N-CSR 1 gpb1.txt THE GEORGE PUTNAM FUND OF BOSTON The George Putnam Fund of Boston Item 1. Report to Stockholders: ------------------------------- The following is a copy of the report transmitted to stockholders pursuant to Rule 30e-1 under the Investment Company Act of 1940: ANNUAL REPORT ON PERFORMANCE AND OUTLOOK 7-31-04 [GRAPHIC OMITTED: SCALES] [SCALE LOGO OMITTED] From the Trustees [GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III] John A. Hill and George Putnam, III Dear Fellow Shareholder: Over the past several months, Putnam has introduced a number of reforms for the benefit of shareholders, including increasing the amount of disclosure for our funds. We would like to call your attention to new information now being included in shareholder reports. Following the performance tables in the Performance Summary, you can find expense and risk comparisons as well as portfolio turnover information for your fund. The expense information lets you estimate the amount you have paid for ongoing expenses such as management fees and distribution (or 12b-1) fees and lets you compare these expenses with the average expense level for your fund's peer group, as tracked by Lipper, an independent fund-rating company. The risk comparison information illustrates your fund's risk relative to similar funds as tracked by Morningstar, another independent fund-rating company. The portfolio turnover information explains how the rate at which a fund buys and sells portfolio securities might affect its return and its taxable distributions to shareholders. It also compares your fund's portfolio turnover rate with its industry peers, as measured by Lipper. We believe all of this information can be valuable to you and your financial advisor when you make decisions about your financial program. The period covered by this report was generally positive for the stock market, although mixed signals from the economy caused volatility in recent months. There were also significant variations in stock performance, with small companies and value-style stocks leading large companies and growth-style stocks. The George Putnam Fund of Boston generated positive returns for the year but lagged its all-equity benchmark, primarily because of its emphasis on high-quality stocks in a market that favored lower-quality securities. Asset allocation decisions were beneficial, and the bond portion of the fund helped reduce volatility and enhance returns. On the following pages the fund's management teams provide insight into their investment decisions, the market environment in which they were operating, and their outlook for the coming months. Respectfully yours, /S/ JOHN A. HILL /S/ GEORGE PUTNAM, III John A. Hill George Putnam, III Chairman of the Trustees President of the Funds September 15, 2004 Report from Fund Management Fund highlights * The George Putnam Fund of Boston's class A shares returned 9.77% at net asset value (NAV), and 3.45% at public offering price (POP) for the annual period ended July 31, 2004. * This balanced fund invests in stocks and bonds. During the period, it underperformed its all-stock benchmark, the S&P 500/Barra Value Index, which returned 17.33%. The fund lagged because of its focus on high-quality stocks, which underperformed higher-risk stocks. * For the same reason, the fund underperformed its custom blended benchmark, which comprises 60% S&P 500/Barra Value Index and 40% Lehman Aggregate Bond Index. The Blended Index returned 12.39%. * Based on performance at NAV, the fund outperformed its all-bond benchmark, the Lehman Aggregate Bond Index, which returned 4.84%. * Based on performance at NAV, the fund outperformed the average return for Lipper's Balanced Funds category, which was 9.23%. * See the Performance Summary beginning on page 7 for additional fund performance, comparative performance, and Lipper data. Performance commentary We are pleased to report that your fund generated positive returns in what was a challenging fiscal year. For much of the period, the market favored small-cap stocks and lower-quality stocks, neither of which is a focus of the fund. Also, the portfolio had less exposure to certain outperforming stocks than its official benchmark, the S&P 500/Barra Value Index, as well as its custom blended benchmark. However, volatility was smoothed and overall performance was helped by the portfolio's well-diversified bond positions and, in particular, by our asset allocation decisions throughout the year. For example, in the second quarter we reduced the bond exposure to 35% in anticipation of the Federal Reserve Board raising short-term interest rates on June 30. FUND PROFILE The George Putnam Fund of Boston seeks to provide a balanced investment composed of a well-diversified portfolio of stocks and bonds that produce both capital growth and current income. The fund targets attractively priced stocks of large, established, dividend-paying companies that are poised to experience positive change and improved financial performance. The bond portion is a diversified mix of investment-grade securities. The fund may be appropriate for investors seeking current income and long-term growth from a balanced investment. Market overview The equities market advanced in the last five months of 2003 and then moved within a narrow range for the remainder of the fund's fiscal year. Events in Iraq and concerns about global terrorism created a blanket of uncertainty that tempered investors' appetite for risk. Energy prices rose as the increase in global demand was met with tight supply and limited discovery of new resources. The price of a barrel of crude oil rose by 43% to nearly $44, quite high by historical measures. To manage inflationary pressures, the Federal Reserve Board raised the short-term interest rate by 25 basis points (one quarter of a percentage point) on the last day of June. On August 10, soon after the fund's 2005 fiscal year began, the Fed raised rates by another 25 basis points. The pace of corporate earnings growth in the United States has slowed, although it is still continuing at what we consider a healthy pace. Year-over-year comparisons of corporate earnings growth within the S&P 500 Index show a downward-sloping trend line, which we believe is likely to continue through 2004. ------------------------------------------------------------------------------- MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 7/31/04 ------------------------------------------------------------------------------- Equities ------------------------------------------------------------------------------- S&P 500/Barra Value Index (large-company value stocks) 17.33% ------------------------------------------------------------------------------- Russell 2000 Growth Index (small-company growth stocks) 11.32% ------------------------------------------------------------------------------- Russell 2000 Value Index (small-company value stocks) 22.83% ------------------------------------------------------------------------------- Russell 1000 Index (large-company stocks) 13.03% ------------------------------------------------------------------------------- Bonds ------------------------------------------------------------------------------- Lehman Aggregate Bond Index (broad bond market) 4.84% ------------------------------------------------------------------------------- JP Morgan Global High Yield Index (global high-yield corporate bonds) 13.83% ------------------------------------------------------------------------------- Lehman Government Bond Index (U.S. Treasury and agency securities) 3.86% ------------------------------------------------------------------------------- These indexes provide an overview of performance in different market sectors for the 12 months ended 7/31/04. ------------------------------------------------------------------------------- Strategy overview Throughout the year, we actively managed the portfolio's asset allocation between stocks and bonds and sought to earn a competitive return while adhering to the fund's conservative value-oriented investment style. For the equity portion of the portfolio, we continued to seek what we believed were the best opportunities in large-cap value stocks. We emphasized dividend-paying stocks, which, in our view, were priced attractively. While this positioning may have contributed to the fund's underperformance relative to the equity benchmark, we believe it will be rewarded over time as the market comes to prize dividends more highly. Dividend income often represents a larger portion of investors' total return in a slower-growth environment, which, in our opinion, appears to be taking shape. To take advantage of an improving economy and to boost income, last year we invested a small but significant portion of the fund in high-yield corporate bonds. This allocation was diversified across many issuers in many industries to minimize company-specific risk. The positions performed well and contributed meaningfully to the fund's returns. We gradually reduced the portfolio's high-yield bond exposure to zero by the end of the fiscal year. In May, when it appeared that a rise in short-term interest rates was imminent, we reduced the fund's bond exposure to 35% of total portfolio market value by buying Treasury futures, and took a 5% cash position, which reflected our view that stocks did not appear particularly attractive relative to bonds. In recent months, we shortened the duration of the fund's bond portfolio (reduced its interest-rate sensitivity), anticipating that the Federal Reserve Board would soon raise short-term interest rates, which it did, on June 30. At the end of the reporting period, the fund's duration was slightly shorter than that of the Lehman Aggregate Bond Index. [GRAPHIC OMITTED: horizontal bar chart PORTFOLIO COMPOSITION COMPARED] PORTFOLIO COMPOSITION COMPARED as of 1/31/04 as of 7/31/04 Common stocks 60.9% 60.5% U.S. government and agency securities 24.3% 26.1% Short-term investments 14.9% 8.1% Corporate bonds 10.2% 7.5% Collateralized mortgage obligations 5.0% 5.6% Asset-backed rsecurities 4.8% 5.4% Convertible preferred stocks 0.7% 0.6% Other 0.5% 0.3% Footnote reads: This chart shows how the fund's top weightings have changed over the last six months. Weightings are shown as a percentage of net assets. Holdings will vary over time. How fund holdings affected performance Tyco International was among the portfolio's top performers during the period. This Bermuda-based conglomerate operates many disparate manufacturing and service businesses around the world, of which undersea telecommunications systems, security and fire protection systems, health-care and specialty products, and electronic components manufacturing are just a few. Under the leadership of CEO Ed Breen, we believe this conglomerate has now moved beyond the accounting, balance sheet, and liquidity issues that were so troublesome in 2001 and 2002. Strong cash flow has helped to reduce debt while restructuring and divestitures have reduced the number of unprofitable operations. The company now has strong operating leverage and earnings. Its stock price rose nearly 70% during the year, and the fund still maintains a relatively large position. Shares of retailer J.C. Penney provided a strong return, indicating that under the leadership of CEO Allen Questrom the company had made significant progress overcoming its operating difficulties. The nationwide retailer vastly improved its efficiency and same-store sales results when it adopted a centralized inventory management system. Also, the company benefited from divesting itself of the unprofitable Eckerd Drug Store chain. Proceeds of the sale helped to reduce debt and a portion was returned to shareholders. The company's fundamentals have continued to improve and we have maintained a position. While our outlook for this company is favorable, we are less certain about the short-term prospects of retailers in general, because we believe consumer spending may decrease in coming months. [GRAPHIC OMITTED: TOP EQUITY HOLDINGS] TOP EQUITY HOLDINGS (Percent of fund's net assets as of 7/31/04) 1 Exxon Mobil Corp. (3.1%) Oil and gas 2 Citigroup, Inc. (2.8%) Banking 3 Bank of America Corp. (2.2%) Banking 4 Hewlett-Packard Co. (1.6) Computers 5 Altria Group, Inc. (1.5%) Tobacco 6 U.S. Bancorp (1.5%) Banking 7 JPMorgan Chase & Co. (1.4%) Investment banking/brokerage 8 Pfizer, Inc. (1.4%) Pharmaceuticals 9 Microsoft Corp. (1.4%) Software 10 Tyco International, Ltd. (1.3%) Conglomerates Footnote reads: The fund's holdings will change over time. Edison International, which owns California's second-largest electric utility, Southern California Edison, suffered as a result of the state's energy crisis. Poor financial performance led to elimination of the dividend, and the stock price fell precipitously. However, the Supreme Court of California approved a rescue plan that enabled the utility to generate free cash flow and repair its balance sheet. Thanks to more stable natural gas prices and a more favorable regulatory situation, it is making steady progress. Earnings have recovered dramatically, and Edison has resumed payment of dividends on both its common and preferred shares. The stock has done well. We recently took some profits, but we are maintaining a fairly large position. Shares of Boeing performed well during the period. In our opinion, investors overreacted when financially troubled major airlines cancelled orders for Boeing's commercial aircraft. However, a significant portion of Boeing's business is defense related, and this segment flourished during the period. Boeing's share price bounced back, and the portfolio still owns its position. Fund holdings that disappointed during the period included Union Pacific Railroad, which cut its workforce too severely and, as a result, sacrificed service quality at a time when demand for rail transport was strong. The high price of gasoline has made railroads more attractive than trucking. We believe the Union Pacific's troubles will be short-lived, but it has taken the company longer than we expected to resolve its service issues. The fund maintains a position. Hewlett-Packard (HP) underperformed our expectations during the period, even as it continued to find efficiencies from its merger with Compaq computer. We believe the merger was a positive move for HP that will ultimately reward shareholders. In our view, HP is poised to benefit from a steady increase in capital spending by cash-rich companies. The fund is retaining its position. In the midst of a slump in the health-care sector, King Pharmaceuticals lost patent protection for one of its most important products. This was made worse by the company's faltering earnings. Taken together, these factors caused the stock price to swoon. We have maintained a position and are monitoring the situation closely. Subsequent to the end of the reporting period, King Pharmaceuticals received an offer to be acquired by generic-drug firm, Mylan Laboratories. Please note that all holdings discussed in this report are subject to review in accordance with the fund's investment strategy and may vary in the future. The fund's management teams The fund is managed by the Putnam Large-Cap Value, Core Fixed-Income, and Global Asset Allocation teams. The members of the Large-Cap Value Team are Jeanne Mockard (Portfolio Leader), Mike Abata, Ronald Bukovac, Bartlett Geer, David King, Deborah Kuenstner, Cole Lannum, George Maris, Christopher Miller, and Hugh Mullin. The members of the Core Fixed-Income Team are Kevin Cronin (Portfolio Member), Carl Bell, Rob Bloemker, Andrea Burke, Steve Horner, D. William Kohli, Michael Salm, John Van Tassel, and David Waldman. The members of the Global Asset Allocation Team are Jeff Knight (Portfolio Member), Robert Kea, Bruce MacDonald, and Robert Schoen. The outlook for your fund The following commentary reflects anticipated developments that could affect your fund over the next six months, as well as your management teams' plans for responding to them. Looking forward, we believe the current very high oil prices are unsustainable and, barring any world crises, will recede to lower levels. This would be beneficial for markets as a whole. However, we think commodity prices and interest rates will continue to rise gradually. In our view, the pace of earnings growth will be more moderate, but companies will continue to benefit from productivity enhancements and an improving economy. We believe that corporations have largely completed their debt reduction efforts. Therefore we expect to see free cash flows used increasingly for stock buybacks, more generous dividend payouts, and capital expenditures on new and profitable endeavors. Accordingly, we are targeting stocks that we believe would benefit from increased capital spending. In contrast, we see less opportunity in consumer-oriented stocks this year. We expect consumer spending will fall off as a result of higher gas prices, lack of tax breaks, and decreased home-refinancing activity. Presently, we see compelling value in larger-cap stocks. The portfolio's average market capitalization may increase as we take advantage of some of these opportunities. We believe higher-quality, dividend-paying stocks are poised to outperform, which would be a positive for your fund. We feel it is always worthwhile to reiterate the role bonds play in this portfolio and to assure investors that we actively manage the fund's stock and bond allocations on a daily basis. Not only do bonds help to manage the portfolio's overall volatility, but throughout the bear market, they provided the bulk of the fund's returns. In the midst of a recovering economy, when equities simply pause, experience a correction, or respond to economic or market data such as a worse-than-expected unemployment report, bonds help to cushion the impact on the portfolio. The benefits of balanced investing have endured the test of time, and we continue to believe that an actively managed portfolio of stocks and bonds is one of the best ways to build wealth over the long term. The views expressed in this report are exclusively those of Putnam Management. They are not meant as investment advice. This fund may have a significant portion of its holdings in bonds. Mutual funds that invest in bonds are subject to certain risks, including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. The fund invests some of its assets in midsize companies. Such investments increase the risk of greater price fluctuations. Lower-rated bonds may offer higher yields in return for more risk. Performance summary This section shows your fund's performance during its fiscal year, which ended July 31, 2004. In accordance with regulatory requirements, we also include performance for the most current calendar quarter-end. Performance should always be considered in light of a fund's investment strategy. Data represents past performance. Past performance does not guarantee future results. More recent returns may be less or more than those shown. Investment return and principal value will fluctuate and you may have a gain or a loss when you sell your shares. For the most recent month-end performance, please visit www.putnaminvestments.com.
---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN FOR PERIODS ENDED 7/31/04 ---------------------------------------------------------------------------------------------------------------------------------- Class A Class B Class C Class M Class R (inception dates) (11/5/37) (4/27/92) (7/26/99) (12/1/94) (1/21/03) ---------------------------------------------------------------------------------------------------------------------------------- NAV POP NAV CDSC NAV CDSC NAV POP NAV ---------------------------------------------------------------------------------------------------------------------------------- 1 year 9.77% 3.45% 8.88% 3.88% 8.92% 7.92% 9.18% 5.39% 9.60% ---------------------------------------------------------------------------------------------------------------------------------- 5 years 14.09 7.52 9.82 8.00 9.83 9.83 11.31 7.45 12.71 Annual average 2.67 1.46 1.89 1.55 1.89 1.89 2.17 1.45 2.42 ---------------------------------------------------------------------------------------------------------------------------------- 10 years 140.53 126.78 123.14 123.14 123.01 123.01 128.72 120.64 134.75 Annual average 9.17 8.53 8.36 8.36 8.35 8.35 8.63 8.24 8.91 ---------------------------------------------------------------------------------------------------------------------------------- Annual average (life of fund) 9.40 9.30 8.36 8.36 8.58 8.58 8.63 8.58 9.13 ----------------------------------------------------------------------------------------------------------------------------------
Performance assumes reinvestment of distributions and does not account for taxes. Returns at public offering price (POP) for class A and M shares reflect a sales charge of 5.75% and 3.50%, respectively (which for class A shares does not reflect a reduction in sales charges that went into effect on January 28, 2004; if this reduction had been in place for all periods indicated, returns would have been higher). Class B share returns reflect the applicable contingent deferred sales charge (CDSC), which is 5% in the first year, declining to 1% in the sixth year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the first year that is eliminated thereafter. Class R share returns have no initial sales charge or CDSC. Performance for class B, C, M, and R shares before their inception is derived from the historical performance of class A shares, adjusted for the applicable sales charge (or CDSC) and higher operating expenses for such shares. A 2% short-term trading fee will be applied to shares exchanged or sold within 5 days of purchase.
---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN FOR PERIODS ENDED 6/30/04 (MOST RECENT CALENDAR QUARTER) ---------------------------------------------------------------------------------------------------------------------------------- Class A Class B Class C Class M Class R (inception dates) (11/5/37) (4/27/92) (7/26/99) (12/1/94) (1/21/03) ---------------------------------------------------------------------------------------------------------------------------------- NAV POP NAV CDSC NAV CDSC NAV POP NAV ---------------------------------------------------------------------------------------------------------------------------------- 1 year 10.48% 4.10% 9.60% 4.60% 9.63% 8.63% 9.89% 6.05% 10.25% ---------------------------------------------------------------------------------------------------------------------------------- 5 years 12.90 6.39 8.68 6.87 8.70 8.70 10.15 6.30 11.56 Annual average 2.46 1.25 1.68 1.34 1.68 1.68 1.95 1.23 2.21 ---------------------------------------------------------------------------------------------------------------------------------- 10 years 149.29 134.91 131.29 131.29 131.09 131.09 137.18 128.95 143.21 Annual average 9.56 8.92 8.75 8.75 8.74 8.74 9.02 8.64 9.29 ---------------------------------------------------------------------------------------------------------------------------------- Annual average (life of fund) 9.43 9.34 8.40 8.40 8.61 8.61 8.67 8.61 9.16 ----------------------------------------------------------------------------------------------------------------------------------
[GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT] CHANGE IN THE VALUE OF A $10,000 INVESTMENT Cumulative total return of a $10,000 investment, 7/31/94 to 7/31/04 S&P 500/ Fund's class A Barra Value Lehman Aggregate George Putnam Date shares at POP Index Bond Index Blended Index 7/31/94 9,425 10,000 10,000 10,000 7/31/95 11,100 12,140 11,011 11,683 7/31/96 12,737 14,028 11,621 13,032 7/31/97 16,752 20,703 12,872 17,170 7/31/98 18,349 23,465 13,884 19,144 7/31/99 19,878 27,094 14,223 21,184 7/31/00 18,866 27,056 15,078 21,766 7/31/01 21,292 28,131 16,993 23,474 7/31/02 19,120 20,913 18,273 20,371 7/31/03 20,660 23,528 19,263 22,541 7/31/04 $22,678 $27,606 $20,195 $25,333 Footnote reads: Past performance does not indicate future results. At the end of the same time period, a $10,000 investment in the fund's class B and class C shares would have been valued at $22,314 and $22,301, respectively, and no contingent deferred sales charges would apply. A $10,000 investment in the fund's class M shares would have been valued at $22,872 ($22,064 at public offering price). A $10,000 investment in the fund's class R shares would have been valued at $23,475. See first page of performance section for performance calculation method.
--------------------------------------------------------------------------------------------------------- COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/04 --------------------------------------------------------------------------------------------------------- S&P 500/ Lehman George Putnam Lipper Balanced Barra Value Aggregate Blended Funds category Index Bond Index Index average* --------------------------------------------------------------------------------------------------------- 1 year 17.33% 4.84% 12.39% 9.23% --------------------------------------------------------------------------------------------------------- 5 years 1.89 41.99 19.58 8.36 Annual average 0.38 7.26 3.64 1.49 --------------------------------------------------------------------------------------------------------- 10 years 176.06 101.95 153.33 123.17 Annual average 10.69 7.28 9.74 8.21 --------------------------------------------------------------------------------------------------------- Annual average (life of fund) --+ --+ --+ --+ ---------------------------------------------------------------------------------------------------------
Index and Lipper results should be compared to fund performance at net asset value. * Over the 1-, 5-, and 10-year periods ended 7/31/04, there were 540, 364, and 138 funds, respectively, in this Lipper category. + The benchmarks were not in existence at the time of the fund's inception. The S&P 500/Barra Value Index commenced 12/31/74. The Lehman Aggregate Bond Index commenced 12/31/75. The George Putnam Blended Index commenced 12/31/86. The Lipper Average commenced 12/31/59.
