PUTNAM CAPITAL APPRECIATION FUND, N-30D, 1998-07-23

PUTNAM CAPITAL APPRECIATION FUND
N-30D, 1998-07-23

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Putnam
Capital
Appreciation
Fund

ANNUAL REPORT

May 31, 1998

[LOGO: BOSTON * LONDON * TOKYO]

Fund highlights

* Putnam Capital Appreciation Fund's class A shares ranked 14 out of
133 capital appreciation funds (top 11%) tracked by Lipper Analytical
Services for the 3-year period ended June 30, 1998.*

CONTENTS

4 Report from Putnam Management

9 Fund performance summary

14 Portfolio holdings

26 Financial statements

* Lipper rankings are based on total return performance, vary over time,
and do not include the effects of sales charges. For the 3-year period
ended 6/30/98, the fund's class B shares ranked 19 out of 133 capital
appreciation funds. For the 1-year period ended 6/30/98, the fund's class
A, class B, and class M shares ranked 120, 129, and 125, respectively, out
of 231 capital appreciation funds. Past performance is not indicative of
future results.

From the Chairman

[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]

[copyright] Karsh, Ottawa

Dear Shareholder:

Investor acceptance of Putnam Capital Appreciation Fund has been enthusiastic
since the fund's 1993 introduction. It has been so intense, in fact, that it
has generated an unrestrained flow of assets -- to the point at which Putnam
Management concluded that further growth might hamper the fund's ability to
carry out its investment strategy.

As a consequence, Putnam Management has decided to close the fund to new
investors. This change will not affect any shareholders whose accounts were
established as of June 30, 1998.

Also, I am pleased to announce the recent addition of Edward R. Finch to the
team. Ted joined Putnam in 1997 as a portfolio manager in the Global Core
Equity Group. He was previously with M. A. Weatherbie & Co. and State Street
Research and Management. He has 14 years of investment experience.

In the following report, the managers discuss fund strategy and performance
during the fiscal year ended May 31, 1998, and look at prospects for the
months ahead.

Respectfully yours,

/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 15, 1998

Report from the Fund Managers
Gerald S. Zukowski
William H. Miller
Edward R. Finch

Stock market volatility, struggling world economies, and a retreat in the
performance of small-company stocks provided a challenging backdrop for the
second half of Putnam Capital Appreciation Fund's fiscal year. Once again,
however, your fund's flexible strategy and emphasis on fundamental stock
selection enabled it to sidestep most of the negative effects of this
environment. For the 12 months ended May 31, 1998, the fund's class A shares
provided a total return of 26.67% at net asset value and 19.41% at public
offering price. For complete performance information, please refer to the
summary that begins on page 9.

In our last report, at the fiscal year's midpoint, we discussed a rebound in
U.S. small-company stocks. Since that time, however, investors have done an
about-face, returning to the stocks of large, well-established, blue-chip
companies. Indeed, since the beginning of calendar 1998, the S&P
500(registered trademark) Index, which is weighted in favor of large-company
stocks, had returned 13.11% as of May 31, 1998, while the Russell 2000, a
measure of small-company stocks, gained only 4.71%. At the same time, all
sectors of the U.S. market experienced turbulence, as jittery investors
continued to worry about the effect of Asia's financial crises on U.S.
corporate profits. Despite these challenges, your fund was able to take
advantage of some positive trends, including powerful performance from
pharmaceutical companies and a retail sector that benefited from the relative
strength of the U.S. economy.

*PHARMACEUTICAL STOCKS DELIVER IMPRESSIVE RETURNS

Perhaps the most impressive growth sector during the fund's fiscal year was
the U.S. pharmaceutical industry. A number of drug companies in your fund's
portfolio are dominating global markets with their innovative products for the
treatment of illness and disease. In addition, the industry as a whole has
buzzed with merger, acquisition, and takeover discussions. To investors, this
type of activity often signifies a healthy, thriving industry, even in cases
in which merger discussions fall apart or are temporarily suspended.

One of the largest -- and most profitable -- holdings in the portfolio was
Warner-Lambert, which has evolved from a stodgy, low-growth company to a
worldwide pharmaceutical leader. Just after the midpoint of fiscal '98, the
company announced that its new diabetes drug Rezulin would require stricter
medical monitoring because of liver disorders that had occurred in a small
number of the drug's users. Glaxo Wellcome, marketer of the drug in Great
Britain, suspended distribution temporarily and several Wall Street analysts
lowered their earnings estimates for Warner-Lambert.

When the stock price dropped more than 18% in one day, we believed investors
had overreacted to a short-term setback and continued to view Warner-Lambert
as a fundamentally strong company with solid long-term potential. Our decision
to stick with this stock proved profitable; its price has since reached an
all-time high. In addition to Rezulin, Warner-Lambert has had great success
with another innovative drug, Lipitor, a treatment to lower cholesterol.

The pharmaceutical stock that received the most worldwide attention during the
period was that of Pfizer, developer of the male impotence drug Viagra. While
some pharmaceutical companies depend heavily on one or two major products,
Pfizer is developing several new drugs that are expected to generate
impressive sales growth over the long term. The products include Zelodox, a
new drug for schizophrenia, and Tovan, an antibiotic.

[GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS]

TOP INDUSTRY SECTORS*

Insurance
and finance 13.6%

Retail 10.0%

Real estate 8.8%

Pharmaceuticals 8.5%

Computer services
and software 6.2%

Footnote reads:
* Based on net assets as of 5/31/98. Holdings will vary over time.

Of course, the company's most notable recent success resulted after the FDA
approval of Viagra, which resulted in the largest new-drug launch in history
and sent Pfizer's stock price soaring. In addition to its strong product line,
Pfizer also enhances its profitability through cross-licensing, in which it
markets and sells drugs developed by other companies and shares in the
resulting profits. While these holdings, along with others discussed in this
report, were viewed favorably at the end of the fiscal period, all are subject
to review and adjustment in accordance with the fund's investment strategy and
may vary in the future.

*VOLATILE TECHNOLOGY SECTOR SHOWS SOME BRIGHT SPOTS

The technology sector volatility we discussed six months ago continued through
the end of fiscal '98. Once again, however, there were some strong performers
among your fund's technology holdings. Computer Sciences Corp., for example,
provides outsourcing services to assist businesses with computer system
analysis, data management, and network operations. Computer Sciences's recent
growth has been propelled by increasing demand for its outsourcing services
and its Year 2000 services, which help businesses prepare their computer
systems to handle dates after December 31, 1999.

Storage Technology Corp., another of the fund's standout holdings, designs,
manufactures, markets, and maintains computer information storage devices. The
company's products and services are used to store, transport, and secure
information ranging from mainframe data to client/server applications to
video, audio, and still images.

In the portfolio's telecommunications sector, the stock of Energis, a
London-based company, rose considerably during the period. Energis provides
businesses in the United Kingdom with voice, data, video, Internet, and
intranet services. The company recently formed a joint venture with two other
European companies to build new local telecommunications networks in major
cities throughout the United Kingdom.

[GRAPHIC OMITTED: TOP 10 HOLDINGS]

TOP 10 HOLDINGS

General Electric Co.
Electronics and electrical equipment

ICN Pharmaceuticals, Inc.
Pharmaceuticals

Warner-Lambert Co.
Pharmaceuticals

Rite-Aid Corp.
Retail

Tele-Communications, Inc. Class A
Consumer services

First Chicago NDB Corp.
Financial services

Bergen Brunswig Corp. Class A
Medical supplies and devices

Computer Sciences Corp.
Business equipment and services

Storage Technology Corp.
Computer services and software

GATX Corp.
Transportation

These holdings represent 15.1% of the fund's net assets as of 5/31/98.
Portfolio holdings will vary over time.

*RETAIL SHINES WHILE REITs SERVE AS DEFENSIVE MEASURE

The U.S. economy provided fuel for the retail sector in the form of low
unemployment, low inflation, a high level of consumer confidence, and the
drawing of more lower-income consumers into the spending stream. Among the
retail holdings that boosted the fund's performance was Quality Food Centers,
which was acquired by Fred Meyer, Inc., a chain of food, drug, and
multidepartment stores. Another strong retail stock was Wal-Mart Stores, the
nation's largest retailer, which recently announced plans to enter the retail
food market by building several test supermarkets in Arkansas. Also displaying
great strength was Lowe's Companies, Inc., a Fortune 500 retailer serving the
do-it-yourself home improvement market.

