477
---------------------------------------------------------------------------------------------
Dividends, interest and other receivables 42,577,248
---------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 3,341,739
---------------------------------------------------------------------------------------------
Receivable for securities sold 74,581,649
---------------------------------------------------------------------------------------------
Receivable for variation margin 263,151
---------------------------------------------------------------------------------------------
Receivable for open swap contracts 123,398
---------------------------------------------------------------------------------------------
Receivable for closed swap contracts 282,392
---------------------------------------------------------------------------------------------
Total assets 2,694,133,573
Liabilities
---------------------------------------------------------------------------------------------
Payable for securities purchased 83,376,139
---------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 14,021,773
---------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 3,462,713
---------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 711,367
---------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 107,870
---------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 8,960
---------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 994,742
---------------------------------------------------------------------------------------------
Payable for open forward currency contracts 2,811
---------------------------------------------------------------------------------------------
Payable for open swap contracts 125,267
---------------------------------------------------------------------------------------------
Other accrued expenses 61,647
---------------------------------------------------------------------------------------------
Total liabilities 102,873,289
---------------------------------------------------------------------------------------------
Net assets $2,591,260,284
Represented by
---------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $2,962,695,523
---------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 10,705,575
---------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (266,828,006)
---------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and
liabilities in foreign currencies (115,312,808)
---------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $2,591,260,284
Computation of net asset value and offering price
---------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($946,754,777 divided by 150,580,388 shares) $6.29
---------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $6.29)* $6.60
---------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($373,336,214 divided by 59,704,859 shares)** $6.25
---------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($10,363,461 divided by1,652,604 shares)** $6.27
---------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,066,538,735 divided by 170,695,859 shares) $6.25
---------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $6.25)* $6.46
---------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share
($194,267,097 divided by30,787,468 shares) $6.31
---------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000
or more and on group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year ended October 31, 2000
<S> <C>
Investment income:
-------------------------------------------------------------------------------------------
Interest $ 228,126,914
-------------------------------------------------------------------------------------------
Dividends 2,832,998
-------------------------------------------------------------------------------------------
Total investment income 230,959,912
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 15,138,276
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 4,752,544
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 74,308
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 27,134
-------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,520,640
-------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 4,056,832
-------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 57,432
-------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 6,654,501
-------------------------------------------------------------------------------------------
Other 673,676
-------------------------------------------------------------------------------------------
Total expenses 33,955,343
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (810,816)
-------------------------------------------------------------------------------------------
Net expenses 33,144,527
-------------------------------------------------------------------------------------------
Net investment income 197,815,385
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (111,038,320)
-------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (7,473,581)
-------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 2,006,428
-------------------------------------------------------------------------------------------
Net realized gain on swap contracts (Note 1) 203,766
-------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the year 429,404
-------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, swap contracts
and futures contracts during the year 29,529,021
-------------------------------------------------------------------------------------------
Net loss on investments (86,343,282)
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 111,472,103
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year ended October 31
---------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 197,815,385 $ 210,524,741
--------------------------------------------------------------------------------------------------
Net realized loss on investments and
foreign currency transactions (116,301,707) (113,385,885)
--------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments
and assets and liabilities in foreign currencies 29,958,425 (110,959,050)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 111,472,103 (13,820,194)
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income
Class A (66,755,585) (78,558,769)
--------------------------------------------------------------------------------------------------
Class B (24,000,494) (25,718,093)
--------------------------------------------------------------------------------------------------
Class C (339,786) (9,492)
--------------------------------------------------------------------------------------------------
Class M (86,532,277) (91,242,779)
--------------------------------------------------------------------------------------------------
Class Y (15,019,596) (14,995,609)
--------------------------------------------------------------------------------------------------
In excess of net investment income
Class A -- (3,839,887)
--------------------------------------------------------------------------------------------------
Class B -- (1,257,079)
--------------------------------------------------------------------------------------------------
Class C -- (464)
--------------------------------------------------------------------------------------------------
Class M -- (4,459,871)
--------------------------------------------------------------------------------------------------
Class Y -- (732,973)
--------------------------------------------------------------------------------------------------
From return of capital
Class A -- (2,501,477)
--------------------------------------------------------------------------------------------------
Class B -- (818,918)
--------------------------------------------------------------------------------------------------
Class C -- (302)
--------------------------------------------------------------------------------------------------
Class M -- (2,905,362)
--------------------------------------------------------------------------------------------------
Class Y -- (477,492)
--------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) (827,254,775) 384,718,493
--------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (908,430,410) 143,379,732
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 3,499,690,694 3,356,310,962
--------------------------------------------------------------------------------------------------
End of year (including undistributed net
investment income of $10,705,575 and
$85,462, respectively) $2,591,260,284 $3,499,690,694
--------------------------------------------------------------------------------------------------
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 October 31
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $6.44 $6.87 $7.14 $7.02 $7.07
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .43(c) .40(c) .48(c) .45 .45
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.16) (.40) (.28) .15 (.04)
-----------------------------------------------------------------------------------------------------
Total from
investment operations .27 -- .20 .60 .41
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.42) (.40) (.40) (.44) (.46)
-----------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.02) -- -- --
-----------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- (.04) (.04) --
-----------------------------------------------------------------------------------------------------
From return of capital -- (.01) (.03) -- --
-----------------------------------------------------------------------------------------------------
Total distributions (.42) (.43) (.47) (.48) (.46)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.29 $6.44 $6.87 $7.14 $7.02
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.39 (.09) 2.78 8.88 6.08
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $946,755 $1,160,121 $1,426,583 $1,296,600 $1,037,718
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .95 .96 1.02 1.17 1.17
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.86 5.95 6.69 6.39 6.50
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 207.35 209.02 257.12 265.71 213.46
-----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charge.