---------------------------------------------------------------------------------------------------------- PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 7/31/04 ---------------------------------------------------------------------------------------------------------- Class A Class B Class C Class M Class R ---------------------------------------------------------------------------------------------------------- Distributions (number) 4 4 4 4 4 ---------------------------------------------------------------------------------------------------------- Income $0.332 $0.205 $0.206 $0.250 $0.307 ---------------------------------------------------------------------------------------------------------- Capital gains -- -- -- -- -- ---------------------------------------------------------------------------------------------------------- Total $0.332 $0.205 $0.206 $0.250 $0.307 ---------------------------------------------------------------------------------------------------------- Share value: NAV POP NAV NAV NAV POP NAV ---------------------------------------------------------------------------------------------------------- 7/31/03 $15.72 $16.68 $15.56 $15.63 $15.57 $16.13 $15.70 ---------------------------------------------------------------------------------------------------------- 7/31/04 16.91 17.85* 16.73 16.81 16.74 17.35 16.89 ---------------------------------------------------------------------------------------------------------- Current return ---------------------------------------------------------------------------------------------------------- Current dividend rate 1 1.85% 1.75% 1.08% 1.09% 1.36% 1.31% 1.63% ---------------------------------------------------------------------------------------------------------- Current 30-day SEC yield 2 2.05 1.94 1.31 1.31 1.56 1.47 1.79 ----------------------------------------------------------------------------------------------------------
* Reflects a reduction in sales charges that took effect on January 28, 2004. 1 Most recent distribution, excluding capital gains, annualized and divided by NAV or POP at end of period. 2 Based only on investment income, calculated using SEC guidelines. Understanding your fund's expenses As a mutual fund investor, you pay ongoing expenses, such as management fees, distribution fees (12b-1 fees), and other expenses. Using the information below, you can estimate how these expenses affect your investment and compare them with the expenses of other funds. You may also pay one-time transaction expenses, including sales charges (loads) and redemption fees, which are not shown in this section and would have resulted in higher total expenses. For more information, see your fund's prospectus or talk to your financial advisor. Review your fund's expenses The table below shows the expenses you would have paid on a $1,000 investment in The George Putnam Fund of Boston from February 1, 2004, to July 31, 2004. It also shows how much a $1,000 investment would be worth at the close of the period, assuming actual returns and expenses. ----------------------------------------------------------------------------- EXPENSES AND VALUE OF A $1,000 INVESTMENT assuming actual returns for the 6 months ended 7/31/04 ----------------------------------------------------------------------------- Class A Class B Class C Class M Class R ----------------------------------------------------------------------------- Expenses paid per $1,000* $5.06 $8.80 $8.80 $7.55 $6.31 ----------------------------------------------------------------------------- Ending value (after expenses) $993.40 $988.90 $989.40 $990.20 $991.50 ----------------------------------------------------------------------------- * Expenses for each share class are calculated using the fund's annualized expense ratio for each class, which represents the ongoing expenses as a percentage of net assets for the six months ended 7/31/04. The expense ratio may differ for each share class (see the table at the bottom of the next page). Expenses are calculated by multiplying the expense ratio by the average account value for the period; then multiplying the result by the number of days in the period; and then dividing that result by the number of days in the year. Estimate the expenses you paid To estimate the ongoing expenses you paid for the six months ended July 31, 2004, use the calculation method below. To find the value of your investment on February 1, 2004, go to www.putnaminvestments.com and log on to your account. Click on the "Transaction History" tab in your Daily Statement and enter 02/01/2004 in both the "from" and "to" fields. Alternatively, call Putnam at 1-800-225-1581. ------------------------------------------------------------------------------ HOW TO CALCULATE THE EXPENSES YOU PAID ------------------------------------------------------------------------------ Total Value of your Expenses paid expenses investment on 2/1/04 [DIV] $1,000 X per $1,000 = paid ------------------------------------------------------------------------------ Example Based on a $10,000 investment in class A shares of your fund. ------------------------------------------------------------------------------ $10,000 [DIV] $1,000 X $5.06 (see table above) = $50.60 ------------------------------------------------------------------------------ Comparing your fund's expenses with those of other funds Using the SEC's method to compare expenses The Securities and Exchange Commission (SEC) has established guidelines to help investors assess fund expenses. Per these guidelines, the table below shows your fund's expenses based on a $1,000 investment, assuming a hypothetical 5% annualized return. You can use this information to compare the ongoing expenses (but not transaction expenses or total costs) of investing in the fund with those of other funds. All mutual fund shareholder reports will provide this information to help you make this comparison. Please note that you cannot use this information to estimate your actual ending account balance and expenses paid during the period. ------------------------------------------------------------------------------ EXPENSES AND VALUE OF A $1,000 INVESTMENT assuming a hypothetical 5% annualized return for the 6 months ended 7/31/04 ------------------------------------------------------------------------------ Class A Class B Class C Class M Class R ------------------------------------------------------------------------------ Expenses paid per $1,000* $5.13 $8.92 $8.92 $7.66 $6.39 ------------------------------------------------------------------------------ Ending value (after expenses) $1,020.06 $1,016.29 $1,016.29 $1,017.55 $1,018.80 ------------------------------------------------------------------------------ * Expenses for each share class are calculated using the fund's annualized expense ratio for each class, which represents the ongoing expenses as a percentage of net assets for the six months ended 7/31/04. The expense ratio may differ for each share class (see the table at the bottom of this page). Expenses are calculated by multiplying the expense ratio by the average account value for the period; then multiplying the result by the number of days in the period; and then dividing that result by the number of days in the year. Using industry averages to compare expenses You can also compare your fund's expenses with industry averages, as determined by Lipper, an independent fund-rating agency that ranks funds relative to others that Lipper considers to have similar investment styles or objectives. The expense ratio for each share class shown below indicates how much of your fund's net assets have been used to pay ongoing expenses during the period. ------------------------------------------------------------------------------ EXPENSE RATIO COMPARISONS USING ANNUALIZED DATA ------------------------------------------------------------------------------ Class A Class B Class C Class M Class R ------------------------------------------------------------------------------ Your fund's annualized expense ratio+ 1.01% 1.76% 1.76% 1.51% 1.26% ------------------------------------------------------------------------------ Average annualized expense ratio for Lipper peer group++ 1.32% 2.07% 2.07% 2.07% 1.57% ------------------------------------------------------------------------------ + For the fund's most recent fiscal half year; may differ from expense ratios based on one-year data in the financial highlights. ++ For class A shares, expenses shown represent the average of the expenses of front-end load funds viewed by Lipper as having the same investment classification or objective as the fund, calculated in accordance with Lipper's standard reporting methodology for comparing expenses within a given universe. All Lipper data is for the most recent fiscal periods available as of 6/30/04. For class B, C, M and R shares, Putnam has adjusted the Lipper total expense average to reflect higher 12b-1 fees incurred by these classes of shares. The peer group may include funds that are significantly larger or smaller than the fund, which may limit the comparability of the fund's expenses to the Lipper average. Understanding your fund's portfolio turnover Putnam funds are actively managed by teams of experts who buy and sell securities based on intensive analysis of companies, industries, economies, and markets. Portfolio turnover is a measure of how often a fund's managers buy and sell securities for your fund. A portfolio turnover of 100%, for example, means that the managers sold and replaced securities valued at 100% of a fund's assets within a one-year period. Funds with high turnover may be more likely to generate capital gains and dividends that must be distributed to shareholders as taxable income. High turnover may also cause a fund to pay more brokerage commissions and other transaction costs, which may detract from performance. Funds that invest in bonds may have higher turnover than funds that invest only in stocks. Short-term bond funds tend to have higher turnover than longer-term bond funds, because shorter-term bonds will mature or be sold more frequently than longer-term bonds. You can use the table below to compare your fund's turnover with the average turnover for funds in its Lipper category. ------------------------------------------------------------------------------ TURNOVER COMPARISONS percentage of holdings that change every year ------------------------------------------------------------------------------ 2004 2003 2002 2001 2000 ------------------------------------------------------------------------------ The George Putnam Fund of Boston 166% 121% 132% 333% 141% ------------------------------------------------------------------------------ Lipper Balanced Funds category average 87% 82% 83% 85% 83% ------------------------------------------------------------------------------ Turnover data for the fund is calculated based on the fund's fiscal-year period, which ends on July 31. Turnover data for the fund's Lipper category is calculated based on the average of the turnover of each fund in the category for its fiscal year ended during the indicated calendar year, with the exception of 2004 data. Lipper data for 2004 represents the average turnover for each fund in the category for its most recent fiscal year and for which data is available as of 6/30/04. Risk comparison As part of new initiatives to enhance disclosure, we are including a risk comparison to help you understand how your fund compares with other funds. The comparison utilizes a risk measure developed by Morningstar, an independent fund-rating agency. This risk measure is referred to as the fund's Overall Morningstar Risk. [GRAPHIC OMITTED: chart MORNINGSTAR [REGISTRATION MARK] RISK] MORNINGSTAR [REGISTRATION MARK] RISK Fund's Overall Morningstar Risk 0.88 U.S. stock fund average 3.75 0% INCREASING RISK 100% Your fund's Overall Morningstar Risk is shown alongside that of the average fund in its broad asset class, as determined by Morningstar. The risk bar broadens the comparison by translating the fund's Overall Morningstar Risk into a percentile, which is based on the fund's ranking among all funds rated by Morningstar as of 6/30/04. A higher Overall Morningstar Risk generally indicates that a fund's monthly returns have varied more widely. Morningstar determines a fund's Overall Morningstar Risk by assessing variations in the fund's monthly returns -- with an emphasis on downside variations -- over 3-, 5-, and 10-year periods, if available. Those measures are weighted and averaged to produce the fund's Overall Morningstar Risk. The information shown is provided for the fund's class A shares only; information for other classes may vary. Overall Morningstar Risk is based on historical data and does not indicate future results. Morningstar does not purport to measure the risk associated with a current investment in a fund, either on an absolute basis or on a relative basis. Low Overall Morningstar Risk does not mean that you cannot lose money on an investment in a fund. Copyright 2004 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Terms and definitions Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Net asset value (NAV) is the price, or value, of one share of a mutual fund, without a sales charge. NAVs fluctuate with market conditions. NAV is calculated by dividing the net assets of each class of shares by the number of outstanding shares in the class. Public offering price (POP) is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. POP performance figures shown here assume the 5.75% maximum sales charge for class A shares (since reduced to 5.25%) and 3.50% for class M shares. Contingent deferred sales charge (CDSC) is a charge applied at the time of the redemption of class B or C shares and assumes redemption at the end of the period. Your fund's class B CDSC declines from a 5% maximum during the first year to 1% during the sixth year. After the sixth year, the CDSC no longer applies. The CDSC for class C shares is 1% for one year after purchase. Class A shares are generally subject to an initial sales charge and no sales charge on redemption (except on certain redemptions of shares bought without an initial sales charge). Class B shares may be subject to a sales charge upon redemption. Class C shares are not subject to an initial sales charge and are subject to a contingent deferred sales charge only if the shares are redeemed during the first year. Class M shares have a lower initial sales charge and a higher 12b-1 fee than class A shares and no sales charge on redemption (except on certain redemptions of shares bought without an initial sales charge). Class R shares are not subject to an initial sales charge or CDSC and are available only to certain defined contribution plans. Comparative indexes George Putnam Blended Index is an unmanaged index administered by Putnam Management, 60% of which is the Standard and Poor's 500/Barra Value Index and 40% of which is the Lehman Aggregate Bond Index. JP Morgan Global High Yield Index is an unmanaged index used to mirror the investable universe of the U.S. dollar global high-yield corporate debt market of both developed and emerging markets. Lehman Aggregate Bond Index is an unmanaged index used as a general measure of U.S. fixed-income securities. Lehman Government Bond Index is an unmanaged index of U.S. Treasury and agency securities. Russell 1000 Index is an unmanaged index of the largest 1,000 companies in the Russell 3000 Index. Russell 2000 Growth Index is an unmanaged index of those companies in the Russell 2000 Index chosen for their growth orientation. Russell 2000 Value Index is an unmanaged index of those companies in the Russell 2000 Index chosen for their value orientation. S&P 500/Barra Value Index is an unmanaged index of capitalization-weighted stocks chosen for their value orientation. Indexes assume reinvestment of all distributions and do not account for fees. Securities and performance of a fund and an index will differ. You cannot invest directly in an index. Lipper is a third-party industry ranking entity that ranks funds (without sales charges) with similar current investment styles or objectives as determined by Lipper. Lipper category averages reflect performance trends for funds within a category and are based on results at net asset value. Putnam's policy on confidentiality In order to conduct business with our shareholders, we must obtain certain personal information such as account holders' addresses, telephone numbers, Social Security numbers, and the names of their financial advisors. We use this information to assign an account number and to help us maintain accurate records of transactions and account balances. It is our policy to protect the confidentiality of your information, whether or not you currently own shares of our funds, and in particular, not to sell information about you or your accounts to outside marketing firms. We have safeguards in place designed to prevent unauthorized access to our computer systems and procedures to protect personal information from unauthorized use. Under certain circumstances, we share this information with outside vendors who provide services to us, such as mailing and proxy solicitation. In those cases, the service providers enter into confidentiality agreements with us, and we provide only the information necessary to process transactions and perform other services related to your account. We may also share this information with our Putnam affiliates to service your account or provide you with information about other Putnam products or services. It is also our policy to share account information with your financial advisor, if you've listed one on your Putnam account. If you would like clarification about our confidentiality policies or have any questions or concerns, please don't hesitate to contact us at 1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time. Proxy voting Putnam is committed to managing our mutual funds in the best interests of our shareholders. The Putnam funds' proxy voting guidelines and procedures, as well as information regarding how your fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2004, are available on the Putnam Individual Investor Web site, www.putnaminvestments.com/individual, and on the SEC's Web site, www.sec.gov. If you have questions about finding forms on the SEC's Web site, you may call the SEC at 1-800-SEC-0330. You may also obtain the Putnam funds' proxy voting guidelines and procedures by calling Putnam's Shareholder Services at 1-800-225-1581. Fund portfolio holdings For periods ending on or after July 9, 2004, the fund will file a complete schedule of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Shareholders may obtain the fund's Forms N-Q on the SEC's Web site at www.sec.gov. In addition, the fund's Forms N-Q may be reviewed and copied at the SEC's public reference room in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for information about the SEC's Web site or the operation of the public reference room. A guide to the financial statements These sections of the report, as well as the accompanying Notes, preceded by the Report of Independent Registered Public Accounting Firm, constitute the fund's financial statements. The fund's portfolio lists all the fund's investments and their values as of the last day of the reporting period. Holdings are organized by asset type and industry sector, country, or state to show areas of concentration and diversification. Statement of assets and liabilities shows how the fund's net assets and share price are determined. All investment and noninvestment assets are added together. Any unpaid expenses and other liabilities are subtracted from this total. The result is divided by the number of shares to determine the net asset value per share, which is calculated separately for each class of shares. (For funds with preferred shares, the amount subtracted from total assets includes the net assets allocated to remarketed preferred shares.) Statement of operations shows the fund's net investment gain or loss. This is done by first adding up all the fund's earnings -- from dividends and interest income -- and subtracting its operating expenses to determine net investment income (or loss). Then, any net gain or loss the fund realized on the sales of its holdings -- as well as any unrealized gains or losses over the period -- is added to or subtracted from the net investment result to determine the fund's net gain or loss for the fiscal year. Statement of changes in net assets shows how the fund's net assets were affected by the fund's net investment gain or loss, by distributions to shareholders, and by changes in the number of the fund's shares. It lists distributions and their sources (net investment income or realized capital gains) over the current reporting period and the most recent fiscal year-end. The distributions listed here may not match the sources listed in the Statement of operations because the distributions are determined on a tax basis and may be paid in a different period from the one in which they were earned. Financial highlights provide an overview of the fund's investment results, per-share distributions, expense ratios, net investment income ratios, and portfolio turnover in one summary table, reflecting the five most recent reporting periods. In a semiannual report, the highlight table also includes the current reporting period. For open-end funds, a separate table is provided for each share class. Report of Independent Registered Public Accounting Firm To the Trustees and Shareholders of The George Putnam Fund of Boston In our opinion, the accompanying statement of assets and liabilities, including the fund's portfolio and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The George Putnam Fund of Boston (the "fund") at July 31, 2004, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments owned at July 31, 2004, by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts September 14, 2004 The fund's portfolio July 31, 2004 Common stocks (60.5%) (a) Number of shares Value Aerospace and Defense (1.6%) ------------------------------------------------------------------------------- 579,300 Boeing Co. (The) $29,399,475 684,700 Lockheed Martin Corp. 36,282,253 452,500 Northrop Grumman Corp. (S) 23,801,500 -------------- 89,483,228 Airlines (0.1%) ------------------------------------------------------------------------------- 334,800 Southwest Airlines Co. 4,844,556 Automotive (0.2%) ------------------------------------------------------------------------------- 88,800 BorgWarner, Inc. (S) 4,190,472 166,000 Lear Corp. 9,151,580 -------------- 13,342,052 Banking (9.8%) ------------------------------------------------------------------------------- 1,431,460 Bank of America Corp. 121,688,415 1,095,300 Bank of New York Co., Inc. (The) 31,467,969 3,473,520 Citigroup, Inc. (SEG) 153,147,497 117,800 Compass Bancshares, Inc. 5,193,802 828,600 State Street Corp. 35,472,366 2,886,460 U.S. Bancorp 81,686,818 1,027,800 Wachovia Corp. (S) 45,541,818 86,800 Washington Mutual, Inc. 3,367,840 1,123,930 Wells Fargo & Co. 64,524,821 58,150 Zions Bancorp. 