American Balanced Fund, Inc.

[logo - American Funds®]

Prospectus Supplement

April 1, 2007

For the following funds with prospectuses dated

May 1, 2006 - March 1, 2007

AMCAP Fund,^® Inc.

American Balanced Fund,^® Inc.

American High-Income Municipal Bond Fund,^® Inc.

American High-Income Trust^SM

American Mutual Fund,^®Inc.

The Bond Fund of America,^SM Inc.

Capital Income Builder,^® Inc.

Capital World Bond Fund,^® Inc.

Capital World Growth and Income Fund,^SM Inc.

The Cash Management Trust of America^®

EuroPacific Growth Fund^®

Fundamental Investors,^SM Inc.

The Growth Fund of America,^® Inc.

The Income Fund of America,^® Inc.

Intermediate Bond Fund of America^®

The Investment Company of America^®

Limited Term Tax-Exempt Bond Fund of America^SM

The New Economy Fund^®

New Perspective Fund,^® Inc.

New World Fund,^SM Inc.

Short-Term Bond Fund of America,^SM Inc.

SMALLCAP World Fund,^® Inc.

The Tax-Exempt Bond Fund of America,^® Inc.

The Tax-Exempt Fund of California^®

The Tax-Exempt Fund of Maryland^®

The Tax-Exempt Fund of Virginia^®

The Tax-Exempt Money Fund of America^SM

U.S. Government Securities Fund^SM

The U.S. Treasury Money Fund of America^SM

Washington Mutual Investors Fund,^SM Inc.

Keep this Supplement with your Prospectus and/or Retirement Plan Prospectus.

The following changes are effective beginning April 1, 2007:

1. The second paragraph after the "Purchase minimums and maximums" table in the "Purchase and exchange of shares" section of the Prospectus is amended in its entirety to read as follows (not applicable to American Funds money market funds or tax-exempt funds):

If you have significant American Funds holdings, you may not be eligible to invest in Class B or C shares (or their corresponding 529 share classes). Specifically, you may not purchase Class B or 529-B shares if you are eligible to purchase Class A or 529-A shares at the $100,000 or higher sales charge discount rate, and you may not purchase Class C or 529-C shares if you are eligible to purchase Class A or 529-A shares at the $1 million or more sales charge discount rate (i.e., at net asset value). See "Sales charge reductions and waivers" below and the statement of additional information for more information regarding sales charge discounts.

2. The paragraph immediately after the "Purchase minimums and maximums" table in the "Purchase and exchange of shares" section of the Prospectus for The Tax-Exempt Fund of Maryland and The Tax-Exempt Fund of Virginia is amended in its entirety to read as follows:

If you have significant American Funds holdings, you may not be eligible to invest in Class B or C shares. Specifically, you may not purchase Class B shares if you are eligible to purchase Class A shares at the $100,000 or higher sales charge discount rate, and you may not purchase Class C shares if you are eligible to purchase Class A shares at the $1 million or more sales charge discount rate (i.e., at net asset value). See "Sales charge reductions and waivers" below and the statement of additional information for more information regarding sales charge discounts.

3. The paragraph immediately after the "Purchase minimums and maximums" table in the "Purchase and exchange of shares" section of the Prospectus for The Tax-Exempt Bond Fund of America, American High-Income Municipal Bond Fund, Limited Term Tax-Exempt Bond Fund of America and The Tax-Exempt Fund of California is amended in its entirety to read as follows:

If you have significant American Funds holdings, you may not be eligible to invest in Class B or C shares of The Tax-Exempt Bond Fund of America, American High-Income Municipal Bond Fund and The Tax-Exempt Fund of California. Specifically, you may not purchase Class B shares if you are eligible to purchase Class A shares at the $100,000 or higher sales charge discount rate, and you may not purchase Class C shares if you are eligible to purchase Class A shares at the $1 million or more sales charge discount rate (i.e., at net asset value). See "Sales charge reductions and waivers" below and the statement of additional information for more information regarding sales charge discounts.

4. The subsection entitled "Moving between share classes" in the "Purchase and exchange of shares" section of the Prospectus is amended in its entirety to read as follows:

Moving between share classes and accounts

Please see the statement of additional information for details and limitations on moving investments in certain share classes to different share classes, and on moving investments held in certain accounts to different accounts.

In addition, this amended subsection is added to (1) the "Purchase, exchange and sale of shares" section of the Retirement Plan Prospectus and (2) the "Purchase and exchange of shares" section of the Prospectus for American Funds money market funds.

5. The paragraph immediately under the heading "Reducing your Class A initial sales charge" in the "Sales charge reductions and waivers" section of the Prospectus is amended in its entirety to read as follows (not applicable to American Funds money market funds):

Consistent with the policies described in this prospectus, you and your "immediate family" (your spouse -- or equivalent if recognized under local law -- and your children under the age of 21) may combine all of your American Funds investments to reduce your Class A sales charge. However, for this purpose, investments representing direct purchases of American Funds money market funds are excluded. Following are different ways that you may qualify for a reduced Class A sales charge:

6. The paragraph immediately under the heading "Concurrent purchases" in the "Sales charge reductions and waivers" section of the Prospectus is amended in its entirety to read as follows (not applicable to American Funds money market funds):

You may combine simultaneous purchases (including, upon your request, purchases for gifts) of any class of shares of two or more American Funds to qualify for a reduced Class A sales charge.

7. The second paragraph after the heading "Rights of accumulation" in the "Sales charge reductions and waivers" section of the Prospectus is amended in its entirety to read as follows (not applicable to American Funds money market funds):

If you make a gift of shares, upon your request, you may purchase the shares at the sales charge discount allowed under rights of accumulation of all of your American Funds accounts.

8. The paragraph immediately under the heading "Rights of accumulation" in the "Sales charge reductions" section of the Retirement Plan Prospectus is amended in its entirety to read as follows (not applicable to American Funds money market funds):

You may take into account your accumulated holdings in all share classes of the American Funds to determine the initial sales charge you pay on each purchase of Class A shares. Subject to your investment dealer’s or recordkeeper’s capabilities, your accumulated holdings will be calculated as the higher of (a) the current value of your existing holdings or (b) the amount you invested (excluding capital appreciation) less any withdrawals. Please see the statement of additional information for details. You should retain any records necessary to substantiate the historical amounts you have invested.

9. The paragraph immediately under the heading "Statement of intention" in the "Sales charge reductions and waivers" section of the Prospectus is amended in its entirety to read as follows (not applicable to American Funds money market funds):

You may reduce your Class A sales charge by establishing a statement of intention. A statement of intention allows you to combine all purchases of all share classes of American Funds non-money market funds you intend to make over a 13-month period to determine the applicable sales charge; however, purchases made under a right of reinvestment, appreciation of your holdings, and reinvested dividends and capital gains do not count as purchases made during the statement period. The market value of your existing holdings eligible to be aggregated as of the day immediately before the start of the statement period may be credited toward satisfying the statement. A portion of your account may be held in escrow to cover additional Class A sales charges that may be due if your total purchases over the statement period do not qualify you for the applicable sales charge reduction. [Prospectus for American Funds non-tax-exempt funds adds: Employer-sponsored retirement plans may be restricted from establishing statements of intention. See "Sales charges" above for more information.]

10. The paragraph immediately above the heading "Transactions by telephone, fax or the Internet" in the "How to sell shares" section of the Prospectus, as well as the paragraph immediately above the heading "Valuing shares" in the "Purchase, exchange and sale of shares" section of the Retirement Plan Prospectus, are amended in their entirety to read as follows:

If you notify American Funds Service Company, you may reinvest proceeds from a redemption, dividend payment or capital gain distribution without a sales charge in the same fund or other American Funds provided the reinvestment occurs within 90 days after the date of the redemption or distribution and is made into the same account from which you redeemed the shares or received the distribution. If the account has been closed, reinvestment can be made without a sales charge if the new receiving account has the same registration as the closed account. [Prospectus includes the following: Proceeds from a Class B share redemption made during the contingent deferred sales charge period will be reinvested in Class A shares. Proceeds from any other type of redemption and all dividend payments and capital gain distributions will be reinvested in the same share class from which the original redemption or distribution was made. Any contingent deferred sales charge on Class A or C shares will be credited to your account.] [Retirement Plan Prospectus includes the following: Proceeds will be reinvested in the same share class from which the original redemption or distribution was made.] Redemption proceeds of Class A shares representing direct purchases in American Funds money market funds that are reinvested in non-money market American Funds will be subject to a sales charge. Proceeds will be reinvested at the next calculated net asset value after your request is received and accepted by American Funds Service Company. Redemption proceeds from a systematic withdrawal plan are not eligible for reinvestment without a sales charge. You may not reinvest proceeds in the American Funds as described in this paragraph if such proceeds are subject to a purchase block as described under "Frequent trading of fund shares. " This paragraph does not apply to rollover investments as described under "Rollovers from retirement plans to IRAs. "

MFGEBS-007-0307 Litho in USA CGD/MW/9767-S9100

THE FUND PROVIDES SPANISH TRANSLATION IN CONNECTION WITH THE
PUBLIC OFFERING AND SALE OF ITS SHARES. THE FOLLOWING IS A FAIR
AND ACCURATE ENGLISH TRANSLATION OF A SPANISH LANGUAGE PROSPECTUS
FOR THE FUND.

/s/ PATRICK F. QUAN
    PATRICK F. QUAN
    SECRETARY

[logo - American Funds®]

Prospectus Supplement

April 1, 2007

For the following funds with prospectuses dated

May 1, 2006 - March 1, 2007

AMCAP Fund,^® Inc.

American Balanced Fund,^® Inc.

American High-Income Municipal Bond Fund,^® Inc.

American High-Income Trust^SM

American Mutual Fund,^®Inc.

The Bond Fund of America,^SM Inc.

Capital Income Builder,^® Inc.

Capital World Bond Fund,^® Inc.

Capital World Growth and Income Fund,^SM Inc.

The Cash Management Trust of America^®

EuroPacific Growth Fund^®

Fundamental Investors,^SM Inc.

The Growth Fund of America,^® Inc.

The Income Fund of America,^® Inc.

Intermediate Bond Fund of America^®

The Investment Company of America^®

Limited Term Tax-Exempt Bond Fund of America^SM

The New Economy Fund^®

New Perspective Fund,^® Inc.

New World Fund,^SM Inc.

Short-Term Bond Fund of America,^SM Inc.

SMALLCAP World Fund,^® Inc.

The Tax-Exempt Bond Fund of America,^® Inc.

The Tax-Exempt Fund of California^®

The Tax-Exempt Fund of Maryland^®

The Tax-Exempt Fund of Virginia^®

The Tax-Exempt Money Fund of America^SM

U.S. Government Securities Fund^SM

The U.S. Treasury Money Fund of America^SM

Washington Mutual Investors Fund,^SM Inc.

Keep this Supplement with your Prospectus and/or Retirement Plan Prospectus.

The following changes are effective beginning April 1, 2007:

4. The subsection entitled "Moving between share classes" in the "Purchase and exchange of shares" section of the Prospectus is amended in its entirety to read as follows:

Moving between share classes and accounts

You may combine simultaneous purchases (including, upon your request, purchases for gifts) of any class of shares of two or more American Funds to qualify for a reduced Class A sales charge.

If you make a gift of shares, upon your request, you may purchase the shares at the sales charge discount allowed under rights of accumulation of all of your American Funds accounts.

MFGEBS-007-0307 Litho in USA CGD/MW/9767-S9100

<PAGE>

AMERICAN BALANCED FUND, INC.

Part B
Statement of Additional Information

March 1, 2007
(as supplemented April 1, 2007)

This document is not a prospectus but should be read in conjunction with the
current prospectus or retirement plan prospectus of American Balanced Fund, Inc.
(the "fund" or "AMBAL") dated March 1, 2007. You may obtain a prospectus from
your financial adviser or by writing to the fund at the following address:

American Balanced Fund, Inc.
Attention: Secretary
One Market
Steuart Tower, Suite 1800
San Francisco, California 94105
415/421-9360

Certain privileges and/or services described below may not be available to all
shareholders (including shareholders who purchase shares at net asset value
through eligible retirement plans) depending on the shareholder's investment
dealer or retirement plan recordkeeper. Please see your financial adviser,
investment dealer, plan recordkeeper or employer for more information.

TABLE OF CONTENTS

Item Page no.
---- --------

Certain investment limitations and guidelines . . . . . . . . . . . 2
Description of certain securities and investment techniques . . . . 2
Fundamental policies and investment restrictions. . . . . . . . . . 8
Management of the fund . . . . . . . . . . . . . . . . . . . . . . 11
Execution of portfolio transactions . . . . . . . . . . . . . . . . 29
Disclosure of portfolio holdings. . . . . . . . . . . . . . . . . . 30
Price of shares . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Taxes and distributions . . . . . . . . . . . . . . . . . . . . . . 33
Purchase and exchange of shares . . . . . . . . . . . . . . . . . . 38
Sales charges . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Sales charge reductions and waivers . . . . . . . . . . . . . . . . 44
Selling shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Shareholder account services and privileges . . . . . . . . . . . . 48
General information . . . . . . . . . . . . . . . . . . . . . . . . 51
Appendix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Financial statements

American Balanced Fund -- Page 1
<PAGE>

CERTAIN INVESTMENT LIMITATIONS AND GUIDELINES

The following limitations and guidelines are considered at the time of purchase,
under normal circumstances, and are based on a percentage of the fund's net
assets unless otherwise noted. This summary is not intended to reflect all of
the fund's investment limitations.

EQUITY SECURITIES

. The fund will invest at least 50% of the value of its assets in common
stocks.

DEBT SECURITIES

. The fund will invest at least 25% of the value of its assets in debt
securities (including money market instruments) generally rated Baa or
better by Moody's Investors Service or BBB or better by Standard & Poor's
Corporation, or in unrated securities determined to be of equivalent
quality.

. Although the fund is not normally required to dispose of a security in the
event its rating is reduced below the current minimum rating for its
purchase (or if unrated, its quality becomes equivalent to such a rating),
if, as a result of a downgrade or otherwise, the fund holds more than 5% of
its net assets in these securities, the fund will dispose of the excess as
deemed prudent by Capital Research and Management Company, the fund's
investment adviser.

NON-U.S. SECURITIES

. The fund may invest up to 10% of its assets in securities of issuers
domiciled outside the United States. In determining the domicile of an
issuer, the fund's investment adviser will consider the domicile
determination of a leading provider of global indexes, such as Morgan
Stanley Capital International, and may also take into account such factors
as where the company is legally organized and/or maintains principal
corporate offices and/ or conducts its principal operations.

* * * * * *

The fund may experience difficulty liquidating certain portfolio securities
during significant market declines or periods of heavy redemptions.

DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES

The descriptions below are intended to supplement the material in the prospectus
under "Investment objectives, strategies and risks."

EQUITY SECURITIES -- Equity securities represent an ownership position in a
company. Equity securities held by the fund typically consist of common stocks.
The prices of equity securities fluctuate based on, among other things, events
specific to their issuers and market, economic and other conditions. The prices
of these securities can also be adversely affected depending on the outcome of
financial contracts (such as derivatives) held by third parties relating to
various assets or indices.

American Balanced Fund -- Page 2
<PAGE>

There may be little trading in the secondary market for particular equity
securities, which may adversely affect the fund's ability to value accurately or
dispose of such equity securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the value and/or
liquidity of equity securities.

DEBT SECURITIES -- Debt securities are used by issuers to borrow money.
Generally, issuers pay investors periodic interest and repay the amount borrowed
either periodically during the life of the security and/or at maturity. Some
debt securities, such as zero coupon bonds, do not pay current interest, but are
purchased at a discount from their face values and accrue interest at the
applicable coupon rate over a specified time period. The market prices of debt
securities fluctuate depending on such factors as interest rates, credit quality
and maturity. In general, market prices of debt securities decline when interest
rates rise and increase when interest rates fall.

Certain additional risk factors relating to debt securities are discussed below:

SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES -- Debt securities may be
sensitive to economic changes, political and corporate developments, and
interest rate changes. Periods of economic change and uncertainty also can
be expected to result in increased volatility of market prices and yields
of certain debt securities. The prices of these securities also can be
adversely affected depending on the outcome of financial contracts (such as
derivatives) held by third parties relating to various assets or indices.

PAYMENT EXPECTATIONS -- Debt securities may contain redemption or call
provisions. If an issuer exercises these provisions in a lower interest
rate market, the fund would have to replace the security with a lower
yielding security, resulting in decreased income to investors. If the
issuer of a debt security defaults on its obligations to pay interest or
principal or is the subject of bankruptcy proceedings, the fund may incur
losses or expenses in seeking recovery of amounts owed to it.

LIQUIDITY AND VALUATION -- There may be little trading in the secondary
market for particular debt securities, which may affect adversely the
fund's ability to value accurately or dispose of such debt securities.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and/or liquidity of debt
securities.

The investment adviser attempts to reduce the risks described above through
diversification of the fund's portfolio and by credit analysis of each issuer,
as well as by monitoring broad economic trends and corporate and legislative
developments, but there can be no assurance that it will be successful in doing
so.

Credit ratings for debt securities provided by rating agencies evaluate the
safety of principal and interest payments, not market value risk. The rating of
an issuer is also heavily weighted by past developments and does not necessarily
reflect future conditions. There is frequently a lag between the time a rating
is assigned and the time it is updated. See the Appendix for more information
about credit ratings.

SECURITIES WITH EQUITY AND DEBT CHARACTERISTICS -- The fund may invest in
securities that have a combination of equity and debt characteristics. These
securities may at times behave more like equity than debt and vice versa. Some
types of convertible bonds or preferred stocks

American Balanced Fund -- Page 3
<PAGE>

automatically convert into common stocks and some may be subject to redemption
at the option of the issuer at a predetermined price. The prices and yields of
nonconvertible preferred stocks generally move with changes in interest rates
and the issuer's credit quality, similar to the factors affecting debt
securities. These securities may be treated as debt for fund investment limit
purposes.

Convertible bonds, convertible preferred stocks and other securities may
sometimes be converted, or may automatically convert, into common stocks or
other securities at a stated conversion ratio. These securities, prior to
conversion, may pay a fixed rate of interest or a dividend. Because convertible
securities have both debt and equity characteristics, their value varies in
response to many factors, including the value of the underlying assets, general
market and economic conditions, and convertible market valuations, as well as
changes in interest rates, credit spreads and the credit quality of the issuer.

U.S. GOVERNMENT OBLIGATIONS -- U.S. government obligations are securities backed
by the full faith and credit of the U.S. government. U.S. government obligations
include the following types of securities:

U.S. TREASURY SECURITIES -- U.S. Treasury securities include direct
obligations of the U.S. Treasury, such as Treasury bills, notes and bonds.
For these securities, the payment of principal and interest is
unconditionally guaranteed by the U.S. government, and thus they are of the
highest possible credit quality. Such securities are subject to variations
in market value due to fluctuations in interest rates, but, if held to
maturity, will be paid in full.

FEDERAL AGENCY SECURITIES BACKED BY "FULL FAITH AND CREDIT" -- The
securities of certain U.S. government agencies and government-sponsored
entities are guaranteed as to the timely payment of principal and interest
by the full faith and credit of the U.S. government. Such agencies and
entities include the Government National Mortgage Association (Ginnie Mae),
the Veterans Administration (VA), the Federal Housing Administration (FHA),
the Export-Import Bank (Exim Bank), the Overseas Private Investment
Corporation (OPIC), the Commodity Credit Corporation (CCC) and the Small
Business Administration (SBA).

OTHER FEDERAL AGENCY OBLIGATIONS -- Additional federal agency securities are
neither direct obligations of, nor guaranteed by, the U.S. government. These
obligations include securities issued by certain U.S. government agencies and
government-sponsored entities. However, they generally involve some form of
federal sponsorship: some operate under a government charter; some are backed by
specific types of collateral; some are supported by the issuer's right to borrow
from the Treasury; and others are supported only by the credit of the issuing
government agency or entity. These agencies and entities include, but are not
limited to: Federal Home Loan Bank, Federal Home Loan Mortgage Corporation
(Freddie Mac), Federal National Mortgage Association (Fannie Mae), Tennessee
Valley Authority and Federal Farm Credit Bank System.

PASS-THROUGH SECURITIES -- The fund may invest in various debt obligations
backed by pools of mortgages or other assets including, but not limited to,
loans on single family residences, home equity loans, mortgages on commercial
buildings, credit card receivables and leases on airplanes or other equipment.
Principal and interest payments made on the underlying asset pools backing these
obligations are typically passed through to investors, net of any fees paid to
any guarantor of the securities. Pass-through securities may have either fixed
or adjustable coupons. These securities include:

American Balanced Fund -- Page 4
<PAGE>

MORTGAGE-BACKED SECURITIES -- These securities may be issued by U.S.
government agencies and government-sponsored entities, such as Ginnie Mae,
Fannie Mae and Freddie Mac, and by private entities. The payment of
interest and principal on mortgage-backed obligations issued by U.S.
government agencies may be guaranteed by the full faith and credit of the
U.S. government (in the case of Ginnie Mae), or may be guaranteed by the
issuer (in the case of Fannie Mae and Freddie Mac). However, these
guarantees do not apply to the market prices and yields of these
securities, which vary with changes in interest rates.

Mortgage-backed securities issued by private entities are structured
similarly to those issued by U.S. government agencies. However, these
securities and the underlying mortgages are not guaranteed by any
government agencies. These securities generally are structured with one or
more types of credit enhancements such as insurance or letters of credit
issued by private companies. Mortgage-backed securities generally permit
borrowers to prepay their underlying mortgages. Prepayments can alter the
effective maturity of these instruments.

COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) -- CMOs are also backed by a
pool of mortgages or mortgage loans, which are divided into two or more
separate bond issues. CMOs issued by U.S. government agencies are backed by
agency mortgages, while privately issued CMOs may be backed by either
government agency mortgages or private mortgages. Payments of principal and
interest are passed through to each bond issue at varying schedules
resulting in bonds with different coupons, effective maturities and
sensitivities to interest rates. Some CMOs may be structured in a way that
when interest rates change, the impact of changing prepayment rates on the
effective maturities of certain issues of these securities is magnified.
CMOs may be less liquid or may exhibit greater price volatility than other
types of mortgage or asset-backed securities.

COMMERCIAL MORTGAGE-BACKED SECURITIES -- These securities are backed by
mortgages on commercial property, such as hotels, office buildings, retail
stores, hospitals and other commercial buildings. These securities may have
a lower prepayment uncertainty than other mortgage-related securities
because commercial mortgage loans generally prohibit or impose penalties on
prepayments of principal. In addition, commercial mortgage-related
securities often are structured with some form of credit enhancement to
protect against potential losses on the underlying mortgage loans. Many of
the risks of investing in commercial mortgage-backed securities reflect the
risks of investing in the real estate securing the underlying mortgage
loans, including the effects of local and other economic conditions on real
estate markets, the ability of tenants to make rental payments and the
ability of a property to attract and retain tenants. Commercial
mortgage-backed securities may be less liquid or exhibit greater price
volatility than other types of mortgage or asset-backed securities.

ASSET-BACKED SECURITIES -- These securities are backed by other assets such
as credit card, automobile or consumer loan receivables, retail installment
loans or participations in pools of leases. Credit support for these
securities may be based on the underlying assets and/or provided through
credit enhancements by a third party. The values of these securities are
sensitive to changes in the credit quality of the underlying collateral,
the credit strength of the credit enhancement, changes in interest rates
and at times the financial condition of the issuer. Some asset-backed
securities also may receive prepayments that can change their effective
maturities.

American Balanced Fund -- Page 5
<PAGE>

WARRANTS AND RIGHTS -- The fund may purchase warrants, which may be issued
together with bonds or preferred stocks. Warrants generally entitle the holder
to buy a proportionate amount of common stock at a specified price, usually
higher than the current market price. Warrants may be issued with an expiration
date or in perpetuity. Rights are similar to warrants except that they normally
entitle the holder to purchase common stock at a lower price than the current
market price.

INFLATION-INDEXED BONDS -- The fund may invest in inflation-indexed bonds issued
by governments, their agencies or instrumentalities and corporations. The
principal value of this type of bond is adjusted in response to changes in the
level of the consumer price index. The interest rate is fixed at issuance as a
percentage of this adjustable principal. The actual interest income may
therefore both rise and fall as the level of the consumer price index rises and
falls. In particular, in a period of deflation the interest income would fall.
While the interest income may adjust upward or downward without limit in
response to changes in the consumer price index, the principal has a floor at
par, meaning that the investor receives at least the par value at redemption. If
a guarantee of principal is not provided, the adjusted principal value of the
bond repaid at maturity may be less than the original principal. If interest
rates rise for reasons other than inflation, investors in these securities may
not be protected to the extent the increase is not reflected in the bond's
inflation measure.

Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed and will fluctuate.

REAL ESTATE INVESTMENT TRUSTS -- The fund may invest in securities issued by
real estate investment trusts (REITs), which primarily invest in real estate or
real estate-related loans. Equity REITs own real estate properties, while
mortgage REITs hold construction, development and/or long-term mortgage loans.
The values of REITs may be affected by changes in the value of the underlying
property of the trusts, the creditworthiness of the issuer, property taxes,
interest rates, tax laws and regulatory requirements, such as those relating to
the environment. Both types of REITs are dependent upon management skill and the
cash flows generated by their holdings, the real estate market in general and
the possibility of failing to qualify for any applicable pass-through tax
treatment or failing to maintain any applicable exemptive status afforded under
relevant laws.

INVESTING IN VARIOUS COUNTRIES -- Investing outside the United States may
involve additional risks caused by, among other things, currency controls and
fluctuating currency values; different accounting, auditing, financial reporting
and legal standards and practices in some countries; changing local, regional
and global economic, political and social conditions; expropriation; changes in
tax policy; greater market volatility; differing securities market structures;
higher transaction costs; and various administrative difficulties, such as
delays in clearing and settling portfolio transactions or in receiving payment
of dividends.

The risks described above may be heightened in connection with investments in
developing countries. Although there is no universally accepted definition, the
investment adviser generally considers a developing country as a country that is
in the earlier stages of its industrialization cycle with a low per capita gross
domestic product ("GDP") and a low market capitalization to GDP ratio relative
to those in the United States and the European Union. Historically, the markets
of developing countries have been more volatile than the markets of developed
countries. The fund may invest in securities of issuers in developing countries
only to a limited extent.

American Balanced Fund -- Page 6
<PAGE>

Additional costs could be incurred in connection with the fund's investment
activities outside the United States. Brokerage commissions may be higher
outside the United States, and the fund will bear certain expenses in connection
with its currency transactions. Furthermore, increased custodian costs may be
associated with maintaining assets in certain jurisdictions.

The fund may purchase and sell currencies to facilitate securities transactions.

CASH AND CASH EQUIVALENTS -- The fund may invest in cash and cash equivalents.
These include (a) commercial paper (for example, short-term notes with
maturities typically up to 12 months in length issued by corporations,
governmental bodies or bank/corporation sponsored conduits (asset-backed
commercial paper)) (b) short-term bank obligations (for example, certificates of
deposit, bankers' acceptances (time drafts on a commercial bank where the bank
accepts an irrevocable obligation to pay at maturity)) or bank notes, (c)
savings association and savings bank obligations (for example, bank notes and
certificates of deposit issued by savings banks or savings associations), (d)
securities of the U.S. government, its agencies or instrumentalities that
mature, or may be redeemed, in one year or less, and (e) corporate bonds and
notes that mature, or that may be redeemed, in one year or less.

REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements under
which the fund buys a security and obtains a simultaneous commitment from the
seller to repurchase the security at a specified time and price. Repurchase
agreements permit the fund to maintain liquidity and earn income over periods of
time as short as overnight. The seller must maintain with the fund's custodian
collateral equal to at least 100% of the repurchase price, including accrued
interest, as monitored daily by the investment adviser. The fund will only enter
into repurchase agreements involving securities in which it could otherwise
invest and with selected banks and securities dealers whose financial condition
is monitored by the investment adviser. If the seller under the repurchase
agreement defaults, the fund may incur a loss if the value of the collateral
securing the repurchase agreement has declined and may incur disposition costs
in connection with liquidating the collateral. If bankruptcy proceedings are
commenced with respect to the seller, realization of the collateral by the fund
may be delayed or limited.

FORWARD COMMITMENT, WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The fund
may enter into commitments to purchase or sell securities at a future date. When
the fund agrees to purchase such securities, it assumes the risk of any decline
in value of the security from the date of the agreement. If the other party to
such a transaction fails to deliver or pay for the securities, the fund could
miss a favorable price or yield opportunity, or could experience a loss.

The fund will not use these transactions for the purpose of leveraging and will
segregate liquid assets that will be marked to market daily in an amount
sufficient to meet its payment obligations in these transactions. Although these
transactions will not be entered into for leveraging purposes, to the extent the
fund's aggregate commitments in connection with these transactions exceed its
segregated assets, the fund temporarily could be in a leveraged position
(because it may have an amount greater than its net assets subject to market
risk). Should market values of the fund's portfolio securities decline while the
fund is in a leveraged position, greater depreciation of its net assets would
likely occur than if it were not in such a position. The fund will not borrow
money to settle these transactions and, therefore, will liquidate other
portfolio securities in advance of settlement if necessary to generate
additional cash to meet its obligations. After a transaction is entered into,
the fund may still dispose of or renegotiate the transaction. Additionally,
prior to receiving delivery of securities as part of a transaction, the fund may
sell such securities.

American Balanced Fund -- Page 7
<PAGE>

The fund may also enter into "roll" transactions which involve the sale of
mortgage-backed or other securities together with a commitment to purchase
similar, but not identical, securities at a later date. The fund assumes the
risk of price and yield fluctuations during the time of the commitment. The fund
will segregate liquid assets which will be marked to market daily in an amount
sufficient to meet its payment obligations in these transactions.

RESTRICTED OR ILLIQUID SECURITIES -- The fund may purchase securities subject to
restrictions on resale. Restricted securities may only be sold pursuant to an
exemption from registration under the Securities Act of 1933 (the "1933 Act"),
or in a registered public offering. Where registration is required, the holder
of a registered security may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to seek
registration and the time it may be permitted to sell a security under an
effective registration statement. Difficulty in selling such securities may
result in a loss to the fund or cause it to incur additional administrative
costs.

Securities (including restricted securities) not actively traded will be
considered illiquid unless they have been specifically determined to be liquid
under procedures adopted by the fund's board of directors, taking into account
factors such as the frequency and volume of trading, the commitment of dealers
to make markets and the availability of qualified investors, all of which can
change from time to time. The fund may incur certain additional costs in
disposing of illiquid securities.

* * * * * *

PORTFOLIO TURNOVER -- Portfolio changes will be made without regard to the
length of time particular investments may have been held. Short-term trading
profits are not the fund's objective, and changes in its investments are
generally accomplished gradually, though short-term transactions may
occasionally be made. High portfolio turnover involves correspondingly greater
transaction costs in the form of dealer spreads or brokerage commissions, and
may result in the realization of net capital gains, which are taxable when
distributed to shareholders.

A fund's portfolio turnover rate would equal 100% if each security in the fund's
portfolio were replaced once per year. The fund's portfolio turnover rates for
the fiscal years ended December 31, 2006 and 2005 were 34% and 35%,
respectively. See "Financial highlights" in the prospectus for the fund's annual
portfolio turnover rate for each of the last five fiscal years.

Under normal circumstances, the investment adviser anticipates that portfolio
turnover for common stocks in the fund's portfolio will not exceed 100% on an
annual basis, and that portfolio turnover for other securities will not exceed
100% on an annual basis.

Fixed-income securities are generally traded on a net basis and usually neither
brokerage commissions nor transfer taxes are involved. Transaction costs are
usually reflected in the spread between the bid and asked price.

FUNDAMENTAL POLICIES AND INVESTMENT RESTRICTIONS

FUNDAMENTAL POLICIES -- The fund has adopted the following fundamental policies
and investment restrictions, which may not be changed without approval by
holders of a majority of its outstanding shares. Such majority is defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), as the vote of the
lesser of (a) 67% or more of the outstanding voting

American Balanced Fund -- Page 8
<PAGE>

securities present at a shareholder meeting, if the holders of more than 50% of
the outstanding voting securities are present in person or by proxy, or (b) more
than 50% of the outstanding voting securities. All percentage limitations are
considered at the time securities are purchased and are based on the fund's net
assets unless otherwise indicated. None of the following investment restrictions
involving a maximum percentage of assets will be considered violated unless the
excess occurs immediately after, and is caused by, an acquisition by the fund.

1. To invest in a diversified list of securities, including common stocks,
preferred stocks, and bonds, to the extent considered advisable by management.

2. To allocate its investments among different industries as well as among
individual companies. The amount invested in an industry will vary from time to
time in accordance with the judgment of management, but 25% or more of the value
of the fund's total assets shall not be invested in securities of issuers in any
one industry (other than securities issued or guaranteed by the U.S. government
or its agencies or instrumentalities).

3. Not to invest in companies for the purpose of exercising control or
management.

4. Not to invest more than 5% of the value of its total assets in the
securities of any one issuer (except the U.S. government).

5. Not to acquire more than 10% of the outstanding voting securities, or 10%
of all of the securities, of any one issuer.

6. Not to borrow money except temporarily extraordinary or emergency purposes,
in an amount not exceeding 5% of the fund's total assets at the time of
borrowing.

7. Not to underwrite the sale, or participate in any underwriting or selling
group in connection with the public distribution, of any security. The fund may
invest not more than 10% of its net assets in, and subsequently distribute, as
permitted by law, securities and other assets for which there is no ready
market.

8. Not to purchase securities on margin (except that it may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities).

9. Not to engage in the purchase or sale of real estate. Investments in real
estate investment trusts which may invest only in mortgages or other security
interests are not deemed purchases of real estate.

10. Not to purchase or sell commodities or commodity contracts.

11. Not to make loans of money or securities to any person or firm; provided,
however, that the acquisition for investment of bonds, debentures, notes or
other evidences of indebtedness of any corporation or government shall not be
construed to be the making of a loan.

12. Not to effect short sales of securities.

13. Not to invest more than 75% of the value of the fund's net assets in common
stocks, such percentage including the value of that portion of convertible
securities attributable to the conversion feature.

American Balanced Fund -- Page 9
<PAGE>

14. Not to write, purchase or sell options.

For purposes of Investment Restriction #7, restricted securities are treated as
not readily marketable by the fund, with the exception of those securities that
have been determined to be liquid pursuant to procedures adopted by the fund's
board of directors.

For purposes of Investment Restriction #9, investments in real estate investment
trusts that own real estate properties are not deemed to be purchases of real
estate by the fund.

Notwithstanding Investment Restriction #14, the fund may purchase warrants
issued together with bonds or preferred stock as well as rights.

NONFUNDAMENTAL POLICIES -- The following policies may be changed without
shareholder approval:

1. Not to invest in securities of other investment companies, except as
permitted by the 1940 Act.

2. Not to invest in senior securities, except as permitted by the 1940 Act.

3. The fund may not acquire securities of open-end investment companies or
unit investment trusts registered under the Investment Company Act of 1940 in
reliance on Sections 12(d)(1)(F) or 12(d)(1)(G) of the Investment Company Act of
1940.

