UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-06431
MANAGERS TRUST II
(Exact name of registrant as specified in charter)
800 Connecticut Avenue, Norwalk, Connecticut 06854
(Address of principal executive offices) (Zip code)
The Managers Funds LLC
800 Connecticut Avenue, Norwalk, Connecticut 06854
(Name and address of agent for service)
Registrant's telephone number, including area code: (203) 299-3500
Date of fiscal year end: MARCH 31
Date of reporting period: APRIL 1, 2003 - MARCH 31, 2004
(Annual Shareholder Report)
<Page>
Item 1. REPORT TO SHAREHOLDERS.
================================
Managers
========
ANNUAL REPORT
The Managers Funds
Short Duration Government Fund
Intermediate Duration Government Fund
Total Return Bond Fund
Dated March 31,2004
access to excellence
Table of Contents
=================
Begins
on Page
Letter to Shareholders 1
- ----------------------
Investment Managers' Comments and
- --------------------------------- 2
Schedules of Portfolio Investments
- ----------------------------------
Financial Statements
- -------------------- 18
Statements of Assets & Liabilities
Fund balance sheets, Net Asset Value (NAV)
per share computations and related
components
Statements of Operations 19
Detail of sources of income,
Fund expenses, and realized and unrealized
gains (losses)during the fiscal year
Statements of Changes in Net Assets 20
Detail of changes in each Fund's assets
for the past two fiscal periods
Financial Highlights
- -------------------- 22
Historical net asset values per share,
distributions, total returns, expense ratios,
turnover ratios and total net assets for
the Funds
Notes to Financial Statements
- ----------------------------- 25
Accounting and distribution policies,
details of agreements and transactions with
Fund management and description of certain
investment risks
Report of Independent Auditors
- ------------------------------ 32
Trustees and Officers 33
- ---------------------
Founded in 1983,The Managers Funds offers individual and
institutional investors the experience and discipline of some of
the world 's most highly regarded investment professionals.
<Page>
Letter to Shareholders
======================
Dear Fellow Shareholder:
The one-year period ending March 2004 was an extremely profitable
year for most investors as stock markets around the world rebounded
from a three-year slump, the economies of many countries displayed
solid evidence that they are expanding, and, because inflation
seemed to remain tame, bond markets provided acceptable returns,
particularly in the credit sectors. Stock markets rose virtually
uninterrupted from March '03 until early March '04 when valuation
concerns induced some profit taking. One reason for this fortunate
trend was that investors, business managers and consumers became less
risk averse, most likely because their perceived risks were
significantly diminished. Although the war in Iraq lingers on and has
recently intensified, the swift initial success of the invasion without
the release of chemical weapons, the loss of thousands of lives, the
destruction of major oil fields or any major terrorist retaliation,
was a considerable relief. These were serious risks that weighed on the
economy and the financial markets before the war that, while certainly
not eliminated, were significantly reduced by mid-year.
The rally in debt securities was interrupted dramatically during the
summer of 2003 when strengthening economic statistics created fears
that inflation would increase and that the FOMC would act to quell it.
July proved to be one of the worst months for bonds in decades.
However, inflation remained muted and the FOMC is only now starting to
hint that it may tighten gradually in the coming months. Thus after a
harrowing summer, bond prices stabilized and recovered. Corporate
bonds, which had the most to gain from a strengthening economy,
performed best, with the lowest grade credits leading the way.
Because the Funds detailed within this report are positioned in the
high credit quality portions of the market and in the short and
intermediate maturity spectrum, their returns for the period were
modest. Managers Short Duration Government Fund returned 2.00%
for the one-year ended March 31,2004,while its primary benchmark,the
six-month U.S.Treasury bill, returned 1.22%.Managers Intermediate
Duration Government Fund returned 4.07%for the period,slightly
underperforming its primary benchmark,the Citigroup Mortgage
Index,which returned 4.11%.Managers Total Return Bond Fund,a
diversified investment grade portfolio,returned 4.17%for the
period,which was behind its benchmark (Lehman Brothers Aggregate
Index),which returned 5.41%.Given the low level of current interest
rates,prospects for the returns of these Funds in the near future
remain modest.
The following report contains detailed financial statements for each
Fund,a listing of all portfolio holdings as of March 31,2004 and a
written review of each Fund 's investment strategy as well as a
commentary of the Fund 's performance for the year. As always,
we post any news or other pertinent information about the Funds as soon
as applicableon our website at www.managersfunds.com.Should you have
any questions about this report, please feel free to contact us at 1-
800-835-3879,or visit the website. Thank you for your investment.
Sincerely,
/s/ Peter M. Lebovitz /s/ Thomas G. Hoffman
Peter M.Lebovitz Thomas G. Hoffman,CFA
President Director of Research
The Managers Funds The Managers Funds
1
<Page>
Managers Short Duration Government Fund
=======================================
Managers Short Duration Government Fund
- ---------------------------------------
("Short Duration ")seeks to provide investors with a high level of
current income,consistent with a low volatility of NAV.The Fund
seeks to achieve its objective by matching the duration,or interest
rate risk,of a portfolio that investsexclusively in six-month
U.S.Treasury securities on a constant maturity basis.TMF currently
utilizes a single independent sub advisor,Smith Breeden Associates,
Inc.("Smith Breeden ")to manage the portfolio.Dan Dektar,of Smith
Breeden,has been managing the portfolio since the Fund 's inception
in 1992.
The Portfolio Manager:
- ----------------------
Dan and the portfolio management team at Smith Breeden specialize in
analyzing and investing in mortgage-backed securities.Through careful
analysis and comparison of the characteristics of these securities,
such as type of issuer, coupon,maturity, geographic structure,and
prepayment rates,Dan seeks to structure a portfolio with similar
risk characteristics to six-month U.S.Treasury securities but with
slightly higher returns.Because there is less certainty about the
timing of principal payments to individual mortgage securities
than for U.S.Treasury securities,mortgage-backed securities tend
to carry a slightly higher yield.A properly structured portfolio
of mortgage securities, however, can have a highly predictable cash
flow while maintaining a yield advantage over Treasuries.Although
Dan often purchases securities with maturities longer than six-months,
he does not attempt to increase returns by actively positioning the
interest rate sensitivity of the portfolio.Instead he typically
manages the weighted average duration of the portfolio so that it
remains close to six months.
The Year in Review:
- -------------------
The economic backdrop continued to improve during the 12 months ended
March 2004,as most reports and data released during the period confirmed
a fairly robust economic recovery.While the early stages of the recovery
were led by consumer spending,vis-vis easier access to credit,the recovery
seemed more sure footed early in 2004,especially given the signs of a
ramp-up in corporate spending plans. Such a macroeconomic backdrop is
often good for stocks (strong economy =better corporate profits =higher
equity prices)and bad for bonds (faster growth =potentially higher
inflation =higher interest rates).
The backdrop indeed proved lucrative for equity prices:broad-based
U.S.stock indices surged 30-40%during the 12-month period,while small-
cap stocks surged more than 60%.
Bond market performance,meanwhile,was driven primarily by improving
credit trends.
While volatile throughout the period,interest rates
ended the 12 months relatively unchanged from the prior March.A lack of
measurable inflation was the main reason why rates did not increase.
The Fed acknowledged as much by maintaining exceptionally low short-
term interest rates throughout the period.In fact,when the Federal Open
Market Committee decided to lower its target for the federal funds rate
last June,it noted that deflation was more of a concern than
inflation.Thus,returns for Treasuries were quite modest,often in line
with their respective coupons.Shorter-term (1-3 year)Treasuries
returned only 2.4%and Treasury bills returned just over 1%.
As would be expected given the improving economy,corporate bonds
outperformed Treasuries by a wide margin.In particular,lower quality
and longer duration credits had impressive returns.Outside of the
corporate and Treasury segments of the bond market,mortgage-
backed securities (MBS)and asset-backed securities (ABS)had mixed
results.The MBS sector survived a brutal July,its worst month of
relative performance ever,to finish the year with performance similar
to comparable-duration Treasuries.In July,the unraveling of much of
the leverage in the mortgage market resulted in a substantial drop in
prices.The ABS sector, meanwhile,offered reasonable performance also
due in part to the improving economy.
The Fund returned 2.0%for the 12 months ended March 2004,compared with
a return of 1.2% for the 6-month Treasury bill.While modest in absolute
terms,the Fund 's gain was reasonably good for a period where starting
yields were low and the MBS sector struggled.
Dan Dektar managed the Fund fairly conservatively throughout the
period.That is to say, the Fund 's exposure to the MBS sector remained
low by historic standards.Instead,Dan looked to add value through
specific security selection and timely trading.For securities,Dan
invested in several types of Agency mortgages with less prepayment
sensitivity.Prepayments can affect the returns to MBS bondholders
because the quicker return of principal limits the
2
<Page>
Managers Short Duration Government Fund (continued)
====================================================
amount of interest to be earned.Within the MBS sector,these included
shorter-maturity MBS and reperforming MBS,which have less prepay
sensitivity due to the credit standing of the underlying mortgagers.Dan
also was able to capitalize on the opportunity presented in late July
and early August.The rout in the MBS sector,as discussed above,made
those bonds more attractively valued.Thus,Dan traded into the sector
ahead of the recovery in late August.As spreads widened (MBS
outperformed),Dan sold many of these securities and again adopted a
conservative posture.
Outside of the MBS sector,Dan also invested modestly in higher-
yielding,AAA-rated asset-backed securities.These offered additional
yield without much incremental credit risk.As the economy continued to
improve,many of these bonds performed extremely well.
Looking Ahead:
- --------------
Dan continues his conservative strategy heading into the
Fund 's new fiscal year.The Fund 's duration,or aggregate level of
interest rate sensitivity,is right around 6-months.In addition,Dan and
the investment team at Smith Breeden remain concerned about the
relative value of the MBS sector.Thus,he will look to employ the same
strategy,security selection and opportunistic trading,until MBS spreads
begin to look more attractive
Cumulative Total Return Performance
- -----------------------------------
The Fund 's cumulative total return is based on the daily change in net
asset value (NAV),and assumes that all distributions were
reinvested.This chart compares a hypothetical $10,000 investment made
in Short Duration Government Fund on March 31,1994 to a $10,000 invest-
ment made in the Merrill Lynch 6-Month T-Bill Index for the same time
period.The listed returns for the Fund are net of expenses and the
returns for the indices exclude expenses.
Total returns would have been lower had certain expenses not been
reduced.This chart is not intended to imply any future performance of
the Fund.The graph and chart do not reflect the deduction of taxes that
a shareholder would pay on a Fund distribution or redemption of shares.
<Table>
<c> <c>
Year End March 31, Short Duration Government Merrill Lynch 6-Month T-Bill Index
1994 $10,000 $10,000
1995 10,658 10,501
1996 11,185 11,126
1997 11,920 11,728
1998 12,664 12,393
1999 13,275 13,049
2000 13,640 13,698
2001 14,643 14,643
2002 15,530 15,200
2003 16,115 15,518
2004 16,436 15,708
</Table>
The table below shows the average annual total returns for the Short
Duration Government and the Merrill Lynch 6-Month T-Bill Index for the
one-year,five-year,and 10-year periods ending March 31,2004
<Table>
<s> <c> <c> <c>
Annual Total Returns 1 Year 5 Years 10 Years
- -------------------- ----------------------------------------
Short Duration Government 2.00% 4.36% 5.09%
Merrill Lynch 6-Month T-Bill Index 1.22% 3.78% 4.62%
</Table>
Past performance is not indicative of future results.For current
performance data,which may be lower or higher than that reported,visit
our website at www.managersamg.com or call 800-835-3879.The investment
return and the principal value on an investment will fluctuate so that
an investor 's shares,when redeemed,may be worth more or less than
their original cost.
3
<Page>
Managers Short Duration Government Fund
Schedule of Portfolio Investments
========================================
March 31,2004
========================================
<Table>
<c> <c>
Principal
Amount Value
--------- -----------
U.S.Government and Agency Obligations -110.7%(1)
- ------------------------------------------------
Federal Home Loan Mortgage Corporation -12.2%
- ----------------------------------------------
FHLMC,5.000%,05/01/18 $ 5,659,671 $ 5,825,181
FHLMC,Gold,5.000%,05/01/18 891,303 917,368
FHLMC,5.500%,11/01/17 to 12/01/17 2,759,529 2,878,569
FHLMC Gold,5.500%,04/15/34 600,000 614,813
FHLMC,6.000%,11/01/17 1,000,000 1,053,759
FHLMC Gold,6.000%,09/01/17 2,736,920 2,884,937
FHLMC IO Strip,6.000%,01/15/26 8,551 13
FHLMC,6.300%,6/30/04 50,000 49,875
FHLMC,6.500%,09/01/32 390,195 410,061
FHLMC Gold,6.500%,05/13/34 450,000 472,360
FHLMC,6.691%,04/25/28 155,292 160,291
FHLMC,7.500%,04/01/15 to 02/25/42 6,296,941 6,799,726
FHLMC,7.500%,08/25/42(2) 970,839 1,060,562
FHLMC Gold,7.500%,04/01/15 to 04/01/29 798,394 856,150
FHLMC Gold,8.500%,05/01/25 to 12/01/25 176,262 192,681
Total Federal Home Loan Mortgage Corporation 24,176,346
-------------------------------------------- ----------
Federal Home Association/Veteran's Association -2.5%
- ----------------------------------------------------
FHA/VA,4.000%,10/20/31(2) 3,781,901 3,781,943
FHA/VA,5.625%,12/20/26(2) 556,967 571,566
FHA/VA,5.750%,08/20/23(2) 306,550 312,672
FHA/VA,6.625%,10/20/17 to 12/20/25(2) 429,421 440,113
Total Federal Home Association/Veteran's Association 5,106,294
---------------------------------------------------- ---------
Federal National Mortgage Association -72.4%
- --------------------------------------------
FNMA Grantor Trust,1.230%,05/25/32(2) 5,156,710 5,165,144
FNMA Grantor Trust,1.250%,03/25/33(2) 6,703,969 6,705,379
FNMA,1.240%,10/25/33(2) 8,470,000 8,478,743
FNMA,1.510%,05/25/42 8,155,055 8,163,443
FNMA,1.710%,06/25/43 2,729,778 2,720,843
FNMA,2.500%,07/25/42 100,613 100,570
FNMA,4.280%,03/25/33 3,300,000 3,339,778
FNMA,4.500%,04/20/19,TBA 23,200,000 23,482,762
FNMA,5.000%,04/20/19,TBA 19,000,000 19,528,428
FNMA,5.000%,07/01/18 1,852,956 1,906,584
FNMA,5.100%,05/25/42 1,498,649 1,502,310
FNMA,5.250%,04/15/07 60,000 65,188
FNMA,5.500%,11/01/18 to 12/01/18 5,303,025 5,529,458
FNMA,5.700%,07/01/09 973,175 1,056,002
FNMA,5.730%,11/01/08 280,674 308,336
FNMA,5.900%,12/01/08 940,437 1,039,754
FNMA,5.920%,01/01/09 467,737 517,754
FNMA,6.000%,03/01/17 to 10/25/27 5,841,900 6,006,138
FNMA,6.010%,12/01/08 4,571,124 5,072,835
FNMA,6.040%,10/01/08 1,237,555 1,367,758
</Table>
The accompanying notes are an integral part of these financial
statements.
