<Page>
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 811-04911
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State Street Research Financial Trust
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(Exact name of registrant as specified in charter)
One Financial Center, Boston, MA 02111
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(Address of principal executive offices) (Zip code)
Terrence J. Cullen, Senior Vice President and Counsel
State Street Research
One Financial Center, Boston, MA 02111
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(Name and address of agent for service)
Registrant's telephone number, including area code: 617-357-1200
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Date of fiscal year end: 10/31/04
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Date of reporting period: 11/1/03 - 4/30/04
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
ITEM 1: REPORT TO SHAREHOLDERS
The Semi-annual Report is attached.
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[LOGO] STATE STREET RESEARCH
Government Income Fund
April 30, 2004
Semiannual Report to Shareholders
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Table of Contents
3 Performance Discussion
4 Portfolio Holdings
6 Financial Statements
10 Financial Highlights
13 Trustees and Officers
FROM THE CHAIRMAN
State Street Research
After putting on a spectacular show of strength in the second quarter of 2003,
the U.S. economy settled down to a slower, but nevertheless solid, pace of
growth during the six-month period from November 1, 2003, to April 30, 2004.
Gross Domestic Product (GDP), a common measure of economic growth, rose 4.1% in
the fourth quarter of 2003 and 4.2% for the first quarter of 2004. Consumer
confidence was generally strong throughout the period as a combination of
accelerated tax cuts and tax rebates fueled higher disposable income for most
working Americans. The housing market was strong, and consumer spending
continued to rise. Better yet, business spending began to recover after a long
period of stagnation. Corporate profits staged a solid rebound, making it easier
for companies to increase outlays, especially on information technology and
electronic equipment.
The economic news was slightly less upbeat as the first quarter of 2004 began.
Durable goods orders declined and the number of new jobs added to the labor
market in January and February fell short of expectations. Consumer confidence
slipped in March. However, strong job growth in March and April suggested that
the economic recovery was on solid ground. The period ended with the expectation
that the Federal Reserve Board would likely raise short-term interest rates
sooner rather than later in the year.
Stock and Bond Markets Moved Higher
The stock market moved sharply higher through early February as economic growth
firmed up and corporate profits rose 20% or more for the reporting period, as
reported by Thomson First Call. However, a host of worries stopped the major
indexes in their tracks in the final six weeks of the period. Investors grew
more cautious about interest rates, the threat of terrorist attacks and
corporate profit comparisons going forward.
High-yield bonds continued to rally, delivering returns that exceeded those of
the broad stock market. However, they also stalled along with the stock market
late in the period. Most other segments of the bond market reported low
single-digit returns. Mortgage bonds bounced back as prepayment activity slowed.
Investment-grade and municipal bonds earned solid but modest returns. Government
bonds were the period's weakest performers; they were hurt the most when
interest rates rose late in the period.
Looking Ahead
The recent bear and bull cycles serve as a reminder that markets can be
unpredictable, which underscores the importance of having an asset allocation
plan in place. If you have a plan in place, stay with it, invest regularly and
talk to your investment professional before you make a significant move outside
your plan.
As always, we look forward to helping you achieve your long-term financial goals
with State Street Research Funds.
Sincerely,
/s/ RICHARD S. DAVIS
Richard S. Davis
Chairman
April 30, 2004
2
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- -----------
PERFORMANCE
- -----------
Discussion as of April 30, 2004
How State Street Research Government Income Fund Performed
State Street Research Government Income Fund returned 0.29% for the six-month
period ended April 30, 2004.(1) The fund trailed both the Merrill Lynch
Government Master Index, which returned 0.80%, and the Lipper General U.S.
Government Funds Average, which returned 0.56% over the same period.(2)
Reasons for the Fund's Performance
Interest rates remained volatile over the six-month reporting period. From
November 2003 through March 2004, as employment growth appeared to be weak,
interest rates gradually fell. However, interest rates spiked dramatically
higher as improved payroll data was reported for both March and April. In this
environment, the fund's decision to underweight government agency issues
detracted from its return because agency bonds performed better than Treasuries.
The fund's exposure to mortgage-backed securities (MBS) benefited performance
during the first five months of the period. However, much of this gain was
offset in April as the mortgage sector underperformed Treasuries amid sharply
rising interest rates. The fund's investment in commercial mortgage-backed
securities (CMBS) helped performance as the sector beat Treasuries. Security
selection among CMBS was also a positive factor.
The fund's shorter-than-benchmark duration was a slight positive for the
six-month period. Initially, the fund's shorter duration hampered returns as
interest rates fell. However, these losses were more than offset when interest
rates rose in April. Duration is a measure of interest-rate sensitivity. Our
decision to shorten duration in anticipation of higher interest rates proved
favorable when interest rates did move higher over the period.
Looking Ahead
The fixed income markets have signaled that they expect inflation to move higher
and the Federal Reserve Board to respond with higher short-term interest rates.
With that in mind, we plan to maintain the fund's shorter-than-benchmark
duration in order to reduce interest-rate risk. We also expect to stay
underweight in government agencies, which we believe could suffer from potential
legislative changes and headline risks. In April, we began adding to our stake
in mortgages, which look more attractive on a risk/return basis after the recent
rise in interest rates. We also plan to maintain the fund's modest exposure to
CMBS, paying close attention to the credit risk of specific issues because the
prospects for commercial real estate are less certain.
A Word about Risk
The major risks of bond investing include the tendency for bond prices to fall
when interest rates rise. Although the U.S. government ensures the timely
payment of principal and interest on certain underlying securities, the value of
fund shares is not guaranteed and will fluctuate.
Asset Allocation
- --------------------------------------------------------------------------------
Issuer/Security % of Fund Net Assets
- --------------------------------------------------------------------------------
U.S. Treasury 46%
- --------------------------------------------------------------------------------
U.S. Agency Mortgage 45%
- --------------------------------------------------------------------------------
Other Mortgage 7%
- --------------------------------------------------------------------------------
Foreign 1%
- --------------------------------------------------------------------------------
Cash 1%
- --------------------------------------------------------------------------------
Total 100%
- --------------------------------------------------------------------------------
Interest Rates
- --------------------------------------------------------------------------------
(November 1, 2003 to April 30, 2004)
[DATA BELOW IS REPRESENTED BY A LINE CHART IN THE ORIGINAL REPORT]
90-Day 90-day 10-year 30-year 30-year
Date Commercial Treasury Treasury Treasury Mortgage
10/31/2003 1.10 0.93 4.29 5.13 5.94
11/28/2003 1.08 0.91 4.33 5.13 5.93
12/31/2003 1.07 0.90 4.25 5.07 5.88
01/30/2004 1.03 0.89 4.13 4.96 5.71
02/27/2004 1.03 0.92 3.97 4.84 5.64
03/31/2004 1.02 0.92 3.83 4.77 5.45
04/30/2004 1.08 0.94 4.51 5.28 6.01
Performance
- --------------------------------------------------------------------------------
Fund average annual total return as of 4/30/04(3,5,6)
(does not reflect sales charge)
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A -0.41% 5.14% 6.33%
- --------------------------------------------------------------------------------
Class B(1) -1.11% 4.35% 5.51%
- --------------------------------------------------------------------------------
Class B -1.11% 4.40% 5.55%
- --------------------------------------------------------------------------------
Class C -1.11% 4.41% 5.56%
- --------------------------------------------------------------------------------
Class R -0.61% 5.09% 6.30%
- --------------------------------------------------------------------------------
Class S -0.11% 5.45% 6.61%
- --------------------------------------------------------------------------------
Fund average annual total return as of 3/31/04(3,4,5,6)
(at maximum applicable sales charge)
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A -1.62% 4.86% 6.06%
- --------------------------------------------------------------------------------
Class B(1) -2.69% 4.71% 5.74%
- --------------------------------------------------------------------------------
Class B -2.63% 4.76% 5.78%
- --------------------------------------------------------------------------------
Class C 1.32% 5.10% 5.78%
- --------------------------------------------------------------------------------
Class R 2.78% 5.78% 6.53%
- --------------------------------------------------------------------------------
Class S 3.25% 6.14% 6.84%
- --------------------------------------------------------------------------------
Because financial markets and mutual fund strategies are constantly evolving, it
is possible that the fund's holdings, market stance, outlook for various
industries or securities and other matters discussed in this report have changed
since this information was prepared. Portfolio changes should not be considered
recommendations for action by individual investors.