Notwithstanding non-fundamental Investment Restriction #1, the fund may invest
in securities of other investment companies if deemed advisable by its officers
in connection with the administration of a deferred compensation plan adopted by
directors pursuant to an exemptive order granted by the Securities and Exchange
Commission.

American Balanced Fund -- Page 10
<PAGE>

MANAGEMENT OF THE FUND

BOARD OF DIRECTORS AND OFFICERS

"INDEPENDENT" DIRECTORS/1/

NAME, AGE AND NUMBER OF
POSITION WITH FUND PORTFOLIOS/3/
(YEAR FIRST ELECTED AS A PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS/4/ HELD
DIRECTOR/2/) DURING PAST FIVE YEARS BY DIRECTOR BY DIRECTOR
--------------------------------------------------------------------------------------------------------------

Robert A. Fox, 69 Managing General Partner, 7 Chemtura Corporation
Director (1976-1978; 1982) Fox Investments LP;
corporate director; retired
President and CEO, Foster
Farms (poultry producer)
--------------------------------------------------------------------------------------------------------------
Leonade D. Jones, 59 Co-founder, VentureThink LLC 6 None
Chairman of the Board (developed and managed
(Independent and e-commerce businesses) and
Non-Executive) (1993) Versura Inc. (education loan
exchange); former Treasurer,
The Washington Post Company

--------------------------------------------------------------------------------------------------------------
John M. Lillie, 70 Business consultant; former 2 None
Director (2003) President, Sequoia
Associates LLC (investment
firm specializing in
medium-size buyouts); former
Vice Chairman of the Board,
Gap, Inc. (specialty apparel
retailing)

--------------------------------------------------------------------------------------------------------------
John G. McDonald, 69 Stanford Investors 8 iStar Financial, Inc.;
Director (1975-1978; 1988) Professor, Graduate School Plum Creek Timber Co.;
of Business, Stanford Scholastic Corporation;
University Varian, Inc.
--------------------------------------------------------------------------------------------------------------
Henry E. Riggs, 72 President Emeritus, Keck 4 None
Director (1989) Graduate Institute of
Applied Life Sciences
--------------------------------------------------------------------------------------------------------------
Isaac Stein, 60 President, Waverley 2 Alexza Pharmaceuticals, Inc.;
Director (2004) Associates (private Maxygen, Inc.
investment fund); Chairman
Emeritus, Stanford
University Board of Trustees

--------------------------------------------------------------------------------------------------------------
Patricia K. Woolf, 72 Private investor; corporate 6 None
Director (1988) director; former Lecturer,
Department of Molecular
Biology, Princeton
University
--------------------------------------------------------------------------------------------------------------

American Balanced Fund -- Page 11
<PAGE>

"INTERESTED" DIRECTORS/5,6/

PRINCIPAL OCCUPATION(S)
DURING PAST FIVE YEARS
NAME, AGE AND AND POSITIONS NUMBER OF
POSITION WITH FUND HELD WITH AFFILIATED ENTITIES PORTFOLIOS/3/
(YEAR FIRST ELECTED AS A OR THE PRINCIPAL UNDERWRITER OVERSEEN OTHER DIRECTORSHIPS/4/ HELD
DIRECTOR/OFFICER/2/) OF THE FUND BY DIRECTOR BY DIRECTOR
----------------------------------------------------------------------------------------------------------

Robert G. O'Donnell, 62 Senior Vice President and 2 None
Vice Chairman of the Board Director, Capital Research
(1990) and Management Company
----------------------------------------------------------------------------------------------------------
Paul G. Haaga, Jr., 58 Vice Chairman of the Board, 15 None
Director (1994) Capital Research and
Management Company;
Director, The Capital Group
Companies, Inc.*
----------------------------------------------------------------------------------------------------------

OTHER OFFICERS/6/

NAME, AGE AND
POSITION WITH FUND PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
(YEAR FIRST ELECTED AS AND POSITIONS HELD WITH AFFILIATED ENTITIES
AN OFFICER/2/) OR THE PRINCIPAL UNDERWRITER OF THE FUND
-------------------------------------------------------------------------------

Gregory D. Johnson, Senior Vice President, Capital Research Company*
43
President (2003)
-------------------------------------------------------------------------------
Hilda L. Applbaum, 46 Senior Vice President, Capital Research Company*
Senior Vice President
(1999)
-------------------------------------------------------------------------------
Abner D. Goldstine, Senior Vice President and Director, Capital Research
77 and Management Company
Senior Vice President
(1990)
-------------------------------------------------------------------------------
John H. Smet, 50 Senior Vice President, Capital Research and
Senior Vice President Management Company; Director, American Funds
(2000) Distributors, Inc.*
-------------------------------------------------------------------------------
Jeffrey T. Lager, 38 Vice President, Capital Research Company*
Vice President (2002)
-------------------------------------------------------------------------------
Patrick F. Quan, 48 Vice President - Fund Business Management Group,
Secretary (1986) Capital Research and Management Company
-------------------------------------------------------------------------------
Jennifer M. Buchheim, Vice President - Fund Business Management Group,
33 Capital Research and Management Company
Treasurer (2005)
-------------------------------------------------------------------------------
R. Marcia Gould, 52 Vice President - Fund Business Management Group,
Assistant Treasurer Capital Research and Management Company
(1994)
-------------------------------------------------------------------------------

* Company affiliated with Capital Research and Management Company.

1 The term "independent" director refers to a director who is not an "interested
person" within the meaning of the 1940 Act.
2 Directors and officers of the fund serve until their resignation, removal or
retirement.
3 Funds managed by Capital Research and Management Company, including the
American Funds, American Funds Insurance Series,(R) which is composed of 15
funds and serves as the underlying investment vehicle for certain variable
insurance contracts, American Funds Target Date Retirement Series,/SM/ Inc.,
which is composed of nine funds and is available to investors in tax-deferred
retirement plans and IRAs, and Endowments, which is composed of two portfolios
and is available to certain nonprofit organizations.

American Balanced Fund -- Page 12
<PAGE>

4 This includes all directorships (other than those in the American Funds) that
are held by each director as a director of a public company or a registered
investment company.
5 "Interested persons," within the meaning of the 1940 Act, on the basis of
their affiliation with the fund's investment adviser, Capital Research and
Management Company, or affiliated entities (including the fund's principal
underwriter).

6 All of the officers listed, except Jeffrey T. Lager, are officers and/or
directors/trustees of one or more of the other funds for which Capital Research
and Management Company serves as investment adviser.

THE ADDRESS FOR ALL DIRECTORS AND OFFICERS OF THE FUND IS 333 SOUTH HOPE STREET,
55TH FLOOR, LOS ANGELES, CALIFORNIA 90071, ATTENTION: SECRETARY.

American Balanced Fund -- Page 13
<PAGE>

FUND SHARES OWNED BY DIRECTORS AS OF DECEMBER 31, 2006

AGGREGATE DOLLAR RANGE/1/
OF SHARES
OWNED IN ALL FUNDS
IN THE AMERICAN FUNDS
DOLLAR RANGE/1/ OF FUND FAMILY OVERSEEN
NAME SHARES OWNED BY DIRECTOR
-------------------------------------------------------------------------------

"INDEPENDENT" DIRECTORS
-------------------------------------------------------------------------------
Robert A. Fox Over $100,000 Over $100,000
-------------------------------------------------------------------------------
Leonade D. Jones Over $100,000 Over $100,000
-------------------------------------------------------------------------------
John M. Lillie Over $100,000 Over $100,000
-------------------------------------------------------------------------------
John G. McDonald $50,001 - $100,000 Over $100,000
-------------------------------------------------------------------------------
Henry E. Riggs Over $100,000 Over $100,000
-------------------------------------------------------------------------------
Isaac Stein Over $100,000 Over $100,000
-------------------------------------------------------------------------------
Patricia K. Woolf $50,001 - $100,000 Over $100,000
-------------------------------------------------------------------------------
"INTERESTED" DIRECTORS
-------------------------------------------------------------------------------
Paul G. Haaga, Jr. $10,001 - $50,000 Over $100,000
-------------------------------------------------------------------------------
Robert G. O'Donnell Over $100,000 Over $100,000
-------------------------------------------------------------------------------

1 Ownership disclosure is made using the following ranges: None; $1 - $10,000;
$10,001 - $50,000; $50,001 - $100,000; and Over $100,000. The amounts listed
for "interested" directors include shares owned through The Capital Group
Companies, Inc. retirement plan and 401(k) plan.

DIRECTOR COMPENSATION -- No compensation is paid by the fund to any officer or
director who is a director, officer or employee of the investment adviser or its
affiliates. The boards of funds advised by the investment adviser typically meet
either individually or jointly with the boards of one or more other such funds
with substantially overlapping board membership (in each case referred to as a
"board cluster"). The fund typically pays each independent director an annual
fee, which ranges from $15,000 to $34,000, based primarily on the total number
of board clusters on which that independent director serves.

In addition, the fund generally pays independent directors attendance and other
fees for meetings of the board and its committees. Board and committee chairs
receive additional fees for their services.

Independent directors also receive attendance fees for certain special joint
meetings and information sessions with directors and trustees of other groupings
of funds advised by the investment adviser. The fund and the other funds served
by each independent director each pay an equal portion of these attendance fees.

No pension or retirement benefits are accrued as part of fund expenses.
Independent directors may elect, on a voluntary basis, to defer all or a portion
of their fees through a deferred

American Balanced Fund -- Page 14
<PAGE>

compensation plan in effect for the fund. The fund also reimburses certain
expenses of the independent directors.

DIRECTOR COMPENSATION PAID DURING THE FISCAL YEAR ENDED DECEMBER 31, 2006

TOTAL COMPENSATION (INCLUDING
VOLUNTARILY DEFERRED
COMPENSATION/1/)
AGGREGATE COMPENSATION FROM ALL FUNDS MANAGED BY
(INCLUDING VOLUNTARILY CAPITAL RESEARCH AND MANAGEMENT
DEFERRED COMPENSATION/1/) COMPANY OR ITS AFFILIATES/2/
NAME FROM THE FUND
-----------------------------------------------------------------------------------

Robert A. Fox/3/ $34,142 $257,500
-----------------------------------------------------------------------------------
Leonade D. Jones/3/ 48,667 263,500
-----------------------------------------------------------------------------------
John M. Lillie 44,400 96,000
-----------------------------------------------------------------------------------
John G. McDonald/3/ 36,187 340,000
-----------------------------------------------------------------------------------
Henry E. Riggs/3/ 32,750 181,500
-----------------------------------------------------------------------------------
Isaac Stein 45,400 98,000
-----------------------------------------------------------------------------------
Patricia K. Woolf/3/ 36,459 224,500
-----------------------------------------------------------------------------------

1 Amounts may be deferred by eligible directors under a nonqualified deferred
compensation plan adopted by the fund in 1993. Deferred amounts accumulate at
an earnings rate determined by the total return of one or more American Funds
as designated by the directors. Compensation shown in this table for the fiscal
year ended December 31, 2006 does not include earnings on amounts deferred in
previous fiscal years. See footnote 3 to this table for more information.
2 Funds managed by Capital Research and Management Company, including the
American Funds, American Funds Insurance Series,(R) which is composed of 15
funds and serves as the underlying investment vehicle for certain variable
insurance contracts, American Funds Target Date Retirement Series,/SM/ Inc.,
which is composed of nine funds and is available to investors in tax-deferred
retirement plans and IRAs, and Endowments, which is composed of two portfolios
and is available to certain nonprofit organizations.
3 Since the deferred compensation plan's adoption, the total amount of deferred
compensation accrued by the fund (plus earnings thereon) through the 2006
fiscal year for participating directors is as follows: Robert A. Fox
($532,661), Leonade D. Jones ($105,274), John G. McDonald ($418,588), Henry E.
Riggs ($366,444) and Patricia K. Woolf ($196,863). Amounts deferred and
accumulated earnings thereon are not funded and are general unsecured
liabilities of the fund until paid to the directors.

As of February 1, 2007, the officers and directors of the fund and their
families, as a group, owned beneficially or of record less than 1% of the
outstanding shares of the fund.

FUND ORGANIZATION AND THE BOARD OF DIRECTORS -- The fund, an open-end,
diversified management investment company, was organized as a Delaware
corporation on September 6, 1932, and reorganized in Maryland on February 2,
1990. Although the board of directors has delegated day-to-day oversight to the
investment adviser, all fund operations are supervised by the fund's board,
which meets periodically and performs duties required by applicable state and
federal laws.

Under Maryland law, the business affairs of a fund are managed under the
direction of the board of directors, and all powers of the fund are exercised by
or under the authority of the board except as reserved to the shareholders by
law or the fund's charter or by-laws. Maryland law requires each director to
perform his/her duties as a director, including his/her duties as a member of
any board committee on which he/she serves, in good faith, in a manner he/she

American Balanced Fund -- Page 15
<PAGE>

reasonably believes to be in the best interest of the fund, and with the care
that an ordinarily prudent person in a like position would use under similar
circumstances.

Members of the board who are not employed by the investment adviser or its
affiliates are paid certain fees for services rendered to the fund as described
above. They may elect to defer all or a portion of these fees through a deferred
compensation plan in effect for the fund.

The fund has several different classes of shares. Shares of each class represent
an interest in the same investment portfolio. Each class has pro rata rights as
to voting, redemption, dividends and liquidation, except that each class bears
different distribution expenses and may bear different transfer agent fees and
other expenses properly attributable to the particular class as approved by the
board of directors and set forth in the fund's rule 18f-3 Plan. Each class'
shareholders have exclusive voting rights with respect to the respective class'
rule 12b-1 plans adopted in connection with the distribution of shares and on
other matters in which the interests of one class are different from interests
in another class. Shares of all classes of the fund vote together on matters
that affect all classes in substantially the same manner. Each class votes as a
class on matters that affect that class alone. Note that CollegeAmerica/(R)/
account owners invested in Class 529 shares are not shareholders of the fund
and, accordingly, do not have the rights of a shareholder, such as the right to
vote proxies relating to fund shares. As the legal owner of the fund's Class 529
shares, the Virginia College Savings Plan/SM/ will vote any proxies relating to
such fund shares.

The fund does not hold annual meetings of shareholders. However, significant
matters that require shareholder approval, such as certain elections of board
members or a change in a fundamental investment policy, will be presented to
shareholders at a meeting called for such purpose. Shareholders have one vote
per share owned. At the request of the holders of at least 10% of the shares,
the fund will hold a meeting at which any member of the board could be removed
by a majority vote.

The fund's Articles of Incorporation and by-laws as well as separate
indemnification agreements that the fund has entered into with independent
directors provide in effect that, subject to certain conditions, the fund will
indemnify its officers and directors against liabilities or expenses actually
and reasonably incurred by them relating to their service to the fund. However,
directors are not protected from liability by reason of their willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of their office.

COMMITTEES OF THE BOARD OF DIRECTORS -- The fund has an audit committee
comprised of Robert A. Fox, Leonade D. Jones, John M. Lillie and Isaac Stein,
none of whom is an "interested person" of the fund within the meaning of the
1940 Act. The committee provides oversight regarding the fund's accounting and
financial reporting policies and practices, its internal controls and the
internal controls of the fund's principal service providers. The committee acts
as a liaison between the fund's independent registered public accounting firm
and the full board of directors. Four audit committee meetings were held during
the 2006 fiscal year.

The fund has a contracts committee comprised of Robert A. Fox, Leonade D. Jones,
John M. Lillie, John G. McDonald, Henry E. Riggs, Isaac Stein and Patricia K.
Woolf, none of whom is an "interested person" of the fund within the meaning of
the 1940 Act. The committee's principal function is to request, review and
consider the information deemed necessary to evaluate the terms of certain
agreements between the fund and its investment adviser or the investment
adviser's affiliates, such as the Investment Advisory and Service Agreement,
Principal

American Balanced Fund -- Page 16
<PAGE>

Underwriting Agreement, Administrative Services Agreement and Plans of
Distribution adopted pursuant to rule 12b-1 under the 1940 Act, that the fund
may enter into, renew or continue, and to make its recommendations to the full
board of directors on these matters. One contracts committee meeting was held
during the 2006 fiscal year.

The fund has a nominating committee comprised of John M. Lillie, John G.
McDonald, Henry E. Riggs and Patricia K. Woolf, none of whom is an "interested
person" of the fund within the meaning of the 1940 Act. The committee
periodically reviews such issues as the board's composition, responsibilities,
committees, compensation and other relevant issues, and recommends any
appropriate changes to the full board of directors. The committee also
evaluates, selects and nominates independent director candidates to the full
board of directors. While the committee normally is able to identify from its
own and other resources an ample number of qualified candidates, it will
consider shareholder suggestions of persons to be considered as nominees to fill
future vacancies on the board. Such suggestions must be sent in writing to the
nominating committee of the fund, addressed to the fund's secretary, and must be
accompanied by complete biographical and occupational data on the prospective
nominee, along with a written consent of the prospective nominee for
consideration of his or her name by the committee. Three nominating committee
meetings were held during the 2006 fiscal year.

The fund has a proxy committee comprised of Robert A. Fox, Leonade D. Jones,
John G. McDonald, Isaac Stein and Patricia K. Woolf, none of whom is an
"interested person" of the fund within the meaning of the 1940 Act. The
committee's functions include establishing and reviewing procedures and policies
for voting proxies of companies held in the fund's portfolio, making
determinations with regard to certain contested proxy voting issues, and
discussing related current issues. Four proxy committee meetings were held
during the 2006 fiscal year.

PROXY VOTING PROCEDURES AND GUIDELINES -- The fund and its investment adviser
have adopted Proxy Voting Guidelines (the "Guidelines") with respect to voting
proxies of securities held by the fund, other American Funds, Endowments and
American Funds Insurance Series. Certain American Funds, including the fund,
have established separate proxy voting committees that vote proxies or delegate
to a voting officer the authority to vote on behalf of those funds. Proxies for
all other funds are voted by a committee of the investment adviser under
authority delegated by those funds' boards. Therefore, if more than one fund
invests in the same company, they may vote differently on the same proposal.

All U.S. proxies are voted. Non-U.S. proxies also are voted, provided there is
sufficient time and information available. After a proxy is received, the
investment adviser prepares a summary of the proposals in the proxy. A
discussion of any potential conflicts of interest is also included in the
summary. After reviewing the summary, one or more research analysts familiar
with the company and industry make a voting recommendation on the proxy
proposals. A second recommendation is made by a proxy coordinator (a senior
investment professional) based on the individual's knowledge of the Guidelines
and familiarity with proxy-related issues. The proxy summary and voting
recommendations are then sent to the appropriate proxy voting committee for the
final voting decision.

The analyst and proxy coordinator making voting recommendations are responsible
for noting any potential material conflicts of interest. One example might be
where a director of one or more American Funds is also a director of a company
whose proxy is being voted. In such instances, proxy voting committee members
are alerted to the potential conflict. The proxy voting committee

American Balanced Fund -- Page 17
<PAGE>

may then elect to vote the proxy or seek a third-party recommendation or vote of
an ad hoc group of committee members.

The Guidelines, which have been in effect in substantially their current form
for many years, provide an important framework for analysis and decision-making
by all funds. However, they are not exhaustive and do not address all potential
issues. The Guidelines provide a certain amount of flexibility so that all
relevant facts and circumstances can be considered in connection with every
vote. As a result, each proxy received is voted on a case-by-case basis
considering the specific circumstances of each proposal. The voting process
reflects the funds' understanding of the company's business, its management and
its relationship with shareholders over time.

Information regarding how the fund voted proxies relating to portfolio
securities during the 12-month period ended June 30 of each year will be
available on or about September 1 of each year (a) without charge, upon request
by calling American Funds Service Company at 800/421-0180, (b) on the American
Funds website at americanfunds.com and (c) on the SEC's website at sec.gov.

The following summary sets forth the general positions of the American Funds,
Endowments, American Funds Insurance Series and the investment adviser on
various proposals. A copy of the full Guidelines is available upon request, free
of charge, by calling American Funds Service Company at 800/421-0180 or visiting
the American Funds website.

DIRECTOR MATTERS -- The election of a company's slate of nominees for
director is generally supported. Votes may be withheld for some or all of
the nominees if this is determined to be in the best interest of
shareholders. Separation of the chairman and CEO positions may also be
supported. Typically, proposals to declassify the board (elect all
directors annually) are supported based on the belief that this increases
the directors' sense of accountability to shareholders.

SHAREHOLDER RIGHTS -- Proposals to repeal an existing poison pill, to
provide for confidential voting and to provide for cumulative voting are
usually supported. Proposals to eliminate the right of shareholders to act
by written consent or to take away a shareholder's right to call a special
meeting are not typically supported.

COMPENSATION AND BENEFIT PLANS -- Option plans are complicated, and many
factors are considered in evaluating a plan. Each plan is evaluated based
on protecting shareholder interests and a knowledge of the company and its
management. Considerations include the pricing (or repricing) of options
awarded under the plan and the impact of dilution on existing shareholders
from past and future equity awards. Compensation packages should be
structured to attract, motivate and retain existing employees and qualified
directors; however, they should not be excessive.

ROUTINE MATTERS -- The ratification of auditors, procedural matters
relating to the annual meeting and changes to company name are examples of
items considered routine. Such items are generally voted in favor of
management's recommendations unless circumstances indicate otherwise.

PRINCIPAL FUND SHAREHOLDERS - The following table identifies those investors who
own of record or are known by the fund to own beneficially 5% or more of any
class of its shares as of the

American Balanced Fund -- Page 18
<PAGE>

opening of business on February 1, 2007. Unless otherwise indicated, the
ownership percentages below represent ownership of record rather than beneficial
ownership.

NAME AND ADDRESS OWNERSHIP PERCENTAGE
----------------------------------------------------------------------------

Edward D. Jones & Co. Class A 17.39%
201 Progress Parkway Class B 7.25
Maryland Heights, MO 63043-3009
----------------------------------------------------------------------------
Citigroup Global Markets, Inc. Class B 5.35
333 W. 34th Street Class C 12.32
New York, NY 10001-2402
----------------------------------------------------------------------------
MLPF&S Class B 5.12
4800 Deer Lake Drive, East, Floor 2 Class C 15.41
Jacksonville, FL 32246-6484
----------------------------------------------------------------------------
Charles Schwab & Co., Inc. Class F 10.89
101 Montgomery Street Class R-4 7.39
San Francisco, CA 94104-4151
----------------------------------------------------------------------------
Prudential Investment Management Services Class F 5.20
100 Mulberry Street
3 Gateway Center, Floor 11
Newark, NJ 07102-4000
----------------------------------------------------------------------------
Hartford Life Insurance Co. Class R-1 19.40
P.O. Box 2999 Class R-3 8.45
Hartford, CT 06104-2999
----------------------------------------------------------------------------
AST Trust Co. Class R-1 5.07
P.O. Box 52129
Phoenix, AZ 85072-2129
----------------------------------------------------------------------------
John Hancock Life Ins. Co. USA Class R-3 15.08
601 Congress Street
Boston, MA 02210-2804
----------------------------------------------------------------------------
ING Life Insurance & Annuity Class R-3 11.66
151 Farmington Avenue, #TN41 Class R-4 5.87
Hartford, CT 06156-0001
----------------------------------------------------------------------------
Fidelity Investments Institutional Class R-5 29.67
100 Magellan Way
Covington, KY 41015-1999
----------------------------------------------------------------------------
UBS Financial Services Class R-5 11.63
P. O. Box 92994
Chicago, IL 60675-2994
----------------------------------------------------------------------------
Nationwide Trust Company Class R-5 7.55
P.O. Box 182029
Columbus, OH 43218-2029
----------------------------------------------------------------------------

INVESTMENT ADVISER -- Capital Research and Management Company, the fund's
investment adviser, founded in 1931, maintains research facilities in the United
States and abroad (Los Angeles, San Francisco, New York, Washington, DC, London,
Geneva, Hong Kong, Singapore

American Balanced Fund -- Page 19
<PAGE>

and Tokyo). These facilities are staffed with experienced investment
professionals. The investment adviser is located at 333 South Hope Street, Los
Angeles, CA 90071 and 135 South State College Boulevard, Brea, CA 92821. It is a
wholly owned subsidiary of The Capital Group Companies, Inc., a holding company
for several investment management subsidiaries. The investment adviser manages
equity assets for the American Funds through two divisions. These divisions
generally function separately from each other with respect to investment
research activities and they make investment decisions for the funds on a
separate basis.

The investment adviser has adopted policies and procedures that address issues
that may arise as a result of an investment professional's management of the
fund and other funds and accounts. Potential issues could involve allocation of
investment opportunities and trades among funds and accounts, use of information
regarding the timing of fund trades, investment professional compensation and
voting relating to portfolio securities. The investment adviser has adopted
policies and procedures that it believes are reasonably designed to address
these issues.

COMPENSATION OF INVESTMENT PROFESSIONALS -- As described in the prospectus, the
investment adviser uses a system of multiple portfolio counselors in managing
fund assets. In addition, Capital Research and Management Company's investment
analysts may make investment decisions with respect to a portion of a fund's
portfolio within their research coverage. Portfolio counselors and investment
analysts may also make investment decisions for other mutual funds advised by
Capital Research and Management Company.

Portfolio counselors and investment analysts are paid competitive salaries by
Capital Research and Management Company. In addition, they may receive bonuses
based on their individual portfolio results. Investment professionals also may
participate in profit-sharing plans. The relative mix of compensation
represented by bonuses, salary and profit-sharing will vary depending on the
individual's portfolio results, contributions to the organization and other
factors. In order to encourage a long-term focus, bonuses based on investment
results are calculated by comparing pretax total returns to relevant benchmarks
over both the most recent year and a four-year rolling average, with the greater
weight placed on the four-year rolling average. For portfolio counselors,
benchmarks may include measures of the marketplaces in which the relevant fund
invests and measures of the results of comparable mutual funds. For investment
analysts, benchmarks may include relevant market measures and appropriate
industry or sector indexes reflecting their areas of expertise. Capital Research
and Management Company also separately compensates analysts for the quality of
their research efforts. The benchmarks against which American Balanced Fund
portfolio counselors are measured include: S&P 500; Lipper Growth and Income
Funds Index and Lehman Brothers Aggregate Bond Index.

PORTFOLIO COUNSELOR FUND HOLDINGS AND OTHER MANAGED ACCOUNTS -- As described
below, portfolio counselors may personally own shares of the fund. In addition,
portfolio counselors may manage portions of other mutual funds or accounts
advised by Capital Research and Management Company or its affiliates.

American Balanced Fund -- Page 20
<PAGE>

THE FOLLOWING TABLE REFLECTS INFORMATION AS OF DECEMBER 31, 2006:

NUMBER NUMBER
OF OTHER OF OTHER NUMBER
REGISTERED POOLED OF OTHER
INVESTMENT INVESTMENT ACCOUNTS
COMPANIES (RICS) VEHICLES (PIVS) THAT
THAT THAT PORTFOLIO
PORTFOLIO PORTFOLIO COUNSELOR
DOLLAR RANGE COUNSELOR COUNSELOR MANAGES
OF FUND MANAGES MANAGES (ASSETS OF
PORTFOLIO SHARES (ASSETS OF RICS (ASSETS OF PIVS OTHER ACCOUNTS
COUNSELOR OWNED/1/ IN BILLIONS)/2/ IN BILLIONS)/3/ IN BILLIONS)/4/
----------------------------------------------------------------------------------------------

Robert G. Over 2 $ 85.1 None None
O'Donnell $1,000,000
----------------------------------------------------------------------------------------------
Gregory D. Johnson $100,001 -- 2 $ 85.1 None None
$500,000
----------------------------------------------------------------------------------------------
Hilda L. Applbaum $100,001 -- 2 $ 78.8 None None
$500,000
----------------------------------------------------------------------------------------------
John H. Smet $100,001 -- 6 $204.3 None 3 $2.44
$500,000
----------------------------------------------------------------------------------------------
Alan N. Berro $100,001 -- 2 $175.0 None None
$500,000
----------------------------------------------------------------------------------------------
James R. Mulally $500,001 -- 2 $ 93.9 7 $1.23 20/5/ $7.58
1,000,000
----------------------------------------------------------------------------------------------
Dina N. Perry $100,001 -- 3 $171.3 1 $0.67 None
$500,000
----------------------------------------------------------------------------------------------

1 Ownership disclosure is made using the following ranges: None; $1 - $10,000;
$10,001 - $50,000; $50,001 - $100,000; $100,001 - $500,000; $500,001 -
$1,000,000; and Over $1,000,000. The amounts listed include shares owned
through The Capital Group Companies, Inc. retirement plan and 401(k) plan.
2 Indicates fund(s) where the portfolio counselor also has significant
responsibilities for the day to day management of the fund(s). Assets noted are
the total net assets of the registered investment companies and are not
indicative of the total assets managed by the individual, which is a
substantially lower amount. No fund has an advisory fee that is based on the
performance of the fund.
3 Represents funds advised or sub-advised by Capital Research and Management
Company and sold outside the United States and/ or fixed-income assets in
institutional accounts managed by investment adviser subsidiaries of Capital
Group International, Inc., an affiliate of Capital Research and Management
Company. Assets noted are the total net assets of the funds or accounts and are
not indicative of the total assets managed by the individual, which is a
substantially lower amount. No fund or account has an advisory fee that is
based on the performance of the fund or account.
4 Reflects other professionally managed accounts held at companies affiliated
with Capital Research and Management Company. Personal brokerage accounts of
portfolio counselors and their families are not reflected.

5 The advisory fee of one of these accounts (representing $0.05 billion in total
assets) is based partially on its investment results.

INVESTMENT ADVISORY AND SERVICE AGREEMENT -- The Investment Advisory and Service
Agreement (the "Agreement") between the fund and the investment adviser will
continue in effect until December 31, 2007, unless sooner terminated, and may be
renewed from year to year thereafter, provided that any such renewal has been
specifically approved at least annually by (a) the board of directors, or by the
vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of the fund, and (b) the vote of a majority of directors who are not
parties to the Agreement or interested persons (as defined in the 1940 Act) of
any such party,

American Balanced Fund -- Page 21
<PAGE>

cast in person at a meeting called for the purpose of voting on such approval.
The Agreement provides that the investment adviser has no liability to the fund
for its acts or omissions in the performance of its obligations to the fund not
involving willful misconduct, bad faith, gross negligence or reckless disregard
of its obligations under the Agreement. The Agreement also provides that either
party has the right to terminate it, without penalty, upon 60 days' written
notice to the other party, and that the Agreement automatically terminates in
the event of its assignment (as defined in the 1940 Act).

In addition to providing investment advisory services, the investment adviser
furnishes the services and pays the compensation and travel expenses of persons
to perform the fund's executive, administrative, clerical and bookkeeping
functions, and provides suitable office space, necessary small office equipment
and utilities, general purpose accounting forms, supplies and postage used at
the fund's offices. The fund pays all expenses not assumed by the investment
adviser, including, but not limited to: custodian, stock transfer and dividend
disbursing fees and expenses; shareholder recordkeeping and administrative
expenses; costs of the designing, printing and mailing of reports, prospectuses,
proxy statements and notices to its shareholders; taxes; expenses of the
issuance and redemption of fund shares (including stock certificates,
registration and qualification fees and expenses); expenses pursuant to the
fund's plans of distribution (described below); legal and auditing expenses;
compensation, fees and expenses paid to independent directors; association dues;
costs of stationery and forms prepared exclusively for the fund; and costs of
assembling and storing shareholder account data.

The investment adviser receives a management fee at the annual rate of 0.42% on
the first $500 million of the fund's daily net assets, 0.324% of such assets
over $500 million to $1 billion, 0.30% of such assets over $1 billion to $1.5
billion, 0.282% of such assets over $1.5 billion to $2.5 billion, 0.27% of such
assets over $2.5 billion to $4 billion, 0.262% of such assets over $4 billion to
$6.5 billion, 0.255% of such assets over $6.5 billion to $10.5 billion, 0.25% of
such assets over $10.5 billion to $13 billion, 0.245% of such assets over $13
billion to $17 billion, 0.24% of such assets over $17 billion to $21 billion,
0.235% of such assets over $21 billion to $27 billion, 0.230% of such assets
over $27 billion to $34 billion, 0.225% of such assets over $34 billion to $44
billion, 0.220% of such assets over $44 billion to $55 billion, 0.215% of such
assets over $55 billion to $71 billion, and 0.210% of such assets over $71
billion.

The Agreement provides for a management fee reduction to the extent that the
annual ordinary operating expenses of the fund's Class A shares exceed 1 1/2% of
the first $30 million of the net assets of the fund and 1% of the average net
assets in excess thereof. Expenses which are not subject to these limitations
are interest, taxes and extraordinary expenses. Expenditures, including costs
incurred in connection with the purchase or sale of portfolio securities, which
are capitalized in accordance with generally accepted accounting principles
applicable to investment companies, are accounted for as capital items and not
as expenses. To the extent the fund's management fee must be waived due to Class
A share expense ratios exceeding the expense limitations described above,
management fees will be reduced similarly for all classes of shares of the fund,
or other Class A fees will be waived in lieu of management fees.

For the fiscal years ended December 31, 2006, 2005 and 2004, the investment
adviser was entitled to receive from the fund management fees of $127,668,000,
$118,294,000 and $90,936,000, respectively. After giving effect to the
management fee waiver described below, the fund paid the investment adviser
management fees of $114,901,000 (a reduction of $12,767,000), $107,841,000 (a
reduction of $10,453,000) and $89,237,000 (a reduction of $1,699,000) for the
fiscal years ended December 31, 2006, 2005 and 2004, respectively.

American Balanced Fund -- Page 22
<PAGE>

For the period from September 1, 2004 through March 31, 2005, the investment
adviser agreed to waive 5% of the management fees that it was otherwise entitled
to receive under the Agreement. Beginning April 1, 2005, this waiver increased
to 10% of the management fees that the investment adviser is otherwise entitled
to receive. As a result of this waiver, management fees are reduced similarly
for all classes of shares of the fund.

ADMINISTRATIVE SERVICES AGREEMENT -- The Administrative Services Agreement (the
"Administrative Agreement") between the fund and the investment adviser relating
to the fund's Class C, F, R and 529 shares will continue in effect until
December 31, 2007, unless sooner terminated, and may be renewed from year to
year thereafter, provided that any such renewal has been specifically approved
at least annually by the vote of a majority of directors who are not parties to
the Administrative Agreement or interested persons (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval. The fund may terminate the Administrative Agreement at any
time by vote of a majority of independent directors. The investment adviser has
the right to terminate the Administrative Agreement upon 60 days' written notice
to the fund. The Administrative Agreement automatically terminates in the event
of its assignment (as defined in the 1940 Act).

Under the Administrative Agreement, the investment adviser provides certain
transfer agent and administrative services for shareholders of the fund's Class
C and F shares, and Class R and 529 shares. The investment adviser may contract
with third parties, including American Funds Service Company, the fund's
Transfer Agent, to provide these services. Services include, but are not limited
to, shareholder account maintenance, transaction processing, tax information
reporting and shareholder and fund communications. In addition, the investment
adviser monitors, coordinates and oversees the activities performed by third
parties providing such services. For Class R-1 and R-2 shares, the investment
adviser has agreed to pay a portion of the fees payable under the Administrative
Agreement that would otherwise have been paid by the fund. For the year ended
December 31, 2006, the total fees paid by the investment adviser were $330,000.