4
<Page>
Managers Short Duration Government Fund
Schedule of Portfolio Investments (continued)
===============================================
<Table>
<s> <c>
Principal
Amount Value
--------- -----
Federal National Mortgage Association (continued)
- -------------------------------------------------
FNMA,6.170%,04/01/08 $ 1,852,688 $ 2,047,221
FNMA,6.220%,07/01/08 214,633 238,235
FNMA,6.230%,07/01/08 to 09/01/08 3,001,294 3,340,215
FNMA,6.265%,06/01/08 93,074 103,353
FNMA,6.305%,02/01/08 23,119 25,100
FNMA,6.310%,07/01/08 293,741 326,962
FNMA,6.419%,06/01/08 450,602 502,733
FNMA,6.500%,01/01/08 to 04/01/17 2,865,355 3,059,876
FNMA,6.510%,01/01/08 153,349 170,499
FNMA,6.590%,12/01/07 345,898 384,808
FNMA,6.620%,11/01/07 to 01/01/08 1,921,538 2,136,844
FNMA,6.725%,10/01/07 185,195 206,117
FNMA,6.740%,06/01/09 950,165 1,036,214
FNMA,6.750%,08/01/07 1,850,218 2,053,023
FNMA,6.825%,09/01/07 2,441,048 2,719,000
FNMA,7.016%,08/25/31 5,930,548 6,048,987
FNMA,7.035%,06/01/06 543,710 586,313
FNMA,7.105%,08/01/05 2,937,526 3,067,496
FNMA,7.500%,11/18/14 to 12/25/42 12,440,033 13,098,100
FNMA Grantor Trust,7.500%,10/25/41 485,154 533,821
FNMA IO,8.000%,08/25/02 306,673 58,031
FNMA IO,9.000%,12/15/16 171,621 35,899
Total Federal National Mortgage Association 143,836,054
------------------------------------------- -----------
Government National Mortgage Association -23.0%
- -----------------------------------------------
GNMA,3.000%,07/20/31 to 08/20/33(2) 11,155,947 11,208,933
GNMA,3.500%,01/20/32 to 01/20/34(2) 23,769,127 24,079,870
GNMA,4.250%,01/20/28(2) 245,196 248,130
GNMA,4.375%,03/20/21(2) 158,287 161,753
GNMA,5.375%,03/20/23(2) 405,572 411,890
GNMA,5.375%,04/20/26 684,657 697,044
GNMA,5.750%,08/20/21(2) 355,634 363,234
GNMA,6.000%,07/20/28 1,603,717 1,654,130
GNMA,6.375%,04/20/24 490,388 498,152
GNMA,6.375%,06/20/22 to 05/20/27(2) 2,999,678 3,055,602
GNMA,6.500%,02/15/32 to 09/15/29 548,017 578,841
GNMA,6.625%,11/20/17 to 11/20/27(2) 1,816,883 1,862,491
GNMA,6.750%,07/20/18 to 08/20/26(2) 710,900 727,687
GNMA,9.500%,07/15/09 to 12/15/17 78,961 88,146
Total Government National Mortgage Association 45,635,903
---------------------------------------------- ----------
United States Treasury Notes-0.6%
- ----------------------------------
U.S.Treasury Notes,2.625%,05/15/08 1,260,000 1,267,678
Total U.S.Government and Agency Obligations
- -------------------------------------------
(cost $218,510,737) 220,022,275
-----------
</Table>
The accompanying notes are an integral part of these financial
statements.
5
<Page>
Managers Short Duration Government Fund
Schedule of Portfolio Investments (continued)
=============================================
<Table>
<s> <c> <c>
Value
Principal Value
Value
--------- -----
Asset-Backed Security -17.5%
- ----------------------------
Asset Securitization Corp.,7.040%,11/13/29 $ 3,176,053 $ 3,504,687
Bank of America-First Union,IO,
Series 2001-3,Class XC,0.866%,04/11/37(2,3) 5,729,782 313,420
Chase Commercial Mortgage Securities Corp.,IO,
0.620%,05/18/30(2) 5,284,342 137,463
CS First Boston Mortgage Sec.Corp.,IO,
Series 1998-C1,Class AX,1.249%,05/17/40(2,3) 901,001 173,125
CS First Boston Mortgage,IO,0.943%,12/15/35(2,3) 1,831,301 91,081
DLJ Commercial Mortgage Corp.,6.410%,06/10/31 1,610,000 1,810,379
GE Capital Commercial Mortgage Corporation,
6.496%,01/15/33 525,000 600,183
GMAC,6.957%,09/15/35 1,570,000 1,829,795
GMAC,7.724%,03/15/33 7,341,000 8,787,323
GMAC,Series 1999-C1,Class X,0.839%,05/15/33(2) 11,368,906 318,014
GMAC,Series 2000-C2,Class A2,7.455%,08/16/33 1,130,000 1,339,220
JP Morgan Chase Commercial Mortgage,1.091,03/15/33(2,3) 19,900,839 1,090,638
JP Morgan Commercial Mortgage Finance Corp.,
8.033%,04/25/28(2) 1,000,000 1,100,735
LB Commercial Conduit Mortgage Trust,5.870%,10/15/35 2,956,992 3,090,987
Merrill Lynch Mortgage Investors,Inc.,7.560%,11/15/31 2,760,000 3,187,562
Morgan Stanley Capital,Inc.6.760%,03/15/32 3,988,088 4,349,405
PNC Mortgage Acceptance,7.300%,10/12/33 2,000,000 2,366,597
Salomon Brothers Mortgage Securities,
1.448%,03/18/36)(2,3) 3,985,468 275,129
Salomon Brothers Mortgage,7.455%,07/18/33 340,000 400,225
Total Asset Backed (cost $34,326,460)
------------------------------------- 34,765,968
Preferred Stock -1.7%(3) Shares ----------
- --------------------- ------
Home Ownership Funding Corp.,(cost $3,914,486) 7,300 3,464,536
Short-Term Investments -3.8% ---------
- ----------------------------
Other Investment Company -3.3%
- ------------------------------
JPMorgan Prime Money Market Fund,
Institutional Class Shares,0.92%(4) 6,507,678 6,507,678
---------
U.S.Government Agency Discount Notes -0.5%(5,6) Principal
- ----------------------------------------------- Amount
---------
FHLMC,0.000%,04/22/04 to 09/22/04 675,000 672,860
FNMA,0.000%,04/30/04 to 11/12/04 315,000 313,250
Total U.S.Government Agency Discount Notes 986,110
------------------------------------------ -------
Total Short-Term Investments
- ----------------------------
(cost $7,493,156) 7,493,788
---------
Total Investments -133.7%
- -------------------------
(cost $264,244,839) 265,746,567
-----------
Other Assets,less Liabilities -(33.7)% (67,021,018)
- -------------------------------------- ------------
Net Assets -100.0% $ 198,725,549
- ------------------ -------------
The accompanying notes are an integral part of these financial
statements.
</Table>
6
<Page>
Managers Intermediate Duration Government Fund
===============================================
Managers Intermediate Duration Government Fund ("Intermediate
Duration")seeks to provide investors with a total return in excess of
the total return of the Citigroup Mortgage Index ("Citi Mortgage ").TMF
currently utilizes a single independent subadvisor, Smith Breeden
Associates,Inc.("Smith Breeden ")to manage the portfolio.Dan Dektar
and Dan Adler,of Smith Breeden,have been managing the portfolio since
1992 and 2003,respectively.
The Portfolio Manager:
- ----------------------
The portfolio management team at Smith Breeden specializes in
analyzing and investing in mortgage-backed securities.
Through careful analysis and comparison of the characteristics of these
securities,such as type of issuer,coupon,maturity,geographic
structure,and historic and prospective prepayment rates,the portfolio
managers seek to structure a portfolio that will outperform the Citi
Mortgage.While the portfolio managers will purchase securities of any
maturity or duration,they do not attempt to add value by actively
positioning the interest rate sensitivity of the portfolio.Instead,they
typically manage the weighted average duration of the portfolio so that
it is similar to that of the duration of the Citi Mortgage.
The Year in Review:
- -------------------
The economic backdrop continued to improve during the 12 months
ended March 2004,as most reports and data released during
the period confirmed a fairly robust economic recovery.While the early
stages of the recovery were led by consumer spending,vis-vis easier
access to credit,the recovery seemed more sure footed early in
2004,especially given the signs of a ramp-up in corporate spending
plans.Such a macroeconomic backdrop is often good for stocks (strong
economy =better corporate profits=higher equity prices)and bad for
bonds (faster growth =potentially higher inflation = higher interest
rates).The backdrop indeed proved lucrative for equity prices:broad-
based U.S.stock indices surged 30-40%during the 12-month period,while
small-cap stocks surged more than 60%.
Bond market performance,meanwhile,was driven primarily by improving
credit trends. While volatile throughout the period,interest rates
ended the 12 months relatively unchanged from the prior March.A lack of
measurable inflation was the main reason why rates did not increase.The
Fed acknowledged as much by maintaining exceptionally low short-term
interest rates throughout the period.In fact,when the Federal Open
Market Committee decided to lower its target for the federal funds rate
last June,it noted that deflation was more of a concern than
inflation.Thus,returns for Treasuries were quite modest,often in line
with their respective coupons.Shorter-term (1-3 year)Treasuries
returned only 2.4%and Treasury bills returned just over 1%.
As would be expected given the improving economy,corporate bonds
outperformed Treasuries by a wide margin.In particular,lower quality
and longer duration credits had impressive returns.Outside of the
corporate and Treasury segments of the bond market,mortgage-backed
securities (MBS)and asset-backed securities (ABS)had mixed results.
The MBS sector survived a brutal July,its worst month of relative
performance ever,to finish the year with performance similar to
comparable-duration Treasuries.In July,the unraveling of much of the
leverage in the mortgage market resulted in a substantial drop
in prices.The ABS sector,meanwhile,offered reasonable performance also
due in part to the improving economy.
In the 12 months ended March 2004,the Fund returned 4.07%in line with
the gain of 4.11%for the Citi Mortgage.Portfolio managers Dan Dektar
and Dan Adler managed the Fund somewhat conservatively throughout the
period.The Fund 's overall sensitivity to the MBS sector,or its "spread
duration," was in line with that of the Citi Mortgage. Thus, Dan and
Dan were not looking to make any significant bets on the MBS sector in
general.
7
<Page>
Managers Intermediate Duration Government (continued)
- -----------------------------------------------------
Rather,they focused their efforts on security selection and trading.The
result was a moderately successful period.While,the Fund did not
materially outperform the index,the conservative positioning protected
the Fund from the sharp drop in July.The portfolio managers focused on
identifying mortgages with less prepayment sensitivity than typical
Agency MBS. These included shorter-maturity MBS and reperforming
MBS,which have less prepay sensitivity due to the credit standing of
the underlying mortgagers.
Looking Ahead:
- --------------
Heading into the new fiscal year,portfolio managers Dan Dektar and
Dan Adler have marginally increased the portfolio 's spread
duration while still maintaining an overall defensive posture.Given the
sell off in mortgages on the heels of the employment report for
March,they expect a substantial slowdown in refinanced-based
prepayments to materialize during the summer months.This is not a
significant increase in their appetite for an aggressive MBS
repositioning,but rather a basis for where they will focus their
attempt to add value through security selection.
Cumulative Total Return Performance
- -----------------------------------
The Fund's cumulative total return is based on the daily change in net
asset value (NAV),and assumes that all distributions were reinvested.
This chart compares a hypothetical $10,000 investment made in
Intermediate Duration Government Fund on March 31,1994 to a $10,000
investment made in the Citigroup Mortgage Index for the same time
period. The listed returns for the Fund are net of expenses and the
returns for the indices exclude expenses.Total returns would have been
lower had certain expenses not been reduced.This chart is not intended
to imply any future performance of the Fund.The graph and chart do not
reflect the deduction of taxes that a shareholder would pay on a
Fund distribution or redemption of shares.
<Table>
<s> <c> <c>
Year Ended March 31, Intermediate Duration Government Citigroup Mortgage Index
1994 $10,000 $10,000
1995 10,609 10,600
1996 11,637 11,714
1997 12,326 12,404
1998 13,639 13,758
1999 14,420 14,629
2000 14,478 14,966
2001 16,240 16,869
2002 17,341 17,946
2003 18,812 19,513
2004 19,578 20,315
</Table>
The table below shows the average annual returns for the Intermediate
Duration Government and the Citigroup Mortgage Index for the one-year,
five-year, and 10-year periods ending March 31, 2004.
<Table>
<s> <c> <c> <c>
Average Annual Total Returns 1 Year 5 Years 10 Years
- ---------------------------- ------ ------- --------
Intermediate Duration Government 4.07% 6.31% 6.95%
Citigroup Mortgage Index 4.11 6.79% 7.34%
</Table>
Past performance is not indicative of future results.For current
performance data,which may be lower or higher than that reported,visit
our website at www.managersamg.com or call 800-835-3879.The investment
return and the principal value on an investment will fluctuate so that
an investor 's shares,when redeemed,may be worth more or less than
their original cost.