(1) Class A shares; does not reflect sales charge.
(2) The Merrill Lynch Government Master Index is comprised of fixed-rate U.S.
Treasury and agency securities. The index is unmanaged and does not take
transaction charges into consideration. It is not possible to invest
directly in an index. The Lipper General U.S. Government Funds Average
shows the performance of a category of mutual funds with similar goals. The
Lipper average shows you how well the fund has done compared with competing
funds.
(3) Keep in mind that the performance data quoted represents past performance
and is no guarantee of future results. Current performance may be lower or
higher than the performance data quoted herein. For the most recent
month-end performance results, visit our website at www.ssrfunds.com. The
fund's share price, yield and return will fluctuate, and you may have a
gain or loss when you sell your shares. All returns assume reinvestment of
capital gains distributions and income dividends at net asset value. The
returns shown do not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the redemption of fund shares.
(4) Performance reflects a maximum 4.50% Class A share front-end sales charge,
or a 5% Class B or Class B(1), or 1% Class C share contingent deferred
sales charge, where applicable.
(5) Performance for Class B(1) shares reflects Class B share performance
through December 31, 1998, and Class B(1) share performance thereafter.
Performance for Class R shares reflects Class A share performance through
April 2, 2003, and Class R share performance thereafter. If the returns for
Class B(1) and Class R shares had reflected their current
service/distribution (Rule 12b-1) fees for the entire period, these returns
would have been lower.
(6) Class R and Class S shares, offered without sales charge, are only
available through certain employee benefit plans and special programs.
State Street Research Government Income Fund 3
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PORTFOLIO
- ---------
Holdings
April 30, 2004 (unaudited)
Maturity Principal Market
Issuer Date Amount Value
- --------------------------------------------------------------------------------
U.S. Government Securities 91.3%
U.S. Treasury 46.1%
U.S. Treasury Note, 4.00% ........... 11/15/2012 $ 1,575,000 $ 1,534,025
U.S. Treasury Bond, 10.75% .......... 8/15/2005 43,075,000 47,929,337
U.S. Treasury Bond, 10.375% ......... 11/15/2012 36,425,000 45,157,056
U.S. Treasury Bond, 12.00% .......... 8/15/2013 17,600,000 23,594,313
U.S. Treasury Bond, 10.625% ......... 8/15/2015 27,775,000 42,138,786
U.S. Treasury Bond, 9.875% .......... 11/15/2015 12,650,000 18,390,924
U.S. Treasury Bond, 9.25% ........... 2/15/2016 4,350,000 6,091,531
U.S. Treasury Bond, 8.875% .......... 2/15/2019 12,200,000 17,017,097
U.S. Treasury Bond, 6.25% ........... 8/15/2023 7,400,000 8,222,673
U.S. Treasury Bond, 6.75% ........... 8/15/2026 34,275,000 40,435,143
U.S. Treasury Bond, 6.25% ........... 5/15/2030 6,475,000 7,276,534
------------
257,787,419
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U.S. Agency Mortgage 44.5%
ENSCO Offshore Co., 6.36% ........... 12/01/2015 2,780,037 3,042,305
Federal Home Loan Mortgage
Corp., 9.00% ...................... 12/01/2009 795,153 863,195
Federal Home Loan Mortgage
Corp., 4.00% ...................... 3/15/2010 2,925,000 2,977,833
Federal Home Loan Mortgage
Corp., 3.75% ...................... 3/15/2011 4,706,000 4,775,587
Federal Home Loan Mortgage
Corp., 4.00% ...................... 8/15/2013 3,000,000 3,045,198
Federal National Mortgage
Association, 5.50% ................ 5/02/2006 9,350,000 9,859,005
Federal National Mortgage
Association, 8.00% ................ 4/01/2008 578,421 616,787
Federal National Mortgage
Association, 8.00% ................ 6/01/2008 837,877 893,452
Federal National Mortgage
Association, 8.50% ................ 2/01/2009 1,182,637 1,272,759
Federal National Mortgage
Association, 9.00% ................ 5/01/2009 1,012,862 1,096,167
Federal National Mortgage
Association, 7.13% ................ 6/15/2010 19,575,000 22,493,495
Federal National Mortgage
Association, 6.02% ................ 11/25/2010 3,600,000 3,862,301
Federal National Mortgage
Association, 6.50% ................ 12/01/2014 1,139,656 1,207,559
Federal National Mortgage
Association, 9.00% ................ 4/01/2016 283,380 311,958
Federal National Mortgage
Association, 7.00% ................ 1/01/2017 1,989,510 2,124,246
Federal National Mortgage
Association, 7.50% ................ 7/01/2029 1,437,306 1,541,012
Federal National Mortgage
Association, 6.50% ................ 12/01/2029 2,550,232 2,659,676
Federal National Mortgage
Association, 7.00% ................ 4/01/2032 1,285,950 1,359,397
Maturity Principal Market
Issuer Date Amount Value
- --------------------------------------------------------------------------------