(b) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(d) Per share distributions were less than $.01 per share.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS B
-----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $6.41 $6.83 $7.11 $6.99 $7.04
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .38(c) .35(c) .42(c) .39 .40
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.17) (.39) (.28) .16 (.04)
-----------------------------------------------------------------------------------------------------
Total from
investment operations .21 (.04) .14 .55 .36
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.37) (.35) (.36) (.39) (.41)
-----------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.02) -- -- --
-----------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- (.04) (.04) --
-----------------------------------------------------------------------------------------------------
From return of capital -- (.01) (.02) -- --
-----------------------------------------------------------------------------------------------------
Total distributions (.37) (.38) (.42) (.43) (.41)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.25 $6.41 $6.83 $7.11 $6.99
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 3.46 (.69) 1.92 8.15 5.32
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $373,336 $458,766 $494,703 $403,704 $340,775
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.70 1.71 1.77 1.92 1.92
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.11 5.20 5.92 5.64 5.76
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 207.35 209.02 257.12 265.71 213.46
-----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charge.
(b) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(d) Per share distributions were less than $.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 October 31 to October 31
--------------------------------------------------------------
2000 1999
--------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $6.43 $6.54
--------------------------------------------------------------
Investment operations
--------------------------------------------------------------
Net investment income (c) .39 .10
--------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.17) (.11)
--------------------------------------------------------------
Total from
investment operations .22 (.01)
--------------------------------------------------------------
Less distributions:
--------------------------------------------------------------
From net
investment income (.38) (.10)
--------------------------------------------------------------
In excess of net
investment income -- --(d)
--------------------------------------------------------------
From net realized gain
on investments -- --
--------------------------------------------------------------
From return of capital -- --(d)
--------------------------------------------------------------
Total distributions (.38) (.10)
--------------------------------------------------------------
Net asset value,
end of period $6.27 $6.43
--------------------------------------------------------------
Ratios and supplemental data
--------------------------------------------------------------
Total return at
net asset value (%)(a) 3.53 (.13)*
--------------------------------------------------------------
Net assets, end of period
(in thousands) $10,363 $1,869
--------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.70 .46*
--------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.17 1.36*
--------------------------------------------------------------
Portfolio turnover (%) 207.35 209.02
--------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charge.
(b) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(d) Per share distributions were less than $.01 per share.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS M
-----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $6.41 $6.84 $7.11 $6.99 $7.04
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .42(c) .38(c) .47(c) .43 .44
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.17) (.40) (.28) .16 (.04)
-----------------------------------------------------------------------------------------------------
Total from
investment operations .25 (.02) .19 .59 .40
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.41) (.38) (.39) (.43) (.45)
-----------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.02) -- -- --
-----------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- (.04) (.04) --
-----------------------------------------------------------------------------------------------------
From return of capital -- (.01) (.03) -- --
-----------------------------------------------------------------------------------------------------
Total distributions (.41) (.41) (.46) (.47) (.45)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.25 $6.41 $6.84 $7.11 $6.99
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.05 (.26) 2.58 8.74 5.92
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,066,539 $1,623,061 $1,188,620 $368,297 $18,937
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.20 1.21 1.27 1.42 1.42
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.61 5.68 6.53 5.76 6.28
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 207.35 209.02 257.12 265.71 213.46
-----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charge.
