<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
PORTFOLIO MANAGEMENT
<TABLE>
<S> <C>
Roger Honour...................................... Senior Portfolio Manager
Andy Pratt........................................ Portfolio Manager
</TABLE>
INVESTMENT REVIEW
Q: THE MONTGOMERY VARIABLE SERIES: GROWTH FUND OUTPERFORMED THE S&P 500 AND
THE LIPPER GROWTH FUNDS AVERAGE. WHY?
A: The short answer is good stock selection. We don't impose any kind of top-
down, sector positioning for the Variable Series: Growth Fund. Instead, we
apply our process-driven investment strategy to find companies with improving
growth at reasonable valuations. And the Fund is, by design, fairly
concentrated with 46 stocks in the portfolio. We want each position to add
performance to the Fund while maintaining reasonable diversification.
Q: HOW WERE YOUR SECTOR WEIGHTINGS DIFFERENT FROM THAT OF THE S&P 500?
A: The Fund often has a very different sector profile than the market as a
whole because we focus on stock selection, looking for undervalued growth
situations. During the period, however, we had slightly more technology
exposure than the S&P 500, and we were underweighted in the consumer staples
sector. We also had a fairly high cash position, around 30%, for most of the
period. The good news is that our cash position made the portfolio less
volatile than the rest of the market. Of course, in a rising market, if that
30% had been invested, it may have enhanced overall fund performance. We don't
seek incremental performance by adding incremental risk; we stick to our
screening and valuation discipline, which we believe will result in relatively
stable long-term performance.
Q: WHAT SECTORS DID PARTICULARLY WELL FOR THE FUND DURING THE PERIOD?
A: Retailing and energy stocks did well for the Fund. The retail sector is a
great example of how we uncover out-of-favor stocks with excellent potential.
The market has been very bearish on retail stocks in the last year or so, but
we found some companies, like Dayton Hudson, that were responding well to a
challenging environment. Dayton Hudson demonstrated improving growth, and we
bought the stock at a very attractive price. It has performed very well for
the portfolio.
Q: WERE THERE ANY SECTORS THAT DID NOT PERFORM AS WELL AS YOU EXPECTED DURING
THE YEAR?
A: Technology stocks in aggregate were flat over the period; however, by
sticking with our stock selection process, we were able to find some
opportunities. One example is Avid Technology, which makes tools for digital
film editing. More and more, film and broadcast professionals as well as home
video makers, are using digital tools to edit video footage on computers. That
market is growing about 30% a year. Avid is a leader in this business but
slipped by focusing more on market share than profitability. Going forward,
new management is in place, and the company is focused on profitable growth.
We saw this as an opportunity--which is why we made Avid a top priority in the
Variable Series: Growth Fund.
1
<PAGE>
Q: HOW HAS THE FUND'S STRATEGY CHANGED OVER THE PERIOD?
A: The strategy remains constant, but it's worth reviewing for our
shareholders. We use proprietary, quantitative screening techniques to uncover
established companies (generally with market capitalizations of more than $1
billion) with improving growth, then we use fundamental research to validate
each company's prospects and future outlook. Those two steps help us find good
companies. Then, our valuation analysis helps us determine which of those
companies' stocks are good for the Variable Series: Growth Fund.
We stick to that disciplined process of stock selection. And, of course, we'll
change the underlying portfolio whenever good opportunities appear or existing
positions no longer seem attractive.
Q: HOW HAVE YOU POSITIONED THE FUND FOR THE PERIOD AHEAD?
A: More of the same. Apply the process. Look for stocks that offer "growth at
the right place" and look in every sector for opportunities.
Q: WHY SHOULD AN INVESTOR CONSIDER THE VARIABLE SERIES: GROWTH FUND RIGHT NOW?
A: Historically, stocks have outperformed bonds over the long run, and there's
little reason to think that won't be true in the future. But in the short
term, it's wise to keep in mind that this bull market has had quite a long
run. In this environment, we believe that paying close attention to
valuations--a key component of our strategy--is especially prudent. We won't
chase a high-flying stock, because if there's a correction, those are the
stocks that can get knocked down--sometimes severely. Instead, the stocks in
which the Variable Series: Growth Fund invests are inexpensive relative to our
projections for their companies' prospects. We believe that our discipline of
buying "growth at the right price" will pay off, both in the current market
climate and over the long term.