Federal National Mortgage
Association, 6.00%* ............... 11/13/2033 $ 15,925,000 $ 16,288,281
Federal National Mortgage
Association, 4.50%* ............... 11/13/2033 19,950,000 19,632,037
Federal National Mortgage
Association, 4.00%* ............... 11/13/2033 2,400,000 2,306,251
Federal National Mortgage
Association, 5.00%* ............... 11/13/2033 26,025,000 25,211,719
Federal National Mortgage
Association, 6.50%** .............. 11/13/2033 5,625,000 5,853,516
Federal National Mortgage
Association, 6.00%** .............. 11/13/2033 5,650,000 5,891,888
Federal National Mortgage
Association, 5.50%** .............. 11/13/2033 50,975,000 51,099,623
Federal National Mortgage
Association, 5.00%* ............... 11/13/2033 13,100,000 13,148,765
Government National Mortgage
Association, 9.50% ................ 9/15/2009 389,983 430,244
Government National Mortgage
Association, 9.50% ................ 10/15/2009 718,670 792,825
Government National Mortgage
Association, 9.50% ................ 11/15/2009 330,770 364,918
Government National Mortgage
Association, 9.50% ................ 11/15/2017 41,724 46,989
Government National Mortgage
Association, 9.50% ................ 9/15/2019 47,897 53,966
Government National Mortgage
Association, 7.00% ................ 5/15/2027 966,695 1,030,253
Government National Mortgage
Association, 7.00% ................ 11/15/2028 3,557,260 3,790,079
Government National Mortgage
Association, 6.50% ................ 11/15/2028 2,120,766 2,218,320
Government National Mortgage
Association, 6.50% ................ 9/15/2029 2,003,600 2,094,950
Government National Mortgage
Association, 7.50% ................ 6/15/2031 569,235 611,418
Government National Mortgage
Association, 6.00% ................ 9/20/2033 2,225,629 2,280,352
Government National Mortgage
Association, 6.00% ................ 10/20/2033 3,580,011 3,680,428
Government National Mortgage
Association, 5.00% ................ 10/20/2033 3,133,468 3,044,850
Government National Mortgage
Association, 6.00% ................ 11/20/2033 4,697,986 4,813,499
Government National Mortgage
Association, 6.00% ................ 2/20/2034 3,174,477 3,252,422
Government National Mortgage
Association, 5.50%* ............... 12/01/2034 6,925,000 6,925,000
Overseas Private Investor Bond,
3.42% ............................. 1/15/2015 3,215,954 3,103,814
Private Export Funding Note,
3.38% ............................. 2/15/2009 5,250,000 5,122,415
U.S. Department Housing &
Urban Development 2003-A,
4.44% ............................. 8/01/2011 2,099,000 2,069,121
------------
249,159,875
------------
Foreign Government 0.7%
Canadian Dollar
Republic of Canada, 3.50% ........... 6/01/2005 1,150,000 850,480
Euro
Republic of Germany, 5.00% .......... 8/19/2005 700,000 867,045
Japanese Yen
Republic of Japan, 3.00% ............ 10/20/2005 250,000,000 2,266,241
------------
3,983,766
------------
Total U.S. Government Securities (Cost $512,278,545) ............ 510,931,060
------------
4 The notes are an integral part of the financial statements.
<Page>
Maturity Principal Market
Issuer Date Amount Value
- -------------------------------------------------------------------------------
Other Investments 6.7%
Finance/Mortgage 6.7%
Bear Stearns Commercial
Mortgage Securities Inc.,
2002 Cl. A1, 5.92% ............... 10/15/2036 $ 2,625,777 $ 2,822,744
Chase Commercial Mortgage
Securities Corp. 1998 Cl. A1,
6.025% ........................... 11/18/2030 1,428,431 1,505,605
Chase Commercial Mortgage
Securities Corp. 1998 Cl. A2,
6.39% ............................ 11/18/2030 2,875,000 3,139,338
First Union Lehman Brothers
Bank Corp. Series 1998
Cl. A1, 6.28% .................... 11/18/2035 2,134,588 2,208,997
LB Commercial Commercial
Mortgage Trust, 3.25% ............ 3/15/2029 2,100,000 2,020,788
LB Commercial Conduit
Mortgage Trust 1997 Cl. A1,
6.79% ............................ 10/12/2034 30,125 30,197
LB-UBS Commercial Mortgage
Trust 2001 Cl. A4, 5.64% ......... 12/15/2025 4,052,412 4,295,782
LB-UBS Commercial Mortgage
Trust 2001 Cl. A4, 5.93% ......... 12/15/2025 3,450,000 3,699,052
Merrill Lynch Mortgage
Investments Inc. Series 1997
Cl. A1, 6.46% .................... 12/10/2029 326,289 327,455
Morgan Stanley Capital Inc.
1999, 5.91% ...................... 11/15/2031 1,799,361 1,890,639
Morgan Stanley Dean Witter
Capital Inc. 2002 Cl. A1,
5.38% ............................ 1/15/2039 4,909,284 5,156,068
Nomura Asset Securities Corp.,
1998 Cl. D6, 6.59% ............... 3/15/2030 2,625,000 2,887,183
Washington Mutual Mortgage
Inc. 2003, 3.42% ................. 5/25/2033 4,350,000 4,249,725
Washington Mutual Mortgage
Inc. 2003, 1.00% ................. 10/25/2033 3,275,000 3,186,402
------------
37,419,975
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Total Other Investments (Cost $42,202,591) ................... 37,419,975
------------
Market
Issuer Shares Value
- -------------------------------------------------------------------------------
Short-Term Investments 25.2%
State Street Navigator Securities Lending Prime
Portfolio ....................................... 140,979,392 $140,979,392
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Total Short-Term Investments (Cost $140,979,392) ............... 140,979,392
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Maturity Principal
Date Amount
- -------------------------------------------------------------------------------
Commercial Paper 26.8%
Federal Home Loan Bank, 0.85% ......... 5/03/2004 $5,000,000 4,999,764
Federal Home Loan Bank, 0.97% ......... 5/05/2004 28,068,000 28,064,975
Federal Home Loan Bank, 1.00% ......... 5/10/2004 46,338,000 46,327,128
Federal Home Loan Bank, 0.93% ......... 5/10/2004 10,273,000 10,270,611
Federal Home Loan Bank, 0.93% ......... 5/13/2004 10,001,000 9,997,900
Federal Home Loan Bank, 0.92% ......... 5/18/2004 42,819,000 42,800,423
Federal Home Loan Bank, 0.98% ......... 5/20/2004 7,500,000 7,496,121
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Total Commercial Paper (Cost $149,956,922) ..................... 149,956,922
------------
% of
Net Assets
- -------------------------------------------------------------------------------
Summary of Portfolio Assets
Total Investments (Cost $834,525,289).. 150.0% 839,287,349
Other Assets, Less Liabilities ........ (50.0%) (279,708,921)
----- ------------
Net Assets ............................ 100.0% $559,578,428
====== ============
KEY TO SYMBOLS
* Denotes a To Be Announced purchase commitment to purchase securities for a
fixed unit price at a future date beyond customary settlement time.
Although the unit price has been established, the principal value has not
been finalized.
** A portion of this security was pledged and segregated with the custodian to
cover margin requirements for futures contracts at April 30, 2004.
Federal Income Tax Information
At April 30, 2004, the net unrealized depreciation of
investments based on cost for federal income tax
purposes of $845,493,544 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost $ 6,714,381
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value (12,920,576)
-------------
$ (6,206,195)
=============
Futures contracts open at April 30, 2004, are as follows:
<Table>
<Caption>
Unrealized
Number Notional Expiration Appreciation
Type of Contracts Amount Month (Depreciation)
- ----------------------------------------------------------------------------------------------------------------
2-Year U.S. Treasury Notes Long ........... 174 $ 36,983,156 June 2004 $ (259,545)
5-Year U.S. Treasury Notes Short .......... (115) (12,643,261) June 2004 5
10-Year U.S. Treasury Notes Short ......... (229) (25,304,500) June 2004 (14,510)
30-Year U.S. Treasury Notes Short ......... (101) (10,816,469) June 2004 439,725
----------
$ 165,675
==========
Options open at April 30, 2004, are as follows:
<Caption>
Number Expiration
Type of Contracts Premium Month Value
- --------------------------------------------------------------------------------------------------------------
10-Year U.S. Treasury Futures Call ......... (449) $ (446,868) May 2004 $ (154,344)
10-Year U.S. Treasury Futures Put .......... (449) (559,117) May 2004 (827,844)
------------ ----------
$ (1,005,985) $ (982,188)
============ ==========
</Table>
The notes are an integral part of the financial statements.
State Street Research Government Income Fund 5
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- ---------
FINANCIAL
- ---------
Statements
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
April 30, 2004 (unaudited)
Assets
Investments, at value (cost $834,525,289) (Note 1) ........... $839,287,349
Receivable for securities sold ............................... 9,509,666
Interest receivable .......................................... 7,156,164
Receivable for fund shares sold .............................. 362,825
Receivable for variation margin .............................. 1,254
Other assets ................................................. 91,068
------------
856,408,326
------------
Liabilities
Payable for securities purchased ............................. 151,152,867
Payable for collateral received on securities loaned ......... 140,979,392
Payable for fund shares redeemed ............................. 1,662,487
Options written at fair value (premium $1,005,985) ........... 982,188
Dividends payable ............................................ 823,824
Accrued transfer agent and shareholder services .............. 477,076
Accrued management fee ....................................... 279,377
Accrued distribution and service fees ........................ 219,386
Payable to custodian (Note 1) ................................ 95,333
Accrued trustees' fees ....................................... 13,734
Accrued administration fee ................................... 4,115
Other accrued expenses ....................................... 140,119
------------
296,829,898
------------
Net Assets ................................................... $559,578,428
============
Net Assets consist of:
Unrealized appreciation of investments ..................... $ 4,762,060
Unrealized appreciation of futures contracts
and options .............................................. 189,472
Unrealized depreciation of foreign currency ................ (2,001)
Accumulated net realized loss .............................. (21,462,470)
Paid-in capital ............................................ 576,091,367
------------
$559,578,428
============
Net Asset Value (NAV) of Each Share Class
Except where noted, the NAV is the offering and the redemption price for each
class.
Class Net Assets [divided by] Number of Shares = NAV
A $405,257,757 32,584,123 $ 12.44*
B(1) $ 97,525,559 7,908,632 $ 12.33**
B $ 29,907,693 2,414,101 $ 12.39**
C $ 17,360,134 1,400,419 $ 12.40**
R $ 96,109 7,726 $ 12.44
S $ 9,431,176 758,897 $ 12.43
* Maximum offering price per share = $13.03 ($12.44 [divided by] 0.955)
** When you sell Class B(1), Class B or Class C shares, you receive the net
asset value minus deferred sales charge, if any.