3,518,075 -------------- 545,609,421 Beverage (0.6%) ------------------------------------------------------------------------------- 363,700 Coca-Cola Co. (The) 15,951,882 715,100 Coca-Cola Enterprises, Inc. 14,588,040 -------------- 30,539,922 Biotechnology (0.2%) ------------------------------------------------------------------------------- 168,100 Amgen, Inc. (NON) 9,561,528 Broadcasting (0.5%) ------------------------------------------------------------------------------- 756,200 Viacom, Inc. Class B 25,400,758 Building Materials (0.8%) ------------------------------------------------------------------------------- 1,493,700 Masco Corp. (S) 45,169,488 Cable Television (0.5%) ------------------------------------------------------------------------------- 254,700 Echostar Communications Corp. Class A (NON) 7,060,284 1,966,400 Liberty Media Corp. Class A (NON) 16,675,072 19,664 Liberty Media International, Inc. (NON) (S) 118,181 98,320 Liberty Media International, Inc. Class A (NON) (S) 3,065,618 -------------- 26,919,155 Capital Goods (0.1%) ------------------------------------------------------------------------------- 101,200 Eaton Corp. 6,541,568 Chemicals (1.5%) ------------------------------------------------------------------------------- 157,100 Avery Dennison Corp. (S) 9,515,547 1,006,700 Dow Chemical Co. (The) 40,157,263 267,700 Engelhard Corp. 7,870,380 408,100 PPG Industries, Inc. 24,057,495 -------------- 81,600,685 Commercial and Consumer Services (0.3%) ------------------------------------------------------------------------------- 2,477,860 Service Corp. International (NON) 15,734,411 Communications Equipment (0.1%) ------------------------------------------------------------------------------- 341,600 Cisco Systems, Inc. (NON) 7,125,776 Computers (2.6%) ------------------------------------------------------------------------------- 250,500 Dell, Inc. (NON) 8,885,235 4,422,681 Hewlett-Packard Co. 89,117,022 352,230 IBM Corp. 30,668,666 81,000 Lexmark International, Inc. (NON) 7,168,500 1,362,800 Sun Microsystems, Inc. (NON) 5,383,060 -------------- 141,222,483 Conglomerates (2.9%) ------------------------------------------------------------------------------- 8,987 Berkshire Hathaway, Inc. Class B (NON) 26,008,378 1,400,700 General Electric Co. 46,573,275 468,200 Honeywell International, Inc. 17,609,002 2,249,660 Tyco International, Ltd. (Bermuda) (S) 69,739,460 -------------- 159,930,115 Consumer Finance (0.6%) ------------------------------------------------------------------------------- 78,600 Capital One Financial Corp. 5,448,552 91,350 Countrywide Financial Corp. 6,586,335 792,000 MBNA Corp. 19,554,480 246,000 Providian Financial Corp. (NON) 3,404,640 -------------- 34,994,007 Consumer Goods (0.7%) ------------------------------------------------------------------------------- 311,400 Colgate-Palmolive Co. 16,566,480 461,900 Procter & Gamble Co. 24,088,085 -------------- 40,654,565 Electric Utilities (1.9%) ------------------------------------------------------------------------------- 97,050 Dominion Resources, Inc. (S) 6,158,793 40,792 DPL, Inc. (S) 813,800 895,000 Edison International 23,986,000 185,000 Entergy Corp. 10,637,500 622,900 Exelon Corp. 21,739,210 989,950 PG&E Corp. (NON) (S) 28,253,173 132,580 Progress Energy, Inc. 5,586,921 90,200 Public Service Enterprise Group, Inc. 3,517,800 146,600 Wisconsin Energy Corp. 4,713,190 -------------- 105,406,387 Electrical Equipment (0.1%) ------------------------------------------------------------------------------- 135,300 Emerson Electric Co. 8,212,710 Electronics (1.2%) ------------------------------------------------------------------------------- 246,852 Celestica, Inc. (Canada) (NON) (S) 4,233,512 864,930 Intel Corp. 21,086,993 685,000 Micron Technology, Inc. (NON) (S) 9,268,050 1,246,700 Motorola, Inc. 19,859,931 1,358,289 Solectron Corp. (NON) (S) 7,470,590 383,800 Vishay Intertechnology, Inc. (NON) (S) 5,948,900 -------------- 67,867,976 Energy (0.6%) ------------------------------------------------------------------------------- 405,500 GlobalSantaFe Corp. (Cayman Islands) (S) 11,110,700 553,300 Halliburton Co. (S) 17,567,275 180,000 Varco International, Inc. (NON) (S) 4,350,600 -------------- 33,028,575 Financial (2.6%) ------------------------------------------------------------------------------- 75,950 CIT Group, Inc. (S) 2,640,022 899,890 Fannie Mae 63,856,194 1,065,340 Freddie Mac (S) 68,512,015 161,700 PMI Group, Inc. (The) (S) 6,666,891 -------------- 141,675,122 Food (0.7%) ------------------------------------------------------------------------------- 251,900 Dean Foods Co. (NON) 9,315,262 423,800 General Mills, Inc. (S) 19,028,620 313,200 H.J. Heinz Co. 11,553,948 330 PSF Group Holdings, Inc. 144A Class A 495,570 -------------- 40,393,400 Forest Products and Packaging (0.6%) ------------------------------------------------------------------------------- 352,450 Boise Cascade Corp. 11,366,513 792,900 Smurfit-Stone Container Corp. (NON) (S) 14,755,869 346,950 Sonoco Products Co. 8,989,475 -------------- 35,111,857 Gaming & Lottery (0.2%) ------------------------------------------------------------------------------- 240,300 Harrah's Entertainment, Inc. 11,171,547 Health Care Services (0.8%) ------------------------------------------------------------------------------- 315,500 Cardinal Health, Inc. 14,039,750 174,800 CIGNA Corp. (S) 10,839,348 211,500 Express Scripts, Inc. Class A (NON) 13,874,400 207,700 Medco Health Solutions, Inc. (NON) 6,293,310 -------------- 45,046,808 Homebuilding (0.3%) ------------------------------------------------------------------------------- 200,900 Lennar Corp. (S) 8,574,412 175,500 Pulte Homes, Inc. (S) 9,587,565 -------------- 18,161,977 Household Furniture and Appliances (0.5%) ------------------------------------------------------------------------------- 467,700 Whirlpool Corp. (S) 29,203,188 Insurance (2.9%) ------------------------------------------------------------------------------- 1,092,800 ACE, Ltd. (Bermuda) 44,356,752 346,250 American International Group, Inc. 24,462,563 164,300 AON Corp. (S) 4,344,092 194,500 Axis Capital Holdings, Ltd. (Bermuda) (S) 4,998,650 86,900 MBIA, Inc. 4,690,862 188,500 Old Republic International Corp. 4,390,165 250,500 Radian Group, Inc. 11,528,010 737,256 St. Paul Travelers Cos., Inc. (The) 27,330,080 69,600 Torchmark Corp. 3,638,688 93,800 Willis Group Holdings, Ltd. (Bermuda) 3,264,240 416,525 XL Capital, Ltd. Class A (Bermuda) (S) 29,439,987 -------------- 162,444,089 Investment Banking/Brokerage (2.0%) ------------------------------------------------------------------------------- 2,151,300 JPMorgan Chase & Co. 80,308,029 97,600 Lehman Brothers Holdings, Inc. 6,841,760 278,800 Merrill Lynch & Co., Inc. 13,861,936 152,600 Morgan Stanley Dean Witter & Co. 7,527,758 -------------- 108,539,483 Lodging/Tourism (0.2%) ------------------------------------------------------------------------------- 721,200 Hilton Hotels Corp. (S) 12,858,996 Machinery (0.8%) ------------------------------------------------------------------------------- 608,550 Ingersoll-Rand Co. Class A (Bermuda) 41,801,300 Manufacturing (0.1%) ------------------------------------------------------------------------------- 206,450 Dover Corp. 8,191,936 Media (0.7%) ------------------------------------------------------------------------------- 538,500 Fox Entertainment Group, Inc. Class A (NON) 14,555,655 1,100,300 Walt Disney Co. (The) 25,405,927 -------------- 39,961,582 Medical Technology (0.3%) ------------------------------------------------------------------------------- 52,500 Baxter International, Inc. 1,578,675 94,400 C.R. Bard, Inc. (S) 5,210,880 112,400 Guidant Corp. 6,217,968 120,100 Medtronic, Inc. 5,965,367 -------------- 18,972,890 Metals (0.2%) ------------------------------------------------------------------------------- 405,000 Alcoa, Inc. 12,972,150 Office Equipment & Supplies (0.1%) ------------------------------------------------------------------------------- 142,500 Pitney Bowes, Inc. 6,013,500 Oil & Gas (5.7%) ------------------------------------------------------------------------------- 182,200 Amerada Hess Corp. (S) 15,186,370 400,500 BP PLC ADR (United Kingdom) 22,572,180 682,600 Chevron Texaco Corp. 65,290,690 3,723,392 ExxonMobil Corp. 172,393,050 190,200 Marathon Oil Corp. 7,164,834 217,400 Noble Corp. (Cayman Islands) (NON) 8,417,728 454,900 Unocal Corp. (S) 17,631,924 79,900 Valero Energy Corp. 5,986,108 -------------- 314,642,884 Pharmaceuticals (3.7%) ------------------------------------------------------------------------------- 1,414,400 Abbott Laboratories 55,656,640 260,900 Bristol-Myers Squibb Co. 5,974,610 190,400 Forest Laboratories, Inc. (NON) 9,575,216 746,700 Johnson & Johnson 41,270,109 1,255,700 King Pharmaceuticals, Inc. (NON) 14,176,853 2,435,640 Pfizer, Inc. 77,843,054 98,900 Wyeth 3,501,060 -------------- 207,997,542 Photography/Imaging (0.5%) ------------------------------------------------------------------------------- 1,834,648 Xerox Corp. (NON) (S) 25,428,221 Railroads (1.2%) ------------------------------------------------------------------------------- 467,650 Canadian National Railway Co. (Canada) 21,058,280 822,000 Union Pacific Corp. 46,311,480 -------------- 67,369,760 Regional Bells (2.0%) ------------------------------------------------------------------------------- 390,750 BellSouth Corp. 10,585,418 1,297,804 SBC Communications, Inc. 32,886,353 1,692,100 Verizon Communications, Inc. 65,213,534 -------------- 108,685,305 Restaurants (0.7%) ------------------------------------------------------------------------------- 385,500 Darden Restaurants, Inc. (S) 8,222,715 1,146,200 McDonald's Corp. 31,520,500 -------------- 39,743,215 Retail (2.2%) ------------------------------------------------------------------------------- 112,100 AutoZone, Inc. (NON) (S) 8,654,120 629,700 Home Depot, Inc. (The) 21,233,484 176,700 JC Penney Co., Inc. (Holding Co.) (S) 7,068,000 511,600 Limited Brands 10,457,104 411,800 Lowe's Cos., Inc. 20,062,896 1,725,900 Office Depot, Inc. (NON) (S) 28,304,760 1,714,700 Rite Aid Corp. (NON) (S) 8,419,177 286,300 Wal-Mart Stores, Inc. 15,176,763 -------------- 119,376,304 Software (1.6%) ------------------------------------------------------------------------------- 2,707,800 Microsoft Corp. 77,063,988 1,307,700 Oracle Corp. (NON) 13,743,927 -------------- 90,807,915 Technology Services (0.5%) ------------------------------------------------------------------------------- 335,000 Automatic Data Processing, Inc. 14,063,300 122,800 First Data Corp. 5,478,108 261,700 Fiserv, Inc. (NON) 8,965,842 -------------- 28,507,250 Textiles (0.2%) ------------------------------------------------------------------------------- 343,500 Liz Claiborne, Inc. 12,431,265 Tobacco (1.7%) ------------------------------------------------------------------------------- 1,776,348 Altria Group, Inc. 84,554,165 117,300 R.J. Reynolds Tobacco Holdings, Inc. 8,439,735 -------------- 92,993,900 Toys (0.4%) ------------------------------------------------------------------------------- 1,282,700 Mattel, Inc. (S) 22,472,904 Waste Management (0.2%) ------------------------------------------------------------------------------- 322,300 Republic Services, Inc. 9,217,780 -------------- Total Common stocks (cost $2,778,184,822) $3,365,383,436 U.S. government and agency mortgage obligations (26.1%) (a) Principal amount Value U.S. Government Guaranteed Mortgage Obligations (--%) ------------------------------------------------------------------------------- Government National Mortgage Association Pass-Through Certificates $750,171 7s, with due dates from August 15, 2029 to October 15, 2031 $802,719 5,409 5s, July 15, 2033 5,311 -------------- 808,030 U.S. Government and Agency Mortgage Obligations (26.1%) ------------------------------------------------------------------------------- Federal Home Loan Mortgage Corporation 423,454 8 3/4s, with due dates from May 1, 2009 to June 1, 2009 451,839 Federal National Mortgage Association Pass-Through Certificates 24,371 11s, with due dates from October 1, 2015 to March 1, 2016 27,603 563,354 9s, with due dates from January 1, 2027 to July 1, 2032 611,339 6,905 8 3/4s, July 1, 2009 7,400 2,490,332 8s, with due dates from August 1, 2026 to July 1, 2033 2,696,290 3,124,032 7 1/2s, with due dates from October 1, 2025 to July 1, 2033 3,348,751 74,327,184 7s, with due dates from July 1, 2025 to April 1, 2034 78,641,727 2,693,754 7s, with due dates from November 1, 2007 to January 1, 2015 2,863,795 117,300,000 7s, TBA, August 15, 2034 123,916,447 434,655,970 6 1/2s, with due dates from June 1, 2023 to July 1, 2034 454,565,914 549,724 6 1/2s, with due dates from July 1, 2010 to May 1, 2011 582,602 11,000,000 6 1/2s, TBA, August 15, 2034 11,478,672 60,012 6s, December 1, 2033 61,643 367,079 6s, with due dates from December 1, 2013 to May 1, 2017 384,457 113,400,000 6s, TBA, September 15, 2034 115,880,625 117,300,000 6s, TBA, August 15, 2034 120,333,308 175,800,000 5 1/2s, TBA, August 15, 2034 176,198,292 612,589 5s, with due dates from March 1, 2019 to June 1, 2019 617,996 75,200,000 5s, TBA, August 15, 2019 75,722,873 102,331,220 4 1/2s, with due dates from August 1, 2033 to July 1, 2034 96,727,106 195,000,000 4 1/2s, TBA, August 15, 2034 184,137,896 41,759 4s, June 1, 2019 40,088 -------------- 1,449,296,663 -------------- Total U.S. Government and Agency Mortgage Obligations (cost $1,441,987,170) $1,450,104,693 U.S. government agency obligations (0.8%) (a) Principal amount Value ------------------------------------------------------------------------------- $38,135,000 Fannie Mae 7 1/4s, January 15, 2010 $43,627,779 -------------- Total U.S. Government Agency Obligations (cost $43,062,595) $43,627,779 U.S. treasury obligations (0.1%) (a) Principal amount Value ------------------------------------------------------------------------------- $1,450,000 U.S. Treasury Bonds 4 1/4s, November 15, 2013 $1,427,570 3,005,000 U.S. Treasury Notes 3 1/4s, August 15, 2008 2,982,932 -------------- Total U.S. Treasury Obligations (cost $4,552,170) $4,410,502 Corporate bonds and notes (7.5%) (a) Principal amount Value Aerospace and Defense (0.2%) ------------------------------------------------------------------------------- $685,000 Boeing Co. (The) debs. 6 7/8s, 2043 $710,567 625,000 Litton Industries, Inc. sr. notes 8s, 2009 720,225 1,270,000 Lockheed Martin Corp. bonds 8 1/2s, 2029 1,615,346 1,115,000 Northrop Grumman Corp. company guaranty 7 1/8s, 2011 1,254,183 205,000 Raytheon Co. bonds 5 3/8s, 2013 206,992 625,000 Raytheon Co. debs. 7s, 2028 674,834 2,275,000 Raytheon Co. debs. 6s, 2010 2,432,774 1,145,000 Raytheon Co. notes 8.3s, 2010 1,350,708 830,000 Raytheon Co. notes 4.850s, 2011 830,465 -------------- 9,796,094 Airlines (0.1%) ------------------------------------------------------------------------------- 4,215,000 Continental Airlines, Inc. pass-through certificates Ser. 98-2, 6.32s, 2008 4,082,638 Automotive (0.3%) ------------------------------------------------------------------------------- 2,525,000 DaimlerChrysler NA Holding Corp. company guaranty 7.2s, 2009 2,774,301 2,785,000 DaimlerChrysler NA Holding Corp. company guaranty Ser. D, 3.4s, 2004 2,798,389 2,120,000 Ford Motor Co. debs. 9.98s, 2047 2,506,590 3,835,000 Ford Motor Credit Corp. notes 7 3/8s, 2009 4,114,533 1,295,000 General Motors Acceptance Corp. bonds 8s, 2031 1,314,992 755,000 General Motors Corp. debs. 8 3/8s, 2033 (S) 784,361 520,000 Lear Corp. company guaranty Ser. B, 8.11s, 2009 595,315 -------------- 14,888,481 Banking (1.1%) ------------------------------------------------------------------------------- 1,055,000 Allfirst Financial Inc. sub. notes 7.2s, 2007 1,155,703 705,000 Bank of America Corp. sub. notes 7.4s, 2011 803,653 405,000 Bank of New York Co., Inc. (The) sr. sub. notes FRN 3.4s, 2013 391,840 2,355,000 Bank One Corp. sub. notes 7.6s, 2007 2,602,753 7,190,000 Bank United Corp. notes Ser. A, 8s, 2009 8,311,273 790,000 Barclays Bank PLC 144A FRN 6.86s, 2049 (United Kingdom) 828,942 545,000 Capital One Bank notes 6 1/2s, 2013 569,321 385,000 Capital One Bank notes Ser. BKNT, 4 7/8s, 2008 392,138 470,000 Capital One Bank sr. notes Ser. BKNT, 6.7s, 2008 507,807 1,925,000 Citigroup, Inc. debs. 6 5/8s, 2028 2,044,548 2,865,000 Citigroup, Inc. sub. notes 7 1/4s, 2010 3,256,379 1,035,000 Countrywide Capital III company guaranty Ser. B, 8.05s, 2027 1,164,767 375,000 Credit Suisse First Boston USA, Inc. notes 6 1/8s, 2011 398,429 1,620,000 First Chicago NBD Corp. sub. notes 6 3/8s, 2009 1,786,387 3,815,000 First Union National Bank sub. notes 7.8s, 2010 4,435,273 935,000 Fleet Capital Trust V bank guaranty FRN 2.534s, 2028 943,213 2,300,000 HSBC Capital Funding LP 144A bank guaranty FRB 9.547s, 2049 (Jersey) 2,828,775 1,455,000 Merita Bank, Ltd. sub. notes 6 1/2s, 2006 (Finland) 1,532,738 1,095,000 National City Bank bonds 4 5/8s, 2013 1,050,500 985,000 National City Bank sub. notes Ser. BKNT, 6 1/4s, 2011 1,083,714 5,540,000 NB Capital Trust IV company guaranty 8 1/4s, 2027 6,228,456 815,000 Nordea Bank Finland PLC sub. notes 6 1/2s, 2009 (Finland) 891,224 2,345,000 PNC Funding Corp. bonds 5 1/4s, 2015 2,286,391 1,200,000 Popular North America, Inc. sub. notes 3 7/8s, 2008 1,180,468 80,000 Rabobank Capital Funding II 144A bonds 5.26s, 2049 78,229 400,000 Royal Bank of Scotland Group PLC FRB 7.648s, 2049 (United Kingdom) 455,090 2,035,000 Sovereign Bancorp, Inc. sr. notes 10 1/2s, 2006 2,327,714 1,270,000 Suncorp-Metway, Ltd. 144A FRB 3 1/2s, 2013 (Australia) 1,229,564 3,020,000 UBS AG/Jersey Branch FRN 4.55s, 2008 (United Kingdom) 3,080,400 1,345,000 UBS Preferred Funding Trust I FRB 8.622s, 2049 1,600,268 1,830,000 Wachovia Corp. sub. notes 5 1/4s, 2014 1,808,534 1,010,000 Westpac Capital Trust III 144A sub. notes FRN 5.819s, 2049 1,017,676 -------------- 58,272,167 Beverage (0.1%) ------------------------------------------------------------------------------- 760,000 Diageo PLC company guaranty 8s, 2022 (United Kingdom) 944,878 215,000 Grand Metro Investment Corp. company guaranty 9s, 2011 274,625 1,380,000 Miller Brewing Co. 144A notes 5 1/2s, 2013 1,396,754 -------------- 2,616,257 Broadcasting (0.1%) ------------------------------------------------------------------------------- 1,355,000 Chancellor Media Corp. company guaranty 8s, 2008 1,522,729 365,000 News America Holdings, Inc. company guaranty 9 1/4s, 2013 461,536 75,000 News America, Inc. company guaranty 4 3/4s, 2010 75,253 1,420,000 News America, Inc. sr. notes 6 5/8s, 2008 1,540,017 -------------- 3,599,535 Cable Television (0.3%) ------------------------------------------------------------------------------- 525,000 AT&T Broadband Corp. company guaranty 8 3/8s, 2013 622,410 1,305,000 Cox Communications, Inc. notes 7 3/4s, 2010 1,489,145 945,000 Cox Enterprises, Inc. 144A notes 8s, 2007 1,042,608 3,585,000 Jones Intercable, Inc. sr. notes 7 5/8s, 2008 3,962,199 615,000 Liberty Media Corp. bonds 7 7/8s, 2009 689,025 1,330,000 Liberty Media Corp. sr. notes 5.7s, 2013 1,308,624 1,400,000 Rogers Cable Inc. sec. notes 6 1/4s, 2013 (Canada) 1,348,679 1,115,000 TCI Communications, Inc. debs. 8 3/4s, 2015 1,357,171 2,175,000 TCI Communications, Inc. debs. 7 7/8s, 2013 2,500,904 1,380,000 USA Interactive notes 7s, 2013 1,500,823 -------------- 15,821,588 Chemicals (0.2%) ------------------------------------------------------------------------------- 1,270,000 Avery Dennison Corp. notes 4 7/8s, 2013 1,254,834 1,315,000 Dow Chemical Co. (The) debs. 8.55s, 2009 1,540,517 685,000 Dow Chemical Co. (The) notes 5 3/4s, 2009 721,806 1,510,000 Dow Chemical Co. (The) Pass Through Trust 144A company guaranty 4.027s, 2009 1,437,695 685,000 Eastman Chemical Co. notes 3 1/4s, 2008 660,074 450,000 ICI Wilmington Inc. company guaranty 5 5/8s, 2013 444,985 1,150,000 ICI Wilmington Inc. company guaranty 4 3/8s, 2008 1,137,049 1,442,000 ISP Chemco, Inc. company guaranty Ser. B, 10 1/4s, 2011 1,607,830 680,000 Millennium America, Inc. company guaranty 9 1/4s, 2008 734,400 730,000 Monsanto Co. notes 4s, 2008 726,399 240,000 Monsanto Co. sr. notes 7 3/8s, 2012 273,908 465,000 Praxair, Inc. notes 6 3/8s, 2012 509,391 -------------- 11,048,888 Coal (--%) ------------------------------------------------------------------------------- 1,505,000 Arch Western Finance, LLC 144A sr. notes 7 1/4s, 2013 1,527,575 Computers (--%) ------------------------------------------------------------------------------- 695,000 SunGard Data Systems, Inc. bonds 4 7/8s, 2014 665,774 Conglomerates (0.1%) ------------------------------------------------------------------------------- 1,775,000 Textron Financial Corp. notes 6s, 2009 1,923,887 1,375,000 Tyco International Group SA company guaranty 7s, 2028 (Luxembourg) 1,476,853 1,770,000 Tyco International Group SA company guaranty 6 3/4s, 2011 (Luxembourg) 1,940,816 -------------- 5,341,556 Consumer Finance (0.2%) ------------------------------------------------------------------------------- 445,000 Countrywide Home Loans, Inc. company guaranty Ser. K, 5 5/8s, 2007 467,267 1,710,000 Countrywide Home Loans, Inc. company guaranty Ser. MTNL, 4s, 2011 1,613,525 1,505,000 Household Finance Corp. notes 8s, 2010 1,755,074 4,025,000 Household Finance Corp. notes 7s, 2012 4,485,850 1,820,000 Household Finance Corp. notes 6 3/4s, 2011 2,004,939 -------------- 10,326,655 Consumer Goods (--%) ------------------------------------------------------------------------------- 1,385,000 Johnson (SC) & Son, Inc. 144A bonds 5 3/4s, 2033 1,318,016 Containers (--%) ------------------------------------------------------------------------------- 845,000 Sealed Air Corp. 144A bonds 6 7/8s, 2033 862,658 800,000 Sealed Air Corp. 144A notes 5 5/8s, 2013 796,917 -------------- 1,659,575 Electric Utilities (0.8%) ------------------------------------------------------------------------------- 485,000 AEP Texas Central Co. sr. notes Ser. D, 5 1/2s, 2013 490,384 275,000 American Electric Power Co., Inc. notes Ser. A, 6 1/8s, 2006 288,837 400,000 American Electric Power Co., Inc. sr. notes Ser. C, 5 3/8s, 2010 411,773 475,000 Appalachian Power Co. notes 3.6s, 2008 464,932 4,845,000 Arizona Public Services Co. sr. notes 6 3/4s, 2006 5,179,121 480,000 Carolina Power & Light Co. 1st mtge. 6 1/8s, 2033 478,021 1,290,000 Cleveland Electric Illuminating Co. (The) 144A sr. notes 5.65s, 2013 1,289,103 2,410,000 Consumers Energy Co. 1st mtge. Ser. B, 5 3/8s, 2013 2,398,063 735,000 Consumers Energy Co. bonds 6 1/4s, 2006 772,095 975,000 Dayton Power & Light Co. (The) 144A 1st mtge. 5 1/8s, 2013 943,545 775,000 