The investment adviser receives an administrative services fee at the annual
rate of up to 0.15% of the average daily net assets for Class C, F, R (excluding
Class R-5 shares) and 529 shares for administrative services provided to these
share classes. Administrative services fees are paid monthly and accrued daily.
The investment adviser uses a portion of this fee to compensate third parties
for administrative services provided to the fund. Of the remainder, the
investment adviser does not retain more than 0.05% of the average daily net
assets for each applicable share class. For Class R-5 shares, the administrative
services fee is calculated at the annual rate of up to 0.10% of the average
daily net assets. The administrative services fee includes compensation for
transfer agent and shareholder services provided to the fund's Class C, F, R and
529 shares. In addition to making administrative service fee payments to
unaffiliated third parties, the investment adviser also makes payments from the
administrative services fee to American Funds Service Company according
to a fee schedule contained in a Shareholder Services Agreement between the fund
and American Funds Service Company.

American Balanced Fund -- Page 23
<PAGE>

During the 2006 fiscal year, administrative services fees, gross of any payments
made by the investment adviser, were:

ADMINISTRATIVE SERVICES FEE
--------------------------------------------------------------------------------

CLASS C $8,269,000
--------------------------------------------------------------------------------
CLASS F 1,105,000
--------------------------------------------------------------------------------
CLASS 529-A 1,012,000
--------------------------------------------------------------------------------
CLASS 529-B 341,000
--------------------------------------------------------------------------------
CLASS 529-C 515,000
--------------------------------------------------------------------------------
CLASS 529-E 66,000
--------------------------------------------------------------------------------
CLASS 529-F 24,000
--------------------------------------------------------------------------------
CLASS R-1 117,000
--------------------------------------------------------------------------------
CLASS R-2 4,400,000
--------------------------------------------------------------------------------
CLASS R-3 4,896,000
--------------------------------------------------------------------------------
CLASS R-4 2,311,000
--------------------------------------------------------------------------------
CLASS R-5 351,000
--------------------------------------------------------------------------------

PRINCIPAL UNDERWRITER AND PLANS OF DISTRIBUTION -- American Funds Distributors,
Inc. (the "Principal Underwriter") is the principal underwriter of the fund's
shares. The Principal Underwriter is located at 333 South Hope Street, Los
Angeles, CA 90071; 135 South State College Boulevard, Brea, CA 92821; 15370
Barranca Parkway, Irvine, CA 92618; 3500 Wiseman Boulevard, San Antonio, TX
78251; 8332 Woodfield Crossing Boulevard, Indianapolis, IN 46240; and 5300 Robin
Hood Road, Norfolk, VA 23513.

The Principal Underwriter receives revenues from sales of the fund's shares. For
Class A and 529-A shares, the Principal Underwriter receives commission revenue
consisting of that portion of the Class A and 529-A sales charge remaining after
the allowances by the Principal Underwriter to investment dealers. For Class B
and 529-B shares, the Principal Underwriter sells the rights to the 12b-1 fees
paid by the fund for distribution expenses to a third party and receives the
revenue remaining after compensating investment dealers for sales of Class B and
529-B shares. The fund also pays the Principal Underwriter for advancing the
immediate service fees paid to qualified dealers of Class B and 529-B shares.
For Class C and 529-C shares, the Principal Underwriter receives any contingent
deferred sales charges that apply during the first year after purchase. The fund
pays the Principal Underwriter for advancing the immediate service fees and
commissions paid to qualified dealers of Class C and 529-C shares. For Class
529-E shares, the fund pays the Principal Underwriter for advancing the
immediate service fees and commissions paid to qualified dealers. For Class F
and 529-F shares, the fund pays the Principal Underwriter for advancing the
immediate service fees paid to qualified dealers and advisers who sell Class F
and 529-F shares. For Class R-1, R-2, R-3 and R-4 shares, the fund pays the
Principal Underwriter for advancing the immediate service fees paid to qualified
dealers and advisers who sell Class R-1, R-2, R-3 and R-4 shares.

American Balanced Fund -- Page 24
<PAGE>

Commissions, revenue or service fees retained by the Principal Underwriter after
allowances or compensation to dealers were:

COMMISSIONS, ALLOWANCE OR

REVENUE COMPENSATION

FISCAL YEAR/PERIOD OR FEES RETAINED TO DEALERS
-----------------------------------------------------------------------------------------------------

CLASS A 2006 $19,623,000 $ 88,391,000
2005 32,034,000 145,394,000
2004 42,738,000 195,563,000
-----------------------------------------------------------------------------------------------------
CLASS B 2006 2,418,000 14,487,000
2005 4,421,000 27,592,000
2004 7,325,000 55,703,000
-----------------------------------------------------------------------------------------------------
CLASS C 2006 2,773,000 7,595,000
2005 4,427,000 13,217,000
2004 -- 20,544,000
-----------------------------------------------------------------------------------------------------
CLASS 529-A 2006 1,205,000 5,778,000
2005 1,562,000 7,530,000
2004 1,646,000 7,995,000
-----------------------------------------------------------------------------------------------------
CLASS 529-B 2006 196,000 1,220,000
2005 293,000 1,730,000
2004 492,000 2,610,000
-----------------------------------------------------------------------------------------------------
CLASS 529-C 2006 97,000 897,000
2005 89,000 1,099,000
2004 -- 1,231,000
-----------------------------------------------------------------------------------------------------

The fund has adopted plans of distribution (the "Plans") pursuant to rule 12b-1
under the 1940 Act. The Principal Underwriter receives amounts payable pursuant
to the Plans (see below). As required by rule 12b-1 and the 1940 Act, the Plans
(together with the Principal Underwriting Agreement) have been approved by the
full board of directors and separately by a majority of the independent
directors of the fund who have no direct or indirect financial interest in the
operation of the Plans or the Principal Underwriting Agreement. Potential
benefits of the Plans to the fund include quality shareholder services; savings
to the fund in transfer agency costs; and benefits to

American Balanced Fund -- Page 25
<PAGE>

the investment process from growth or stability of assets. The selection and
nomination of independent directors are committed to the discretion of the
independent directors during the existence of the Plans. The Plans may not be
amended to increase materially the amount spent for distribution without
shareholder approval. Plan expenses are reviewed quarterly and the Plans must be
renewed annually by the board of directors.

Under the Plans, the fund may annually expend the following amounts to finance
any activity primarily intended to result in the sale of fund shares, provided
the fund's board of directors has approved the category of expenses for which
payment is being made: (a) for Class A shares, up to 0.25% of the average daily
net assets attributable to Class A shares; (b) for Class 529-A shares, up to
0.50% of the average daily net assets attributable to Class 529-A shares; (c)
for Class B and 529-B shares, up to 1.00% of the average daily net assets
attributable to Class B and 529-B shares, respectively; (d) for Class C and
529-C shares, up to 1.00% of the average daily net assets attributable to Class
C and 529-C shares, respectively; (e) for Class 529-E shares, up to 0.75% of the
average daily net assets attributable to Class 529-E shares; (f) for Class F and
529-F shares, up to 0.50% of the average daily net assets attributable to Class
F and 529-F shares, respectively; (g) for Class R-1 shares, up to 1.00% of the
average daily net assets attributable to Class R-1 shares; (h) for Class R-2
shares, up to 1.00% of the average daily net assets attributable to Class R-2
shares; (i) for Class R-3 shares, up to 0.75% of the average daily net assets
attributable to Class R-3 shares; and (j) for Class R-4 shares, up to 0.50% of
the average daily net assets attributable to Class R-4 shares. The fund has not
adopted a Plan for Class R-5 shares; accordingly, no 12b-1 fees are paid from
Class R-5 share assets.

For Class A and 529-A shares: (a) up to 0.25% is reimbursed to the Principal
Underwriter for paying service-related expenses, including paying service fees
to qualified dealers, and (b) up to the amount allowable under the fund's Class
A and 529-A 12b-1 limit, after reimbursement for paying service-related
expenses, is reimbursed to the Principal Underwriter for paying
distribution-related expenses, including dealer commissions and wholesaler
compensation paid on sales of shares of $1 million or more purchased without a
sales charge (including purchases by employer-sponsored defined
contribution-type retirement plans investing $1 million or more or with 100 or
more eligible employees, and retirement plans, endowments and foundations with
$50 million or more in assets -- "no load purchases"). Commissions on no load
purchases of Class A and 529-A shares in excess of the Class A and 529-A plan
limitations not reimbursed to the Principal Underwriter during the most recent
fiscal quarter are recoverable for five quarters, provided the amount recovered
does not cause the fund to exceed the annual expense limit. After five quarters,
these commissions are not recoverable. As of December 31, 2006, there were no
unreimbursed expenses subject to reimbursement under the Plans for Class A or
529-A shares.

For Class B and 529-B shares: (a) up to 0.25% is paid to the Principal
Underwriter for paying service-related expenses, including paying service fees
to qualified dealers, and (b) 0.75% is paid to the Principal Underwriter for
distribution-related expenses, including the financing of commissions paid to
qualified dealers.

For Class C and 529-C shares: (a) up to 0.25% is paid to the Principal
Underwriter for paying service-related expenses, including paying service fees
to qualified dealers, and (b) up to 0.75% is paid to the Principal Underwriter
for paying distribution-related expenses, including commissions paid to
qualified dealers.

American Balanced Fund -- Page 26
<PAGE>

For Class 529-E shares: currently (a) up to 0.25% is paid to the Principal
Underwriter for paying service-related expenses, including paying service fees
to qualified dealers, and (b) up to 0.25% is paid to the Principal Underwriter
for paying distribution-related expenses, including commissions paid to
qualified dealers.

For Class F and 529-F shares: currently up to 0.25% is paid to the Principal
Underwriter for paying service-related expenses, including paying service fees
to qualified dealers or advisers.

For Class R-1 shares: (a) up to 0.25% is paid to the Principal Underwriter for
paying service-related expenses, including paying service fees to qualified
dealers, and (b) up to 0.75% is paid to the Principal Underwriter for
distribution-related expenses, including commissions paid to qualified dealers.

For Class R-2 shares: currently (a) up to 0.25% is paid to the Principal
Underwriter for paying service-related expenses, including paying service fees
to qualified dealers, and (b) up to 0.50% is paid to the Principal Underwriter
for paying distribution-related expenses, including commissions paid to
qualified dealers.

For Class R-3 shares: currently (a) up to 0.25% is paid to the Principal
Underwriter for paying service-related expenses, including paying service fees
to qualified dealers, and (b) up to 0.25% is paid to the Principal Underwriter
for paying distribution-related expenses, including commissions paid to
qualified dealers.

For Class R-4 shares: currently up to 0.25% is paid to the Principal Underwriter
for paying service-related expenses, including paying service fees to qualified
dealers or advisers.

As of the end of the 2006 fiscal year, total 12b-1 expenses, and the portion of
the expenses that remained unpaid, were:

12B-1 UNPAID LIABILITY
12B-1 EXPENSES OUTSTANDING
------------------------------------------------------------------------------------------------

CLASS A $84,333,000 $7,359,000
------------------------------------------------------------------------------------------------
CLASS B 52,195,000 4,598,000
------------------------------------------------------------------------------------------------
CLASS C 55,602,000 4,923,000
------------------------------------------------------------------------------------------------
CLASS F 3,000,000 271,000
------------------------------------------------------------------------------------------------
CLASS 529-A 1,992,000 181,000
------------------------------------------------------------------------------------------------
CLASS 529-B 2,842,000 267,000
------------------------------------------------------------------------------------------------
CLASS 529-C 4,544,000 438,000
------------------------------------------------------------------------------------------------
CLASS 529-E 327,000 31,000
------------------------------------------------------------------------------------------------
CLASS 529-F -- --
------------------------------------------------------------------------------------------------
CLASS R-1 703,000 72,000
------------------------------------------------------------------------------------------------
CLASS R-2 7,376,000 695,000
------------------------------------------------------------------------------------------------
CLASS R-3 13,914,000 1,307,000
------------------------------------------------------------------------------------------------
CLASS R-4 3,912,000 400,000
------------------------------------------------------------------------------------------------

American Balanced Fund -- Page 27
<PAGE>

OTHER COMPENSATION TO DEALERS -- As of January 2007, the top dealers (or their
affiliates) that American Funds Distributors anticipates will receive additional
compensation (as described in the prospectus) include:

A. G. Edwards & Sons, Inc.
AIG Advisors Group:
Advantage Capital Corporation
AIG Financial Advisors, Inc.
American General Securities Incorporated
FSC Securities Corporation
Royal Alliance Associates, Inc.
AXA Advisors, LLC
Cadaret, Grant & Co., Inc.
Cambridge Investment Research, Inc.
Commonwealth Financial Network
Cuna Brokerage Services, Inc.
Deutsche Bank Securities Inc.
Edward Jones
Genworth Financial Securities Corporation
Hefren-Tillotson, Inc.
HTK/Janney Montgomery Group:
Hornor, Townsend & Kent, Inc.
Janney Montgomery Scott LLC
ING Advisors Network Inc.:
Bancnorth Investment Group, Inc.
Financial Network Investment Corporation
Guaranty Brokerage Services, Inc.
ING Financial Partners, Inc.
Multi-Financial Securities Corporation
Primevest Financial Services, Inc.
InterSecurities/Transamerica:
InterSecurities, Inc.
Transamerica Financial Advisors, Inc.
J.J.B. Hilliard/PNC Bank:
J.J.B. Hilliard, W.L. Lyons, Inc.
PNC Bank, National Association
PNC Brokerage Corp.
PNC Investments LLC
Lincoln Financial Advisors Corporation:
Lincoln Financial Advisors Corporation
Jefferson Pilot Securities Corporation
LPL Financial Services:
Linsco/Private Ledger Corp.
Uvest Investment Services

American Balanced Fund -- Page 28
<PAGE>

Merrill Lynch, Pierce, Fenner & Smith Incorporated
Metlife Enterprises:
Metlife Securities Inc.
Tower Square Securities
New England Securities
Walnut Street Securities, Inc.
MML Investors Services, Inc.
Morgan Keegan & Company, Inc.
Morgan Stanley DW Inc.
National Planning Holdings Inc.:
Invest Financial Corporation
Investment Centers of America, Inc.
National Planning Corporation
SII Investments, Inc.
NFP Securities, Inc.
Northwestern Mutual Investment Services, LLC
Pacific Select Distributors Inc.:
Associated Securities Corp.
Contemporary Financial Solutions, Inc.
M.L. Stern & Co., LLC
Mutual Service Corporation
Sorrento Pacific Financial, LLC
United Planners' Financial Services of America
Waterstone Financial Group, Inc.
Park Avenue Securities LLC
Princor Financial Services Corporation
Raymond James Group:
Raymond James & Associates, Inc.
Raymond James Financial Services Inc.
RBC Dain Rauscher Inc.
Robert W. Baird & Co. Incorporated
Securian/C.R.I.:
CRI Securities, LLC
Securian Financial Services, Inc.
Smith Barney
U.S. Bancorp Investments, Inc.
UBS Financial Services Inc.
First Clearing LLC
Wells Fargo Investments, L.L.C.

EXECUTION OF PORTFOLIO TRANSACTIONS

As described in the prospectus, the investment adviser places orders with
broker-dealers for the fund's portfolio transactions. Portfolio transactions for
the fund may be executed as part of concurrent authorizations to purchase or
sell the same security for other funds served by the investment adviser, or for
trusts or other accounts served by affiliated companies of the investment
adviser. When such concurrent authorizations occur, the objective is to allocate
the executions in an equitable manner.

American Balanced Fund -- Page 29
<PAGE>

Brokerage commissions paid on portfolio transactions, including investment
dealer concessions on underwritings, if applicable, for the fiscal years ended
December 31, 2006, 2005 and 2004 amounted to $25,798,000, $30,955,000 and
$26,904,000, respectively. With respect to fixed-income securities, brokerage
commissions include explicit investment dealer concessions and may exclude other
transaction costs which may be reflected in the spread between the bid and asked
price.

The fund is required to disclose information regarding investments in the
securities of its "regular" broker-dealers (or parent companies of its regular
broker-dealers) that derive more than 15% of their revenue from broker-dealer,
underwriter or investment adviser activities. A regular broker-dealer is (a) one
of the 10 broker-dealers that received from the fund the largest amount of
brokerage commissions by participating, directly or indirectly, in the fund's
portfolio transactions during the fund's most recent fiscal year; (b) one of the
10 broker-dealers that engaged as principal in the largest dollar amount of
portfolio transactions of the fund during the fund's most recent fiscal year; or
(c) one of the 10 broker-dealers that sold the largest amount of securities of
the fund during the fund's most recent fiscal year.

At the end of the fund's most recent fiscal year, the fund's regular
broker-dealers included Citigroup Global Markets Inc., J.P. Morgan Securities
Inc. and Wachovia Corporation. As of the fund's most recent fiscal year-end, the
fund held equity securities of Citigroup Inc. in the amount of $919,050,000 and
Wachovia Corporation in the amount of $165,155,000. The fund held debt
securities of J.P. Morgan Chase & Co. in the amount of $22,407,000 and Citigroup
Inc. in the amount of $41,240,000.

DISCLOSURE OF PORTFOLIO HOLDINGS

The fund's investment adviser, on behalf of the fund, has adopted policies and
procedures with respect to the disclosure of information about fund portfolio
securities. These policies and procedures have been reviewed by the fund's board
of directors and compliance will be periodically assessed by the board in
connection with reporting from the fund's Chief Compliance Officer.

Under these policies and procedures, the fund's complete list of portfolio
holdings available for public disclosure, dated as of the end of each calendar
quarter, is permitted to be posted on the American Funds website no earlier than
the tenth day after such calendar quarter. In practice, the public portfolio
typically is posted on the website approximately 45 days after the end of the
calendar quarter. In addition, the fund's list of top 10 equity portfolio
holdings measured by percentage of net assets invested, dated as of the end of
each calendar month, is permitted to be posted on the American Funds website no
earlier than the tenth day after such month. Such portfolio holdings information
may then be disclosed to any person pursuant to an ongoing arrangement to
disclose portfolio holdings information to such person no earlier than one day
after the day on which the information is posted on the American Funds website.
The fund's custodian, outside counsel and auditor, each of which requires
portfolio holdings information for legitimate business and fund oversight
purposes, may receive the information earlier.

Affiliated persons of the fund as described above who receive portfolio holdings
information are subject to restrictions and limitations on the use and handling
of such information pursuant to applicable codes of ethics, including
requirements to maintain the confidentiality of such information, preclear
securities trades and report securities transactions activity, as applicable.
Third party service providers of the fund receiving such information are subject
to confidentiality

American Balanced Fund -- Page 30
<PAGE>

obligations. When portfolio holdings information is disclosed other than through
the American Funds website to persons not affiliated with the fund (which, as
described above, would typically occur no earlier than one day after the day on
which the information is posted on the American Funds website), such persons may
be bound by agreements (including confidentiality agreements) that restrict and
limit their use of the information to legitimate business uses only. Neither the
fund nor its investment adviser or any affiliate thereof receives compensation
or other consideration in connection with the disclosure of information about
portfolio securities.

Subject to board policies, the authority to disclose a fund's portfolio
holdings, and to establish policies with respect to such disclosure, resides
with the appropriate investment-related committees of the fund's investment
adviser. In exercising their authority, the committees determine whether
disclosure of information about the fund's portfolio securities is appropriate
and in the best interest of fund shareholders. The investment adviser has
implemented policies and procedures to address conflicts of interest that may
arise from the disclosure of fund holdings. For example, the investment
adviser's code of ethics specifically requires, among other things, the
safeguarding of information about fund holdings and contains prohibitions
designed to prevent the personal use of confidential, proprietary investment
information in a way that would conflict with fund transactions. In addition,
the investment adviser believes that its current policy of not selling portfolio
holdings information and not disclosing such information to unaffiliated third
parties until such holdings have been made public on the American Funds website
(other than to certain fund service providers for legitimate business and fund
oversight purposes) helps reduce potential conflicts of interest between fund
shareholders and the investment adviser and its affiliates.

PRICE OF SHARES

Shares are purchased at the offering price or sold at the net asset value price
next determined after the purchase or sell order is received and accepted by the
fund or the Transfer Agent; the offering or net asset value price is effective
for orders received prior to the time of determination of the net asset value
and, in the case of orders placed with dealers or their authorized designees,
accepted by the Principal Underwriter, the Transfer Agent, a dealer or any of
their designees. In the case of orders sent directly to the fund or the Transfer
Agent, an investment dealer should be indicated. The dealer is responsible for
promptly transmitting purchase and sell orders to the Principal Underwriter.

Orders received by the investment dealer or authorized designee, the Transfer
Agent or the fund after the time of the determination of the net asset value
will be entered at the next calculated offering price. Note that investment
dealers or other intermediaries may have their own rules about share
transactions and may have earlier cut-off times than those of the fund. For more
information about how to purchase through your intermediary, contact your
intermediary directly.

Prices that appear in the newspaper do not always indicate prices at which you
will be purchasing and redeeming shares of the fund, since such prices generally
reflect the previous day's closing price, while purchases and redemptions are
made at the next calculated price. The price you pay for shares, the offering
price, is based on the net asset value per share, which is calculated once daily
as of approximately 4:00 p.m. New York time, which is the normal close of
trading on the New York Stock Exchange, each day the Exchange is open. If, for
example, the Exchange closes at 1:00 p.m., the fund's share price would still be
determined as of 4:00 p.m. New York time. The New York Stock Exchange is
currently closed on weekends and on the following holidays: New Year's Day;
Martin Luther King, Jr. Day; Presidents' Day; Good Friday;

American Balanced Fund -- Page 31
<PAGE>

Memorial Day; Independence Day; Labor Day; Thanksgiving; and Christmas Day. Each
share class of the fund has a separately calculated net asset value (and share
price).

All portfolio securities of funds managed by Capital Research and Management
Company (other than money market funds) are valued, and the net asset values per
share for each share class are determined, as indicated below. The fund follows
standard industry practice by typically reflecting changes in its holdings of
portfolio securities on the first business day following a portfolio trade.

1. Equity securities, including depositary receipts, are valued at the
official closing price of, or the last reported sale price on, the exchange or
market on which such securities are traded, as of the close of business on the
day the securities are being valued or, lacking any sales, at the last available
bid price. Prices for each security are taken from the principal exchange or
market in which the security trades. Fixed-income securities are valued at
prices obtained from an independent pricing service, when such prices are
available; however, in circumstances where the investment adviser deems it
appropriate to do so, such securities will be valued at the mean quoted bid and
asked prices (or bid prices, if asked prices are not available) or at prices for
securities of comparable maturity, quality and type. The pricing services base
bond prices on, among other things, an evaluation of the yield curve as of
approximately 3:00 p.m. New York time. The fund's investment adviser performs
certain checks on these prices prior to calculation of the fund's net asset
value.

Securities with both fixed-income and equity characteristics (e.g., convertible
bonds, preferred stocks, units comprised of more than one type of security,
etc.), or equity securities traded principally among fixed-income dealers, are
valued in the manner described above for either equity or fixed-income
securities, depending on which method is deemed most appropriate by the
investment adviser.

Securities with original maturities of one year or less having 60 days or less
to maturity are amortized to maturity based on their cost if acquired within 60
days of maturity, or if already held on the 60th day, based on the value
determined on the 61st day. Forward currency contracts are valued at the mean of
representative quoted bid and asked prices.

Assets or liabilities initially expressed in terms of non-U.S. currencies are
translated prior to the next determination of the net asset value of the fund's
shares into U.S. dollars at the prevailing market rates.

Securities and assets for which market quotations are not readily available or
are considered unreliable are valued at fair value as determined in good faith
under policies approved by the fund's board. Subject to board oversight, the
fund's board has delegated the obligation to make fair valuation determinations
to a valuation committee established by the fund's investment adviser. The board
receives regular reports describing fair-valued securities and the valuation
methods used.

The valuation committee has adopted guidelines and procedures (consistent with
SEC rules and guidance) to ensure that certain basic principles and factors are
considered when making all fair value determinations. As a general principle,
securities lacking readily available market quotations, or that have quotations
that are considered unreliable by the investment adviser, are valued in good
faith by the valuation committee based upon what the fund might reasonably
expect to receive upon their current sale. The valuation committee considers all
indications of

American Balanced Fund -- Page 32
<PAGE>

value available to it in determining the fair value to be assigned to a
particular security, including, without limitation, the type and cost of the
security, contractual or legal restrictions on resale of the security, relevant
financial or business developments of the issuer, actively traded similar or
related securities, conversion or exchange rights on the security, related
corporate actions, significant events occurring after the close of trading in
the security and changes in overall market conditions. The valuation committee
employs additional fair value procedures to address issues related to investing
substantial portions of applicable fund portfolios outside the United States.
Securities owned by these funds trade in markets that open and close at
different times, reflecting time zone differences. If significant events occur
after the close of a market (and before these fund's net asset values are next
determined) which affect the value of portfolio securities, appropriate
adjustments from closing market prices may be made to reflect these events.
Events of this type could include, for example, earthquakes and other natural
disasters or significant price changes in other markets (e.g., U.S. stock
markets).

2. Each class of shares represents interests in the same portfolio of
investments and is identical in all respects to each other class, except for
differences relating to distribution, service and other charges and expenses,
certain voting rights, differences relating to eligible investors, the
designation of each class of shares, conversion features and exchange
privileges. Expenses attributable to the fund, but not to a particular class of
shares, are borne by each class pro rata based on relative aggregate net assets
of the classes. Expenses directly attributable to a class of shares are borne by
that class of shares. Liabilities, including accruals of taxes and other expense
items attributable to particular share classes, are deducted from total assets
attributable to such share classes.

3. Net assets so obtained for each share class are then divided by the total
number of shares outstanding of that share class, and the result, rounded to the
nearest cent, is the net asset value per share for that share class.

TAXES AND DISTRIBUTIONS

FUND TAXATION -- The fund has elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code (the "Code"). A
regulated investment company qualifying under Subchapter M of the Code is
required to distribute to its shareholders at least 90% of its investment
company taxable income (including the excess of net short-term capital gain over
net long-term capital losses) and generally is not subject to federal income tax
to the extent that it distributes annually 100% of its investment company
taxable income and net realized capital gains in the manner required under the
Code. The fund intends to distribute annually all of its investment company
taxable income and net realized capital gains and therefore does not expect to
pay federal income tax, although in certain circumstances, the fund may
determine that it is in the interest of shareholders to distribute less than
that amount.

To be treated as a regulated investment company under Subchapter M of the Code,
the fund must also (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, net income from certain
publicly traded partnerships and gains from the sale or other disposition of
securities or foreign currencies, or other income (including, but not limited
to, gains from options, futures or forward contracts) derived with respect to
the business of investing in such securities or currencies, and (b) diversify
its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the fund's assets is represented by cash, U.S. government
securities and securities of other regulated investment companies, and other
securities (for purposes of this calculation, generally limited in respect of
any one issuer, to

American Balanced Fund -- Page 33
<PAGE>

an amount not greater than 5% of the market value of the fund's assets and 10%
of the outstanding voting securities of such issuer) and (ii) not more than 25%
of the value of its assets is invested in the securities of (other than U.S.
government securities or the securities of other regulated investment companies)
any one issuer; two or more issuers which the fund controls and which are
determined to be engaged in the same or similar trades or businesses; or the
securities of certain publicly traded partnerships.

Under the Code, a nondeductible excise tax of 4% is imposed on the excess of a
regulated investment company's "required distribution" for the calendar year
ending within the regulated investment company's taxable year over the
"distributed amount" for such calendar year. The term "required distribution"
means the sum of (a) 98% of ordinary income (generally net investment income)
for the calendar year, (b) 98% of capital gain (both long-term and short-term)
for the one-year period ending on October 31 (as though the one-year period
ending on October 31 were the regulated investment company's taxable year) and
(c) the sum of any untaxed, undistributed net investment income and net capital
gains of the regulated investment company for prior periods. The term
"distributed amount" generally means the sum of (a) amounts actually distributed
by the fund from its current year's ordinary income and capital gain net income
and (b) any amount on which the fund pays income tax during the periods
described above. Although the fund intends to distribute its net investment
income and net capital gains so as to avoid excise tax liability, the fund may
determine that it is in the interest of shareholders to distribute a lesser
amount.

The following information may not apply to you if you hold fund shares in a
tax-deferred account, such as a retirement plan or education savings account.
Please see your tax adviser for more information.

DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS -- Dividends and capital gain
distributions on fund shares will be reinvested in shares of the fund of the
same class, unless shareholders indicate in writing that they wish to receive
them in cash or in shares of the same class of other American Funds, as provided
in the prospectus. Dividends and capital gain distributions by 529 share classes
will be automatically reinvested.

Distributions of investment company taxable income and net realized capital
gains to shareholders will be taxable whether received in shares or in cash,
unless such shareholders are exempt from taxation. Shareholders electing to
receive distributions in the form of additional shares will have a cost basis
for federal income tax purposes in each share so received equal to the net asset
value of that share on the reinvestment date. Dividends and capital gain
distributions by the fund to a tax-deferred retirement plan account are not
taxable currently.

DIVIDENDS -- The fund intends to follow the practice of distributing
substantially all of its investment company taxable income. Investment
company taxable income generally includes dividends, interest, net
short-term capital gains in excess of net long-term capital losses, and
certain foreign currency gains, if any, less expenses and certain foreign
currency losses. To the extent the fund invests in stock of domestic and
certain foreign corporations and meets the applicable holding period
requirement, it may receive "qualified dividends". The fund will designate
the amount of "qualified dividends" to its shareholders in a notice sent
within 60 days of the close of its fiscal year and will report "qualified
dividends" to shareholders on Form 1099-DIV.

American Balanced Fund -- Page 34
<PAGE>

Under the Code, gains or losses attributable to fluctuations in exchange
rates that occur between the time the fund accrues receivables or
liabilities denominated in a foreign currency and the time the fund
actually collects such receivables, or pays such liabilities, generally are
treated as ordinary income or ordinary loss. Similarly, on disposition of
debt securities denominated in a foreign currency and on disposition of
certain futures contracts, forward contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of disposition
are also treated as ordinary gain or loss. These gains or losses, referred
to under the Code as Section 988 gains or losses, may increase or decrease
the amount of the fund's investment company taxable income to be
distributed to its shareholders as ordinary income.

If the fund invests in stock of certain passive foreign investment
companies, the fund may be subject to U.S. federal income taxation on a
portion of any "excess distribution" with respect to, or gain from the
disposition of, such stock. The tax would be determined by allocating such
distribution or gain ratably to each day of the fund's holding period for
the stock. The distribution or gain so allocated to any taxable year of the
fund, other than the taxable year of the excess distribution or
disposition, would be taxed to the fund at the highest ordinary income rate
in effect for such year, and the tax would be further increased by an
interest charge to reflect the value of the tax deferral deemed to have
resulted from the ownership of the foreign company's stock. Any amount of
distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the fund's investment company taxable
income and, accordingly, would not be taxable to the fund to the extent
distributed by the fund as a dividend to its shareholders.

To avoid such tax and interest, the fund intends to elect to treat these
securities as sold on the last day of its fiscal year and recognize any
gains for tax purposes at that time. Under this election, deductions for
losses are allowable only to the extent of any prior recognized gains, and
both gains and losses will be treated as ordinary income or loss. The fund
will be required to distribute any resulting income, even though it has not
sold the security and received cash to pay such distributions. Upon
disposition of these securities, any gain recognized is treated as ordinary
income and loss is treated as ordinary loss to the extent of any prior
recognized gain.

Dividends from domestic corporations are expected to comprise some portion
of the fund's gross income. To the extent that such dividends constitute
any of the fund's gross income, a portion of the income distributions of
the fund may be eligible for the deduction for dividends received by
corporations. Corporate shareholders will be informed of the portion of
dividends that so qualifies. The dividends-received deduction is reduced to
the extent that either the fund shares, or the underlying shares of stock
held by the fund, with respect to which dividends are received, are treated
as debt-financed under federal income tax law, and is eliminated if the
shares are deemed to have been held by the shareholder or the fund, as the
case may be, for less than 46 days during the 90-day period beginning on
the date that is 45 days before the date on which the shares become
ex-dividend. Capital gain distributions are not eligible for the
dividends-received deduction.

A portion of the difference between the issue price of zero coupon
securities and their face value (original issue discount) is considered to
be income to the fund each year, even though the fund will not receive cash
interest payments from these securities. This

American Balanced Fund -- Page 35
<PAGE>

original issue discount (imputed income) will comprise a part of the
investment company taxable income of the fund that must be distributed to
shareholders in order to maintain the qualification of the fund as a
regulated investment company and to avoid federal income taxation at the
level of the fund.

The price of a bond purchased after its original issuance may reflect
market discount which, depending on the particular circumstances, may
affect the tax character and amount of income required to be recognized by
a fund holding the bond. In determining whether a bond is purchased with
market discount, certain de minimis rules apply.

Dividend and interest income received by the fund from sources outside the
United States may be subject to withholding and other taxes imposed by such
foreign jurisdictions. Tax conventions between certain countries and the
United States, however, may reduce or eliminate these foreign taxes. Some
foreign countries impose taxes on capital gains with respect to investments
by foreign investors.

CAPITAL GAIN DISTRIBUTIONS -- The fund also intends to follow the practice
of distributing the entire excess of net realized long-term capital gains
over net realized short-term capital losses. Net capital gains for a fiscal
year are computed by taking into account any capital loss carry forward of
the fund.

If any net long-term capital gains in excess of net short-term capital
losses are retained by the fund for reinvestment, requiring federal income
taxes to be paid thereon by the fund, the fund intends to elect to treat
such capital gains as having been distributed to shareholders. As a result,
each shareholder will report such capital gains as long-term capital gains
taxable to individual shareholders at a maximum 15% capital gains rate,
will be able to claim a pro rata share of federal income taxes paid by the
fund on such gains as a credit against personal federal income tax
liability, and will be entitled to increase the adjusted tax basis on fund
shares by the difference between a pro rata share of the retained gains and
such shareholder's related tax credit.

SHAREHOLDER TAXATION -- In January of each year, individual shareholders holding
fund shares in taxable accounts will receive a statement of the federal income
tax status of all distributions. Shareholders of the fund also may be subject to
state and local taxes on distributions received from the fund.

DIVIDENDS -- Fund dividends are taxable to shareholders as ordinary income.
All or a portion of a fund's dividend distribution may be a "qualified
dividend." If the fund meets the applicable holding period requirement, it
will distribute dividends derived from qualified corporation dividends to
shareholders as qualified dividends. Interest income from bonds and money
market instruments and nonqualified foreign dividends will be distributed
to shareholders as nonqualified fund dividends. The fund will report on
Form 1099-DIV the amount of each shareholder's dividend that may be treated
as a qualified dividend. If a shareholder meets the requisite holding
period requirement, qualified dividends are taxable at a maximum rate of
15%.