Statement of Operations
- --------------------------------------------------------------------------------
For the six months ended April 30, 2004 (unaudited)
Investment Income
Interest ...................................................... $12,509,876
-----------
Expenses
Management fee (Note 2) ....................................... 1,779,255
Transfer agent and shareholder services (Note 2) .............. 854,456
Distribution and service fees - Class A (Note 4) .............. 639,972
Distribution and service fees - Class B(1) (Note 4) ........... 532,642
Distribution and service fees - Class B (Note 4) .............. 188,058
Distribution and service fees - Class C (Note 4) .............. 102,224
Distribution and service fees - Class R (Note 4) .............. 244
Custodian fee ................................................. 99,918
Administration fee (Note 2) ................................... 45,500
Trustees' fees (Note 2) ....................................... 31,284
Registration fees ............................................. 25,844
Reports to shareholders ....................................... 21,850
Audit fee ..................................................... 17,290
Legal fees .................................................... 9,646
Miscellaneous ................................................. 23,650
-----------
4,371,833
Fees paid indirectly (Note 2) ................................. (10,320)
-----------
4,361,513
-----------
Net investment income ......................................... 8,148,363
-----------
Realized and Unrealized Gain (Loss) on
Investments, Foreign Currencies, Futures
Contracts and Options
Net increase from payment by affiliate (Note 2) ............... 138,757
-----------
Net realized gain on investments (Notes 1 and 3) .............. 8,271,454
Net realized gain on foreign currency (Note 1) ................ 2,545
Net realized loss on futures contracts and
options (Note 1) ........................................... (1,938,433)
-----------
Total net realized gain ..................................... 6,335,566
-----------
Change in unrealized depreciation of investments .............. (13,830,174)
Change in unrealized depreciation of foreign currency ......... (2,001)
Change in unrealized appreciation of futures contracts
and options ................................................. 1,127,548
-----------
Total change in unrealized depreciation ..................... (12,704,627)
-----------
Net loss on investments, foreign currencies, futures
contracts and options ....................................... (6,230,304)
-----------
Net increase in net assets resulting from operations .......... $ 1,918,059
===========
6 The notes are an integral part of the financial statements.
<Page>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Six months ended
April 30, 2004 Year ended
(unaudited) October 31, 2003
---------------- ----------------
Increase (Decrease) In Net Assets
Operations:
Net investment income ................... $ 8,148,363 $ 21,756,769
Net increase from payment by
affiliate ............................. 138,757 --
Net realized gain on investments,
foreign currency, future contracts
and options ........................... 6,335,566 17,525,536
Change in unrealized depreciation
of investments, foreign currency,
futures contracts and options ......... (12,704,627) (26,546,733)
------------ ------------
Net increase resulting
from operations ....................... 1,918,059 12,735,572
------------ ------------
Dividends from net investment
income:
Class A ............................... (9,108,344) (21,773,956)
Class B(1) ............................ (1,921,754) (4,783,459)
Class B ............................... (674,663) (2,405,307)
Class C ............................... (366,997) (1,160,250)
Class R ............................... (1,989) (2,293)
Class S ............................... (239,094) (658,794)
------------ ------------
(12,312,841) (30,784,059)
------------ ------------
Net decrease from fund share
transactions (Note 5) ................. (66,656,986) (144,063,764)
------------ ------------
Total decrease in net assets ............ (77,051,768) (162,112,251)
Net Assets
Beginning of period ..................... 636,630,196 798,742,447
------------ ------------
End of period including
undistributed net investment
income of $0 and $913,934,
respectively .......................... $559,578,428 $636,630,196
============ ============
Notes to Unaudited Financial Statements
- --------------------------------------------------------------------------------
April 30, 2004
Note 1
State Street Research Government Income Fund is a series of State Street
Research Financial Trust (the "Trust"), which is organized as a Massachusetts
business trust registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company.
The investment objective of this fund is to seek high current income. Under
normal market conditions, the fund invests at least 80% of net assets in U.S.
government securities.
The fund offers six classes of shares. Class A shares are subject to an initial
sales charge of up to 4.50% and pay annual service and distribution fees equal
to 0.30% of average daily net assets. Class B(1) shares pay annual service and
distribution fees equal to 1.00% of average daily net assets and automatically
convert into Class A shares (which pay lower ongoing expenses) at the end of
eight years. Class B(1) shares are subject to contingent deferred sales charge
on certain redemptions made within six years of purchase. Class B shares are
offered only to current shareholders through reinvestment of dividends and
distributions or through exchanges from existing Class B accounts of State
Street Research funds. Class B shares automatically convert into Class A shares
at the end of eight years. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase. Class C
shares are subject to a contingent deferred sales charge of 1.00% on any shares
redeemed within one year of purchase. Class C shares also pay annual service and
distribution fees equal to 1.00% of average daily net assets. Class R shares are
offered to retirement plans participating in certain platforms sponsored by
broker-dealers which may involve multiple fund families. Class R shares pay a
service and distribution fee of 0.50%. No sales charge is imposed at the time of
purchase or redemption of Class R shares. Class S shares are only offered
through certain retirement accounts, advisory accounts of State Street Research
& Management Company (the "Adviser"), an investment management subsidiary of
MetLife, Inc. ("MetLife"), and special programs. No sales charge is imposed at
the time of purchase or redemption of Class S shares. Class S shares do not pay
any service or distribution fees. The fund's expenses are borne prorata by each
class, except that each class bears expenses, and has exclusive voting rights
with respect to provisions of the plans of distribution, related specifically to
that class. The Trustees declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by the
fund in preparing its financial statements, and such policies are in conformity
with accounting principles generally accepted in the United States of America.
A. Investment Valuation
Securities are valued by a pricing service, which utilizes market transactions,
quotations from dealers, and various relationships among securities in
determining value. Securities for which there is no such valuation, if any, are
valued at their fair value as determined in accordance with established methods
consistently applied. Short-term securities maturing within sixty days are
valued at amortized cost. Securities quoted in foreign currencies are translated
into U.S. dollars at the current exchange rate.
B. Foreign Currencies
Securities quoted in foreign currencies are translated into U.S. dollars at the
current exchange rate. Gains and losses that arise from changes in exchange
rates are not segregated from gains and losses that arise from changes in market
prices of investments.
C. Security Transactions
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed). Realized gains or losses are reported on the basis of
identified cost of securities delivered. As part of the custodian contract
between the custodian bank and the fund, the custodian bank has a lien on the
securities of the fund to the extent permitted by the fund's investment
restriction to cover any advances made by the
The notes are an integral part of the financial statements.
State Street Research Government Income Fund 7
<Page>
Notes (continued)
custodian bank for the settlement of securities purchased by the fund. At April
30, 2003, the payable to the custodian bank of $95,333 represents the amount due
for cash advance for the settlement of a security purchased.
D. Net Investment Income
Net investment income is determined daily and consists of interest accrued and
discount earned, less the estimated daily expenses of the fund. The fund is
charged for expenses directly attributable to it, while indirect expenses are
allocated among both funds in the Trust.
E. Dividends
Dividends from net investment income are declared daily and paid or reinvested
monthly. Net realized capital gains, if any, are distributed annually, unless
additional distributions are required for compliance with applicable tax
regulations.
Income dividends and capital gains distributions are determined in accordance
with federal income tax regulations which may differ from accounting principles
generally accepted in the United States of America. The difference is primarily
caused by differing treatment of accrued interest on defaulted bonds and premium
amortization on fixed income securities.
F. Federal Income Taxes
No provision for federal income taxes is necessary because the fund has elected
to qualify under Subchapter M of the Internal Revenue Code and its policy is to
distribute all of its taxable income, including net realized capital gains,
within the prescribed time periods.
At October 31, 2003, the fund had a capital loss carryforward of $10,078,466
available, to the extent provided in regulations, to offset future capital
gains, if any, of which, $492,884, $7,218,002, and $2,367,580 expire on October
31, 2007, 2008 and 2010, respectively.
G. Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from these estimates.
H. Securities Lending
The fund may seek additional income by lending portfolio securities to qualified
institutions. The fund will receive cash or securities as collateral in an
amount equal to at least 100% of the current market value of any loaned
securities plus accrued interest. By reinvesting any cash collateral it receives
in these transactions, the fund could realize additional gains and losses. If
the borrower fails to return the securities and the value of the collateral has
declined during the term of the loan, the fund will bear the loss. At April 30,
2004, the value of the securities loaned and the value of collateral were
$138,314,173 and $140,979,392 (consisting entirely of cash collateral invested
in State Street Navigator Securities Lending Prime Portfolio), respectively.
During the six months ended April 30, 2004, income from securities lending
amounted to $42,597 and is included in interest income.
I. Futures
The fund may enter into futures contracts as a hedge against unfavorable market
conditions and to enhance income. The fund will not purchase any futures
contract if, after such purchase, more than one-third of net assets would be
represented by long future contracts. The fund will limit its risks by entering
into a futures position only if it appears to be a liquid investment.