8
<Page>
Managers Intermediate Duration Government Fund
Schedule of Portfolio Investments
March 31,2004
===============================================
<Table>
<s> <c> <c>
Principal Value
Amount
--------- -------
U.S.Government and Agency Obligations -109.3%(1)
- ------------------------------------------------
Federal Home Loan Bank Corporation -3.5%
- ----------------------------------------
FHLB,4.250,12/21/09 $ 1,700,000 $ 1,730,794
FHLB,4.500,04/29/09 500,000 508,804
FHLB,5.125%,05/10/07 300,000 301,209
FHLB,7.050%,09/14/09 1,750,000 1,794,909
Total Federal Home Loan Bank Corporation 4,335,716
---------------------------------------- ---------
Federal Home Loan Mortgage Corporation -70.6%
- ---------------------------------------------
FHLMC IO Strip,4.500%,04/15/22 480,698 43,970
FHLMC,4.500%,04/15/34,TBA 2,000,000 1,954,376
FHLMC,5.000%,04/20/19,TBA 7,200,000 7,402,500
FHLMC,5.000%,04/15/34,TBA 7,000,000 7,032,816
FHLMC,Gold,5.000%,05/01/18 891,303 917,368
FHLMC IO Strip,5.000%,05/15/17 859,035 118,825
FHLMC,5.375%,08/16/06 1,000,000 1,015,091
FHLMC,5.500%,06/24/09 to 03/01/34 11,263,427 11,595,556
FHLMC Gold,5.500%,04/15/34 45,200,000 46,315,898
FHLMC,6.000%,06/01/16 to 07/15/28 3,647,692 3,826,160
FHLMC Gold,6.000%,09/01/17 597,968 630,307
FHLMC IO Strip,6.000%,01/15/26 to 05/01/31 54,149 6,225
FHLMC,6.530%,9/15/16(2) to 10/15/16 1,698,514 178,928
FHLMC IO Strip,6.780%,06/15/31 301,970 28,655
FHLMC,6.980%,07/20/09 1,300,000 1,322,964
FHLMC,7.130%,08/25/09 950,000 972,153
FHLMC,7.500%,08/01/31 to 02/25/42 2,217,632 2,408,868
FHLMC,7.500%,08/25/42(2) 1,359,174 1,484,787
FHLMC,Gold,7.500%,01/01/31 99,680 107,306
Total Federal Home Loan Mortgage Corporation 87,362,753
-------------------------------------------- ----------
Federal National Mortgage Association -30.3%
- --------------------------------------------
FNMA IO Strip,4.000%,09/01/33 to 09/01/34 2,882,271 419,528
FNMA,4.250%,07/15/07 3,700,000 3,912,402
FNMA IO Strip,4.500%,03/25/09 to 02/25/22 2,639,491 144,349
FNMA,4.500%,04/25/19 4,000,000 4,048,752
FNMA,4.750%,06/18/07 1,000,000 1,007,600
FNMA,5.000%,05/01/07 to 11/01/33 2,733,982 2,065,377
FNMA,5.250%,04/15/07 1,220,000 1,325,491
FNMA,5.500%,03/01/17 to 03/01/19 7,210,046 7,518,186
FNMA,5.700%,05/28/09 500,000 503,555
FNMA,5.710%,05/24/06 1,000,000 1,006,685
FNMA,6.000%,01/01/14 to 08/01/17 1,624,996 1,713,027
FNMA,6.500%,04/15/34,TBA 3,500,000 3,676,092
FNMA,6.500%,11/01/28 to 07/01/32 1,901,122 2,002,683
FNMA,6.600%,07/16/07 1,000,000 1,015,488
FNMA,6.625%,11/01/10 600,000 705,526
</Table>
The accompanying notes are an integral part of these financial
statements.
9
<Page>
Managers Intermediate Duration Government Fund
Schedule of Portfolio Investments (continued)
==============================================
<Table>
<s> <c> <c>
Principal Value
Amount
--------- ------
Federal National Mortgage Association(continued)
- ------------------------------------------------
FNMA,7.000%,03/25/24 $ 2,750,000 $ 3,005,758
FNMA,IO Strip,7.000%,04/01/23 to 06/01/23 1,065,491 158,162
FNMA,7.500%,06/25/32 to 12/25/42 2,645,871 2,912,080
FNMA Grantor Trust,7.500%,10/25/41 388,123 427,057
Total Federal National Mortgage Association 37,567,798
------------------------------------------- -----------
Government National Mortgage Association-2.8%
- ---------------------------------------------
GNMA,4.375%,05/20/21 to 06/20/16(2) 216,960 221,333
GNMA,5.375%,03/20/16 (2) 105,771 107,826
GNMA,5.750%,08/20/17 to 08/20/18(2) 297,693 305,705
GNMA,6.500%,07/15/31 to 04/15/32 1,707,420 1,802,857
GNMA,6.625%,11/20/17 to 12/20/17(2) 107,064 110,124
GNMA,7.500%,09/15/28 to 11/15/31 793,110 853,716
Total Government National Mortgage Association 3,401,561
---------------------------------------------- ---------
United States Treasury Bonds -2.1%
- ----------------------------------
U.S.Treasury Bonds,7.250%,08/15/22 2,000,000 2,627,500
Total U.S.Government and Agency Obligations ---------
- -------------------------------------------
(cost $135,030,683) 135,295,328
-----------
Asset-Backed Security -5.1%
- ---------------------------
Chase Funding Mortgage Loan,1.260%,04/25/18(2) 1,373,034 1,373,491
DLJ Commercial Mortgage Corp.,6.410%,06/10/31 250,000 281,115
GS Mortgage Securities Corp.,1.340%,11/25/33(2) 2,397,779 2,397,778
Merrill Lynch Mortgage Investors,Inc.,
7.560%,11/15/31 2,020,000 2,332,926
Total Asset-Backed Security (cost $6,326,315) 6,385,310
- --------------------------------------------- ---------
Preferred Stock -1.1%(3) Shares
- ----------------------- ------
Home Ownership Funding 2,13.338% 1,500 712,168
Home Ownership Funding Corp.,13.331% 1,500 711,891
Total Preferred Stock (cost $1,418,591) 1,424,059
- --------------------- ---------
Short-Term Investments -45.2%
- -----------------------------
Other Investment Companies -45.1%
- ---------------------------------
JPMorgan Liquid Assets Money Market Fund,
Institutional Class Shares,0.99%(4) 3,017,478 3,017,478
JPMorgan Prime Money Market Fund,
Institutional Class Shares,0.92%(4) 52,860,709 52,860,709
Total Other Investment Companies 55,878,187
-------------------------------- ----------
Federal National Mortgage
- -------------------------
Association Discount Notes -0.1% Principal
-------------------------------- Amount
--------
FNMA,0.000%,06/25/04(5,6) $ 50,000 49,882
Total Short-Term Investments (cost $55,928,061) 55,928,069
- ---------------------------- ----------
Total Investments 160.7%
- ------------------------
(cost $198,703,650) 199,032,766
-----------
Other Assets,less Liabilities -(60.7)% (75,206,659)
- -------------------------------------- ------------
Net Assets -100.0% $123,826,107
- ------------------ ------------
</Table>
The accompanying notes are an integral part of these financial
statements.
10
<Page>
Managers Total Return Bond Fund
===============================
Managers Total Return Bond Fund
- -------------------------------
("Total Return "),launched in December 2002, seeks a high level
of total return by investing in a diversified portfolio of fixed-
income securities.The Managers Funds currently utilizes a single
independent subadvisor,Merganser Capital Management LP
("Merganser ").Robert W.LeLacheur and a team of analysts are the
portfolio managers of the Fund.Mr.LeLacheur is a Vice President of,and
a portfolio manager for,Merganser and has acted in those capacities
since 1993.
The Portfolio Manager
- ----------------------
The portfolio managers and analysts at Merganser Capital Management
("Merganser ")employ a value-oriented investment philosophy that seeks
to consistently provide strong risk-adjusted returns while preserving
their clients' principal. Merganser believes that bonds are complex
securities whose prices often reflect non-economic factors. The
investment team seeks to exploit such mispricing opportunities through
fundamental credit and structure research as well as through constant
communication with the brokerage community.Security selection,trade
execution and sector allocation are the main drivers of performance.
Merganser does not make duration bets and maintains an overall interest
rate sensitivity in line with the benchmark.
The members of their six-person investment team conduct Merganser's
credit and structure research.The goal is to identify securities that
have unusually attractive risk/reward characteristics.The analysts
review credit quality,structure,collateral,liquidity,and trading
history.The first hurdle a security must pass is the certainty of the
repayment of principal.With corporate credits,while they're
comfortable owning complicated fixed-income securities,they prefer to
avoid complicated corporate financial structures.Merganser also favors
corporate managements that rely on both the debt and equity market for
financing.Merganser's analysts favor predictable cash flows across all
sectors of the bond market.Within the mortgage-backed sector,this means
emphasizing bonds with low prepayment risk,such as seasoned mortgages.
In the asset-backed (ABS)sector,Merganser focuses on structures with
predictable,yet diversified collateral.The ABS sector is important to
Merganser,where the fairly complicated structures and sporadic lack of
liquidity can result in investment opportunities.
In addition to a security-level review,Merganser analyzes the relative
attractiveness of all of the debt sectors.This includes a consideration
of how macro events may affect yield spreads.Once the investment team
determines which sectors and securities appear attractive,the sector
specialists canvass the market to seek securities offered at or below
what they determine to be fair value.As the majority of Merganser's
trades are executed in the secondary market,information sharing with a
network of broker-dealer relationships is crucial to their ability to
buy bonds at attractive prices and to receive best trade execution.
Merganser will sell a position if their sector specialists determine
that prices being bid by the broker community exceed what they consider
to be fair value.Merganser may also sell a security if there is a
significant price drop,depending on their conviction to the original
investment thesis.Their portfolios are well diversified, with
approximately 100 securities across most sectors.Turnover is typically
moderate,30-50%,depending on the market environment.Treasuries are used
primarily for cash flow and duration management,as Merganser focuses
its analytical effort on the spread sectors.
The Year in Review
- ------------------
The economic backdrop continued to improve during the 12 months ended
March 2004,as most reports and data released during the period
confirmed a fairly robust economic recovery.While the early stages of
the recovery were led by consumer spending,facili-
11
<Page>
Managers Total Return Bond Fund (continued)
===========================================
tated with easier access to credit,the recovery seemed more sure footed
early in 2004,especially given the signs of a ramp-up in corporate
spending plans.Such a macroeconomic backdrop is often good for stocks
(strong economy =better corporate profits = higher equity prices)and
bad for bonds (faster growth =potentially higher inflation = higher
interest rates).The backdrop indeed proved lucrative for equity prices:
broad-based U.S.stock indices surged 30-40%during the 12-month
period,while small-cap stocks surged more than 60%.
Bond market performance,meanwhile,was driven primarily by improving
credit trends. While volatile throughout the period,interest rates
ended the 12 months relatively unchanged from the prior March.A lack of
measurable inflation was the main reason why rates did not increase.The
Fed acknowledged as much by maintaining exceptionally low short-term
interest rates throughout the period.In fact,when the Federal Open
Market Committee decided to lower its target for the federal funds rate
last June,it noted that deflation was more of a concern than inflation.
Thus, returns for Treasuries were quite modest,often in line with their
respective coupons.Shorter-term (1-3 year)Treasuries returned only
2.4%and Treasury bills returned just over 1%.
As would be expected given the improving economy,corporate bonds
outperformed Treasuries by a wide margin.In particular,lower quality
and longer duration credits had impressive returns.Outside of the
corporate and Treasury segments of the bond market,mortgage-backed
securities ("MBS ")and asset-backed securities ("ABS ")had mixed
results.The MBS sector survived a brutal July,its worst month of
relative performance ever,to finish the year with performance similar
to comparable-duration Treasuries.In July,the unraveling of much of the
leverage in the mortgage market resulted in a substantial drop in
prices.The ABS sector,meanwhile,offered reasonable performance also due
in part to the improving economy.
Managers Total Return Bond Fund rose 4.17%for the 12 months ending
March 31,2004 while the Lehman Brothers Aggregate Index ("LB Agg")
returned 5.41%for the respective period.Although relative
underperformance was disappointing,it was not unreasonable given the
manager's philosophy.Merganser's preference to invest more
conservatively within the spread sectors meant shorter durations and,
typically,higher quality bonds within the portfolio.It is also the
manager's view that given all other risks in corporate bonds,shorter
maturities are preferred.This philosophy, unfortunately, did not sync
with the overall state of the bond market during the fiscal year as
lower quality and longerduration credits exhibited some of the
strongest returns.The Fund's largest exposure relative to the LB Agg
was in the ABS sector,and the largest credit sector exposure was in
financials.Holdings in both areas lagged,and consequently detracted
from performance.
Looking Ahead
- -------------
True to Merganser's value-oriented investment philosophy,LeLacheur has
focused mostly on the spread sectors of the bond market where he
believes securities have more potential of being mispriced.Heading into
the second quarter of 2004,nearly 70%of the Fund's assets were invested
in the corporate bond,mortgage-backed securities (MBS), and asset-
backed securities (ABS)sectors. Less than 10%was in U.S.governments,
while 10% was in non-U.S.governments,and 2%was in cash.The portfolio's
modified duration was less than the benchmark at 3.98 years,and the
average credit quality was AAA-.
12
<Page>
Managers Total Return Bond Fund (continued)
===========================================
Cumulative Total Return Performance
- -----------------------------------
The Fund 's cumulative total return is based on the daily change in net
asset value (NAV),and assumes that all distributions were reinvested.
This chart compares a hypothetical$10,000 investment made in Total
Return Bond Fund on December 30,2002 to a $10,000investment made in
the Lehman Brothers U.S.Aggregate Index for the same time period.The
listed returns for the Fund are net of expenses and the returns for
the indicesexclude expenses.Total returns would have been lower had
certain expenses not beenreduced.This chart is not intended to imply
any future performance of the Fund.The graph and chart do not reflect
the deduction of taxes that a shareholder would pay on a Fund
distribution or redemption of shares.
<Table>
<s> <c> <c>
For the Year Ending Total Return Bond Fund Lehman Brothers U.S. Aggregate Index
Dec 30, 2002 $10,000 $10,000
Mar 31, 2003 $10,170 $10,131
Mar 31, 2004 $10,595 $10,678
</Table>
The table below shows the average annualized total returns for Total
Return Bond and the Lehman Brothers U.S.Aggregate Index since
inception through March 31,2004.
<table>
<s> <c>
Average Annual Total Returns: 1 Year Since Inception*
----------------------------- ------ ----------------
Total Return Bond Fund 4.17% 4.73%
Lehman Brothers U.S.Aggregate Index 5.41% 5.39%
*Commencement of operations was December 30,2002
</Table>
Past performance is not indicative of future results.For current
performance data,which may be lower or higher than that reported,
visit our website at www.managersamg.com or call 800-835-3879.The
investment return and the principal value on an investment will
fluctuate so that an investor 's shares,when redeemed,may be worth
more or less than their original cost.