(b) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(d) Per share distributions were less than $.01 per share.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS Y
-----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $6.46 $6.88 $7.15 $7.02 $7.07
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .45(c) .41(c) .50(c) .47 .47
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.17) (.39) (.28) .16 (.04)
-----------------------------------------------------------------------------------------------------
Total from
investment operations .28 .02 .22 .63 .43
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.43) (.41) (.42) (.46) (.48)
-----------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.02) -- -- --
-----------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- (.04) (.04) --
-----------------------------------------------------------------------------------------------------
From return of capital -- (.01) (.03) -- --
-----------------------------------------------------------------------------------------------------
Total distributions (.43) (.44) (.49) (.50) (.48)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.31 $6.46 $6.88 $7.15 $7.02
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.58 .27 3.02 9.23 6.31
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $194,267 $255,873 $246,405 $170,902 $133,516
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .70 .71 .77 .92 .92
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.11 6.19 6.92 6.64 6.76
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 207.35 209.02 257.12 265.71 213.46
-----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charge.
(b) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(d) Per share distributions were less than $.01 per share.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
October 31, 2000
Note 1
Significant accounting policies
Putnam Income Fund (the "fund") is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The fund seeks high current income consistent with
what Putnam Investment Management, Inc. ("Putnam Management"), the
fund's manager, a wholly-owned subsidiary of Putnam Investments, Inc.,
believes to be prudent risk. The fund invests in a portfolio of debt
securities, both government and corporate obligations, and may invest in
preferred stocks and dividend-paying common stocks.
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 4.75%.
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
3.25% 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 Management.
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. Other investments, including restricted securities, are stated at
fair value following procedures approved by the Trustees. 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 Investment Management, Inc. ("Putnam Management"), the fund's
manager, a wholly-owned subsidiary of Putnam Investments, Inc. 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. Non-cash dividends, if any, are recorded at the fair
market value of the securities received. 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 stepped coupon bonds is amortized on a
yield-to-maturity basis.
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) Equity swap contracts The fund may engage in swap agreements, which
are agreements to exchange the return generated by one instrument for
the return generated by another instrument. To manage its exposure to
equity markets the fund may enter into equity swap agreements, which
involve a commitment by one party to pay interest in exchange for a
market-linked return based on a notional amount. To the extent that the
total return of the security or index underlying the transaction exceeds
or falls short of the offsetting interest rate obligation, the fund will
receive a payment from or make a payment to the counterparty,
respectively. Equity swaps are marked to market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized gain or loss. Payments received or made at the end of the
measurement period are recorded as realized gains or losses. The fund
could be exposed to credit or market risk due to unfavorable changes in
the fluctuation of interest rates or in the price of the underlying
security or index, the possibility that there is no liquid market for
these agreements or that the counterparty may default on its obligation
to perform.
I) Interest rate swap contracts The fund may engage in interest rate
swap agreements, which are agreements between two parties to exchange
cash flows based on a notional amount. The fund may enter into interest
rate swap agreements, to change the funds exposure to interest rates.
Interest rate swaps are marked to market daily based upon quotations
from market makers and the change, if any, is recorded as unrealized
gain or loss. Net payments are included as part of interest income.
Payments received or made at the end of the measurement period are
recorded as income. The fund could be exposed to credit or market risk
due to unfavorable changes in the fluctuation of interest rates or that
the counterparty may default on its obligation to perform.
J) 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.
K) 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
October 31, 2000, the fund had no borrowings against the line of credit.
L) 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 October 31, 2000, the fund had a capital loss
carryover of approximately $265,939,000 available to offset future
capital gains, if any. The amount of the carryover and the expiration
dates are:
Loss Carryover Expiration
-------------- ------------------
$ 21,203,000 October 31, 2006
120,511,000 October 31, 2007
124,225,000 October 31, 2008
M) 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, defaulted bond interest, unrealized gains and losses on
certain futures contracts, paydown gains and losses on mortgage backed
securities, market discount, book accretion/amortization adjustment and
swap adjustment.. 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 October 31, 2000, the fund reclassified $5,452,466 to
increase undistributed net investment income and $24,196 to decrease
paid-in-capital, with an increase to accumulated net realized losses of
$5,428,270. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
Note 2
Management fees, 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, 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.
For the year ended October 31, 2000, fund expenses were reduced by
$810,816 under expense offset arrangements with PFTC. 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 $2,347
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 0.50% of the average net assets attributable to class A, class
B, class C and class M shares, respectively.
For the year ended October 31, 2000, Putnam Retail Management, Inc.,
acting as underwriter received net commissions of $281,826 and $130,170
from the sale of class A and class M shares, respectively, and received
$1,050,520 and $5,001 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 October 31, 2000, Putnam Retail Management,
Inc., acting as underwriter received $28,939 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended October 31, 2000, cost of purchases and proceeds
from sales of investment securities other than U.S. government
obligations and short-term investments aggregated $3,683,469,537 and
$4,239,618,170, respectively. Purchases and sales of U.S. government
obligations aggregated $2,292,923,584 and $2,530,788,141, respectively.