Dominion Resources, Inc. sr. notes 8 1/8s, 2010 902,440 1,155,000 Duke Capital Corp. sr. notes Ser. A, 6 1/4s, 2005 1,192,084 1,945,000 Exelon Generation Co., LLC sr. notes 6.95s, 2011 (S) 2,147,949 1,055,000 Florida Power & Light Co. 1st mtge. 5.95s, 2033 1,058,541 490,000 Florida Power & Light Co. 1st mtge. 5 5/8s, 2034 469,537 515,000 Indianapolis Power & Light 144A 1st mtge. 6.3s, 2013 535,370 2,185,000 Monongahela Power Co. 1st mtge. 5s, 2006 2,233,496 1,040,000 Nevada Power Co. 2nd mtge. 9s, 2013 1,159,600 1,355,000 NiSource Finance Corp. company guaranty 7 7/8s, 2010 1,569,300 1,880,000 Northern States Power Co. mtge. Ser. B, 8s, 2012 2,254,062 820,000 Oncor Electric Delivery Co. sec. notes 7 1/4s, 2033 924,207 1,365,000 Oncor Electric Delivery Co. sec. notes 6 3/8s, 2012 1,476,308 1,015,000 Pacific Gas & Electric Co. 1st mtge. 6.05s, 2034 976,313 550,000 Pacific Gas & Electric Co. 1st mtge. 4.8s, 2014 527,206 370,000 Pacific Gas & Electric Co. 1st. mtge. 4.2s, 2011 355,194 1,020,000 PacifiCorp Sinking Fund 1st mtge. 5.45s, 2013 1,043,762 470,000 Panhandle Eastern Pipe Line sr. notes 4.8s, 2008 470,999 825,000 Pepco Holdings, Inc. notes 5 1/2s, 2007 853,879 585,000 Potomac Edison Co. 1st mtge. 8s, 2024 588,575 1,396,633 Power Receivable Finance LLC 144A sr. notes 6.29s, 2012 1,429,468 605,000 PP&L Capital Funding, Inc. company guaranty Ser. D, 8 3/8s, 2007 675,799 165,000 Progress Energy, Inc. sr. notes 6.05s, 2007 174,222 570,000 Public Service Company of New Mexico sr. notes 4.4s, 2008 569,109 1,465,000 Public Service Electric & Gas Co. 1st mtge. FRN 6 3/8s, 2008 1,575,147 375,000 Public Services Co. of Colorado sr. notes Ser. A, 6 7/8s, 2009 416,007 510,000 Rochester Gas & Electric notes 6 3/8s, 2033 521,471 770,000 Southern California Edison Co. 1st mtge. 6s, 2034 754,855 985,000 Southern California Edison Co. 1st mtge. 5s, 2014 972,869 660,000 Tampa Electric Co. notes 6 7/8s, 2012 722,713 90,000 Westar Energy, Inc. 1st mtge. 6s, 2014 93,216 730,000 Western Energy, Inc. sr. notes Ser. (a), 7 1/8s, 2009 791,383 560,000 Western Resources, Inc. 1st mtge. 7 7/8s, 2007 617,207 921,000 Western Resources, Inc. sr. notes 9 3/4s, 2007 1,049,241 -------------- 43,817,403 Electronics (--%) ------------------------------------------------------------------------------- 640,000 Jabil Circuit, Inc. sr. notes 5 7/8s, 2010 662,376 390,000 Motorola, Inc. notes 7 5/8s, 2010 443,971 -------------- 1,106,347 Energy (--%) ------------------------------------------------------------------------------- 548,000 BRL Universal Equipment sec. notes 8 7/8s, 2008 584,990 1,180,000 Schlumberger Technology Corp. 144A notes 6 1/2s, 2012 1,294,808 -------------- 1,879,798 Financial (1.1%) ------------------------------------------------------------------------------- 1,310,000 Ace INA Holdings, Inc. company guaranty 8.3s, 2006 1,435,270 4,774,000 ASIF Global Financing 144A notes 3.85s, 2007 4,798,777 1,525,000 Associates Corp. NA sr. notes Ser. 8, 7 3/8s, 2007 1,675,609 3,165,000 Associates First Capital Corp. debs. 6.95s, 2018 3,536,919 3,770,000 Associates First Capital Corp. sr. notes 6 1/4s, 2008 4,073,466 4,065,000 Associates First Capital Corp. sub. debs. 8.15s, 2009 4,715,640 1,250,000 AXA Financial, Inc. sr. notes 7 3/4s, 2010 1,442,116 1,015,000 CIT Group, Inc. sr. notes 7 3/4s, 2012 1,167,149 2,105,000 CIT Group, Inc. sr. notes 5s, 2014 2,020,836 1,545,000 Executive Risk Capital Trust company guaranty Class B, 8.675s, 2027 1,726,922 1,300,000 Fund American Cos. Inc. notes 5 7/8s, 2013 1,305,739 565,000 General Electric Capital Corp. notes Ser. A, 6 3/4s, 2032 616,909 830,000 General Electric Capital Corp. notes Ser. A, 6s, 2012 886,127 1,340,000 General Electric Capital Corp. notes Ser. MTN, 3 1/4s, 2009 1,284,098 955,000 General Electric Capital Corp. notes Ser. MTNA, 6 1/8s, 2011 1,029,306 600,000 Greenpoint Capital Trust I company guaranty 9.1s, 2027 678,595 890,000 Hartford Financial Services Group, Inc. (The) sr. notes 7.9s, 2010 1,037,259 760,000 Heller Financial, Inc. notes 7 3/8s, 2009 867,472 1,585,000 International Lease Finance Corp. notes 4.35s, 2008 1,592,595 1,470,000 John Hancock Financial Services, Inc. sr. notes 5 5/8s, 2008 1,554,078 765,000 John Hancock Global Funding II 144A notes 7.9s, 2010 891,627 8,205,000 Liberty Mutual Insurance 144A notes 7.697s, 2097 8,297,306 680,000 Metlife, Inc. sr. notes 6 1/8s, 2011 727,180 465,000 Nationwide Financial Services, Inc. notes 5 5/8s, 2015 468,760 375,000 Nationwide Mutual Insurance Co. 144A notes 8 1/4s, 2031 447,367 710,000 OneAmerica Financial Partners, Inc. 144A bonds 7s, 2033 709,020 1,515,000 Principal Life Global Funding I 144A sec. notes 5 1/4s, 2013 1,517,382 865,000 Protective Life Corp. notes 4.3s, 2013 812,425 585,000 Prudential Financial, Inc. notes Ser. MTNB, 4 1/2s, 2013 549,255 870,000 Prudential Insurance Co. 144A notes 8.3s, 2025 1,063,043 1,585,000 St. Paul Co., Inc. (The) sr. notes 5 3/4s, 2007 1,662,119 935,000 State Street Capital Trust II FRN 1 3/4s, 2008 940,743 1,100,000 Steers Delaware Business Trust 144A notes 5.565s, 2005 1,155,000 2,115,000 Sun Life Canada Capital Trust 144A company guaranty 8.526s, 2049 2,356,044 565,000 Travelers Property Casualty Corp. sr. notes 3 3/4s, 2008 562,247 620,000 XL Capital Europe PLC company guaranty 6 1/2s, 2012 (United Kingdom) 668,088 -------------- 60,272,488 Food (0.3%) ------------------------------------------------------------------------------- 1,465,000 Archer Daniels Midland Co. debs. 8 1/8s, 2012 1,771,104 2,070,000 Cadbury Schweppes US Finance LLC 144A notes 3 7/8s, 2008 2,042,933 1,130,000 ConAgra Foods, Inc. notes 7 7/8s, 2010 1,317,642 690,000 ConAgra Foods, Inc. notes 6 3/4s, 2011 761,678 1,375,000 Hormel Foods Corp. notes 6 5/8s, 2011 1,519,686 5,245,000 Kraft Foods, Inc. notes 4 5/8s, 2006 5,378,071 390,000 Tyson Foods, Inc. notes 8 1/4s, 2011 451,741 150,000 Tyson Foods, Inc. notes 7 1/4s, 2006 160,994 -------------- 13,403,849 Forest Products and Packaging (--%) ------------------------------------------------------------------------------- 745,000 Georgia-Pacific Corp. sr. notes 8s, 2014 826,950 590,000 Weyerhaeuser Co. debs. 7 1/8s, 2023 628,510 705,000 Weyerhaeuser Co. notes 6 3/4s, 2012 770,796 -------------- 2,226,256 Gaming & Lottery (--%) ------------------------------------------------------------------------------- 810,000 GTECH Holdings Corp. notes 4 3/4s, 2010 800,458 535,000 Park Place Entertainment Corp. sr. notes 7 1/2s, 2009 583,150 505,000 Park Place Entertainment Corp. sr. sub. notes 9 3/8s, 2007 553,606 -------------- 1,937,214 Health Care (--%) ------------------------------------------------------------------------------- 695,000 HCA, Inc. sr. notes 7 7/8s, 2011 769,654 495,000 HCA, Inc. sr. notes 6.95s, 2012 521,479 -------------- 1,291,133 Homebuilding (0.1%) ------------------------------------------------------------------------------- 1,350,000 D.R. Horton, Inc. company guaranty 8s, 2009 1,505,250 490,000 D.R. Horton, Inc. sr. notes 6 7/8s, 2013 508,375 840,000 D.R. Horton, Inc. sr. notes 5 7/8s, 2013 817,950 1,867,000 K. Hovnanian Enterprises, Inc. sr. notes 6 1/2s, 2014 1,768,983 20,000 Lennar Corp. company guaranty Ser. B, 9.95s, 2010 22,225 973,000 Lennar Corp. sr. notes 7 5/8s, 2009 1,085,041 1,990,000 Pulte Homes, Inc. company guaranty 7 7/8s, 2011 2,261,052 -------------- 7,968,876 Investment Banking/Brokerage (0.2%) ------------------------------------------------------------------------------- 2,365,000 Bear Stearns Cos., Inc. (The) notes 7.8s, 2007 (S) 2,638,555 770,000 Goldman Sachs Group, Inc. (The) notes 4 3/4s, 2013 731,759 2,700,000 JPMorgan Chase & Co. sub. notes 5 3/4s, 2013 2,776,475 540,000 Merrill Lynch & Co., Inc. notes Ser. B, 4 3/4s, 2009 546,749 1,365,000 Morgan Stanley Tracers notes 4 1/4s, 2010 1,336,110 -------------- 8,029,648 Lodging/Tourism (0.1%) ------------------------------------------------------------------------------- 2,015,000 Cendant Corp. notes 6 1/4s, 2010 2,171,177 1,015,000 Cendant Corp. sr. notes 7 3/8s, 2013 1,145,198 900,000 Hilton Hotels Corp. notes 8 1/4s, 2011 1,014,750 465,000 Hilton Hotels Corp. notes 7 5/8s, 2012 513,244 621,000 Starwood Hotels & Resorts Worldwide, Inc. company guaranty 7 3/8s, 2007 655,155 -------------- 5,499,524 Machinery (--%) ------------------------------------------------------------------------------- 1,720,000 Kennametal, Inc. sr. notes 7.2s, 2012 1,833,744 Manufacturing (--%) ------------------------------------------------------------------------------- 265,000 Bunge Ltd. Finance Corp. company guaranty 7.8s, 2012 304,217 905,000 Bunge Ltd. Finance Corp. company guaranty 4 3/8s, 2008 897,935 420,000 Bunge Ltd. Finance Corp. notes 5 7/8s, 2013 425,801 -------------- 1,627,953 Media (0.1%) ------------------------------------------------------------------------------- 960,000 AOL Time Warner, Inc. bonds 7 5/8s, 2031 1,056,152 4,090,000 Time Warner, Inc. debs. 9 1/8s, 2013 5,029,142 915,000 Time Warner, Inc. notes 8.18s, 2007 1,023,513 -------------- 7,108,807 Metals (0.1%) ------------------------------------------------------------------------------- 2,750,000 Alcoa, Inc. notes 6 1/2s, 2011 3,024,604 1,205,000 Falconbridge, Ltd. bonds 5 3/8s, 2015 (Canada) 1,152,395 575,000 WMC Finance USA company guaranty 6 1/4s, 2033 (Australia) 557,412 995,000 WMC Finance USA company guaranty 5 1/8s, 2013 (Australia) 967,450 -------------- 5,701,861 Natural Gas Utilities (0.1%) ------------------------------------------------------------------------------- 260,000 CenterPoint Energy Resources Corp. debs. 8.9s, 2006 291,529 1,060,000 CenterPoint Energy Resources Corp. notes 7 3/4s, 2011 1,208,283 2,440,000 Duke Energy Field Services, LLC notes 7 7/8s, 2010 2,810,202 1,860,000 Kinder Morgan, Inc. sr. notes 6 1/2s, 2012 1,982,539 545,000 National Fuel Gas Co. notes 5 1/4s, 2013 541,853 -------------- 6,834,406 Oil & Gas (0.3%) ------------------------------------------------------------------------------- 750,000 Amerada Hess Corp. notes 7 3/8s, 2009 821,282 290,000 Amerada Hess Corp. unsub notes 6.65s, 2011 310,995 935,000 Anadarko Finance Co. company guaranty Ser. B, 6 3/4s, 2011 1,035,445 3,130,000 Conoco Funding Co. company guaranty 6.35s, 2011 3,423,657 1,230,000 Kerr-McGee Corp. company guaranty 6 7/8s, 2011 1,336,222 1,140,000 MidAmerican Energy Holdings Co. sr. notes 4 5/8s, 2007 1,156,466 245,000 MidAmerican Energy Holdings Co. sr. notes 3 1/2s, 2008 237,379 1,780,000 Motiva Enterprises, LLC 144A sr. notes 5.2s, 2012 1,788,248 1,140,000 Ocean Energy, Inc. company guaranty 7 1/4s, 2011 1,260,527 820,000 Petro-Canada, Ltd. bonds 5.35s, 2033 (Canada) 711,344 1,525,000 Phillips Petroleum Co. notes 8 3/4s, 2010 1,852,648 320,000 XTO Energy, Inc. sr. notes 7 1/2s, 2012 364,372 -------------- 14,298,585 Pharmaceuticals (0.1%) ------------------------------------------------------------------------------- 2,935,000 American Home Products Corp. notes 6.95s, 2011 3,150,497 845,000 Bayer Corp. 144A FRB 6.2s, 2008 903,339 860,000 Hospira, Inc. 144A notes 4.95s, 2009 869,574 -------------- 4,923,410 Power Producers (--%) ------------------------------------------------------------------------------- 175,300 York Power Funding 144A notes 12s, 2007 (Cayman Islands) (In default) (NON) 18 Railroads (0.1%) ------------------------------------------------------------------------------- 955,000 CSX Corp. notes 6 3/4s, 2011 1,042,760 385,000 CSX Corp. notes 6 1/4s, 2008 412,910 2,310,000 Norfolk Southern Corp. notes 7.05s, 2037 2,496,006 115,000 Norfolk Southern Corp. sr. notes 6 3/4s, 2011 126,599 1,025,000 Union Pacific Corp. notes 7 3/8s, 2009 1,158,562 150,000 Union Pacific Corp. notes 6.65s, 2011 164,785 885,000 Union Pacific Corp. notes 6 5/8s, 2008 958,303 -------------- 6,359,925 Real Estate (0.4%) ------------------------------------------------------------------------------- 3,535,000 Archstone-Smith Operating Trust notes 5s, 2007 (R) 3,635,063 650,000 CenterPoint Properties Trust notes Ser. MTN, 4 3/4s, 2010 640,978 660,000 Colonial Properties Trust notes 6 1/4s, 2014 672,454 1,320,000 Developers Diversified Realty Corp. notes 4 5/8s, 2010 1,291,229 1,835,000 Equity One, Inc. company guaranty 3 7/8s, 2009 1,755,243 2,850,000 Franchise Finance Corp. of America sr. notes 8 3/4s, 2010 (R) 3,518,445 670,000 Heritage Property Investment Trust 144A notes 5 1/8s, 2014 633,955 1,690,000 Hospitality Properties Trust notes 6 3/4s, 2013 (R) 1,770,888 530,000 HRPT Properties Trust bonds 5 3/4s, 2014 (R) 518,651 525,000 HRPT Properties Trust notes 6 1/4s, 2016 527,572 200,000 iStar Financial, Inc. sr. notes 8 3/4s, 2008 (R) 225,000 1,050,000 iStar Financial, Inc. sr. notes 7s, 2008 (R) 1,113,000 680,000 iStar Financial, Inc. sr. notes 6s, 2010 (R) 681,700 1,375,000 Kimco Realty Corp. notes Ser. MTNC, 5.19s, 2013 1,353,413 445,000 Rouse Co. (The) notes 5 3/8s, 2013 435,924 510,000 Rouse Co. (The) notes 3 5/8s, 2009 488,498 2,575,000 Tanger Properties, Ltd. company guaranty 7 7/8s, 2004 2,590,943 1,045,000 Vornado Realty Trust notes 4 3/4s, 2010 1,021,998 -------------- 22,874,954 Regional Bells (0.1%) ------------------------------------------------------------------------------- 200,000 Ameritech Capital Funding company guaranty 6 1/4s, 2009 213,955 1,020,000 Bellsouth Capital Funding notes 7 3/4s, 2010 1,168,773 440,000 SBC Communications, Inc. notes 5 7/8s, 2012 456,988 3,130,000 Verizon New England Inc. sr. notes 6 1/2s, 2011 3,373,793 670,000 Verizon Virginia Inc. debs. Ser. A, 4 5/8s, 2013 633,308 -------------- 5,846,817 Restaurants (--%) ------------------------------------------------------------------------------- 580,000 Yum! Brands, Inc. sr. notes 8 7/8s, 2011 705,345 Retail (0.2%) ------------------------------------------------------------------------------- 1,770,029 CVS Corp. 144A pass-through certificates 6.117s, 2013 1,855,753 805,000 Federated Department Stores, Inc. sr. notes 6 5/8s, 2011 881,395 1,385,000 Fred Meyer, Inc. Holding Co. company guaranty 7.45s, 2008 1,539,482 1,333,000 JC Penney Co., Inc. notes 7.6s, 2007 1,439,640 275,000 Kroger Co. company guaranty 6 3/4s, 2012 300,774 540,000 May Department Stores Co. 144A notes 5 3/4s, 2014 541,669 725,000 Nordstrom, Inc. debs. 6.95s, 2028 769,492 1,190,000 RadioShack Corp. notes 7 3/8s, 2011 1,350,863 -------------- 8,679,068 Shipping (--%) ------------------------------------------------------------------------------- 1,275,000 FedEx Corp. 144A notes 2.65s, 2007 1,244,325 Software (--%) ------------------------------------------------------------------------------- 460,000 Computer Associates International, Inc. sr. notes Ser. B, 6 3/8s, 2005 472,190 Technology Services (--%) ------------------------------------------------------------------------------- 645,000 Fiserv, Inc. notes 4s, 2008 644,407 Telecommunications (0.6%) ------------------------------------------------------------------------------- 715,000 AT&T Wireless Services, Inc. sr. notes 8 3/4s, 2031 889,968 3,125,000 AT&T Wireless Services, Inc. sr. notes 7 7/8s, 2011 (S) 3,591,694 1,465,000 Cingular Wireless, LLC sr. notes 5 5/8s, 2006 1,534,022 1,405,000 Deutsche Telekom International Finance BV bonds 8 1/2s, 2010 (Netherlands) 1,657,137 1,235,000 Deutsche Telekom International Finance BV company guaranty 8 3/4s, 2030 (Netherlands) 1,529,189 1,540,000 Deutsche Telekom International Finance BV notes 5 1/4s, 2013 (Netherlands) 1,525,225 540,000 France Telecom notes 9 1/2s, 2031 (France) 687,550 3,345,000 France Telecom notes 7 3/4s, 2011 (France) 3,902,839 1,085,000 Koninklijke (Royal) KPN NV sr. unsub. notes 8 3/8s, 2030 (Netherlands) 1,335,109 2,455,000 Sprint Capital Corp. company guaranty 7 5/8s, 2011 2,756,938 1,445,000 Sprint Capital Corp. company guaranty 6 7/8s, 2028 1,438,038 1,090,000 Sprint Capital Corp. company guaranty 6 1/8s, 2008 1,154,654 1,460,000 Telecom Italia Capital 144A company guaranty 6 3/8s, 2033 (Luxembourg) (S) 1,436,993 1,165,000 Telecom Italia Capital 144A company guaranty 5 1/4s, 2013 (Luxembourg) 1,142,409 1,610,000 Telecom Italia Capital 144A company guaranty 4s, 2008 (Luxembourg) (S) 1,591,152 775,000 United States Cellular Corp. notes 6.7s, 2033 742,852 3,315,000 Verizon Wireless, Inc. notes 5 3/8s, 2006 3,474,180 725,000 Vodafone Group PLC notes 7 7/8s, 2030 (United Kingdom) 870,605 1,005,000 Vodafone Group PLC notes 7 3/4s, 2010 (United Kingdom) 1,158,975 -------------- 32,419,529 Telephone (--%) ------------------------------------------------------------------------------- 1,655,000 Telefonica Europe BV company guaranty 7 3/4s, 2010 (Netherlands) 1,912,243 Waste Management (0.1%) ------------------------------------------------------------------------------- 1,540,000 Allied Waste North America, Inc. sr. notes 7 7/8s, 2013 1,611,225 1,245,000 Waste Management, Inc. sr. notes 7 3/8s, 2010 1,409,469 -------------- 3,020,694 -------------- Total Corporate bonds and notes (cost $405,788,978) $414,905,616 Collateralized mortgage obligations (5.6%) (a) Principal amount Value ------------------------------------------------------------------------------- $129,400,242 Banc of America Large Loan 144A Ser. 03-BBA2, Class X1A, Interest only (IO), 0.806s, 2015 $1,036,213 12,069,695 Bayview Commercial Asset Trust 144A Ser. 04-2, IO, 0.72s, 2034 958,334 1,931,000 Bear Stearns Alternate Trust Ser. 04-9, Class 1A1, 5.16s, 2007 1,967,206 Bear Stearns Commercial Mortgage Securitization Corp. 144A 1,070,000 Ser. 04-ESA, Class K, 3.88s, 2016 1,070,000 793,000 Ser. 04-HS2A, Class G, 2.78s, 2016 793,000 2,827,124 Chase Commercial Mortgage Securities Corp. Ser. 00-1, Class A1, 7.656s, 2032 2,885,985 4,937,500 Commercial Mortgage Acceptance Corp. Ser. 97-ML1, Class A3, 6.57s, 2030 5,271,553 9,485,000 Criimi Mae Commercial Mortgage Trust Ser. 98-C1, Class A2, 7s, 2011 10,119,309 3,385,000 Criimi Mae Commercial Mortgage Trust 144A Ser. 98-C1, Class B, 7s, 2033 3,509,960 1,124,000 CS First Boston Mortgage Securities Corp. 144A FRB Ser. 03-TF2A, Class L, 5.38s, 2014 1,116,083 444,188 DLJ Commercial Mortgage Corp. Ser. 98-CF2, Class B3, 6.04s, 2031 437,872 1,000,000 DLJ Mortgage Acceptance Corp. 144A Ser. 97-CF1, Class A3, 7.76s, 2030 1,087,197 Fannie Mae 4,113,692 Ser. 346, Class 2, IO, 5.5s, 2033 1,077,273 3,236,690 Ser. 04-10, Class QC, 22.8s, 2031 3,863,166 1,825,908 Ser. 02-36, Class SJ, 16 1/2s, 2029 2,000,975 4,117,530 Ser. 04-4, Class QM, 11.3s, 2033 3,998,507 Fannie Mae 16,421,707 Ser. 329, Class 2, IO, 5.5s, 2033 4,110,567 1,434,452 Ser. 04-T3, Class PT1, 10.368s, 2044 1,651,037 653,470 Ser. 03-W6, Class PT1, 9.437s, 2042 742,007 4,319,501 Ser. 04-W8, Class 3A, 7 1/2s, 2044 4,658,528 152,001 Ser. 04-T3, Class 1A4, 7 1/2s, 2044 163,932 5,408,019 Ser. 04-W9, Class 2A3, 7 1/2s, 2044 5,832,481 93,473 Ser. 02-T18, Class A4, 7 1/2s, 2042 100,810 2,388,645 Ser. 03-W3, Class 1A3, 7 1/2s, 2042 2,576,124 2,408,113 Ser. 02-T16, Class A3, 7 1/2s, 2042 2,597,120 3,015,702 Ser. 02-T19, Class A3, 7 1/2s, 2042 3,252,398 6,165,683 Ser. 03-W2, Class 1A3, 7 1/2s, 2042 6,649,613 636,739 Ser. 02-T12, Class A3, 7 1/2s, 2042 686,715 6,752,949 Ser. 02-W4, Class A5, 7 1/2s, 2042 7,282,972 620,937 Ser. 02-W1, Class 2A, 7 1/2s, 2042 669,672 1,768,336 Ser. 02-14, Class A2, 7 1/2s, 2042 1,907,128 5,282,447 Ser. 01-T10, Class A2, 7 1/2s, 2041 5,697,053 1,034,597 Ser. 02-T4, Class A3, 7 1/2s, 2041 1,115,800 9,375,072 Ser. 02-T6, Class A2, 7 1/2s, 2041 10,110,899 3,313,430 Ser. 01-T12, Class A2, 7 1/2s, 2041 3,573,494 3,821,835 Ser. 01-T8, Class A1, 7 1/2s, 2041 4,121,802 6,708,811 Ser. 01-T7, Class A1, 7 1/2s, 2041 7,235,370 376,890 Ser. 01-T3, Class A1, 7 1/2s, 2040 406,472 1,477,588 Ser. 01-T1, Class A1, 7 1/2s, 2040 1,593,560 457,483 Ser. 99-T2, Class A1, 7 1/2s, 2039 493,389 1,365,462 Ser. 02-T1, Class A3, 7 1/2s, 2031 1,472,634 4,227,107 Ser. 00-T6, Class A1, 7 1/2s, 2030 4,558,883 99,043 Ser. 01-T5, Class A3, 7 1/2s, 2030 106,817 1,955,643 Ser. 02-W7, Class A5, 7 1/2s, 2029 2,109,137 9,081,800 Ser. 01-T4, Class A1, 7 1/2s, 2028 9,794,609 3,082,974 Ser. 02-W3, Class A5, 7 1/2s, 2028 3,324,949 38,597,146 Ser. 03-W6, Class 3, IO, 0.367s, 2042 402,291 27,822,065 Ser. 03, Class PK, IO, 5.5s, 2026 2,051,877 31,438,361 Ser. 03-W6, Class 21, IO, 1.416s, 2042 237,120 28,445,758 Ser. 338, Class 2, IO, 5.5s, 2033 7,413,676 4,720,609 Ser. 03-16, Class IC, IO, 5s, 2015 904,174 369,332 Ser. 03-17, IO, 5.5s, 2025 31,162 20,938,373 Ser. 03-W12, Class 2, IO, 2.228s, 2043 1,337,848 41,131,025 Ser. 03-W6, Class 23, IO, 0.352s, 2042 412,934 56,519,192 Ser. 03-W2, Class 1, IO, 0.471s, 2042 750,488 6,174,936 Ser. 343, Class 29, IO, 5s, 2033 1,046,844 29,602,551 Ser. 03-49, Class SV, IO, 1s, 2033 1,077,716 15,685,387 Ser. 03-W10, Class 3, IO, 2.003s, 2043 911,713 10,350,378 Ser. 01-79, Class BI, IO, 0.348s, 2045 94,249 62,707,417 Ser. 03-W10, Class 1, IO, 2.016s, 2043 3,644,869 33,957,099 Ser. 03-W6, Class 11, IO, 1.084s, 2042 520,214 26,909,967 Ser. 03-W6, Class 51, IO, 0.672s, 2042 502,521 8,214,761 Ser. 03-W3, Class 2IO1, IO, 0.674s, 2042 170,130 6,648,418 Ser. 03-W3, Class 2IO2, IO, 1.698s, 2042 102,001 21,416,182 Ser. 02-T4, IO, 0.45s, 2041 245,883 51,440,304 Ser. 02-T1, IO, 0.422s, 2031 555,672 3,956,124 Ser. 02-36, Class QH, IO, 6.6s, 2029 248,035 Fannie Mae 4,529,221 Ser. 03-42, Class JI, IO, 5 1/2s, 2028 362,549 7,084,796 Ser. 03-54, Class IY, IO, 5 1/2s, 2026 850,176 62,171,667 Ser. 01-T12, Class IO, 0.572s, 2041 956,890 10,123,184 Ser. 348, Class 4, IO, 5s, 2034 2,589,320 16,535,463 Ser. 345, Class 3, IO, 5s, 2033 4,464,575 11,911,710 Ser. 03-31, Class IM, IO, 5.75s, 2032 1,453,598 7,883,136 Ser. 03-8, Class IP, IO, 5 1/2s, 2028 771,759 5,319,272 Ser. 03-6, Class IB, IO, 5 1/2s, 2022 348,994 722 Ser. 92-15, Class L, IO, 5s, 2022 8,866 48,300 Ser. 03-29, Class IG, IO, 5 1/2s, 2031 15,954 16,614,759 Ser. 03-118, Class SF, IO, 6.65s, 2033 2,432,659 18,841,464 Ser. 03-W17, Class 12, IO, 1.162s, 2033 626,210 2,070,348 Ser. 03-W10, Class 1A1, 1.701s, 2032 2,065,172 45,700,611 Ser. 03-W8, Class 11, IO, 1.237s, 2042 407,031 37,967,942 Ser. 03-W4, Class 3A, IO, 0.292s, 2042 415,274 6,242,187 Ser. 03-24, Class UI, IO, 5s, 2031 1,236,002 70,723,523 Ser. 03-W3, Class 1, IO, 0.438s, 2042 864,650 98,265,979 Ser. 03-T2, Class 2, IO, 1.1s, 2042 2,506,969 23,492,259 Ser. 03-22, IO, 6s, 2033 5,735,400 6,738,928 Ser. 03-58, Class ID, IO, 6s, 2033 1,544,689 66,245,820 Ser. 03-W8, Class 12, IO, 1.643s, 2042 3,220,799 1,198,367 Federal Home Loan Mortgage Corp. Structured Pass-Through Securities Ser. 212, IO, 2 1/2s, 2031 262,790 Federal Home Loan Mortgage Corp. Structured Pass-Through Securities 1,456,278 Ser. T-58, Class 4A, 7 1/2s, 2043 1,570,578 1,017,802 Ser. T-42, Class A5, 7 1/2s, 2042 1,097,687 36,386,798 Ser. T-56, Class 2, IO, 0.062s, 2043 125,080 31,296,257 Ser. T-56, Class 3, IO, 0.368s, 2043 400,983 25,531,915 Ser. T-56, Class A, IO, 1.651s, 2043 638,298 36,346,570 Ser. T-56, Class 1, IO, 0.272s, 2043 340,749 15,802,000 FFCA Secured Lending Corp. 144A Ser. 00-1, Class A2, 7.77s, 2027 17,618,565 4,877,751 