Upon entering into a futures contract, the fund deposits with the selling broker
sufficient cash or U.S. government securities to meet the minimum "initial
margin" requirements. Thereafter, the fund receives from or pays to the broker
cash or U.S. government securities equal to the daily fluctuation in value of
the contract ("variation margin"), which is recorded as unrealized gain or loss.
When the contract is closed, the fund records a realized gain or loss equal to
the difference between the value of the contract at the time it has opened and
the value at the time it was closed.
The potential risk to the fund is that the change in value of futures contracts
may not correspond to the change in value of the hedged instruments. In
addition, losses may arise in changes from the value of the underlying
instruments, if there is an illiquid secondary market for the contracts, or if
the counterparty to the contract is unable to perform.
J. Options
The fund may use options to hedge against changes in values of securities the
Portfolio owns or expects to purchase. Writing puts or buying calls tends to
increase the fund's exposure to the underlying instrument and writing calls or
buying puts tends to decrease the fund's exposure to the underlying instrument,
or hedge other fund investments.
For options purchased to hedge the fund's investments, the potential risk to the
fund is that the change in value of options contracts may correspond to the
change in value of the hedged instruments. In addition, losses may arise from
changes in the value of the underlying instruments, if there is an illiquid
secondary market, or if the counter party is unable to perform. The maximum loss
for purchased options is limited to the premium initially paid for the option.
For options written by the fund, the maximum loss is not limited to the premium
initially received for the option.
Note 2
The Trust and the Adviser have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.60% of the first $500 million of net
assets annually, 0.55% of the next $500 million, and 0.50% of any amount over $1
billion. In consideration of these fees, the Adviser furnishes the fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses of
management. During the six months ended April 30, 2004, the fees pursuant to
such agreement amounted to $1,779,255.
State Street Research Service Center, a division of State Street Research
Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), provides certain shareholder services to the fund such as
responding to inquiries and instructions from investors with respect to the
purchase and redemption of shares of the fund. In addition, MetLife receives a
fee for maintenance of the accounts of certain shareholders who are participants
in sponsored arrangements, such as employee benefit plans, through or under
which shares of the fund may be purchased. Total shareholder service costs are
allocated to each fund in the same ratios as the transfer agent costs. During
the six months ended April 30, 2004, the amount of such expenses allocated to
the fund was $282,917.
The fund has entered into an arrangement with its transfer agent whereby credits
realized as a result of uninvested cash balances were used to reduce a portion
of the fund's expense. During the six months ended April 30, 2004, the fund's
transfer agent fees were reduced by $10,320 under this arrangement.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$31,284 during the six months ended April 30, 2004.
The fund has agreed to pay the Adviser for certain administrative costs incurred
in providing other assistance and services to the fund. The fee was based on a
fixed amount that has been allocated equally among the State Street Research
funds. During the six months ended April 30, 2004, the amount of such expenses
was $45,500.
On February 19, 2004, the Distributor entered into an agreement with the NASD
resolving all outstanding issues relating to an investigation by the NASD of the
Distributor's e-mail retention practices and supervision of trading activity in
shares of the State Street Research funds. The Distributor, without admitting or
denying the allegations or the findings set forth in the agreement, and solely
for the purposes of the settlement, agreed to the entry of certain findings by
the NASD relating to the Distributor's compliance with document retention
requirements and the Distributor's supervision of enforcement of shareholder
exchange limitations set forth in the funds' prospectuses. The agreement
contains no allegations or findings of fraudulent conduct by the Distributor. As
part of this agreement, the Distributor made a payment to the fund to compensate
the fund for losses relating to the exchange of fund shares beyond the annual
limit set forth in the fund's prospectus. The payment was allocated among the
fund's share classes as follows: $99,915 to Class A, $24,174 to Class B(1),
$7,801 to Class B, $4,470 to Class C and $2,397 to Class S. These amounts are
shown in the total amount of $138,757 as "Net increase from payment by
affiliate" in the Statement of Operations.
Note 3
For the six months ended April 30, 2004, purchases and sales of securities,
exclusive of short-term obligations, aggregated $1,034,500,362, and
$1,091,651,626 (including $1,027,986,529 and $1,081,279,705 of U.S. government
obligations), respectively.
8
<Page>
Note 4
The Trust has adopted plans of distribution pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Under the plans, the fund pays annual service
fees to the Distributor at a rate of 0.25% of average daily net assets for Class
A, Class B(1), Class B, Class C and Class R shares. In addition, the fund pays
annual distribution fees of 0.05% of average daily net assets for Class A
shares. The fund pays annual distribution fees of 0.75% of average daily net
assets for Class B(1), Class B and Class C shares and 0.25% of average net
assets for Class R shares. The Distributor uses such payments for personal
services and/or the maintenance of shareholder accounts, to reimburse securities
dealers for distribution and marketing services, to furnish ongoing assistance
to investors and to defray a portion of its distribution and marketing expenses.
For the six months ended April 30, 2004, fees pursuant to such plans amounted to
$639,972, $532,642, $188,058, $102,224 and $244 for Class A, Class B(1), Class
B, Class C and Class R shares, respectively. For Class A, Class B and Class C
shares, the payments are intended to reimburse the distributor for expenditures
incurred under the plan, and any unused payments are returnable to the fund. As
of April 30, 2004, there were $5,561,073, $857,238 and $2,291,636 for Class A, B
and Class C shares, respectively, of unreimbursed distribution and shareholder
servicing related expenses to be carried forward to future plan years. For Class
B(1) and R shares, the payments compensate the distributor for services and
expenditures incurred under the plan, and none of the payments are returnable to
the fund.
The fund has been informed that the Distributor and MetLife Securities, Inc., a
wholly owned subsidiary of MetLife, earned initial sales charges aggregating
$163,659 and $798,290, respectively, on sales of Class A shares of the fund
during the six months ended April 30, 2004, and that MetLife Securities, Inc.
earned commissions aggregating $513,963 and $13,920 on sales of Class B(1) and
Class C shares, and the Distributor collected contingent deferred sales charges
aggregating $244,886, $1,519 and $910 on redemptions of Class B(1), Class B and
Class C shares, respectively, during the same period.
Note 5
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest at $0.001 par value per share. At April 30, 2004, the
Adviser held 7,716 Class R shares.