Real estate investment trusts (REITs), which continued to represent
approximately 9% of the fund's portfolio, were somewhat disappointing during
the period. REITs are publicly traded companies that own or develop properties
such as apartments, hotels, and commercial office buildings. REITs
underperformed the overall market as investors showed a preference for more
glamorous stocks. We believe, however, that REITs add intrinsic value to the
portfolio and will serve as a defensive measure should the market experience a
downturn.

*PREPARING FOR POTENTIAL VOLATILITY IN COMING FISCAL YEAR

Just after the close of your fund's fiscal year, U.S. markets began to
experience greater volatility, with major indexes slipping considerably from
their highs earlier in the calendar year. Although the fund has had another
outstanding year, we expect that the markets are likely to experience more
volatility, especially in light of the turmoil in many foreign economies. We
are prepared for turbulence in all sectors and will stick to our strategy of
seeking opportunities in stocks that we believe have strong, long-term growth
potential.

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 5/31/98, 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 Capital Appreciation Fund is designed for
investors seeking capital gain through investments in equities
chosen for their growth potential.

TOTAL RETURN FOR PERIODS ENDED 5/31/98

Class A Class B Class M
(inception date) (8/5/93) (11/2/94) (1/22/96)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 year 26.67% 19.41% 25.72% 20.72% 26.04% 21.60%
- ------------------------------------------------------------------------
Life of fund 215.89 197.74 204.66 202.66 208.01 197.35
Annual average 26.95 25.40 26.00 25.83 26.29 25.37
- ------------------------------------------------------------------------

COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/98

Russell Standard &
Midcap Poor's Consumer
Index 500 Index Price Index
- ------------------------------------------------------------------------
1 year 27.33% 30.68% 1.69%
- ------------------------------------------------------------------------
Life of fund 131.06 172.49 12.74
Annual average 18.92 23.05 2.51
- ------------------------------------------------------------------------

Past performance is not indicative of future results. Returns for
class A and class M shares reflect the current maximum initial
sales charges of 5.75% and 3.50%, respectively. Class B share
returns for the 1-, 5-, and 10-year (where available) and
life-of-fund periods reflect the applicable contingent deferred
sales charge (CDSC), which is 5% in the first year, declines to 1%
in the sixth year, and is eliminated thereafter. Returns shown for
class B and class M shares for periods prior to their inception are
derived from the historical performance of class A shares, adjusted
to reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and in the case of class B and class M
shares, the higher operating expenses applicable to such shares.
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.

[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
8/5/93

Fund's class A S&P Consumer Price Russell
Date shares at POP 500 Index Index Midcap Index

8/5/93 9,425 10,000 10,000 10,000
5/31/94 12,025 10,437 10,215 10,392
5/31/95 13,902 12,544 10,540 12,037
5/31/96 19,125 16,111 10,845 15,473
5/31/97 23,506 20,850 11,087 18,145
5/31/98 29,774 27,249 11,274 23,106

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 shares would have been
valued at $30,466 ($30,266 with a redemption at the end of the period); a
$10,000 investment in the fund's class M shares would have been valued at
$30,801 ($29,735 at public offering price). See first page of performance
section for performance calculation method.

PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/98

Class A Class B Class M
- ------------------------------------------------------------------------
Distributions (number) 1 1 1
- ------------------------------------------------------------------------
Income $0.092 $0.003 $0.044
- ------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------
Long-term 0.262 0.262 0.262
- ------------------------------------------------------------------------
Short-term 0.200 0.200 0.200
- ------------------------------------------------------------------------
Total $0.554 $0.465 $0.506
- ------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------
5/31/97 $18.76 $19.90 $18.59 $18.62 $19.30
- ------------------------------------------------------------------------
5/31/98 23.15 24.56 22.86 22.91 23.74
- ------------------------------------------------------------------------

TOTAL RETURN FOR PERIODS ENDED 6/30/98
(most recent calendar quarter)

Class A Class B Class M
(inception date) (8/5/93) (11/2/94) (1/22/96)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 year 22.96% 15.90% 22.04% 17.04% 22.40% 18.11%
- ------------------------------------------------------------------------
Life of fund 222.17 203.65 210.52 208.52 214.06 203.19
Annual average 26.97 25.44 26.02 25.85 26.31 25.40
- ------------------------------------------------------------------------

Performance data represent past results, do not reflect future
performance, and will differ for each share class. 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 M shares have a lower initial sales charge and a higher 12b-1
fee than class A shares and no sales charge on redemption.

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

Public offering price (POP) is the price of a mutual fund share
plus the maximum sales charge levied at the time of purchase. POP
performance figures shown here assume the 5.75% maximum sales
charge for class A shares and 3.50% for class M shares.

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

COMPARATIVE BENCHMARKS

Standard & Poor's 500 Index* is an unmanaged list of common stocks
that is frequently used as a general measure of stock market
performance.

Consumer Price Index (CPI) is a commonly used measure of inflation;
it does not represent an investment return.

Russell Midcap Index*+ is composed of all medium and medium/small
companies in the Russell 1000 Index. The Russell 1000 represents
the universe of stocks from which the most active money managers
typically select.

* Securities indexes assume reinvestment of all distributions and
interest payments and do not take into account brokerage fees or
taxes. Securities in the fund do not match those in the indexes and
performance of the fund will differ. It is not possible to invest
directly in an index.

+ This index will now be included as an additional benchmark for
the fund since, in Putnam Management's opinion, it provides a more
accurate reflection of the fund's strategy than the S&P 500 Index.

Report of independent accountants
For the fiscal year ended May 31, 1998

To the Trustees and Shareholders of
Putnam Capital Appreciation Fund

In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Putnam Capital
Appreciation Fund (the "fund") at May 31, 1998, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments owned at May 31, 1998 by correspondence with the
custodian and the application of alternative auditing procedures where
investments purchased were not yet received by the custodian, provide a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP
Boston, Massachusetts
July 15, 1998

Portfolio of investments owned
May 31, 1998

COMMON STOCKS (92.2%) (a)
NUMBER OF SHARES VALUE

Advertising (0.4%)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
181,000 True North Communications Inc. $ 5,758,063
223,800 Young & Rubicam, Inc. (NON) 6,266,400
--------------
12,024,463

Automotive (1.2%)
- -------------------------------------------------------------------------------------------------------------
50,200 CSK Auto Corp. (NON) 1,349,125
170,000 Dana Corp. 8,861,250
205,000 Exide Corp. 3,702,813
250,000 Ford Motor Co. 12,968,750
79,000 Keystone Automotive Industries, Inc. 2,054,000
80,000 Lear Corp. (NON) 4,270,000
117,000 Snap-On Inc. 5,133,375
145,900 Standard Automotive Corp. 1,531,950
--------------
39,871,263

Basic Industrial Products (2.1%)
- -------------------------------------------------------------------------------------------------------------
220,000 Deere (John) & Co. 11,412,500
60,800 General Signal Corp. 2,500,400
247,000 Integrated Sensor Solutions, Inc. (NON) 1,991,438
603,500 Owens-Illinois, Inc. (NON) 27,119,757
234,400 Parker-Hannifin Corp. 9,625,050
238,600 Sundstrand Corp. 14,793,200
104,100 TransTechnology Corp. 2,810,700
--------------
70,253,045

Biotechnology (0.7%)
- -------------------------------------------------------------------------------------------------------------
178,500 Agritope, Inc. (NON) 758,625
542,500 Biochem Pharmaceutical, Inc. 14,240,625
410,000 Chiron Corp. (NON) 7,405,625
--------------
22,404,875