2
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
PORTFOLIO INVESTMENTS
JUNE 30, 1996--(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ----------
<C> <S> <C>
COMMON STOCKS--73.0%
BANKS/SAVINGS AND LOAN--3.5%
150 BankAmerica Corporation............................... $ 11,362
550 Golden West Financial Corporation..................... 30,800
----------
42,162
----------
BROADCASTING/ADVERTISING--0.5%
200 Grupo Televisa S.A., GDR.............................. 6,150
----------
BUILDING MATERIALS--2.9%
1,150 Masco Corporation..................................... 34,788
----------
BUSINESS SERVICES--7.6%
700 AccuStaff Inc.+....................................... 19,163
160 Computer Sciences Corporation+........................ 11,960
1,000 Outdoor Systems Inc.+................................. 34,750
700 Whittman-Hart Inc.+................................... 25,550
----------
91,423
----------
CONGLOMERATES--0.7%
200 Tyco International Ltd. .............................. 8,150
----------
DIVERSIFIED FINANCIAL SERVICES--2.1%
150 American Express Company.............................. 6,694
300 Associates First Capital Corporation+................. 11,287
200 Norwest Corporation................................... 6,975
----------
24,956
----------
HEALTH CARE--2.1%
700 Healthsource Inc.+.................................... 12,250
300 Oxford Health Plans, Inc.+............................ 12,319
----------
24,569
----------
LEISURE TIME--1.3%
525 GTECH Holdings Corporation+........................... 15,553
----------
LODGING--7.8%
1,150 HFS Inc.+............................................. 80,500
600 Interstate Hotels Company+............................ 13,350
----------
93,850
----------
MACHINERY AND TOOLS--2.1%
850 Measurex Corporation.................................. 24,863
----------
METAL AND MINING--0.9%
350 Freeport-McMoRan Copper, Series B..................... 11,156
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996--(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ----------
<C> <S> <C>
COMMON STOCKS--(CONTINUED)
OIL--1.5%
500 Belco Oil & Gas Corporation+.......................... $ 17,750
----------
OILFIELD EQUIPMENT--3.6%
350 Schlumberger Ltd. .................................... 29,487
300 Tidewater Inc. ....................................... 13,162
----------
42,649
----------
PHARMACY/DRUGS--2.5%
300 Dura Pharmaceuticals Inc.+............................ 16,818
300 Pharmacia and Upjohn Inc. ............................ 13,312
----------
30,130
----------
PIPELINES--1.0%
300 Enron Corporation..................................... 12,263
----------
PULP AND PAPER--2.9%
950 International Paper Company........................... 35,031
----------
RAILROAD--0.8%
550 Canadian National Railway Company..................... 10,106
----------
REAL ESTATE--0.6%
200 Starwood Lodging Trust................................ 7,275
----------
RETAIL TRADE--8.8%
350 Dayton Hudson Corporation............................. 36,094
150 Gucci Group........................................... 9,675
700 Nordstrom, Inc. ...................................... 31,063
500 Saks Holdings Inc.+................................... 17,062
600 Staples, Inc.+........................................ 11,662
----------
105,556
----------
SEMICONDUCTORS--1.9%
500 Analog Devices Inc.+.................................. 12,750
600 International Rectifier Corporation+.................. 9,675
----------
22,425
----------
SOFTWARE SYSTEMS--1.8%
100 HBO & Company......................................... 6,763
600 Prism Solutions Inc.+................................. 14,250
----------
21,013
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
PORTFOLIO INVESTMENTS--(CONTINUED)
JUNE 30, 1996--(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ----------
<C> <S> <C>
COMMON STOCKS--(CONTINUED)
TECHNOLOGY--MISCELLANEOUS--3.4%
1,800 Avid Technology Inc.+............................. $ 33,188
200 Compuware Corporation+............................ 7,875
----------
41,063
----------
TELECOMMUNICATIONS--2.8%
875 Lucent Technologies Inc.+......................... 33,141
----------
TELECOMMUNICATIONS EQUIPMENT--8.4%
600 Ericsson (L.M.) Telephone Company, Class B, ADR... 12,863
700 General Instruments Corporation New+.............. 20,213
350 Northern Telecom Ltd. ............................ 19,031
1,800 Octel Communications Corporation+................. 35,325
350 PictureTel Corporation+........................... 13,803
----------
101,235
----------
TOBACCO--1.5%
175 Philip Morris Companies, Inc. .................... 18,200
----------
TOTAL COMMON STOCKS
(Cost $811,027).................................. 875,457
----------
<CAPTION>
PRINCIPAL
AMOUNT
---------
<C> <S> <C>