First Chicago Lennar Trust 144A Ser. 97-CHL1, Class D, 7.867s, 2039 5,021,796 34,676,608 First Union National Bank-Bank of America Commercial Mortgage 144A Ser. 01-C1, Class 3, IO, 1.76s, 2033 3,062,649 6,237,588 First Union-Lehman Brothers Commercial Mortgage Trust II Ser. 97-C1, Class A3, 6s, 2029 6,721,732 Freddie Mac 6,036,646 Ser. 2763, Class SC, 23.08s, 2032 7,198,465 6,495,012 Ser. 2437, Class SB, IO, 6.62s, 2032 673,857 6,819,656 Ser. 2702, Class DI, IO, 5 1/2s, 2024 727,344 5,978,300 Ser. 2553, Class IJ, IO, 5 1/2s, 2020 337,213 7,242,381 Ser. 2581, Class IE, IO, 5 1/2s, 2025 1,253,368 7,014,008 Ser. 2596, Class IL, IO, 5s, 2030 1,255,617 513,416 Ser. 2626, Class JS, IO, 5s, 2023 43,400 5,371,179 Ser. 2469, Class SH, IO, 5.9s, 2032 510,262 2,422,997 Ser. 2696, Principal only (PO), zero %, 2033 1,408,697 953,603 G-Force FRB Ser. 01-1A, Class A, 2.02s, 2033 (Cayman Islands) 955,288 G-Force CDO, Ltd. 144A 715,000 Ser. 02-1A, Class E, 8 1/4s, 2037 723,379 315,000 Ser. 02-1A, Class D, 7.61s, 2037 336,509 3,021,621 General Growth Properties-Mall Properties Trust FRB Ser. 01-C1A, Class D3, 3.63s, 2014 3,025,399 6,364,285 GMAC Commercial Mortgage Securities, Inc. Ser. 97-C2, Class A2, 6.55s, 2029 6,362,437 1,614,303 GMAC Commercial Mortgage Securities, Inc. 144A Ser. 99-C3, Class G, 6.974s, 2036 1,187,856 Government National Mortgage Association 4,242,038 Ser. 03-114, Class SP, 15.78s, 2027 4,612,652 309,983 Ser. 98-2, Class EA, PO, zero %, 2028 256,704 565,000 GS Mortgage Securities Corp. II 144A FRB Ser. 03-FL6A, Class L, 4.63s, 2015 565,706 LB Commercial Conduit Mortgage Trust 144A 715,303 Ser. 99-C1, Class F, 6.41s, 2031 703,993 765,731 Ser. 99-C1, Class G, 6.41s, 2031 588,678 1,650,895 Lehman Brothers Floating Rate Commercial Mortgage Trust 144A FRB Ser. 03-C4, Class A, 1.963s, 2015 1,652,959 180,540 Merrill Lynch Mortgage Investors, Inc. Ser. 96-C2, Class A3, 6.96s, 2028 191,174 3,216,733 Mezz Cap Commercial Mortgage Trust 144A Ser. 04-C1, Class X, IO, 7.85s, 2037 1,490,252 Morgan Stanley Capital I 144A 1,007,000 Ser. 96-C1, Class E, 7.45s, 2028 1,059,789 1,000,000 Ser. 04-RR, Class F5, 6s, 2039 852,698 1,700,000 Ser. 04-RR, Class F6, 6s, 2039 1,393,230 1,179,102 Morgan Stanley Dean Witter Capital I Ser. 00-LIF2, Class A1, 6.96s, 2008 1,265,596 Morgan Stanley Dean Witter Capital I 144A 645,206 FRB Ser. 01-XLF, Class D, 2.88s, 2013 645,383 719,091 FRB Ser. 01-XLF, Class E, 2.83s, 2013 719,142 Mortgage Capital Funding, Inc. FRB 2,426,000 Ser. 98-MC3, Class E, 7.296s, 2031 2,624,155 1,020,000 Ser. 98-MC2, Class E, 7.139s, 2030 1,102,913 2,634,000 Salomon Brothers Mortgage Securities VII Ser. 96-C1, Class E, 8.42s, 2028 2,794,136 16,195,884 Salomon Brothers Mortgage Securities VII 144A Ser. 03-CDCA, Class X3CD, IO, 0.89s, 2015 225,026 1,767,000 Starwood Asset Receivables Trust FRN Ser. 02-1A, Class F, 2.797s, 2020 1,769,297 Starwood Asset Receivables Trust 144A 589,822 FRB Ser. 03-1A, Class F, 2.55s, 2022 590,766 748,620 FRB Ser. 03-1A, Class E, 2 1/2s, 2022 749,818 STRIPS 144A 757,000 Ser. 03-1A, Class L, 5s, 2018 (Cayman Islands) 656,243 513,000 Ser. 03-1A, Class M, 5s, 2018 (Cayman Islands) 420,865 337,000 Ser. 04-1A, Class L, 5s, 2018 (Cayman Islands) 292,516 11,767,264 Structured Adjustable Rate Mortgage Loan Ser. 04-6, Class 1A, 4.439s, 2034 11,929,063 2,764,000 Structured Adjustable Rate Mortgage Loan Trust Ser. 04-10, Class 1A1, 4.977s, 2034 2,815,825 Structured Asset Securities Corp. 2,622,510 Ser. 03-40A, Class 1A, 5.031s, 2034 2,682,746 4,613,069 Ser. 03-26A, Class 2A, 4.603s, 2033 4,696,140 2,084,255 Ser. 04-8, Class 1A1, 4.442s, 2034 2,116,089 690,329 TIAA Commercial Real Estate Securitization Ser. 01-C1A, Class A1, 5.77s, 2016 (Cayman Islands) 711,146 718,000 Trizechahn Office Properties Trust 144A Ser. 01-TZHA, Class D3, 6.943s, 2013 762,424 -------------- Total Collateralized mortgage obligations (cost $315,290,767) $311,124,680 Asset-backed securities (5.4%) (a) Principal amount Value ------------------------------------------------------------------------------- $12,890,250 Aames Mortgage Trust Ser. 03-1, Class A, IO, 6s, 2005 $560,540 6,157,000 Ace Securities Corp. Ser. 03-FM1, Class A, IO, 4.5s, 2005 285,069 2,404,167 Advanta Mortgage Loan Trust Ser. 00-1, Class A4, 8.61s, 2028 2,496,578 Aegis Asset Backed Securities Trust 144A 585,592 Ser. 04-1N, Class Note, 5s, 2034 584,952 929,281 Ser. 04-2N, Class N1, 4 1/2s, 2034 925,796 6,110,553 AFC Home Equity Loan Trust Ser. 99-2, Class 1A, 1.86s, 2029 6,110,553 10,740,000 American Express Credit Account Master Trust 144A Ser. 04-C, Class C, 1.88s, 2012 10,740,000 Ameriquest Mortgage Securities, Inc. 15,335,625 Ser. 02-3, Class S, IO, 6s, 2032 461,267 6,485,358 Ser. 03-12, Class S, IO, 5s, 2006 365,815 7,639,691 Ser. 03-6, Class S, IO, 5s, 2033 316,928 7,186,927 Ser. 03-8, Class S, IO, 5s, 2006 372,283 Amortizing Residential Collateral Trust 5,915,364 Ser. 01-BC6, Class A, IO, 6s, 2004 83,398 6,049,091 Ser. 02-BC1, Class A, IO, 6s, 2005 114,909 6,034,727 Ser. 02-BC10, Class A, IO, 6s, 2004 144,783 9,531,818 Ser. 02-BC3, Class A, IO, 6s, 2005 321,994 14,227,273 Ser. 02-BC6, Class A, IO, 6s, 2004 59,133 15,818,182 Ser. 02-BC7, Class AIO, IO, 6s, 2004 144,478 10,922,545 Ser. 02-BC9, Class A, IO, 6s, 2004 208,088 AQ Finance NIM Trust 144A 434,207 Ser. 03-N7A, Class Note, 9.07s, 2033 436,106 290,975 Ser. 03-N9A, Class Note, 7.385s, 2033 292,793 243,203 Arc Net Interest Margin Trust Ser. 02-2, Class A, 7 3/4s, 2032 242,798 Arcap REIT, Inc. 144A 1,283,000 Ser. 03-1A, Class E, 7.11s, 2038 1,332,315 1,112,000 Ser. 04-1A, Class E, 6.42s, 2039 1,103,834 298,333 Argent NIM Trust Ser. 03-N8, Class A, 5.56s, 2034 298,333 Argent NIM Trust 144A 435,389 Ser. 03-N6, Class A, 6.4s, 2034 435,389 1,072,635 Ser. 04-WN2, Class A, 4.55s, 2034 1,068,613 888,713 Ser. 04-WN4, Class A, 4.459s, 2034 886,244 20,836,805 Argent Securities, Inc. Ser. 03-W2, Class A, IO, 5s, 2004 19,378 Asset Backed Funding Corp. NIM Trust 144A 431,062 Ser. 03-OPT1, Class Note, 6.9s, 2033 431,062 473,491 Ser. 03-WF1, Class N1, 8.35s, 2032 473,491 1,289,129 Ser. 04-0PT1, Class N1, 4.55s, 2033 1,285,906 1,962,843 Ser. 04-AHL1, Class Note, 5.6s, 2033 1,962,767 Asset Backed Securities Corp. Home Equity Loan Trust 41,213,000 Ser. 02-HE1, Class A, IO, 3.6s, 2032 3,956 9,931,801 Ser. 03-HE5, Class A, IO, 4s, 2033 388,264 829,603 FRB Ser. 04-HE1, Class A3, 1.78s, 2034 830,025 1,065,003 Aviation Capital Group Trust 144A FRB Ser. 03-2A, Class G1, 2.12s, 2033 1,068,997 210,000 Bank One Issuance Trust FRB Ser. 03-C4, Class C4, 2.41s, 2011 213,553 Bayview Financial Acquisition Trust 1,964,970 Ser. 02-CA, Class A, IO, 5.1s, 2004 23,027 14,359,641 Ser. 03-DA, IO, 4s, 2006 538,487 11,630,558 Ser. 03-E, Class A, IO, 4s, 2006 518,189 52,566,952 Ser. 03-X, Class A, IO, 4s, 2006 887,067 4,211,489 Ser. 04-B, Class A1, 1.962s, 2039 4,211,489 4,813,000 FRB Ser. 03-G, Class A1, 2.062s, 2039 4,813,000 4,427,096 FRN Ser. 03-F, Class A, 1.962s, 2043 4,432,630 Bayview Financial Acquisition Trust 144A 6,257,491 Ser. 03-CA, Class A, IO, 4s, 2005 257,862 200,000 FRB Ser. 04-B, Class M2, 3.362s, 2039 200,000 141,762,627 Bayview Financial Asset Trust Ser. 03-Z, Class A, IO, 0.623s, 2005 565,416 Bayview Financial Asset Trust 144A 1,921,187 FRB Ser. 03-SSRA, Class A, 2.15s, 2038 1,928,487 2,277,830 FRB Ser. 03-SSRA, Class M, 2.8s, 2038 2,277,830 Bear Stearns Asset Backed Securities NIM Trust 144A 1,710,000 Ser. 04-FR1, Class A1, 5s, 2034 (Cayman Islands) 1,710,000 1,012,026 Ser. 04-HE5N, Class A1, 5s, 2034 (Cayman Islands) 1,010,603 85,000 Ser. 04-HE5N, Class A2, 5s, 2034 (Cayman Islands) 84,761 1,062,000 Ser. 04-HE6, Class A1, 5 1/4s, 2034 (Cayman Islands) 1,062,000 Bear Stearns Asset Backed Securities, Inc. 11,341,000 Ser. 03-AC1, Class A, IO, 5s, 2005 432,376 11,241,000 Ser. 03-AC4, Class A, IO, 5s, 2006 653,383 2,229,000 FRB Ser. 03-3, Class A2, 2.04s, 2043 2,229,000 1,780,017 FRN Ser. 03-1, Class A1, 1.95s, 2042 1,780,017 570,000 Capital One Multi-Asset Execution Trust FRB Ser. 02-C1, Class C1, 4.13s, 2010 596,719 CARSSX Finance, Ltd. 144A 410,000 FRB Ser. 04-AA, Class B3, 4.73s, 2011 (Cayman Islands) 410,000 410,000 FRB Ser. 04-AA, Class B4, 6.88s, 2011 (Cayman Islands) 410,000 3,105,000 CDO Repackaging Trust Series 144A FRB Ser. 03-2, Class A, 5.23s, 2008 3,182,625 26,100,000 Centex Home Equity Ser. 04-C, Class A, IO, 3.5s, 2006 856,406 1,730,000 Chase Credit Card Master Trust FRB Ser. 03-3, Class C, 2.46s, 2010 1,765,208 Chase Funding Net Interest Margin 144A 177,210 Ser. 03-3A, Class Note, 6 7/8s, 2036 177,210 710,886 Ser. 03-5A, Class Note, 5 3/4s, 2034 710,033 106,415 Ser. 03-6A, Class Note, 5s, 2035 105,883 622,179 Ser. 03-C1A, Class Note, 6 3/4s, 2036 622,179 1,060,000 Citibank Credit Card Issuance Trust FRN Ser. 01-C1, Class C1, 2.68s, 2010 1,076,885 Conseco Finance Securitizations Corp. 8,597,000 Ser. 00-4, Class A6, 8.31s, 2032 7,354,291 8,310,000 Ser. 01-04, Class A4, 7.36s, 2033 8,120,607 2,692,000 Ser. 01-1, Class A5, 6.99s, 2032 2,451,791 Conseco Finance Securitizations Corp. 6,235,000 Ser. 01-3, Class A4, 6.91s, 2033 5,757,293 3,810,000 Ser. 01-4, Class B1, 9.4s, 2010 571,500 9,336,800 Ser. 02-1, Class A, 6.681s, 2033 9,576,841 4,582,000 Ser. 02-1, Class M2, 9.546s, 2033 2,245,180 9,316,245 Ser. 02-2, Class A, IO, 8.5s, 2010 2,636,358 22,423,882 Conseco Recreational Enthusiast Consumer Trust Ser. 01-A, Class AP, IO, 5s, 2025 210,829 3,061,000 Consumer Credit Reference IDX Securities FRB Ser. 02-1A, Class A, 3.55s, 2007 3,099,875 Countrywide Asset Backed Certificates 144A 360,085 Ser. 03-5NF, Class NF, 6 3/4s, 2034 363,010 975,378 Ser. 04-1NIM, Class Note, 6s, 2034 980,255 1,292,305 Ser. 04-BC1N, Class Note, 5 1/2s, 2035 1,288,267 254,728 Credit-Based Asset Servicing and Securitization 144A Ser. 03-CB2N, Class Note, 8.35s, 2033 254,967 1,617,000 Crest, Ltd. 144A Ser. 03-2A, Class D2, 6.723s, 2038 1,586,113 1,005,851 Finance America NIM Trust 144A Ser. 04-1, Class A, 5 1/4s, 2034 1,006,288 First Franklin Mortgage Loan Asset Backed Certificates 11,428,319 Ser. 03-FF3, Class A, IO, 6s, 2005 330,505 9,689,273 Ser. 03-FFB, Class A, IO, 6s, 2005 429,255 First Franklin NIM Trust 144A 369,400 Ser. 03-FF3A, Class A, 6 3/4s, 2033 (S) 367,966 633,122 Ser. 04-FF1, Class N1, 4 1/2s, 2034 631,349 1,558,353 First Plus Home Loan Trust Ser. 97-3, Class B1, 7.79s, 2023 1,559,327 650,000 Ford Credit Auto Owner Trust Ser. 04-A, Class C, 4.19s, 2009 652,133 616,000 Fort Point CDO, Ltd. FRN Ser. 03-2A, Class A2, 2.365s, 2038 619,450 2,000,000 Foxe Basin, Ltd. FRB Ser. 2003-1A, Class A1, 2.02s, 2015 2,000,000 Fremont NIM Trust 144A 1,561,876 Ser. 04-A, Class Note, 4 3/4s, 2034 1,557,190 946,708 Ser. 04-B, Class Note, 4.703s, 2034 946,708 939,000 G-Force CDO, Ltd. 144A Ser. 03-1A, Class E, 6.58s, 2038 922,127 308,000 G-Star, Ltd. 144A FRN Ser. 02-2A, Class BFL, 3.45s, 2037 306,023 470,000 Goldentree Loan Opportunities II, Ltd. 144A FRN Ser. 2A, Class 4, 5.091s, 2015 (Cayman Islands) 470,588 Granite Mortgages PLC 1,619,000 FRB Ser. 04-1, Class 1C, 2.45s, 2044 1,623,553 2,970,000 FRN Ser. 01-1, Class 1C, 3.03s, 2041 (United Kingdom) 2,980,209 1,300,000 FRB Ser. 02-1, Class 1C, 2.93s, 2042 (United Kingdom) 1,322,140 650,000 FRB Ser. 02-2, Class 1C, 2.88s, 2043 (United Kingdom) 661,904 Green Tree Financial Corp. 393,074 Ser. 99-3, Class A5, 6.16s, 2031 397,988 16,750,000 Ser. 99-5, Class A5, 7.86s, 2030 14,676,084 3,732,000 GS Auto Loan Trust 144A Ser. 04-1, Class D, 5s, 2011 3,670,617 GSAMP Trust 144A 385,664 Ser. 03-HE1N, Class Note, 7 1/4s, 2033 384,739 1,190,228 Ser. 04, Class Note, 5 1/2s, 2032 1,188,442 801,572 Ser. 04-FM1N, Class Note, 5 1/4s, 2033 800,739 860,000 Ser. 04-HE1N, Class N1, 5s, 2034 858,968 3,227,055 High Income Trust Securities 144A FRB Ser. 03-1A, Class A, 1.68s, 2036 3,114,108 746,000 Holmes Financing PLC FRB Ser. 8, Class 2C, 2.32s, 2040 (United Kingdom) 746,234 Holmes Financing PLC FRB 13,365,000 Ser. 1, Class 2C, 2.75s, 2040 (United Kingdom) 13,314,213 870,000 Ser. 4, Class 3C, 2.9s, 2040 (United Kingdom) 882,453 1,300,000 Ser. 5, Class 2C, 3.05s, 2040 (United Kingdom) 1,309,344 Home Equity Asset Trust 144A 319,594 Ser. 03-4N, Class A, 8s, 2033 321,991 667,858 Ser. 03-5N, Class A, 7 1/2s, 2034 671,197 935,592 Ser. 03-7N, Class A, 5 1/4s, 2034 935,592 1,017,531 Ser. 04-1N, Class A, 5s, 2034 1,014,987 32,470,951 Lehman Manufactured Housing Ser. 98-1, Class 1, IO, 0.81s, 2028 717,007 5,220,000 LNR CDO, Ltd. FRB Ser. 02-1A, Class FFL, 4.2s, 2037 (Cayman Islands) 5,013,288 2,585,000 LNR CDO, Ltd. 144A FRB Ser. 03-1A, Class EFL, 4.433s, 2036 (Cayman Islands) 2,722,264 956,285 Long Beach Asset Holdings Corp. 144A Ser. 04-2, Class N1, 4.94s, 2034 956,285 375,368 Long Beach Asset Holdings Corp. NIM Trust 144A Ser. 03-4, Class N1, 6.535s, 2033 375,837 Long Beach Mortgage Loan Trust 30,670,000 Ser. 04-3, Class S1, IO, 4.5s, 2006 2,157,635 15,335,000 Ser. 04-3, Class S2, IO, 4.5s, 2006 1,078,817 Madison Avenue Manufactured Housing Contract 222,921,287 Ser. 02-A IO, 0.3s, 2032 2,507,864 4,059,503 FRB Ser. 02-A, Class B1, 4.7s, 2032 2,232,727 2,484,352 Marriott Vacation Club Owner Trust 144A FRB Ser. 02-1A, Class A1, 2.12s, 2024 2,509,067 831,855 Master Asset Backed Securities NIM Trust 144A Ser. 04-CI3, Class N1, 4.45s, 2034 831,855 1,730,000 MBNA Credit Card Master Note Trust FRN Ser. 03-C5, Class C5, 2.56s, 2010 1,765,141 7,318,163 Merit Securities Corp. FRB Ser. 11PA, Class 3A1, 2.082s, 2027 6,987,131 278,332 Merrill Lynch Mortgage Investors, Inc. Ser. 03-WM3N, Class N1, 8s, 2005 280,767 Merrill Lynch Mortgage Investors, Inc. 144A 643,351 Ser. 03-OP1N, Class N1, 7 1/4s, 2034 643,753 157,058 Ser. 04-WM1N, Class N1, 4 1/2s, 2034 156,272 1,916,298 Ser. 04-WM3N, Class N1, 4 1/2s, 2005 1,904,226 Mid-State Trust 987,290 Ser. 10, Class B, 7.54s, 2036 845,830 523,165 Ser. 11, Class B, 8.221s, 2038 518,506 Morgan Stanley ABS Capital I 144A 434,570 Ser. 03-NC8N, Class Note, 7.6s, 2033 436,607 692,167 Ser. 04-NC2N, Class Note, 6 1/4s, 2033 693,681 1,090,000 Morgan Stanley Auto Loan Trust 144A Ser. 04-HB1, Class D, 5 1/2s, 2011 1,073,650 Morgan Stanley Dean Witter Capital I 1,470,000 FRN Ser. 01-NC3, Class B1, 3.9s, 2031 1,454,184 1,194,000 FRN Ser. 01-NC4, Class B1, 3.95s, 2032 1,175,533 1,168,000 Navigator CDO, Ltd. 144A FRB Ser. 03-1A, Class A1, 1.74s, 2015 1,168,000 1,734,000 New Century Home Equity Loan Trust Ser. 03-5, Class AI7, 5.15s, 2033 1,704,468 New Century Mortgage Corp. NIM Trust 144A 601,170 Ser. 03-5, Class Note, 8s, 2033 608,027 464,674 Ser. 03-B, Class Note, 6 1/2s, 2033 467,433 624,000 Newcastle CDO, Ltd. 144A FRB Ser. 3A, Class 4FL, 4.3s, 2038 627,120 76,950 NNIMS 144A Ser. 03-N1, Class Note, 7.385s, 2033 77,718 Novastar NIM Trust 144A 1,916,975 Ser. 04-N1, Class Note, 4.458s, 2034 1,916,975 1,397,260 Ser. 04-N2, Class Note, 4.458s, 2034 1,397,260 6,500,616 Oakwood Mortgage Investors, Inc. Ser. 02-C, Class A1, 5.41s, 2032 5,736,793 Option One Mortgage Securities Corp. NIM Trust 144A 454,871 Ser. 03-5, Class Note, 6.9s, 2033 457,145 33,404 Ser. 2003-2B, Class N1, 7.63s, 2033 (Cayman Islands) 33,404 Pass-Through Amortizing Credit Card Trust 644,214 Ser. 02-1A, Class A3FL, 4.41s, 2012 646,058 1,082,325 Ser. 02-1A, Class A4FL, 6.91s, 2012 1,085,385 Permanent Financing PLC FRB 870,000 Ser. 1, Class 3C, 2.61s, 2042 (United Kingdom) 879,652 1,300,000 Ser. 3, Class 3C, 2.56s, 2042 (United Kingdom) 1,322,344 657,000 Pillar Funding PLC 144A FRB Ser. 04-1A, Class C1, 2.333s, 2011 (United Kingdom) 656,709 Providian Gateway Master Trust 144A 1,204,000 FRB Ser. 04-AA, Class D, 3.23s, 2011 1,206,769 1,900,000 FRN Ser. 04-BA, Class D, 2.78s, 2010 1,900,000 1,325,967 Re NIM Trust 144A Ser. 04-A, 4.45s, 2034 1,307,817 33,066,263 Renaissance Home Equity Loan Trust Ser. 03-4, Class S, IO, 3s, 2006 348,746 4,634,785 Residential Asset Securities Corp. Ser. 02-KS6, Class AIO, IO, 4.5s, 2005 101,479 Residential Funding Mortgage Securities II 16,373,586 Ser. 03-HS1, Class AI, IO, 5.5s, 2033 676,229 5,169,091 Ser. 03-HS2, Class AI, IO, 5.5s, 2005 237,455 7,125,349 Ser. 03-HS3, Class AI, IO, 5s, 2006 295,702 5,984,184 Restructured Asset Securities 144A FRN Ser. 03-3A, Class A1, 2.56s, 2022 5,916,862 Ryland Mortgage Securities Corp. 304,446 Ser. 94-7C, Class B1, 7.359s, 2025 304,446 375,943 Ser. 94-7C, Class B1, 7.359s, 2025 375,943 SAIL Net Interest Margin Notes 144A 713,651 Ser. 03-4, Class A, 7 1/2s, 2033 (Cayman Islands) 712,866 306,096 Ser. 03-12A, Class A, 7.35s, 2033 (Cayman Islands) 306,004 406,163 Ser. 03-13A, Class A, 6 3/4s, 2033 (Cayman Islands) 405,642 395,586 Ser. 03-6A, Class A, 7s, 2033 (Cayman Islands) 392,645 214,018 Ser. 03-7A, Class A, 7s, 2033 (Cayman Islands) 212,430 413,479 Ser. 03-8A, Class A, 7s, 2033 (Cayman Islands) 411,398 1,046,022 Ser. 03-9A, Class A, 7s, 2033 (Cayman Islands) 1,040,581 532,398 Ser. 03-BC2A, Class A, 7 3/4s, 2033 (Cayman Islands) 530,851 SAIL Net Interest Margin Notes 144A 1,335,588 Ser. 04-2A, Class A, 5 1/2s, 2034 (Cayman Islands) 1,335,588 3,773,374 Ser. 04-4A, Class A, 5s, 2034 (Cayman Islands) 3,767,714 350,000 Ser. 04-4A, Class B, 7 1/2s, 2034 (Cayman Islands) 322,665 1,125,822 Ser. 04-5A, Class A, 4 1/2s, 2034 (Cayman Islands) 1,124,166 Sasco Arc Net Interest Margin Notes 144A 221,588 Ser. 03-3, Class A, 7 3/4s, 2033 220,476 87,242 Ser. 03-5, Class A, 7.35s, 2033 (Cayman Islands) 87,217 131,742 Ser. 03-AM1, Class A, 7 3/4s, 2033 131,100 427,032 Saxon Net Interest Margin Trust 144A Ser. 03-A, Class A, 6.656s, 2033 427,032 373,397 Sharp SP I, LLC Net Interest Margin Trust Ser. 03-NC1N, Class N, 7 1/4s, 2033 375,488 Sharp SP I, LLC Net Interest Margin Trust 144A 1,533,345 Ser. 03-0P1N, Class NA, 4.45s, 2033 1,533,191 180,491 Ser. 03-TC1N, 7.45s, 2033 (S) 180,491 358,299 Ser. 03-HE1N, 6.9s, 2033 360,090 761,904 Ser. 04-HE1N, Class Note, 4.94s, 2034 761,904 476,386 Ser. 04-HS1N, Class Note, 5.92s, 2034 476,386 470,000 South Coast Funding FRB Ser. 3A, Class A2, 2.38s, 2038 475,875 Structured Asset Investment Loan Trust 14,998,641 Ser. 03-BC10, Class A, IO, 6s, 2005 470,413 47,763,783 Ser. 03-BC11, Class A, IO, 6s, 2005 1,848,889 8,966,405 Ser. 03-BC12, Class A, IO, 6s, 2005 329,308 27,274,286 Ser. 03-BC13, Class A, IO, 6s, 2005 1,001,699 52,104 Ser. 03-BC1A, Class A, 7 3/4s, 2033 51,851 35,100,614 Ser. 03-BC2, Class A, IO, 6s, 2005 914,416 17,796,008 Ser. 03-BC3, Class A, IO, 6s, 2004 250,899 5,370,192 Ser. 03-BC4, Class A, IO, 6s, 2004 102,309 9,799,972 Ser. 03-BC5, Class A, IO, 6s, 2004 186,702 26,474,688 Ser. 03-BC6, Class A, IO, 6s, 2005 765,643 8,767,509 Ser. 03-BC8, Class A, IO, 6s, 2005 347,160 10,656,634 Ser. 03-BC9, Class A, IO, 6s, 2005 297,319 46,153,000 Ser. 04-1, Class A, IO, 6s, 2005 2,462,156 33,861,181 Ser. 04-3, Class A, IO, 6s, 2005 1,680,792 Structured Asset Securities Corp. 8,751,636 Ser. 02-BC1, Class A, IO, 6s, 2004 166,730 7,558,718 Ser. 98-RF3, Class A, IO, 6.1s, 2028 1,281,807 Structured Asset Securities Corp. 144A 2,800,000 FRB Ser. 03-NP2, Class A2, 2s, 2032 2,796,063 1,315,168 FRN Ser. 03-NP3, Class A1, 1.95s, 2033 1,315,168 3,199,000 Terwin Mortgage Trust FRB Ser. 04-5HE, Class A1B, IO, 1.87s, 2035 3,195,501 1,698,000 TIAA Commercial Real Estate Securitization 144A Ser. 03-1A, Class E, 8s, 2038 1,523,358 15,062,458 Wells Fargo Home Equity Trust Ser. 04-1, Class A, IO, 6s, 2005 878,224 1,462,625 Wells Fargo Home Equity Trust 144A Ser. 04-1N, Class A, 5s, 2034 1,457,396 1,060,000 Westo Ser. 04-3, Class D, 4.07s, 2012 1,059,895 512,878 Whole Auto Loan Trust Ser. 03-1, Class C, 3.13s, 2010 506,547 3,123,018 Whole Auto Loan Trust 144A Ser. 03-1, Class D, 6s, 2010 3,124,970 -------------- Total Asset-backed securities (cost $318,531,511) $299,871,629 Convertible preferred stocks (0.6%) (a) Number of shares Value ------------------------------------------------------------------------------- 111,300 Hartford Financial Services Group, Inc. (The) $3.50 cv. pfd. $7,025,813 45,500 Hartford Financial Services Group, Inc. (The) $3.00 cv. pfd. 2,809,625 186,848 Xerox Corp. 6.25% cv. pfd. 23,753,052 -------------- Total Convertible preferred stocks (cost $27,734,917) $33,588,490 Convertible bonds and notes (0.2%) (a) Principal amount Value ------------------------------------------------------------------------------- $254,300 CenterPoint Energy, Inc. cv. sub notes FRN 2s, 2029 $8,264,750 3,200,000 Rite Aid Corp. cv. notes 4 3/4s, 2006 3,368,000 -------------- Total Convertible bonds and notes (cost $9,919,719) $11,632,750 Municipal bonds and notes (0.1%) (a) Principal amount Rating (RAT) Value ------------------------------------------------------------------------------- $1,110,000 IL State G.O. Bonds, 5.1s, 6/1/33 AA $1,003,729 1,120,000 NJ State Tpk. Auth. Rev. Bonds, Ser. B, AMBAC, 4.252s, 1/1/16 AAA 1,050,571 1,320,000 OR State G.O. Bonds (Taxable Pension), 5.892s, 6/1/27 AA- 1,347,779 -------------- Total Municipal bonds and notes (cost $3,550,000) $3,402,079 Short-term investments (8.1%) (a) Principal amount Value ------------------------------------------------------------------------------- $229,606,619 Putnam Prime Money Market Fund (e) $229,606,619 218,214,444 Short-term investments held as collateral for loaned securities with yields ranging from 1.28% to 1.52% and due dates ranging from August 2, 2004 to August 23, 2004 (d) 218,136,061 -------------- Total Short-term investments (cost $447,742,680) $447,742,680 ------------------------------------------------------------------------------- Total Investments (cost $5,796,345,329) $6,385,794,334 ------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $5,558,714,880. (RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at July 31, 2004 for the securities listed. Ratings are generally ascribed to securities at the time of issuance. While the agencies may from time to time revise such ratings, they undertake no obligation to do so, and the ratings do not necessarily represent what the agencies would ascribe to these securities at July 31, 2004. Securities rated by Putnam are indicated by "/P" . Ratings are not covered by the Report of Independent Registered Public Accounting Firm. (NON) Non-income-producing security. (SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures contracts, forward currency and forward cross currency contracts at July 31, 2004. (R) Real Estate Investment Trust. (S) Securities on loan, in part or in entirety, at July 31, 2004. (d) See Note 1 to the financial statements. (e) See Note 6 to the financial statements regarding investments in the Putnam Prime Money Market Fund. 144A after the name of a security represents those exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. ADR after the name of a foreign holding stands for American Depositary Receipts representing ownership of foreign securities on deposit with a custodian bank. TBA after the name of a security represents to be announced securities (Note 1). AMBAC represents AMBAC Indemnity Corporation. G.O. Bonds represent General Obligation Bonds. The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates at July 31, 2004.