Building and Construction (0.5%)
- -------------------------------------------------------------------------------------------------------------
60,000 Congoleum Corp. Class A (NON) 603,750
195,800 Dayton Superior Corp. (NON) 3,524,400
1,320,000 DBS Land Ltd. (Singapore) 1,481,110
200,000 Fortress Group, Inc. 1,225,000
160,000 Group Maintenance America Corp. 3,000,000
100,000 Hospitality Worldwide Services, Inc. 850,000
202,600 Integrated Electrical Services, Inc. (NON) 4,102,650
172,000 Southern Energy Homes, Inc. (NON) 1,698,500
--------------
16,485,410

Business Equipment and Services (5.0%)
- -------------------------------------------------------------------------------------------------------------
114,000 Adaptec, Inc. (NON) 1,731,375
470,000 Ascend Communications, Inc. (NON) 20,298,125
551,400 Cendant Corp. (NON) 11,958,488
742,000 Computer Sciences Corp. (NON) 38,537,625
97,000 CompX (NON) 2,255,250
244,000 Corrpro Cos., Inc. (NON) 3,751,500
126,600 ErgoBilt, Inc. (NON) 363,975
47,613 Fiserv, Inc. (NON) 1,871,786
380,000 HBO & Co. 21,933,125
427,500 Ikon Office Solutions, Inc. 9,057,656
57,600 Industrial Distribution Group, Inc. 979,200
32,100 JLK Direct Distribution, Inc. 754,350
111,000 Lazare Kaplan International, Inc. (NON) 1,290,375
139,000 NOVA Corp./Georgia (NON) 4,578,313
134,800 Personnel Group of America, Inc. (NON) 2,729,700
60,000 PIA Merchandising Services, Inc. (NON) 405,000
615,000 Pitney Bowes, Inc. 28,905,000
59,200 Ritchie Bros. Auctioneers Inc. (Canada) (NON) 1,605,800
394,500 Shorewood Packaging Corp. (NON) 5,449,031
196,400 Snyder Communications, Inc. (NON) 7,917,375
19,400 Steelcase Inc. 578,363
248,300 Unidigital, Inc. (NON)(AFF) 2,172,625
--------------
169,124,037

Chemicals (0.9%)
- -------------------------------------------------------------------------------------------------------------
162,000 Agrium, Inc. (Canada) 2,278,125
220,000 Carbide/Graphite Group, Inc. (NON) 7,191,250
25,750 Ciba Specialty Chemicals 144A ADR (Switzerland) 1,837,260
262,950 MacDermid, Inc. 10,780,950
110,000 Olin Corp. 4,757,500
106,200 W.R. Grace & Co. 1,971,338
--------------
28,816,423

Computer Services and Software (6.2%)
- -------------------------------------------------------------------------------------------------------------
380,000 3Com Corp. (NON) 9,642,500
450,000 4Front Software International, Inc. (NON)(AFF) 5,625,000
500,000 Acclaim Entertainment, Inc. (NON) 3,218,750
200,000 Bell Microproducts, Inc. (NON) 1,450,000
349,450 CHS Electronics, Inc. (NON) 6,945,319
620,000 Computer Associates Intl., Inc. 32,550,000
370,000 Computer Learning Centers, Inc. (NON) 6,336,250
600,000 Diamond Multimedia Systems, Inc. (NON) 4,575,000
344,400 Gateway 2000, Inc. (NON) 15,519,525
477,300 Harbinger Corp. (NON) 11,112,141
100,000 HMT Technology Corp. 1,162,500
291,500 iMALL, Inc. (NON) 2,423,094
268,700 Integrated Technology USA (NON) 386,256
277,800 Microsoft Corp. (NON) 23,560,913
190,773 Midway Games Inc. (NON) 2,575,436
140,000 National Computer Systems Inc. 3,395,000
106,000 Pairgain Technologies, Inc. (NON) 1,656,250
158,000 Parametric Technology Corp. (NON) 4,843,688
442,200 Pioneer-Standard Electronics, Inc. 5,499,863
178,100 Pomeroy Computer Resources, Inc. (NON) 4,007,250
152,000 QuadraMed Corp. 3,657,500
240,000 Sterling Commerce, Inc. (NON) 9,525,000
400,000 Sterling Software, Inc. (NON) 10,875,000
446,000 Storage Technology Corp. (NON) 37,408,250
64,500 UBICS, Inc. 862,688
--------------
208,813,173

Conglomerates (0.5%)
- -------------------------------------------------------------------------------------------------------------
650,000 Ogden Corp. 18,565,625

Consumer Durables (0.1%)
- -------------------------------------------------------------------------------------------------------------
122,600 Global-Tech Appliance Inc. (NON) 2,298,750
158,000 Home Security International, Inc. 1,856,500
--------------
4,155,250

Consumer Non Durables (1.7%)
- -------------------------------------------------------------------------------------------------------------
22,900 Addidas AG 144A (Germany) 1,983,713
135,300 American Pad & Paper Co. (NON) 896,363
134,700 Dimon Inc. 1,818,450
200,000 Donnkenny, Inc. (NON) 662,500
68,600 Happy Kids Inc. (NON) 831,775
140,000 Kellwood Co. 4,628,750
100,000 Kimberly-Clark Corp. 4,956,250
180,000 Lewis Galoob Toys, Inc. (NON) 1,991,250
300,000 Newell Co. 14,475,000
190,000 Nu Skin Asia Pacific Inc. Class A (NON) 4,940,000
60,000 OroAmerica, Inc. (NON) 663,750
173,955 Standard Commercial Corp. (NON) 1,935,249
132,500 Styling Technology Corp. (NON) 3,047,500
209,000 Swisher International Group Inc. Class A (NON) 1,854,875
104,100 Toy Biz, Inc. (NON) 1,014,975
110,000 Wesley Jessen VisionCare, Inc. (NON) 2,970,000
316,000 Westpoint Stevens, Inc. (NON) 10,349,000
--------------
59,019,400

Consumer Services (4.2%)
- -------------------------------------------------------------------------------------------------------------
80,000 Applebee's International, Inc. 1,950,000
100,000 Avis Europe PLC 144A ADR (United Kingdom) 4,562,500
59,000 Avis Rent A Car, Inc. 1,430,750
228,000 Bonded Motors, Inc. (NON) (AFF) 2,137,500
550,000 Cracker Barrel Old Country Store, Inc. 17,737,500
97,400 Hertz Corp. Class A 4,468,225
124,000 Hillenbrand Industries, Inc. 7,657,000
100,000 Norwood Promotional Products, Inc. (NON) 2,025,000
178,000 Paging Network, Inc. (NON) 2,436,375
194,700 Pittston Brink's Group 7,532,456
228,700 Planet Hollywood International, Inc. Class A (NON) 1,958,244
90,578 Service Corp. International 3,702,376
123,050 Star Buffet, Inc. 1,830,369
348,000 Steiner Leisure Ltd. (NON) 10,353,000
91,000 STRATESEC Inc. 159,250
100,000 Tele-Comm Liberty Media Group, Inc. Class A (NON) 3,300,000
88,400 Tele-Communications TCI ventures Group Class A (NON) 1,538,713
1,330,000 Tele-Communications, Inc. Class A (NON) 45,635,625
179,600 TV Azteca, S.A. de C.V. (Mexico) 2,592,975
100,000 WMS Industries, Inc. 443,750
332,000 Young Broadcasting Corp. Class A (NON) 17,222,500
--------------
140,674,108

Electronics and Electrical Equipment (4.5%)
- -------------------------------------------------------------------------------------------------------------
111,850 AFC Cable Systems, Inc. (NON) 3,774,938
171,000 Analog Devices, Inc. (NON) 4,221,563
112,350 Asia Electronics Holding Co. (NON) 631,969
50,000 Bay Networks Inc. (NON) 1,384,375
253,000 Berg Electronics Corp. (NON) 5,218,125
1,060,000 General Electric Co. 88,377,500
207,800 Honeywell, Inc. 17,442,213
71,500 Illinois Tool Works, Inc. 4,719,000
93,400 International Manufacturing Services, Inc. 747,200
60,000 Optek Technology, Inc. 1,252,500
273,000 QLogic Corp. 11,056,500
191,000 Semtech Corp. (NON) 4,011,000
120,000 Sipex Corp. (NON) 2,610,000
265,860 Vishay Intertechnology, Inc. 5,932,001
--------------
151,378,884