REPURCHASE AGREEMENTS--32.0%
$192,000 Agreement with Barclays de Zoete Wedd Tri-Party,
5.600% dated 06/28/96, to be repurchased at
$192,090, on 07/01/96, collateralized by $195,840
market value of U.S. Government securities,
having various maturities and various interest
rates............................................ 192,000
192,000 Agreement with Bear Stearns Tri-Party, 5.600%
dated 06/28/96, to be repurchased at $192,090 on
07/01/96, collateralized by $214,700 value of
U.S. Government securities, having various
maturities and various interest rates............ 192,000
----------
TOTAL REPURCHASE AGREEMENTS
(Cost $384,000).................................. 384,000
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $1,195,027*)......................... 105.0% 1,259,457
OTHER ASSETS AND LIABILITIES (Net)........................... (5.0) (60,631)
----- ----------
NET ASSETS................................................... 100.0% $1,198,826
===== ==========
</TABLE>
- --------
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
Abbreviation:
ADR--American Depositary Receipt
GDR--Global Depositary Receipt
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (Identified cost
$1,195,027) (Note 1)
Securities................................................ $ 875,457
Repurchase agreements..................................... 384,000
----------
Total investments........................................... 1,259,457
Cash........................................................ 464
Receivables:
Expenses absorbed by Manager (Note 2)..................... 10,000
Dividends................................................. 310
Interest.................................................. 179
Other Assets:
Organization costs (Note 1)............................... 54,357
----------
Total Assets................................................ 1,324,767
----------
LIABILITIES:
Payables:
Organizational cost....................................... $55,687
Investment securities purchased........................... 47,572
Shares of beneficial interest redeemed.................... 6,082
Trustees' fees and expenses............................... 1,600
Custodian fees............................................ 686
Other accrued liabilities and expenses.................... 14,314
-------
Total Liabilities........................................... 125,941
----------
NET ASSETS.................................................. $1,198,826
==========
NET ASSETS CONSIST OF:
Undistributed net investment income......................... $ 9,033
Accumulated net realized gain on securities sold............ 19,908
Net unrealized appreciation of investments.................. 64,430
Shares of beneficial interest............................... 1,034
Additional paid-in capital.................................. 1,104,421
----------
NET ASSETS.................................................. $1,198,826
----------
Net Asset Value, offering and redemption price per share
($1,198,826 / 103,363 shares of beneficial interest
outstanding)............................................... $11.60
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 1996 (UNAUDITED)*
<TABLE>
<S> <C> <C>
NET INVESTMENT INCOME:
Interest.................................................... $ 7,036
Dividends (Net of foreign withholding taxes of $19)......... 1,269
-------
Total Investment Income................................... 8,305
-------
EXPENSES:
Legal and audit fees........................................ $ 21,154
Printing fees............................................... 6,500
Trustees' fees and expenses (Note 2)........................ 6,253
Amortization of organization expenses (Note 1).............. 3,165
Management fee (Note 2)..................................... 2,766
Custodian fees (Note 2)..................................... 1,171
Transfer agency fees........................................ 21
Other....................................................... 2,485
Fees deferred and expenses absorbed by Manager (Note 2)..... (43,515)
--------
Total Expenses............................................ --
-------
NET INVESTMENT INCOME....................................... 8,305
-------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Notes 1 and
3):
Net realized gain on investments during the period.......... 19,908
Net unrealized appreciation of investments during the peri-
od......................................................... 64,430
-------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............. 84,338
-------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $92,643
=======
</TABLE>
- --------
* Montgomery Variable Series: Growth Fund commenced operations on February 9,
1996.