13
<Page>
Managers Total Return Bond Fund
Schedule of Portfolio Investments
March 31,2004
==================================
<Table>
<s>
Principal
Amount Value
--------- -----
U.S.Government and Agency Obligations -26.2%(1)
- ---------------------------------------------
Federal Farm Credit Bank -2.5%
- ------------------------------
FFCB,5.750%,01/18/11 $ 275,000 $ 308,797
FFCB,6.000%,03/07/11 250,000 284,017
Total Federal Farm Credit Bank 592,814
------------------------------ -------
Federal Home Loan Mortgage Corporation -5.2%
- --------------------------------------------
FHLMC,4.000%,05/15/19 250,000 252,181
FHLMC,4.500%,01/15/13 100,000 102,751
FHLMC,5.500%,04/01/17 142,804 148,964
FHLMC,5.500%,06/01/14 157,972 165,354
FHLMC,5.500%,08/01/29 171,928 176,982
FHLMC,6.000%,01/01/33 210,108 218,768
FHLMC,6.000%,12/01/32 165,976 172,566
Total Federal Home Loan Mortgage Corporation 1,237,566
-------------------------------------------- ---------
Federal National Mortgage Association -8.6%
- -------------------------------------------
FNMA,4.500%,05/01/13 208,592 213,738
FNMA,5.000%,10/01/17 185,661 191,019
FNMA,5.500%,02/01/13 204,939 215,085
FNMA,5.500%,12/01/22 159,048 164,358
FNMA,6.000%,09/01/31 154,154 160,518
FNMA,6.250%,01/25/08 170,898 187,206
FNMA,6.250%,07/01/24 214,420 225,618
FNMA,6.470%,09/25/12 200,000 234,254
FNMA,6.500%,08/01/32 91,236 95,855
FNMA,7.000%,07/01/32 139,082 147,601
FNMA,7.000%,07/01/32 185,857 197,233
Total Federal National Mortgage Association 2,032,485
------------------------------------------- ---------
Federal Home Loan Bank Corporation -2.5%
- ----------------------------------------
FHLB,6.625%,11/15/10 250,000 294,151
FHLB,7.375%,02/12/10 250,000 302,369
Total Federal Home Loan Bank Corporation 596,520
---------------------------------------- -------
Unites States Treasury Bonds -7.4%
- ----------------------------------
U.S.Treasury Bonds,3.125%,10/15/08 900,000 918,422
U.S.Treasury Bonds,6.250%,08/15/23 700,000 832,316
Total United States Treasury Bonds 1,750,738
---------------------------------- ---------
Total U.S.Government and Agency Obligations
- -------------------------------------------
(cost $6,080,284) 6,210,123
Foreign Government Obligations -8.3% ---------
- ------------------------------------
British Columbia,Province of,5.375%,10/29/08 250,000 275,147
International Bank for Reconstruction &Development,
9.250%,07/15/17 150,000 220,934
Italy Government Bond,4.375%,10/25/06 200,000 211,036
New Zealand Government,10.625%,11/15/05 125,000 142,842
Ontario Province,5.125%,07/17/12 100,000 108,234
</Table>
The accompanying notes are an integral part of these financial
statements.
14
<Page>
Managers Total Return Bond Fund
Schedule of Portfolio Investments (continued)
=============================================
<Table>
<s> <c> <c>
Foreign Government Obligations (continued) Principal Value
- ------------------------------------------ Amount
--------- ------
Province of British Columbia,4.625%,10/03/06 $ 250,000 $ 265,300
Province of Manitoba,4.250%,11/20/06 250,000 263,364
Saskatchewan Province,7.125%,03/15/08 150,000 172,967
Sweden Kingdom (Yankee),11.125%,06/01/15 55,000 84,840
Sweden Kingdom,Series A,0.000%,04/01/09(5) 250,000 209,532
Total Foreign Government Obligations (cost $1,925,941) 1,954,196
------------------------------------ ---------
Corporate Bonds -47.8%
- ----------------------
Asset-Backed -19.4%
- -------------------
Bank One Issuance Trust,3.450,10/17/11 200,000 202,680
Bear Stearns Commercial Mortgage Securities Inc.,
3.970%,11/11/35 241,040 247,834
Bear Stearns Commercial Mortgage Securities Inc.,
5.060%,11/15/16 87,821 93,605
California Infrastructure PG&E-1,6.480%,12/26/09 250,000 279,876
Citibank Credit Card Issuance Trust,5.650%,6/16/08 250,000 269,591
CNH Equipment Trust,2.570%,09/15/09 200,000 200,809
College &University Facility Loan,4.000%,06/01/18 135,085 136,364
Commercial Mortgage Pass-Through
Certificates,3.600%,03/10/39 150,000 151,694
Community Program Loan Trust,4.500%,10/01/18 193,293 196,300
CS First Boston Mortgage Securities Corp.,3.006%,03/15/36 136,371 138,086
CS First Boston Mortgage Securities Corp.,3.516%,01/15/37 100,000 101,314
Detroit Edison Securitization Funding LLC,6.420%,03/01/15 300,000 348,226
Franklin Auto Trust,2.270%,05/20/11 250,000 250,265
LB-UBS Commercial Mortgage Trust,3.478%,07/20/27 150,000 152,106
Morgan Stanley Capital,2.850,09/13/45 148,190 149,279
Morgan Stanley Dean Witter Capital I,4.090%,12/15/35 170,743 176,214
Oncor Electric Delivery Transition
Bond,Co.,4.950%,02/15/15 200,000 212,985
Peco Energy Transition Trust,6.520%,12/31/10 200,000 232,035
PP&L Transition Bond Co.,LLC,7.050%,06/25/09 300,000 336,279
PSE&G Transition Funding LLC,6.610%,06/15/15 246,000 289,374
Public Service New Hampshire
Funding LLC,6.480%,05/01/15 250,000 289,933
Wachovia Bank Commercial Mortgage
Trust,2.986%,06/15/35 145,680 142,377
Total Asset-Backed 4,597,226
------------------ ---------
Finance -25.4%
- --------------
Ambac Financial Group,9.375%,08/01/11 240,000 316,139
Associates Corp.,Series B,7.950%,02/15/10 150,000 181,834
Associates Corp.,NA,8.550%,07/15/09 250,000 308,938
Bank of America,7.800%,02/15/10 300,000 364,248
Bank of Montreal-Chicago,6.100%,09/15/05 250,000 264,821
Deutsche Bank Financial,6.700%,12/13/06 100,000 111,018
Fifth Third Bancorp.,3.375%,08/15/08 100,000 101,392
</Table>
The accompanying notes are an integral part of these financial
statements.
15
<Page>
Managers Total Return Bond Fund
Schedule of Portfolio Investments (continued)
=============================================
Finance (continued)
- -------------------
<Table>
<s> <c> <c>
Principal
Amount Value
--------- -----
First Union Corp.,7.550%,08/18/05 $ 150,000 $ 162,245
General Electric Capital Corp.,8.300%,09/20/09 150,000 185,313
General Electric Capital Corp.,8.700%,03/01/07 200,000 234,969
General Electric Capital Corp.,8.850%,03/01/07 250,000 294,757
HSBC Bank,Plc.,6.950%,03/15/11 150,000 177,650
Hudson United Bank,3.500%,05/13/08 100,000 99,864
Inter-American Development Bank,8.400%,09/01/09 100,000 125,454
Inter-American Development Bank,12.250%,12/15/08 210,000 295,355
KFW International Finance,8.200%,06/01/06 250,000 282,509
Lehman Brothers Holdings,8.250%,05/15/07 275,000 321,751
Massachusetts RRB Special Purpose Trust,7.030%,03/15/12 200,000 233,883
National City Bank,2.700%,08/24/09 250,000 250,065
National Westminster Bank PLC,7.375%,10/01/09 125,000 149,677
Norwest Corp.,6.750%,06/15/07 115,000 130,562
Norwest,6.750%,10/01/06 150,000 166,863
Svenska Handlesbanken,8.125%,08/15/07 150,000 175,439
Swiss Bank Corp.-New York,6.750%,07/15/05 150,000 160,045
Swiss Bank Corp.-New York,7.250%,09/01/06 200,000 224,438
Toyota Motor Credit,5.500,12/15/08 200,000 221,995
US Central Credit Union,2.750%,05/30/08 250,000 246,721
Wells Fargo Financial,6.125%,02/15/06 210,000 226,753
Total Finance 6,014,698
------------- ---------
Industrials -3.0%
- -----------------
ChevronTexaco Corp.,8.110%,12/01/04 88,800 92,817
ConocoPhillips,8.750%,05/10/10 250,000 317,954
Pfizer,Inc.4.500%,02/15/14 300,000 304,278
Total Industrials 715,049
----------------- -------
Total Corporate Bonds (cost $11,141,510) 11,326,973
- --------------------- ----------
Other Investment Company - 2.4%
JPMorgan Prime Money Market Fund, Shares
-------
Institutional Class Shares,0.92%(4) (cost $573,692) 573,692 573,692
Total Investments - 84.7%% -------
--------------------------
(cost $19,721,427) 20,064,984
----------
Other Assets,less Liabilities - 15.3% 3,610,990
- --------------------------------------
Net Assets -100.0% $ 23,675,974
- ------------------ ------------
</Table>
The accompanying notes are an integral part of these financial
statements.
16
<Page>
The Managers Funds
Notes to Schedules of Portfolio Investments
===========================================
The following footnotes and abbreviations are to be read in conjunction
with the Schedules of Portfolio Investments previously presented in
the report.
At March 31,2004,the cost of securities for Federal income tax purposes
and the gross aggregate unrealized appreciation and/or depreciation
based on tax cost were approximately as follows:
<Table>
<s> <c>
Fund Cost Appreciation Depreciation Net
------ ------------ -------------- ------------- --------
Short Duration $263,517,763 $3,105,434 $(876,630) $2,228,804
Intermediate Duration 198,703,650 764,611 (435,495) 329,116
Total Return Bond 19,721,427 362,831 (19,274) 343,557
</Table>
(1) Mortgage-backed obligations and other assets are subject to principal
paydowns as a result of prepayments or refinancings of the underlying
mortgage instruments.As a result,the average life may be substantially
less than the original maturity.The interest rate shown is the rate
in effect at March 31,2004.
(2) Adjustable-rate mortgages with coupon rates that adjust
periodically.The interest rate shown is the rate in effect at
March 31,2004.
(3) Security is exempt from registration under Rule 144A of the
Securities Act of 1933,as amended.These securities may be resold
in transactions exempt from registration,normally to qualified
buyers.At March 31,2004,such securities represented
2.6% of net assets for Short Duration and 1.1% of net assets for
Intermediate Duration.
(4) Yield shown for this investment company represents the March
31,2004,seven-day average yield,which refers to the sum of the
previous seven days' dividends paid,expressed as an annual
percentage.
(5) Zero-coupon security.
(6) Security is held as collateral for futures transactions by J.P.Morgan
Futures,Inc.
Security Ratings (unaudited)
- ----------------------------
The composition of debt holdings as a percentage of portfolio assets is
as follows:
<Table>
<s> <c> <c> <c> <c> <c>
S&P/Moody's Ratings Gov't/AAA AA A BBB BB Not Rated
- -------------------- ---------- -- - --- -- ---------
Short Duration 87.8% 0.0% 0.0% 0.0% 0.0% 12.2%
Intermediate Duration 99.0 0.0 0.0 0.0 0.0 1.0
Total Return Bond 66.7 17.1 11.9 0.5 0.0 3.8
</Table>
Investments Abbreviations:
- --------------------------
DLJ:Donaldson,Lufkin &Jenrette Securities Corp.
FHA/VA:Federal Home Association/Veteran 's Association
FFCB:Federal Farms Credit Bank
FHLB:Federal Home Loan Bank
FHLMC:Federal Home Loan Mortgage Corporation
FNMA:Federal National Mortgage Association
GMAC:General Motors Acceptance Corporation
GNMA:Government National Mortgage Association
IO:Interest Only
TBA:To Be Announced
USTB:United States Treasury Bond
The accompanying notes are an integral part of these financial
statements.
17
<Page>
The Managers Funds
Statements of Assets and Liabilities
March 31,2004
====================================
<Table>
<s> <c> <c> <c>
Managers
Managers Intermediate Managers
Short Duration Duration Total
Government Government Return
Fund Fund Bond Fund
--------------- -------------- -------------
Assets:
- -------
Investments at value* $265,746,567 $199,032,766 $20,064,984
Receivable for investments sold 2,216,613 46,058,438 -
Receivable for investments sold short 472,500 8,363,750 -
Receivable for Fund shares sold 3,027,633 575,249 3,755,169
Dividends, interest and other receivables 851,990 551,441 180,979
Prepaid expenses 14,931 9,901 6,478
Total assets 272,330,234 254,591,545 24,007,610
------------ ----------- ----------- ----------
Liabilities:
- -------------
Payable to Custodian - - 281,936
Payable for investments purchased 44,691,516 77,637,933 -
Payable for investments purchased
on a when-issued basis - 44,555,281 -
Payable for Fund shares repurchased 1,431,746 37,046 12,475
Interest payable-short positions - 25,000 -
Payable for investments sold short, at value
(proceeds $8,363,750) - 8,360,622 -
Reverse repurchase agreement
(proceeds $26,980,000) 26,985,901 - -
Payable for variation margin on futures 297,455 21,766 -
Investment advisory and
management fee payable 116,481 74,646 4,553
Administration fee payable - - 4,157
Other accrued expenses 81,586 53,144 28,515
Total liabilities 73,604,685 130,765,438 331,636
----------------- ---------- ----------- -------
Net Assets $198,725,549 $123,826,107 $23,675,974
- ---------- ------------ ------------ -----------
Shares outstanding 20,511,803 11,527,303 2,311,316
Net asset value, offering and redemption
price per share $9.69 $10.74 $10.24
- ----------------------------------------- ----- ----- ------
Net Assets Represent:
- ---------------------
Paid-in capital $203,657,003 $121,893,548 $23,327,098
Undistributed net investment income 819,057 - 17,849
Accumulated net realized gain (loss)
from investments, futures and option
contracts (5,148,984) 1,770,209 (12,530)
Net unrealized appreciation (depreciation)
of investments, futures and option
contracts (601,527) 162,350 343,557
Net Assets $198,725,549 $123,826,107 $23,675,974
- ---------- ------------ ------------ -----------
*Investments at cost $264,244,839 $198,703,650 $19,721,427
</Table>
The accompanying notes are an integral part of these financial
statements.