These transactions break down by share class as follows:
<Table>
<Caption>
Six months ended
April 30, 2004 Year ended
(unaudited) October 31, 2003
----------------------------------------------------------------
Class A Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Shares sold 2,020,113 $ 25,823,181 16,756,640 $ 218,104,367
Issued upon reinvestment of dividends from net investment income 481,494 6,110,564 1,104,644 14,289,248
Shares redeemed (4,697,904) (59,657,211) (25,899,151) (335,827,118)
------------- ------------- ------------- -------------
Net decrease (2,196,297) $ (27,723,466) (8,037,867) $(103,433,503)
============= ============= ============= =============
Class B(1) Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Shares sold 325,148 $ 4,122,304 2,905,289 $ 37,451,974
Issued upon reinvestment of dividends from net investment income 127,419 1,603,440 315,320 4,044,422
Shares redeemed (1,708,362) (21,538,422) (3,428,090) (43,764,045)
------------- ------------- ------------- -------------
Net decrease (1,255,795) $ (15,812,678) (207,481) $ (2,267,649)
============= ============= ============= =============
Class B Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Shares sold 25,301 $ 329,219 581,326 $ 7,524,870
Issued upon reinvestment of dividends from net investment income 40,951 515,418 141,611 1,825,769
Shares redeemed (1,284,769) (16,283,047) (2,867,374) (36,930,667)
------------- ------------- ------------- -------------
Net decrease (1,218,517) $ (15,438,410) (2,144,437) $ (27,580,028)
============= ============= ============= =============
Class C Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Shares sold 73,006 $ 926,994 875,725 $ 11,343,080
Issued upon reinvestment of dividends from net investment income 21,645 273,847 65,528 848,984
Shares redeemed (564,734) (7,151,209) (1,514,342) (19,422,859)
------------- ------------- ------------- -------------
Net decrease (470,083) $ (5,950,368) (573,089) $ (7,230,795)
============= ============= ============= =============
Class R Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Shares sold -- $ -- 7,726 $ 100,128
------------- ------------- ------------- -------------
Net increase -- $ -- 7,726 $ 100,128
============= ============= ============= =============
Class S Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Shares sold 84,612 $ 1,081,091 524,562 $ 6,797,691
Issued upon reinvestment of dividends from net investment income 16,318 206,919 44,745 578,531
Shares redeemed (238,163) (3,020,074) (854,614) (11,028,139)
------------- ------------- ------------- -------------
Net decrease (137,233) $ (1,732,064) (285,307) $ (3,651,917)
============= ============= ============= =============
</Table>
State Street Research Government Income Fund 9
<Page>
FINANCIAL
Highlights
For a share outstanding throughout each period:
<Table>
<Caption>
Class A
- ---------------------------------------------------------------------------------------------------------------------------------
Six months ended Years ended October 31
April 30, 2004 ---------------------------------------------------------------
(unaudited)(a)(i) 2003(a) 2002(a)(f)(h) 2001(a)(h) 2000(a)(h) 1999(a)(h)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ($) 12.67 12.99 13.08 12.19 12.21 13.07
------- ------- ------- ------- ------- -------
Net investment income ($) 0.18 0.41 0.51 0.74 0.75 0.74
Net realized and unrealized gain (loss) on
investments, future contracts and options ($) (0.14) (0.16) 0.09 0.88 0.00 (0.85)
------- ------- ------- ------- ------- -------
Total from investment operations ($) 0.04 0.25 0.60 1.62 0.75 (0.11)
------- ------- ------- ------- ------- -------
Dividends from net investment income ($) (0.27) (0.57) (0.69) (0.73) (0.77) (0.75)
------- ------- ------- ------- ------- -------
Total distributions ($) (0.27) (0.57) (0.69) (0.73) (0.77) (0.75)
------- ------- ------- ------- ------- -------
Net asset value, end of period ($) 12.44 12.67 12.99 13.08 12.19 12.21
======= ======= ======= ======= ======= =======
Total return (%)(b) 0.29 (c) 1.96 4.82 13.66 6.41 (0.84)
Ratios/Supplemental Data
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period ($ thousands) 405,258 440,597 556,251 514,750 474,054 480,643
Expense ratio (%) 1.27 (d) 1.15 1.17 1.23 1.13 1.05
Expense ratio after expense reductions (%) 1.27 (d) 1.15 1.16 1.22 1.13 1.04
Ratio of net investment income to average net
assets (%) 2.90 (d) 3.21 4.02 5.87 6.21 5.86
Portfolio turnover rate (%) 174.66 273.16 175.05 134.55 148.88 213.70
<Caption>
Class B(1)
- ----------------------------------------------------------------------------------------------------------------------------------
Six months ended Years ended October 31
April 30, 2004 ----------------------------------------------------------------
(unaudited)(a)(i) 2003(a) 2002(a)(f)(h) 2001(a)(h) 2000(a)(h) 1999(a)(e)(h)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ($) 12.56 12.89 12.98 12.11 12.14 12.97
------- ------- ------- ------- ------- -------
Net investment income ($) 0.14 0.32 0.41 0.64 0.65 0.52
Net realized and unrealized gain (loss) on
investments, future contracts and options ($) (0.14) (0.17) 0.10 0.87 0.01 (0.82)
------- ------- ------- ------- ------- -------
Total from investment operations ($) 0.00 0.15 0.51 1.51 0.66 (0.30)
------- ------- ------- ------- ------- -------
Dividends from net investment income ($) (0.23) (0.48) (0.60) (0.64) (0.69) (0.53)
------- ------- ------- ------- ------- -------
Total distributions ($) (0.23) (0.48) (0.60) (0.64) (0.69) (0.53)
------- ------- ------- ------- ------- -------
Net asset value, end of period ($) 12.33 12.56 12.89 12.98 12.11 12.14
======= ======= ======= ======= ======= =======
Total return (%)(b) (0.05)(c) 1.19 4.14 12.80 5.60 (2.31)(c)
Ratios/Supplemental Data
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period ($ thousands) 97,526 115,134 120,766 75,219 34,533 24,250
Expense ratio (%) 1.97 (d) 1.85 1.87 1.93 1.85 1.80 (d)
Expense ratio after expense reductions (%) 1.97 (d) 1.85 1.86 1.92 1.85 1.79 (d)
Ratio of net investment income to average net
assets (%) 2.19 (d) 2.50 3.29 5.12 5.44 5.01 (d)
Portfolio turnover rate (%) 174.66 273.16 175.05 134.55 148.88 213.70
</Table>
10
<Page>
<Table>
<Caption>
Class B
- ---------------------------------------------------------------------------------------------------------------------------------
Six months ended Years ended October 31
April 30, 2004 ---------------------------------------------------------------
(unaudited)(a)(i) 2003(a) 2002(a)(f)(h) 2001(a)(h) 2000(a)(h) 1999(a)(h)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ($) 12.62 12.94 13.02 12.15 12.17 13.03
------- ------- ------- ------- ------- -------
Net investment income ($) 0.14 0.33 0.43 0.65 0.65 0.64
Net realized and unrealized gain (loss) on
investments, future contracts and options ($) (0.14) (0.17) 0.09 0.86 0.02 (0.84)
------- ------- ------- ------- ------- -------
Total from investment operations ($) 0.00 0.16 0.52 1.51 0.67 (0.20)
------- ------- ------- ------- ------- -------
Dividends from net investment income ($) (0.23) (0.48) (0.60) (0.64) (0.69) (0.66)
------- ------- ------- ------- ------- -------
Total distributions ($) (0.23) (0.48) (0.60) (0.64) (0.69) (0.66)
------- ------- ------- ------- ------- -------
Net asset value, end of period ($) 12.39 12.62 12.94 13.02 12.15 12.17
======= ======= ======= ======= ======= =======
Total return (%)(b) (0.05)(c) 1.26 4.20 12.75 5.67 (1.58)
Ratios/Supplemental Data
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period ($ thousands) 29,908 45,840 74,747 82,963 84,327 106,902
Expense ratio (%) 1.97 (d) 1.85 1.87 1.93 1.85 1.80
Expense ratio after expense reductions (%) 1.97 (d) 1.85 1.86 1.92 1.85 1.79
Ratio of net investment income to average net
assets (%) 2.18 (d) 2.52 3.34 5.20 5.49 5.12
Portfolio turnover rate (%) 174.66 273.16 175.05 134.55 148.88 213.70
<Caption>
Class C
- ---------------------------------------------------------------------------------------------------------------------------------
Six months ended Years ended October 31
April 30, 2004 ---------------------------------------------------------------
(unaudited)(a)(i) 2003(a) 2002(a)(f)(h) 2001(a)(h) 2000(a)(h) 1999(a)(h)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ($) 12.63 12.95 13.03 12.16 12.18 13.04
------- ------- ------- ------- ------- -------
Net investment income ($) 0.14 0.33 0.42 0.65 0.66 0.64
Net realized and unrealized gain (loss) on
investments, future contracts and options ($) (0.14) (0.17) 0.10 0.86 0.01 (0.84)
------- ------- ------- ------- ------- -------
Total from investment operations ($) 0.00 0.16 0.52 1.51 0.67 (0.20)
------- ------- ------- ------- ------- -------
Dividends from net investment income ($) (0.23) (0.48) (0.60) (0.64) (0.69) (0.66)
------- ------- ------- ------- ------- -------
Total distributions ($) (0.23) (0.48) (0.60) (0.64) (0.69) (0.66)
------- ------- ------- ------- ------- -------
Net asset value, end of period ($) 12.40 12.63 12.95 13.03 12.16 12.18
======= ======= ======= ======= ======= =======
Total return (%)(b) (0.05)(c) 1.26 4.19 12.74 5.66 (1.58)
Ratios/Supplemental Data
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period ($ thousands) 17,360 23,618 31,641 24,507 19,512 25,818
Expense ratio (%) 1.97 (d) 1.85 1.87 1.93 1.85 1.80
Expense ratio after expense reductions (%) 1.97 (d) 1.85 1.86 1.92 1.85 1.79
Ratio of net investment income to average net
assets (%) 2.19 (d) 2.51 3.30 5.17 5.50 5.11
Portfolio turnover rate (%) 174.66 273.16 175.05 134.55 148.88 213.70
</Table>
(a) Per-share figures have been calculated using the average shares method.
(b) Does not reflect any front-end or contingent deferred sales charges.