CAPITAL GAINS -- Distributions of the excess of net long-term capital gains
over net short-term capital losses that the fund properly designates as
"capital gain dividends" generally will be taxable as long-term capital
gain. Regardless of the length of time the shares of the fund have been
held by a shareholder, a capital gain distribution by the fund is subject

American Balanced Fund -- Page 36
<PAGE>

to a maximum tax rate of 15%. Any loss realized upon the redemption of
shares held at the time of redemption for six months or less from the date
of their purchase will be treated as a long-term capital loss to the extent
of any amounts treated as distributions of long-term capital gains during
such six-month period.

Distributions by the fund result in a reduction in the net asset value of the
fund's shares. Investors should consider the tax implications of buying shares
just prior to a distribution. The price of shares purchased at that time
includes the amount of the forthcoming distribution. Those purchasing just prior
to a distribution will subsequently receive a partial return of their investment
capital upon payment of the distribution, which will be taxable to them.

Redemptions of shares, including exchanges for shares of other American Funds,
may result in federal, state and local tax consequences (gain or loss) to the
shareholder.

If a shareholder exchanges or otherwise disposes of shares of the fund within 90
days of having acquired such shares, and if, as a result of having acquired
those shares, the shareholder subsequently pays a reduced sales charge for
shares of the fund, or of a different fund, the sales charge previously incurred
in acquiring the fund's shares will not be taken into account (to the extent
such previous sales charges do not exceed the reduction in sales charges) for
the purposes of determining the amount of gain or loss on the exchange, but will
be treated as having been incurred in the acquisition of such other fund(s).

Any loss realized on a redemption or exchange of shares of the fund will be
disallowed to the extent substantially identical shares are reacquired within
the 61-day period beginning 30 days before and ending 30 days after the shares
are disposed of. Any loss disallowed under this rule will be added to the
shareholder's tax basis in the new shares purchased.

The fund will be required to report to the IRS all distributions of investment
company taxable income and capital gains as well as gross proceeds from the
redemption or exchange of fund shares, except in the case of certain exempt
shareholders. Under the backup withholding provisions of Section 3406 of the
Code, distributions of investment company taxable income and capital gains and
proceeds from the redemption or exchange of a regulated investment company may
be subject to backup withholding of federal income tax in the case of non-exempt
U.S. shareholders who fail to furnish the investment company with their taxpayer
identification numbers and with required certifications regarding their status
under the federal income tax law. Withholding may also be required if the fund
is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.

The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons (i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates). Each shareholder who is
not a U.S. person should consider the U.S. and foreign tax consequences of
ownership of shares of the fund, including the possibility that such a
shareholder may be subject to a U.S. withholding tax at a rate of 30% (or a
lower rate under an applicable income tax treaty) on dividend income received by
the shareholder.

Shareholders should consult their tax advisers about the application of federal,
state and local tax law in light of their particular situation.

American Balanced Fund -- Page 37
<PAGE>

UNLESS OTHERWISE NOTED, ALL REFERENCES IN THE FOLLOWING PAGES TO CLASS A, B, C
OR F SHARES ALSO REFER TO THE CORRESPONDING CLASS 529-A, 529-B, 529-C OR 529-F
SHARES. CLASS 529 SHAREHOLDERS SHOULD ALSO REFER TO THE APPLICABLE PROGRAM
DESCRIPTION FOR INFORMATION ON POLICIES AND SERVICES SPECIFICALLY RELATING TO
THESE ACCOUNTS. SHAREHOLDERS HOLDING SHARES THROUGH AN ELIGIBLE RETIREMENT PLAN
SHOULD CONTACT THEIR PLAN'S ADMINISTRATOR OR RECORDKEEPER FOR INFORMATION
REGARDING PURCHASES, SALES AND EXCHANGES.

PURCHASE AND EXCHANGE OF SHARES

PURCHASES BY INDIVIDUALS -- As described in the prospectus, you may generally
open an account and purchase fund shares by contacting a financial adviser or
investment dealer authorized to sell the fund's shares. You may make investments
by any of the following means:

CONTACTING YOUR FINANCIAL ADVISER -- Deliver or mail a check to your
financial adviser.

BY MAIL -- for initial investments, you may mail a check, made payable to
the fund, directly to the address indicated on the account application.
Please indicate an investment dealer on the account application. You may
make additional investments by filling out the "Account Additions" form at
the bottom of a recent account statement and mailing the form, along with a
check made payable to the fund, using the envelope provided with your
account statement.

The amount of time it takes for us to receive regular U.S. postal mail may
vary and there is no assurance that we will receive such mail on the day
you expect. Mailing addresses for regular U.S. postal mail can be found in
the prospectus. To send investments or correspondence to us via overnight
mail or courier service, use any of the following addresses:

American Funds
8332 Woodfield Crossing Blvd.
Indianapolis, IN 46240-2482

American Funds
3500 Wiseman Blvd.
San Antonio, TX 78251-4321

American Funds
5300 Robin Hood Rd.
Norfolk, VA 23513-2407

BY TELEPHONE -- using the American FundsLine. Please see the "Shareholder
account services and privileges" section of this document for more
information regarding this service.

BY INTERNET -- using americanfunds.com. Please see the "Shareholder account
services and privileges" section of this document for more information
regarding this service.

American Balanced Fund -- Page 38
<PAGE>

BY WIRE -- If you are making a wire transfer, instruct your bank to wire
funds to:

Wells Fargo Bank
ABA Routing No. 121000248
Account No. 4600-076178

Your bank should include the following information when wiring funds:

For credit to the account of:
American Funds Service Company
(fund's name)

For further credit to:
(shareholder's fund account number)
(shareholder's name)

You may contact American Funds Service Company at 800/421-0180 if you have
questions about making wire transfers.

OTHER PURCHASE INFORMATION -- Class 529 shares may be purchased only through
CollegeAmerica by investors establishing qualified higher education savings
accounts. Class 529-E shares may be purchased only by investors participating in
CollegeAmerica through an eligible employer plan. Class R-5 shares are also
available to clients of the Personal Investment Management group of Capital
Guardian Trust Company who do not have an intermediary associated with their
accounts and without regard to the $1 million purchase minimum. In addition, the
American Funds state tax-exempt funds are qualified for sale only in certain
jurisdictions, and tax-exempt funds in general should not serve as retirement
plan investments. The fund and the Principal Underwriter reserve the right to
reject any purchase order.

PURCHASE MINIMUMS AND MAXIMUMS -- All investments are subject to the purchase
minimums and maximums described in the prospectus. As noted in the prospectus,
purchase minimums may be waived or reduced in certain cases.

In the case of American Funds non-tax-exempt funds, the initial purchase minimum
of $25 may be waived for the following account types:

. Payroll deduction retirement plan accounts (such as, but not limited
to, 403(b), 401(k), SIMPLE IRA, SARSEP and deferred compensation plan
accounts); and

. Employer-sponsored CollegeAmerica accounts.

The following account types may be established without meeting the initial
purchase minimum:

. Retirement accounts that are funded with employer contributions; and

. Accounts that are funded with monies set by court decree.

The following account types may be established without meeting the initial
purchase minimum, but shareholders wishing to invest in two or more funds must
meet the normal initial purchase minimum of each fund:

American Balanced Fund -- Page 39
<PAGE>

. Accounts that are funded with (a) transfers of assets, (b) rollovers
from retirement plans, (c) rollovers from 529 college savings plans or
(d) required minimum distribution automatic exchanges; and

. American Funds money market fund accounts registered in the name of
clients of Capital Guardian Trust Company's Personal Investment
Management group.

Certain accounts held on the fund's books, known as omnibus accounts, contain
multiple underlying accounts that are invested in shares of the fund. These
underlying accounts are maintained by entities such as financial intermediaries
and are subject to the applicable initial purchase minimums as described in the
prospectus and statement of additional information. However, in the case where
the entity maintaining these accounts aggregates the accounts' purchase orders
for fund shares, such accounts are not required to meet the minimum amount for
subsequent purchases.

EXCHANGES -- You may only exchange shares into other American Funds within the
same share class. However, exchanges from Class A shares of The Cash Management
Trust of America may be made to Class B or C shares of other American Funds for
dollar cost averaging purposes. Exchanges are not permitted from Class A shares
of The Cash Management Trust of America to Class B or C shares of Intermediate
Bond Fund of America, Limited Term Tax-Exempt Bond Fund of America and
Short-Term Bond Fund of America. Exchange purchases are subject to the minimum
investment requirements of the fund purchased and no sales charge generally
applies. However, exchanges of shares from American Funds money market funds are
subject to applicable sales charges on the fund being purchased, unless the
money market fund shares were acquired by an exchange from a fund having a sales
charge, or by reinvestment or cross-reinvestment of dividends or capital gain
distributions. Exchanges of Class F shares generally may only be made through
fee-based programs of investment firms that have special agreements with the
fund's distributor and certain registered investment advisers.

You may exchange shares of other classes by contacting the Transfer Agent, by
contacting your investment dealer or financial adviser, by using American
FundsLine or americanfunds.com, or by telephoning 800/421-0180 toll-free, or
faxing (see "American Funds Service Company service areas" in the prospectus for
the appropriate fax numbers) the Transfer Agent. For more information, see
"Shareholder account services and privileges" below. THESE TRANSACTIONS HAVE THE
SAME TAX CONSEQUENCES AS ORDINARY SALES AND PURCHASES.

Shares held in employer-sponsored retirement plans may be exchanged into other
American Funds by contacting your plan administrator or recordkeeper. Exchange
redemptions and purchases are processed simultaneously at the share prices next
determined after the exchange order is received (see "Price of shares" above).

FREQUENT TRADING OF FUND SHARES -- As noted in the prospectus, certain
redemptions may trigger a purchase block lasting 30 calendar days under the
fund's "purchase blocking policy." Under this policy, systematic redemptions
will not trigger a purchase block and systematic purchases will not be
prevented. For purposes of this policy, systematic redemptions include, for
example, regular periodic automatic redemptions and statement of intention
escrow share redemptions. Systematic purchases include, for example, regular
periodic automatic purchases and automatic reinvestments of dividends and
capital gain distributions.

The fund, through its transfer agent, American Funds Service Company,
maintains surveillance procedures to detect frequent trading in fund
shares. Under these procedures, various analytics are used to evaluate
factors that may be indicative of frequent trading. For example,
transactions in fund shares that exceed certain monetary thresholds may be
scrutinized. American Funds Service Company also may review transactions
that occur close in time to other transactions in the same account or in
multiple accounts under common ownership or influence. Trading activity
that is identified through these procedures or as a result of any other
information available to the fund will be evaluated to determine whether
such activity might constitute frequent trading. These procedures may be
modified from time to time as appropriate to improve the detection of
frequent trading, to facilitate monitoring for frequent trading in
particular retirement plans or other accounts, and to comply with
applicable laws.

In addition to the fund's broad ability to restrict potentially harmful
trading, the fund's board of directors has adopted a "purchase blocking
policy," under which any shareholder redeeming shares (including
redemptions that are part of an exchange transaction) having a value of
$5,000 or more from the fund will be precluded from investing in the
fund (including investments that are part of an exchange transaction)
for 30 calendar days after the redemption transaction. Under the fund's
purchase blocking policy, certain purchases will not be prevented and
certain redemptions will not trigger a purchase block, such as: systematic
redemptions and purchases where the entity maintaining the shareholder
account is able to identify the transaction as a systematic redemption or
purchase; purchases and redemptions of shares having a value of less than
$5,000; transactions in Class 529 shares; purchases and redemptions
resulting from reallocations by American Funds Target Date Retirement
Series; retirement plan contributions, loans and distributions (including
hardship withdrawals) identified as such on the retirement plan
recordkeeper's system; and purchase transactions involving transfers of
assets, rollovers, Roth IRA conversions and IRA recharacterizations, where
the entity maintaining the shareholder account is able to identify the
transaction as one of these types of transactions.

The fund reserves the right to waive the purchase blocking policy in those
instances where American Funds Service Company determines that its
surveillance procedures are adequate to detect frequent trading in fund
shares.

American Funds Service Company will work with certain intermediaries (such
as investment dealers holding shareholder accounts in street name,
retirement plan recordkeepers, insurance company separate accounts and bank
trust companies) to apply their procedures which American Funds Service
Company believes are reasonably designed to enforce the frequent trading
policies of the fund. You should refer to disclosures provided by the
intermediaries with which you have an account to determine the specific
trading restrictions that apply to you.

If American Funds Service Company identifies any activity that may
constitute frequent trading, it reserves the right to contact the
intermediary and request that the intermediary either provide information
regarding an account owner's transactions or restrict the account owner's
trading. If American Funds Service Company is not satisfied that the
intermediary has taken appropriate action, American Funds Service Company
may terminate the intermediary's ability to transact in fund shares.

There is no guarantee that all instances of frequent trading in fund shares
will be prevented.

Notwithstanding the fund's surveillance procedures and purchase blocking
policy, all transactions in fund shares remain subject to the fund's and
American Funds Distributors' right to restrict potentially abusive trading
generally (including the types of transactions described above that will
not be prevented or trigger a block under the purchase blocking policy).

American Balanced Fund -- Page 40
<PAGE>

OTHER POTENTIALLY ABUSIVE ACTIVITY -- In addition to implementing purchase
blocks, American Funds Service Company will monitor for other types of activity
that could potentially be harmful to the American Funds - for example,
short-term trading activity in multiple funds. When identified, American Funds
Service Company will request that the shareholder discontinue the activity. If
the activity continues, American Funds Service Company will freeze the
shareholder account to prevent all activity other than redemptions of fund
shares.

MOVING BETWEEN SHARE CLASSES

AUTOMATIC CONVERSIONS -- As described more fully in the prospectus, Class
B, 529-B and C shares automatically convert to Class A, 529-A and F shares,
respectively, after a certain period from the purchase date.

MOVING FROM CLASS B TO CLASS A SHARES -- Under the right of reinvestment
policy as described in the prospectus, if you redeem Class B shares during
the contingent deferred sales charge period, you may reinvest the proceeds
in Class A shares without paying a Class A sales charge if you notify
American Funds Service Company and the reinvestment occurs within 90 days
after the date of redemption and is made into the same account from which
you redeemed the shares. If you redeem your Class B shares after the
contingent deferred sales charge period, you may either reinvest the
proceeds in Class B shares or purchase Class A shares. If you purchase
Class A shares, you are responsible for paying any applicable Class A sales
charges.

MOVING FROM CLASS C TO CLASS A SHARES -- If you redeem Class C shares and
with the redemption proceeds purchase Class A shares, you are still
responsible for paying any Class C contingent deferred sales charges and
applicable Class A sales charges.

MOVING FROM CLASS F TO CLASS A SHARES -- You can redeem Class F shares held
in a qualified fee-based program and with the redemption proceeds purchase
Class A shares without paying an initial Class A sales charge if all of the
following are met: (a) you are leaving or have left the fee-based program,
(b) you have held the Class F shares in the program for at least one year,
and (c) you notify American Funds Service Company and purchase the Class A
shares within 90 days after redeeming the Class F shares.

MOVING FROM CLASS A TO CLASS F SHARES -- If you are part of a qualified
fee-based program and you wish to redeem your Class A shares and with the
redemption proceeds purchase Class F shares for the program, any Class A
sales charges (including contingent deferred sales charges) that you paid
or are payable will not be credited back to your account.

MOVING FROM CLASS A TO CLASS R SHARES -- Provided it is eligible to invest
in Class R shares, a retirement plan currently invested in Class A shares
may redeem its shares and purchase Class R shares with the redemption
proceeds. Any Class A sales charges that the retirement plan previously
paid will not be credited back to the plan's account.

NON-REPORTABLE TRANSACTIONS -- As described above, automatic conversions
will be non-reportable for tax purposes. In addition, except in the case of
a movement between a 529 share class and a non-529 share class or vice
versa, an exchange of shares from one share class of a fund to another
share class of the same fund will be treated as a non-reportable exchange
for tax purposes, provided that the exchange request is received in writing
by American Funds Service Company and processed as a single transaction.

American Balanced Fund -- Page 41
<PAGE>

SALES CHARGES

CLASS A PURCHASES

PURCHASES BY CERTAIN 403(B) PLANS

Individual 403(b) plans may be treated similarly to employer-sponsored
plans for Class A sales charge purposes (i.e., individual participant
accounts are eligible to be aggregated together) if: (a) the American Funds
are principal investment options; (b) the employer facilitates the
enrollment process by, for example, allowing for onsite group enrollment
meetings held during working hours; and (c) there is only one dealer firm
assigned to the plans.

OTHER PURCHASES

Pursuant to a determination of eligibility by a vice president or more
senior officer of the Capital Research and Management Company Fund
Administration Unit, or by his or her designee, Class A shares of the
American Funds stock, stock/bond and bond funds may be sold at net asset
value to:

(1) current or retired directors, trustees, officers and advisory board
members of, and certain lawyers who provide services to, the funds
managed by Capital Research and Management Company, current or retired
employees of Washington Management Corporation, current or retired
employees and partners of The Capital Group Companies, Inc. and its
affiliated companies, certain family members and employees of the
above persons, and trusts or plans primarily for such persons;

(2) currently registered representatives and assistants directly employed
by such representatives, retired registered representatives with
respect to accounts established while active, or full-time employees
(collectively, "Eligible Persons") (and their (a) spouses or
equivalents if recognized under local law, (b) parents and children,
including parents and children in step and adoptive relationships,
sons-in-law and daughters-in-law, and (c) parents-in-law, if the
Eligible Persons or the spouses, children or parents of the Eligible
Persons are listed in the account registration with the
parents-in-law) of dealers who have sales agreements with the
Principal Underwriter (or who clear transactions through such
dealers), plans for the dealers, and plans that include as
participants only the Eligible Persons, their spouses, parents and/or
children;

(3) currently registered investment advisers ("RIAs") and assistants
directly employed by such RIAs, retired RIAs with respect to accounts
established while active, or full-time employees (collectively,
"Eligible Persons") (and their (a) spouses or equivalents if
recognized under local law, (b) parents and children, including
parents and children in step and adoptive relationships, sons-in-law
and daughters-in-law and (c) parents-in-law, if the Eligible Persons
or the spouses, children or parents of the Eligible Persons are listed
in the account registration with the parents-in-law) of RIA firms that
are authorized to sell shares of the funds, plans for the RIA firms,
and plans that include as participants only the Eligible Persons,
their spouses, parents and/or children;

American Balanced Fund -- Page 42
<PAGE>

(4) companies exchanging securities with the fund through a merger,
acquisition or exchange offer;

(5) insurance company separate accounts;

(6) accounts managed by subsidiaries of The Capital Group Companies, Inc.;

(7) The Capital Group Companies, Inc., its affiliated companies and
Washington Management Corporation;

(8) an individual or entity with a substantial business relationship with
The Capital Group Companies, Inc. or its affiliates, or an individual
or entity related or relating to such individual or entity;

(9) wholesalers and full-time employees directly supporting wholesalers
involved in the distribution of insurance company separate accounts
whose underlying investments are managed by any affiliate of The
Capital Group Companies, Inc.; and

(10) full-time employees of banks that have sales agreements with the
Principal Underwriter, who are solely dedicated to directly supporting
the sale of mutual funds.

Shares are offered at net asset value to these persons and organizations
due to anticipated economies in sales effort and expense. Once an account
is established under this net asset value privilege, additional investments
can be made at net asset value for the life of the account.

TRANSFERS TO COLLEGEAMERICA -- A transfer from the Virginia Prepaid
Education Program/SM/ or the Virginia Education Savings Trust/SM/ to a
CollegeAmerica account will be made with no sales charge. No commission
will be paid to the dealer on such a transfer.

MOVING BETWEEN ACCOUNTS -- Investments in certain account types may be moved to
other account types without incurring additional Class A sales charges. These
transactions include, for example:

. redemption proceeds from a non-retirement account (for example, a
joint tenant account) used to purchase fund shares in an IRA or other
individual-type retirement account;

. required minimum distributions from an IRA or other individual-type
retirement account used to purchase fund shares in a non-retirement
account; and

. death distributions paid to a beneficiary's account that are used by
the beneficiary to purchase fund shares in a different account.

LOAN REPAYMENTS -- Repayments on loans taken from a retirement plan or an
individual-type retirement account are not subject to sales charges if American
Funds Service Company is notified of the repayment.

DEALER COMMISSIONS AND COMPENSATION -- Commissions (up to 1.00%) are paid to
dealers who initiate and are responsible for certain Class A share purchases not
subject to sales charges. These purchases consist of purchases of $1 million or
more, purchases by employer-sponsored defined contribution-type retirement plans
investing $1 million or more or with 100 or

American Balanced Fund -- Page 43
<PAGE>

more eligible employees, and purchases made at net asset value by certain
retirement plans, endowments and foundations with assets of $50 million or more.
Commissions on such investments (other than IRA rollover assets that roll over
at no sales charge under the fund's IRA rollover policy as described in the
prospectus) are paid to dealers at the following rates: 1.00% on amounts to $4
million, 0.50% on amounts over $4 million to $10 million and 0.25% on amounts
over $10 million. Commissions are based on cumulative investments and are not
annually reset.

A dealer concession of up to 1% may be paid by the fund under its Class A plan
of distribution to reimburse the Principal Underwriter in connection with dealer
and wholesaler compensation paid by it with respect to investments made with no
initial sales charge.

SALES CHARGE REDUCTIONS AND WAIVERS

REDUCING YOUR CLASS A SALES CHARGE -- As described in the prospectus, there are
various ways to reduce your sales charge when purchasing Class A shares.
Additional information about Class A sales charge reductions is provided below.

STATEMENT OF INTENTION -- By establishing a statement of intention (the
"Statement"), you enter into a nonbinding commitment to purchase shares of
American Funds non-money market funds over a 13-month period and receive
the same sales charge (expressed as a percentage of your purchases) as if
all shares had been purchased at once.

The market value of your existing holdings eligible to be aggregated (see
below) as of the day immediately before the start of the Statement period
may be credited toward satisfying the Statement.

The Statement may be revised upward at any time during the Statement
period, and such a revision will be treated as a new Statement, except that
the Statement period during which the purchases must be made will remain
unchanged. Purchases made from the date of revision will receive the
reduced sales charge, if any, resulting from the revised Statement.

The Statement will be considered completed if the shareholder dies within
the 13-month Statement period. Commissions to dealers will not be adjusted
or paid on the difference between the Statement amount and the amount
actually invested before the shareholder's death.

When a shareholder elects to use a Statement, shares equal to 5% of the
dollar amount specified in the Statement may be held in escrow in the
shareholder's account out of the initial purchase (or subsequent purchases,
if necessary) by the Transfer Agent. All dividends and any capital gain
distributions on shares held in escrow will be credited to the
shareholder's account in shares (or paid in cash, if requested). If the
intended investment is not completed within the specified Statement period,
the purchaser may be required to remit to the Principal Underwriter the
difference between the sales charge actually paid and the sales charge
which would have been paid if the total of such purchases had been made at
a single time. Any dealers assigned to the shareholder's account at the
time a purchase was made during the Statement period will receive a
corresponding commission adjustment if appropriate. If the difference is
not paid by the close of the Statement period, the appropriate number of
shares held in escrow will be redeemed to

American Balanced Fund -- Page 44
<PAGE>

pay such difference. If the proceeds from this redemption are inadequate,
the purchaser may be liable to the Principal Underwriter for the balance
still outstanding.

Certain payroll deduction retirement plans purchasing Class A shares under
a Statement on or before November 12, 2006, may continue to purchase Class
A shares at the sales charge determined by that particular Statement until
the plans' values reach the amounts specified in their Statements. Upon
reaching such amounts, the Statements for these plans will be deemed
completed and will terminate at that time. After such termination, these
plans are eligible for additional sales charge reductions by meeting the
criteria under the fund's rights of accumulation policy.

If you make an American Funds purchase under a statement of intention
prior to April 1, 2007, purchases of American Legacy variable annuity
contracts and variable life insurance policies may also be credited toward
completion of that statement of intention.

Shareholders purchasing shares at a reduced sales charge under a Statement
indicate their acceptance of these terms and those in the prospectus with
their first purchase.

AGGREGATION -- Qualifying investments for aggregation include those made by
you and your "immediate family" as defined in the prospectus, if all
parties are purchasing shares for their own accounts and/or:

. individual-type employee benefit plans, such as an IRA, individual
403(b) plan (see exception in "Purchases by certain 403(b) plans"
under "Sales charges") or single-participant Keogh-type plan;

. business accounts solely controlled by you or your immediate family
(for example, you own the entire business);

. trust accounts established by you or your immediate family (for trusts
with only one primary beneficiary, upon the trustor's death the trust
account may be aggregated with such beneficiary's own accounts; for
trusts with multiple primary beneficiaries, upon the trustor's death
the trustees of the trust may instruct American Funds Service Company
to establish separate trust accounts for each primary beneficiary;
each primary beneficiary's separate trust account may then be
aggregated with such beneficiary's own accounts);

. endowments or foundations established and controlled by you or your
immediate family; or

. 529 accounts, which will be aggregated at the account owner level
(Class 529-E accounts may only be aggregated with an eligible employer
plan).

Individual purchases by a trustee(s) or other fiduciary(ies) may also be
aggregated if the investments are:

. for a single trust estate or fiduciary account, including employee
benefit plans other than the individual-type employee benefit plans
described above;

. made for two or more employee benefit plans of a single employer or of
affiliated employers as defined in the 1940 Act, excluding the
individual-type employee benefit plans described above;

. for a diversified common trust fund or other diversified pooled
account not specifically formed for the purpose of accumulating fund
shares;

. for nonprofit, charitable or educational organizations, or any
endowments or foundations established and controlled by such
organizations, or any employer--

American Balanced Fund -- Page 45
<PAGE>

sponsored retirement plans established for the benefit of the
employees of such organizations, their endowments, or their
foundations; or

. for individually established participant accounts of a 403(b) plan
that is treated similarly to an employer-sponsored plan for sales
charge purposes (see "Purchases by certain 403(b) plans" under "Sales
charges" above), or made for two or more such 403(b) plans that are
treated similarly to employer-sponsored plans for sales charge
purposes, in each case of a single employer or affiliated employers as
defined in the 1940 Act.

Purchases made for nominee or street name accounts (securities held in the
name of an investment dealer or another nominee such as a bank trust
department instead of the customer) may not be aggregated with those made
for other accounts and may not be aggregated with other nominee or street
name accounts unless otherwise qualified as described above.

CONCURRENT PURCHASES -- As described in the prospectus, you may reduce your
Class A sales charge by combining purchases of all classes of shares in the
American Funds, as well as individual holdings in Endowments. Shares of
money market funds purchased through an exchange, reinvestment or
cross-reinvestment from a fund having a sales charge also qualify. However,
direct purchases of American Funds money market funds are excluded.

RIGHTS OF ACCUMULATION -- Subject to the limitations described in the
aggregation policy, you may take into account your accumulated holdings in
all share classes of the American Funds, as well as your holdings in
Endowments, to determine your sales charge on investments in accounts
eligible to be aggregated. Subject to your investment dealer's or
recordkeeper's capabilities, your accumulated holdings will be calculated
as the higher of (a) the current value of your existing holdings (the
"market value") or (b) the amount you invested (including reinvested
dividends and capital gains, but excluding capital appreciation) less any
withdrawals (the "cost value"). Depending on the entity on whose books your
account is held, the value of your holdings in that account may not be
eligible for calculation at cost value. For example, accounts held in
nominee or street name are not eligible for calculation at cost value and
instead will be calculated at market value for purposes of rights of
accumulation.

The value of all of your holdings in accounts established in calendar year
2005 or earlier will be assigned an initial cost value equal to the market
value of those holdings as of the last business day of 2005. Thereafter,
the cost value of such accounts will increase or decrease according to
actual investments or withdrawals. You must contact your financial adviser
or American Funds Service Company if you have additional information that
is relevant to the calculation of the value of your holdings.

If you make a gift of American Funds Class A shares, upon your request, you
may purchase the shares at the sales charge discount allowed under rights
of accumulation of all of your American Funds accounts.

American Balanced Fund -- Page 46
<PAGE>

CDSC WAIVERS FOR CLASS A, B AND C SHARES -- As noted in the prospectus, a
contingent deferred sales charge ("CDSC") may be waived for redemptions due to
death or postpurchase disability of a shareholder (this generally excludes
accounts registered in the names of trusts and other entities). In the case of
joint tenant accounts, if one joint tenant dies, a surviving joint tenant, at
the time he or she notifies the Transfer Agent of the other joint tenant's death
and removes the decedent's name from the account, may redeem shares from the
account without incurring a CDSC. Redemptions made after the Transfer Agent is
notified of the death of a joint tenant will be subject to a CDSC.

In addition, a CDSC may be waived for the following types of transactions, if
together they do not exceed 12% of the value of an "account" (defined below)
annually (the "12% limit"):

. Required minimum distributions taken from retirement accounts upon the
shareholder's attainment of age 70-1/2 (required minimum distributions
that continue to be taken by the beneficiary(ies) after the account
owner is deceased also qualify for a waiver).

. Redemptions through a systematic withdrawal plan (SWP) (see "Automatic
withdrawals" under "Shareholder account services and privileges"
below). For each SWP payment, assets that are not subject to a CDSC,
such as appreciation on shares and shares acquired through
reinvestment of dividends and/or capital gain distributions, will be
redeemed first and will count toward the 12% limit. If there is an
insufficient amount of assets not subject to a CDSC to cover a
particular SWP payment, shares subject to the lowest CDSC will be
redeemed next until the 12% limit is reached. Any dividends and/or
capital gain distributions taken in cash by a shareholder who receives
payments through a SWP will also count toward the 12% limit. In the
case of a SWP, the 12% limit is calculated at the time a systematic
redemption is first made, and is recalculated at the time each
additional systematic redemption is made. Shareholders who establish a
SWP should be aware that the amount of a payment not subject to a CDSC
may vary over time depending on fluctuations in the value of their
accounts. This privilege may be revised or terminated at any time.

For purposes of this paragraph, "account" means:

. in the case of Class A shares, your investment in Class A shares of
all American Funds (investments representing direct purchases of
American Funds money market funds are excluded);

. in the case of Class B shares, your investment in Class B shares of
the particular fund from which you are making the redemption; and

. in the case of Class C shares, your investment in Class C shares of
the particular fund from which you are making the redemption.

CDSC waivers are allowed only in the cases listed here and in the prospectus.
For example, CDSC waivers will not be allowed on redemptions of Class 529-B and
529-C shares due to termination of CollegeAmerica; a determination by the
Internal Revenue Service that CollegeAmerica

American Balanced Fund -- Page 47
<PAGE>

does not qualify as a qualified tuition program under the Code; proposal or
enactment of law that eliminates or limits the tax-favored status of
CollegeAmerica; or elimination of the fund by the Virginia College Savings Plan
as an option for additional investment within CollegeAmerica.

SELLING SHARES

The methods for selling (redeeming) shares are described more fully in the
prospectus. If you wish to sell your shares by contacting American Funds Service
Company directly, any such request must be signed by the registered
shareholders. To contact American Funds Service Company via overnight mail or
courier service, see "Purchase and exchange of shares."

A signature guarantee may be required for certain redemptions. In such an event,
your signature may be guaranteed by a domestic stock exchange or the National
Association of Securities Dealers, Inc., bank, savings association or credit
union that is an eligible guarantor institution. The Transfer Agent reserves the
right to require a signature guarantee on any redemptions.

Additional documentation may be required for sales of shares held in corporate,
partnership or fiduciary accounts. You must include with your written request
any shares you wish to sell that are in certificate form.

If you sell Class A, B or C shares and request a specific dollar amount to be
sold, we will sell sufficient shares so that the sale proceeds, after deducting
any applicable CDSC, equals the dollar amount requested.

Redemption proceeds will not be mailed until sufficient time has passed to
provide reasonable assurance that checks or drafts (including certified or
cashier's checks) for shares purchased have cleared (which may take up to 10
business days from the purchase date). Except for delays relating to clearance
of checks for share purchases or in extraordinary circumstances (and as
permissible under the 1940 Act), sale proceeds will be paid on or before the
seventh day following receipt and acceptance of an order. Interest will not
accrue or be paid on amounts that represent uncashed distribution or redemption
checks.

You may request that redemption proceeds of $1,000 or more from money market
funds be wired to your bank by writing American Funds Service Company. A
signature guarantee is required on all requests to wire funds.

SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES

The following services and privileges are generally available to all
shareholders. However, certain services and privileges may not be available for
Class 529 shareholders or if your account is held with an investment dealer or
through an employer-sponsored retirement plan.

AUTOMATIC INVESTMENT PLAN -- An automatic investment plan enables you to make
monthly or quarterly investments in the American Funds through automatic debits
from your bank account. To set up a plan, you must fill out an account
application and specify the amount that you would like to invest ($50 minimum
per fund; $25 minimum per fund in the case of employer-sponsored 529 accounts)
and the date on which you would like your investments to occur. The plan will
begin within 30 days after your account application is received. Your bank
account will be debited on the day or a few days before your investment is made,
depending on the bank's capabilities. The Transfer Agent will then invest your
money into the fund you specified on or around the date

American Balanced Fund -- Page 48
<PAGE>

you specified. If the date you specified falls on a weekend or holiday, your
money will be invested on the following business day. However, if the following
business day falls in the next month, your money will be invested on the
business day immediately preceding the weekend or holiday. If your bank account
cannot be debited due to insufficient funds, a stop-payment or the closing of
the account, the plan may be terminated and the related investment reversed. You
may change the amount of the investment or discontinue the plan at any time by
contacting the Transfer Agent.

AUTOMATIC REINVESTMENT -- Dividends and capital gain distributions are
reinvested in additional shares of the same class and fund at net asset value
unless you indicate otherwise on the account application. You also may elect to
have dividends and/or capital gain distributions paid in cash by informing the
fund, the Transfer Agent or your investment dealer. Dividends and capital gain
distributions paid to retirement plan shareholders or shareholders of the 529
share classes will be automatically reinvested.

If you have elected to receive dividends and/or capital gain distributions in
cash, and the postal or other delivery service is unable to deliver checks to
your address of record, or you do not respond to mailings from American Funds
Service Company with regard to uncashed distribution checks, your distribution
option will automatically be converted to having all dividends and other
distributions reinvested in additional shares.

CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS -- For all share classes,
except the 529 classes of shares, you may cross-reinvest dividends and capital
gains (distributions) into other American Funds in the same share class at net
asset value, subject to the following conditions:

(1) the aggregate value of your account(s) in the fund(s) paying distributions
equals or exceeds $5,000 (this is waived if the value of the account in the fund
receiving the distributions equals or exceeds that fund's minimum initial
investment requirement);

(2) if the value of the account of the fund receiving distributions is below
the minimum initial investment requirement, distributions must be automatically
reinvested; and

(3) if you discontinue the cross-reinvestment of distributions, the value of
the account of the fund receiving distributions must equal or exceed the minimum
initial investment requirement. If you do not meet this requirement within 90
days of notification, the fund has the right to automatically redeem the
account.