Forward currency contracts to buy at July 31, 2004 (aggregate face value $1,356,113) Unrealized Aggregate Delivery appreciation/ Value face value date (depreciation) ------------------------------------------------------------------------------------------------------ Canadian Dollar $703,871 $686,874 9/15/04 $16,997 Euro 666,031 669,239 9/15/04 (3,208) ------------------------------------------------------------------------------------------------------ $13,789 ------------------------------------------------------------------------------------------------------ Futures contracts outstanding at July 31, 2004 Unrealized Aggregate Expiration appreciation/ Value face value date (depreciation) ------------------------------------------------------------------------------------------------------ Euro 90 day (Long) $2,206,350 $2,206,610 Sep 04 $(260) Euro 90 day (Long) 732,300 735,838 Dec 04 (3,538) Euro 90 day (Long) 729,300 732,838 Mar 05 (3,538) Euro 90 day (Long) 726,525 729,838 Jun 05 (3,313) Euro 90 day (Long) 723,975 727,175 Sep 05 (3,200) Euro 90 day (Long) 721,688 724,888 Dec 05 (3,200) Interest Rate Swap 10 yr (Long) 968,344 936,514 Sep 04 31,830 S&P 500 Index (Short) 70,470,400 72,555,840 Sep 04 2,085,440 U.S. Treasury Bond (Long) 147,393,938 142,344,014 Sep 04 5,049,924 U.S. Treasury Note 5 yr (Short) 699,595,500 694,582,624 Sep 04 (5,012,876) U.S. Treasury Note 10 yr (Long) 741,262,031 726,873,559 Sep 04 14,388,472 ------------------------------------------------------------------------------------------------------ $16,525,741 ------------------------------------------------------------------------------------------------------ TBA sales commitments outstanding at July 31, 2004 (proceeds receivable $518,355,367) Principal Settlement Agency amount date Value ------------------------------------------------------------------------------------------------------ FNMA 6 1/2s, August 15, 2034 $234,700,000 8/12/04 $244,913,111 FNMA 4 1/2s, August 15, 2034 289,200,000 8/12/04 273,090,664 ------------------------------------------------------------------------------------------------------ $518,003,775 ------------------------------------------------------------------------------------------------------ Interest rate swap contracts outstanding at July 31, 2004 Unrealized Notional Termination appreciation/ amount date (depreciation) ------------------------------------------------------------------------------------------------------ Agreement with Bank of America, N.A. dated January 14, 2004 to pay semi-annually the notional amount multiplied by 4.35625% and receive quarterly the notional amount multiplied by the three month USD-LIBOR. $158,677,000 1/16/14 $6,443,945 Agreement with Bank of America, N.A. dated January 26, 2004 to receive semi-annually the notional amount multiplied by 5.2125% and pay quarterly the notional amount multiplied by the three month USD-LIBOR. 82,772,000 1/28/24 (2,806,822) Agreement with Bank of America, N.A. dated December 2, 2003 to receive semi-annually the notional amount multiplied by 2.444% and pay quarterly the notional amount multiplied by the three month USD LIBOR. 12,822,000 12/5/05 (8,580) Agreement with Bank of America N.A. dated December 12, 2003 to pay semi-annually the notional amount multiplied by 2.1125% and receive quarterly the notional amount multiplied by three month USD-LIBOR. 3,280,000 12/16/05 21,972 Agreement with Credit Suisse First Boston International dated July 7, 2004 to receive semi-annually the notional amount multiplied by 2.931% and pay quarterly the notional amount multiplied by the three month USD LIBOR. 25,631,800 7/9/06 (24,968) Agreement with Lehman Brothers Special Financing, Inc. dated August 1, 2003 to receive semi-annually the notional amount multiplied by 3.93% and pay quarterly the notional amount multiplied by the three month USD LIBOR. 116,700,000 8/5/08 2,057,291 Agreement with Lehman Brothers Special Financing, Inc. dated December 5, 2003 to receive semi-annually the notional amount multiplied by 2.23762% and pay quarterly the notional amount multiplied by three month USD-LIBOR-BBA. 54,516,000 12/9/05 (230,547) Agreement with Lehman Brothers Special Financing, Inc. dated January 22, 2004 to pay semi-annually the notional amount multiplied by 1.999% and receive quarterly the notional amount multiplied by the three month USD-LIBOR-BBA. 28,852,000 1/26/06 308,688 Agreement with Lehman Brothers Special Financing, Inc. dated January 21, 2004 to pay semi-annually the notional amount multiplied by 2.008% and receive quarterly the notional amount multiplied by the three month USD-LIBOR-BBA. 28,154,000 1/23/06 294,668 Agreement with Lehman Brothers Special Financing, Inc. dated January 21, 2004 to pay semi-annually the notional amount multiplied by 2.009% and receive quarterly the notional amount multiplied by the three month USD-LIBOR-BBA 28,154,000 1/23/06 294,661 Agreement with Lehman Brothers Special Financing, Inc. dated January 22, 2004 to pay semi-annually the notional amount multiplied by 2.007% and receive quarterly the notional amount multiplied by the three month USD-LIBOR-BBA. 15,124,000 1/26/06 160,282 Agreement with Lehman Brothers Special Financing, Inc. dated December 11, 2003 to pay semi-annually the notional amount multiplied by 4.71% and receive quarterly the notional amount multiplied by three month USD-LIBOR-BBA. 10,708,000 12/15/13 108,859 Agreement with Lehman Brothers Special Financing, Inc. dated December 12, 2003 to pay semi-annually the notional amount multiplied by 4.5792% and receive quarterly the notional amount multiplied by three month USD-LIBOR-BBA. 10,192,000 12/16/13 207,362 Agreement with Lehman Brothers Special Financing, Inc. dated January 22, 2004 to pay semi-annually the notional amount multiplied by 4.375% and receive quarterly the notional amount multiplied by the three month USD-LIBOR-BBA. 9,540,000 1/26/14 388,937 Agreement with Lehman Brothers Special Financing, Inc. dated January 21, 2004 to pay semi-annually the notional amount multiplied by 4.408% and receive quarterly the notional amount multiplied by the three month USD-LIBOR-BBA. 9,307,000 1/23/14 352,111 Agreement with Lehman Brothers Special Financing, Inc. dated January 21, 2004 to pay semi-annually the notional amount multiplied by 4.419% and receive quarterly the notional amount multiplied by the three month USD-LIBOR-BBA. 9,307,000 1/23/14 344,643 Agreement with Lehman Brothers Special Financing, Inc. dated January 22, 2004 to pay semi-annually the notional amount multiplied by 4.379% and receive quarterly the notional amount multiplied by the three month USD-LIBOR-BBA. 4,886,000 1/26/14 197,730 Agreement with Lehman Brothers Special Financing, Inc. dated December 9, 2003 to receive semi-annually the notional amount multiplied by 4.641% and pay quarterly the notional amount multiplied by three month USD-LIBOR-BBA. 3,658,000 12/15/13 (55,150) Agreement with Lehman Brothers Special Financing, Inc. dated December 11, 2003 to pay semi-annually the notional amount multiplied by 2.235% and receive quarterly the notional amount multiplied by three month USD-LIBOR-BBA. 2,559,000 12/15/05 12,868 ------------------------------------------------------------------------------------------------------ $8,067,950 ------------------------------------------------------------------------------------------------------ Total return swap contracts outstanding at July 31, 2004 Unrealized Notional Termination appreciation/ amount date (depreciation) ------------------------------------------------------------------------------------------------------ Agreement with Deutsche Bank AG dated July 16, 2004 to receive monthly the notional amount multiplied by the nominal spread depreciation of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index adjusted by a modified duration factor and pay monthly the notional amount multiplied by the nominal spread appreciation of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index and an accrual of 40 basis points plus the beginning of the period nominal spread of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index. $11,081,500 1/31/05 $0 Agreement with Deutsche Bank AG dated June 28, 2004 to pay at maturity the notional amount multiplied by the spread appreciation of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index adjusted by a modified duration factor and receive at maturity the notional amount multiplied by the depreciation of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index plus 43 basis points. 18,122,400 1/1/05 13,290 Agreement with Goldman Sachs Capital Markets, L.P. dated June 16, 2004 to pay monthly the notional amount multiplied by the spread appreciation of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index adjusted by a modified duration factor and receive monthly the notional amount multiplied by the depreciation of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index plus 43 basis points. 23,800,939 6/1/05 15,869 Agreement with Goldman Sachs Capital Markets, L.P. dated June 25, 2004 to pay monthly the notional amount multiplied by the spread appreciation of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index adjusted by a modified duration factor and receive monthly the notional amount multiplied by the depreciation of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index plus 43 basis points. 24,163,147 10/1/04 17,518 Agreement with JP Morgan Chase Bank dated February 26, 2004 to receive (pay) at termination the notional amount multiplied by CMBS Lehman Brothers Investment Grade Index and pay at termination the notional amount multiplied by the six month USD-LIBOR-BBA adjusted by a specified spread. 7,276,053 9/1/04 (140,969) Agreement with Lehman Brothers Special Financing, Inc. dated March 3, 2004 to receive monthly the notional amount multiplied by Lehman Brothers CMBS ERISA-Eligible Index and pay monthly the absolute value of the spread return amount. 8,655,713 9/1/04 10,529 Agreement with Lehman Brothers Special Financing, Inc. dated February 26, 2004 to receive (pay) semi-annually the notional amount multiplied by Lehman Brothers CMBS ERISA -- Eligible Index and pay monthly the notional amount multiplied by the one month USD-LIBOR-BBA adjusted by a specified spread. 7,079,179 9/1/04 68,495 Agreement with Morgan Stanley & Co. dated July 16, 2004 to pay monthly the notional amount multiplied by the nominal spread depreciation of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index adjusted by a modified duration factor and receive monthly the notional amount multiplied by the nominal spread appreciation of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index and an accrual of 47 basis points plus the beginning of the period nominal spread of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index. 11,081,500 1/31/05 0 Agreement with Morgan Stanley & Co. dated July 16, 2004 to pay monthly the notional amount multiplied by the nominal spread depreciation of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index adjusted by a modified duration factor and receive monthly the notional amount multiplied by the nominal spread appreciation of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index and an accrual of 47 basis points plus the beginning of the period nominal spread of the Lehman Brothers AAA Commercial Mortgage Backed Securities Index. 22,163,000 1/31/05 16,998 ------------------------------------------------------------------------------------------------------ $1,730 ------------------------------------------------------------------------------------------------------ Credit default contracts outstanding at July 31, 2004 (premiums received $213,254) Notional amount Value ------------------------------------------------------------------------------------------------------ Agreement with Merrill Lynch International effective June 26, 2003, maturing on September 20, 2008, to receive a premium equal to 11.088% times the notional amount. Upon a credit default event of The Gap, Inc. 5.75% due 3/15/09 the fund makes a payment of the proportional notional amount times the difference between the par value and the then-market value of The Gap, Inc. 5.75%, 2009. $1,350,000 $43,375 Agreement with Merrill Lynch International effective July 1, 2004, maturing on July 1, 2007, to receive a premium equal to 1.441% times the notional amount. Upon a credit default event of Consolidated Natural Gas, 6.625%, December 12, 2008, the fund makes a payment of the proportional notional amount times the difference between the par value and the then- market value of Consolidated Natural Gas, 6.625%, December 12, 2008. 4,410,000 62,049 ------------------------------------------------------------------------------------------------------ $105,424 ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. Statement of assets and liabilities July 31, 2004 Assets ------------------------------------------------------------------------------- Investment in securities, at value, including $212,225,191 of securities on loan (Note 1): ------------------------------------------------------------------------------- Unaffiliated Issuers (identified cost $5,566,738,710) $6,156,187,715 ------------------------------------------------------------------------------- Affiliated Issuers (identified cost $229,606,619) (Note 6) 229,606,619 ------------------------------------------------------------------------------- Cash 11,627,552 ------------------------------------------------------------------------------- Dividends, interest and other receivables 29,853,173 ------------------------------------------------------------------------------- Receivable for shares of the fund sold 4,777,134 ------------------------------------------------------------------------------- Receivable for securities sold 946,313,780 ------------------------------------------------------------------------------- Receivable for open swap contracts (Note 1) 11,336,716 ------------------------------------------------------------------------------- Receivable for open forward currency contracts (Note 1) 16,997 ------------------------------------------------------------------------------- Receivable for variation margin (Note 1) 3,574,150 ------------------------------------------------------------------------------- Total assets 7,393,293,836 Liabilities ------------------------------------------------------------------------------- Payable for securities purchased 1,067,163,704 ------------------------------------------------------------------------------- Payable for shares of the fund repurchased 16,056,417 ------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 6,734,998 ------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 2,344,509 ------------------------------------------------------------------------------- Payable for Trustee compensation and expenses (Note 2) 342,054 ------------------------------------------------------------------------------- Payable for administrative services (Note 2) 4,251 ------------------------------------------------------------------------------- Payable for distribution fees (Note 2) 1,851,593 ------------------------------------------------------------------------------- Credit default contracts outstanding, at value (premiums received $213,254) (Note 1) 105,424 ------------------------------------------------------------------------------- Payable for open swap contracts (Note 1) 3,267,036 ------------------------------------------------------------------------------- Payable for open forward currency contracts (Note 1) 3,208 ------------------------------------------------------------------------------- TBA sales commitments, at value (proceeds receivable $518,355,367) (Note 1) 518,003,775 ------------------------------------------------------------------------------- Collateral on securities loaned, at value (Note 1) 218,136,061 ------------------------------------------------------------------------------- Other accrued expenses 565,926 ------------------------------------------------------------------------------- Total liabilities 1,834,578,956 ------------------------------------------------------------------------------- Net assets $5,558,714,880 Represented by ------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $5,378,210,375 ------------------------------------------------------------------------------- Undistributed net investment income (Note 1) 12,056,047 ------------------------------------------------------------------------------- Accumulated net realized loss on investments and foreign currency transactions (Note 1) (446,085,415) ------------------------------------------------------------------------------- Net unrealized appreciation of investments 614,533,873 ------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $5,558,714,880 ------------------------------------------------------------------------------- Computation of net asset value and offering price ------------------------------------------------------------------------------- Net asset value and redemption price per class A share ($3,322,531,859 divided by 196,526,569 shares) $16.91 ------------------------------------------------------------------------------- Offering price per class A share (100/94.75 of $16.91)* $17.85 ------------------------------------------------------------------------------- Net asset value and offering price per class B share ($1,095,664,658 divided by 65,483,968 shares)** $16.73 ------------------------------------------------------------------------------- Net asset value and offering price per class C share ($75,184,946 divided by 4,473,674 shares)** $16.81 ------------------------------------------------------------------------------- Net asset value and redemption price per class M share ($217,045,649 divided by 12,964,006 shares) $16.74 ------------------------------------------------------------------------------- Offering price per class M share (100/96.50 of $16.74)* $17.35 ------------------------------------------------------------------------------- Net asset value, offering price and redemption price per class R share ($126,769 divided by 7,508 shares) $16.89 ------------------------------------------------------------------------------- Net asset value, offering price and redemption price per class Y share ($848,160,999 divided by 50,040,043 shares) $16.95 ------------------------------------------------------------------------------- * On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales, the offering price is reduced. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. The accompanying notes are an integral part of these financial statements. Statement of operations Year ended July 31, 2004 Investment income: ------------------------------------------------------------------------------- Interest (including interest income of $737,815 from investments in affiliated issuers) (Note 6) $93,905,109 ------------------------------------------------------------------------------- Dividends (net of foreign tax of $281,493) 79,733,911 ------------------------------------------------------------------------------- Securities lending 163,521 ------------------------------------------------------------------------------- Total investment income 173,802,541 Expenses: ------------------------------------------------------------------------------- Compensation of Manager (Note 2) 28,920,371 ------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 14,751,056 ------------------------------------------------------------------------------- Trustee compensation and expenses (Note 2) 104,474 ------------------------------------------------------------------------------- Administrative services (Note 2) 45,938 ------------------------------------------------------------------------------- Distribution fees -- Class A (Note 2) 8,882,260 ------------------------------------------------------------------------------- Distribution fees -- Class B (Note 2) 12,315,500 ------------------------------------------------------------------------------- Distribution fees -- Class C (Note 2) 840,270 ------------------------------------------------------------------------------- Distribution fees -- Class M (Note 2) 1,742,567 ------------------------------------------------------------------------------- Distribution fees -- Class R (Note 2) 175 ------------------------------------------------------------------------------- Other 1,598,718 ------------------------------------------------------------------------------- Non-recurring costs (Note 6) 110,550 ------------------------------------------------------------------------------- Costs assumed by Manager (Note 6) (110,550) ------------------------------------------------------------------------------- Fees waived and reimbursed by Manager (Note 6) (121,285) ------------------------------------------------------------------------------- Total expenses 69,080,044 ------------------------------------------------------------------------------- Expense reduction (Note 2) (1,647,315) ------------------------------------------------------------------------------- Net expenses 67,432,729 ------------------------------------------------------------------------------- Net investment income 106,369,812 ------------------------------------------------------------------------------- Net realized gain on investments (Notes 1 and 3) 256,098,168 ------------------------------------------------------------------------------- Net realized gain on swap contracts (Note 1) 2,347,865 ------------------------------------------------------------------------------- Net realized loss on futures contracts (Note 1) (33,475,052) ------------------------------------------------------------------------------- Net realized gain on foreign currency transactions (Note 1) 220,927 ------------------------------------------------------------------------------- Net realized loss on credit default contracts (Note 1) (978,684) ------------------------------------------------------------------------------- Net realized gain on written options (Notes 1 and 3) 1,860,166 ------------------------------------------------------------------------------- Net unrealized appreciation of assets and liabilities in foreign currencies during the year 121,972 ------------------------------------------------------------------------------- Net unrealized appreciation of investments, futures contracts, swap contracts, credit default contracts, written options, and TBA sale commitments during the year 238,758,263 ------------------------------------------------------------------------------- Net gain on investments 464,953,625 ------------------------------------------------------------------------------- Net increase in net assets resulting from operations $571,323,437 ------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. Statement of changes in net assets Year ended July 31 Increase (decrease) in net assets 2004 2003 ------------------------------------------------------------------------------- Operations: ------------------------------------------------------------------------------- Net investment income $106,369,812 $137,222,025 ------------------------------------------------------------------------------- Net realized gain (loss) on investments and foreign currency transactions 226,073,390 (314,771,145) ------------------------------------------------------------------------------- Net unrealized appreciation of investments and assets and liabilities in foreign currencies 238,880,235 666,689,756 ------------------------------------------------------------------------------- Net increase in net assets resulting from operations 571,323,437 489,140,636 ------------------------------------------------------------------------------- Distributions to shareholders: (Note 1) ------------------------------------------------------------------------------- From net investment income Class A (71,321,677) (107,895,962) ------------------------------------------------------------------------------- Class B (15,606,522) (29,270,787) ------------------------------------------------------------------------------- Class C (1,081,609) (1,730,918) ------------------------------------------------------------------------------- Class M (3,563,743) (6,195,401) ------------------------------------------------------------------------------- Class R (455) (11) ------------------------------------------------------------------------------- Class Y (21,369,832) (26,338,433) ------------------------------------------------------------------------------- Increase (decrease) from capital share transactions (Note 4) (1,204,250,931) 919,964,935 ------------------------------------------------------------------------------- Total increase (decrease) in net assets (745,871,332) 1,237,674,059 Net assets ------------------------------------------------------------------------------- Beginning of year 6,304,586,212 5,066,912,153 ------------------------------------------------------------------------------- End of year (including undistributed net investment income of $12,056,047 and $20,229,226, respectively) $5,558,714,880 $6,304,586,212 ------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Financial highlights (For a common share outstanding throughout the period) CLASS A --------------------------------------------------------------------------------------------------------------------------------- Per-share Year ended July 31 operating performance 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $15.72 $15.02 $17.24 $15.77 $18.49 --------------------------------------------------------------------------------------------------------------------------------- Investment operations: --------------------------------------------------------------------------------------------------------------------------------- Net investment income (a) .32 (d) .37 .45 .52 .55 --------------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments 1.20 .81 (2.17) 1.49 (1.44) --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.52 1.18 (1.72) 2.01 (.89) --------------------------------------------------------------------------------------------------------------------------------- Less distributions: --------------------------------------------------------------------------------------------------------------------------------- From net investment income (.33) (.48) (.48) (.53) (.58) --------------------------------------------------------------------------------------------------------------------------------- From net realized gain on investments -- -- (.02) (.01) (1.25) --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.33) (.48) (.50) (.54) (1.83) --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $16.91 $15.72 $15.02 $17.24 $15.77 --------------------------------------------------------------------------------------------------------------------------------- Total return at net asset value (%)(b) 9.77 8.06 (10.20) 12.86 (5.09) --------------------------------------------------------------------------------------------------------------------------------- Ratios and supplemental data --------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $3,322,532 $3,784,601 $2,990,984 $3,176,287 $3,030,281 --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.00 (d) .99 .96 .92 .93 --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 1.90 (d) 2.50 2.75 3.11 3.32 --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover (%) 165.66 121.38 (e)(f) 131.89 (e) 333.46 140.92 ---------------------------------------------------------------------------------------------------------------------------------
(a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through brokerage service and expense offset arrangements (Note 2). (d) Reflects waivers of certain fund expenses during the period. As a result of such waivers the expenses of the fund for the period ended July 31, 2004 reflect a reduction of less than 0.01% of the average net assets of class A shares. (Note 6). (e) Portfolio turnover excludes certain treasury note transactions executed in connection with a short-term trading strategy. (f) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam Balanced Fund and Putnam Balanced Retirement Fund (Note 5). The accompanying notes are an integral part of these financial statements.
Financial highlights (For a common share outstanding throughout the period) CLASS B --------------------------------------------------------------------------------------------------------------------------------- Per-share Year ended July 31 operating performance 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $15.56 $14.87 $17.07 $15.62 $18.33 --------------------------------------------------------------------------------------------------------------------------------- Investment operations: --------------------------------------------------------------------------------------------------------------------------------- Net investment income (a) .19 (d) .26 .33 .39 .42 --------------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments 1.19 .80 (2.15) 1.48 (1.43) --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.38 1.06 (1.82) 1.87 (1.01) --------------------------------------------------------------------------------------------------------------------------------- Less distributions: --------------------------------------------------------------------------------------------------------------------------------- From net investment income (.21) (.37) (.36) (.41) (.45) --------------------------------------------------------------------------------------------------------------------------------- From net realized gain on investments -- -- (.02) (.01) (1.25) --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.21) (.37) (.38) (.42) (1.70) --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $16.73 $15.56 $14.87 $17.07 $15.62 --------------------------------------------------------------------------------------------------------------------------------- Total return at net asset value (%)(b) 8.88 7.25 (10.86) 12.02 (5.82) --------------------------------------------------------------------------------------------------------------------------------- Ratios and supplemental data --------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $1,095,665 $1,308,605 $1,068,667 $1,199,676 $1,175,947 --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.75 (d) 1.74 1.71 1.67 1.68 --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 1.16 (d) 1.75 2.00 2.36 2.57 --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover (%) 165.66 121.38 (e)(f) 131.89 (e) 333.46 140.92 ---------------------------------------------------------------------------------------------------------------------------------
(a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through brokerage service and expense offset arrangements (Note 2). (d) Reflects waivers of certain fund expenses during the period. As a result of such waivers the expenses of the fund for the period ended July 31, 2004 reflect a reduction of less than 0.01% of the average net assets of class B shares. (Note 6). (e) Portfolio turnover excludes certain treasury note transactions executed in connection with a short-term trading strategy. (f) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam Balanced Fund and Putnam Balanced Retirement Fund (Note 5). The accompanying notes are an integral part of these financial statements.
Financial highlights (For a common share outstanding throughout the period) CLASS C --------------------------------------------------------------------------------------------------------------------------------- Per-share Year ended July 31 operating performance 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $15.63 $14.94 $17.16 $15.71 $18.49 --------------------------------------------------------------------------------------------------------------------------------- Investment operations: --------------------------------------------------------------------------------------------------------------------------------- Net investment income (a) .19 (d) .26 .33 .39 .42 --------------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments 1.20 .80 (2.16) 1.49 (1.44) --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.39 1.06 (1.83) 1.88 (1.02) --------------------------------------------------------------------------------------------------------------------------------- Less distributions: --------------------------------------------------------------------------------------------------------------------------------- From net investment income (.21) (.37) (.37) (.42) (.51) --------------------------------------------------------------------------------------------------------------------------------- From net realized gain on investments -- -- (.02) (.01) (1.25) --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.21) (.37) (.39) (.43) (1.76) --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $16.81 $15.63 $14.94 $17.16 $15.71 --------------------------------------------------------------------------------------------------------------------------------- Total return at net asset value (%)(b) 8.92 7.25 (10.88) 12.02 (5.82) --------------------------------------------------------------------------------------------------------------------------------- Ratios and supplemental data --------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $75,185 $91,282 $53,186 $37,453 $20,642 --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.75 (d) 1.74 1.71 1.67 1.68 --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (%) 1.16 (d) 1.73 1.99 2.32 2.60 --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover (%) 165.66 121.38 (e)(f) 131.89 (e) 333.46 140.92 ---------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations. * Not annualized. (a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through brokerage service and expense offset arrangements (Note 2). (d) Reflects waivers of certain fund expenses during the period. As a result of such waivers the expenses of the fund for the period ended July 31, 2004 reflect a reduction of less than 0.01% of the average net assets of class C shares. (Note 6). (e) Portfolio turnover excludes certain treasury note transactions executed in connection with a short-term trading strategy. (f) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam Balanced Fund and Putnam Balanced Retirement Fund (Note 5). The accompanying notes are an integral part of these financial statements.
Financial highlights (For a common share outstanding throughout the period) CLASS M --------------------------------------------------------------------------------------------------------------------------------- Per-share Year ended July 31 operating performance 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $15.57 $14.87 $17.08 $15.63 $18.33 --------------------------------------------------------------------------------------------------------------------------------- Investment operations: --------------------------------------------------------------------------------------------------------------------------------- Net investment income (a) .23 (d) .30 .37 .43 .46 --------------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments 1.19 .80 (2.16) 1.48 (1.42) --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.42 1.10 (1.79) 1.91 (.96) --------------------------------------------------------------------------------------------------------------------------------- Less distributions: --------------------------------------------------------------------------------------------------------------------------------- From net investment income (.25) (.40) (.40) (.45) (.49) --------------------------------------------------------------------------------------------------------------------------------- From net realized gain on investments -- -- (.02) (.01) (1.25) --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.25) (.40) (.42) (.46) (1.74) --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $16.74 $15.57 $14.87 $17.08 $15.63 --------------------------------------------------------------------------------------------------------------------------------- Total return at net asset value (%)(b) 9.18 7.58 (10.69) 12.31 (5.52) --------------------------------------------------------------------------------------------------------------------------------- Ratios and supplemental data --------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $217,046 $239,662 $222,176 $252,802 $223,246 --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.50 (d) 1.49 1.46 1.42 1.43 --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 1.40 (d) 2.02 2.25 2.60 2.82 --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover (%) 165.66 121.38 (e)(f) 131.89 (e) 333.46 140.92 ---------------------------------------------------------------------------------------------------------------------------------
(a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through brokerage service and expense offset arrangements (Note 2). (d) Reflects waivers of certain fund expenses during the period. As a result of such waivers the expenses of the fund for the period ended July 31, 2004 reflect a reduction of less than 0.01% of the average net assets of class M shares. (Note 6). (e) Portfolio turnover excludes certain treasury note transactions executed in connection with a short-term trading strategy. (f) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam Balanced Fund and Putnam Balanced Retirement Fund (Note 5). The accompanying notes are an integral part of these financial statements.
Financial highlights (For a common share outstanding throughout the period) CLASS R ------------------------------------------------------------------------------------------------------------------------- Year For the period ended January 21, 2003+ Per-share July 31 to July 31 operating performance 2004 2003 ------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $15.70 $15.05 ------------------------------------------------------------------------------------------------------------------------- Investment operations: ------------------------------------------------------------------------------------------------------------------------- Net investment income (a) .21 (d) .17 ------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 1.29 .65 ------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.50 .82 ------------------------------------------------------------------------------------------------------------------------- Less distributions: ------------------------------------------------------------------------------------------------------------------------- From net investment income (.31) (.17) ------------------------------------------------------------------------------------------------------------------------- Total distributions (.31) (.17) ------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $16.89 $15.70 ------------------------------------------------------------------------------------------------------------------------- Total return at net asset value (%)(b) 9.60 5.52* ------------------------------------------------------------------------------------------------------------------------- Ratios and supplemental data ------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $127 $1 ------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.25 (d) .65* ------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 1.33 (d) 1.18* ------------------------------------------------------------------------------------------------------------------------- Portfolio turnover (%) 165.66 121.38 (e)(f) -------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations. * Not annualized. (a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through brokerage service and expense offset arrangements (Note 2). (d) Reflects waivers of certain fund expenses during the period. As a result of such waivers the expenses of the fund for the period ended July 31, 2004 reflect a reduction of less than 0.01% of the average net assets of class R shares. (Note 6). (e) Portfolio turnover excludes certain treasury note transactions executed in connection with a short-term trading strategy. (f) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam Balanced Fund and Putnam Balanced Retirement Fund (Note 5). The accompanying notes are an integral part of these financial statements.