Energy-Related (1.4%)
- -------------------------------------------------------------------------------------------------------------
1,430,000 Calpine Corp. (NON) (AFF) 25,471,875
350,000 Canadian Fracmaster, Ltd. (Canada) (NON) 1,069,418
30,000 Canadian Fracmaster, Ltd. 144A (Canada) (NON) 91,664
541,000 Manalta Coal Income Trust (Canada) 1,132,965
570,000 Newpark Resources, Inc. (NON) 10,366,875
63,400 Precision Drilling Corp. (Canada) (NON) 1,323,475
133,500 U. S. Energy Systems, Inc. (NON) 267,000
110,000 Virginia Gas Co. 728,750
248,751 Williams Cos., Inc. 8,068,861
--------------
48,520,883

Environmental Control (1.6%)
- -------------------------------------------------------------------------------------------------------------
137,000 Allied Waste Industries, Inc. (NON) 3,630,500
150,000 Browning-Ferris Industries, Inc. 5,334,375
455,600 Commodore Applied Technologies, Inc. (NON) 996,625
274,200 Commodore Separation Technologies, Inc. 548,400
2,306,000 Philip Services Corp. (Canada) (NON) 8,935,750
665,000 USA Waste Services, Inc. (NON) 31,379,688
100,000 Waste Management, Inc. 3,250,000
--------------
54,075,338

Food and Beverages (3.3%)
- -------------------------------------------------------------------------------------------------------------
136,000 Authentic Specialty Foods, Inc. (NON) 2,273,750
200,000 Chiquita Brands International, Inc. 2,687,500
1,500,000 Foster's Brewing Group Ltd. (Australia) 3,241,154
170,000 Heinz (H.J.) Co. 9,020,625
300,000 IBP, Inc. 5,812,500
650,000 JP Foodservice, Inc. (NON) 21,531,250
156,900 Omega Protein Corp. 2,569,238
806,500 PepsiCo, Inc. 32,915,281
410,000 Sara Lee Corp. 24,138,750
241,500 Scheid Vineyards, Inc. Class A (AFF) 1,992,375
272,000 Wendy's International, Inc. 6,715,000
--------------
112,897,423

Health Care (2.1%)
- -------------------------------------------------------------------------------------------------------------
921,000 Complete Management, Inc. (NON)(AFF) 6,216,750
960,000 Epitope, Inc. (NON)(AFF) 5,460,000
129,000 Foundation Health Systems, Inc. Class A (NON) 3,926,438
369,000 HEALTHSOUTH Corp. (NON) 10,470,375
762,000 MedPartners, Inc. (NON) 6,810,375
323,100 Omega Orthodontics, Inc. (AFF) 726,975
38,800 Priority Healthcare Corp. Class B 698,400
353,700 Sun Healthcare Group Inc. (NON) 5,946,581
473,000 WeLLPoint Health Networks, Inc. (NON) 30,745,000
--------------
71,000,894

Information Systems (0.4%)
- -------------------------------------------------------------------------------------------------------------
75,100 Galileo International, Inc. 2,957,063
298,900 May & Speh, Inc. (NON) 4,969,213
200,000 Metrika Systems Corp. 3,475,000
199,800 OptiSystems Solutions Ltd. 1,598,400
--------------
12,999,676

Insurance and Finance (13.6%)
- -------------------------------------------------------------------------------------------------------------
98,700 Affiliated Managers Group, Inc. (NON) 3,534,694
299,900 AFLAC Inc. 19,174,856
65,000 American Capital Strategies, Ltd. 1,531,563
138,000 American Express Co. 14,162,250
200,000 AMRESCO, Inc. (NON) 6,750,000
185,100 Annuity and Life Re, Ltd. (NON) 4,222,594
410,000 ARM Financial Group, Inc. 8,379,375
65,521 Associates First Capital Corp. 4,901,790
250,000 Banc One Corp. 13,781,250
251,600 Banco BHIF ADR (Chile) 3,805,450
450,000 Banco de A. Edwards ADR (Chile) 6,243,750
300,000 Banco De Galicia y Buenos Aires S.A. de C.V.
ADR Class B, (Argentina) 6,150,000
460,000 Banco Rio de La Plata S.A. ADR (Argentina) 5,520,000
240,000 BankAmerica Corp. 19,845,000
500,000 Beacon Capital Partners 144A 10,000,000
100,000 Chase Manhattan Corp. 13,593,750
38,000 Citicorp 5,666,750
419,998 Conseco Inc. 19,582,407
243,100 Consolidated Capital Corp. 5,363,394
194,038 Credit Depot Corp. 218,293
292,100 FBR Asset Investment Corp. 144A 5,549,900
180,000 Federal National Mortgage Association 10,777,500
276,650 Federated Investors, Inc. (NON) 4,962,409
151,210 Fidelity National Financial, Inc. 5,046,634
480,000 First Chicago NBD Corp. 41,970,000
430,000 First Union Corp. 23,784,375
162,000 Fremont General Corp. 9,264,375
348,300 Friedman, Billings, Ramsey Group, Inc. (NON) 5,463,956
173,600 Hartford Life, Inc. Class A 8,940,400
150,000 Heller Financial, Inc. (NON) 4,181,250
565,000 Long Beach Financial Corp. (NON) 6,638,750
90,000 Merrill Lynch & Co., Inc. 8,055,000
175,894 MMI Companies, Inc. 3,891,655
77,600 Morgan Stanley, Dean Witter, Discover and Co. 6,057,650
80,000 National Australia Bank, Ltd. ADR (Australia) 5,515,000
275,000 National Auto Finance Co., Inc. (NON) 378,125
122,000 NationsBank Corp. 9,241,500
80,000 Nationwide Financial Services, Inc. Class A 3,475,000
13,262 Omega Worldwide, Inc. (NON) 112,727
149,650 Preferred Employers Holdings, Inc. (NON) 1,402,969
225,000 Provident Companies, Inc. 8,296,875
23,500 Resource America, Inc. 1,568,625
35,700 Rockford Industries, Inc. (NON) 365,925
320,000 SLM Holding Corp. 12,780,000
142,000 Symons International Group, Inc. (NON) 2,627,000
445,000 The CIT Group, Inc. (NON) 14,017,500
283,600 The Equitable Companies, Inc. 19,532,950
161,000 The PMI Group, Inc. 12,105,188
394,800 Ugly Duckling Corp. (NON) 3,503,850
390,000 Uniao de Bancos Brasileiros S.A. GDR (Brazil) 12,211,875
1,084,000 UniCapital Corp. (NON) 18,834,500
50,000 Union Acceptance Corp. Class A (NON) 362,500
130,000 United Asset Management Corp. 3,380,000
2,000 United Bank of Switzerland (Switzerland) 3,360,324
224,800 Waddell & Reed Financial, Inc. 5,198,500
147,600 Wilshire Financial Services Group, Inc. (NON) 3,468,600
--------------
458,750,553

Medical Supplies and Devices (2.4%)
- -------------------------------------------------------------------------------------------------------------
460,000 Baxter International, Inc. 26,306,250
970,000 Bergen Brunswig Corp. Class A 40,255,000
510,000 ESC Medical Systems Ltd. (Israel) (NON) 14,216,250
--------------
80,777,500

Metals and Mining (1.1%)
- -------------------------------------------------------------------------------------------------------------
190,000 Freeport-McMoRan Copper & Gold Co., Inc. Class B 3,182,500
285,700 Metals USA, Inc. 5,285,450
40,000 Minerals Technologies, Inc. 2,117,500
100,000 Northwest Pipe Co. 2,275,000
248,000 Novamerican Steel, Inc. 2,852,000
288,700 RMI Titanium Co. (NON) 6,189,006
166,400 Schuff Steel Co. 2,412,800
307,200 Titanium Metals Corp. (NON) 7,468,800
385,000 Zeigler Coal Holding Co. 7,002,188
--------------
38,785,244