18
<Page>
The Managers Funds
Statements of Operations
For the fiscal year ended March 31,2004
=======================================
<Table>
<s>
Managers
Managers Intermediate Managers
Short Duration Duration Total
Government Government Return
Fund Fund Bond Fund
-------------- -------------- -------------
Investment Income:
- ------------------
Interest income $ 5,634,671 $ 2,520,804 $ 589,561
Dividend income 171,990 66,176 -
Total investment income 5,806,661 2,586,980 589,561
----------------------- ----------- ---------- -------
Expenses:
- ---------
Investment advisory and
management fees 1,203,940 610,187 81,645
Administrative fees - - 40,823
Transfer agent 84,628 56,806 9,381
Custodian 134,513 37,115 21,208
Professional fees 60,468 44,190 43,159
Registration fees 58,205 36,035 18,603
Trustees fees and expenses 7,403 4,209 689
Interest expense 43,641 67 -
Insurance 7,107 3,343 271
Miscellaneous 22,511 14,703 850
Total expenses before offsets 1,622,416 806,655 216,629
----------------------------- --------- ------- -------
Expense reimbursements (235,154) (39,473) (54,970)
Expense reductions (6) - -
Net expenses 1,387,256 767,182 161,659
------------ --------- ------- -------
Net investment income 4,419,405 1,819,798 427,902
--------------------- --------- --------- -------
Net Realized and Unrealized Gain (Loss):
- ----------------------------------------
Net realized gain on
investments and option contracts 2,445,590 2,709,595 2,117
Net realized loss
on futures contracts (1,754,615) (35,965) -
Net unrealized appreciation
(depreciation)of investments
and option contracts (657,017) (610,314) 238,595
Net unrealized depreciation
of futures contracts (1,205,949) (158,369) -
Net realized and unrealized gain
(loss)on investments (1,171,991) 1,904,947 240,712
-------------------------------- ------------ ----------- -------
Net Increase in Net Assets
Resulting from Operations $ 3,247,414 $ 3,724,745 $ 668,614
- --------------------------- ------------ ----------- ----------
</Table>
19
<Page>
The Managers Funds
Statements of Changes in Net Assets
For the fiscal periods ended March 31,
========================================
<Table>
<s> <c> <c>
Managers
Short Duration Government Fund
------------------------------------
2004 2003
---- ----
Increase in Net Assets From Operation
-------------------------------------
Net investment income $ 4,419,405 $ 2,587,796
Net realized gain (loss)on investments 690,975 (782,256)
Net unrealized appreciation (depreciation)
of investments (1,862,966) 1,390,485
Net increase in net assets
resulting from operations 3,247,414 3,196,025
---------------------------- ---------- ---------
Distributions to Shareholders:
------------------------------
From net investment income (4,327,424) (2,877,036)
From realized gains on investments - -
Return of capital - (192,995)
Total distributions to shareholders (4,327,424) (3,070,031)
----------------------------------- ----------- -----------
From Capital Share Transactions:
--------------------------------
Proceeds from sale of shares 198,318,670 172,951,398
Net asset value of shares issued in connection
with reinvestment of dividends and distributions 3,999,105 2,744,405
Cost of shares repurchased (163,221,952) (45,581,966)
Net increase from
capital share transactions 39,095,823 130,113,837
--------------------------- ---------- -----------
Total increase in net assets 38,015,813 130,239,831
---------------------------- ---------- -----------
Net Assets:
-----------
Beginning of period 160,709,736 30,469,905
End of period $ 198,725,549 $ 160,709,736
------------- ------------- -------------
End of period (distributed in excess)/
undistributed net investment income $ 819,057 $ (727,076)
------------------------------------- ------------- --------------
Share Transactions:
-------------------
Sale of shares 20,365,279 17,759,101
Shares issued in connection with reinvestment
of dividends and distributions 411,262 282,118
Shares repurchased (16,758,841) (4,681,287)
Net increase in shares 4,017,700 13,359,932
---------------------- ---------- ----------
</Table>
The accompanying notes are an integral part of these financial
statements.
20
<Page>
<Table> <s> <c> <c> <c>
Managers Managers
Intermediate Duration Government Fund Total Return Bond Fund
------------------------------------- ----------------------
2004 2003 2004 2003 *
---- ---- ---- -----
$ 1,819,798 $ 2,241,861 $ 427,902 $ 74,950
2,673,630 749,685 2,117 45,567
(768,683) 992,154 238,595 104,962
3,724,745 3,983,700 668,614 225,479
--------- ---------- ------- -------
(1,827,167) (2,279,093) (433,160) (66,088)
(664,035) - (45,968) -
- - - -
(2,491,202) (2,279,093) (479,128) (66,088)
----------- ----------- --------- -------
107,422,633 79,442,303 14,222,044 14,430,799
2,055,258 2,102,884 477,510 65,859
(58,226,960) (38,800,162) (4,874,607) (994,508)
51,250,931 42,745,025 9,824,947 13,502,150
---------- ---------- --------- ----------
52,484,474 44,449,632 10,014,433 13,661,541
---------- ---------- ---------- ----------
71,341,633 26,892,001 13,661,541 -
$ 123,826,107 $ 71,341,633 $ 23,675,974 $ 13,661,541
-------------- -------------- ------------ ------------
$ - $ - $ 17,849 $ 8,862
-------------- --------------- ------------ ------------
10,092,322 7,546,058 1,398,411 1,441,496
193,451 199,836 47,146 6,543
(5,483,141) (3,669,312) (483,791) (98,489)
4,802,632 4,076,582 961,766 1,349,550
--------- --------- ------- ---------
</Table>
*Commencement of operations was December 30,2002.
The accompanying notes are an integral part of these financial
statements.
21
<Page>
Managers Short Duration Government Fund
Financial Highlights
For a share outstanding throughout each fiscal year
===================================================
Fiscal Year Ended March 31,
- ---------------------------
<Table>
<c> <c> <c>
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net Asset Value,
Beginning of Year $9.74 $9.72 $9.71 $9.64 $9.94
- ----------------- ----- ----- ----- ----- -----
Income from
Investment Operations:
- -----------------------
Net investment income 0.25 0.30 0.54 0.74 0.54
Net realized and
unrealized gain (loss)
on investments (0.06) 0.06 0.01 (0.06) (0.27)
Total from investment
operations 0.19 0.36 0.55 0.68 0.27
--------------------- ----- ----- ----- ----- -----
Less Distributions to
Shareholders from:
- ---------------------
Net investment income (0.24) (0.32) (0.54) (0.61) (0.57)
Return of capital - (0.02) - - -
Total distributions to
shareholders (0.24) (0.34) (0.54) (0.61) (0.57)
---------------------- ------ ------ ------ ------ ------
Net Asset Value,
End of Year $9.69 $9.74 $9.72 $9.71 $9.64
- ---------------- ----- ----- ----- ----- -----
Total Return (a) 2.00% 3.76% 6.06% 7.35% 2.75%
- ---------------- ----- ----- ----- ----- -----
Ratio of net
operating expenses
to average net assets (b) 0.78% 0.78% 0.78% 0.78% 0.78%
Ratio of total expenses
to average net assets 0.92%(c) 0.92%(c) 1.39%(c) 2.18%(c) 1.07%
Ratio of net
investment income
to average net assets (a) 2.59% 2.74% 5.71% 6.24% 6.01%
Portfolio turnover 349% 418% 683% 866% 268%
Net assets at end of
year (000's omitted) $198,726 $160,710 $30,470 $26,263 $35,540
</Table>
(a)Total returns and net investment income would have been
lower had certain expenses not been reduced.
(b)After expense offsets.(See Note 1(c)of "Notes to
Financial Statements.")
(c)Includes interest expense for the fiscal years ended
2004,2003,2002 and 2001 of 0.03%,
0.01%,0.28% and 1.14%,respectively.(See Note 1(i)of
("Notes to Financial Statements.")
22
<Page>
Managers Intermediate Duration Government Fund
Financial Highlights
For a share outstanding throughout each fiscal year
===================================================
Fiscal Year Ended March 31,
- ---------------------------
<Table>
<s> <c> <c> <c> <c> <c>
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net Asset Value,
Beginning of Year $10.61 $10.16 $9.94 $9.37 $9.91
- ------------------ ------ ------ ----- ----- -----
Income from
Investment Operations:
- -----------------------
Net investment income 0.23 0.40 0.41 0.61 0.53
Net realized and
unrealized gain (loss)
on investments 0.20 0.45 0.26 0.49 (0.50)
Total from investment
operations 0.43 0.85 0.67 1.10 0.03
--------------------- ----- ---- ---- ----- -----
Less Distributions to
Shareholders from:
- ---------------------
Net investment income (0.23) (0.40) (0.45) (0.53) (0.53)
Return of capital - - - - (0.02)
Net realized gain
on investments (0.07) - - - (0.02)
Total distributions to
shareholders (0.30) (0.40) (0.45) (0.53) (0.57)
---------------------- ------ ------ ------ ------ ------
Net Asset Value,
End of Year $10.74 $10.61 $10.16 $9.94 $9.37
- --------------- ------ ------ ----- ----- -----
Total Return (a) 4.07% 8.48% 6.78% 12.17% 0.40%
- ---------------- ----- ----- ----- ------ -----
Ratio of net
operating expenses to
average net assets (b) 0.88% 0.88% 0.88% 0.88% 0.88%
Ratio of total expenses
to average net assets 0.93%(c) 1.03%(c) 1.09% 1.07%(c) 1.06%
Ratio of net
investment income to
average net assets (a) 2.09% 3.75% 3.76% 5.85% 5.72%
Portfolio turnover 667% 578% 1,106% 690% 455%
Net assets at end of
year (000's omitted) $ 123,826 $71,342 $26,892 $24,077 $31,139
</Table>
(a)Total returns and net investment income would have been
lower had certain expenses not been reduced.
(b)After expense offsets.(See Note 1(c)of "Notes to
Financial Statements.")
(c)Includes interest expense for the fiscal years ended
2004,2003,2002 and 2001 of 0.00%, 0.03%,
0.01%,respectively.(See Note 1(i)of
("Notes to Financial Statements.")
23
<Page>
Managers Total Return Bond Fund
Financial Highlights
For a share outstanding throughout each fiscal period
=====================================================
<Table>
<s> <c> <c>
Fiscal Fiscal
Year ended Period*ended
March 31,2004 March 31,2003
-------------- -------------
Net Asset Value,
Beginning of Period $10.12 $10.00
- -------------------- ------ ------
Income from
Investment Operations:
- -----------------------
Net investment income 0.26 0.06
Net realized and unrealized
gain on investments 0.16 0.11
Total from investment
operation 0.42 0.17
--------------------- ---- ----
Less Distributions to
Shareholders from:
- -----------------------
Net investment income (0.27) (0.05)
Net realized gain on investments (0.03) -
Total distributions to
shareholders (0.30) (0.05)
---------------------- ------ ------
Net Asset Value,
End of Period $10.24 $10.12
- ---------------- ------ ------
Total Return (a) 4.17% 1.70%(c)
- ---------------- ----- --------
Ratio of net operating expenses
to average net assets (b) 0.99% 0.99%(d)
Ratio of total expenses
to average net assets 1.33% 1.95%(d)
Ratio of net investment income
to average net assets (a) 2.62% 2.37%(d)
Portfolio turnover 39% 62%(c)
Net assets at end of period
(000's omitted) $23,676 $13,662
</Table>
*Commencement of operations was December 30,2002.
(a)Total returns and net investment income would have
been lower had certain expenses not been reduced
(b)After expense offsets.(See Note 1(c)of "Notes to Financial
Statements.")
(c)Not annualized.
(d)Annualized.
24
<Page>
The Managers Funds
Notes to Financial Statements
March 31,2004
=============================================================
(1)Summary of Significant Accounting Policies
- ---------------------------------------------
Managers Trust II ("Trust II ")is a no-load,open-end,management
investment company organized as a Massachusetts business trust
and registered under the Investment Company Act of 1940,as
amended (the "1940 Act ").Included in this report are
three series of Trust II:Managers Short Duration Government Fund
("Short Duration "),Managers Intermediate Duration Government Fund
("Intermediate Duration ")and Managers Total Return Bond Fund ("Total
Return Bond ").The financial statements of Short Duration,
Intermediate Duration and Total Return Bond (each a"Fund " and
collectively,,the "Funds ")are prepared in accordance with
accounting principles generally accepted in the United States of
America which require management to make estimates and
assumptions that affect the reported amount of assets and liabilities
and disclosure of contingentassets and liabilities at the date of
the financial statements and the reported amounts of income and
expenses during the reporting periods.Actual results could differ
from those estimates.The following is a summary of significant
accounting policies followed by the Funds in the preparation of their
financial statements.
(a)Valuation of Investments
- ---------------------------
Equity securities traded on a domestic or international securities
exchange and over-the countersecurities are valued at the last
quoted sales price,or,lacking any sales,at the last quoted bid price.
Fixed-income securities are valued based on valuations furnished by
independent pricing services that utilize matrix systems,which
reflect such factors as security prices,yields,maturities,and ratings,
and are supplemented by dealer and exchange quotations.Futures
contracts for which market quotations are readily available are
valued at the settlement price as of the close of the futures exchange.
Short-term investments,having a remaining maturity of 60 days or
less,are valued at amortized cost, which approximates market.
Investments in other regulated investment companies are valued at their
end of day net asset value per share.Investments in certain
mortgage-backed,stripped mortgage-backed,preferred stocks,
convertible securities,derivatives and other debt securities not traded
on an organized securities market are valued on the basis of
valuations provided by dealers or by a pricing service which uses
information with respect to transactions in such securities,various
relationships between securitiesand yield to maturity in determining
value.Securities (including derivatives)for which market quo-
tations are not readily available are valued at fair value,as
determined in good faith and pursuant to procedures adopted by
the Board of Trustees of the Trust.
(b)Security Transactions
- ------------------------
Security transactions are accounted for as of trade date.Realized gains
and losses on securities sold are determined on the basis of identified
cost.
(c)Investment Income and Expenses
- ---------------------------------
Dividend income is recorded on the ex-dividend date.Interest
income,which includes amortization of premium and accretion of
discount on debt securities,as required,is accrued as earned.
Non-cash dividends included in dividend income,if any,are reported at
the fair market value of the securities received.Other income and
expenses are recorded on an accrual basis.An expense that
cannot be directly attributed to a particular Fund is apportioned
among the Fund,and in some casesother funds in the family,based upon
their relative net assets or number of shareholders.The Funds have
an arrangement with the Bank of New York ("BNY ")whereby each Fund
is credited with an interest factor equal to 1% below the effective
90-day T-Bill rate for account balances left uninvested overnight.
These credits serve to reduce custody expenses that would otherwise be
charged to each Fund.For the year ended March 31,2004,the custodian
expense was reduced under the BNY arrangement as follows:
Short Duration -$6,Intermediate Duration -$0 and Total
Return Bond -$0.
The Managers Funds LLC (the "Investment Manager "),a subsidiary of
Affiliated Managers Group,Inc.("AMG "),has contractually agreed,
through at least August 1,2004,to waive its fees and/or bear
expenses of each Fund to cause total operating expenses (excluding
interest,taxes,brokerage and extraordinary expenses)to not exceed
the annual rate of 0.88% for Intermediate Duration,0.78% for Short
Duration and 0.99%for Total Return Bond (the "Expense Agreements ").