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED JUNE 30, 1996 (UNAUDITED)*
<TABLE>
<S> <C>
NET INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income............................................... $ 8,305
Net realized gain on securities during the period................... 19,908
Net unrealized appreciation of securities during the period......... 64,430
----------
Net increase in net assets resulting from operations................ 92,643
BENEFICIAL INTEREST TRANSACTIONS:
Net increase from beneficial interest transactions (Note 4)......... 986,794
----------
Net increase in net assets.......................................... 1,079,437
NET ASSETS:
Beginning of period................................................. 119,389
----------
End of period....................................................... $1,198,826
==========
Undistributed net investment income................................. $ 9,033
==========
</TABLE>
- --------
* Montgomery Variable Series: Growth Fund commenced operations on February 9,
1996.
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA FOR THE PERIOD ENDED:
<TABLE>
<CAPTION>
06/30/96
(UNAUDITED)*
------------
<S> <C>
Net asset value--beginning of period.............................. $ 10.08
-------
Net investment income............................................. 0.09
Net realized and unrealized gain on investments................... 1.43
-------
Net increase in net assets resulting from investment operations... 1.52
-------
Net asset value--end of period.................................... $ 11.60
=======
Total return**.................................................... 15.08%
=======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).............................. $ 1,199
Ratio of net investment income to average net assets.............. 3.00%+
Ratio of operating expenses to average net assets................. 0.00%+
Portfolio turnover rate........................................... 23%
Average commission rate paid (a).................................. $0.0431
Net investment loss before deferral of fees and absorption of ex-
penses by Manager................................................ $ (0.37)
Operating expense ratio before deferral of fees and absorption of
expenses by Manager.............................................. 15.73%+
</TABLE>
- --------
* The Montgomery Variable Series: Growth Fund commenced operations on February
9, 1996.
** Total return represents aggregate total return for the period indicated.
+ Annualized.
(a) Average commission rate paid per share of securities purchased and sold by
the Fund.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
THE MONTGOMERY FUNDS III
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Montgomery Fund III (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end
management investment company. As of June 30, 1996, the Trust had two series,
the Montgomery Variable Series: Growth Fund and the Montgomery Variable
Series: Emerging Markets Fund.
The Montgomery Funds III was organized as a Delaware business trust on
August 24, 1994. Prior to the public offerings of shares of the Fund, a
limited number of shares were sold to Montgomery Asset Management, L.P. and/or
affiliated persons of Montgomery Asset Management in private placement
offerings. Otherwise, the Funds had no significant operations prior to
February 1, 1996, the date on which the Montgomery Variable Series: Emerging
Markets Fund commenced operations (i.e., commenced selling shares to the
public).
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. Information
presented in these financial statements pertains to the Montgomery Variable
Series: Growth Fund (the "Fund"). The Montgomery Variable Series: Emerging
Markets Fund is presented under a separate cover.
The following is a summary of significant accounting policies.
a. PORTFOLIO VALUATION--The Fund's securities are valued using current
market valuations: either the last reported sales price or, lacking any
reported sales, and in the case of fixed income securities, the mean between
the closing bid and asked prices. The value of securities denominated in
foreign currencies and traded on foreign exchanges or in foreign markets will
be translated into U.S. dollars at the last price of their respective currency
denomination against U.S. dollars quoted by a major bank or, if no such
quotation is available, at the rate of exchange determined in accordance with
policies established in good faith by the Board of Trustees. Securities for
which market quotations are not readily available (including restricted
securities which are subject to limitations as to their sale) are valued at
fair value as determined in good faith by or under the supervision of the
Trust in accordance with methods which are authorized by the Trust's Board of
Trustees.