Oil and Gas (0.8%)
- -------------------------------------------------------------------------------------------------------------
2,200,000 Abacan Resource Corp. (Canada) (NON) 825,000
1,550,000 Arakis Energy Corp. (NON) 2,228,125
144,200 Fortune Natural Resources Corp. 207,288
585,000 Seitel, Inc. (NON) 9,945,000
100,000 Southern Mineral Corp. (NON) 356,250
420,000 Ultramar Diamond Shamrock Corp. 13,413,750
--------------
26,975,413

Packaging and Containers (0.1%)
- -------------------------------------------------------------------------------------------------------------
43,700 EarthShell Corp. (NON) 491,625
75,040 Sealed Air Corp. (NON) 4,014,640
--------------
4,506,265

Paper and Forest Products (0.9%)
- -------------------------------------------------------------------------------------------------------------
655,300 Fort James Corp. 31,331,531

Pharmaceuticals (8.5%)
- -------------------------------------------------------------------------------------------------------------
559,333 Astra AB ADR Class A, (Sweden) 11,326,493
363,300 Centocor, Inc. (NON) 14,168,700
1,540,000 ICN Pharmaceuticals, Inc. 66,508,750
232,000 Lilly (Eli) & Co. 14,253,500
161,200 Maxim Pharmaceuticals, Inc. (NON) 2,951,975
290,000 Merck & Co., Inc. 33,948,125
346,000 North American Vaccine, Inc. 6,768,625
263,000 Pfizer, Inc. 27,565,688
270,000 Pharmacia & Upjohn, Inc. 11,930,625
200,000 PharMerica, Inc. (NON) 2,437,500
360,000 Schering-Plough Corp. 30,127,500
1,002,000 Warner-Lambert Co. 63,940,125
--------------
285,927,606

Publishing (0.3%)
- -------------------------------------------------------------------------------------------------------------
250,000 Journal Register Co. (NON) 5,000,000
140,000 World Color Press, Inc. 4,208,750
--------------
9,208,750

Real Estate (8.8%)
- -------------------------------------------------------------------------------------------------------------
306,000 Alexander Haagen Properties, Inc. (R) 4,532,625
50,000 Alexandria Real Estate Equities, Inc. (R) 1,584,375
491,000 American Residential Investment Trust, Inc. (R) (AFF) 5,615,813
187,100 Annaly Mortgage Management, Inc. (R) 2,023,019
328,400 Anthracite Capital, Inc. (NON) 4,474,450
210,500 Anworth Mortgage Asset Corp. (NON) (AFF) 1,789,250
456,000 Apartment Investment & Management Co. Class A (R) 17,784,000
250,000 Avista Real Estate Investment Trust (Canada) (R) 935,526
75,000 Bentall Corp. (Canada) 847,123
486,850 Boston Properties, Inc. (R) 16,552,900
150,000 Brookfield Properties Corp. (Canada) 2,183,466
213,900 Burnham Pacific Properties, Inc. (R) 3,007,969
39,600 Cadillac Fairview Corp. (Canada) 819,225
415,900 Capital Automotive (R) 5,978,563
184,000 Capstone Capital Trust, Inc. (R) 4,289,500
485,700 Captec Net Lease Realty, Inc. (R)(AFF) 7,680,131
500,000 CCA Prison Realty Trust (R) 15,656,250
600,000 Chastain Capital Corp. (R)(NON)(AFF) 8,325,000
135,700 Commercial Net Lease Realty Inc. (R) 2,179,681
395,000 Cornerstone Properties, Inc. (R) 6,912,500
190,000 Correctional Properties Trust (R)(NON) 3,978,125
515,200 CRIIMI MAE, Inc. (R) 7,856,800
220,000 Engel General Developers Ltd. (AFF) 1,210,000
144,600 Equity Inns, Inc. (R) 2,069,588
60,000 Equity Office Properties Trust (R) 1,650,000
138,750 Equity Residential Properties Trust (R) 6,790,078
90,000 Excel Legacy Corp. (R)(NON) 461,250
90,000 Excel Realty Trust, Inc. (R) 2,452,500
100,000 First Industrial Realty Trust, Inc. (R) 3,100,000
65,000 First Washington Realty Trust, Inc. (R) 1,637,188
270,000 Glenborough Realty Trust, Inc. (R) 7,593,750
278,600 Hanover Capital Mortgage Holdings, Inc. (R)(AFF) 5,084,450
260,000 Healthcare Realty Trust, Inc. (R) 7,361,250
330,000 Horizon Group Inc. (R) 3,671,250
245,000 Imperial Credit Commercial Mortgage
Investment Corp. (R) 3,391,719
315,000 Indymac Mortgage Holdings, Inc. (R) 7,461,563
264,000 Innkeepers USA Trust (R) 3,679,500
122,600 Kilroy Realty Corp. (R) 3,210,588
214,500 LASER Mortgage Management, Inc. (R) 3,150,469
152,000 Lexington Corporate Properties Trust (R) 2,147,000
105,300 Malan Realty Investors, Inc. (R) 1,869,075
111,400 Mid Atlantic Realty Trust (R) 1,496,938
64,000 Millennium & Copthorne Hotels PLC
144A ADR (United Kingdom) 2,432,000
135,000 Mills Corp. (R) 3,332,813
29,000 National Health Investors, Inc. (R) 1,024,063
308,600 Novastar Financial, Inc. (R) 5,863,400
205,000 Nursing Home Properties PLC (United Kingdom) 524,937
164,000 Nursing Home Properties PLC 419,950
40,000 Omega Healthcare Investors, Inc. (R) 1,377,500
216,400 Pan Pacific Retal Properties, Inc. (R) 4,584,975
777,100 Prime Retail, Inc. (R) 10,248,006
62,500 Public Storage, Inc. (R) 1,875,000
72,000 Regency Realty Corp. (R) 1,764,000
227,200 RFS Hotel Investors, Inc. (R) 4,515,600
286,100 Security Capital Group, Inc. 8,010,800
130,000 Sizeler Property Investments, Inc. (R) 1,405,625
328,450 SL Green Realty Corp. (R) 7,451,709
160,000 Starwood Lodging Trust (R) 7,550,000
630,000 Sunstone Hotel Investors, Inc. (R) 9,056,250
220,000 Thornburg Mortgage Asset Corp. (R) 3,093,750
271,800 Tower Realty Trust, Inc. (R) 6,234,413
25,000 Town & Country Trust (R) 410,938
161,100 Vornado Realty Trust (R) 6,182,213
937,400 Wilshire Real Estate Investment Trust, Inc. (R)(AFF) 15,349,925
113,900 Winston Hotels (R) 1,366,800
--------------
298,569,114

Recreation (0.7%)
- -------------------------------------------------------------------------------------------------------------
122,000 Audio Book Club, Inc. (NON) 518,500
284,600 Royal Caribbean Cruises Ltd. 19,833,063
312,000 Royal Olympic Cruise Lines Inc. (NON) 4,095,000
--------------
24,446,563

Retail (10.0%)
- -------------------------------------------------------------------------------------------------------------
490,000 Albertsons, Inc. 22,693,125
221,000 BJ's Wholesale Club, Inc. (NON) 8,729,500
230,000 Claire's Stores, Inc. 4,326,875
207,800 Club Monaco Inc. 144A (Canada) (NON) 1,412,538
280,000 Cole National Corp. Class A (NON) 10,867,500
531,800 CompUSA, Inc. (NON) 8,375,850
49,820 Consolidated Stores Corp. (NON) 1,902,501
73,000 Cost Plus, Inc. (NON) 2,162,625
100,000 Costco Companies, Inc. (NON) 5,787,500
123,600 Cross-Continent Auto Retailers, Inc. (NON) 996,525
68,700 CVS Corp. 4,821,881
146,450 Distribucion y Servicio D&S S.A. ADR (Chile) 2,315,741
200,000 Dollar General Corp. 7,625,000
265,000 Duckwall-Alco Stores, Inc. (NON)(AFF) 4,770,000
224,300 Fabri-Centers of America Class A (NON) 6,616,850
281,200 Federated Department Stores, Inc. (NON) 14,569,675
620,000 Fred Meyer, Inc. (NON) 26,660,000
260,000 Friendly Ice Cream Corp. 6,532,500
493,000 Giant Food, Inc. 21,199,000
279,000 InterTAN, Inc. (NON) 1,691,438
610,000 Intimate Brands, Inc. 17,499,375
197,100 Krause's Furniture, Inc. (NON) 702,169
226,041 Limited, Inc. (The) 7,515,863
370,000 Lowe's Cos., Inc. 29,299,375
75,000 99 Cents Only Stores (NON) 2,859,375
526,000 Officemax, Inc. (NON) 8,646,125
600,000 Pier 1 Imports, Inc. 14,437,500
1,400,000 Rite Aid Corp. 50,137,500
214,200 The Men's Wearhouse, Inc. (NON) 9,130,275
157,000 Tiffany & Co. 7,516,375
430,000 Wal-Mart Stores, Inc. 23,730,625
949,000 West Coast Entertainment Corp. (NON)(AFF) 1,898,000
--------------
337,429,181