Each Fund is obligated to repay the Investment Manager such amounts
waived,paid or reimbursed in future years
25
<Page>
The Managers Funds
Notes to Financial Statements (continued)
=========================================
provided that the repayment occurs within three years after the waiver
or reimbursement and thatsuch repayment would not cause the Short
Duration,Intermediate Duration or Total Return Bond Fund 's expenses
as a percent of average net assets in any such future year to exceed
0.78%,0.88% or 0.99%,respectively.
(d)Dividends and Distributions
- --------------------------------
Dividends resulting from net investment income,if any,normally are
declared and paid monthly for Intermediate Duration,Short Duration
and Total Return Bond.Dividends and distributions to shareholders
are recorded on the ex-dividend date.Distributions of capital
gains,if any,will be made on an annual basis in December and when
required for Federal excise tax purposes.Income and capital gain
distributions are determined in accordance with Federal income
tax regulations,which may differ from generally accepted
accounting principles.These differences are primarily due to
differing treatments for losses deferred due to wash sales,
equalization accounting for tax purposes,options, futures and market
discount transactions.Permanent book and tax basis
differences,if any,relating to shareholder distributions will result
in reclassifications to paid-in capital.The tax character of
distributions paid during fiscal years ended March 31,2004 and 2003
were as follows:
<Table>
<s> <c> <c> <c> <c> <c> <c>
Short Intermediate Total Return
Duration Duration Bond
2004 2003 2004 2003 2004 2003
Distributions paid from: ---------------------------------------------------------------------------------------------
Ordinary income $4,327,424 $2,877,036 $1,819,798 $2,279,093 $418,915 $66,088
Short-term capital gains - - 671,404 - 60,213 -
Return of capital - 192,995 - - - -
---------------------------------------------------------------------------------------------
$4,327,424 $3,070,031 $2,491,202 $2,279,093 $479,128 $66,088
---------------------------------------------------------------------------------------------
As a %of distributions paid:
Qualified ordinary income - - - - - -
Ordinary income -dividends
received deduction - - - - - -
- ------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<s> <c> <c> <c>
Short Intermediate Total Return
Duration Duration Bond
--------- ------------ -------------
Capital loss carryforward $(3,059,271) $ - $ -
Undistributed ordinary income 91,981 - 17,849
Undistributed long-term capital gains - 47,870 1,656
Undistributed short-term capital gains - 2,114,888 17,226
</Table>
Pursuant to section 852 of the Internal Revenue Code,Intermediate
Duration and Total Return Bond designate $47,870 and $1,656,
respectively,as long-term capital gain for the taxable year ended
March 31,2004.
(e)Federal Taxes
- ----------------
Each Fund intends to comply with the requirements under Subchapter M of
the Internal Revenue Code of 1986,as amended,and to distribute
substantially all of its taxable income and gains to its
shareholders and to meet certain diversification and income
requirements with respect to investment companies.
(f)Capital Loss Carryovers
- --------------------------
As of March 31,2004,the following Fund has accumulated net realized
capital loss carryovers from securities transactions for Federal
income tax purposes as shown in the chart.These amounts may
be used to offset realized capital gains,if any,through March 31,2010.
<Table>
<s> <c> <c>
Capital Loss
Fund Carryover Amounts Expires Mar.31,
- ------------ ------------------------- ---------------
Short Duration $367,469 2005
760,963 2008
1,568,229 2009
362,610 2010
</Table
26
<Page>
The Managers Funds
Notes to Financial Statements (continued)
=========================================
(g)Capital Stock
- ----------------
The Trust 's Declaration of Trust authorizes the issuance of an
unlimited number of shares of beneficial interest,without par value.
Each Fund records sales and repurchases of its capital stock on the
trade date.
At March 31,2004,certain unaffiliated shareholders,specifically omnibus
accounts,held greater than 10%of the outstanding shares of the
following Funds:Short Duration - 2 such accounts held 75%;
Intermediate Duration - 3 such accounts held 76%.
(h)Repurchase Agreements
- ------------------------
Each Fund may enter into repurchase agreements provided that the value
of the underlying collateral,including accrued interest,will be equal
to or exceed the value of the repurchase agreement during the term
of the agreement.The underlying collateral for all repurchase
agreements is held in safekeeping by the Fund 's custodian or at
the Federal Reserve Bank.
If the seller defaults and the value of the collateral declines,or if
bankruptcy proceedings commence with respect to the seller of the
security,realization of the collateral by the Fund may be delayed or
limited.
(i)Reverse Repurchase Agreements (Short Duration)
- --------------------------------
A reverse repurchase agreement involves the sale of portfolio assets
together with an agreement to repurchase the same assets later at
a fixed price.Additional assets are maintained in a segregated
account with the custodian,and are marked to market daily.The
segregated assets may consist of cash,U.S.Government securities,
or other liquid securities at least equal in value to the obligations
under the reverse repurchase agreements.In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy
or becomes insolvent,a fund 's use of the proceeds under the
agreement may be restricted pending a determination by the other
party,or its trustee or receiver,whether to enforce the obligation
to repurchase the securities.
Reverse Repurchase agreements as of March 31,2004:
<Table>
<s> <c> <c> <c>
Principal Current
Fund Amount Security Liability
- ---- ----------- -------- ---------
Short Duration $26,980,000 Morgan Stanley,1.06% due 4/7/04 $26,985,901
</Table>
(j)Delayed Delivery Transactions and When-Issued Securities
- -----------------------------------------------------------
(Short Duration & Intermediate Duration)
The Funds may purchase or sell securities on a delayed delivery or
when-issued basis.Payment and delivery may take place after the
customary settlement period for that security.The price of the
underlying securities and the date when the securities will be
delivered and paid for are fixed at the time the transaction is
negotiated.During the time a delayed delivery sell is outstanding,
the contract is marked to market daily and equivalent deliverable
securities are held for the transaction.The value of the securities
purchased on a delayed delivery or when-issued basis are identified
as such in the Funds Schedule of Investments.With respect to purchase
commitments,the Funds identify securities as segregated in its records
with a value at least equal to the amount of the commitment. The
payables and receivables associated with the purchases and sales of
delayed delivery securities having the same coupon,settlement date
and broker are offset.Delayed delivery or when-issued securities that
have been purchased from and sold to different brokers are reflected
as both payables and receivables in the Funds Statement of Assets
and Liabilities under the caption Delayed delivery.Losses may arise
due to changes in the value of the underlying securities or if the
counterparty does not perform under the contract,or if the issuer
does not issue the securities due to political,economic,or other
factors.
(k)Dollar Roll and Reverse Dollar Roll Agreements
- -------------------------------------------------
(Short Duration & Intermediate Duration)
A dollar roll is an agreement to sell securities for delivery in the
current month and to repurchase substantially similar securities
on a specified future date.During the roll period,principal and
interestpaid on these securities are not received.When a fund invests
in a dollar roll,it is compensated by the difference between the
current sales price and the forward price for the future purchase
as well as by earnings on the cash proceeds of the initial sale.
A reverse dollar roll is an agreement to buy securities for delivery
in the current month and to sell substantially similar securities
on a specified
27
<Page>
The Managers Funds
Notes to Financial Statements (continued)
=========================================
future date,typically at a lower price.During the roll period,the Fund
receives the principal and interest on the securities purchased in
compensation for the cash invested in the transaction.
TBA Sale Committment (Short Duration & Intermediate Duration)
- --------------------
Each 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
settlement commmitment is outstanding, equivalent deliverable
securities,or an offsetting TBA purchase commitment deliverable on
or before the sale commitment date, are held over as "cover" for the
transaction. Unsettled TBA sale commitments are valued at the current
market value of the underlying securities, generally according to the
procedures described under the "Valuation of Investments", in
footnote 1a above. Each 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 committment, the Fund
realizes a gain or loss from the sale of the securities based
upon the unit price established as the date the committment was
entered into. TBA sale committments outstanding as of March 31,
2004 are as follows:
<Table>
<s> <c> <c> <c>
Fund Amount Security Current Liability
- ----- ------- -------- ------------------
Short Duration $500,000 FNMA,6.500%,04/15/34 $473,244
Intermediate $6,000,000 FNMA,5.500%,04/20/19 $6,249,998
Duration $2,000,000 FNMA,6.500% 04/15/34 $2,110,624
</Table>
(m)Futures Contracts Held or Issued for Purposes other than Trading
- -------------------------------------------------------------------
(Short Duration &Intermediate Duration)
Each of the Funds may use interest-rate futures contracts for risk
management purposes in order to reduce fluctuations in each Fund 's
net asset values relative to each Fund 's targeted option-adjusted
duration.On entering into a futures contract,either cash or securities
in an amount equal to a certain percentage of the contract value
(initial margin)must be deposited with the futures broker.Sub-
sequent payments (variation margin)are made or received each day.The
variation margin payments equal the daily changes in the contract
value and are recorded as unrealized gains or losses.The Fund
recognizes a realized gain or loss when the contract is closed or
expires 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.
Short Duration had the following open futures contracts as of March
31,2004:
<Table>
<s> <c> <c> <c> <c>
Number of Expiration Unrealized
Type Contracts Position Month Gain/(Loss)
- ----- ---------- -------- ---------- -----------
2-Year U.S.Treasury Note 120 Long June 2004 $ 91,703
5-Year U.S.Treasury Note 46 Short June 2004 (28,400)
10-Year U.S.Treasury Bond 5 Short June 2004 (9,768)
20-Year U.S.Treasury Bond 8 Short June 2004 (23,341)
10-Year Interest Swap 102 Short June 2004 (207,819)
3-Month Eurodollar 6 Long June 2009-
December 2011 23,680
3-Month Eurodollar 1299 Short June 2004 -
December 2011 (1,949,308)
------------
Total $(2,103,253)
=============
</Table>
Intermediate Duration had the following open futures contracts as of
March 31,2004:
<Table>
<s> <c> <c> <c> <c>
Number of Expiration Unrealized
Type Contracts Position Month Gain/(Loss)
- ---- --------- -------- ---------- ----------
2-Year U.S.Treasury Note 1 Long June 2004 $ 1,153
5-Year U.S.Treasury Note 17 Long June 2004 30,619
20-Year U.S.Treasury Bond 27 Short June 2004 (78,777)
28
<Page>
The Managers Funds
Notes to Financial Statements (continued)
=========================================
3-Month Eurodollar 12 Long September 2007 -
September 2008 23,657
3-Month Eurodollar 72 Short June 2004 -
December 2007 (146,546)
-----------
Total $ (169,894)
=============
</Table>
Futures transactions involve additional costs and may result in
losses.The effective use of futures depends on the Funds' ability
to close futures positions at times when the Funds' portfolio
managers deem it desirable to do so.The use of futures also involves
the risk of imperfect correlation among movements in the values of
the securities underlying the futures purchased and sold by the Funds,
of the futures contracts themselves,and of the securities that are the
subject of a hedge.
(n)Assets Pledged to Cover Margin Requirements for Open Futures
- ---------------------------------------------------------------
Positions (Short Duration & Intermediate Duration)
- ---------
The aggregate market value of assets pledged to cover margin
requirements for the open futures positions at March 31,2004 was:
<Table>
<s> <c>
Fund Assets Pledged
- ---- --------------
Short Duration $986,110
Intermediate Duration 49,882
</Table>
(o)Interest Rate Caps,Swap Contracts and Options
- ------------------------------------------------
(Short Duration & Intermediate Duration)
Each Fund may enter into over-the-counter transactions involving
interest rate caps,swap contracts,or purchase options to enter
into such contracts,in order to manage interest rate risk.In an
interest rate cap agreement,one party agrees to make payments
only under specified circumstances,usually in return for payment of a
fee by the other party.An interest rate cap entitles the purchaser,to
the extent that a specified index exceeds a predetermined interest rate,to
receive payments of interest on a notional principal amount from the party
selling such interest rate cap.Swap contracts represent an agreement
between counter parties to exchange cash flows based on the difference
between two rates applied to a notional principal amount for a specified
period.The most common type of interest rate swap involves the exchange
of fixed-rate cash flows for variable-rate cash flows.Swaps do not
involve the exchange of principal between the parties.Purchased
options on swap contracts ("swaptions ")give the holder the right,
but not the obligation,to enter into a swap contract with the
counter party which has written the option on a date,at an interest
rate,and with a notional amount as specified in the swaption agreement.
If the counter party to the swap transaction defaults,the
Fund will be limited to contractual remedies pursuant to the agreements
governing the transaction. There is no assurance that swap or swaption
contract counter parties will be able to meet their obligations under
the contracts or that,in the event of default,the Fund
will succeed in pursuing contractual remedies.The Fund may thus assume
the risk that payments owed the Fund under a swap or swaption contract
will be delayed,or not received at all.During the term of the swap
agreementor swaption,unrealized gains or losses are recorded as a result
of "marking to market." When the swap agreement or swaption is
terminated,the Fund will record a realized gain or loss equal to the
difference between the proceeds from (or cost of)the closing
transaction and the Fund 's basis in the contract,if any.In each
of the contracts,the Fund pays a premium,to the counter party,in
return for the swaption.These swaptions may be exercised by entering
into a swap contract with the counter party only on the date
specified in each contract.
(2)Agreements and Transactions with Affiliates
- ----------------------------------------------
The Trust has entered into separate Fund Management Agreements with the
Investment Manager dated August 1,2000,with respect to Short Duration,
Intermediate Duration and December 20,2002 for Total Return Bond.Under
these agreements,the Investment Manager provides or oversees
investment advisory and management services to the Funds.The
Investment Manager selects sub advisors for each Fund (subject
to Trustee approval),and monitors the portfolio managers' investment
programs and results.The Funds are distributed by Managers
Distributors,Inc.("MDI "),a wholly-owned subsidiary of The Managers
Funds LLC.Each Fund is managed by a sub advisor pursuant to
29
<Page>
The Managers Funds
Notes to Financial Statements (continued)
=========================================
a Sub advisory Agreement by and between the Investment Manager on
behalf of each Fund and the respective sub advisor.Certain Trustees
and Officers of the Funds are Officers and/or Directors of
the Investment Manager,AMG and/or MDI.
Investment advisory and management fees of 0.70%,0.70%and 0.50% per
annum are paid directly by Short Duration,Intermediate Duration and
Total Return Bond,respectively,to the Investment Manager based on
average daily net assets.
Total Return Bond has entered into an Administration and Shareholder
Servicing Agreement under which The Managers Funds LLC serves as the
Fund's administrator (the "Administrator ")and is responsible for all
aspects of managing the Fund operations,including
administration and shareholderservices to the Fund,its shareholders,
and certain institutions,such as bank trust departments,broker-dealers
and registered investment advisers,that advise or act as an
intermediary with the Fund's shareholders.During the year ended
March 31,2004,the Fund paid a fee to the Administrator at the
rate of 0.25% per annum of the Fund 's average daily net assets.