Short term debt obligations with remaining maturities in excess of 60 days
are valued at current market prices, as discussed above. Short-term securities
with maturities of 60 days or less are carried at amortized cost, which
approximates market value.
b. DIVIDENDS AND DISTRIBUTIONS--Dividends, if any, from net investment
income of the Fund are declared and paid at least annually.
Distributions of any short-term capital gains earned by the Fund are
distributed no less frequently than annually. Additional distributions of net
investment income and capital gains for the Fund may be made in order to avoid
the application of a 4% non-deductible excise tax on certain undistributed
amounts of ordinary income and capital gains. Income distributions and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing treatments of income and gains on
various investment securities held by a Fund, timing differences and differing
characterizations of distributions made by a Fund.
c. REPURCHASE AGREEMENTS--The Fund may engage in repurchase agreement
transactions individually or jointly through a joint repurchase account with
other series of the Trust pursuant to a joint repurchase agreement. Under the
terms of a typical repurchase agreement, a Fund writes a financial contract
with a counterparty and takes possession of a government debt obligation as
collateral. The Fund also agrees with the
10
<PAGE>
THE MONTGOMERY FUNDS III
NOTES TO FINANCIAL STATEMENTS--(UNAUDITED) (CONTINUED)
counterparty to allow the counterparty to repurchase the financial contract at
a specified date and price, thereby determining the yield during the Fund's
holding period. This arrangement results in a fixed rate of return that is not
subject to market fluctuations during the Fund's holding period. The value of
the collateral is at least equal at all times to the total amount of the
repurchase obligations, including interest. In the event of counterparty
default, a Fund has the right to use the collateral to offset losses incurred.
There could be potential loss to the Fund in the event a Fund is delayed or
prevented from exercising its rights to dispose of the collateral securities,
including the risk of a possible decline in the value of the underlying
securities during the period while a Fund seeks to assert its rights. The
Fund's investment manager, acting under the supervision of the Board of
Trustees, reviews the value of the collateral and the creditworthiness of
those banks and dealers with which a Fund enters into repurchase agreements to
evaluate potential risks. The Fund may also participate on an individual or
joint basis in tri-party repurchase agreements which involves a counterparty
and a custodian bank.
d. SECURITIES TRANSACTIONS AND INVESTMENT INCOME--Securities transactions
are recorded on a trade-date basis. Realized gain and loss from securities
transactions are recorded on the specific identified cost basis. Dividend
income is recognized on the ex-dividend date and interest income, including,
where applicable, amortization of discount on short-term investments, is
recognized on an accrual basis. Dividend income on foreign securities is
recognized as soon as the Fund is informed of the ex-dividend date.
e. FEDERAL INCOME TAXES--It is the intention of the Fund to qualify and
elect treatment as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), by complying with the
provisions available to certain investment companies, as defined in applicable
sections of the Code, and to make distributions of taxable income to
shareholders sufficient to relieve the Fund from all or substantially all
federal income taxes.
f. ORGANIZATION COSTS--Expenses incurred in connection with the organization
of the Fund, including the fees and expenses of registering and qualifying its
shares for distribution under federal and state securities regulations, are
amortized on a straight-line basis over a period of five years from
commencement of operations.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES:
a. Montgomery Asset Management, L.P. is the Fund's Manager (the "Manager").
The Manager, a California limited partnership, is an investment adviser
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended (the "Advisers Act"). The general partner of
the Manager is Montgomery Asset Management, Inc. The sole limited partner of
the Manager is Montgomery Securities. Under the Advisers Act, both Montgomery
Asset Management, Inc. and Montgomery Securities may be deemed controlling
persons of the Manager. Although the operations and management of the Manager
are independent from those of Montgomery Securities, it is expected that the
Manager may draw upon the research and administrative resources of Montgomery
Securities at its discretion in a manner consistent with applicable
regulations.