Telecommunications (1.4%)
- -------------------------------------------------------------------------------------------------------------
125,000 Echostar Communications Corp. Class A (NON) 3,179,688
271,700 Energis PLC, ADR (NON) 19,630,325
375,000 Hellenic Telecommunication Organization
S.A. (Greece) 11,005,177
52,000 Inter-Tel, Inc. (NON) 976,625
568,300 Ionica Group PLC (United Kingdom) (NON) 287,338
345,100 PhoneTel Technologies, Inc. (NON) 647,063
53,200 STARTEC Global Communications Corp. 871,150
142,625 Telecom Corp. of New Zealand Ltd. (New Zealand) 2,959,469
205,000 US West Media Group 7,597,813
--------------
47,154,648

Textiles (0.6%)
- -------------------------------------------------------------------------------------------------------------
210,000 Mohawk Industries, Inc. (NON) 6,378,750
248,550 Novel Denim Holdings Ltd. (Hong Kong) 6,446,766
220,000 Quaker Fabric Corp. (NON) 5,857,500
--------------
18,683,016

Transportation (4.6%)
- -------------------------------------------------------------------------------------------------------------
239,400 Airborne Freight Corp. 8,917,650
236,000 AirNet Systems, Inc. (NON) 5,546,000
130,000 AMR Corp. (NON) 20,011,875
260,000 CNF Transportation, Inc. 10,676,250
445,000 GATX Corp. 36,545,625
68,200 International Total Services, Inc. 1,432,200
363,000 KLM Royal Dutch Air Lines NV (Netherlands) 14,134,313
255,000 MIF Ltd. (Norway) (NON) 4,054,806
318,000 Pittston Burlington Group 5,584,875
200,000 Sea Containers, Ltd. Class A 8,087,500
61,300 Simon Transportation Services, Inc. (NON) 440,594
452,700 Southwest Airlines Co. 12,081,431
311,600 Stolt-Nielsen S.A. ADR 5,647,750
80,100 Swift Transportation Co., Inc. (NON) 1,782,225
230,900 The Cronos Group (NON) 1,399,831
97,000 Transport Corp. of America (NON) 1,697,500
220,400 Tranz Rail Holdings Ltd. ADR (New Zealand) 1,942,275
102,000 UAL Corp. (NON) 8,102,625
1,539,337 Ugland International Holdings PLC
(United Kingdom) (NON) 2,535,765
100,000 USFreightways Corp. 3,150,000
--------------
153,771,090

Utilities (1.6%)
- -------------------------------------------------------------------------------------------------------------
106,400 Baltimore Gas & Electric Co. 3,238,550
398,800 Companhia Paranaense de Energia-Copel 4,056,651
12,000 Light, Servicos de Electricidade S.A. 4,225,352
502,000 SBC Communications, Inc. 19,515,250
270,000 Sprint Corp. 19,372,500
75,000 US West Communications Group 3,806,250
--------------
54,214,553
--------------
Total Common Stocks (cost $2,647,820,821) $3,111,611,197

CONVERTIBLE PREFERRED STOCKS (1.4%) (a)
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
400,000 Cendant Corp. $0.65 cv. pfd. $ 12,400,000
56,300 Commodore Separation Technologies, Inc. 10% cv. pfd. 211,125
16,400 Continental Airlines 144A $4.25 cv. pfd. 1,951,600
29,800 CRIIMI MAE Inc. Ser. B, $2.719 cv. pfd. 1,046,725
259,000 National Australia Bank Ltd. $1.969 cv. pfd. 7,527,188
126,450 Owens-Illinois, Inc. $2.375 cv. pfd. 6,638,625
12,900 Sea Containers Ltd. $4.00 cv. pfd. 896,550
66,500 Sealed Air Corp. Ser. A, $2.00 cv. pfd. 3,703,218
112,200 Standard Automotive Corp. $1.02 cv. pfd. 1,276,275
320,000 WBK STRYPES Trust $3.135 cv. pfd. 10,540,000
--------------
Total Convertible Preferred Stocks (cost $48,056,501) $ 46,191,306

CONVERTIBLE BONDS AND NOTES (0.8%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$ 875,000 Complete Management, Inc. cv. sub. deb. 8s, 2003 $ 638,750
3,850,000 HMT Technology Corp. 144A cv. sub. notes
5 3/4s, 2004 3,195,500
2,000,000 Hutchinson Technology 144A cv. sub. notes 6s, 2005 2,250,000
3,900,000 May & Speh, Inc. cv. sub. notes 5 1/4s, 2003 4,777,500
500,000 Omega Healthcare Investors, Inc. cv. sub. deb.
8 1/2s, 2001 661,875
465,000 Pioneer Financial Services, Inc. cv. sub. notes
6 1/2s, 2003 789,919
2,000,000 Preferred Employers Holdings, Inc. cv. sub. notes
7s, 2003 2,000,000
850,000 Southern Mineral Corp. cv. deb. 6 7/8s, 2007 726,750
3,300,000 USA Waste Services, Inc. cv. sub. notes 4s, 2002 4,046,625
10,000,000 World Airways, Inc. 144A cv. sub. deb. 8s, 2004 7,500,000
1,200,000 Youth Services International, Inc. cv. sub. deb. 7s, 2006 1,072,500
--------------
Total Convertible Bonds and Notes
(cost $28,905,000) $ 27,659,419

WARRANTS (--%)(a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- -------------------------------------------------------------------------------------------------------------
166,000 Commodore Applied Technology 6/28/01 $ 124,500
190,000 Commodore Separation Technology, Inc. 4/3/02 71,250
75,000 Credit Depot Corp. 10/10/99 8
13,000 Maxim Pharmaceuticals, Inc. 7/10/01 115,375
173,100 Omega Orthodontics, Inc. 9/30/02 43,275
117,000 Optisytems Solutions, Inc. 6/12/02 204,750
88,500 U. S. Energy Systems, Inc. 12/2/01 27,656
--------------
Total Warrants (cost $74,760) $ 586,814

SHORT-TERM INVESTMENTS (5.7%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$25,000,000 Asset Securitization Corp. effective yield of
5.50%, June 26, 1998 6/26/98 $ 24,904,167
21,425,000 Ciesco Corp. effective yield of 5.52%,
June 12, 1998 6/12/98 21,388,994
25,000,000 Metlife Funding effective yield of 5.51%,
July 7, 1998 7/7/98 24,862,250
35,000,000 USA Capital Corp. effective yield of 5.51%,
June 29, 1998 6/29/98 34,850,006
85,000,000 Interest in $453,400,000 joint repurchase
agreement dated May 29, 1998 with First Boston
due June 1, 1998 with respect to various U.S.
Treasury obligations -- maturity value of
$85,038,958 for an effective yield of 5.50% 85,038,958
--------------
Total Short-Term Investments (cost $191,044,375) $ 191,044,375
- -------------------------------------------------------------------------------------------------------------
Total Investments (cost $2,915,901,457) (b) $3,377,093,111
- -------------------------------------------------------------------------------------------------------------

(a) Percentages indicated are based on net assets of $3,373,967,241.

(b) The aggregate identified cost on a tax basis is $2,916,182,467, resulting in gross unrealized appreciation
and depreciation of $659,837,757 and $198,927,113, respectively, or net unrealized appreciation of
$460,910,644.