AUTOMATIC EXCHANGES -- For all share classes, you may automatically exchange
shares of the same class in amounts of $50 or more among any of the American
Funds on any day (or preceding business day if the day falls on a nonbusiness
day) of each month you designate.

AUTOMATIC WITHDRAWALS -- For all share classes, except the R and 529 classes of
shares, you may automatically withdraw shares from any of the American Funds.
You can make automatic withdrawals of $50 or more. You can designate the day of
each period for withdrawals and request that checks be sent to you or someone
else. Withdrawals may also be electronically deposited to your bank account. The
Transfer Agent will withdraw your money from the fund you specify on or around
the date you specify. If the date you specified falls on a weekend or holiday,
the redemption will take place on the previous business day. However, if the
previous business day falls in the preceding month, the redemption will take
place on the following business day after the weekend or holiday.

American Balanced Fund -- Page 49
<PAGE>

Withdrawal payments are not to be considered as dividends, yield or income.
Automatic investments may not be made into a shareholder account from which
there are automatic withdrawals. Withdrawals of amounts exceeding reinvested
dividends and distributions and increases in share value would reduce the
aggregate value of the shareholder's account. The Transfer Agent arranges for
the redemption by the fund of sufficient shares, deposited by the shareholder
with the Transfer Agent, to provide the withdrawal payment specified.

ACCOUNT STATEMENTS -- Your account is opened in accordance with your
registration instructions. Transactions in the account, such as additional
investments, will be reflected on regular confirmation statements from the
Transfer Agent. Dividend and capital gain reinvestments, purchases through
automatic investment plans and certain retirement plans, as well as automatic
exchanges and withdrawals will be confirmed at least quarterly.

AMERICAN FUNDSLINE AND AMERICANFUNDS.COM -- You may check your share balance,
the price of your shares or your most recent account transaction; redeem shares
(up to $75,000 per American Funds shareholder each day) from nonretirement plan
accounts; or exchange shares around the clock with American FundsLine or using
americanfunds.com. To use American FundsLine, call 800/325-3590 from a
TouchTone(TM) telephone. Redemptions and exchanges through American FundsLine
and americanfunds.com are subject to the conditions noted above and in
"Telephone and Internet purchases, redemptions and exchanges" below. You will
need your fund number (see the list of the American Funds under "General
information -- fund numbers"), personal identification number (generally the
last four digits of your Social Security number or other tax identification
number associated with your account) and account number.

Generally, all shareholders are automatically eligible to use these services.
However, if you are not currently authorized to do so, you may complete an
American FundsLink Authorization Form. Once you establish this privilege, you,
your financial adviser or any person with your account information may use these
services.

TELEPHONE AND INTERNET PURCHASES, REDEMPTIONS AND EXCHANGES -- By using the
telephone (including American FundsLine) or the Internet (including
americanfunds.com), or fax purchase, redemption and/or exchange options, you
agree to hold the fund, the Transfer Agent, any of its affiliates or mutual
funds managed by such affiliates, and each of their respective directors,
trustees, officers, employees and agents harmless from any losses, expenses,
costs or liability (including attorney fees) that may be incurred in connection
with the exercise of these privileges. Generally, all shareholders are
automatically eligible to use these services. However, you may elect to opt out
of these services by writing the Transfer Agent (you may also reinstate them at
any time by writing the Transfer Agent). If the Transfer Agent does not employ
reasonable procedures to confirm that the instructions received from any person
with appropriate account information are genuine, it and/or the fund may be
liable for losses due to unauthorized or fraudulent instructions. In the event
that shareholders are unable to reach the fund by telephone because of technical
difficulties, market conditions or a natural disaster, redemption and exchange
requests may be made in writing only.

CHECKWRITING -- You may establish check writing privileges for Class A shares
(but not Class 529-A shares) of American Funds money market funds. This can be
done by using an account application. If you request check writing privileges,
you will be provided with checks that you may use to draw against your account.
These checks may be made payable to anyone you designate and must be signed by
the authorized number of registered shareholders exactly as indicated on your
account application.

American Balanced Fund -- Page 50
<PAGE>

REDEMPTION OF SHARES -- The fund's Articles of Incorporation permit the fund to
direct the Transfer Agent to redeem the shares of any shareholder for their then
current net asset value per share if at such time the shareholder of record owns
shares having an aggregate net asset value of less than the minimum initial
investment amount required of new shareholders as set forth in the fund's
current registration statement under the 1940 Act, and subject to such further
terms and conditions as the board of directors of the fund may from time to time
adopt.

While payment of redemptions normally will be in cash, the fund's Articles of
Incorporation permit payment of the redemption price wholly or partly in
securities or other property included in the assets belonging to the fund when
in the opinion of the fund's board of directors, which shall be conclusive,
conditions exist which make payment wholly in cash unwise or undesirable.

SHARE CERTIFICATES -- Shares are credited to your account and certificates are
not issued unless you request them by contacting the Transfer Agent.
Certificates are not available for the 529 or R share classes.

GENERAL INFORMATION

CUSTODIAN OF ASSETS -- Securities and cash owned by the fund, including proceeds
from the sale of shares of the fund and of securities in the fund's portfolio,
are held by JPMorgan Chase Bank, 270 Park Avenue, New York, NY 10017-2070, as
Custodian. If the fund holds non-U.S. securities, the Custodian may hold these
securities pursuant to subcustodial arrangements in non-U.S. banks or non-U.S.
branches of U.S. banks.

TRANSFER AGENT -- American Funds Service Company, a wholly owned subsidiary of
the investment adviser, maintains the records of shareholder accounts, processes
purchases and redemptions of the fund's shares, acts as dividend and capital
gain distribution disbursing agent, and performs other related shareholder
service functions. The principal office of American Funds Service Company is
located at 135 South State College Boulevard, Brea, CA 92821-5823. American
Funds Service Company was paid a fee of $34,148,000 for Class A shares and
$5,219,000 for Class B shares for the 2006 fiscal year. American Funds Service
Company is also compensated for certain transfer agency services provided to all
other share classes from the administrative services fees paid to Capital
Research and Management Company, as described under "Administrative services
agreement."

In the case of certain shareholder accounts, third parties who may be
unaffiliated with the investment adviser provide transfer agency and shareholder
services in place of American Funds Service Company. These services are rendered
under agreements with American Funds Service Company or its affiliates and the
third parties receive compensation according to such agreements. Compensation
for transfer agency and shareholder services, whether paid to American Funds
Service Company or such third parties, is ultimately paid from fund assets and
is reflected in the expenses of the fund as disclosed in the prospectus.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -- Deloitte & Touche LLP, 695 Town
Center Drive, Suite 1200, Costa Mesa, CA 92626, serves as the fund's independent
registered public accounting firm, providing audit services, preparation of tax
returns and review of certain documents to be filed with the Securities and
Exchange Commission. The financial statements included in this statement of
additional information from the annual report have been so included in reliance
on the report of Deloitte & Touche LLP, independent registered public accounting
firm, given on the authority of said firm as experts in accounting and auditing.
The selection of the

American Balanced Fund -- Page 51
<PAGE>

fund's independent registered public accounting firm is reviewed and determined
annually by the board of directors.

INDEPENDENT LEGAL COUNSEL -- Paul, Hastings, Janofsky & Walker LLP, 515 South
Flower Street, Los Angeles, CA 90071, serves as counsel for the fund and for
independent directors in their capacities as such. Certain legal matters in
connection with certain capital shares offered by the prospectus have been
passed upon for the fund by Paul, Hastings, Janofsky & Walker LLP. Counsel does
not provide legal services to the fund's investment adviser or any of its
affiliated companies. A determination with respect to the independence of the
fund's "independent legal counsel" will be made at least annually by the
independent directors of the fund, as prescribed by the 1940 Act and related
rules.

PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS -- The fund's fiscal
year ends on December 31. Shareholders are provided updated prospectuses
annually and at least semiannually with reports showing the fund's investment
portfolio or summary investment portfolio, financial statements and other
information. The fund's annual financial statements are audited by the fund's
independent registered public accounting firm, Deloitte & Touche LLP. In
addition, shareholders may also receive proxy statements for the fund. In an
effort to reduce the volume of mail shareholders receive from the fund when a
household owns more than one account, the Transfer Agent has taken steps to
eliminate duplicate mailings of prospectuses, shareholder reports and proxy
statements. To receive additional copies of a prospectus, report or proxy
statement, shareholders should contact the Transfer Agent.

CODES OF ETHICS -- The fund and Capital Research and Management Company and its
affiliated companies, including the fund's Principal Underwriter, have adopted
codes of ethics that allow for personal investments, including securities in
which the fund may invest from time to time. These codes include a ban on
acquisitions of securities pursuant to an initial public offering; restrictions
on acquisitions of private placement securities; preclearance and reporting
requirements; review of duplicate confirmation statements; annual
recertification of compliance with codes of ethics; blackout periods on personal
investing for certain investment personnel; ban on short-term trading profits
for investment personnel; limitations on service as a director of publicly
traded companies; and disclosure of personal securities transactions.

LEGAL PROCEEDINGS -- On February 16, 2005, the NASD filed an administrative
complaint against the Principal Underwriter. The complaint alleges violations of
certain NASD rules by the Principal Underwriter with respect to the selection of
broker-dealer firms that buy and sell securities for mutual fund investment
portfolios. The complaint seeks sanctions, restitution and disgorgement. On
August 30, 2006, the NASD Hearing Panel ruled against the Principal Underwriter
and imposed a $5 million fine. The Principal Underwriter has appealed this
decision to the NASD's National Adjudicatory Council.

On March 24, 2005, the investment adviser and Principal Underwriter filed a
complaint against the Attorney General of the State of California in Los Angeles
County Superior Court. The complaint alleged that the Attorney General
threatened to take enforcement actions against the investment adviser and
Principal Underwriter that are without merit and preempted by federal law. On
the same day, following the filing of the investment adviser's and Principal
Underwriter's complaint, the Attorney General of the State of California filed a
complaint against the Principal Underwriter and investment adviser. Filed in Los
Angeles County Superior Court, the Attorney General's complaint alleged
violations of certain sections of the California Corporations Code with respect
to so-called "revenue sharing" disclosures in mutual fund prospectuses and

American Balanced Fund -- Page 52
<PAGE>

statements of additional information. On November 22, 2005, the Los Angeles
Superior Court dismissed the Attorney General's complaint. The Attorney General
subsequently appealed the Superior Court's decision to California's Court of
Appeal for the Second Appellate District. On January 26, 2007, the Court of
Appeal issued a ruling allowing the California Attorney General to proceed with
his civil action.

The investment adviser and Principal Underwriter believe that the likelihood
that these matters could have a material adverse effect on the fund or on the
ability of the investment adviser or Principal Underwriter to perform their
contracts with the fund is remote. The SEC is conducting a related investigation
as of the date of this statement of additional information. The investment
adviser and Principal Underwriter are cooperating fully. In addition, class
action lawsuits have been filed in the U.S. District Court, Central District of
California, relating to these matters. The investment adviser believes that
these suits are without merit and will defend itself vigorously. Further updates
on these issues will be available on the American Funds website
(americanfunds.com) under "American Funds regulatory matters."

OTHER INFORMATION -- The financial statements including the investment portfolio
and the report of the fund's independent registered public accounting firm
contained in the annual report are included in this statement of additional
information. The following information on fund numbers is not included in the
annual report:

DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND MAXIMUM OFFERING PRICE
PER SHARE FOR CLASS A SHARES -- DECEMBER 31, 2006

Net asset value and redemption price per share
(Net assets divided by shares outstanding). . $19.02
Maximum offering price per share
(100/94.25 of net asset value per share,
which takes into account the fund's current maximum
sales charge). . . . . . . . . . . . . . . . $20.18

FUND NUMBERS -- Here are the fund numbers for use with our automated telephone
line, American FundsLine/(R)/, or when making share transactions:

FUND NUMBERS
------------------------------------
FUND CLASS A CLASS B CLASS C CLASS F
-----------------------------------------------------------------------------------------------------

STOCK AND STOCK/BOND FUNDS
AMCAP Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . 002 202 302 402
American Balanced Fund/(R)/ . . . . . . . . . . . . . . . . . 011 211 311 411
American Mutual Fund/(R)/ . . . . . . . . . . . . . . . . . . 003 203 303 403
Capital Income Builder/(R)/ . . . . . . . . . . . . . . . . . 012 212 312 412
Capital World Growth and Income Fund/SM/ . . . . . . . . . . . 033 233 333 433
EuroPacific Growth Fund/(R)/ . . . . . . . . . . . . . . . . . 016 216 316 416
Fundamental Investors/SM/ . . . . . . . . . . . . . . . . . . 010 210 310 410
The Growth Fund of America/(R)/ . . . . . . . . . . . . . . . 005 205 305 405
The Income Fund of America/(R)/ . . . . . . . . . . . . . . . 006 206 306 406
The Investment Company of America/(R)/ . . . . . . . . . . . . 004 204 304 404
The New Economy Fund/(R)/ . . . . . . . . . . . . . . . . . . 014 214 314 414
New Perspective Fund/(R)/ . . . . . . . . . . . . . . . . . . 007 207 307 407
New World Fund/SM/ . . . . . . . . . . . . . . . . . . . . . . 036 236 336 436
SMALLCAP World Fund/(R)/ . . . . . . . . . . . . . . . . . . . 035 235 335 435
Washington Mutual Investors Fund/SM/ . . . . . . . . . . . . . 001 201 301 401
BOND FUNDS
American High-Income Municipal Bond Fund/(R)/ . . . . . . . . 040 240 340 440
American High-Income Trust/SM/ . . . . . . . . . . . . . . . . 021 221 321 421
The Bond Fund of America/SM/ . . . . . . . . . . . . . . . . . 008 208 308 408
Capital World Bond Fund/(R)/ . . . . . . . . . . . . . . . . . 031 231 331 431
Intermediate Bond Fund of America/SM/ . . . . . . . . . . . . 023 223 323 423
Limited Term Tax-Exempt Bond Fund of America/SM/ . . . . . . . 043 243 343 443
Short-Term Bond Fund of America/SM/ . . . . . . . . . . . . . 048 248 348 448
The Tax-Exempt Bond Fund of America/(R)/ . . . . . . . . . . . 019 219 319 419
The Tax-Exempt Fund of California/(R)/* . . . . . . . . . . . 020 220 320 420
The Tax-Exempt Fund of Maryland/(R)/* . . . . . . . . . . . . 024 224 324 424
The Tax-Exempt Fund of Virginia/(R)/* . . . . . . . . . . . . 025 225 325 425
U.S. Government Securities Fund/SM/ . . . . . . . . . . . . . 022 222 322 422
MONEY MARKET FUNDS
The Cash Management Trust of America/(R)/ . . . . . . . . . . 009 209 309 409
The Tax-Exempt Money Fund of America/SM/ . . . . . . . . . . . 039 N/A N/A N/A
The U.S. Treasury Money Fund of America/SM/ . . . . . . . . . 049 N/A N/A N/A
___________
*Qualified for sale only in certain jurisdictions.

American Balanced Fund -- Page 53
<PAGE>

FUND NUMBERS
---------------------------------------------
CLASS CLASS CLASS CLASS CLASS
FUND 529-A 529-B 529-C 529-E 529-F
-------------------------------------------------------------------------------

STOCK AND STOCK/BOND FUNDS
AMCAP Fund . . . . . . . . . . 1002 1202 1302 1502 1402
American Balanced Fund . . . . 1011 1211 1311 1511 1411
American Mutual Fund . . . . . 1003 1203 1303 1503 1403
Capital Income Builder . . . . 1012 1212 1312 1512 1412
Capital World Growth and Income
Fund . . . . . . . . . . . . . 1033 1233 1333 1533 1433
EuroPacific Growth Fund . . . . 1016 1216 1316 1516 1416
Fundamental Investors . . . . . 1010 1210 1310 1510 1410
The Growth Fund of America . . 1005 1205 1305 1505 1405
The Income Fund of America . . 1006 1206 1306 1506 1406
The Investment Company of
America . . . . . . . . . . . . 1004 1204 1304 1504 1404
The New Economy Fund . . . . . 1014 1214 1314 1514 1414
New Perspective Fund . . . . . 1007 1207 1307 1507 1407
New World Fund . . . . . . . . 1036 1236 1336 1536 1436
SMALLCAP World Fund . . . . . . 1035 1235 1335 1535 1435
Washington Mutual Investors Fund
. . . . . . . . . . . . . . . 1001 1201 1301 1501 1401
BOND FUNDS
American High-Income Trust . . 1021 1221 1321 1521 1421
The Bond Fund of America . . . 1008 1208 1308 1508 1408
Capital World Bond Fund . . . . 1031 1231 1331 1531 1431
Intermediate Bond Fund of
America . . . . . . . . . . . . 1023 1223 1323 1523 1423
Short-Term Bond Fund of America 1048 1248 1348 1548 1448
U.S. Government Securities Fund 1022 1222 1322 1522 1422
MONEY MARKET FUND
The Cash Management Trust of
America . . . . . . . . . . . . 1009 1209 1309 1509 1409

American Balanced Fund -- Page 54
<PAGE>

FUND NUMBERS
----------------------------------------
CLASS CLASS CLASS CLASS CLASS
FUND R-1 R-2 R-3 R-4 R-5
-------------------------------------------------------------------------------

STOCK AND STOCK/BOND FUNDS
AMCAP Fund . . . . . . . . . . . . . 2102 2202 2302 2402 2502
American Balanced Fund . . . . . . . 2111 2211 2311 2411 2511
American Mutual Fund . . . . . . . . 2103 2203 2303 2403 2503
Capital Income Builder . . . . . . . 2112 2212 2312 2412 2512
Capital World Growth and Income Fund 2133 2233 2333 2433 2533
EuroPacific Growth Fund . . . . . . 2116 2216 2316 2416 2516
Fundamental Investors . . . . . . . 2110 2210 2310 2410 2510
The Growth Fund of America . . . . . 2105 2205 2305 2405 2505
The Income Fund of America . . . . . 2106 2206 2306 2406 2506
The Investment Company of America . 2104 2204 2304 2404 2504
The New Economy Fund . . . . . . . . 2114 2214 2314 2414 2514
New Perspective Fund . . . . . . . . 2107 2207 2307 2407 2507
New World Fund . . . . . . . . . . . 2136 2236 2336 2436 2536
SMALLCAP World Fund . . . . . . . . 2135 2235 2335 2435 2535
Washington Mutual Investors Fund . . 2101 2201 2301 2401 2501
BOND FUNDS
American High-Income Municipal Bond
Fund . . . . . . . . . . . . . . . . N/A N/A N/A N/A 2540
American High-Income Trust . . . . . 2121 2221 2321 2421 2521
The Bond Fund of America . . . . . . 2108 2208 2308 2408 2508
Capital World Bond Fund . . . . . . 2131 2231 2331 2431 2531
Intermediate Bond Fund of America . 2123 2223 2323 2423 2523
Limited Term Tax-Exempt Bond Fund of
America. . . . . . . . . . . . . . . N/A N/A N/A N/A 2543
Short-Term Bond Fund of America. . . 2148 2248 2348 2448 2548
The Tax-Exempt Bond Fund of America N/A N/A N/A N/A 2519
The Tax-Exempt Fund of California* . N/A N/A N/A N/A 2520
The Tax-Exempt Fund of Maryland* . . N/A N/A N/A N/A 2524
The Tax-Exempt Fund of Virginia* . . N/A N/A N/A N/A 2525
U.S. Government Securities Fund . . 2122 2222 2322 2422 2522
MONEY MARKET FUNDS
The Cash Management Trust of America 2109 2209 2309 2409 2509
The Tax-Exempt Money Fund of America N/A N/A N/A N/A 2539
The U.S. Treasury Money Fund of
America . . . . . . . . . . . . . . 2149 2249 2349 2449 2549
___________
*Qualified for sale only in certain
jurisdictions.

American Balanced Fund -- Page 55
<PAGE>

FUND NUMBERS
-------------------------------------------------
CLASS CLASS CLASS CLASS CLASS
FUND CLASS A R-1 R-2 R-3 R-4 R-5
-------------------------------------------------------------------------------

AMERICAN FUNDS TARGET DATE RETIREMENT SERIES
American Funds 2050 Target
Date Retirement Fund . . . 069 2169 2269 2369 2469 2569
American Funds 2045 Target
Date Retirement Fund . . . 068 2168 2268 2368 2468 2568
American Funds 2040 Target
Date Retirement Fund . . . 067 2167 2267 2367 2467 2567
American Funds 2035 Target
Date Retirement Fund . . . 066 2166 2266 2366 2466 2566
American Funds 2030 Target
Date Retirement Fund . . . 065 2165 2265 2365 2465 2565
American Funds 2025 Target
Date Retirement Fund . . . 064 2164 2264 2364 2464 2564
American Funds 2020 Target
Date Retirement Fund . . . 063 2163 2263 2363 2463 2563
American Funds 2015 Target
Date Retirement Fund . . . 062 2162 2262 2362 2462 2562
American Funds 2010 Target
Date Retirement Fund . . . 061 2161 2261 2361 2461 2561

American Balanced Fund -- Page 56
<PAGE>

APPENDIX

The following descriptions of debt security ratings are based on information
provided by Moody's Investors Service and Standard & Poor's Corporation.

DESCRIPTION OF BOND RATINGS

MOODY'S
LONG-TERM RATING DEFINITIONS

Aaa
Obligations rated Aaa are judged to be of the highest quality, with minimal
credit risk.

Aa
Obligations rated Aa are judged to be of high quality and are subject to very
low credit risk.

A
Obligations rated A are considered upper-medium grade and are subject to low
credit risk.

Baa
Obligations rated Baa are subject to moderate credit risk. They are considered
medium-grade and as such may possess certain speculative characteristics.

Ba
Obligations rated Ba are judged to have speculative elements and are subject to
substantial credit risk.

B
Obligations rated B are considered speculative and are subject to high credit
risk.

Caa
Obligations rated Caa are judged to be of poor standing and are subject to very
high credit risk.

Ca
Obligations rated Ca are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.

C
Obligations rated C are the lowest rated class of bonds and are typically in
default, with little prospect for recovery of principal or interest.

NOTE: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.

American Balanced Fund -- Page 57
<PAGE>

STANDARD & POOR'S
LONG-TERM ISSUE CREDIT RATINGS

AAA
An obligation rated AAA has the highest rating assigned by Standard & Poor's.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

AA
An obligation rated AA differs from the highest-rated obligations only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.

A
An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

BBB
An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.

BB, B, CCC, CC, AND C
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and C
the highest. While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.

BB
An obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.

B
An obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.

CCC
An obligation rated CCC is currently vulnerable to nonpayment and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.

CC
An obligation rated CC is currently highly vulnerable to nonpayment.

American Balanced Fund -- Page 58
<PAGE>

C
The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.

D
An obligation rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless Standard & Poor's believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.

PLUS (+) OR MINUS (-)
The ratings from AA to CCC may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.

American Balanced Fund -- Page 59

[logo - American Funds®]

American Balanced Fund^®

Investment portfolio

December 31, 2006

Common stocks — 65.18%	Shares			Market value (000)

INFORMATION TECHNOLOGY — 13.61%
Microsoft Corp.		50,520,000		$	1,508,527
International Business Machines Corp.		10,700,000			1,039,505
Oracle Corp.¹		43,200,000			740,448
Cisco Systems, Inc.¹		22,005,000			601,397
Nokia Corp. (ADR)		29,300,000			595,376
Motorola, Inc.		21,930,000			450,881
Intel Corp.		20,500,000			415,125
Applied Materials, Inc.		17,338,300			319,892
Dell Inc.¹		9,500,000			238,355
QUALCOMM Inc.		6,000,000			226,740
Analog Devices, Inc.		6,000,000			197,220
Google Inc., Class A¹		420,000			193,401
Agilent Technologies, Inc.¹		5,000,000			174,250
Hewlett-Packard Co.		4,000,000			164,760
Automatic Data Processing, Inc.		3,250,000			160,062
EMC Corp.¹		11,500,000			151,800
Texas Instruments Inc.		4,250,000			122,400
Yahoo! Inc.¹		4,750,000			121,315
Electronic Data Systems Corp.		4,200,000			115,710
Nortel Networks Corp. (CAD denominated)¹		1,835,000			49,286
Nortel Networks Corp.¹		700,000			18,711
Maxim Integrated Products, Inc.		1,397,800			42,801
					7,647,962


FINANCIALS — 10.36%
Citigroup Inc.		16,500,000			919,050
Berkshire Hathaway Inc., Class A¹		7,590			834,824
Wells Fargo & Co.		18,050,000			641,858
Fannie Mae		9,500,000			564,205
Washington Mutual, Inc.		9,500,000			432,155
American International Group, Inc.		5,550,000			397,713
Bank of America Corp.		5,500,000			293,645
Fifth Third Bancorp		7,000,000			286,510
Freddie Mac		3,000,000			203,700
U.S. Bancorp		5,500,000			199,045
Lincoln National Corp.		2,800,000			185,920
SunTrust Banks, Inc.		2,200,000			185,790
Wachovia Corp.		2,900,000			165,155
St. Paul Travelers Companies, Inc.		2,750,000			147,647
Société Générale		850,000			144,224
ING Groep NV		2,702,421			119,768
Marsh & McLennan Companies, Inc.		3,300,000			101,178
					5,822,387


INDUSTRIALS — 7.70%
General Electric Co.		22,700,000			844,667
Northrop Grumman Corp.		7,735,000			523,660
United Parcel Service, Inc., Class B		5,550,000			416,139
Deere & Co.		3,848,750			365,901
Tyco International Ltd.		11,440,000			347,776
Caterpillar Inc.		4,000,000			245,320
Illinois Tool Works Inc.		5,000,000			230,950
United Technologies Corp.		3,630,000			226,948
3M Co.		2,800,000			218,204
Union Pacific Corp.		2,000,000			184,040
General Dynamics Corp.		2,410,000			179,183
Emerson Electric Co.		4,000,000			176,360
Lockheed Martin Corp.		1,600,000			147,312
Parker Hannifin Corp.		1,500,000			115,320
Southwest Airlines Co.		6,835,000			104,712
					4,326,492


HEALTH CARE — 7.57%
Medtronic, Inc.		12,100,000			647,471
Eli Lilly and Co.		12,002,000			625,304
Abbott Laboratories		9,450,000			460,310
Pfizer Inc		14,000,000			362,600
Johnson & Johnson		5,100,000			336,702
Merck & Co., Inc.		6,500,000			283,400
Roche Holding AG		1,558,422			279,431
Bristol-Myers Squibb Co.		10,000,000			263,200
Sanofi-Aventis		2,600,000			239,959
AstraZeneca PLC (ADR)		3,450,000			184,748
CIGNA Corp.		1,129,800			148,648
Aetna Inc.		3,400,000			146,812
Schering-Plough Corp.		6,000,000			141,840
Amgen Inc.¹		2,000,000			136,620
					4,257,045


CONSUMER DISCRETIONARY — 6.62%
Target Corp.		11,850,000			676,042
Time Warner Inc.		21,800,000			474,804
Lowe’s Companies, Inc.		14,200,000			442,330
Carnival Corp., units		5,350,000			262,417
Best Buy Co., Inc.		5,100,000			250,869
Toyota Motor Corp.		3,500,000			234,118
Home Depot, Inc.		5,500,000			220,880
Walt Disney Co.		6,000,000			205,620
Gannett Co., Inc.		2,800,000			169,288
Koninklijke Philips Electronics NV		4,250,000			160,205
CBS Corp., Class B		5,000,000			155,900
Magna International Inc., Class A		1,750,000			140,962
Carnival PLC		2,555,000			129,470
Viacom Inc., Class B¹		2,500,000			102,575
Sony Corp.		2,200,000			94,286
					3,719,766


ENERGY — 6.37%
Chevron Corp.		12,000,000			882,360
ConocoPhillips		10,500,000			755,475
Royal Dutch Shell PLC, Class A (ADR)		10,300,000			729,137
Exxon Mobil Corp.		6,200,000			475,106
Schlumberger Ltd.		5,190,000			327,800
TOTAL SA (ADR)		2,135,000			153,549
EnCana Corp.		3,000,000			138,228
Marathon Oil Corp.		1,250,000			115,625
					3,577,280


CONSUMER STAPLES — 5.75%
Altria Group, Inc.		11,800,000			1,012,676
Wal-Mart Stores, Inc.		16,300,000			752,734
Coca-Cola Co.		9,250,000			446,312
Walgreen Co.		5,000,000			229,450
Avon Products, Inc.		5,700,000			188,328
Anheuser-Busch Companies, Inc.		2,800,000			137,760
H.J. Heinz Co.		2,750,000			123,778
Unilever NV (New York registered)		4,500,000			122,625
PepsiCo, Inc.		1,800,000			112,590
General Mills, Inc.		1,790,000			103,104
					3,229,357


MATERIALS — 3.67%
E.I. du Pont de Nemours and Co.		8,500,000			414,035
Alcoa Inc.		11,300,000			339,113
Weyerhaeuser Co.		4,590,000			324,284
International Paper Co.		9,500,000			323,950
Dow Chemical Co.		7,000,000			279,580
Rohm and Haas Co.		2,775,000			141,858
Bayer AG		2,525,000			135,458
Alcan Inc.		2,200,000			107,228
					2,065,506


TELECOMMUNICATION SERVICES — 2.73%
AT&T Inc.		10,625,000			379,844
Sprint Nextel Corp., Series 1		18,500,000			349,465
Vodafone Group PLC		120,062,500			332,641
BellSouth Corp.		6,500,000			306,215
Verizon Communications Inc.		4,500,000			167,580
					1,535,745


UTILITIES — 0.47%
Exelon Corp.		2,500,000			154,725
Dominion Resources, Inc.		1,300,000			108,992
					263,717


MISCELLANEOUS — 0.33%
Other common stocks in initial period of acquisition					184,525


Total common stocks (cost: $29,078,234,000)					36,629,782


Preferred stocks — 0.49%

FINANCIALS — 0.49%
MUFG Capital Finance 1 Ltd. 6.346% noncumulative preferred²		63,400,000			64,510
BNP Paribas 5.186% noncumulative^2,3		38,903,000			37,413
BNP U.S. Funding LLC, Series A, 7.738% noncumulative preferred^2,3		7,000,000			7,127
BNP Paribas Capital Trust 9.003% noncumulative trust preferred^2,3		6,000,000			6,712
Wachovia Capital Trust III 5.80%²		30,000,000			30,276
Société Générale 7.85%^2,3		25,000,000			25,189
Shinsei Finance II (Cayman) Ltd. 7.16% noncumulative preferred^2,3		20,000,000			20,375
Fuji JGB Investment LLC, Series A, 9.87% noncumulative preferred^2,3		14,425,000			15,292
ING Capital Funding Trust III 8.439% noncumulative preferred²		13,000,000			14,361
Fannie Mae, Series O, 7.00%^2,3		150,000			8,034
Fannie Mae, Series E, 5.10%		108,000			4,887
Swire Pacific Capital Ltd. 8.84% cumulative guaranteed perpetual capital securities³		370,000			10,649
National Bank of Canada, Series A, 8.35% exchangeable preferred depositary shares		300,000			7,887
HSBC Capital Funding LP, Series 2, 10.176% noncumulative step-up perpetual preferred^2,3		5,000,000			7,409
CIT Group Inc., Series B, 5.189%		70,000			6,980
DBS Capital Funding Corp., Series A, 7.657% noncumulative guaranteed preference shares^2,3		5,500,000			5,920
RBS Capital Trust I 4.709% noncumulative trust preferred²		4,500,000			4,284

Total preferred stocks (cost: $268,750,000)					277,305


Convertible securities — 0.02%

FINANCIALS — 0.02%
Equity Office Properties Trust, Series B, 5.25% convertible preferred 2008		150,000			10,092


CONSUMER DISCRETIONARY — 0.00%
Ford Motor Co. Capital Trust II 6.50% cumulative convertible trust preferred 2032		94,700			3,238


Total convertible securities (cost: $11,541,000)					13,330



Bonds & notes — 28.58%		Principal amount (000	)