Pursuant to investment management agreement ("Investment Management
Agreement"), the Manager provides the Fund with advice on buying and selling
securities, manages the investments of the Fund including the placement of
orders for portfolio transactions, furnishes the Fund with office space and
certain administrative services, and provides the personnel needed by the
Trust with respect to the Manager's responsibilities under such Agreement. As
compensation, the Fund pays the Manager a monthly management fee (accrued
daily) at the following annual rates based upon the average daily net assets
of the Fund:
<TABLE>
<CAPTION>
FIRST $500 NEXT $500 OVER $1
MILLION MILLION BILLION
---------- --------- -------
<S> <C> <C> <C>
MONTGOMERY VARIABLE SERIES:
Growth Fund................................. 1.00% 0.90% 0.80%
</TABLE>
11
<PAGE>
THE MONTGOMERY FUNDS III
NOTES TO FINANCIAL STATEMENTS--(UNAUDITED) (CONTINUED)
The Manager has agreed to reduce some or all of its management fee or absorb
the Fund expenses if necessary to keep the Fund's annual operating expenses,
exclusive of interest or taxes, at or below the average daily net assets or
the maximum allowed by applicable state expense limitations for the Fund as
follows:
<TABLE>
<CAPTION>
ANNUAL
RATE
------
<S> <C>
MONTGOMERY VARIABLE SERIES:
Growth Fund....................................................... 1.25%
</TABLE>
Any reductions or absorptions made for the Fund by the Manager in its fees
are subject to recovery within the following three years provided the Fund is
able to affect such reimbursement and remain in compliance with applicable
expense limitations. Any of the Manager's voluntary absorptions are also
subject to recovery.
For the period ended June 30, 1996, the Manager has deferred fees and
absorbed expenses as follows:
<TABLE>
<CAPTION>
FEES EXPENSES
DEFERRED ABSORBED
-------- --------
<S> <C> <C>
MONTGOMERY VARIABLE SERIES:
Growth Fund............................................ $2,766 $40,749
</TABLE>
As of June 30, 1996, the deferred management fees and absorbed expenses
subject to recoupment are $43,515 for the Montgomery Variable Series: Growth
Fund.
b. Certain officers and Trustees of the Trust are, with respect to the
Trust's Manager and/or Montgomery Securities, "affiliated persons" as defined
in the 1940 Act. Each Trustee who is not an "affiliated person" receives an
annual retainer and quarterly meeting fees totalling $35,000 per annum, as
well as reimbursement for expenses ($5,000 of which will be allocated to the
Montgomery Funds III).
c. The Fund has no sales load and does not pay distribution (Rule 12b-1)
fees.
3. SECURITIES TRANSACTIONS:
a. The aggregate amount of purchases and sales of investment securities,
other than short-term securities, for the period ended June 30, 1996, was as
follows:
<TABLE>
<CAPTION>
PURCHASES SALES
--------- -------
<S> <C> <C>
MONTGOMERY VARIABLE SERIES:
Growth Fund........................................... $870,052 $78,933
</TABLE>
b. At June 30, 1996, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and aggregate
gross unrealized depreciation for all securities in which there was an excess
of tax cost over value for federal income tax purposes were as follows:
<TABLE>
<CAPTION>
TAX BASIS TAX BASIS
UNREALIZED UNREALIZED
APPRECIATION DEPRECIATION
------------ ------------
<S> <C> <C>
MONTGOMERY VARIABLE SERIES:
Growth Fund.................................... $94,829 $30,399
</TABLE>
12
<PAGE>
THE MONTGOMERY FUNDS III
NOTES TO FINANCIAL STATEMENTS--(UNAUDITED) (CONTINUED)
4. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:
The Trust has authorized an unlimited number of shares of beneficial
interest which have a par value of $0.01. Transactions in shares of beneficial
interest for the period indicated below were:
<TABLE>
<CAPTION>
PERIOD ENDED
JUNE 30, 1996*
------------------
SHARES AMOUNT
------ ----------
<S> <C> <C>
MONTGOMERY VARIABLE SERIES: GROWTH FUND:
Shares Sold.......................................... 94,675 $1,023,858
Issued as Reinvestment of Dividends.................. -- --
Shares Redeemed...................................... (3,155) (37,064)
------ ----------
Net Increase......................................... 91,520 $ 986,794
------ ----------
</TABLE>
- --------
* Montgomery Variable Series: Growth Fund commenced operations on February 9,
1996.
13