(NON) Non-income-producing security.

(AFF) Affiliated issuers (Note 5)

(R) Real Estate Investment Trust.

144A after the name of a security represents those exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally
to qualified institutional buyers.

ADR or GDR after the name of a foreign holding stands for American Depository Receipts or Global
Depository Receipts, respectively, representing ownership of foreign securities on deposit with a
domestic custodian bank.

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

</TABLE>

Statement of assets and liabilities
May 31, 1998

<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $2,915,901,457) (Note 1) $3,377,093,111
- ---------------------------------------------------------------------------------------------------
Cash 4,977,238
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 2,389,142
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 29,004,578
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 362,083
- ---------------------------------------------------------------------------------------------------
Total assets 3,413,826,152

Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 27,463,991
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 4,727,765
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 4,044,385
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 614,486
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 16,390
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 5,494
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 2,231,009
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 755,391
- ---------------------------------------------------------------------------------------------------
Total liabilities 39,858,911
- ---------------------------------------------------------------------------------------------------
Net assets $3,373,967,241

Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $2,835,678,669
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 3,294,580
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 73,802,338
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 461,191,654
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $3,373,967,241

Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,530,289,779 divided by 66,112,533 shares) $23.15
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $23.15)* $24.56
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($1,723,053,583 divided by 75,380,066 shares)** $22.86
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($120,623,879 divided by 5,266,016 shares) $22.91
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $22.91)* $23.74
- ---------------------------------------------------------------------------------------------------

* 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 charges.

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

</TABLE>

Statement of operations
Year ended May 31, 1998

<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $3,748) $ 29,832,129
- --------------------------------------------------------------------------------------------------
Interest 8,428,007
- --------------------------------------------------------------------------------------------------
Total investment income 38,260,136

Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 11,520,147
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 4,011,354
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 33,287
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 27,368
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,533,177
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 10,864,221
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 602,894
- --------------------------------------------------------------------------------------------------
Reports to shareholders 200,357
- --------------------------------------------------------------------------------------------------
Registration fees 584,110
- --------------------------------------------------------------------------------------------------
Auditing 40,949
- --------------------------------------------------------------------------------------------------
Legal 20,962
- --------------------------------------------------------------------------------------------------
Postage 198,700
- --------------------------------------------------------------------------------------------------
Other 218,383
- --------------------------------------------------------------------------------------------------
Total expenses 30,855,909
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (768,560)
- --------------------------------------------------------------------------------------------------
Net expenses 30,087,349
- --------------------------------------------------------------------------------------------------
Net investment income 8,172,787
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3)
(including realized gain of $59,661 on sales of investments in affiliated issuers) 95,643,722
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 295,714,232
- --------------------------------------------------------------------------------------------------
Net gain on investments 391,357,954
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $399,530,741
- --------------------------------------------------------------------------------------------------

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

</TABLE>

Statement of changes in net assets

Year ended May 31
--------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 8,172,787 $ 2,374,808
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 95,643,722 33,732,900
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 295,714,232 99,347,566
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 399,530,741 135,455,274
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (4,172,539) (1,521,434)
- ----------------------------------------------------------------------------------------------------------------------
Class B (147,312) (239,310)
- ----------------------------------------------------------------------------------------------------------------------
Class M (169,011) (61,582)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (20,953,406) (16,388,552)
- ----------------------------------------------------------------------------------------------------------------------
Class B (22,686,031) (15,162,496)
- ----------------------------------------------------------------------------------------------------------------------
Class M (1,774,614) (720,914)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 1,920,758,165 672,969,276
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 2,270,385,993 774,330,262

Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 1,103,581,248 329,250,986
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $3,294,580 and $1,048,441, respectively) $3,373,967,241 $1,103,581,248
- ----------------------------------------------------------------------------------------------------------------------

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

</TABLE>

Financial highlights
(For a share outstanding throughout the period)

CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------

For the period
Per-share Aug. 5, 1993+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $18.76 $16.33 $12.24 $10.74 $8.53
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .17(d) .13(d) .14 .06(e) .07(d)(e)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 4.77 3.48 4.37 1.59 2.27
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 4.94 3.61 4.51 1.65 2.34
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.09) (.10) (.13) (.03) (.04)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.46) (1.08) (.29) (.10) (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of realized
gain on investments -- -- -- (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.55) (1.18) (.42) (.15) (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $23.15 $18.76 $16.33 $12.24 $10.74
- ------------------------------------------------------------------------------------------------------------------------------------

Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 26.67 22.91 37.57 15.61 27.58*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,530,290 $525,804 $173,321 $103,555 $3,062
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.03 1.20 1.29 1.13 (e) .78*(e)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .77 .79 1.05 1.89 (e) .73*(e)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 31.08 38.35 76.68 15.32 102.99*
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (c) $.0458 $.0473
- ------------------------------------------------------------------------------------------------------------------------------------

+ Commencement of operations.

* Not annualized.

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

(b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter, includes
amounts paid through expense offset and brokerage service arrangements. Prior periods exclude these
amounts. (Note 2)

(c) Average commission rate paid on security trades is required for fiscal periods beginning on or after
September 1, 1995.

(d) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.

(e) Reflects an expense limitation in effect during the period. As a result of these limitaitons, expenses of
the fund for the period ended May 31, 1994 reflect a reduction of $0.11 per share. For the period
ended May 31, 1995 the reduction was less that $0.01 per share for both class A and class B.

(f) Distributions from net investment income amounted to less than $0.01 per share for class B.

</TABLE>

Financial highlights
(For a share outstanding throughout the period)

CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------

For the period
Per-share Nov. 2, 1994+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $18.59 $16.24 $12.19 $11.08
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income --(d) --(d) .04 .06(e)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 4.73 3.45 4.35 1.20
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 4.73 3.45 4.39 1.26
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income --(f) (.02) (.05) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.46) (1.08) (.29) (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of realized
gain on investments -- -- -- (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.46) (1.10) (.34) (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $22.86 $18.59 $16.24 $12.19
- ------------------------------------------------------------------------------------------------------------------------------------

Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 25.72 21.95 36.62 11.55*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,723,054 $543,015 $153,905 $89,962
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.78 1.95 2.05 1.12*(e)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .02 .03 .30 .65*(e)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 31.08 38.35 76.68 15.32
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (c) $.0458 $.0473
- ------------------------------------------------------------------------------------------------------------------------------------

+ Commencement of operations.

* Not annualized.

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

(c) Average commission rate paid on security trades is required for fiscal periods beginning on or after
September 1, 1995.

(d) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.

(f) Distributions from net investment income amounted to less than $0.01 per share for class B.

</TABLE>

Financial highlights
(For a share outstanding throughout the period)

CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------

For the period
Per-share Jan. 22, 1996+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $18.62 $16.29 $13.84
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .06(d) .04(d) .02(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 4.73 3.46 2.43
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 4.79 3.50 2.45
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.04) (.09) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.46) (1.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of realized
gain on investments -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.50) (1.17) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $22.91 $18.62 $16.29
- ------------------------------------------------------------------------------------------------------------------------------------

Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 26.04 22.28 17.70*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $120,624 $34,763 $2,025
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.53 1.70 .66*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .28 .23 .16*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 31.08 38.35 76.68
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (c) $.0458 $.0473
- ------------------------------------------------------------------------------------------------------------------------------------

+ Commencement of operations.

* Not annualized.

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

(c) Average commission rate paid on security trades is required for fiscal periods beginning on or after
September 1, 1995.

(d) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.

(f) Distributions from net investment income amounted to less than $0.01 per share for class B.

</TABLE>

Notes to financial statements
May 31, 1998

Note 1
Significant accounting policies

Putnam Capital Appreciation 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 capital appreciation by
investing primarily in common stocks that offer potential for capital
appreciation. Current income is only an incidental consideration in selecting
investments for the fund.