MORTGAGE-BACKED OBLIGATIONS⁴— 9.87%
Fannie Mae, Series 2000-T5, Class B, 7.30% 2010	$	52,930			56,743
Fannie Mae, Series 2001-T11, Class B, 5.503% 2011		45,000			45,936
Fannie Mae, Series 2003-T1, Class B, 4.491% 2012		16,000			15,498
Fannie Mae 4.89% 2012		30,000			29,520
Fannie Mae 4.00% 2015		28,809			27,527
Fannie Mae 5.00% 2018		22,784			22,473
Fannie Mae 5.00% 2018		4,419			4,358
Fannie Mae 5.00% 2018		2,650			2,614
Fannie Mae 5.50% 2018		23,745			23,798
Fannie Mae 11.00% 2018		628			712
Fannie Mae 5.50% 2019		4,233			4,243
Fannie Mae 11.00% 2020		234			257
Fannie Mae 6.00% 2021		13,024			13,206
Fannie Mae 10.50% 2022		490			541
Fannie Mae, Series 2001-4, Class NA, 11.905% 2025²		650			722
Fannie Mae 7.00% 2026		427			442
Fannie Mae 8.50% 2027		116			124
Fannie Mae 8.50% 2027		79			85
Fannie Mae 8.50% 2027		72			77
Fannie Mae 8.50% 2027		36			38
Fannie Mae, Series 2002-W3, Class A-5, 7.50% 2028		1,376			1,426
Fannie Mae 7.50% 2030		298			309
Fannie Mae 7.50% 2030		93			96
Fannie Mae 7.00% 2031		265			274
Fannie Mae 7.50% 2031		346			358
Fannie Mae 7.50% 2031		246			255
Fannie Mae, Series 2001-20, Class D, 11.07% 2031²		140			156
Fannie Mae 5.50% 2032		4,876			4,839
Fannie Mae 5.50% 2033		31,073			30,792
Fannie Mae 5.00% 2035		9,899			9,561
Fannie Mae 5.00% 2035		5,111			4,936
Fannie Mae 5.50% 2035		26,467			26,182
Fannie Mae 5.50% 2035		9,324			9,228
Fannie Mae 6.50% 2035		24,493			25,045
Fannie Mae, Series 2006-43, Class JO, principal only, 0% 2036		7,901			5,913
Fannie Mae 5.50% 2036		87,044			86,051
Fannie Mae 5.50% 2036		79,545			78,626
Fannie Mae 5.50% 2036		60,000			59,306
Fannie Mae 5.50% 2036		50,922			50,333
Fannie Mae 5.50% 2036		40,000			39,538
Fannie Mae 5.50% 2036		38,744			38,296
Fannie Mae 5.50% 2036		21,200			20,955
Fannie Mae 5.50% 2036		18,105			17,896
Fannie Mae 5.50% 2036		15,919			15,735
Fannie Mae 5.50% 2036		13,586			13,429
Fannie Mae 5.50% 2036		13,536			13,381
Fannie Mae 5.50% 2036		4,482			4,431
Fannie Mae 5.50% 2036		253			251
Fannie Mae 5.841% 2036²		19,009			19,109
Fannie Mae 5.924% 2036²		19,205			19,344
Fannie Mae, Series 2006-49, Class PA, 6.00% 2036		21,298			21,681
Fannie Mae 6.00% 2036		10,668			10,748
Fannie Mae 6.50% 2036		15,214			15,502
Fannie Mae, Series 2001-T10, Class A-1, 7.00% 2041		941			967
Fannie Mae, Series 2001-50, Class BA, 7.00% 2041		847			870
Fannie Mae, Series 2002-W1, Class 2A, 7.50% 2042		1,236			1,283
Freddie Mac 8.50% 2008		2			2
Freddie Mac, Series SF02, Class GC, 2.64% 2009		7,866			7,728
Freddie Mac 4.00% 2015		50,251			47,515
Freddie Mac, Series 2310, Class B, 9.895% 2015²		234			254
Freddie Mac 5.00% 2018		24,517			24,147
Freddie Mac 10.00% 2018		491			546
Freddie Mac 8.50% 2020		358			383
Freddie Mac 8.50% 2020		37			40
Freddie Mac 6.00% 2021		26,139			26,490
Freddie Mac, Series T-041, Class 3-A, 7.50% 2032		5,060			5,241
Freddie Mac 5.00% 2035		52,453			50,639
Freddie Mac 5.00% 2035		52,344			50,535
Freddie Mac 5.00% 2035		15,293			14,764
Freddie Mac 5.00% 2035		5,042			4,868
Freddie Mac 5.50% 2035		25,789			25,507
Freddie Mac 5.50% 2035		25,611			25,331
Freddie Mac, Series 3061, Class PN, 5.50% 2035		19,151			19,184
Freddie Mac, Series 3156, Class PO, principal only, 0% 2036		22,519			16,670
Freddie Mac, Series 3146, Class PO, principal only, 0% 2036		16,044			11,556
Freddie Mac 6.00% 2036		324,195			326,575
Freddie Mac, Series 3233, Class PA, 6.00% 2036		39,794			40,367
Government National Mortgage Assn. 9.00% 2009		579			589
Government National Mortgage Assn. 10.00% 2020		442			498
Government National Mortgage Assn. 10.00% 2021		764			864
Government National Mortgage Assn. 4.00% 2035²		23,624			23,275
Government National Mortgage Assn. 4.00% 2035²		7,683			7,550
Government National Mortgage Assn. 4.00% 2035²		7,189			7,065
Government National Mortgage Assn. 5.50% 2036		107,517			106,748
Government National Mortgage Assn. 6.00% 2036		201,295			203,716
Government National Mortgage Assn. 6.00% 2036		90,794			91,886
Government National Mortgage Assn. 6.00% 2036		11,892			12,035
CS First Boston Mortgage Securities Corp., Series 2003-23, Class VII-A-1, 5.00% 2018		6,685			6,533
CS First Boston Mortgage Securities Corp., Series 2005-7, Class III-A-1, 5.00% 2020		13,340			13,027
CS First Boston Mortgage Securities Corp., Series 2002-34, Class I-A-1, 7.50% 2032		3,664			3,682
CS First Boston Mortgage Securities Corp., Series 2002-30, Class I-A-1, 7.50% 2032		3,209			3,219
CS First Boston Mortgage Securities Corp., Series 2003-21, Class V-A-1, 6.50% 2033		3,286			3,314
CS First Boston Mortgage Securities Corp., Series 2003-29, Class V-A-1, 7.00% 2033		4,279			4,362
CS First Boston Mortgage Securities Corp., Series 2004-AR1, Class II-A-1, 4.661% 2034²		4,003			3,963
CS First Boston Mortgage Securities Corp., Series 2001-CKN5, Class A-4, 5.435% 2034		23,875			24,002
CS First Boston Mortgage Securities Corp., Series 2004-5, Class IV-A-1, 6.00% 2034		10,448			10,416
CS First Boston Mortgage Securities Corp., Series 2001-CF2, Class A-3, 6.238% 2034		4,587			4,608
CS First Boston Mortgage Securities Corp., Series 2001-CP4, Class A-4, 6.18% 2035		28,300			29,273
CS First Boston Mortgage Securities Corp., Series 2005-5, Class IV-A-1, 6.25% 2035		20,358			20,475
CS First Boston Mortgage Securities Corp., Series 2001-CK1, Class A-3, 6.38% 2035		93,660			96,871
CS First Boston Mortgage Securities Corp., Series 2006-2R, Class A-PO, principal only, 0% 2036³		19,782			13,657
CS First Boston Mortgage Securities Corp., Series 2003-CK2, Class A-4, 4.801% 2036		17,585			17,123
CS First Boston Mortgage Securities Corp., Series 2006-3, Class 1-A-4A, 5.896% 2036		5,100			5,100
CS First Boston Mortgage Securities Corp., Series 2001-CK6, Class A-3, 6.387% 2036		20,675			21,569
CS First Boston Mortgage Securities Corp., Series 2002-CKN2, Class A-3, 6.133% 2037		16,045			16,658
CS First Boston Mortgage Securities Corp., Series 2005-C1, Class A-3, 4.813% 2038		13,200			12,926
CS First Boston Mortgage Securities Corp., Series 2005-C4, Class A-2, 5.017% 2038		10,000			9,916
CS First Boston Mortgage Securities Corp., Series 2004-C4, Class A-2, 3.88% 2039		13,000			12,565
CS First Boston Mortgage Securities Corp., Series 2004-C4, Class A-4, 4.283% 2039		5,000			4,796
CS First Boston Mortgage Securities Corp., Series 2005-C6, Class A-3, 5.23% 2040		30,875			30,647
CS First Boston Mortgage Securities Corp., Series 1998-C1, Class A-1B, 6.48% 2040		7,202			7,291
Countrywide Alternative Loan Trust, Series 2005-6CB, Class 2-A-1, 5.00% 2020		4,613			4,505
Countrywide Alternative Loan Trust, Series 2005-20CB, Class 4-A-1, 5.25% 2020		39,111			38,518
Countrywide Alternative Loan Trust, Series 2006-J3, Class 3-A-1, 5.50% 2021		23,581			23,533
Countrywide Alternative Loan Trust, Series 2004-5CB, Class 1-A-1, 6.00% 2034		13,584			13,549
Countrywide Alternative Loan Trust, Series 2005-46CB, Class A-8, 5.50% 2035		71,142			71,038
Countrywide Alternative Loan Trust, Series 2005-40CB, Class A-1, 5.50% 2035		25,303			24,869
Countrywide Alternative Loan Trust, Series 2005-21CB, Class A-9, 5.50% 2035		23,460			23,405
Countrywide Alternative Loan Trust, Series 2005-54CB, Class 1-A-7, 5.50% 2035		23,177			23,157
Countrywide Alternative Loan Trust, Series 2005-64CB, Class 1-A-7, 5.50% 2035		19,596			19,456
Countrywide Alternative Loan Trust, Series 2004-28CB, Class 5-A-1, 5.75% 2035		18,176			17,966
Countrywide Alternative Loan Trust, Series 2005-62, Class 2-A-1, 5.758% 2035²		21,377			21,399
Countrywide Alternative Loan Trust, Series 2005-21CB, Class A-17, 6.00% 2035		29,937			29,833
Countrywide Alternative Loan Trust, Series 2004-36CB, Class 1-A-1, 6.00% 2035		27,451			27,604
Countrywide Alternative Loan Trust, Series 2006-6CB, Class 1-A-1, 5.50% 2036		9,253			9,215
Countrywide Alternative Loan Trust, Series 2006-16CB, Class A-2, 6.00% 2036		17,022			16,998
Residential Accredit Loans, Inc., Series 2003-QS14, Class A-1, 5.00% 2018		9,614			9,391
Residential Accredit Loans, Inc., Series 2004-QS6, Class A-1, 5.00% 2019		19,063			18,619
Residential Accredit Loans, Inc., Series 2004-QS16, Class 1-A-1, 5.50% 2034		33,249			33,003
Residential Accredit Loans, Inc., Series 2005-QR1, Class A, 6.00% 2034		42,407			42,499
Residential Accredit Loans, Inc., Series 2005-QS4, Class A-3, 5.50% 2035		41,027			40,497
Residential Accredit Loans, Inc., Series 2006-QS1, Class A-3, 5.75% 2036		71,410			71,507
Residential Accredit Loans, Inc., Series 2006-QA1, Class A-III-1, 6.272% 2036²		33,603			34,065
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2004-CIBC10, Class A-2, 3.89% 2037		10,000			9,771
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2002-CIBC5, Class A-1, 4.372% 2037		13,604			13,352
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2005-CIBC12, Class A-3B, 5.333% 2037²		63,000			63,306
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2002-C1, Class A-3, 5.376% 2037		10,680			10,716
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2003-ML1, Class A-1, 3.972% 2039		17,682			17,155
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2005-LDP4, Class A-2, 4.79% 2042		15,000			14,782
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2005-LDP4, Class A-SB, 4.824% 2042		25,000			24,378
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2005-LDP4, Class A-3A1, 4.871% 2042		5,000			4,918
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2005-LDP1, Class A-2, 4.625% 2046		28,000			27,531
Structured Adjustable Rate Mortgage Loan Trust, Series 2005-22, Class 5-A-1, 6.023% 2035²		26,581			26,655
Structured Adjustable Rate Mortgage Loan Trust, Series 2006-4, Class 4-A-1, 5.961% 2036²		27,422			27,490
Structured Adjustable Rate Mortgage Loan Trust, Series 2006-4, Class 5-A-1, 5.963% 2036²		66,691			66,858
Structured Adjustable Rate Mortgage Loan Trust, Series 2006-2, Class 5-A-1, 6.00% 2036²		57,698			57,807
Wells Fargo Mortgage-backed Securities Trust, Series 2003-16, Class II-A-1, 4.50% 2018		23,610			22,642
Wells Fargo Mortgage-backed Securities Trust, Series 2003-B, Class A-1, 4.15% 2033²		4,230			4,135
Wells Fargo Mortgage-backed Securities Trust, Series 2003-3, Class II-A-1, 5.25% 2033		41,156			40,558
Wells Fargo Mortgage-backed Securities Trust, Series 2005-AR10, Class II-A-6, 4.109% 2035²		30,000			29,151
Wells Fargo Mortgage-backed Securities Trust, Series 2006-AR15, Class A-1, 5.697% 2036		75,939			75,866
CHL Mortgage Pass-Through Trust, Series 2003-J1, Class 3-A-1, 5.00% 2018		20,900			20,442
CHL Mortgage Pass-Through Trust, Series 2003-HYB3, Class 4-A-1, 3.467% 2033²		3,810			3,748
CHL Mortgage Pass-Through Trust, Series 2003-27, Class A-1, 3.688% 2033²		3,783			3,738
CHL Mortgage Pass-Through Trust, Series 2003-56, Class 6-A-1, 4.833% 2033²		14,185			14,078
CHL Mortgage Pass-Through Trust, Series 2004-HYB6, Class A-3, 5.129% 2034²		12,190			12,162
CHL Mortgage Pass-Through Trust, Series 2005-HYB8, Class 4-A-1, 5.675% 2035²		31,993			31,749
CHL Mortgage Pass-Through Trust, Series 2006-HYB5, Class 3-A-1B, 5.961% 2036²		17,966			18,072
WaMu Mortgage Pass-Through Certificates Trust, Series 2003-S6, Class II-A-1, 5.00% 2018		7,759			7,579
WaMu Mortgage Pass-Through Certificates Trust, Series 2004-CB2, Class VII-A, 5.50% 2019		4,728			4,718
WaMu Mortgage Pass-Through Certificates Trust, Series 2003-AR7, Class A-7, 3.842% 2033²		5,976			5,840
WaMu Mortgage Pass-Through Certificates Trust, Series 2003-AR8, Class A, 4.03% 2033²		8,253			8,163
WaMu Mortgage Pass-Through Certificates Trust, Series 2003-AR5, Class A-7, 4.208% 2033²		3,334			3,303
WaMu Mortgage Pass-Through Certificates Trust, Series 2003-AR6, Class A-1, 4.337% 2033²		2,129			2,103
WaMu Mortgage Pass-Through Certificates Trust, Series 2004-AR1, Class A, 4.229% 2034²		6,461			6,351
WaMu Mortgage Pass-Through Certificates Trust, Series 2004-AR11, Class A, 4.564% 2034²		13,175			12,965
WaMu Mortgage Pass-Through Certificates Trust, Series 2006-AR2, Class 2-A1, 5.843% 2037²		32,867			32,704
WaMu Mortgage Pass-Through Certificates Trust, Series 2005-AR15, Class A-1-A, 5.61% 2045²		19,945			20,024
GE Commercial Mortgage Corp., Series 2005-C4, Class A-3A, 5.333% 2045		65,575			66,048
GE Commercial Mortgage Corp., Series 2005-C1, Class A-2, 4.353% 2048		34,140			33,256
GMAC Commercial Mortgage Securities, Inc., Series 2001-C1, Class A-2, 6.465% 2034		84,500			87,959
GMAC Commercial Mortgage Securities, Inc., Series 1999-C3, Class F, 7.814% 2036²		4,000			4,260
GMAC Commercial Mortgage Securities, Inc., Series 2002-C2, Class A-2, 5.389% 2038		5,187			5,189
Bear Stearns ARM Trust, Series 2003-6, Class I-A-2, 3.969% 2033²		10,890			10,711
Bear Stearns ARM Trust, Series 2003-3, Class III-A-1, 5.114% 2033²		4,065			4,034
Bear Stearns ARM Trust, Series 2003-9, Class III-A-3, 4.345% 2034²		24,772			24,138
Bear Stearns ARM Trust, Series 2004-1, Class I-2-A-5, 4.374% 2034²		17,714			17,434
Bear Stearns ARM Trust, Series 2003-9, Class III-A-2, 4.97% 2034²		16,665			16,443
Bear Stearns ARM Trust, Series 2005-10, Class A-3, 4.65% 2035²		20,000			19,514
Crown Castle Towers LLC, Series 2005-1, Class A-FX, 4.643% 2035³		65,800			64,516
Crown Castle Towers LLC, Series 2005-1, Class C, 5.074% 2035³		10,200			10,074
Crown Castle Towers LLC, Series 2005-1, Class D, 5.612% 2035³		7,550			7,515
Crown Castle Towers LLC, Series 2006-1, Class E, 6.065% 2036³		9,000			8,995
Wachovia Bank Commercial Mortgage Trust, Series 2005-C16, Class A-1, 4.061% 2041		9,114			8,947
Wachovia Bank Commercial Mortgage Trust, Series 2005-C16, Class A-PB, 4.692% 2041		32,750			31,878
Wachovia Bank Commercial Mortgage Trust, Series 2005-C17, Class A-2, 4.782% 2042		27,000			26,647
Wachovia Bank Commercial Mortgage Trust, Series 2005-C17, Class A-4, 5.083% 2042		21,430			21,058
Morgan Stanley Mortgage Loan Trust, Series 2004-3, Class 4-A, 5.688% 2034²		45,356			44,315
Morgan Stanley Mortgage Loan Trust, Series 2005-10, Class 4-A-1, 5.50% 2035		41,441			40,689
Salomon Brothers Commercial Mortgage Trust, Series 2000-C3, Class A-2, 6.592% 2033		19,500			20,272
Salomon Brothers Commercial Mortgage Trust, Series 2001-C1, Class A-2, 6.226% 2035		787			790
Salomon Brothers Commercial Mortgage Trust, Series 2001-C1, Class A-3, 6.428% 2035		53,934			56,039
Bear Stearns Commercial Mortgage Securities Inc., Series 1999-WF2, Class A-1, 6.80% 2031		405			406
Bear Stearns Commercial Mortgage Securities Inc., Series 2000-WF2, Class A-2, 7.32% 2032		3,050			3,241
Bear Stearns Commercial Mortgage Securities Inc., Series 2002-PBW1, Class A-1, 3.97% 2035		15,988			15,617
Bear Stearns Commercial Mortgage Securities Inc., Series 2001-TOP2, Class A-2, 6.48% 2035		13,205			13,795
Bear Stearns Commercial Mortgage Securities Inc., Series 2005-PWR9, Class A-2, 4.735% 2042		38,000			37,434
First Horizon Alternative Mortgage Securities Trust, Series 2005-FA8, Class I-A-14, 5.50% 2035		34,526			34,463
First Horizon Alternative Mortgage Securities Trust, Series 2005-FA11, Class I-A-5, 5.75% 2036		33,192			33,037
GSR Mortgage Loan Trust, Series 2004-6F, Class IVA-1, 5.00% 2019		38,500			37,614
GSR Mortgage Loan Trust, Series 2004-2F, Class XIIIA-1, 5.00% 2019		9,324			9,130
GSR Mortgage Loan Trust, Series 2005-AR1, Class 2-A-1, 4.941% 2035²		20,559			20,379
IndyMac INDX Mortgage Loan Trust, Series 2006-AR5, Class 2-A-1, 5.878% 2036²		34,657			34,527
IndyMac INDX Mortgage Loan Trust, Series 2006-AR11, Class 6-A-1, 5.924% 2036²		31,877			32,022
Banc of America Commercial Mortgage Inc., Series 2002-PB2, Class A-4, 6.186% 2035		4,350			4,516
Banc of America Commercial Mortgage Inc., Series 2001-1, Class A-2, 6.503% 2036		47,276			49,103
Banc of America Commercial Mortgage Inc., Series 2003-2, Class A-1, 3.411% 2041		12,858			12,568
Chase Commercial Mortgage Securities Corp., Series 1998-2, Class A-2, 6.39% 2030		25,880			26,262
Chase Commercial Mortgage Securities Corp., Series 1998-1, Class A-2, 6.56% 2030		4,204			4,244
Chase Commercial Mortgage Securities Corp., Series 2000-1, Class A-2, 7.757% 2032		25,456			26,924
Tower Ventures, LLC, Series 2006-1, Class A1-FX, 5.361% 2036³		22,800			22,844
Tower Ventures, LLC, Series 2006-1, Class A-2, 5.45% 2036³		13,000			13,067
Tower Ventures, LLC, Series 2006-1, Class C, 5.707% 2036³		15,000			15,104
SBA CMBS Trust, Series 2005-1, Class A, 5.369% 2035³		16,250			16,319
SBA CMBS Trust, Series 2005-1, Class D, 6.219% 2035³		4,000			4,065
SBA CMBS Trust, Series 2006-1A, Class A, 5.314% 2036³		27,350			27,414
SBA CMBS Trust, Series 2006-1A, Class B, 5.451% 2036³		2,000			2,006
GE Capital Commercial Mortgage Corp., Series 2002-2, Class A-3, 5.349% 2036		10,000			10,023
GE Capital Commerical Mortgage Corp., Series 2002-3, Class A-1, 4.229% 2037		37,172			36,362
Commercial Mortgage Trust, Series 2000-C1, Class E, 8.132% 2033		4,000			4,279
Commercial Mortgage Trust, Series 2003-LNB1, Class A-2, 4.084% 2038		39,825			37,324
Chase Mortgage Finance Trust, Series 2003-S4, Class II-A-1, 5.00% 2018		37,775			36,904
GMAC Mortgage Loan Trust, Series 2006-AR1, Class 2-A-1, 5.647% 2036²		35,917			35,840
Bear Stearns ALT-A Trust, Series 2006-2, Class II-4-A-1, 5.943% 2036²		34,683			34,841
Washington Mutual Securities Corp., Series 2005-AR1, Class A-1-A, 5.61% 2035²		13,673			13,692
Washington Mutual Securities Corp., WMALT Series 2005-1, Class 5-A-1, 6.00% 2035		20,005			20,027
Merrill Lynch Mortgage Investors, Inc., Series 1999-C1, Class A-2, 7.56% 2031		6,179			6,436
Merrill Lynch Mortgage Investors, Inc., Series 2004-A1, Class II-A-1, 4.582% 2034²		26,107			25,836
Morgan Stanley Capital I, Inc., Series 1999-FNV1, Class A-2, 6.53% 2031		9,779			9,946
Morgan Stanley Capital I, Inc., Series 2004-RR2, Class A-1, 4.39% 2033³		22,106			21,704
Bear Stearns Asset-backed Securities I Trust, Series 2006-AC-2, Class II-1A-1, 6.00% 2036		25,144			25,137
Morgan Stanley Dean Witter Capital I Trust, Series 2002-HQ, Class A-2, 6.09% 2034		3,202			3,225
Morgan Stanley Dean Witter Capital I Trust, Series 2000-PRIN, Class C, 7.743% 2034²		7,435			8,638
Morgan Stanley Dean Witter Capital I Trust, Series 2001-TOP5, Class A-3, 6.16% 2035		9,000			9,163
Morgan Stanley Dean Witter Capital I Trust, Series 2003-TOP9, Class A-1, 3.98% 2036		3,545			3,442
L.A. Arena Funding, LLC, Series 1, Class A, 7.656% 2026³		18,707			20,582
Citigroup Commercial Mortgage Trust, Series 2004-C2, Class A-4, 4.623% 2041		21,090			20,316
First Union National Bank Commercial Mortgage Trust, Series 2000-C1, Class A-1, 7.739% 2032		1,922			1,944
First Union National Bank Commercial Mortgage Trust, Series 2002-C1, Class A-1, 5.585% 2034		7,104			7,137
First Union National Bank Commercial Mortgage Trust, Series 2002-C1, Class A-2, 6.141% 2034		8,810			9,158
J.P. Morgan Mortgage Trust, Series 2004-S1, Class 1-A-7, 5.00% 2019		14,625			14,279
J.P. Morgan Mortgage Trust, Series 2005-A1, Class 4-A-1, 4.776% 2035²		3,951			3,817
LB-UBS Commercial Mortgage Trust, Series 2000-C3, Class A-2, 7.95% 2025		3,750			4,012
LB-UBS Commercial Mortgage Trust, Series 2002-C1, Class A-4, 6.462% 2031		13,185			13,865
Residential Asset Mortgage Products Trust, Series 2003-RZ4, Class A-7, 4.79% 2033²		8,447			8,240
Residential Asset Mortgage Products Trust, Series 2003-RS11, Class A-I-7, 4.828% 2033		9,000			8,767
Banc of America Mortgage Securities Trust, Series 2003-F, Class 2-A-1, 3.734% 2033²		6,134			6,063
Banc of America Mortgage Securities Trust, Series 2003-G, Class 2-A-1, 4.088% 2033²		6,049			5,975
Banc of America Mortgage Securities Trust, Series 2004-A, Class 2-A-2, 4.116% 2034²		4,550			4,476
Prudential Mortgage Capital Funding, LLC, Series ROCK 2001-C1, Class A-2, 6.605% 2034		15,555			16,326
Residential Funding Mortgage Securities I, Inc., Series 2004-S9, Class II-A-1, 4.75% 2019		10,034			9,694
Residential Funding Mortgage Securities I, Inc., Series 2004-SA1, Class A-II, 4.319% 2034²		6,733			6,597
Banc of America Alternative Loan Trust, Series 2005-2, Class 3-A-1, 5.00% 2020		12,765			12,436
Meristar Commercial Mortgage Trust, Series 1999-C1, Class A-1, 7.28% 2016³		3,924			4,036
Meristar Commercial Mortgage Trust, Series 1999-C1, Class B, 7.90% 2016³		7,750			8,260
Residential Asset Securitization Trust, Series 2005-A6CB, Class A-7, 6.00% 2035		12,223			12,234
GS Mortgage Securities Corp. II, Series 1998-C1, Class D, 7.197% 2030²		10,000			10,295
Adjustable Rate Mortgage Trust, Series 2006-1, Class 3-A-3, 5.96% 2036²		9,355			9,415
HarborView Mortgage Loan Trust, Series 2005-15, Class 2-A1A2, 6.15% 2045²		8,618			8,700
Residential Funding Corp., Series 2003-RM2, Class A-II, 5.00% 2018		8,882			8,678
Merrill Lynch Mortgage Trust, Series 2005-LC1, Class A-2, 5.202% 2044		8,615			8,596
MASTR Asset Securitization Trust, Series 2003-9, Class 1-A-1, 5.00% 2018		8,406			8,211
Structured Asset Securities Corp., Series 2004-3, Class 3-A-1, 5.50% 2019		6,361			6,316
Structured Asset Securities Corp., Series 1998-RF2, Class A, 8.52% 2027^2,3		1,390			1,396
LB Commercial Mortgage Trust, Series 1998-C1, Class A-3, 6.48% 2030		5,711			5,743
Hilton Hotel Pool Trust, Series 2000-HLTA, Class A-1, 7.055% 2015³		5,069			5,241
ABN AMRO Mortgage Group Corp., Series 2003-9, Class A-1, 4.50% 2018		4,503			4,318
Host Marriott Pool Trust, Series 1999-HMTA, Class A, 6.98% 2015³		3,944			4,027
MASTR Alternative Loan Trust, Series 2005-3, Class 1-A-1, 5.50% 2035		4,021			3,960
DLJ Commercial Mortgage Corp., Series 1999-CG1, Class A-1B, 6.46% 2032		3,750			3,825
Chase Manhattan Bank — First Union National Bank, Commercial Mortgage Trust, Series 1999-1, Class C, 7.625% 2031		3,000			3,169
Bank of America, NA and First Union National Bank Commercial Mortgage Trust, Series 2001-3, Class A-1, 4.89% 2037		1,643			1,631
					5,545,389


U.S. GOVERNMENT & GOVERNMENT AGENCY BONDS & NOTES — 6.87%
U.S. Treasury 3.125% 2007		40,000			39,722
U.S. Treasury 3.625% 2007		77,300			76,787
U.S. Treasury 3.75% 2007		50,000			49,836
U.S. Treasury 3.875% 2007		100,000			99,336
U.S. Treasury 6.25% 2007		200,000			200,296
U.S. Treasury 6.625% 2007		150,000			150,855
U.S. Treasury 2.625% 2008		50,000			48,512
U.S. Treasury 3.625% 2008⁵		24,995			25,264
U.S. Treasury 4.75% 2008		20,000			19,975
U.S. Treasury 5.625% 2008		350,000			353,255
U.S. Treasury 3.875% 2009⁵		369,342			379,590
U.S. Treasury 0.875% 2010⁵		21,316			20,214
U.S. Treasury 5.75% 2010		50,000			51,735
U.S. Treasury 3.50% 2011⁵		29,002			30,195
U.S. Treasury 5.00% 2011		25,000			25,317
U.S. Treasury 3.375% 2012⁵		68,225			71,238
U.S. Treasury 4.875% 2012		50,250			50,721
U.S. Treasury 10.375% 2012		8,000			8,358
U.S. Treasury 3.625% 2013		20,000			18,850
U.S. Treasury 4.25% 2013		385,625			376,046
U.S. Treasury 9.25% 2016		65,000			86,623
U.S. Treasury 8.875% 2017		160,000			214,099
U.S. Treasury 7.875% 2021		63,000			82,028
U.S. Treasury 6.25% 2023		88,500			101,830
U.S. Treasury 2.375% 2025⁵		53,557			53,405
U.S. Treasury 6.875% 2025		233,250			288,719
U.S. Treasury 5.25% 2029		103,000			108,086
Fannie Mae 5.25% 2007		111,250			111,234
Fannie Mae 5.25% 2012		145,000			145,829
Fannie Mae 6.25% 2029		116,875			133,112
Federal Agricultural Mortgage Corp. 4.25% 2008		92,500			91,312
Federal Agricultural Mortgage Corp. 4.875% 2011³		68,500			68,249
Federal Home Loan Bank 5.125% 2013		90,000			90,558
Federal Home Loan Bank 5.625% 2016		53,250			54,825
Freddie Mac 3.625% 2008		25,000			24,419
Freddie Mac 4.125% 2009		5,000			4,894
Freddie Mac 5.75% 2010		€3,000			4,189
Freddie Mac 5.50% 2011	$	83,000			84,971
Freddie Mac 6.25% 2012		5,000			5,006
United States Government-Guaranteed Certificates of Participation, Overseas Private Investment Corp., Series 2000-044-A, 3.74% 2015⁴		8,954			8,513
					3,858,003


FINANCIALS — 4.43%
Washington Mutual, Inc. 5.625% 2007		4,750			4,750
Washington Mutual, Inc. 5.55% 2010		15,000			15,117
Washington Mutual, Inc. 5.00% 2012		4,000			3,903
Washington Mutual, Inc. 5.665% 2012²		17,000			17,054
Washington Mutual, Inc. 5.761% 2012²		20,000			20,127
Washington Mutual, Inc. 5.25% 2017		42,500			41,063
Washington Mutual Preferred Funding I Ltd. 6.534% (undated)^2,3		110,500			109,619
AIG SunAmerica Global Financing XII 5.30% 2007³		3,000			2,999
AIG SunAmerica Global Financing VII 5.85% 2008³		7,750			7,814
International Lease Finance Corp. 5.00% 2010		5,000			4,949
American General Finance Corp., Series J, 5.653% 2011²		10,000			10,045
American General Finance Corp., Series I, 4.875% 2012		10,000			9,768
International Lease Finance Corp. 5.00% 2012		10,000			9,809
International Lease Finance Corp., Series R, 5.40% 2012		7,500			7,515
International Lease Finance Corp., Series R, 5.625% 2013		10,000			10,087
American General Finance Corp., Series I 5.85% 2013		10,000			10,205
International Lease Finance Corp. 5.875% 2013		12,100			12,371
American General Finance Corp., Series I, 5.40% 2015		7,500			7,438
American International Group, Inc. 6.25% 2036		9,500			10,129
ILFC E-Capital Trust II 6.25% 2065^2,3		15,570			15,844
Household Finance Corp. 6.50% 2008		7,000			7,159
Household Finance Corp. 4.125% 2009		20,000			19,457
Household Finance Corp. 4.75% 2009		7,500			7,423
HSBC Finance Corp. 4.625% 2010		13,000			12,728
Household Finance Corp. 6.375% 2011		17,500			18,318
Household Finance Corp. 6.75% 2011		5,000			5,297
Household Finance Corp. 6.375% 2012		21,000			22,140
Household Finance Corp. 7.00% 2012		5,000			5,397
HSBC Finance Corp. 5.50% 2016		15,000			15,097
Midland Bank 5.688% Eurodollar note (undated)²		4,000			3,470
CIT Group Inc. 3.65% 2007		12,280			12,108
CIT Group Inc. 5.50% 2007		10,000			10,024
CIT Group Inc. 4.00% 2008		4,000			3,932
CIT Group Inc. 3.375% 2009		18,000			17,292
CIT Group Inc. 6.875% 2009		11,500			11,971
CIT Group Inc. 5.656% 2011²		5,000			5,011
CIT Group Inc. 7.75% 2012		18,500			20,419
CIT Group Inc. 5.40% 2013		31,000			30,806
EOP Operating LP 6.75% 2008		10,495			10,665
EOP Operating LP 4.65% 2010		69,500			69,074
EOP Operating LP 8.10% 2010		3,750			4,135
EOP Operating LP 6.75% 2012		4,125			4,460
EOP Operating LP 4.75% 2014		7,500			7,441
J.P. Morgan Chase & Co. 4.50% 2010		10,000			9,747
J.P. Morgan Chase & Co. 4.891% 2015		10,000			9,807
Bank One Corp. 4.90% 2015		12,000			11,535
Chase Capital II, Global Floating Rate Capital Securities, Series B, 5.871% 2027²		7,500			7,208
JPM Capital Trust I, cumulative capital securities trust, 7.54% 2027		2,750			2,853
J.P. Morgan Chase Capital XX, Series T, 6.55% 2036		28,000			29,009
JPMorgan Chase Capital XVIII, Series R, 6.95% 2036		22,865			24,814
Residential Capital Corp. 6.474% 2009²		14,500			14,655
Residential Capital Corp. 6.375% 2010		61,250			62,011
Residential Capital Corp. 6.00% 2011		4,500			4,496
Residential Capital Corp. 6.50% 2013		12,000			12,177
CNA Financial Corp. 5.85% 2014		44,000			44,249
CNA Financial Corp. 6.50% 2016		16,000			16,720
CNA Financial Corp. 7.25% 2023		14,000			15,217
Liberty Mutual Group Inc. 6.70% 2016³		18,000			19,023
Liberty Mutual Group Inc. 6.50% 2035³		21,990			21,501
Liberty Mutual Group Inc. 7.50% 2036³		21,875			24,008
PRICOA Global Funding I, Series 2003-2, 3.90% 2008³		8,000			7,778
PRICOA Global Funding I 4.20% 2010³		16,000			15,478
Prudential Financial, Inc., Series D, 5.50% 2016		14,000			14,021
Prudential Holdings, LLC, Series C, 8.695% 2023^3,4		19,500			23,901
XL Capital Finance (Europe) PLC 6.50% 2012		3,015			3,144
Mangrove Bay Pass Through Trust 6.102% 2033^2,3		57,885			56,646
HBOS PLC, Series B, 5.92% (undated)^2,3		54,200			53,257
Bank of Scotland 7.00% (undated)^2,3		4,225			4,267
Capital One Bank 4.875% 2008		20,000			19,883
Capital One Financial Corp. 5.633% 2009²		15,000			15,079
Capital One Financial Corp. 6.15% 2016		20,000			20,722
Simon Property Group, LP 4.875% 2010		20,000			19,739
Simon Property Group, LP 4.875% 2010		5,500			5,437
Simon Property Group, LP 5.375% 2011		5,000			5,005
Simon Property Group, LP 5.875% 2017		22,165			22,622
ProLogis 5.50% 2012		15,000			14,989
ProLogis 5.50% 2013		11,860			11,838
ProLogis 5.625% 2015		25,000			24,920
Developers Diversified Realty Corp. 3.875% 2009		16,500			15,988
Developers Diversified Realty Corp. 4.625% 2010		23,150			22,556
Developers Diversified Realty Corp. 5.50% 2015		13,000			12,824
ACE INA Holdings Inc. 5.875% 2014		30,000			30,622
ACE Capital Trust II 9.70% 2030		13,055			17,947
Lincoln National Corp. 7.00% 2066²		45,555			48,366
MBNA America Bank, National Assn. 7.125% 2012		7,650			8,345
BankAmerica Capital III, BankAmerica Corp., Series 3, 5.944% 2027²		22,500			21,881
MBNA Global Capital Funding, Series B, 6.171% 2027²		18,000			17,979
Kimco Realty Corp., Series C, 4.82% 2011		15,000			14,658
Kimco Realty Corp. 6.00% 2012		2,750			2,834
Kimco Realty Corp., Series C, 4.82% 2014		13,000			12,419
Kimco Realty Corp., Series C, 5.783% 2016		14,000			14,204
Sumitomo Mitsui Banking Corp. 5.625% (undated)^2,3		10,000			9,792
Sumitomo Mitsui Banking Corp. 6.078% (undated)^2,3		33,000			32,866
Westfield Capital Corp. Ltd., WT Finance (Australia) Pty Ltd. and WEA Finance LLC 4.375% 2010³		20,000			19,307
Westfield Group 5.70% 2016³		23,000			23,129
Citigroup Inc. 4.25% 2009		7,000			6,854
Citigroup Inc. 4.125% 2010		20,000			19,415
Citigroup Inc. 5.125% 2011		15,000			14,971
UniCredito Italiano SpA 5.584% 2017^2,3		40,000			40,267
iStar Financial, Inc. 5.375% 2010		8,250			8,189
iStar Financial, Inc. 6.05% 2015		11,000			11,081
iStar Financial, Inc. 5.875% 2016		20,000			19,858
USA Education, Inc. 5.625% 2007		25,000			25,018
SLM Corp., Series A, 3.95% 2008		7,500			7,341
SLM Corp., Series A, 4.50% 2010		5,500			5,358
ING Security Life Institutional Funding 2.70% 2007³		25,000			24,910
ING Groep NV 5.775% (undated)²		10,300			10,210
SocGen Real Estate Co. LLC, Series A, 7.64% (undated)^2,3		32,750			33,262
ERP Operating LP 4.75% 2009		6,730			6,625
ERP Operating LP 5.375% 2016		25,000			24,784
Santander Issuances, SA Unipersonal 5.805% 2016^2,3		20,000			20,191
Abbey National PLC 6.70% (undated)²		5,790			5,882
Hospitality Properties Trust 6.75% 2013		18,345			19,224
Hospitality Properties Trust 6.30% 2016		6,500			6,664
US Bank National Assn. 4.40% 2008		25,000			24,686
Lehman Brothers Holdings Inc., Series H, 5.50% 2016		24,000			24,040
American Express Co. 4.75% 2009		15,000			14,890
American Express Co. 6.80% 2066²		7,500			8,012
AXA SA 6.379% (undated)^2,3		22,600			22,388
Genworth Financial, Inc. 5.51% 2007²		22,000			22,026
BOI Capital Funding (No. 2) LP 5.571% (undated)^2,3		22,350			21,866
Nationwide Life Insurance Co. 5.35% 2007³		6,000			6,000
North Front Pass Through Trust 5.81% 2024^2,3		10,000			9,860
Nationwide Mutual Insurance Co. 7.875% 2033³		5,000			5,949
Zions Bancorporation 6.00% 2015		21,000			21,421
Travelers Property Casualty Corp. 5.00% 2013		10,000			9,774
St. Paul Travelers Companies, Inc. 6.25% 2016		11,000			11,570
Monumental Global Funding II, Series 2002-A, 5.20% 2007³		21,000			20,996
PNC Funding Corp., Series I, 6.517% (undated)^2,3		20,500			20,877
American Honda Finance Corp. 5.125% 2010³		20,500			20,422
Allstate Financial Global Funding LLC 5.25% 2007³		6,000			6,000
Allstate Financial Global Funding LLC 4.25% 2008³		14,225			14,002
Assurant, Inc. 5.625% 2014		20,000			19,975
Protective Life Insurance Co., Series 2005-C, 4.85% 2010		18,000			17,806
Skandinaviska Enskilda Banken AB 5.471% (undated)^2,3		18,250			17,732
Downey Financial Corp. 6.50% 2014		16,880			16,943
Resona Bank, Ltd. 5.85% (undated)^2,3		15,000			14,673
John Hancock Global Funding II, Series 2004-A, 3.50% 2009³		14,000			13,508
United Dominion Realty Trust, Inc. 6.50% 2009		7,375			7,585
United Dominion Realty Trust, Inc. 5.00% 2012		6,000			5,843
Principal Life Insurance Co. 3.20% 2009		14,000			13,400
Lazard Group LLC 7.125% 2015		12,875			13,357
New York Life Global Funding 3.875% 2009³		13,500			13,143
Assured Guaranty US Holdings Inc., Series A, 6.40% 2066²		12,975			13,009
Federal Realty Investment Trust 6.125% 2007		4,000			4,016
Federal Realty Investment Trust 4.50% 2011		8,500			8,181
Financial Security Assurance Holdings Ltd. 6.40% 2066^2,3		10,000			10,080
First Industrial, LP 6.875% 2012		8,625			9,046
World Savings Bank, FSB, Bank Notes, Series 2008-FXR, 4.125% 2008		7,500			7,371
National Westminster Bank PLC 7.75% (undated)²		7,000			7,096
City National Corp. 5.125% 2013		7,000			6,864
Brandywine Operating Partnership, LP 5.75% 2012		5,250			5,292
Realogy Corp. 6.15% 2011³		5,000			5,115
Wells Fargo & Co. 4.125% 2008		5,000			4,936
BCI U.S. Funding Trust I 8.01% noncumulative preferred (undated)^2,3		4,000			4,136
Bank of Nova Scotia 5.125% 2085²		4,000			3,396
Den Norske CreditBank 5.625% (undated)²		3,000			2,593
Canadian Imperial Bank of Commerce 5.625% Eurodollar note 2085²		1,600			1,336
					2,489,218