(c) Not annualized
(d) Annualized
(e) January 1, 1999 (commencement of share class) to October 31, 1999
(f) Effective November 1, 2001, the fund has adopted the provisions on the
AICPA Audit and Accounting Guide, Audit of Investment Companies and began
amortizing premium on all fixed income securities. The effect of this
change for the year ended October 31, 2002, was to decrease net investment
income per share by $0.16, increase net realized and unrealized loss per
share by $0.16, and decrease the ratio of net investment income to average
net assets by 1.24%. The statement of changes and financial highlights for
the period prior to November 1, 2001, have not been restated for this
change in policy.
(g) April 3, 2003 (commencement of share class) to October 31, 2003
(h) Audited by other auditors
(i) During the six months ended April 30, 2004, the Distributor made
restitution payments to the fund as part of a settlement with NASD. This
had no effect on net realized gain on investments per share.
State Street Research Government Income Fund 11
<Page>
Class R
- -----------------------------------------------------------------------------
Six months ended
April 30, 2004
(unaudited)(a) 2003(a)(g)
- -----------------------------------------------------------------------------
Net asset value, beginning of period ($) 12.67 12.96
------ ------
Net investment income ($)* 0.17 0.22
Net realized and unrealized loss on
investments, future contracts and options ($) (0.14) (0.21)
------ ------
Total from investment operations ($) 0.03 0.01
------ ------
Dividend from net investment income ($) (0.26) (0.30)
------ ------
Total distributions ($) (0.26) (0.30)
------ ------
Net asset value, end of period ($) 12.44 12.67
====== ======
Total return (%)(b) 0.19 (c) (0.04)(c)
Ratios/Supplemental Data
- -----------------------------------------------------------------------------
Net assets at end of period ($ thousands) 96 98
Expense ratio (%)* 1.47 (d) 1.35 (d)
Expense ratio after expense reductions (%)* 1.47 (d) 1.35 (d)
Ratio of net investment income to average net
assets (%)* 2.70 (d) 2.88 (d)
Portfolio turnover rate (%) 174.66 273.16
<Table>
<Caption>
Class S
- ---------------------------------------------------------------------------------------------------------------------------------
Six months ended Years ended October 31
April 30, 2004 --------------------------------------------------------------
(unaudited)(a)(i) 2003(a) 2002(a)(f)(h) 2001(a)(h) 2000(a)(h) 1999(a)(h)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ($) 12.66 12.98 13.06 12.18 12.20 13.06
------ ------ ------ ------ ------ -------
Net investment income ($) 0.20 0.46 0.55 0.78 0.78 0.75
Net realized and unrealized gain (loss) on
investments, future contracts and options ($) (0.14) (0.17) 0.10 0.87 0.01 (0.83)
------ ------ ------ ------ ------ -------
Total from investment operations ($) 0.06 0.29 0.65 1.65 0.79 (0.08)
------ ------ ------ ------ ------ -------
Dividends from net investment income ($) (0.29) (0.61) (0.73) (0.77) (0.81) (0.78)
------ ------ ------ ------ ------ -------
Total distributions ($) (0.29) (0.61) (0.73) (0.77) (0.81) (0.78)
------ ------ ------ ------ ------ -------
Net asset value, end of period ($) 12.43 12.66 12.98 13.06 12.18 12.20
====== ====== ====== ====== ====== =======
Total return (%)(b) 0.44 (c) 2.26 5.22 13.93 6.71 (0.60)
Ratios/Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period ($ thousands) 9,431 11,344 15,338 13,775 13,418 187,373
Expense ratio (%)* 0.97 (d) 0.85 0.87 0.93 0.85 0.80
Expense ratio after expense reductions (%)* 0.97 (d) 0.85 0.86 0.92 0.85 0.79
Ratio of net investment income to average net
assets (%)* 3.20 (d) 3.54 4.33 6.18 6.39 5.94
Portfolio turnover rate (%) 174.66 273.16 175.05 134.55 148.88 213.70
</Table>
(a) Per-share figures have been calculated using the average shares method.
(b) Does not reflect any front-end or contingent deferred sales charges.
(c) Not annualized
(d) Annualized
(e) January 1, 1999 (commencement of share class) to October 31, 1999
(f) Effective November 1, 2001, the fund has adopted the provisions on the
AICPA Audit and Accounting Guide, Audit of Investment Companies and began
amortizing premium on all fixed income securities. The effect of this
change for the year ended October 31, 2002, was to decrease net investment
income per share by $0.16, increase net realized and unrealized loss per
share by $0.16, and decrease the ratio of net investment income to average
net assets by 1.24%. The statement of changes and financial highlights for
the period prior to November 1, 2001, have not been restated for this
change in policy.
(g) April 3, 2003 (commencement of share class) to October 31, 2003
(h) Audited by other auditors
(i) During the six months ended April 30, 2004, the Distributor made
restitution payments to the fund as part of a settlement with NASD. This
had no effect on net realized gain on investments per share.
12
<Page>
- ---------------------
TRUSTEES AND OFFICERS
- ---------------------
State Street Research Financial Trust
<Table>
<Caption>
Number of Funds Other
Name, Position(s) Term of Office in Fund Complex Directorships Held
Address Held with and Length of Principal Occupations Overseen by by Trustee/Officer
and Age(a) Fund Time Served(b) During Past 5 Years Trustee/Officer(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Independent Trustees
Bruce R. Bond Trustee Since Retired; formerly Chairman of the 19 Avaya Corp.
(58) 1999 Board, Chief Executive Officer and
President, PictureTel Corporation
(video conferencing systems)
- ------------------------------------------------------------------------------------------------------------------------------------
Peter S. Drotch (62) Trustee Since Retired, formerly Partner, 19 The First Marblehead
2004 PricewaterhouseCoopers LLP Corp.
- ------------------------------------------------------------------------------------------------------------------------------------
Steve A. Garban Trustee Since Retired; formerly Senior Vice 53 Metropolitan Series
(66) 1997 President for Finance and Operations Fund, Inc. and
and Treasurer, The Pennsylvania State Metropolitan Series
University Fund II
- ------------------------------------------------------------------------------------------------------------------------------------
Susan M. Phillips Trustee Since Dean, School of Business and Public 19 The Kroger Co.
(59) 1998 Management, George Washington
University; formerly a member of the
Board of Governors of the Federal
Reserve System; and Chairman and
Commissioner of the Commodity Futures
Trading Commission
- ------------------------------------------------------------------------------------------------------------------------------------
Toby Rosenblatt Trustee Since President, Founders Investments Ltd. 53 A.P. Pharma, Inc.;
(65) 1993 (investments); President, Pacific Four Metropolitan Series
Investments (investments); formerly Fund, Inc. and
President, The Glen Ellen Company Metropolitan Series
(private investment firm) Fund II
- ------------------------------------------------------------------------------------------------------------------------------------
Michael S. Scott Trustee Since Jay W. Forrester Professor of 53 Metropolitan Series
Morton (66) 1987 Management, Sloan School of Fund, Inc. and
Management, Massachusetts Institute of Metropolitan Series
Technology Fund II
- ------------------------------------------------------------------------------------------------------------------------------------
Interested Trustees
Richard S. Davis+ Trustee Since Chairman of the Board, President and 19 None
(58) 2000 Chief Executive Officer of State
Street Research & Management Company;
formerly Senior Vice President, Fixed
Income Investments, Metropolitan Life
Insurance Company
- ------------------------------------------------------------------------------------------------------------------------------------
Officers
C. Kim Goodwin Vice Since Managing Director and Chief Investment 18 None
(45) President 2002 Officer - Equities of State Street
Research & Management Company;
formerly Chief Investment Officer -
U.S. Growth Equities, American Century
- ------------------------------------------------------------------------------------------------------------------------------------
John S. Lombardo Vice Since Managing Director, Chief Financial 19 None
(49) President 2001 Officer and Director of State Street
Research & Management Company;
formerly Executive Vice President,
State Street Research & Management
Company; and Senior Vice President,
Product and Financial Management,
MetLife Auto & Home
- ------------------------------------------------------------------------------------------------------------------------------------
Mark Marinella (46) Vice Since Managing Director and Chief Investment 9 None
President 2003 Officer - Fixed Income, State Street
Research & Management Company;
formerly Executive Vice President and
Senior Vice President, State Street
Research & Management Company; and
Chief Investment Officer and Head of
Fixed Income, Columbia Management
Group
- ------------------------------------------------------------------------------------------------------------------------------------
Ajay Mehra Vice Since Managing Director of State Street 4 None
(39) President 2003 Research & Management Company;
formerly Senior Vice President and
Portfolio Manager, Columbia Management
Group
- ------------------------------------------------------------------------------------------------------------------------------------
Elizabeth M. Vice Since Managing Director of State Street 8 None
Westvold (44) President 2003 Research & Management Company;
formerly Senior Vice President, State
Street Research & Management Company
- ------------------------------------------------------------------------------------------------------------------------------------
Erin Xie (36) Vice Since Senior Vice President, State Street 2 None
President 2003 Research & Management Company;
formerly Vice President, State Street
Research & Management Company; and
research associate, Sanford Bernstein
& Company
- ------------------------------------------------------------------------------------------------------------------------------------
Douglas A. Romich Treasurer Since Senior Vice President and Treasurer of 19 None
(47) 2001 State Street Research & Management
Company; formerly Vice President and
Assistant Treasurer, State Street
Research & Management Company
</Table>
The fund's Statement of Additional Information includes additional information
about the fund's trustees, and is available without charge, by contacting State
Street Research, One Financial Center, Boston, Massachusetts 02111-2690, or by
calling toll-free 1-87-SSR-FUNDS (1-877-773-8637).