The fund offers class A, class B and class M shares. Effective June 30, 1998,
all classes of shares will be closed to new investors. Class A shares are sold
with a maximum front-end sales charge of 5.75%. Class B shares, which convert
to class A shares after approximately eight years, do not pay a front-end
sales charge, but pay a higher ongoing distribution fee than class A shares,
and are subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class M shares are sold with a maximum
front-end sales charge of 3.50% and pay an ongoing distribution fee that is
lower than class B shares and higher than class A shares.

Expenses of the fund are borne pro-rata by the holders of 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 the
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. 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 sale price, or, if no sales are reported -- as in the case of some
securities traded over-the-counter -- the last reported bid price. Short-term
investments having remaining maturities of 60 days or less are stated at
amortized cost which approximates market, and other investments are stated at
fair value following procedures approved by the Trustees. Foreign securities
quoted in foreign currencies are translated into U.S. dollars at the current
exchange.

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. 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). 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.

E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, 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 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.

F) 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 May 31, 1998, the funds had
no borrowings against the line of credit.

G) 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.

H) 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 and nontaxable
dividends. 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 May 31, 1998, the
fund reclassified $1,437,786 to decrease undistributed net investment income
and $1,230,584 to increase paid-in-capital, with an increase to accumulated
net realized gains of $207,202. The calculation of net investment income per
share in the financial highlights table excludes these adjustments.

I) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities and
Exchange commission and with various states and the initial public offering of
its shares were $17,091. These expenses have been fully amortized on a
straight-line basis over a five-year period.

Note 2
Management fee, administrative
services and other transactions

Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such
fee is based on the following annual rates: 0.65% of the first $500 million of
average net assets, 0.55% of the next $500 million, 0.50% of the next $500
million, 0.45% of the next $5 billion, 0.425% of the next $5 billion, 0.405%
of the next $5 billion, 0.39% of the next $5 billion, and 0.38% thereafter.

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

Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.

For the year ended May 31, 1998, fund expenses were reduced by $768,560 under
expense offset arrangements with PFTC and brokerage service arrangements.
Investor servicing and custodian fees reported in the Statement of operations
exclude these credits. The fund could have invested a portion of the assets
utilized in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.

Each Trustee of the fund receives an annual Trustee fee, of which $2,040 has
been allocated to the fund, and an additional fee for each Trustee's meeting
attended. Trustees who are not interested persons of Putnam Management and who
serve on committees of the 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 in the fund and are
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
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 and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a 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 Mutual Funds
Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees currently limit payment by the fund to an annual rate of 0.25%, 1.00%
and 0.75% of the average net assets attributable to class A, class B and class
M shares respectively.

For the year ended May 31, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $3,059,360 and $201,236 from the sale
of class A and class M shares, respectively and $1,318,007 in contingent
deferred sales charges from redemptions of class B shares. A deferred sales
charge of up to 1% is assessed on certain redemptions of class A shares. For
the year ended May 31, 1998, Putnam Mutual Funds Corp., acting as underwriter
received $30,067 on class A redemptions.

Note 3
Purchases and sales of securities

During the year ended May 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $2,374,162,270 and
$641,002,271, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.

Note 4
Capital shares

At May 31, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:

Year ended
May 31, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 51,074,128 $1,123,253,209
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,143,129 23,946,747
- ------------------------------------------------------------
52,217,257 1,147,199,956

Shares
repurchased (14,135,542) (309,703,535)
- ------------------------------------------------------------
Net increase 38,081,715 $837,496,421
- ------------------------------------------------------------

Year ended
May 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 23,315,457 $404,430,001
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,018,535 17,152,092
- ------------------------------------------------------------
24,333,992 421,582,093

Shares
repurchased (6,913,708) (119,517,927)
- ------------------------------------------------------------
Net increase 17,420,284 $302,064,166
- ------------------------------------------------------------

Year ended
May 31, 1998
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 57,943,337 $1,265,178,122
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,013,073 21,030,886
- ------------------------------------------------------------
58,956,410 1,286,209,008

Shares
repurchased (12,789,657) (276,546,324)
- ------------------------------------------------------------
Net increase 46,166,753 $1,009,662,684
- ------------------------------------------------------------

Year ended
May 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 24,600,044 $424,156,560
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 875,491 14,655,764
- ------------------------------------------------------------
25,475,535 438,812,324

Shares
repurchased (5,740,119) (98,010,754)
- ------------------------------------------------------------
Net increase 19,735,416 $340,801,570
- ------------------------------------------------------------

Year ended
May 31, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 4,053,490 $88,211,779
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 90,372 1,877,929
- ------------------------------------------------------------
4,143,862 90,089,708

Shares
repurchased (744,948) (16,490,648)
- ------------------------------------------------------------
Net increase 3,398,914 $73,599,060
- ------------------------------------------------------------

Year ended
May 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 2,002,905 $34,599,182
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 44,736 749,320
- ------------------------------------------------------------
2,047,641 35,348,502

Shares
repurchased (304,855) (5,244,962)
- ------------------------------------------------------------
Net increase 1,742,786 $30,103,540
- ------------------------------------------------------------

Note 5
Transactions with Affiliated Issuers

Transactions during the year with companies in which the fund owned at least
5% of the voting securities were as follows:

Purchase Sales Dividend Market
Name of Affiliates cost cost Income Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American Residential
Investment Trust, Inc. $ 7,345,680 $ -- $-- $ 5,615,813
Anworth Mortgage Asset Corp 1,894,500 -- -- 1,789,250
Bonded Motors, Inc. 1,301,277 -- -- 2,137,500
Calpine Corp. 16,189,843 -- -- 25,471,875
Captec Net Lease Realty, In 8,742,600 -- -- 7,680,131
Chastain Capital Corp. 9,000,000 -- -- 8,325,000
Complete Management, Inc. 3,489,124 -- -- 6,216,750
Duckwall-Alco Stores, Inc. 437,500 63,995 -- 4,770,000
Engel General Developers, L 2,007,600 -- -- 1,210,000
Epitope Inc. 4,451,755 -- -- 5,460,000
4Front Software Internation 1,090,070 51,175 -- 5,625,000
Hanover Capital Mortgage
Holdings, Inc. 4,300,355 -- -- 5,084,450
Omega Orthodontics Inc. 1,488,600 -- -- 726,975
Scheid Vineyards Inc. Class 2,270,000 -- -- 1,992,375
Standard Automotive Corp. 1,459,000 -- -- 1,531,950
Unidigital Inc. 356,000 -- -- 2,172,625
West Coast Entertainment Co 1,035,963 -- -- 1,898,000
Wilshire Real Estate Investment
Trust, Inc. 14,998,400 -- -- 15,349,925
- --------------------------------------------------------------------------------------------
Totals $81,858,267 $115,170 $-- $103,057,619
- --------------------------------------------------------------------------------------------

</TABLE>

Federal tax information
(Unaudited)

Pursuant to Section 852 of the Internal Revenue Code, as amended,
the Fund hereby designates $70,777,890 as capital gain, which includes
$33,086,089 as 20% capital gain, for its taxable year ended May 31,
1998.

The fund has designated 62.73% of dividends paid from net investment
income as qualifying for the dividends received deduction for corporations.

The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.

Fund information

INVESTMENT MANAGER

Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109

MARKETING SERVICES

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

CUSTODIAN

Putnam Fiduciary Trust Company

LEGAL COUNSEL

Ropes & Gray

INDEPENDENT ACCOUNTANTS

PricewaterhouseCoopers LLP

TRUSTEES

George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike

OFFICERS

George Putnam
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

Gerald S. Zukowski
Vice President and Fund Manager

William H. Miller
Vice President and Fund Manager

Edward R. Finch
Vice President and Fund Manager

William N. Shiebler
Vice President

John R. Verani
Vice President

Beverly Marcus
Clerk and Assistant Treasurer

This report is for the information of shareholders of Putnam Capital
Appreciation Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales charges,
investment objectives, and operating policies of the fund, and the most recent
copy of Putnam's Quarterly Performance Summary. For more information or to
request a prospectus, call toll free: 1-800-225-1581. You can also learn more
at Putnam Investments' website: http://www.putnaminv.com.

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

[LOGO OMITTED]

PUTNAM INVESTMENTS

The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109

- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------

AN002-43772 433/948/2BN 7/98