Financial highlights (For a common share outstanding throughout the period) CLASS Y --------------------------------------------------------------------------------------------------------------------------------- Per-share Year ended July 31 operating performance 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $15.76 $15.05 $17.28 $15.80 $18.53 --------------------------------------------------------------------------------------------------------------------------------- Investment operations: --------------------------------------------------------------------------------------------------------------------------------- Net investment income (a) .36 (d) .41 .49 .56 .60 --------------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments 1.21 .82 (2.17) 1.50 (1.46) --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.57 1.23 (1.68) 2.06 (.86) --------------------------------------------------------------------------------------------------------------------------------- Less distributions: --------------------------------------------------------------------------------------------------------------------------------- From net investment income (.38) (.52) (.53) (.57) (.62) --------------------------------------------------------------------------------------------------------------------------------- From net realized gain on investments -- -- (.02) (.01) (1.25) --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.38) (.52) (.55) (.58) (1.87) --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $16.95 $15.76 $15.05 $17.28 $15.80 --------------------------------------------------------------------------------------------------------------------------------- Total return at net asset value (%)(b) 10.03 8.38 (10.01) 13.18 (4.89) --------------------------------------------------------------------------------------------------------------------------------- Ratios and supplemental data --------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $848,161 $880,435 $731,900 $768,075 $621,363 --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) .75 (d) .74 .71 .67 .68 --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 2.16 (d) 2.76 3.00 3.35 3.57 --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover (%) 165.66 121.38 (e)(f) 131.89 (e) 333.46 140.92 ---------------------------------------------------------------------------------------------------------------------------------
(a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through brokerage service and expense offset arrangements (Note 2). (d) Reflects waivers of certain fund expenses during the period. As a result of such waivers the expenses of the fund for the period ended July 31, 2004 reflect a reduction of less than 0.01% of the average net assets of class Y shares. (Note 6). (e) Portfolio turnover excludes certain treasury note transactions executed in connection with a short-term trading strategy. (f) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam Balanced Fund and Putnam Balanced Retirement Fund (Note 5). The accompanying notes are an integral part of these financial statements. Notes to financial statements July 31, 2004 Note 1 Significant accounting policies The George Putnam Fund of Boston ("the fund"), a Massachusetts business trust, is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The fund seeks to provide a balanced investment comprised of a well-diversified portfolio of stocks and bonds, which will produce both capital growth and current income. The fund offers class A, class B, class C, class M, class R and class Y shares. Class A shares are sold with a maximum front-end sales charge of 5.25%. Prior to January 28, 2004, the maximum front-end sales charge for class A shares was 5.75%. Class B shares, which convert to class A shares after approximately eight years, do not pay a front-end sales charge but pay a higher ongoing distribution fee than class A, class M and class R shares, and are subject to a contingent deferred sales charge, if those shares are redeemed within six years of purchase. Class C shares are subject to the same fees and expenses as class B shares, except that class C shares have a one-year 1.00% contingent deferred sales charge and do not convert to class A shares. Class M shares are sold with a maximum front-end sales charge of 3.50% and pay an ongoing distribution fee that is higher than class A and class R shares but lower than class B and class C shares. Class R shares are sold without a front-end sales charge and pay an ongoing distribution fee that is higher than class A shares, but lower than class B, class C and class M shares. Class R shares are offered to qualified employee-benefit plans. Class Y shares, which are sold at net asset value, are generally subject to the same expenses as class A, class B, class C, class M and class R shares, but do not bear a distribution fee. Class Y shares are sold to certain eligible purchasers including certain defined contribution plans (including corporate IRAs), bank trust departments, trust companies and certain college savings plans. Effective April 19, 2004 (May 3, 2004 for defined contribution plans administered by Putnam) a 2.00% redemption fee may apply to any shares that are redeemed (either by selling or exchanging into another fund) within 5 days of purchase. The redemption fee is accounted for as an addition to paid-in-capital. Total redemption fees received by the fund for the year ended July 31, 2004 were $2,271. Expenses of the fund are borne pro-rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the distribution fees applicable to such class). Each class votes as a class only with respect to its own distribution plan or other matters on which a class vote is required by law or determined by the Trustees. Shares of each class would receive their pro-rata share of the net assets of the fund, if the fund were liquidated. In addition, the Trustees declare separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. A) Security valuation Investments for which market quotations are readily available are valued at the last reported sales price on their principal exchange, or official closing price for certain markets. If no sales are reported -- as in the case of some securities traded over-the-counter -- a security is valued at its last reported bid price. Market quotations are not considered to be readily available for certain debt obligations; such investments are valued at fair value on the basis of valuations furnished by an independent pricing service or dealers, approved by the Trustees. Such services or dealers determine valuations for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships, generally recognized by institutional traders, between securities. Many securities markets and exchanges outside the U.S. close prior to the close of the New York Stock Exchange and therefore the closing prices for securities in such markets or on such exchanges may not fully reflect events that occur after such close but before the close of the New York Stock Exchange. Accordingly, on certain days, the fund will fair value foreign securities taking into account multiple factors, including movements in the U.S. securities markets. The number of days on which fair value prices will be used will depend on market activity and it is possible that fair value prices will be used by the fund to a significant extent. Securities quoted in foreign currencies are translated into U.S. dollars at the current exchange rate. Short-term investments having remaining maturities of 60 days or less are valued at amortized cost, which approximates fair value. Other investments, including restricted securities, are valued at fair value following procedures approved by the Trustees. Such valuations and procedures are reviewed periodically by the Trustees. B) Joint trading account The fund may transfer uninvested cash balances, including cash collateral received under security lending arrangements, into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Investment Management, LLC ("Putnam Management"), the fund's manager, an indirect wholly-owned subsidiary of Putnam, LLC. These balances may be invested in issuers of high-grade short-term investments having maturities of up to 397 days for collateral received under security lending arrangements and up to 90 days for other cash investments. C) Security transactions and related investment income Security transactions are recorded on the trade date (date the order to buy or sell is executed). Gains or losses on securities sold are determined on the identified cost basis. Interest income is recorded on the accrual basis. Dividend income, net of applicable withholding taxes, is recognized on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. All premiums/discounts are amortized/accreted on a yield-to-maturity basis. D) Foreign currency translation The accounting records of the fund are maintained in U.S. dollars. The market value of foreign securities, currency holdings, and other assets and liabilities are recorded in the books and records of the fund after translation to U.S. dollars based on the exchange rates on that day. The cost of each security is determined using historical exchange rates. Income and withholding taxes are translated at prevailing exchange rates when earned or incurred. The fund does not isolate that portion of realized or unrealized gains or losses resulting from changes in the foreign exchange rate on investments from fluctuations arising from changes in the market prices of the securities. Such gains and losses are included with the net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net realized exchange gains or losses on closed forward currency contracts, disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized appreciation and depreciation of assets and liabilities in foreign currencies arise from changes in the value of open forward currency contracts and assets and liabilities other than investments at the period end, resulting from changes in the exchange rate. Investments in foreign securities involve certain risks, including those related to economic instability, unfavorable political developments, and currency fluctuations, not present with domestic investments. E) Forward currency contracts The fund may buy and sell forward currency contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date. These contracts are used to protect against a decline in value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of a currency in which securities a fund intends to buy are denominated, when a fund holds cash reserves and short term investments). The U.S. dollar value of forward currency contracts is determined using current forward currency exchange rates supplied by a quotation service. The market value of the contract will fluctuate with changes in currency exchange rates. The contract is marked to market daily and the change in market value is recorded as an unrealized gain or loss. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The fund could be exposed to risk if the value of the currency changes unfavorably, if the counterparties to the contracts are unable to meet the terms of their contracts or if the fund is unable to enter into a closing position. Risks may exceed amounts recognized on the statement of assets and liabilities. Forward currency contracts outstanding at period end, if any, are listed after the fund's portfolio. F) Futures and options contracts The fund may use futures and options contracts to hedge against changes in the values of securities the fund owns or expects to purchase. The fund may also write options on securities it owns or in which it may invest to increase its current returns. The potential risk to the fund is that the change in value of futures and options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty to the contract is unable to perform. Risks may exceed amounts recognized on the statement of assets and liabilities. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. The fund and the broker agree to exchange an amount of cash equal to the daily fluctuation in the value of the futures contract. Such receipts or payments are known as "variation margin." Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by dealers. Futures and written option contracts outstanding at period end, if any, are listed after the fund's portfolio. G) Total return swap contracts The fund may enter into total return swap contracts, which are arrangements to exchange a market linked return for a periodic payment, both based on a notional principal amount. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the fund will receive a payment from or make a payment to the counterparty, respectively. Total return swap contracts are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss. Payments received or made are recorded as realized gains or loss. The fund could be exposed to credit or market risk due to unfavorable changes in the fluctuation of interest rates or in the price of the underlying security or index, the possibility that there is no liquid market for these agreements or that the counterparty may default on its obligation to perform. Risks may exceed amounts recognized on the statement of assets and liabilities. Total return swap contracts outstanding at period end, if any, are listed after the fund's portfolio. H) Interest rate swap contracts The fund may enter into interest rate swap contracts, which are arrangements between two parties to exchange cash flows based on a notional principal amount, to manage the fund's exposure to interest rates. Interest rate swap contracts are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss. Payments received or made are recorded as realized gains or loss. The fund could be exposed to credit or market risk due to unfavorable changes in the fluctuation of interest rates or if the counterparty defaults on its obligation to perform. Risks may exceed amounts recognized on the statement of assets and liabilities. Interest rate swap contracts outstanding at period end, if any, are listed after the fund's portfolio. I) Credit default contracts The fund may enter into credit default contracts where one party, the protection buyer, makes an upfront payment to a counter party, the protection seller, in exchange for the right to receive a contingent payment. The maximum amount of the payment may equal the notional amount, at par, of the underlying index or security as a result of a related credit event. An upfront payment received by the fund, as the protection seller, is recorded as a liability on the fund's books. An upfront payment made by the fund, as the protection buyer, is recorded as an asset on the fund's books. The credit default contracts are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss. Payments received or made as a result of a credit event or termination of the contract are recognized, net of a proportional amount of the upfront payment, as realized gains or losses. In addition to bearing the risk that the credit event will occur, the fund could be exposed to market risk due to unfavorable changes in interest rates or in the price of the underlying security or index, the possibility that the fund may be unable to close out its position at the same time or at the same price as if it had purchased comparable publicly traded securities or that the counterparty may default on its obligation to perform. The risk of loss may exceed the fair value of these contracts recognized on the statement of assets and liabilities. Credit default contracts outstanding at period end, if any, are listed after the fund's portfolio. J) TBA purchase commitments The fund may enter into "TBA" (to be announced) commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not significantly differ from the principal amount. The fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the fund's other assets. Unsettled TBA purchase commitments are valued at fair value of the underlying securities, according to the procedures described under "Security valuation" above. The contract is "marked-to-market" daily and the change in market value is recorded by the fund as an unrealized gain or loss. Although the fund will generally enter into TBA purchase commitments with the intention of acquiring securities for its portfolio or for delivery pursuant to options contracts it has entered into, the fund may dispose of a commitment prior to settlement if Putnam Management deems it appropriate to do so. K) TBA sale commitments The fund may enter into TBA sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as "cover" for the transaction. Unsettled TBA sale commitments are valued at fair value of the underlying securities, generally according to the procedures described under "Security valuation" above. The contract is "marked-to-market" daily and the change in market value is recorded by the fund as an unrealized gain or loss. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the fund realizes a gain or loss. If the fund delivers securities under the commitment, the fund realizes a gain or a loss from the sale of the securities based upon the unit price established at the date the commitment was entered into. TBA sale commitments outstanding at period end, if any, are listed after the fund's portfolio. L) Security lending The fund may lend securities, through its agents, to qualified borrowers in order to earn additional income. The loans are collateralized by cash and/or securities in an amount at least equal to the market value of the securities loaned. The market value of securities loaned is determined daily and any additional required collateral is allocated to the fund on the next business day. The risk of borrower default will be borne by the fund's agents; the fund will bear the risk of loss with respect to the investment of the cash collateral. Income from securities lending is included in investment income on the statement of operations. At July 31, 2004, the value of securities loaned amounted to $212,225,191. The fund received cash collateral of $218,136,061 which is pooled with collateral of other Putnam funds into 29 issuers of high grade short-term investments. M) Line of credit During the period, the fund was entered into a committed line of credit with certain banks. The line of credit agreement included restrictions that the fund would maintain an asset coverage ratio of at least 300% and that borrowings would not exceed prospectus limitations. For the period ended August 6, 2003, the fund had no borrowings against the line of credit. Effective August 6, 2003, the fund no longer participated in a committed line of credit. N) Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986 (the "Code"), as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains. At July 31, 2004, the fund had a capital loss carryover of $322,771,264 available to the extent allowed by the Code to offset future net capital gain, if any. The amount of the carryover and the expiration dates are: Loss Carryover Expiration -------------------------------- $35,701,820 July 31, 2010 287,069,444 July 31, 2011 O) Distributions to shareholders Distributions to shareholders from net investment income are recorded by the fund on the ex-dividend date. Distributions from capital gains, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences include temporary and permanent differences of losses on wash sales transactions, foreign currency gains and losses, nontaxable dividends, defaulted bond interest, realized and unrealized gains and losses on certain futures contracts, paydown gains and losses on mortgage-backed securities, market discount, straddle loss deferrals, realized built-in losses, and income on swap contracts. Reclassifications are made to the fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. For the year ended July 31, 2004, the fund reclassified $1,599,153 to decrease undistributed net investment income with a decrease to accumulated net realized losses of $1,599,153. The tax basis components of distributable earnings and the federal tax cost as of period end were as follows: Unrealized appreciation $583,862,351 Unrealized depreciation (101,141,716) ------------ Net unrealized appreciation 482,720,635 Undistributed ordinary income 13,828,664 Capital loss carryforward (322,771,264) Cost for federal income tax purposes $5,903,073,699 Note 2 Management fee, administrative services and other transactions Putnam Management is paid for management and investment advisory services quarterly based on the average net assets of the fund. Such fee is based on the following annual rates: 0.65% of the first $500 million of average net assets, 0.55% of the next $500 million, 0.50% of the next $500 million, 0.45% of the next $5 billion, 0.425% of the next $5 billion, 0.405% of the next $5 billion, 0.39% of the next $5 billion and 0.38% thereafter. Effective January 28, 2004, Putnam Management has agreed to limit its compensation (and, to the extent necessary, bear other expenses) through December 31, 2004, to the extent that the fund's net expenses as a percentage of average net assets exceed the average expense ratio for the fund's Lipper peer group of front-end load funds. The fund reimburses Putnam Management an allocated amount for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust Company ("PFTC"), a subsidiary of Putnam, LLC. Putnam Investor Services, a division of PFTC, provides investor servicing agent functions to the fund. During the year ended July 31, 2004, the fund paid PFTC $12,456,463 for these services. The fund has entered into an arrangement with PFTC whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the fund's expenses. The fund also reduced expenses through brokerage service arrangements. For the year ended July 31, 2004, the fund's expenses were reduced by $1,647,315 under these arrangements. Each independent Trustee of the fund receives an annual Trustee fee, of which $4,417, as a quarterly retainer, has been allocated to the fund, and an additional fee for each Trustees meeting attended. Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees fees payable on or after July 1, 1995. The deferred fees remain invested in certain Putnam funds until distribution in accordance with the Deferral Plan. The fund has adopted an unfunded noncontributory defined benefit pension plan (the "Pension Plan") covering all Trustees of the fund who have served as a Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in Trustee compensation and expenses in the statement of operations. Accrued pension liability is included in Payable for Trustee compensation and expenses in the statement of assets and liabilities. The Trustees have terminated the Pension Plan with respect to any Trustee first elected after 2003. The fund has adopted distribution plans (the "Plans") with respect to its class A, class B, class C, class M and class R shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The purpose of the Plans is to compensate Putnam Retail Management, a wholly-owned subsidiary of Putnam, LLC and Putnam Retail Management GP, Inc., for services provided and expenses incurred in distributing shares of the fund. The Plans provide for payments by the fund to Putnam Retail Management at an annual rate of up to 0.35%, 1.00%, 1.00% ,1.00% and 1.00% of the average net assets attributable to class A, class B, class C, class M and class R shares, respectively. The Trustees have approved payment by the fund at an annual rate of 0.25%, 1.00%, 1.00%, 0.75% and 0.50% of the average net assets attributable to class A, class B, class C, class M and class R shares, respectively. For the year ended July 31, 2004, Putnam Retail Management, acting as underwriter, received net commissions of $575,423 and $8,764 from the sale of class A and class M shares, respectively, and received $2,790,512 and $43,615 in contingent deferred sales charges from redemptions of class B and class C shares, respectively. A deferred sales charge of up to 1.00% and 0.65% is assessed on certain redemptions of class A and class M shares, respectively. For the year ended July 31, 2004, Putnam Retail Management, acting as underwriter, received $218,739 and no monies on class A and class M redemptions, respectively. Note 3 Purchases and sales of securities During the year ended July 31, 2004, cost of purchases and proceeds from sales of investment securities other than U.S. government securities and short-term investments aggregated $7,796,369,471 and $8,777,931,314, respectively. Purchases and sales of U.S. government securities aggregated $948,455,165 and $950,652,445, respectively. Written option transactions during the year are summarized as follows: Contract Premiums Amounts Received ---------------------------------------------------------------- Written options outstanding at beginning of year 25,121 $15,324 ---------------------------------------------------------------- Options opened 1,195,529 287,151 Options expired (412,678) (108,885) Options closed (807,972) (193,590) ---------------------------------------------------------------- Written options outstanding at end of year -- $-- ---------------------------------------------------------------- Note 4 Capital shares At July 31, 2004 there were an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows: Year ended July 31, 2004 ---------------------------------------------------------------- Class A Shares Amount ---------------------------------------------------------------- Shares sold 38,177,152 $636,173,891 ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 4,010,048 65,565,354 ---------------------------------------------------------------- 42,187,200 701,739,245 Shares repurchased (86,369,385) (1,432,154,084) ---------------------------------------------------------------- Net decrease (44,182,185) $(730,414,839) ---------------------------------------------------------------- Year ended July 31, 2003 ---------------------------------------------------------------- Class A Shares Amount ---------------------------------------------------------------- Shares sold 56,893,872 $849,636,705 ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 6,611,050 98,441,412 ---------------------------------------------------------------- Shares issued in connection with the merger of Putnam Balanced Fund 5,510,707 78,454,369 ---------------------------------------------------------------- Shares issued in connection with the merger of Putnam Balanced Retirement Fund 36,618,830 521,331,845 ---------------------------------------------------------------- 105,634,459 1,547,864,331 Shares repurchased (64,088,705) (949,329,152) ---------------------------------------------------------------- Net increase 41,545,754 $598,535,179 ---------------------------------------------------------------- Year ended July 31, 2004 ---------------------------------------------------------------- Class B Shares Amount ---------------------------------------------------------------- Shares sold 10,048,720 $165,010,566 ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 894,212 14,468,542 ---------------------------------------------------------------- 10,942,932 179,479,108 Shares repurchased (29,561,948) (487,125,122) ---------------------------------------------------------------- Net decrease (18,619,016) $(307,646,014) ---------------------------------------------------------------- Year ended July 31, 2003 ---------------------------------------------------------------- Class B Shares Amount ---------------------------------------------------------------- Shares sold 16,149,786 $237,706,103 ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 1,840,131 27,227,335 ---------------------------------------------------------------- Shares issued in connection with the merger of Putnam Balanced Fund 1,154,490 16,293,350 ---------------------------------------------------------------- Shares issued in connection with the merger of Putnam Balanced Retirement Fund 14,223,453 200,736,033 ---------------------------------------------------------------- 33,367,860 481,962,821 Shares repurchased (21,153,997) (307,917,883) ---------------------------------------------------------------- Net increase 12,213,863 $174,044,938 ---------------------------------------------------------------- Year ended July 31, 2004 ---------------------------------------------------------------- Class C Shares Amount ---------------------------------------------------------------- Shares sold 1,298,282 $21,315,780 ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 60,062 973,315 ---------------------------------------------------------------- 1,358,344 22,289,095 Shares repurchased (2,725,476) (45,065,317) ---------------------------------------------------------------- Net decrease (1,367,132) $(22,776,222) ---------------------------------------------------------------- Year ended July 31, 2003 ---------------------------------------------------------------- Class C Shares Amount ---------------------------------------------------------------- Shares sold 2,469,236 $36,842,084 ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 107,929 1,603,699 ---------------------------------------------------------------- Shares issued in connection with the merger of Putnam Balanced Fund 206,343 2,926,165 ---------------------------------------------------------------- Shares issued in connection with the merger of Putnam Balanced Retirement Fund 1,118,461 15,861,018 ---------------------------------------------------------------- 3,901,969 57,232,966 Shares repurchased (1,621,481) (23,883,301) ---------------------------------------------------------------- Net increase 2,280,488 $33,349,665 ---------------------------------------------------------------- Year ended July 31, 2004 ---------------------------------------------------------------- Class M Shares Amount ---------------------------------------------------------------- Shares sold 1,968,774 $32,462,800 ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 215,887 3,497,386 ---------------------------------------------------------------- 2,184,661 35,960,186 Shares repurchased (4,611,033) (76,071,025) ---------------------------------------------------------------- Net decrease (2,426,372) $(40,110,839) ---------------------------------------------------------------- Year ended July 31, 2003 ---------------------------------------------------------------- Class M Shares Amount ---------------------------------------------------------------- Shares sold 2,958,968 $43,759,073 ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 410,989 6,080,663 ---------------------------------------------------------------- Shares issued in connection with the merger of Putnam Balanced Fund 49,611 700,183 ---------------------------------------------------------------- Shares issued in connection with the merger of Putnam Balanced Retirement Fund 1,163,340 16,418,669 ---------------------------------------------------------------- 4,582,908 66,958,588 Shares repurchased (4,130,141) (60,618,953) ---------------------------------------------------------------- Net increase 452,767 $6,339,635 ---------------------------------------------------------------- Year ended July 31, 2004 ---------------------------------------------------------------- Class R Shares Amount ---------------------------------------------------------------- Shares sold 8,000 $136,550 ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 27 455 ---------------------------------------------------------------- 8,027 137,005 Shares repurchased (586) (9,998) ---------------------------------------------------------------- Net increase 7,441 $127,007 ---------------------------------------------------------------- For the period January 21, 2003 (commencement of operations) to July 31, 2003 ---------------------------------------------------------------- Class R Shares Amount ---------------------------------------------------------------- Shares sold 65 $1,000 ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 2 11 ---------------------------------------------------------------- 67 1,011 Shares repurchased -- -- ---------------------------------------------------------------- Net increase 67 $1,011 ---------------------------------------------------------------- Year ended July 31, 2004 ---------------------------------------------------------------- Class Y Shares Amount ---------------------------------------------------------------- Shares sold 13,234,706 $218,756,844 ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 1,301,572 21,369,832 ---------------------------------------------------------------- 14,536,278 240,126,676 Shares repurchased (20,348,272) (343,556,700) ---------------------------------------------------------------- Net decrease (5,811,994) $(103,430,024) ---------------------------------------------------------------- Year ended July 31, 2003 ---------------------------------------------------------------- Class Y Shares Amount ---------------------------------------------------------------- Shares sold 13,589,658 $204,021,187 ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 1,762,486 26,338,433 ---------------------------------------------------------------- Shares issued in connection with the merger of Putnam Balanced Fund 1,599,557 22,813,715 ---------------------------------------------------------------- Shares issued in connection with the merger of Putnam Balanced Retirement Fund 295,174 4,209,928 ---------------------------------------------------------------- 17,246,875 257,383,263 Shares repurchased (10,018,455) (149,688,756) ---------------------------------------------------------------- Net increase 7,228,420 $107,694,507 ---------------------------------------------------------------- Note 5 Acquisition of Putnam Balanced Fund and Putnam Balanced Retirement Fund On September 23, 2002, the fund issued the following shares to acquire the net assets of Putnam Balanced Fund and Putnam Balanced Retirement Fund in a tax-free exchange approved by the shareholders. Shares