ASSET-BACKED OBLIGATIONS⁴— 1.82%
Drive Auto Receivables Trust, Series 2004-1, Class A-4, MBIA insured, 4.14% 2010³		22,000			21,835
Drive Auto Receivables Trust, Series 2005-1, Class A-4, MBIA insured, 4.01% 2012		28,125			27,688
Drive Auto Receivables Trust, Series 2005-2, Class A-3, MBIA insured, 4.26% 2012³		18,580			18,333
Drive Auto Receivables Trust, Series 2005-3, Class A-4, FSA insured, 5.09% 2013³		47,500			47,426
Drive Auto Receivables Trust, Series 2006-2, Class A-3, MBIA insured, 5.33% 2014³		8,500			8,551
ARG Funding Corp., Series 2005-1, Class A-1, MBIA insured, 4.02% 2009³		23,400			23,072
ARG Funding Corp., Series 2005-2, Class A-1, AMBAC insured, 4.54% 2009³		4,500			4,462
ARG Funding Corp., Series 2005-1, Class A-3, MBIA insured, 4.29% 2011³		8,000			7,801
ARG Funding Corp., Series 2005-2, Class A-4, AMBAC insured, 4.84% 2011³		49,500			49,087
AmeriCredit Automobile Receivables Trust, Series 2003-C-F, Class A-4, FSA insured, 3.48% 2010		8,506			8,453
AmeriCredit Automobile Receivables Trust, Series 2004-A-F, Class A-4, FSA insured, 2.87% 2011		13,959			13,645
AmeriCredit Automobile Receivables Trust, Series 2006-B-G, Class A-4, FGIC insured, 5.21% 2013		20,880			20,893
AmeriCredit Automobile Receivables Trust, Series 2006-A-F, Class A-4, FSA insured, 5.64% 2013		20,000			20,284
MBNA Credit Card Master Note Trust, Series 2005-6, Class A, 4.50% 2013		49,425			48,583
MBNA Credit Card Master Note Trust, Series 2002-1, Class C, 6.80% 2014		12,500			13,305
New Century Home Equity Loan Trust, Series 2004-A, Class A-II-5, FGIC insured, 5.25% 2034		10,000			9,931
New Century Home Equity Loan Trust, Series 2004-A, Class A-II-6, FGIC insured, 5.65% 2034		34,977			35,043
CPS Auto Receivables Trust, Series 2003-A, Class A-2, XLCA insured, 2.89% 2009³		754			742
CPS Auto Receivables Trust, Series 2003-D, Class A-2, FSA insured, 3.56% 2010³		6,735			6,634
CPS Auto Receivables Trust, Series 2004-B, Class A-2, XLCA insured, 3.56% 2011³		7,283			7,160
CPS Auto Receivables Trust, Series 2005-D, Class A-2, FSA insured, 5.06% 2012³		18,000			17,991
CPS Auto Receivables Trust, Series 2006-A, Class 1-A-4, FSA insured, 5.33% 2012³		9,000			9,042
Long Beach Acceptance Auto Receivables Trust, Series 2004-A, Class A-2, FSA insured, 2.841% 2010²		7,652			7,499
Long Beach Acceptance Auto Receivables Trust, Series 2004-C, Class A-4, FSA insured, 3.777% 2011		17,150			16,812
Long Beach Acceptance Auto Receivables Trust, Series 2005-B, Class A-4, FSA insured, 4.522% 2012		14,000			13,811
Rental Car Finance Corp., Series 2005-1, Class A-2, XLCA insured, 4.59% 2011³		36,230			35,499
Residential Asset Securities Corp. Trust, Series 2001-KS3, Class A-I-6, 5.96% 2031		8,388			8,382
Residential Asset Securities Corp. Trust, Series 2004-KS9, Class A-I-4, FGIC insured, 4.61% 2032		10,000			9,847
Residential Asset Securities Corp. Trust, Series 2003-KS8, Class A-I-6, 4.83% 2033		8,473			8,288
Residential Asset Securities Corp. Trust, Series 2003-KS6, Class A-2, 5.65% 2033²		191			191
Residential Asset Securities Corp. Trust, Series 2004-KS12, Class A-1-2, 5.58% 2035²		8,541			8,544
Ameriquest Mortgage Securities Inc., Series 2004-R4, Class M-1, 5.90% 2034²		30,000			30,179
Hertz Vehicle Financing LLC, Rental Car Asset-backed Notes, Series 2005-1, Class A-5, MBIA insured, 5.08% 2011³		29,550			29,381
PG&E Energy Recovery Funding LLC, Series 2005-1, Class A-2, 3.87% 2011		12,583			12,380
PG&E Energy Recovery Funding LLC, Series 2005-2, Class A-3, 5.12% 2014		16,076			16,111
Capital One Multi-asset Execution Trust, Series 2006-10, Class A, 5.15% 2014		26,540			26,631
Triad Automobile Receivables Trust, Series 2006-C, Class A-3, AMBAC insured, 5.26% 2011		25,750			25,726
Capital Auto Receivables Asset Trust, Series 2004-2, Class A-4, 3.75% 2009		25,500			25,010
Bear Stearns Asset-backed Securities I Trust, Series 2004-HE11, Class I-A-2, 5.65% 2033²		396			397
Bear Stearns Asset-backed Securities I Trust, Series 2005-CL1, Class A-1, 5.85% 2034²		20,534			20,614
Cendant Timeshare Receivables Funding, LLC, Series 2005-1, Class A-1, FGIC insured, 4.67% 2017³		20,928			20,698
Drivetime Auto Owner Trust, Series 2005-C, Class A-3, MBIA insured, 5.006% 2011³		20,000			19,928
Chase Issuance Trust, Series 2005-7, Class A, 4.55% 2013		20,250			19,889
Honda Auto Receivables Owner Trust, Series 2005-4, Class A-4, 4.60% 2010		20,000			19,746
American Express Credit Account Master Trust, Series 2005-5, Class A, 5.39% 2013²		19,500			19,521
First Investors Auto Owner Trust, Series 2003-A, Class A, MBIA insured, 2.58% 2011³		3,535			3,472
First Investors Auto Owner Trust, Series 2005-A, Class A-2, MBIA insured, 4.23% 2012³		13,582			13,432
GE SeaCo Finance SRL, Series 2004-1, Class A, AMBAC insured, 5.65% 2019^2,3		15,877			15,882
West Penn Funding LLC, Transition Bonds, Series 2005-A, Class A-1, 4.46% 2010³		15,851			15,584
Chase Credit Card Owner Trust, Series 2003-4, Class B, 6.00% 2016²		14,000			14,380
CWABS, Inc., Series 2004-12, Class 2-AV-2, 5.63% 2033²		742			743
CWABS, Inc., Series 2004-15, Class 2-AV-2, 5.62% 2034²		7,264			7,274
CWABS, Inc., Series 2004-BC1, Class M-1, 5.85% 2034²		6,150			6,169
Morgan Stanley ABS Capital I, Inc., Series 2004-NC3, Class M-1, 5.88% 2034²		14,117			14,159
Advanta Business Card Master Trust, Series 2005-A3, Class A, 4.70% 2011		14,250			14,114
GMAC Mortgage Loan Trust, Series 2006-HE3, Class A-5, FGIC insured, 5.809% 2036²		13,000			13,095
Home Equity Asset Trust, Series 2004-2, Class M-1, 5.88% 2034²		11,000			11,046
WFS Financial Owner Trust, Series 2004-1, Class C, 2.49% 2011		1,426			1,398
WFS Financial Owner Trust, Series 2004-1, Class A-4, 2.81% 2011		9,335			9,127
CWHEQ Home Equity Loan Trust, Series 2006-S4, Class A-6, AMBAC insured, 5.834% 2034		10,000			10,052
Net Lease Funding LP, Series 2005-1, Class A-A1, MBIA insured, 4.258% 2014³		8,276			8,156
World Financial Network Credit Card Master Note Trust, Series 2004-A, Class B, 5.85% 2013²		7,000			7,030
Impac CMB Grantor Trust, Series 2004-6, Class 1-A-1, 5.75% 2034²		3,414			3,430
Impac CMB Grantor Trust, Series 2004-6, Class M-2, 5.95% 2034²		2,953			2,960
Prestige Auto Receivables Trust, Series 2004-1, Class A-2, FSA insured, 3.69% 2011³		5,670			5,612
Merrill Lynch Mortgage Investors, Inc., Series 2002-NC1, Class M-1, 6.05% 2033²		4,742			4,748
Merrill Lynch Mortgage Investors, Inc., Series 2002-NC1, Class M-2, 6.55% 2033²		780			782
Nordstrom Credit Card Master Note Trust, Series 2002-1, Class B, 6.05% 2010^2,3		5,000			5,009
Household Private Label Credit Card Master Note Trust I, Series 2002-1, Class B, 5.90% 2011²		4,000			4,004
Vanderbilt Acquisition Loan Trust, Series 2002-1, Class A-3, 5.70% 2023		3,412			3,420
UPFC Auto Receivables Trust, Series 2004-A, Class A-3, AMBAC insured, 3.27% 2010		3,327			3,284
MASTR Asset-backed Securities Trust, Series 2006-AB1, Class A-4, 5.719% 2036		3,000			2,967
PP&L Transition Bond Co. LLC, Series 1999-1, Class A-7, 7.05% 2009		2,318			2,333
Specialty Underwriting and Residential Finance Trust, Series 2004-BC4, Class A-2B, 5.66% 2035²		1,153			1,153
Capital One Auto Finance Trust, Series 2004-B, Class A-3, MBIA insured, 2.96% 2009		889			888
New South Motor Vehicle Trust, Series 2002-A, Class A-3, AMBAC insured, 3.03% 2010		316			313
					1,021,061


CONSUMER DISCRETIONARY — 1.40%
Comcast Cable Communications, Inc. 8.375% 2007		14,000			14,131
Comcast Corp. 5.674% 2009²		20,000			20,059
Comcast Cable Communications, Inc. 6.875% 2009		13,000			13,455
Comcast Corp. 5.45% 2010		25,000			25,111
Comcast Cable Communications, Inc. 6.75% 2011		10,000			10,487
Comcast Corp. 5.85% 2015		13,000			13,041
Comcast Corp. 6.50% 2015		20,750			21,654
TCI Communications, Inc. 8.75% 2015		2,670			3,163
Comcast Corp. 6.50% 2017		24,950			26,084
Time Warner Inc. 5.606% 2009²		10,000			10,014
AOL Time Warner Inc. 6.875% 2012		54,750			57,921
AOL Time Warner Inc. 7.625% 2031		39,375			44,117
Viacom Inc. 5.75% 2011		47,000			47,068
Viacom Inc. 6.875% 2036		14,500			14,381
News America Holdings Inc. 9.25% 2013		17,500			20,558
News America Inc. 5.30% 2014		8,750			8,615
News America Inc. 6.40% 2035		29,000			28,904
Cox Communications, Inc. 4.625% 2010		25,000			24,488
Cox Communications, Inc. 7.75% 2010		15,000			16,146
Cox Communications, Inc. 5.45% 2014		15,500			15,125
Toll Brothers, Inc. 4.95% 2014		35,000			32,074
Toll Brothers, Inc. 5.15% 2015		12,000			11,014
May Department Stores Co. 5.75% 2014		32,000			31,349
Federated Retail Holdings, Inc. 5.90% 2016		8,500			8,502
Johnson Controls, Inc. 5.50% 2016		36,000			35,360
DaimlerChrysler North America Holding Corp. 4.75% 2008		10,000			9,911
DaimlerChrysler North America Holding Corp. 7.75% 2011		13,160			14,099
DaimlerChrysler North America Holding Corp. 6.50% 2013		9,155			9,412
Pulte Homes, Inc. 7.875% 2011		10,000			10,835
Pulte Homes, Inc. 6.25% 2013		5,000			5,082
Pulte Homes, Inc. 5.20% 2015		10,000			9,543
Pulte Homes, Inc. 7.875% 2032		5,000			5,514
Clear Channel Communications, Inc. 4.625% 2008		15,000			14,860
Chancellor Media Corp. of Los Angeles 8.00% 2008		9,500			9,881
Harrah’s Operating Co., Inc. 5.50% 2010		14,375			14,101
Harrah’s Operating Co., Inc. 6.50% 2016		7,000			6,278
Omnicom Group Inc. 5.90% 2016		20,000			20,247
D.R. Horton, Inc. 6.50% 2016		16,094			16,220
Thomson Corp. 5.50% 2035		17,300			15,793
Seminole Tribe of Florida 5.798% 2013^3,4		15,000			14,791
Hyatt Equities, LLC 6.875% 2007³		12,760			12,814
Centex Corp. 5.25% 2015		13,500			12,772
Royal Caribbean Cruises Ltd. 7.25% 2016		10,000			10,228
MDC Holdings, Inc. 5.50% 2013		5,000			4,787
MDC Holdings, Inc. 5.375% 2014		4,730			4,408
Viacom Inc. 5.625% 2007		5,000			5,003
Carnival Corp. 3.75% 2007		5,000			4,933
Ryland Group, Inc. 5.375% 2012		2,750			2,628
					786,961


TELECOMMUNICATION SERVICES — 1.23%
Sprint Capital Corp. 7.625% 2011		11,000			11,788
Nextel Communications, Inc., Series E, 6.875% 2013		74,923			75,774
Nextel Communications, Inc., Series D, 7.375% 2015		73,577			75,520
Sprint Capital Corp. 6.875% 2028		5,000			5,019
BellSouth Corp. 4.75% 2012		43,750			42,273
BellSouth Capital Funding Corp. 7.875% 2030		62,395			72,661
BellSouth Corp. 6.55% 2034		36,855			37,903
SBC Communications Inc. 4.125% 2009		22,420			21,789
SBC Communications Inc. 6.25% 2011		15,000			15,500
SBC Communications Inc. 5.10% 2014		15,000			14,587
SBC Communications Inc. 5.625% 2016		40,000			39,888
SBC Communications Inc. 6.15% 2034		15,000			14,802
SBC Communications Inc. 6.45% 2034		40,000			40,724
AT&T Wireless Services, Inc. 7.875% 2011		12,170			13,287
AT&T Wireless Services, Inc. 8.125% 2012		45,230			50,952
Verizon Global Funding Corp. 7.25% 2010		30,000			32,006
Verizon Global Funding Corp. 7.75% 2030		11,450			13,470
Telefónica Emisiones, SAU 7.045% 2036		28,000			29,836
Telecom Italia Capital SA 7.20% 2036		17,000			17,816
PCCW-HKT Capital Ltd. 8.00% 2011^2,3		15,000			16,529
Deutsche Telekom International Finance BV 8.25% 2030²		10,000			12,329
France Télécom 7.75% 2011²		10,000			10,902
Singapore Telecommunications Ltd. 6.375% 2011³		10,000			10,492
Embarq Corp. 6.738% 2013		7,500			7,686
Koninklijke KPN NV 8.00% 2010		5,500			5,939
					689,472


INDUSTRIALS — 0.89%
General Electric Capital Corp., Series A, 5.00% 2007		20,000			19,975
General Electric Capital Corp., Series A, 5.375% 2007		7,000			7,001
General Electric Capital Corp., Series A, 6.00% 2012		8,000			8,291
General Electric Co. 5.00% 2013		23,000			22,774
General Electric Capital Corp., Series A, 5.645% 2018²		20,000			20,034
General Electric Capital Corp., Series A, 5.748% 2026²		20,000			20,046
Continental Airlines, Inc., Series 2001-1, Class A-2, 6.503% 2011⁴		5,000			5,153
Continental Airlines, Inc., Series 1999-2, Class A-2, 7.056% 2011⁴		3,085			3,172
Continental Airlines, Inc., Series 2000-2, Class A-2, 7.487% 2012⁴		300			317
Continental Airlines, Inc., Series 1998-1, Class A, 6.648% 2019⁴		14,697			15,257
Continental Airlines, Inc., Series 1997-4, Class A, 6.90% 2019⁴		5,681			5,866
Continental Airlines, Inc., Series 1999-1, Class A, 6.545% 2020⁴		13,076			13,543
Continental Airlines, Inc., Series 1999-2, Class A-1, 7.256% 2021⁴		1,848			1,946
Continental Airlines, Inc., Series 2001-1, Class A-1, 6.703% 2022⁴		9,346			9,632
Continental Airlines, Inc., Series 2000-2, Class A-1, 7.707% 2022⁴		25,241			27,402
Continental Airlines, Inc., Series 2000-1, Class A-1, 8.048% 2022⁴		12,373			13,772
Delta Air Lines, Inc., Series 2002-1, Class G-2, MBIA insured, 6.417% 2014⁴		29,550			29,938
Delta Air Lines, Inc., Series 2002-1, Class G-1, MBIA insured, 6.718% 2024⁴		22,445			22,796
BAE SYSTEMS 2001 Asset Trust, Series 2001, Class B, 7.156% 2011^3,4		27,179			28,113
BAE SYSTEMS 2001 Asset Trust, Series 2001, Class G, MBIA insured, 6.664% 2013^3,4		20,168			21,129
John Deere Capital Corp., Series D, 4.375% 2008		7,500			7,415
John Deere Capital Corp., Series D, 3.75% 2009		12,000			11,651
John Deere Capital Corp., Series D, 4.125% 2010		10,000			9,692
John Deere Capital Corp. 5.40% 2011		14,000			14,044
Union Pacific Railroad Co. Pass Through Trust, Series 2004-2, 5.214% 2014³		10,000			9,818
Union Pacific Railroad Co. Pass Through Trust, Series 2002-1, 6.061% 2023⁴		6,498			6,768
Union Pacific Railroad Co. Pass Through Trust, Series 2004-1, 5.404% 2025⁴		19,211			19,158
American Airlines, Inc., Series 2003-1, Class G, AMBAC insured, 3.857% 2012⁴		6,716			6,522
American Airlines, Inc., Series 2001-2, Class A-1, 6.978% 2012⁴		6,560			6,711
American Airlines, Inc., Series 2001-2, Class B, 8.608% 2012		3,000			3,189
American Airlines, Inc., Series 2001-2, Class A-2, 7.858% 2013⁴		15,650			17,107
Hutchison Whampoa International Ltd. 6.50% 2013³		31,500			33,016
Raytheon Co. 4.85% 2011		20,000			19,693
BNSF Funding Trust I 6.613% 2055²		15,000			14,955
USG Corp. 6.30% 2016³		10,000			9,930
Canadian National Railway Co. 4.25% 2009		9,550			9,339
United Air Lines, Inc., Series 2001-1, Class A-2, 6.201% 2010⁴		999			1,006
United Air Lines, Inc., Series 2001-1, Class A-3, 6.602% 2015⁴		2,929			2,971
Southern Capital Corp. Pass Through Trust, Series 2002-1, Class G, MBIA insured, 5.70% 2023^3,4		1,759			1,745
					500,887


UTILITIES — 0.68%
MidAmerican Energy Holdings Co., Series D, 5.00% 2014		18,000			17,359
MidAmerican Energy Holdings Co. 6.125% 2036		34,875			35,276
Abu Dhabi National Energy Co. PJSC (TAQA) 5.875% 2016³		15,350			15,487
Abu Dhabi National Energy Co. PJSC (TAQA) 6.50% 2036³		28,000			28,977
Exelon Corp. 4.45% 2010		20,000			19,361
Exelon Generation Co., LLC 6.95% 2011		15,270			16,102
Commonwealth Edison Co., First Mortgage Bonds, Series 103, 5.90% 2036		3,775			3,687
Alabama Power Co., Series FF, 5.20% 2016		32,000			31,585
Southern California Edison Co., First and Refunding Mortgage Bonds, Series 2006-B, 5.471% 2009²		15,000			15,029
Southern California Edison Co., First and Refunding Mortgage Bonds, Series 2005-A, 5.00% 2016		16,000			15,466
Pacific Gas and Electric Co., First Mortgage Bonds, 3.60% 2009		9,500			9,181
Pacific Gas and Electric Co., First Mortgage Bonds, 6.05% 2034		20,000			20,239
Ameren Corp. 4.263% 2007		12,150			12,088
Cilcorp Inc. 8.70% 2009		13,000			13,990
American Electric Power Co., Inc. 4.709% 2007²		7,500			7,464
Appalachian Power Co., Series G, 3.60% 2008		9,000			8,790
Appalachian Power Co., Series M, 5.55% 2011		7,800			7,817
San Diego Gas & Electric Co., Series CCC, 5.30% 2015		15,000			14,923
Virginia Electric and Power Co., Series 2002-A, 5.375% 2007		6,250			6,249
Dominion Resources, Inc., Series 2002-D, 5.125% 2009		5,250			5,220
Virginia Electric and Power Co., Series 2003-B, 4.50% 2010		3,500			3,394
Consolidated Edison Co. of New York, Inc., Series 2004-C, 4.70% 2009		15,000			14,834
Scottish Power PLC 5.375% 2015		15,000			14,825
PSEG Power LLC 3.75% 2009		14,700			14,204
SP PowerAssets Ltd. 3.80% 2008³		11,500			11,218
Kern River Funding Corp. 4.893% 2018^3,4		5,880			5,721
Tri-State Generation and Transmission Assn. Inc., Pass Through Trust, Series 2003-A, 6.04% 2018^3,4		5,365			5,423
Constellation Energy Group, Inc. 6.125% 2009		5,000			5,092
Oncor Electric Delivery Co. 6.375% 2012		4,920			5,070
					384,071


INFORMATION TECHNOLOGY — 0.34%
Electronic Data Systems Corp., Series B, 6.50% 2013²		63,250			63,760
Electronic Data Systems Corp. 7.45% 2029		26,594			29,185
Cisco Systems, Inc. 5.25% 2011		59,500			59,704
Oracle Corp. 5.00% 2011		30,000			29,725
Western Union Co. 5.93% 2016³		10,000			9,922
					192,296


HEALTH CARE — 0.33%
Cardinal Health, Inc. 5.64% 2009^2,3		23,000			23,028
Cardinal Health, Inc. 6.75% 2011		7,750			8,126
Cardinal Health, Inc. 4.00% 2015		50,000			44,409
Cardinal Health, Inc. 5.80% 2016³		14,700			14,693
Cardinal Health, Inc. 5.85% 2017		15,000			14,946
Amgen Inc. 4.00% 2009		21,000			20,388
Wyeth 5.50% 2016		17,000			17,053
Aetna Inc. 5.75% 2011		5,500			5,589
Aetna Inc. 7.875% 2011		10,000			10,911
Humana Inc. 6.45% 2016		14,200			14,617
UnitedHealth Group Inc. 3.75% 2009		15,000			14,539
					188,299


ENERGY — 0.29%
Ras Laffan Liquefied Natural Gas Co. Ltd. 3.437% 2009^3,4		9,559			9,319
Ras Laffan Liquefied Natural Gas II 5.298% 2020^3,4		22,000			21,128
Ras Laffan Liquefied Natural Gas III 5.838% 2027^3,4		20,000			19,269
Energy Transfer Partners, LP 5.65% 2012		11,000			10,967
Energy Transfer Partners, LP 5.95% 2015		23,385			23,555
Energy Transfer Partners, LP 6.125% 2017		14,250			14,475
Enterprise Products Operating LP 6.875% 2033		25,000			26,185
Sunoco, Inc. 4.875% 2014		15,000			14,066
Devon Financing Corp., ULC 6.875% 2011		10,000			10,585
Petroleum Export Ltd., Class A-2, XLCA insured, 4.633% 2010^3,4		8,944			8,808
OXYMAR 7.50% 2016^3,4		2,238			2,370
					160,727


MUNICIPALS — 0.18%
State of California, Golden State Tobacco Securitization Corp., Tobacco Settlement Asset-backed Bonds, Series 2003-A-1, 6.25% 2033		43,070			48,150
State of South Dakota, Educational Enhancement Funding Corp., Tobacco Settlement Asset-backed Bonds, Series 2002-A, Class A, 6.72% 2025		19,257			19,211
State of Wisconsin, Badger Tobacco Asset Securitization Corp., Tobacco Settlement Asset-backed Bonds, 6.125% 2027		13,055			14,104
State of Washington, Tobacco Settlement Authority, Asset-backed Bonds, Series 2002, 6.50% 2026		9,825			10,830
State of New York, Sales Tax Asset Receivable Corp., Taxable Revenue Bonds, Series 2005-B, FGIC insured, 4.06% 2010		5,000			4,822
State of Louisiana, Tobacco Settlement Financing Corp., Tobacco Settlement Asset-backed Bonds, Series 2001-A, Class A, 6.36% 2025		4,316			4,312
					101,429


MATERIALS — 0.17%
Stora Enso Oyj 7.25% 2036³		24,000			25,234
C10 Capital (SPV) Ltd. 6.722% (undated)^2,3		22,630			22,673
International Paper Co. 5.85% 2012		16,394			16,750
Weyerhaeuser Co. 7.375% 2032		13,000			13,609
Norske Skogindustrier ASA 6.125% 2015³		10,950			10,306
SCA Coordination Center NV 4.50% 2015³		6,750			6,195
					94,767


CONSUMER STAPLES — 0.07%
Tyson Foods, Inc. 6.85% 2016²		24,000			24,764
CVS Corp. 6.036% 2028^3,4		10,000			9,989
Costco Wholesale Corp. 5.50% 2007		4,750			4,748
					39,501


NON-U.S. GOVERNMENT BONDS & NOTES — 0.01%
State of Qatar 9.75% 2030		5,000			7,475


Total bonds & notes (cost: $16,034,831,000)					16,059,556


		Principal amount			Market value
Short-term securities — 5.57%		(000	)		(000	)

Federal Home Loan Bank 5.10%-5.17% due 1/3-3/28/2007	$	583,501		$	580,166
Bank of America Corp. 5.235%-5.25% due 1/11-3/22/2007		225,000			223,556
Ranger Funding Co. LLC 5.26%-5.30% due 1/31-3/2/2007³		139,500			138,469
Variable Funding Capital Corp. 5.23%-5.25% due 1/5-2/2/2007³		314,300			313,441
Jupiter Securitization Co., LLC 5.21%-5.26% due 1/18-3/1/2007³		243,788			242,705
Park Avenue Receivables Co., LLC 5.25%-5.26% due 1/8-1/10/2007³		52,851			52,781
Citigroup Funding Inc. 5.26% due 2/15/2007		75,000			74,496
CAFCO, LLC 5.23%-5.28% due 2/12-2/26/2007³		179,800			178,611
Procter & Gamble Co. 5.22%-5.23% due 1/2-1/10/2007³		165,600			165,424
Clipper Receivables Co., LLC 5.25%-5.265% due 1/25-2/15/2007³		135,900			135,178
Hewlett-Packard Co. 5.23%-5.31% due 1/19-2/1/2007³		120,800			120,335
CIT Group, Inc. 5.23%-5.26% due 1/16-4/11/2007³		110,000			109,068
Freddie Mac 5.10%-5.144% due 1/16-1/23/2007		99,170			98,883
Abbott Laboratories 5.20%-5.22% due 1/16-3/6/2007³		94,600			94,072
Pfizer Investment Capital PLC 5.20% due 2/9/2007³		75,000			74,566
NetJets Inc. 5.18%-5.20% due 1/22-2/8/2007³		66,500			66,178
Tennessee Valley Authority 5.11% due 1/11/2007		51,600			51,519
Union Bank of California, N.A. 5.28% due 1/25/2007		50,000			49,999
3M Co. 5.19% due 1/30/2007		46,994			46,791
IBM Corp. 5.23% due 2/7/2007³		45,000			44,751
Caterpillar Financial Services Corp. 5.19% due 1/8/2007		41,000			40,953
Concentrate Manufacturing Co. of Ireland 5.23% due 1/19/2007³		40,400			40,288
Three Pillars Funding, LLC 5.29% due 1/18/2007³		35,500			35,406
Federal Farm Credit Banks 5.13% due 1/12/2007		32,000			31,945
Triple-A One Funding Corp. 5.25% due 1/29/2007³		27,822			27,705
Scripps (E.W.) Co. 5.22% due 1/4/2007³		25,000			24,985
Private Export Funding Corp. 5.23% due 2/13/2007³		25,000			24,841
Harley-Davidson Funding Corp. 5.20% due 1/29/2007³		15,000			14,937
Johnson & Johnson 5.20% due 1/16/2007³		11,500			11,473
Bank of New York Co., Inc. 5.20% due 1/2/2007		10,000			9,997
HSBC Finance Corp. 5.23% due 1/9/2007		4,500			4,494

Total short-term securities (cost: $3,127,980,000)					3,128,013


Total investment securities (cost: $48,521,336,000)					56,107,986
Other assets less liabilities					91,550

Net assets				$	56,199,536

“Miscellaneous” securities include holdings in their initial period of acquisition that have not previously been publicly disclosed.

¹ Security did not produce income during the last 12 months.

² Coupon rate may change periodically.

³ Purchased in a private placement transaction; resale may be limited to qualified institutional buyers; resale to the public may require registration. The total value of all such restricted securities was $3,993,937,000, which represented 7.11% of the net assets of the fund.

⁴ Principal payments may be made periodically. Therefore, the effective maturity date may be earlier than the stated maturity date.

⁵ Index-linked bond whose principal amount moves with a government retail price index.

The industry classifications shown in the investment portfolio were obtained from sources believed to be reliable and are not covered by the Report of Independent Registered Public Accounting Firm.

ADR = American Depositary Receipts

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so you may lose money.

Investors should carefully consider the investment objectives, risks, charges and expenses of the American Funds. This and other important information is contained in each fund’s prospectus, which can be obtained from a financial adviser and should be read carefully before investing.

MFGEFP-911-0207-S6864

Financial statements

Statement of assets and liabilities
at December 31, 2006	(dollars and shares in thousands, except per-share amounts)

Assets:
Investment securities at market (cost: $48,521,336)			$	56,107,986
Cash				2,859
Receivables for:
Sales of investments	$	260
Sales of fund's shares		104,100
Dividends and interest		221,955		326,315
				56,437,160
Liabilities:
Payables for:
Purchases of investments		26,151
Repurchases of fund's shares		172,562
Investment advisory services		10,243
Services provided by affiliates		26,527
Deferred directors' compensation		1,591
Other		550		237,624
Net assets at December 31, 2006			$	56,199,536

Net assets consist of:
Capital paid in on shares of capital stock			$	48,480,848
Undistributed net investment income				135,629
Distributions in excess of net realized gain				(3,812	)
Net unrealized appreciation				7,586,871
Net assets at December 31, 2006			$	56,199,536

Total authorized capital stock - 5,500,000 shares, $.001 par value (2,957,401 total shares outstanding)
		Net assets	Shares outstanding		Net asset value per share*

Class A	$	35,431,451	1,862,631	$	19.02
Class B		5,385,610	283,992		18.96
Class C		5,742,991	303,051		18.95
Class F		1,247,224	65,578		19.02
Class 529-A		1,124,861	59,181		19.01
Class 529-B		310,965	16,367		19.00
Class 529-C		500,560	26,343		19.00
Class 529-E		72,708	3,827		19.00
Class 529-F		27,937	1,470		19.00
Class R-1		82,269	4,343		18.94
Class R-2		1,078,927	56,942		18.95
Class R-3		3,059,138	161,350		18.96
Class R-4		1,723,702	90,722		19.00
Class R-5		411,193	21,604		19.03
(*) Maximum offering price and redemption price per share were equal to the net asset value per share for all share classes, except for Class A and 529-A, for which the maximum offering prices per share were $20.18 and $20.17, respectively.