The aggregate annual fee paid to each independent Trustee for serving
as a Trustee of Managers Trust I and Trust II is $2,000.The Trustees
fee expense shown in the financial statements represents
each Fund 's allocated portion of the total fees and expenses paid by
the Trust II for the fiscal year ended March 31,2004.
(3)Purchases and Sales of Securities
- ------------------------------------
Purchases and sales of securities,excluding short-term securities,for
the year ended March 31,2004, were as follows.
<Table>
<s> <c> <c> <c> <c>
Long-Term Securities U.S.Government Securities
Fund Purchases Sales Purchases Sales
- ---- --------- ----- --------- -----
Short Duration $781,075,957 $656,627,529 $4,529,097 $5,784,797
Intermediate Duration 750,000,684 686,238,870 930,981 893,974
Total Return Bond* 8,137,909 2,795,289 4,697,830 2,408,610
</Table>
(4)Portfolio Securities Loaned
- ------------------------------
The Funds may participate in a securities lending program offered by
BNY,providing for the lending of corporate bonds,equity and
government securities to qualified brokers.Collateral on all
securities loaned are accepted in cash and/or government
securities.Collateral is maintained at a minimum level of 102% of
the market value,plus interest,if applicable,of investments on loan.
Collateral received in the form of cash is temporarily invested in
institutional money market funds or other short-term investments by BNY.
Earnings of such temporary cash investments are divided between BNY,as
a fee for its services under the program,and the Fund loaning the
security,according to agreed-upon rates.
(5)Risks Associated with Mortgage Related and Asset-backed Securities
- ---------------------------------------------------------------------
Asset-backed securities are less effective than other types of
securities as a means of "locking in" attractive long-term interest
rates.One reason is the need to reinvest prepayments of principal;
another is the possibility of significant unscheduled prepayments
resulting from declines in interest rates.These prepayments would
have to be reinvested at lower rates.As a result,these securi-
ties may have less potential for capital appreciation during periods of
declining interest rates than other securities of comparable
maturities,although they may have a similar risk of decline in market
value during periods of rising interest rates.Prepayments may also
significantly shorten the effective maturities of these securities,
especially during periods of declining interest rates.Conversely,
during periods of rising interest rates,a reduction in prepayments
may increase the effective maturities of these securities,subjecting
them to a greater risk of decline in market value in response to rising
interest rates than traditional debt securities,and therefore,
potentially increasing the volatility of the Funds.
Prepayments may cause losses on securities purchased at a premium.At
times,some mortgage-backed and asset-backed securities will have higher
than market interest rates and therefore will be purchased at a
premium above their par value.
CMO's may be issued by a U.S.government agency or instrumentality or
by a private issuer.Although payment of the principal of,and interest
on,the underlying collateral securing privately issued CMO 's may be
guaranteed by the U.S.government or its agencies
or instrumentalities,these
30
<Page>
The Managers Funds
Notes to Financial Statements (continued)
=========================================
CMO 's represent obligations solely of the
private issuer and are not insured or guaranteed by the U.S.government,
its agencies or instrumentalities or any other person or entity.
Prepayments could cause early retirement of CMO 's.CMO 's are designed
to reduce the risk of prepayment for investors by issuing multiple
classes of securities,each having different maturities,interest rates
and payment schedules,and with the principal and interest on
the underlying mortgages allocated among the several classes in
various ways.Payment of interest or principal on some classes
or series of CMO 's may be subject to contingencies or some classes or
series may bear some or all of the risk of default on the underlying
mortgages.CMO 's of different classes or series are generally
retired in sequence as the underlying mortgage loans in the mortgage
pool are repaid.If enough mortgages are repaid ahead of schedule,
the classes or series of a CMO with the earliest maturities
generally will be retired prior to their maturities.Thus,the early
retirement of particular classes or series of a CMO would have the
same effect as the prepayment of mortgages underlying other mort-
gage-backed securities.Conversely,slower than anticipated prepayments
can extend the effective maturities of CMO 's,subjecting them to a
greater risk of decline in market value in response to rising
interest rates than traditional debt securities,and therefore,
potentially increasing their volatility.Prepayments could result in
losses on stripped mortgage-backed securities.Stripped mortgage-
backed securities are usually structured with two classes that receive
different portions of interest and principal distributions on a pool
of mortgage loans.The yield to maturity on an interest only
or "IO " class of stripped mortgage--backed securities is extremely
sensitive not only to changes in prevailing interest rates but also
to the rate of principal payments (including prepayments)and the
underlying assets.A rapid rate of principal prepayments may have a
measurable adverse effect on the Fund 's yield to maturity to the
extent it invests in IO 's.If the assets underlying the IO experi-
ence greater than anticipated prepayments of principal,a Fund may fail
to recoup fully its initial investment in these securities.Conversely,
principal only or "PO's" tend to increase in value if pre-
payments are greater than anticipated and decline if prepayments are
slower than anticipated.
31
<Page>
Report of Independent Auditors
===============================
To the Trustees of Managers Trust II and the
Shareholders of Managers Short Duration Government Fund,
Managers Intermediate Duration Government Fund and
Managers Total Return Bond Fund:
In our opinion,the accompanying statements of assets and
liabilities,including the schedules of portfolio investments,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 Managers Short Duration Government
Fund,Managers Intermediate Duration Government Fund and Managers
Total Return Bond Fund (each a series of Managers Trust II,hereafter
referred to as the "Funds "),at March 31,2004,and the results of
each of their operations,the changes in each of their net assets and
the financial highlights for 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 Funds' 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 auditing standards generally accepted in the United States
of America,which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements
are free of material misstatements.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 securities at March 31,2004,
by correspondence with the custodian and brokers,provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston,Massachusetts
May 19,2004
32
<Page>
Trustees and Officers
=====================
The Trustees and Officers of the Trust,their business
addresses,principal occupations for the past five years and dates
of birth are listed below.Unless otherwise noted,the address of each
Trustee or Officer is the address of the Trust:800 Connecti-
cut Avenue,Norwalk,Connecticut 06854.
The Trustees hold office without limit in time except that (a)any
Trustee may resign or retire;(b)any Trustee may be removed with
or without cause by at least two-thirds of the number of Trustees
remaining after such removal (provided that there shall
not be fewer than 3 remaining Trustees);(c)shareholders may vote to
remove a Trustee at a special meeting of shareholders held at
the written request of shareholders of 10%or more of the
outstanding shares of the Trust.
Independent Trustees
The following Trustees are not "interested persons "of the
Trust within the meaning of the 1940 Act:
<Table>
<s> <c>
Name,Date of Birth, Principal Occupation(s)During Past 5 Years
Number of Funds and Other Directorships Held by Trustee
Overseen
in Fund Complex*
- ------------------------------------------------------------------------
Jack W.Aber,
- -----------
9/9/37 Professor of Finance,Boston University School of
* Trustee since 1999 Management (1972-Present);Trustee of Appleton
* Oversees 27 Funds Growth Fund (1 portfolio);Trustee of Third
in Fund Complex Avenue Trust(4 portfolios);Trustee of Third
Avenue Variable Trust (1 portfolio)
William E. Chapman,II,
- --------------------- President and Owner,Longboat Retirement Plan-
9/23/41 ning Solutions (1998-Present);Hewitt Associ-
* Trustee since 1999 ates,LLC (part time)(provider of Retirement
* Oversees 27 Funds and Investment Education Seminars);Interim
in Fund Complex Executive Vice President,QuadraMed Corporation
(2001);President Retirement Plans Group,Kemper
Funds (1990-1998);Trustee of Bowdoin College
Edward J. Kaier,
- --------------- Partner,Hepburn,Willcox,Hamilton &Putnam
9/23/45 (1977-Present);Trustee of Third Avenue Trust (4
* Trustee since 1999 portfolios);Trustee of Third Avenue Variable Trust
* Oversees 27 Funds (1 portfolio)
in Fund Complex
Madeline H.McWhinney,
- --------------------- Member,Investment Committee,New Jersey
3/11/22 Supreme Court (1990-Present);Member,Advisory
* Trustee since 1987 Board on Professional Ethics,New Jersey Supreme
* Oversees 19 Funds Court (1983-1998);President,Dale,Elliott &
in Fund Complex Company,Inc.(Management Consultant)(1977-
1994);No other directorships held by trustee
33
<Page>
Trustees and Officers (continued)
=================================
Steven J.Paggioli,
- ------------------
4/3/50 Consultant (2001-Present);Formerly Executive
* Trustee since 1993 Vice President and Director,The Wadsworth Group
* Oversees 19 Funds (1986-2001);Executive Vice President,Secretary
in Fund Complex and Director,Investment Company Administration,
LLC (1990-2001);Vice President,Secretary and
Director,First Fund Distributors,Inc.(1991-2001);
Trustee,Professionally Managed Portfolios (15
portfolios);Director,Sustainable Growth Advisors,
LP.
Eric Rakowski,
- --------------
6/5/58 Professor,University of California at Berkeley
* Trustee since 1999 School of Law (1990-Present);Visiting Profes-
* Oversees 27 Funds sor,Harvard Law School (1998-1999);Trustee of
in Fund Complex Third Avenue Trust (4 portfolios);Trustee of Third
Avenue Variable Trust (1 portfolio)
Thomas R.Schneeweis,
- ------------------- Professor of Finance,University of Massachusetts
5/10/47 (1985-Present);Managing Director,CISDM at
* Trustee since 1987 the University of Massachusetts,(1994-Present);
* Oversees 19 Funds President and Chief Executive Officer,Schneeweis
in Fund Complex Partners,LLC (2001-Present);No other director-
ships held by trustee.
- ------------------------------------------------------------------------------
</Table>
*The Fund Complex consists of The Managers Funds,Managers AMG
Funds,Managers Trust I and Managers Trust II.
Interested Trustees (1)
The following Trustees are "interested persons " of the Trust within
the meaning of the 1940 Act.Mr.Healey is an interested person
of the Trust within the meaning of the 1940 Act by virtue of his
positions with,and interest in securities of,Affiliated
Managers Group,Inc.
Mr.Lebovitz is an interested person of the Trust within the meaning of
the 1940 Act by virtue of his positions with The Managers
Funds LLC and Managers Distributors,Inc.
<Table>
<s> <c>
Name,Date of Birth, Principal Occupation(s)During Past 5 Years
Number of Funds and Other Directorships Held by Trustee
Overseen
in Fund Complex*
- -------------------------------------------------------------------------
Sean M.Healey,5/9/61 President and Chief Operating Officer,
- -------------- Affiliated Managers Group, Inc.(1999-
* Trustee since 1999 Present); Director,Affliated Managers Group,
* Oversees 27 Funds in Inc.(2001-Present);Executive Vice-President,
Fund Complex Affliated Managers Group,Inc.(1995-1999);
Vice-President, Goldman, Sachs & Company
(1987-1995); No other directorships
held by Trustee
34
<Page>
Trustees and Officers (continued)
=================================
Peter M. Lebovitz,
- ------------------
1/18/55 President and Chief Executive Officer,The Manag-
* Trustee & President ers Funds LLC (1999-Present);President,Manag-
since 2002 ers Distributors,Inc.(2000-Present);Director of
* Oversees 27 Funds Marketing,The Managers Funds,LP (1994-1999);
in Fund Complex Director of Marketing,Hyperion Capital Manage-
ment,Inc.(1993-1994);Senior Vice President,
Greenwich Asset Management,Inc.(1989-1993);
No other directorships held by trustee.
- ------------------------------------------------------------------------------
</Table>
*The Fund Complex consists of The Managers Funds,Managers AMG
Funds,Managers Trust I and Managers Trust II.
(1) Interested Person of another person means,when used with respect to
an investment company,any affiliated person of such company.
Officers
- --------
<Table>
<s> <c>
Name,Date of Birth,
Position(s)Held With Fund
& Length of Time Served Principal Occupation(s)During Past 5 Years
- -------------------------- ------------------------------------------
Galan G.Daukas,10/24/63
- ----------------------- Chief Operating Officer,The Managers Funds
* Chief Financial Officer LLC,(2002-Present);Chief Financial Officer,Man-
since 2002 agers AMG Funds,Managers Trust I and Managers
Trust II (2002-Present);Chief Operating Officer
and Chairman of the Management Committee,
Harbor Capital Management Co.,Inc.(2000-2002);
Chief Operating Officer,Fleet Investment Advisors
(1992-2000).
Donald S.Rumery,5/29/58
- ----------------------- Director,Finance and Planning,The Managers
* Treasuer since 1995 Funds LLC,(1994-Present);Treasurer and Chief
* Secretary since 1997 Financial Officer,Managers Distributors,Inc.
(2000-Present);Treasurer and Secretary of Manag-
ers Trust I and Managers Trust II (2000-Present);
Treasurer of Managers AMG Funds (1999-Present)
</Table>
35
<Page>
This page intentionally left blank
<Page>
MANAGERS
=========
Investment Manager and Administrator
------------------------------------
The Managers Funds LLC
800 Connecticut Avenue
Norwalk,Connecticut 06854
(203)299-3500 or (800)835-3879
Distributor
----------
Managers Distributors,Inc.
800 Connecticut Avenue
Norwalk,Connecticut 06854
(203)299-3500 or (800)835-3879
Custodian
---------
The Bank of New York
100 Church Street,10th Floor
New York,New York 10286
Legal Counsel
-------------
Goodwin Procter LLP
Exchange Place
Boston,Massachusetts 02109
Transfer Agent
--------------
Boston Financial Data Services,Inc.
Attn:The Managers Funds
P.O.Box 8517
Boston,Massachusetts 02266-8517
(800)252-0682
For ManagersChoice Only
-----------------------
PFPC Brokerage Services,Inc.
P.O.Box 61487
King of Prussia,Pennsylvania 19406-0897
(800)358-7668.
<Page>
<Table>
<s> <c>
The Managers Funds The Managers Funds
Equity Funds: Income Funds:
================== ==================
VALUE FUND MONEY MARKET FUND
Armstrong Shaw Associates Inc. J.P.Morgan Investment Management,Inc.
Osprey Partners Investment Mgmt.,LLC SHORT DURATION
CAPITAL APPRECIATION FUND GOVERNMENT FUND
Essex Investment Management Co.,LLC INTERMEDIATE DURATION
Bramwell capital Management,Inc. GOVERNMENT FUND
SMALL COMPANY FUND Smith Breeden Associates,Inc.
Kalmar Investment Advisers,Inc. TOTAL RETURN BOND FUND
SPECIAL EQUITY FUND Merganser Capital Management LP
Donald Smith &Co.,Inc. BOND FUND
Essex Investment Management Co.,LLC GLOBAL BOND FUND
Westport Asset Management,Inc. Loomis,Sayles & Company L.P.