Shares Issued Exchanged ------------------------------------------------------------ Putnam Balanced Fund Class A 5,510,707 9,462,721 Class B 1,154,490 1,970,031 Class C 206,343 353,307 Class M 49,611 84,332 Class Y 1,599,557 2,752,898 ------------------------------------------------------------ Putnam Balanced Retirement Fund Class A 36,618,830 55,745,386 Class B 14,223,453 21,678,937 Class C 1,118,461 1,705,371 Class M 1,163,340 1,766,568 Class Y 295,174 450,232 ------------------------------------------------------------ The net assets of the fund, Putnam Balanced Fund and Putnam Balanced Retirement Fund on September 20, 2002, valuation date, were $4,894,295,298, $121,187,782 and $758,557,493, respectively. On September 20, 2002, Putnam Balanced Fund had unrealized depreciation of $6,934,989 and Putnam Balanced Retirement Fund had unrealized depreciation of $31,608,849, respectively. The aggregate net assets of the fund immediately following the acquisition were $5,774,040,573. Note 6 Investment in Putnam Prime Money Market Fund The fund invests in the Putnam Prime Money Market Fund, an open-end management investment company managed by Putnam Management. Management fees paid by the fund are reduced by an amount equal to the management fees paid by Putnam Prime Money Market Fund with respect to assets invested by the fund in Putnam Prime Money Market Fund. Income distributions earned by the fund are recorded as income in the statement of operations and totaled $737,815 for the period ended July 31, 2004. Note 7 Regulatory matters and litigation On April 8, 2004, Putnam Management entered into agreements with the Securities and Exchange Commission ("SEC") and the Massachusetts Securities Division representing a final settlement of all charges brought against Putnam Management by those agencies on October 28, 2003 in connection with excessive short-term trading by Putnam employees and, in the case of the charges brought by the Massachusetts Securities Division, by participants in some Putnam-administered 401(k) plans. The settlement with the SEC requires Putnam Management to pay $5 million in disgorgement plus a civil monetary penalty of $50 million, and the settlement with the Massachusetts Securities Division requires Putnam Management to pay $5 million in restitution and an administrative fine of $50 million. The settlements also leave intact the process established under an earlier partial settlement with the SEC under which Putnam Management agreed to pay the amount of restitution determined by an independent consultant, which may exceed the disgorgement and restitution amounts specified above, pursuant to a plan to be developed by the independent consultant. Putnam Management, and not the investors in any Putnam fund, will bear all costs, including restitution, civil penalties and associated legal fees stemming from both of these proceedings. The SEC's and Massachusetts Securities Division's allegations and related matters also serve as the general basis for numerous lawsuits, including purported class action lawsuits filed against Putnam Management and certain related parties, including certain Putnam funds. Putnam Management has agreed to bear any costs incurred by Putnam funds in connection with these lawsuits. Based on currently available information, Putnam Management believes that the likelihood that the pending private lawsuits and purported class action lawsuits will have a material adverse financial impact on the fund is remote, and the pending actions are not likely to materially affect its ability to provide investment management services to its clients, including the Putnam funds. For the period ended July 31, 2004, Putnam Management has assumed $110,550 of legal, shareholder servicing and communication, audit, and Trustee fees incurred by the Fund in connection with these matters. Review of these matters by counsel for Putnam Management and by separate independent counsel for the Putnam funds and their independent Trustees is continuing. The fund may experience increased redemptions as a result of these matters, which could result in increased transaction costs and operating expenses. Note 8 Other matters In connection with a review of compliance procedures and controls, Putnam Management discovered that in early January 2001, certain Putnam employees had willfully circumvented controls in connection with the correction of operational errors with respect to a 401(k) client's investment in certain Putnam Funds, which led to losses in the fund. Putnam made restitution of approximately $169,000 to the fund on February 27, 2004. Putnam has also made a number of personnel changes, including senior managers, and has implemented changes in procedures. Putnam has informed the SEC, the Funds' Trustees and independent auditors. The SEC is investigating this matter. Federal tax information (Unaudited) The fund has designated 69.4% of the distributions from net investment income as qualifying for the dividends received deduction for corporations. For its tax year ended July 31, 2004, the fund hereby designates 70.4%, or the maximum amount allowable, of its net taxable income as qualified dividends taxed at individual net capital gain rates. The Form 1099 you receive in January 2005 will show the tax status of all distributions paid to your account in calendar 2004. About the Trustees Jameson A. Baxter (9/6/43), Trustee since 1994 Ms. Baxter is the President of Baxter Associates, Inc., a private investment firm that she founded in 1986. Ms. Baxter serves as a Director of ASHTA Chemicals, Inc., Banta Corporation (a printing and digital imaging firm), Ryerson Tull, Inc. (a steel service corporation), Advocate Health Care and BoardSource, formerly the National Center for Nonprofit Boards. She is Chairman Emeritus of the Board of Trustees, Mount Holyoke College, having served as Chairman for five years and as a board member for thirteen years. Until 2002, Ms. Baxter was a Director of Intermatic Corporation (a manufacturer of energy control products). Ms. Baxter has held various positions in investment banking and corporate finance, including Vice President and Principal of the Regency Group, and Vice President of and Consultant to First Boston Corporation. She is a graduate of Mount Holyoke College. Charles B. Curtis (4/27/40), Trustee since 2001 Mr. Curtis is President and Chief Operating Officer of the Nuclear Threat Initiative (a private foundation dealing with national security issues) and serves as Senior Advisor to the United Nations Foundation. Mr. Curtis is a member of the Council on Foreign Relations and the Trustee Advisory Council of the Applied Physics Laboratory, Johns Hopkins University. Until 2003, Mr. Curtis was a member of the Electric Power Research Institute Advisory Council and the University of Chicago Board of Governors for Argonne National Laboratory. Prior to 2002, Mr. Curtis was a Member of the Board of Directors of the Gas Technology Institute and the Board of Directors of the Environment and Natural Resources Program Steering Committee, John F. Kennedy School of Government, Harvard University. Until 2001, Mr. Curtis was a member of the Department of Defense Policy Board and Director of EG&G Technical Services, Inc. (a fossil energy research and development support company). From August 1997 to December 1999, Mr. Curtis was a Partner at Hogan & Hartson L.L.P., a Washington, D.C. law firm. Prior to May 1997, Mr. Curtis was Deputy Secretary of Energy. He served as Chairman of the Federal Energy Regulatory Commission from 1977 to 1981 and has held positions on the staff of the U.S. House of Representatives, the U.S. Treasury Department, and the SEC. John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000 Mr. Hill is Vice Chairman of First Reserve Corporation, a private equity buyout firm that specializes in energy investments in the diversified worldwide energy industry. Mr. Hill is a Director of Devon Energy Corporation, TransMontaigne Oil Company, Continuum Health Partners of New York and various private companies controlled by First Reserve Corporation, as well as a Trustee of TH Lee, Putnam Investment Trust (a closed-end investment company advised by an affiliate of Putnam Management). He is also a Trustee of Sarah Lawrence College. Prior to acquiring First Reserve Corporation in 1983, Mr. Hill held executive positions in investment banking and investment management with several firms and with the federal government, including Deputy Associate Director of the Office of Management and Budget and Deputy Director of the Federal Energy Administration. He is active in various business associations, including the Economic Club of New York, and lectures on energy issues in the United States and Europe. Mr. Hill holds a B.A. degree in Economics from Southern Methodist University and pursued graduate studies there as a Woodrow Wilson Fellow. Ronald J. Jackson (12/17/43), Trustee since 1996 Mr. Jackson is a private investor. Mr. Jackson is President of the Kathleen and Ronald J. Jackson Foundation (a charitable trust). He is also a member of the Board of Overseers of WGBH (a public television and radio station) as well as a member of the Board of Overseers of the Peabody Essex Museum. Mr. Jackson is the former Chairman, President and Chief Executive Officer of Fisher-Price, Inc. (a major toy manufacturer), from which he retired in 1993. He previously served as President and Chief Executive Officer of Stride-Rite, Inc. (a manufacturer and distributor of footwear) and of Kenner Parker Toys, Inc. (a major toy and game manufacturer). Mr. Jackson was President of Talbots, Inc. (a distributor of women's apparel) and has held financial and marketing positions with General Mills, Inc. and Parker Brothers (a toy and game company). Mr. Jackson is a graduate of the University of Michigan Business School. Paul L. Joskow (6/30/47), Trustee since 1997 Dr. Joskow is the Elizabeth and James Killian Professor of Economics and Management, and Director of the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology. Dr. Joskow serves as a Director of National Grid Transco (a UK-based holding company with interests in electric and gas transmission and distribution and telecommunications infrastructure) and TransCanada Corporation (an energy company focused on natural gas transmission and power services). He also serves on the board of the Whitehead Institute for Biomedical Research (a non-profit research institution) and has been President of the Yale University Council since 1993. Prior to February 2002, he was a Director of State Farm Indemnity Company (an automobile insurance company), and, prior to March 2000, he was a Director of New England Electric System (a public utility holding company). Dr. Joskow has published five books and numerous articles on topics in industrial organization, government regulation of industry, and competition policy. He is active in industry restructuring, environmental, energy, competition and privatization policies -- serving as an advisor to governments and corporations worldwide. Dr. Joskow holds a Ph.D. and M. Phil from Yale University and B.A. from Cornell University. Elizabeth T. Kennan (2/25/38), Trustee since 1992 Dr. Kennan is a Partner of Cambus-Kenneth Farm (thoroughbred horse and cattle breeding). She is President Emeritus of Mount Holyoke College. Dr. Kennan served as Chairman and is now Lead Director of Northeast Utilities and is a Director of Talbots, Inc. She has served as Director on a number of other boards, including Bell Atlantic, Chastain Real Estate, Shawmut Bank, Berkshire Life Insurance and Kentucky Home Life Insurance. She is a Trustee of the National Trust for Historic Preservation, of Centre College and of Midway College in Midway, Kentucky. She is also a member of The Trustees of Reservations. Dr. Kennan has served on the oversight committee of the Folger Shakespeare Library, as President of Five Colleges Incorporated, as a Trustee of Notre Dame University and is active in various educational and civic associations. As a member of the faculty of Catholic University for twelve years, until 1978, Dr. Kennan directed the post-doctoral program in Patristic and Medieval Studies, taught history and published numerous articles. Dr. Kennan holds a Ph.D. from the University of Washington in Seattle, an M.S. from St. Hilda's College at Oxford University and an A.B. from Mount Holyoke College. She holds several honorary doctorates. John H. Mullin, III (6/15/41), Trustee since 1997 Mr. Mullin is the Chairman and CEO of Ridgeway Farm (a limited liability company engaged in timber and farming). Mr. Mullin serves as a Director of The Liberty Corporation (a broadcasting company), Progress Energy, Inc. (a utility company, formerly known as Carolina Power & Light) and Sonoco Products, Inc. (a packaging company). Mr. Mullin is Trustee Emeritus of The National Humanities Center and Washington & Lee University, where he served as Chairman of the Investment Committee. Prior to May 2001, he was a Director of Graphic Packaging International Corp. Prior to February 2004, he was a Director of Alex Brown Realty, Inc. Mr. Mullin is also a past Director of Adolph Coors Company; ACX Technologies, Inc.; Crystal Brands, Inc.; Dillon, Read & Co., Inc.; Fisher-Price, Inc.; and The Ryland Group, Inc. Mr. Mullin is a graduate of Washington & Lee University and The Wharton Graduate School, University of Pennsylvania. Robert E. Patterson (3/15/45), Trustee since 1984 Mr. Patterson is Senior Partner of Cabot Properties, L.P. and Chairman of Cabot Properties, Inc. Mr. Patterson serves as Chairman of the Joslin Diabetes Center and as a Director of Brandywine Trust Company. Prior to June 2003, he was a Trustee of Sea Education Association. Prior to December 2001, he was President and Trustee of Cabot Industrial Trust (a publicly traded real estate investment trust). Prior to February 1998, he was Executive Vice President and Director of Acquisitions of Cabot Partners Limited Partnership (a registered investment adviser involved in institutional real estate investments). And, prior to 1990, he served as Executive Vice President of Cabot, Cabot & Forbes Realty Advisors, Inc. (the predecessor company of Cabot Partners) and as a Senior Vice President of the Beal Companies (a real estate management, investment and development firm). Mr. Patterson practiced law and held various positions in state government and was the founding Executive Director of the Massachusetts Industrial Finance Agency. Mr. Patterson is a graduate of Harvard College and Harvard Law School. W. Thomas Stephens (9/2/42), Trustee since 1997 Mr. Stephens serves on a number of corporate boards. Effective November 2004, Mr. Stephens is expected to become Chief Executive Officer of Boise Cascade, L.L.C. (a paper, forest products and timberland assets company). Mr. Stephens serves as a Director of Xcel Energy Incorporated (a public utility company) and TransCanada Pipelines Limited. Until 2004, Mr. Stephens was a Director of Qwest Communications and Norske Canada, Inc. (a paper manufacturer). Until 2003, Mr. Stephens was a Director of Mail-Well, Inc. (a diversified printing company). He served as Chairman of Mail-Well until 2001 and as CEO of MacMillan-Bloedel, Ltd. (a forest products company) until 1999. Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of Johns Manville Corporation. He holds B.S. and M.S. degrees from the University of Arkansas. George Putnam, III* (8/10/51), Trustee since 1984 and President since 2000 Mr. Putnam is President of New Generation Research, Inc. (a publisher of financial advisory and other research services), and of New Generation Advisers, Inc. (a registered investment advisor to private funds). Mr. Putnam founded the New Generation companies in 1986. Mr. Putnam is a Director of The Boston Family Office, LLC (a registered investment adviser). He is a Trustee of St. Mark's School, Shore Country Day School, and until 2002 was a Trustee of the Sea Education Association. Mr. Putnam previously worked as an attorney with the law firm of Dechert LLP (formerly known as Dechert Price & Rhoads) in Philadelphia. He is a graduate of Harvard College, Harvard Business School and Harvard Law School. A.J.C. Smith* (4/13/34), Trustee since 1986 Mr. Smith is the Chairman of Putnam Investments and Director of and Consultant to Marsh & McLennan Companies, Inc. Mr. Smith is also a Director of Trident Corp. (a limited partnership with over thirty institutional investors). He is also a Trustee of the Carnegie Hall Society, the Educational Broadcasting Corporation, and the National Museums of Scotland. He is Chairman of the Central Park Conservancy and a Member of the Board of Overseers of the Joan and Sanford I. Weill Graduate School of Medical Sciences of Cornell University. Prior to May 2000 and November 1999, Mr. Smith was Chairman and CEO, respectively, of Marsh & McLennan Companies, Inc. The address of each Trustee is One Post Office Square, Boston, MA 02109. As of July 31, 2004, there were 102 Putnam Funds. Each Trustee serves for an indefinite term, until his or her resignation, retirement at age 72, death, or removal. * Trustees who are or may be deemed to be "interested persons" (as defined in the Investment Company Act of 1940) of the fund, Putnam Management, Putnam Retail Management, or Marsh & McLennan Companies, Inc., the parent company of Putnam, LLC and its affiliated companies. Messrs. Putnam, III, and Smith are deemed "interested persons" by virtue of their positions as officers of the fund, Putnam Management, Putnam Retail Management or Marsh & McLennan Companies, Inc. and as shareholders of Marsh & McLennan Companies, Inc. George Putnam, III is the President of your fund and each of the other Putnam funds. Mr. Smith serves as a Director of and Consultant to Marsh & McLennan Companies, Inc. and as Chairman of Putnam Investments. Officers In addition to George Putnam, III, the other officers of the fund are shown below: Charles E. Porter (7/26/38) Executive Vice President, Associate Treasurer and Principal Executive Officer Since 1989 Managing Director, Putnam Investments and Putnam Management Jonathan S. Horwitz (6/4/55) Senior Vice President and Treasurer Since 2004 Managing Director, Putnam Investments Steven D. Krichmar (6/27/58) Vice President and Principal Financial Officer Since 2002 Senior Managing Director, Putnam Investments. Prior to July 2001, Partner, PricewaterhouseCoopers LLP Michael T. Healy (1/24/58) Assistant Treasurer and Principal Accounting Officer Since 2000 Managing Director, Putnam Investments Beth S. Mazor (4/6/58) Vice President Since 2002 Senior Vice President, Putnam Investments Daniel T. Gallagher (2/27/62) Vice President and Legal and Compliance Liaison Officer Since 2004 Vice President, Putnam Investments. Prior to 2004, Associate, Ropes & Gray LLP; prior to 2000, Law Clerk, Massachusetts Supreme Judicial Court Francis J. McNamara, III (8/19/55) Vice President and Chief Legal Officer Since 2004 Senior Managing Director, Putnam Investments, Putnam Management and Putnam Retail Management. Prior to 2004, General Counsel, State Street Research & Management Company James P. Pappas (2/24/53) Vice President Since 2004 Managing Director, Putnam Investments and Putnam Management. From 2001 to 2002, Chief Operating Officer, Atalanta/Sosnoff Management Corporation; prior to 2001, President and Chief Executive Officer, UAM Investment Services, Inc. Richard S. Robie, III (3/30/60) Vice President Since 2004 Senior Managing Director, Putnam Investments, Putnam Management and Putnam Retail Management. Prior to 2003, Senior Vice President, United Asset Management Corporation Mark C. Trenchard (6/5/62) Vice President and BSA Compliance Officer Since 2002 Senior Vice President, Putnam Investments Judith Cohen (6/7/45) Clerk and Assistant Treasurer Since 1993 Clerk and Assistant Treasurer, The Putnam Funds The address of each Officer is One Post Office Square, Boston, MA 02109. Fund information One of the largest mutual fund families in the United States, Putnam Investments has a heritage of investment leadership dating back to Judge Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition and practice since 1830. Founded over 65 years ago, Putnam Investments was built around the concept that a balance between risk and reward is the hallmark of a well-rounded financial program. We presently manage over 100 mutual funds in growth, value, blend, fixed income, and international. Investment Manager Putnam Investment Management, LLC One Post Office Square Boston, MA 02109 Marketing Services Putnam Retail Management One Post Office Square Boston, MA 02109 Custodian Putnam Fiduciary Trust Company Legal Counsel Ropes & Gray LLP Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP Trustees John A. Hill, Chairman Jameson Adkins Baxter Charles B. Curtis Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan John H. Mullin, III Robert E. Patterson George Putnam, III A.J.C. Smith W. Thomas Stephens Officers George Putnam, III President Charles E. Porter Executive Vice President, Associate Treasurer and Principal Executive Officer Jonathan S. Horwitz Senior Vice President and Treasurer Steven D. Krichmar Vice President and Principal Financial Officer Michael T. Healy Assistant Treasurer and Principal Accounting Officer Beth S. Mazor Vice President Daniel T. Gallagher Vice President and Legal and Compliance Liaison Officer James P. Pappas Vice President Richard S. Robie, III Vice President Mark C. Trenchard Vice President and BSA Compliance Officer Francis J. McNamara, III Vice President and Chief Legal Officer Judith Cohen Clerk and Assistant Treasurer This report is for the information of shareholders of The George Putnam Fund of Boston. It may also be used as sales literature when preceded or accompanied by the current prospectus, the most recent copy of Putnam's Quarterly Performance Summary, and Putnam's Quarterly Ranking Summary. For more recent performance, please visit www.putnaminvestments.com. Investors should carefully consider the investment objective, risks, charges, and expenses of a fund, which are described in its prospectus. For this and other information or to request a prospectus, call 1-800-225-1581 toll free. Please read the prospectus carefully before investing. The fund's Statement of Additional Information contains additional information about the fund's Trustees and is available without charge upon request by calling 1-800-225-1581. [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 PRSRT STD U.S. POSTAGE PAID PUTNAM INVESTMENTS Call 1-800-225-1581 or visit our Web site www.putnaminvestments.com. AN021-216503 9/04 Not FDIC Insured May Lose Value No Bank Guarantee PUTNAM INVESTMENTS [SCALE LOGO OMITTED] ---------------------------------------------------------------------------- The George Putnam Fund of Boston Supplement to Annual Report dated 7/31/04 The following information has been prepared to provide class Y shareholders with a performance overview specific to their holdings. Class Y shares are offered exclusively to clients that meet the eligibility requirements specified in the fund's prospectus for such shares. Performance of class Y shares, which do not incur a front-end load, a distribution fee, or a contingent deferred sales charge, will differ from the performance of class A, B, C, M, and R shares, which are discussed more extensively in the annual report. RESULTS AT A GLANCE ---------------------------------------------------------------------------- Total return for periods ended 7/31/04 NAV 1 year 10.03% 5 years 15.50 Annual average 2.92 10 years 146.53 Annual average 9.44 Life of fund (since class A inception, 11/5/37) Annual average 9.44 Share value: NAV 7/31/03 $15.76 7/31/04 $16.95 ---------------------------------------------------------------------------- Distributions: No. Income Capital gains Total 4 $0.375 -- $0.375 ---------------------------------------------------------------------------- Please note that past performance is not indicative of future results. More recent returns may be more or less than those shown. Returns shown for class Y shares for periods prior to their inception are derived from the historical performance of class A shares, and are not adjusted to reflect the initial sales charge currently applicable to class A shares. These returns have not been adjusted to reflect differences in operating expenses which, for class Y shares, typically are lower than the operating expenses applicable to class A shares. All returns assume reinvestment of distributions at net asset value. Investment return and principal value will fluctuate so your shares, when redeemed, may be worth more or less than their original cost. See full report for information on comparative benchmarks. If you have questions, please consult your fund prospectus or call Putnam toll free at 1-800-752-9894. Please see pages 10-11 of the accompanying shareholder report for a discussion of the information appearing in the tables below: ---------------------------------------------------------------------------- EXPENSES AND VALUE OF A $1,000 INVESTMENT assuming actual returns for the 6 months ended 7/31/04 Class Y Expenses paid per $1,000* $3.81 Ending value (after expenses) $994.10 ---------------------------------------------------------------------------- EXPENSES AND VALUE OF A $1,000 INVESTMENT assuming a hypothetical 5% annualized return for the 6 months ended 7/31/04 Class Y Expenses paid per $1,000* $3.86 Ending value (after expenses) $1,021.32 ---------------------------------------------------------------------------- EXPENSE RATIO COMPARISON USING ANNUALIZED DATA Your fund's annualized expense ratio+ 0.76% Average annualized expense ratio for Lipper peer group++ 1.07% ++ For class Y shares, Putnam has adjusted the Lipper total expense average to reflect that class Y shares do not incur 12b-1 fees. ---------------------------------------------------------------------------- Item 2. Code of Ethics: ----------------------- All officers of the Fund, including its principal executive, financial and accounting officers, are employees of Putnam Investment Management, LLC, the Fund's investment manager. As such they are subject to a comprehensive Code of Ethics adopted and administered by Putnam Investments which is designed to protect the interests of the firm and its clients. The Fund has adopted a Code of Ethics which incorporates the Code of Ethics of Putnam Investments with respect to all of its officers and Trustees who are employees of Putnam Investment Management, LLC. For this reason, the Fund has not adopted a separate code of ethics governing its principal executive, financial and accounting officers. Item 3. Audit Committee Financial Expert: ----------------------------------------- The Funds' Audit and Pricing Committee is comprised solely of Trustees who are "independent" (as such term has been defined by the Securities and Exchange Commission ("SEC") in regulations implementing Section 407 of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe that each of the members of the Audit and Pricing Committee also possess a combination of knowledge and experience with respect to financial accounting matters, as well as other attributes, that qualify them for service on the Committee. In addition, the Trustees have determined that all members of the Funds' Audit and Pricing Committee meet the financial literacy requirements of the New York Stock Exchange's rules and that Mr. Patterson and Mr. Stephens qualify as "audit committee financial experts" (as such term has been defined by the Regulations) based on their review of their pertinent experience and education. Certain other Trustees, although not on the Audit and Pricing Committee, would also qualify as "audit committee financial experts." The SEC has stated that the designation or identification of a person as an audit committee financial expert pursuant to this Item 3 of Form N-CSR does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit and Pricing Committee and the Board of Trustees in the absence of such designation or identification. Item 4. Principal Accountant Fees and Services: ----------------------------------------------- The following table presents fees billed in each of the last two fiscal years for services rendered to the fund by the fund's independent auditors: Audit Audit-Related Tax All Other Fiscal year ended Fees Fees Fees Fees ----------------- ---------- ------------- ------- --------- July 31, 2004 $119,248* $-- $9,028 $1,151 July 31, 2003 $93,273 $47,876** $6,908 $-- * Includes fees of $ 4,953 billed by the fund's independent auditor to the fund for audit procedures necessitated by regulatory and litigation matters. These fees were reimbursed to the fund by Putnam. ** Includes fees billed to the fund for services relating to one or more fund mergers. A portion of such fees was paid by Putnam Management. For the fiscal years ended July 31, 2004 and July 31, 2003, the fund's independent auditors billed aggregate non-audit fees in the amounts of $143,807 and $128,379 , respectively, to the fund, Putnam Management and any entity controlling, controlled by or under common control with Putnam Management that provides ongoing services to the fund. Audit Fees represents fees billed for the fund's last two fiscal years. Audit-Related Fees represents fees billed in the fund's last two fiscal years for services traditionally performed by the fund's auditor, including accounting consultation for proposed transactions or concerning financial accounting and reporting standards and other audit or attest services not required by statute or regulation. Tax Fees represent fees billed in the fund's last two fiscal years for tax compliance, tax planning and tax advice services. Tax planning and tax advice services include assistance with tax audits, employee benefit plans and requests for rulings or technical advice from taxing authorities. All Other Fees Fees represent fees billed for services relating to fund expense processing. Pre-Approval Policies of the Audit and Pricing Committee. The Audit and Pricing Committee of the Putnam funds has determined that, as a matter of policy, all work performed for the funds by the funds' independent auditors will be pre-approved by the Committee and will generally not be subject to pre-approval procedures. Under certain circumstances, the Audit and Pricing Committee believes that it may be appropriate for Putnam Investment Management, LLC ("Putnam Management") and certain of its affiliates to engage the services of the funds' independent auditors, but only after prior approval by the Committee. Such requests are required to be submitted in writing to the Committee and explain, among other things, the nature of the proposed engagement, the estimated fees, and why this work must be performed by that particular audit firm. The Committee will review the proposed engagement at its next meeting. Since May 6, 2003, all work performed by the independent auditors for the funds, Putnam Management and any entity controlling, controlled by or under common control with Putnam Management that provides ongoing services to the fund was pre-approved by the Committee or a member of the Committee pursuant to the pre-approval policies discussed above. Prior to that date, the Committee had a general policy to pre-approve the independent auditor's engagements for non-audit services with the funds, Putnam Management and any entity controlling, controlled by or under common control with Putnam Management that provides ongoing services to the fund. The following table presents fees billed by the fund's principal auditor for services required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X. Audit-Related Tax All Other Total Non- Fiscal year ended Fees Fees Fees Audit Fees ----------------- ------------- ---- --------- ---------- June 30, 2004 $-- $-- $-- $-- June 30, 2003 $-- $-- $-- $-- Item 5. Audit Committee: Not applicable ------------------------- Items 6. Schedule of Investments: Not applicable --------------------------------- Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End ------------------------------------------------------------------------- Management Investment Companies: Not applicable -------------------------------- Item 8. Purchases of Equity Securities by Closed-End Management Investment -------------------------------------------------------------------------- Companies and Affiliated Purchasers: Not applicable ------------------------------------ Item 9. Submission of Matters to a Vote of Security Holders: ------------------------------------------------------------ Not applicable Item 10. Controls and Procedures: -------------------------------- (a) The registrant's principal executive officer and principal financial officer have concluded, based on their evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report, that the design and operation of such procedures are generally effective to provide reasonable assurance that information required to be disclosed by the registrant in this report is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. (b) Changes in internal control over financial reporting: Not applicable Item 11. Exhibits: ------------------ (a) The Code of Ethics of The Putnam Funds, which incorporates the Code of Ethics of Putnam Investments, is filed herewith. (b) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2 under the Investment Company Act of 1940, as amended, and the officer certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002 are filed herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NAME OF REGISTRANT By (Signature and Title): /s/Michael T. Healy -------------------------- Michael T. Healy Principal Accounting Officer Date: September 27, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title): /s/Charles E. Porter --------------------------- Charles E. Porter Principal Executive Officer Date: September 27, 2004 By (Signature and Title): /s/Steven D. Krichmar --------------------------- Steven D. Krichmar Principal Financial Officer Date: September 27, 2004