See Notes to Financial Statements

Statement of operations
for the year ended December 31, 2006		(dollars in thousands)
Investment income:
Income:
Dividends (net of non-U.S. taxes of $11,349)	$	762,114
Interest		920,322		$	1,682,436

Fees and expenses(*):
Investment advisory services		127,668
Distribution services		230,740
Transfer agent services		39,367
Administrative services		25,242
Reports to shareholders		1,824
Registration statement and prospectus		1,579
Postage, stationery and supplies		4,310
Directors' compensation		458
Auditing and legal		123
Custodian		535
State and local taxes		1
Other		135
Total fees and expenses before reimbursements/waivers		431,982
Less reimbursements/waivers of fees and expenses:
Investment advisory services		12,767
Administrative services		330
Total fees and expenses after reimbursements/waivers					418,885
Net investment income					1,263,551

Net realized gain and unrealized appreciation on investments
and non-U.S. currency:
Net realized gain (loss) on:
Investments		1,307,074
Non-U.S. currency transactions		(2,640	)		1,304,434
Net unrealized appreciation on:
Investments		3,321,062
Non-U.S. currency translations		252			3,321,314
Net realized gain and unrealized appreciation
on investments and non-U.S. currency					4,625,748
Net increase in net assets resulting from operations				$	5,889,299

(*) Additional information related to class-specific fees and expenses is included in the Notes to Financial Statements.

See Notes to Financial Statements



Statements of changes in net assets		(dollars in thousands)


		Year ended December 31,
		2006			2005
Operations:
Net investment income	$	1,263,551		$	1,033,502
Net realized gain on investments and non-U.S. currency transactions		1,304,434			1,011,254
Net unrealized appreciation (depreciation) on investments and non-U.S. currency translations		3,321,314			(555,692	)
Net increase in net assets resulting from operations		5,889,299			1,489,064

Dividends and distributions paid to shareholders:
Dividends from net investment income		(1,251,580	)		(998,559	)
Distributions from net realized gain on investments		(1,174,211	)		(957,744	)
Total dividends and distributions paid to shareholders		(2,425,791	)		(1,956,303	)

Capital share transactions		789,477			7,439,777

Total increase in net assets		4,252,985			6,972,538

Net assets:
Beginning of year		51,946,551			44,974,013

End of year (including undistributed net investment income: $135,629 and $121,590, respectively)	$	56,199,536		$	51,946,551


See Notes to Financial Statements

Notes to financial statements

1.	Organization and significant accounting policies

Organization - American Balanced Fund, Inc. (the "fund") is registered under the Investment Company Act of 1940 as an open-end, diversified management investment company. The fund seeks conservation of capital, current income and long-term growth of both capital and income by investing in common stocks and fixed-income securities.

The fund offers 14 share classes consisting of four retail share classes, five CollegeAmerica® savings plan share classes and five retirement plan share classes. The CollegeAmerica savings plan share classes (529-A, 529-B, 529-C, 529-E and 529-F) can be utilized to save for college education. The five retirement plan share classes (R-1, R-2, R-3, R-4 and R-5) are sold without any sales charges and do not carry any conversion rights. The fund’s share classes are described below:

Share class	Initial sales charge	Contingent deferred sales charge upon redemption	Conversion feature
Class A and 529-A	Up to 5.75%	None (except 1% for certain redemptions within one year of purchase without an initial sales charge)	None
Class B and 529-B	None	Declines from 5% to 0% for redemptions within six years of purchase	Class B and 529-B convert to Class A and 529-A, respectively, after eight years
Class C	None	1% for redemptions within one year of purchase	Class C converts to Class F after 10 years
Class 529-C	None	1% for redemptions within one year of purchase	None
Class 529-E	None	None	None
Class F and 529-F	None	None	None
Class R-1, R-2, R-3, R-4 and R-5	None	None	None

Holders of all share classes have equal pro rata rights to assets, dividends and liquidation proceeds. Each share class has identical voting rights, except for the exclusive right to vote on matters affecting only its class. Share classes have different fees and expenses ("class-specific fees and expenses"), primarily due to different arrangements for distribution, administrative and shareholder services. Differences in class-specific fees and expenses will result in differences in net investment income and, therefore, the payment of different per-share dividends by each class.

Significant accounting policies - The financial statements have been prepared to comply with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. The following is a summary of the significant accounting policies followed by the fund:

Security valuation - Equity securities are valued at the official closing price of, or the last reported sale price on, the exchange or market on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Prices for each security are taken from the principal exchange or market in which the security trades. Fixed-income securities, including short-term securities purchased with more than 60 days left to maturity, are valued at prices obtained from an independent pricing service when such prices are available. However, where the investment adviser deems it appropriate, such securities will be valued at the mean quoted bid and asked prices (or bid prices, if asked prices are not available) or at prices for securities of comparable maturity, quality and type. Securities with both fixed-income and equity characteristics, or equity securities traded principally among fixed-income dealers, are valued in the manner described above for either equity or fixed-income securities, depending on which method is deemed most appropriate by the investment adviser. Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates market value. The value of short-term securities originally purchased with maturities greater than 60 days is determined based on an amortized value to par when they reach 60 days or less remaining to maturity. The ability of the issuers of the debt securities held by the fund to meet their obligations may be affected by economic developments in a specific industry, state or region. Securities and other assets for which representative market quotations are not readily available or are considered unreliable by the investment adviser are fair valued as determined in good faith under procedures adopted by authority of the fund's board of directors. Various factors may be reviewed in order to make a good faith determination of a security’s fair value. These factors include, but are not limited to, the type and cost of the security; contractual or legal restrictions on resale of the security; relevant financial or business developments of the issuer; actively traded similar or related securities; conversion or exchange rights on the security; related corporate actions; significant events occurring after the close of trading in the security; and changes in overall market conditions.

Security transactions and related investment income - Security transactions are recorded by the fund as of the date the trades are executed with brokers. Realized gains and losses from security transactions are determined based on the specific identified cost of the securities. In the event a security is purchased with a delayed payment date, the fund will segregate liquid assets sufficient to meet its payment obligations. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis. Market discounts, premiums and original issue discounts on fixed-income securities are amortized daily over the expected life of the security.

Class allocations - Income, fees and expenses (other than class-specific fees and expenses) and realized and unrealized gains and losses are allocated daily among the various share classes based on their relative net assets. Class-specific fees and expenses, such as distribution, administrative and shareholder services, are charged directly to the respective share class.

Dividends and distributions to shareholders - Dividends and distributions paid to shareholders are recorded on the ex-dividend date.

Non-U.S. currency translation - Assets and liabilities, including investment securities, denominated in non-U.S. currencies are translated into U.S. dollars at the exchange rates in effect on the valuation date. Purchases and sales of investment securities and income and expenses are translated into U.S. dollars at the exchange rates on the dates of such transactions. In the accompanying financial statements, the effects of changes in non-U.S. exchange rates on investment securities are included with the net realized gain or loss and net unrealized appreciation or depreciation on investments. The realized gain or loss and unrealized appreciation or depreciation resulting from all other transactions denominated in non-U.S. currencies are disclosed separately.

Mortgage dollar rolls - The fund may enter into mortgage dollar roll transactions in which the fund sells a mortgage-backed security to a counterparty and simultaneously enters into an agreement with the same counterparty to buy back a similar security on a specific future date at a predetermined price. Each mortgage dollar roll is treated as a financing transaction; therefore, any gain or loss is considered unrealized until the roll reaches completion. Risks may arise due to the delayed payment date and the potential inability of counterparties to complete the transaction. Income is generated as consideration for entering into these transactions and is included in interest income on the accompanying financial statements.

2.	Non-U.S. investments

Investment risk - The risks of investing in securities of non-U.S. issuers may include, but are not limited to, investment and repatriation restrictions; revaluation of currencies; adverse political, social and economic developments; government involvement in the private sector; limited and less reliable investor information; lack of liquidity; certain local tax law considerations; and limited regulation of the securities markets.

Taxation - Dividend and interest income is recorded net of non-U.S. taxes paid.

3. Federal income taxation and distributions

The fund complies with the requirements under Subchapter M of the Internal Revenue Code applicable to mutual funds and intends to distribute substantially all of its net taxable income and net capital gains each year. The fund is not subject to income taxes to the extent such distributions are made. Therefore, no federal income tax provision is required.

Distributions - Distributions paid to shareholders are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to differing treatment for items such as non-U.S. currency gains and losses; short-term capital gains and losses; capital losses related to sales of certain securities within 30 days of purchase; unrealized appreciation of certain investments in non-U.S. securities; paydowns on fixed-income securities; and income on certain investments. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund for financial reporting purposes. The fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.

During the year ended December 31, 2006, the fund reclassified $79,000 from undistributed net investment income and $129,272,000 from distributions in excess of net realized gain to capital paid in on shares of capital stock. In addition, the fund reclassified $2,147,000 from distributions in excess of net realized gain to undistributed net investment income to align financial reporting with tax reporting.

As of December 31, 2006, the tax basis components of distributable earnings, unrealized appreciation (depreciation) and cost of investments were as follows:

	(dollars in thousands)
Undistributed ordinary income		$137,613
Post-October non-U.S. currency loss deferrals (realized during the period November 1, 2006, through December 31, 2006)*		(143)
Gross unrealized appreciation on investment securities		8,066,478
Gross unrealized depreciation on investment securities		(483,889)
Net unrealized appreciation on investment securities		7,582,589
Cost of investment securities		48,525,397
*These deferrals are considered incurred in the subsequent year.

The tax character of distributions paid to shareholders was as follows (dollars in thousands):

	Year ended December 31, 2006						Year ended December 31, 2005
		Ordinary income		Long-term capital gains		Total distributions paid		Ordinary income		Long-term capital gains		Total distributions paid
Share class
Class A	$	858,582	$	740,326	$	1,598,908	$	700,690	$	607,596	$	1,308,286
Class B		94,095		112,812		206,907		75,232		95,859		171,091
Class C		97,563		120,375		217,938		77,277		103,362		180,639
Class F		30,712		25,986		56,698		26,618		22,879		49,497
Class 529-A		25,350		23,369		48,719		17,534		16,639		34,173
Class 529-B		4,814		6,491		11,305		3,267		4,872		8,139
Class 529-C		7,752		10,408		18,160		5,113		7,694		12,807
Class 529-E		1,452		1,511		2,963		977		1,087		2,064
Class 529-F		640		580		1,220		374		348		722
Class R-1		1,254		1,721		2,975		775		1,169		1,944
Class R-2		17,330		22,577		39,907		11,685		16,683		28,368
Class R-3		62,774		63,645		126,419		44,197		46,892		91,089
Class R-4		39,471		35,866		75,337		27,675		26,669		54,344
Class R-5		9,791		8,544		18,335		7,145		5,995		13,140
Total	$	1,251,580	$	1,174,211	$	2,425,791	$	998,559	$	957,744	$	1,956,303

4. Fees and transactions with related parties

Capital Research and Management Company ("CRMC"), the fund’s investment adviser, is the parent company of American Funds Service Company ^SM ("AFS"), the fund’s transfer agent, and American Funds Distributors, Inc.^SM ("AFD"), the principal underwriter of the fund’s shares.

Investment advisory services -The Investment Advisory and Service Agreement with CRMC provides for monthly fees accrued daily. These fees are based on a declining series of annual rates beginning with 0.420% on the first $500 million of daily net assets and decreasing to 0.210% on such assets in excess of $71 billion. CRMC is currently waiving 10% of investment advisory services fees. During the year ended December 31, 2006, total investment advisory services fees waived by CRMC were $12,767,000. As a result, the fee shown on the accompanying financial statements of $127,668,000, which was equivalent to an annualized rate of 0.239%, was reduced to $114,901,000, or 0.215% of average daily net assets.

Class-specific fees and expenses - Expenses that are specific to individual share classes are accrued directly to the respective share class. The principal class-specific fees and expenses are described below:

Distribution services - The fund has adopted plans of distribution for all share classes, except Class R-5. Under the plans, the board of directors approves certain categories of expenses that are used to finance activities primarily intended to sell fund shares and service existing accounts. The plans provide for payments, based on an annualized percentage of average daily net assets, ranging from 0.25% to 1.00% as noted below. In some cases, the board of directors has limited the amounts that may be paid to less than the maximum allowed by the plans. All share classes may use up to 0.25% of average daily net assets to pay service fees, or to compensate AFD for paying service fees, to firms that have entered into agreements with AFD to provide certain shareholder services. The remaining amounts available to be paid under each plan are paid to dealers to compensate them for their sales activities.

For Class A and 529-A, the board of directors has also approved the reimbursement of dealer and wholesaler commissions paid by AFD for certain shares sold without a sales charge. These classes reimburse AFD for amounts billed within the prior 15 months but only to the extent that the overall annual expense limit of 0.25% is not exceeded. As of December 31, 2006, there were no unreimbursed expenses subject to reimbursement for Class A or 529-A.

Share class	Currently approved limits	Plan limits
Class A	0.25%	0.25%
Class 529-A	0.25	0.50
Class B and 529-B	1.00	1.00
Class C, 529-C and R-1	1.00	1.00
Class R-2	0.75	1.00
Class 529-E and R-3	0.50	0.75
Class F, 529-F and R-4	0.25	0.50

Transfer agent services - The fund has a transfer agent agreement with AFS for Class A and B. Under this agreement, these share classes compensate AFS for transfer agent services including shareholder recordkeeping, communications and transaction processing. AFS is also compensated for certain transfer agent services provided to all other share classes from the administrative services fees paid to CRMC described below.

Administrative services - The fund has an administrative services agreement with CRMC to provide transfer agent and other related shareholder services for all share classes other than Class A and B. Each relevant share class pays CRMC annual fees up to 0.15% (0.10% for Class R-5) based on its respective average daily net assets. Each relevant share class also pays AFS additional amounts for certain transfer agent services. CRMC and AFS may use these fees to compensate third parties for performing these services. CRMC has agreed to pay AFS on the fund's behalf for a portion of the transfer agent services fees for some of the retirement plan share classes. For the year ended December 31, 2006, the total administrative services fees paid by CRMC were $313 and $330,000 for Class R-1 and R-2, respectively. Administrative services fees are presented gross of any payments made by CRMC. Each 529 share class is subject to an additional annual administrative services fee of 0.10% of its respective average daily net assets; this fee is payable to the Commonwealth of Virginia for the maintenance of the CollegeAmerica plan. Although these amounts are included with administrative services fees on the accompanying financial statements, the Commonwealth of Virginia is not considered a related party.

Expenses under the agreements described above for the year ended December 31, 2006, were as follows (dollars in thousands):

Share class	Distribution services	Transfer agent services	Administrative services
Share class	Distribution services	Transfer agent services	CRMC administrative services	Transfer agent services	Commonwealth of Virginia administrative services
Class A	$84,333	$34,148	Not applicable	Not applicable	Not applicable
Class B	52,195	5,219	Not applicable	Not applicable	Not applicable
Class C	55,602	Included in administrative services	$7,024	$1,245	Not applicable
Class F	3,000		976	129	Not applicable
Class 529-A	1,992		855	157	$1,006
Class 529-B	2,842		241	100	284
Class 529-C	4,544		387	128	455
Class 529-E	327		56	10	66
Class 529-F	-		20	4	24
Class R-1	703		87	30	Not applicable
Class R-2	7,376		1,443	2,957	Not applicable
Class R-3	13,914		3,897	999	Not applicable
Class R-4	3,912		2,268	43	Not applicable
Class R-5	Not applicable		342	9	Not applicable
Total	$230,740	$39,367	$17,596	$5,811	$1,835

Deferred directors’ compensation - Since the adoption of the deferred compensation plan in 1993, directors who are unaffiliated with CRMC may elect to defer the cash payment of part or all of their compensation. These deferred amounts, which remain as liabilities of the fund, are treated as if invested in shares of the fund or other American Funds. These amounts represent general, unsecured liabilities of the fund and vary according to the total returns of the selected funds. Directors’ compensation of $458,000, shown on the accompanying financial statements, includes $292,000 in current fees (either paid in cash or deferred) and a net increase of $166,000 in the value of the deferred amounts.

Affiliated officers and directors - Officers and certain directors of the fund are or may be considered to be affiliated with CRMC, AFS and AFD. No affiliated officers or directors received any compensation directly from the fund.

5. Capital share transactions

Capital share transactions in the fund were as follows (dollars and shares in thousands):

Share class	Sales(*)			Reinvestments of dividends and distributions			Repurchases(*)					Net increase (decrease)
		Amount	Shares		Amount	Shares		Amount		Shares			Amount		Shares
Year ended December 31, 2006
Class A	$	5,136,339	279,341	$	1,536,857	82,119	$	(6,445,634	)	(351,004	)	$	227,562		10,456
Class B		405,315	22,154		197,211	10,532		(735,333	)	(40,183	)		(132,807	)	(7,497	)
Class C		805,710	43,982		205,383	10,975		(1,210,047	)	(66,245	)		(198,954	)	(11,288	)
Class F		265,909	14,440		49,614	2,652		(384,185	)	(20,983	)		(68,662	)	(3,891	)
Class 529-A		212,120	11,530		48,713	2,603		(107,663	)	(5,857	)		153,170		8,276
Class 529-B		39,884	2,173		11,304	602		(23,188	)	(1,265	)		28,000		1,510
Class 529-C		100,547	5,470		18,157	966		(65,347	)	(3,558	)		53,357		2,878
Class 529-E		14,744	802		2,963	158		(8,503	)	(462	)		9,204		498
Class 529-F		9,066	494		1,220	65		(2,882	)	(157	)		7,404		402
Class R-1		29,338	1,602		2,941	157		(16,554	)	(905	)		15,725		854
Class R-2		347,844	19,010		39,876	2,130		(274,833	)	(14,992	)		112,887		6,148
Class R-3		811,622	44,388		126,394	6,763		(601,436	)	(32,810	)		336,580		18,341
Class R-4		483,734	26,328		75,327	4,027		(376,900	)	(20,596	)		182,161		9,759
Class R-5		154,209	8,354		18,207	971		(108,566	)	(5,915	)		63,850		3,410
Total net increase
(decrease)	$	8,816,381	480,068	$	2,334,167	124,720	$	(10,361,071	)	(564,932	)	$	789,477		39,856

Year ended December 31, 2005
Class A	$	7,604,851	425,318	$	1,258,878	70,262	$	(4,717,042	)	(263,357	)	$	4,146,687		232,223
Class B		745,918	41,889		163,095	9,127		(529,258	)	(29,641	)		379,755		21,375
Class C		1,375,439	77,246		170,462	9,545		(888,127	)	(49,772	)		657,774		37,019
Class F		398,797	22,309		43,848	2,448		(303,608	)	(16,955	)		139,037		7,802
Class 529-A		258,297	14,439		34,170	1,908		(57,668	)	(3,213	)		234,799		13,134
Class 529-B		51,768	2,897		8,138	454		(12,100	)	(674	)		47,806		2,677
Class 529-C		118,856	6,649		12,805	715		(37,453	)	(2,085	)		94,208		5,279
Class 529-E		17,241	964		2,064	115		(4,247	)	(236	)		15,058		843
Class 529-F		6,078	340		722	40		(1,197	)	(67	)		5,603		313
Class R-1		33,760	1,894		1,935	108		(14,466	)	(811	)		21,229		1,191
Class R-2		426,971	23,963		28,349	1,587		(193,753	)	(10,853	)		261,567		14,697
Class R-3		1,038,261	58,203		91,063	5,097		(395,872	)	(22,141	)		733,452		41,159
Class R-4		833,009	46,696		54,339	3,036		(265,996	)	(14,886	)		621,352		34,846
Class R-5		133,802	7,471		13,028	727		(65,380	)	(3,647	)		81,450		4,551
Total net increase
(decrease)	$	13,043,048	730,278	$	1,882,896	105,169	$	(7,486,167	)	(418,338	)	$	7,439,777		417,109

(*) Includes exchanges between share classes of the fund.

6. Investment transactions

The fund made purchases and sales of investment securities, excluding short-term securities, of $17,327,983,000 and $18,870,641,000, respectively, during the year ended December 31, 2006.

Financial highlights(1)

			Income (loss) from investment operations(2)									Dividends and distributions

		Net asset value, beginning of period		Net investment income		Net gains (losses) on securities (both realized and unrealized	)		Total from investment operations			Dividends (from net investment income	)		Distributions (from capital gains	)		Total dividends and distributions			Net asset value, end of period	Total return(3	)		Net assets, end of period (in millions	)			Ratio of expenses to average net assets before reimbursements/ waivers				Ratio of expenses to average net assets after reimbursements/ waivers		(4	)	Ratio of net income to average net assets
Class A:
Year ended 12/31/2006	$	17.82	$	.47	$	1.61		$	2.08		$	(.47	)	$	(.41	)	$	(.88	)	$	19.02	11.80	%	$	35,431				.61	%			.58	%			2.57	%
Year ended 12/31/2005		18.00		.41		.15			.56			(.40	)		(.34	)		(.74	)		17.82	3.12			33,009				.61				.59				2.31
Year ended 12/31/2004		17.29		.39		1.12			1.51			(.36	)		(.44	)		(.80	)		18.00	8.92			29,162				.63				.62				2.23
Year ended 12/31/2003		14.42		.37		2.87			3.24			(.37	)		-			(.37	)		17.29	22.82			19,951				.67				.67				2.38
Year ended 12/31/2002		15.85		.42		(1.40	)		(.98	)		(.43	)		(.02	)		(.45	)		14.42	(6.27	)		12,405				.70				.70				2.79
Class B:
Year ended 12/31/2006		17.77		.33		1.60			1.93			(.33	)		(.41	)		(.74	)		18.96	10.95			5,386				1.36				1.33				1.82
Year ended 12/31/2005		17.95		.28		.15			.43			(.27	)		(.34	)		(.61	)		17.77	2.37			5,180				1.36				1.34				1.56
Year ended 12/31/2004		17.24		.26		1.12			1.38			(.23	)		(.44	)		(.67	)		17.95	8.15			4,849				1.37				1.37				1.48
Year ended 12/31/2003		14.38		.25		2.86			3.11			(.25	)		-			(.25	)		17.24	21.90			3,344				1.42				1.42				1.62
Year ended 12/31/2002		15.82		.31		(1.41	)		(1.10	)		(.32	)		(.02	)		(.34	)		14.38	(7.04	)		1,784				1.46				1.46				2.07
Class C:
Year ended 12/31/2006		17.76		.32		1.60			1.92			(.32	)		(.41	)		(.73	)		18.95	10.90			5,743				1.41				1.38				1.77
Year ended 12/31/2005		17.94		.27		.15			.42			(.26	)		(.34	)		(.60	)		17.76	2.30			5,582				1.42				1.40				1.51
Year ended 12/31/2004		17.24		.25		1.11			1.36			(.22	)		(.44	)		(.66	)		17.94	8.02			4,976				1.44				1.44				1.42
Year ended 12/31/2003		14.38		.24		2.87			3.11			(.25	)		-			(.25	)		17.24	21.84			2,968				1.48				1.48				1.55
Year ended 12/31/2002		15.82		.30		(1.41	)		(1.11	)		(.31	)		(.02	)		(.33	)		14.38	(7.08	)		1,440				1.51				1.51				2.03
Class F:
Year ended 12/31/2006		17.82		.48		1.60			2.08			(.47	)		(.41	)		(.88	)		19.02	11.83			1,247				.59				.57				2.59
Year ended 12/31/2005		18.00		.41		.15			.56			(.40	)		(.34	)		(.74	)		17.82	3.10			1,238				.63				.61				2.30
Year ended 12/31/2004		17.29		.39		1.11			1.50			(.35	)		(.44	)		(.79	)		18.00	8.88			1,110				.67				.67				2.19
Year ended 12/31/2003		14.42		.36		2.88			3.24			(.37	)		-			(.37	)		17.29	22.79			659				.69				.69				2.34
Year ended 12/31/2002		15.85		.42		(1.40	)		(.98	)		(.43	)		(.02	)		(.45	)		14.42	(6.29	)		320				.72				.72				2.81
Class 529-A:
Year ended 12/31/2006		17.81		.47		1.60			2.07			(.46	)		(.41	)		(.87	)		19.01	11.76			1,125				.66				.63				2.53
Year ended 12/31/2005		17.99		.40		.15			.55			(.39	)		(.34	)		(.73	)		17.81	3.06			907				.67				.65				2.26
Year ended 12/31/2004		17.28		.38		1.12			1.50			(.35	)		(.44	)		(.79	)		17.99	8.88			679				.69				.68				2.18
Year ended 12/31/2003		14.41		.37		2.87			3.24			(.37	)		-			(.37	)		17.28	22.87			389				.67				.67				2.36
Period from 2/15/2002 to 12/31/2002		15.82		.37		(1.33	)		(.96	)		(.43	)		(.02	)		(.45	)		14.41	(6.19	)		160				.72		(5	)	.72		(5	)	2.91		(5	)
Class 529-B:
Year ended 12/31/2006		17.80		.31		1.61			1.92			(.31	)		(.41	)		(.72	)		19.00	10.87			311				1.48				1.45				1.70
Year ended 12/31/2005		17.99		.25		.14			.39			(.24	)		(.34	)		(.58	)		17.80	2.15			265				1.51				1.49				1.41
Year ended 12/31/2004		17.28		.23		1.12			1.35			(.20	)		(.44	)		(.64	)		17.99	7.94			219				1.56				1.56				1.30
Year ended 12/31/2003		14.41		.23		2.87			3.10			(.23	)		-			(.23	)		17.28	21.74			137				1.58				1.58				1.44
Period from 2/15/2002 to 12/31/2002		15.82		.26		(1.33	)		(1.07	)		(.32	)		(.02	)		(.34	)		14.41	(6.85	)		55				1.60		(5	)	1.60		(5	)	2.04		(5	)
Class 529-C:
Year ended 12/31/2006		17.81		.32		1.59			1.91			(.31	)		(.41	)		(.72	)		19.00	10.81			501				1.47				1.44				1.71
Year ended 12/31/2005		17.99		.26		.14			.40			(.24	)		(.34	)		(.58	)		17.81	2.22			418				1.50				1.48				1.42
Year ended 12/31/2004		17.28		.23		1.12			1.35			(.20	)		(.44	)		(.64	)		17.99	7.94			327				1.55				1.55				1.31
Year ended 12/31/2003		14.41		.23		2.87			3.10			(.23	)		-			(.23	)		17.28	21.76			193				1.57				1.57				1.46
Period from 2/19/2002 to 12/31/2002		15.62		.26		(1.12	)		(.86	)		(.33	)		(.02	)		(.35	)		14.41	(5.63	)		77				1.59		(5	)	1.59		(5	)	2.05		(5	)
Class 529-E:
Year ended 12/31/2006		17.80		.41		1.61			2.02			(.41	)		(.41	)		(.82	)		19.00	11.44			73				.96				.93				2.23
Year ended 12/31/2005		17.98		.35		.14			.49			(.33	)		(.34	)		(.67	)		17.80	2.73			59				.99				.97				1.93
Year ended 12/31/2004		17.28		.32		1.11			1.43			(.29	)		(.44	)		(.73	)		17.98	8.44			45				1.04				1.03				1.83
Year ended 12/31/2003		14.41		.31		2.87			3.18			(.31	)		-			(.31	)		17.28	22.37			27				1.05				1.05				1.97
Period from 3/5/2002 to 12/31/2002		16.14		.31		(1.76	)		(1.45	)		(.28	)		-			(.28	)		14.41	(9.02	)		10				1.06		(5	)	1.06		(5	)	2.60		(5	)
Class 529-F:
Year ended 12/31/2006		17.80		.50		1.61			2.11			(.50	)		(.41	)		(.91	)		19.00	11.99			28				.46				.43				2.73
Year ended 12/31/2005		17.98		.42		.15			.57			(.41	)		(.34	)		(.75	)		17.80	3.15			19				.57				.55				2.35
Year ended 12/31/2004		17.27		.37		1.12			1.49			(.34	)		(.44	)		(.78	)		17.98	8.78			14				.79				.78				2.09
Year ended 12/31/2003		14.41		.35		2.86			3.21			(.35	)		-			(.35	)		17.27	22.63			7				.80				.80				2.16
Period from 9/17/2002 to 12/31/2002		14.18		.13		.21			.34			(.11	)		-			(.11	)		14.41	2.36			-		(6	)	.23				.23				.87



Class R-1:
Year ended 12/31/2006	$	17.75	$	.32	$	1.60		$	1.92		$	(.32	)	$	(.41	)	$	(.73	)	$	18.94	10.91	%	$	82				1.41	%			1.39	%			1.77	%
Year ended 12/31/2005		17.94		.27		.13			.40			(.25	)		(.34	)		(.59	)		17.75	2.24			62				1.45				1.42				1.49
Year ended 12/31/2004		17.24		.25		1.11			1.36			(.22	)		(.44	)		(.66	)		17.94	8.01			41				1.48				1.46				1.43
Year ended 12/31/2003		14.39		.24		2.86			3.10			(.25	)		-			(.25	)		17.24	21.77			16				1.52				1.48				1.50
Period from 5/29/2002 to 12/31/2002		15.93		.19		(1.56	)		(1.37	)		(.17	)		-			(.17	)		14.39	(8.61	)		2				1.83		(5	)	1.48		(5	)	2.23		(5	)
Class R-2:
Year ended 12/31/2006		17.76		.32		1.60			1.92			(.32	)		(.41	)		(.73	)		18.95	10.90			1,079				1.45				1.39				1.77
Year ended 12/31/2005		17.94		.27		.15			.42			(.26	)		(.34	)		(.60	)		17.76	2.31			902				1.48				1.40				1.51
Year ended 12/31/2004		17.24		.25		1.11			1.36			(.22	)		(.44	)		(.66	)		17.94	8.05			648				1.55				1.42				1.45
Year ended 12/31/2003		14.39		.24		2.87			3.11			(.26	)		-			(.26	)		17.24	21.83			293				1.70				1.44				1.54
Period from 5/21/2002 to 12/31/2002		15.97		.20		(1.60	)		(1.40	)		(.18	)		-			(.18	)		14.39	(8.79	)		42				1.54		(5	)	1.45		(5	)	2.30		(5	)
Class R-3:
Year ended 12/31/2006		17.77		.41		1.60			2.01			(.41	)		(.41	)		(.82	)		18.96	11.44			3,059				.92				.90				2.26
Year ended 12/31/2005		17.95		.36		.15			.51			(.35	)		(.34	)		(.69	)		17.77	2.83			2,541				.91				.89				2.02
Year ended 12/31/2004		17.25		.34		1.10			1.44			(.30	)		(.44	)		(.74	)		17.95	8.52			1,828				.97				.97				1.94
Year ended 12/31/2003		14.40		.31		2.85			3.16			(.31	)		-			(.31	)		17.25	22.27			563				1.05				1.05				1.94
Period from 6/4/2002 to 12/31/2002		15.70		.22		(1.32	)		(1.10	)		(.20	)		-			(.20	)		14.40	(7.04	)		79				1.08		(5	)	1.06		(5	)	2.67		(5	)
Class R-4:
Year ended 12/31/2006		17.80		.47		1.60			2.07			(.46	)		(.41	)		(.87	)		19.00	11.78			1,724				.65				.62				2.53
Year ended 12/31/2005		17.99		.41		.13			.54			(.39	)		(.34	)		(.73	)		17.80	3.03			1,441				.65				.63				2.28
Year ended 12/31/2004		17.28		.39		1.11			1.50			(.35	)		(.44	)		(.79	)		17.99	8.89			830				.67				.66				2.23
Year ended 12/31/2003		14.41		.36		2.88			3.24			(.37	)		-			(.37	)		17.28	22.81			258				.68				.68				2.28
Period from 6/21/2002 to 12/31/2002		15.32		.24		(.93	)		(.69	)		(.22	)		-			(.22	)		14.41	(4.52	)		25				.75		(5	)	.71		(5	)	3.13		(5	)
Class R-5:
Year ended 12/31/2006		17.83		.52		1.61			2.13			(.52	)		(.41	)		(.93	)		19.03	12.08			411				.35				.33				2.82
Year ended 12/31/2005		18.01		.46		.15			.61			(.45	)		(.34	)		(.79	)		17.83	3.38			324				.36				.34				2.57
Year ended 12/31/2004		17.30		.44		1.12			1.56			(.41	)		(.44	)		(.85	)		18.01	9.21			246				.37				.36				2.51
Year ended 12/31/2003		14.43		.41		2.87			3.28			(.41	)		-			(.41	)		17.30	23.16			127				.38				.38				2.62
Period from 5/15/2002 to 12/31/2002		16.07		.30		(1.71	)		(1.41	)		(.23	)		-			(.23	)		14.43	(8.77	)		26				.39		(5	)	.39		(5	)	3.27		(5	)

	Year ended December 31
		2006		2005		2004		2003		2002

Portfolio turnover rate for all classes of shares		34	%	35	%	25	%	32	%	41	%

(1) Based on operations for the periods shown (unless otherwise noted) and, accordingly, may not be representative of a full year.

(2) Based on average shares outstanding.

(3) Total returns exclude all sales charges, including contingent deferred sales charges.

(4) The ratios in this column reflect the impact, if any, of certain reimbursements/waivers from CRMC.

During some of the periods shown, CRMC reduced fees for investment advisory services for all share classes. In addition, during the start-up period for the retirement plan

share classes (except Class R-5), CRMC agreed to pay a portion of the fees related to transfer agent services.

(5) Annualized.

(6) Amount less than $1 million.

See Notes to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

American Balanced Fund, Inc:

We have audited the accompanying statement of assets and liabilities of American Balanced Fund, Inc. (the “Fund”), including the investment portfolio, as of December 31, 2006, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2006, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of American Balanced Fund, Inc. as of December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Costa Mesa, California

February 12, 2007

Tax information unaudited

We are required to advise you within 60 days of the fund’s fiscal year-end regarding the federal tax status of certain distributions received by shareholders during such fiscal year. The fund hereby designates the following amounts for the fund’s fiscal year ended December 31, 2006:

Long-term capital gains	$	1,213,443,000
Qualified dividend income		771,983,000
Corporate dividends received deduction		624,575,000
U.S. government income that may be exempt from state taxation		117,388,000

Individual shareholders should refer to their Form 1099 or other tax information, which was mailed in January 2007, to determine the calendar year amounts to be included on their 2006 tax returns. Shareholders should consult their tax advisers.