Kern Capital Management LLC CONVERTIBLES SECURITIES FUND
Skyline Asset Management,L.P. 40/86 Advisors,Inc.
HIGH YIELD FUNDS
INTERNATIONAL EQUITY FUND FIXED INCOME FUND
Lazard Asset Management LLC Loomis,Sayles & Company L.P.
Bernstein Investment Research
and Management
Mastholm Asset Management,L.L.C.
EMERGING MARKETS EQUITY FUND Managers AMG Funds
Rexiter Capital Management Limited Equity Funds
FIRST QUADRANT TAX-MANAGED ==================
EQUITY FUND ESSEX AGGRESSIVE GROWTH FUNDS
First Quadrant,L.P. ESSEX LARGE CAP GROWTH FUND
SCIENCE & TECHNOLOGY FUND Essex investment Management Company,LLc
20 FUND
Oak Associates,ltd. RORER LARGE-CAP FUND
MID-CAP FUND RORER MID-CAP FUND
LARGE-CAP FUND Rorer Asset Management,LLC
Chicago Equity Partners,LLC
BALANCED FUND SYSTEMATIC VALUE FUND
Chicago Equity Partners,LLC Systematic Financial Management,LLP
Loomis,Sayles &Company L.P.
BURRIDGE SMALL CAP GROWTH FUND
The Burridge Group,LLC
</Table>
This report is prepared for the Fund's
shareholders.It is authorized for
distribution to prospective investors only
when preceded or accompanied by an
effective prospectus.To receive a free copy
of the prospectus or Statement of Additional
Information or to request additional informa-
tion about the Fund or other Managers Funds,
please contact us by calling 800-835-3879 or
by visiting our websites listed below.Distrib-
uted by Managers Distributors,Inc.,member
NASD.
www.managersfunds.com
www.managersamg.com
www.managerschoice.com
<Page>
Item 2. CODE OF ETHICS.
========================
Registrant has adopted a Code of Ethics. See attached Exhibit 10(a).
Item 3. AUDIT COMMITTEE FINANCIAL EXPERT.
==========================================
Registrant's Board of Trustees has determined that independent Trustee
Mr. Jack W. Aber and Mr. Steven J. Paggioli each qualify as Audit
Committee Financial Experts. Mr. Aber and Mr. Paggioli are
"independent" as such term is defined in Form N-CSR.
(a) Audit Fees.
- ---------------
For the fiscal years ended March 31, 2004 and March 31, 2003, the
aggregate Audit Fees billed by PricewaterhouseCoopers LLP ("PwC") for
professional services rendered for the audits of the financial
statements, or services that are normally provided in connection with
statutory and regulatory filings or engagements for those fiscal years,
for Short Duration Government Fund, Intermediate Duration Government
Fund and Total Return Bond Fund (the "Funds") and for all funds in The
Managers Funds Family of Funds Complex are shown in the table below.
<Table>
<s> <c> <c>
Funds 2004(A) 2003(A)
- ----- ------- -------
Short Duration Government Fund $14,978 $13,213
Intermediate Duration Government Fund $13,224 $12,829
Total Return Bond Fund $12,635 N/A
All funds in The Managers Funds
Family of Funds Complex audited by PwC $318,166 $281,165
</Table>
(A) Aggregate amounts may reflect rounding.
(b) Audit-Related Fees.
- -----------------------
In each of the fiscal years ended March 31, 2004 and March 31, 2003,
the aggregate Audit-Related Fees billed by PwC for services rendered
for assurance and related services to the Funds that is reasonably
related to the performance of the audit or review of the Funds'
financial statements, but not reported as Audit Fees, are shown in the
table below.
<Table>
<s> <c> <c>
Funds 2004(A,B) 2003(A,B)
- ----- ------- -------
Short Duration Government Fund $0 $0
Intermediate Duration Government Fund $0 $0
Total Return Bond Fund $0 $0
</Table>
(A) Aggregate amounts may reflect rounding.
<Page>
(B) Amounts related to non-audit services prior to May 6, 2003 that
would have been subject to pre-approval if the SEC rules relating to
the pre-approval of non-audit services had been in effect at that time.
In each of the fiscal years ended March 31, 2004 and March 31, 2003,
the aggregate Audit-Related Fees that were billed by PwC that were
required to be approved by the Audit Committee for services rendered on
behalf of Affiliated Managers Group, Inc. ("AMG") and entities
controlling, controlled by, or under common control with AMG (not
including any subadvisor whose role is primarily portfolio management
and is subcontracted with or overseen by another investment adviser)
that provide ongoing services to the Funds ("Fund Service Providers")
for assurance and related services that relate directly to the
operations and financial reporting of the Funds that are reasonably
related to the performance of the audit or review of the Funds'
financial statements, but not reported as Audit Fees, are shown in the
table below.
<Table>
<s> <c> <c>
Billed By 2004(A,B) 2003(A,B)
- --------- --------- ---------
PwC $0 $0
</Table>
(A) Aggregate amounts may reflect rounding.
(B) Amounts related to non-audit services prior to May 6, 2003 that
would have been subject to pre-approval if the SEC rules relating to
the pre-approval of non-audit services had been in effect at that time.
Fees included in the audit-related category comprise assurance and
related services (e.g., due diligence services) that are traditionally
performed by the independent accountant. These audit-related services
include due diligence related to mergers and acquisitions, accounting
consultations and audits in connection with acquisitions, internal
control reviews, attest services that are not required by statute or
regulation and consultation concerning financial accounting and
reporting standards.
(c) Tax Fees.
- -------------
In each of the fiscal years ended March 31, 2004 and March 31, 2003,
the aggregate Tax Fees billed by PwC for professional services rendered
for tax compliance, tax advice, and tax planning for the Funds is shown
in the table below.
<Table>
<s> <c> <c>
Funds 2004(A,B) 2003(A,B)
- ----- --------- ---------
Short Duration Government Fund $3,541 $7,046
Intermediate Duration Government Fund $3,520 $6,783
Total Return Bond Fund $3,254 N/A
</Table>
(A) Aggregate amounts may reflect rounding.
(B) Amounts related to non-audit services prior to May 6, 2003 that
would have been subject to pre-approval if the SEC rules relating to
the pre-approval of non-audit services had been in effect at that time.
In each of the fiscal years ended March 31, 2004 and March 31, 2003,
the aggregate Tax Fees billed by PwC that were required to be approved
by the Audit Committee for professional services rendered on behalf of
the Fund Service Providers for tax compliance, tax advice, and tax
<Page>
planning that relate directly to the operations and financial reporting
of the Funds is shown in the table below.
<Table>
<s> <c> <c>
Billed By 2004(A,B) 2003(A,B)
- --------- --------- ---------
PwC $0 $0
</Table>
(A) Aggregate amounts may reflect rounding.
(B) Amounts related to non-audit services prior to May 6, 2003 that
would have been subject to pre-approval if the SEC rules relating to
the pre-approval of non-audit services had been in effect at that time.
Fees included in the Tax Fees category comprise all services performed
by professional staff in the independent accountant's tax division
except those services related to the audit. Typically, this category
would include fees for tax compliance, tax planning, and tax advice.
Tax compliance, tax advice, and tax planning services include
preparation of original and amended tax returns, claims for refund and
tax payment-planning services, assistance with tax audits and appeals,
tax advice related to mergers and acquisitions and requests for rulings
or technical advice from taxing authorities.
(d) All Other Fees.
- -------------------
In each of the fiscal years ended March 31, 2004 and March 31, 2003,
the aggregate Other Fees billed by PwC for all other non-audit services
rendered to the Funds is shown in the table below.
<Table>
<s> <c> <c>
Funds 2004(A,B) 2003(A,B)
- ----- --------- ---------
Short Duration Government Fund $0 $236
Intermediate Duration Government Fund $0 $171
Total Return Bond Fund $0 N/A
</Table>
(A) Aggregate amounts may reflect rounding.
(B) Amounts related to non-audit services prior to May 6, 2003 that
would have been subject to pre-approval if the SEC rules relating to
the pre-approval of non-audit services had been in effect at that time.
In each of the fiscal years ended March 31, 2004 and March 31, 2003,
the aggregate Other Fees billed by PwC that were required to be
approved by the Audit Committee for all other non-audit services
rendered on behalf of the Funds Service Providers that relate directly
to the operations and financial reporting of the Funds is shown in the
table below.
<Table>
<s> <c> <c>
Billed By 2004(A,B) 2003(A,B)
- --------- --------- ---------
PwC $0 $0
</Table>
(A) Aggregate amounts may reflect rounding.
(B) Amounts related to non-audit services prior to May 6, 2003 that
would have been subject to pre-approval if the SEC rules relating to
the pre-approval of non-audit services had been in effect at that time.
Fees included in the All Other Fees category include services related
to internal control reviews, strategy and other consulting, financial
<Page>
information systems design and implementation, consulting on other
information systems, and other tax services unrelated to the Funds.
(e)(1) Audit Committee Pre-Approval Policies and Procedures:
- -------------------------------------------------------------
The Audit Committee has adopted pre-approval policies and
procedures as follows: Before PwC is engaged to render audit or non-
audit services, the engagement is approved by the Audit
Committee. The Chairman of the Audit Committee is authorized on behalf
of the Board of Trustees and the Audit Committee to approve any other
non-audit services to be performed by PwC involving fees of not more
than $20,000, provided that the Chairman notifies members of the Audit
Committee of such pre-approval not later than the next meeting of the
Audit Committee following the date of such pre-approval.
(e) (2) Services approved pursuant to paragraph (c)(7)(i)(C) of Rule
2-01 of Regulation S-X:
Audit-Related Fees:
- -------------------
There were no amounts that were approved by the Audit Committee
pursuant to the de minimis exception for the fiscal years ended March
31, 2004 and March 31, 2003 on behalf of the Funds. These percentages
include amounts related to non-audit services prior to May 6, 2003 that
would have been subject to pre-approval if the SEC rules relating to
the pre-approval of non-audit services had been in effect at that time.
There were no amounts that were required to be approved by the Audit
Committee pursuant to the de minimis exception for the fiscal years
ended March 31, 2004 and March 31, 2003 on behalf of the Fund Service
Providers that relate directly to the operations and financial
reporting of the Funds. These percentages include amounts related to
non-audit services prior to May 6, 2003 that would have been subject to
pre-approval if the SEC rules relating to the pre-approval of non-audit
services had been in effect at that time.
Tax Fees:
- ---------
There were no amounts that were approved by the Audit Committee
pursuant to the de minimis exception for the fiscal years ended March
31, 2004 and March 31, 2003 on behalf of the Funds. These percentages
include amounts related to non-audit services prior to May 6, 2003 that
would have been subject to pre-approval if the SEC rules relating to
the pre-approval of non-audit services had been in effect at that time.
There were no amounts that were required to be approved by the Audit
Committee pursuant to the de minimis exception for the fiscal years
ended March 31, 2004 and March 31, 2003 on behalf of the Fund Service
Providers that relate directly to the operations and financial
reporting of the Funds. These percentages include amounts related to
non-audit services prior to May 6, 2003 that would have been subject to
pre-approval if the SEC rules relating to the pre-approval of non-audit
services had been in effect at that time.
<Page>
All Other Fees:
- ---------------
There were no amounts that were approved by the Audit Committee
pursuant to the de minimis exception for the fiscal years ended March
31, 2004 and March 31, 2003 on behalf of the Funds. These percentages
include amounts related to non-audit services prior to May 6, 2003 that
would have been subject to pre-approval if the SEC rules relating to
the pre-approval of non-audit services had been in effect at that time.
There were no amounts that were required to be approved by the Audit
Committee pursuant to the de minimis exception for the fiscal years
ended March 31, 2004 and March 31, 2003 on behalf of the Fund Service
Providers that relate directly to the operations and financial
reporting of the Funds. These percentages include amounts related to
non-audit services prior to May 6, 2003 that would have been subject to
pre-approval if the SEC rules relating to the pre-approval of non-audit
services had been in effect at that time.
(f) According to PwC for the fiscal year ended March 31, 2004, the
percentage of hours spent on the audit of the Funds' financial
statements for the most recent fiscal year that were attributed to work
performed by persons who are not full-time, permanent employees of PwC
is as follows:
<Table>
<s> <c>
Funds 2004
- ----- ----
Short Duration Government Fund 0%
Intermediate Duration Government Fund 0%
Total Return Bond Fund 0%
</Table>
(g) The following table sets forth the non-audit services provided by
PwC to the Funds' advisers The Managers Funds and entities controlling,
controlled by or under common control with The Managers Funds LLC that
provide ongoing services to the Funds ("Control Affiliates") for the
last two fiscal years.
<Table>
<s> <c> <c> <c> <c> <c> <c>
Audit-related fees(A) Tax fees(A) All other fees(A)
--------------------- ----------- -----------------
2003 2004 2003 2004 2003 2004
Control Affiliates $0 $0 $0 $0 $0 $0
</Table>
(A) Aggregate amounts may reflect rounding.
(h) The Trust's Audit Committee has considered Non-Covered Services
that were not pre-approved that were provided by PwC to Fund Service
Providers to be compatible with maintaining the independence of PwC in
its audit of the Funds, taking into account representations from PwC,
in accordance with Independence Standards Board Standard No. 1,
regarding its independence from the Funds and its related entities.
Item 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
==============================================
Not applicable.
Item 6. [RESERVED]
==================
<Page>
Item 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-
END MANAGEMENT INVESTMENT COMPANIES.
==============================================================================
Not applicable.
Item 8. [RESERVED]
==================
Item 9. CONTROLS AND PROCEDURES.
=================================
(a) Disclosure Controls and Procedures. The Principal Executive
and Financial Officers concluded that the Registrant's
Disclosure Controls and Procedures are effective based on
their evaluation of the Disclosure Controls and Procedures as
of a date within 90 days of the filing of this report.
(b) Internal Controls. There were no significant changes in the
Registrant's internal controls or in other factors that could
significantly affect these controls subsequent to the date of
our evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Item 10. EXHIBITS
==================
(a) Any code of ethics or amendments hereto. Filed herewith.
(b) Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. Filed herewith.
(c) Certifications pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. Filed herewith.
<Page>
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.
MANAGERS TRUST II
=================
By: /s/ Peter M. Lebovitz
---------------------
Peter M. Lebovitz, President
Date June 2, 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: /s/ Peter M. Lebovitz
---------------------
Peter M. Lebovitz, President
Date June 2, 2004
------------
By: /S/ Galan G. Daukas
-------------------
Galan G. Daukas, Chief Financial Officer
Date June 2, 2004
------------