(a) The address of each person is c/o State Street Research & Management
Company, One Financial Center, Boston, MA 02111-2690.
(b) A Trustee serves until he or she retires, resigns or is removed as provided
in the master trust agreement of the respective Trust. Each Trust has
adopted a mandatory retirement age of 72. Each officer holds office until
he or she resigns, is removed or a successor is elected.
(c) Includes all series of 9 investment companies for which State Street
Research & Management Company has served as sole investment adviser and all
series of Metropolitan Series Fund, Inc. and Metropolitan Series Fund II.
The primary adviser to Metropolitan Series Fund, Inc. and Metropolitan
Series Fund II is MetLife Advisers, LLC, which has retained State Street
Research & Management Company as sub-adviser to certain series of
Metropolitan Series Fund, Inc.
(+) Mr. Davis is an "interested person" of the Trust under the Investment
Company Act of 1940 by reason of his affiliation with the Trust's
Investment Manager, State Street Research & Management Company, as noted.
State Street Research Government Income Fund 13
<Page>
------------
[LOGO] STATE STREET RESEARCH PRSRT STD
One Financial Center U.S. POSTAGE
Boston, MA 02111-2690 PAID
PERMIT #6
HUDSON, MA
------------
New accounts, mutual fund purchases,
exchanges and account information
Internet www.ssrfunds.com
E-mail info@ssrfunds.com
Phone 1-87-SSR-FUNDS (1-877-773-8637),
toll-free, 7 days a week, 24 hours a day
Hearing-impaired: 1-800-676-7876
Chinese- and Spanish-speaking: 1-888-638-3193
Fax 1-617-737-9722 (request confirmation number
first from the Service Center by calling 1-877-773-8637)
Mail State Street Research Service Center
P.O. Box 8408, Boston, MA 02266-8408
- --------------------------------------------------------------------------------
Did You Know?
State Street Research offers electronic delivery of quarterly statements,
shareholder reports and fund prospectuses. If you elect this option, we will
send these materials to you via e-mail. To learn more, visit us on the Web at
www.ssrfunds.com and click on "Go to Your Account" or call us at 1-87-SSR-FUNDS
(1-877-773-8637).
Did you know that you can give a State Street Research mutual fund as a gift?
Call a service center representative at 1-87-SSR-FUNDS (1-877-773-8637), Monday
through Friday, 8am-6pm eastern time, to learn more.
- --------------------------------------------------------------------------------
Investors should carefully consider the fund's investment objective, risks,
charges and expenses before investing. The fund's prospectus contains more
complete information on these and other matters. A prospectus for any State
Street Research fund is available through your financial professional, by
calling toll-free 1-87-SSR-FUNDS (1-877-773-8637) or by visiting our website at
www.ssrfunds.com. Please read the prospectus carefully before investing.
Webcasts
For a professional perspective on the markets, the economy and timely investment
topics, tune in to a State Street Research webcast by visiting our website at
www.ssrfunds.com.
Complete Fund Listing
For a list of our funds, visit our website at www.ssrfunds.com under Research
Our Funds.
[Graphic]
for Excellence in
Shareholder Communications
[Graphic]
for Excellence in Service
This report must be accompanied or preceded by a current prospectus. When used
as sales material after June 30, 2004, this report must be accompanied by a
current Quarterly Performance Update.
"State Street Research Proxy Voting Policies and Procedures"-which describes how
we vote proxies relating to portfolio securities-is available upon request free
of charge, by calling the State Street Research Service Center toll-free at
1-87-SSR-FUNDS (1-877-773-8637) or by accessing the U.S. Securities and Exchange
Commission website at www.sec.gov.
The DALBAR awards recognize quality shareholder service and quality shareholder
communications, and should not be considered a rating of fund performance. The
survey included mutual fund complexes that volunteered or were otherwise
selected to participate and was not industrywide.
Member NASD, SIPC
(C)2004 State Street Research Investment Services, Inc.
One Financial Center
Boston, MA 02111-2690
www.ssrfunds.com
CONTROL NUMBER:(exp0605)SSR-LD GI-1893-0604
<Page>
FORM N-CSR(2 OF 3)
ITEM 2: CODE OF ETHICS
Not applicable for the reporting period.
ITEM 3: AUDIT COMMITTEE FINANCIAL EXPERT
Not applicable for the reporting period.
ITEM 4: (PRINCIPAL ACCOUNTANT FEES AND SERVICES)
Not applicable for the reporting period.
ITEM 5: AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable.
ITEM 6: SCHEDULE OF INVESTMENTS
Not applicable.
ITEM 7: DISCLOSURE OF PROXY VOTING POLICIES & PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES:
Not applicable.
ITEM 8: PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
Not applicable.
ITEM 9: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Governance Committee will consider nominees recommended by
shareholders. Shareholders may submit recommendations to the attention
of the Secretary of the Trust, State Street Research & Management
Company, One Financial Center, 30th Floor, Boston, MA 02111.
ITEM 10: CONTROLS AND PROCEDURES
(a) The Registrant's principal executive and principal financial officers
have concluded, based on their evaluation of the Registrant's disclosure
controls and procedures as of a date within 90 days of the filing date
of this report, that the Registrant's disclosure controls and procedures
are reasonably designed to ensure that information required to be
disclosed by the Registrant on Form N-CSR is recorded, processed,
summarized and reported within the required time periods and that
information required to be disclosed by the Registrant in the reports
that it files or submits on Form N-CSR is accumulated and communicated
to the Registrant's management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions
regarding required disclosure.
(b) There were no changes in the Registrant's internal control over financial
reporting during the Registrant's second fiscal half-year that have
materially affected, or are reasonably likely to materially affect, the
internal control over financial reporting.
ITEM 11: EXHIBITS
(a)(1) Code of Ethics required to be disclosed under Item 2 of Form
N-CSR attached hereto as Exhibit 99.CODE ETH
(a)(2) Certification for each principal executive and principal
financial officer of the Registrant required by Rule 30a-2(a)
under the Investment Company Act of 1940, as amended
(17 CFR 270.30a-2(a)) attached hereto as Exhibit 99.302CERT
(b) Certification required by Rule 30a-2(b) under the Investment
Company Act of 1940, as amended (17 CFR 270.30a-2(b)) attached
hereto as Exhibit 99.906CERT
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.
State Street Research Financial Trust
By: /s/ Richard S. Davis
------------------------------------------------------
Richard S. Davis, President, Chairman and
Chief Executive Officer
Principal Executive Officer
Date June 30, 2004
------------------------------------------------------
<Page>
FORM N-CSR(3 OF 3)
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/ Richard S. Davis
------------------------------------------------------
Richard S. Davis, President, Chairman and
Chief Executive Officer
Principal Executive Officer
Date June 30, 2004
------------------------
By: /s/ Douglas A. Romich
------------------------------------------------------
Douglas A. Romich, Treasurer
Principal Financial Officer
Date June 30, 2004
------------------------