Note 4
Capital shares
At October 31, 2000, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended October 31, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 51,576,520 $ 325,967,523
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 8,474,450 53,362,107
---------------------------------------------------------------------------
60,050,970 379,329,630
Shares
repurchased (89,546,490) (566,339,624)
---------------------------------------------------------------------------
Net decrease (29,495,520) $(187,009,994)
---------------------------------------------------------------------------
Year ended October 31, 1999
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 85,980,837 $ 581,237,616
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 10,082,232 67,300,640
---------------------------------------------------------------------------
96,063,069 648,538,256
Shares
repurchased (123,574,707) (830,101,980)
---------------------------------------------------------------------------
Net decrease (27,511,638) $(181,563,724)
---------------------------------------------------------------------------
Year ended October 31, 2000
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 15,716,366 $ 98,726,856
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,854,577 18,013,577
---------------------------------------------------------------------------
18,570,943 116,740,433
Shares
repurchased (30,448,386) (191,443,181)
---------------------------------------------------------------------------
Net decrease (11,877,443) $(74,702,748)
---------------------------------------------------------------------------
Year ended October 31, 1999
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 22,318,917 $ 149,461,315
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,059,313 20,291,028
---------------------------------------------------------------------------
25,378,230 169,752,343
Shares
repurchased (26,184,970) (173,951,299)
---------------------------------------------------------------------------
Net decrease (806,740) $ (4,198,956)
---------------------------------------------------------------------------
Year ended October 31, 2000
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 1,915,793 $12,055,510
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 47,952 300,675
---------------------------------------------------------------------------
1,963,745 12,356,185
Shares
repurchased (601,691) (3,797,163)
---------------------------------------------------------------------------
Net increase 1,362,054 $ 8,559,022
---------------------------------------------------------------------------
For the period July 26, 1999
(commencement of operations) to
October 31, 1999
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 295,519 $1,899,822
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,464 9,367
---------------------------------------------------------------------------
296,983 1,909,189
Shares
repurchased (6,433) (41,469)
---------------------------------------------------------------------------
Net increase 290,550 $1,867,720
---------------------------------------------------------------------------
Year ended October 31, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 9,971,872 $ 62,739,850
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 346,696 2,170,813
---------------------------------------------------------------------------
10,318,568 64,910,663
Shares
repurchased (92,925,457) (583,232,213)
---------------------------------------------------------------------------
Net decrease (82,606,889) $(518,321,550)
---------------------------------------------------------------------------
Year ended October 31, 1999
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 109,475,894 $ 740,922,579
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 342,020 2,265,651
---------------------------------------------------------------------------
109,817,914 743,188,230
Shares
repurchased (30,394,471) (199,897,904)
---------------------------------------------------------------------------
Net increase 79,423,443 $ 543,290,326
---------------------------------------------------------------------------
Year ended October 31, 2000
---------------------------------------------------------------------------
Class Y Shares Amount
---------------------------------------------------------------------------
Shares sold 17,506,886 $ 110,923,703
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,377,229 15,019,596
---------------------------------------------------------------------------
19,884,115 125,943,299
Shares
repurchased (28,715,389) (181,722,804)
---------------------------------------------------------------------------
Net decrease (8,831,274) $ (55,779,505)
---------------------------------------------------------------------------
Year ended October 31, 1999
---------------------------------------------------------------------------
Class Y Shares Amount
---------------------------------------------------------------------------
Shares sold 26,162,845 $ 175,327,648
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,424,462 16,206,074
---------------------------------------------------------------------------
28,587,307 191,533,722
Shares
repurchased (24,778,519) (166,210,595)
---------------------------------------------------------------------------
Net increase 3,808,788 $ 25,323,127
---------------------------------------------------------------------------
FEDERAL TAX INFORMATION
(Unaudited)
The fund has designated 0.15% 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
KPMG 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
Edward H. D'Alelio
Vice President
Kevin M. Cronin
Vice President
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 Putnam Income
Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary and
Putnam's 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
AN035-66584 004/312/510/514 12/00
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
----------------------------------------------------------------------------
Putnam Income Fund
Supplement to annual Report dated 10/31/00
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 annual
report.
ANNUAL RESULTS AT A GLANCE
----------------------------------------------------------------------------
Total return for periods ended 10/31/00
NAV
1 year 4.58%
5 years 25.46
Annual average 4.64
10 years 111.64
Annual average 7.79
Life of fund (since class A inception, 11/1/54)
Annual average 8.30
Share value: NAV
10/31/99 $6.46
10/31/00 $6.31
----------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
12 $0.4323 -- $0.4323
----------------------------------------------------------------------------
Please note that past performance is not indicative of future results. More
recent returns may be more or less than those shown. 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, typically are lower than the operating expenses applicable to
class A shares. All returns assume reinvestment of distributions at net
asset value. 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.
