-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KKxEfgoJv2qWwqeh3QRhPdgR5hN3I/GnVV4V/VdmqPuyLUrw5v20I40RnNYvMDWQ qyAcR0wZzWlwzvVzVuP5XQ== 0000928816-04-000950.txt : 20040927 0000928816-04-000950.hdr.sgml : 20040927 20040927173140 ACCESSION NUMBER: 0000928816-04-000950 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040731 FILED AS OF DATE: 20040927 DATE AS OF CHANGE: 20040927 EFFECTIVENESS DATE: 20040927 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUTNAM TAX FREE INCOME TRUST /MA/ CENTRAL INDEX KEY: 0000771951 IRS NUMBER: 046483374 STATE OF INCORPORATION: MA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-04345 FILM NUMBER: 041047906 BUSINESS ADDRESS: STREET 1: ONE POST OFFICE SQ CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6172921000 MAIL ADDRESS: STREET 1: NULL FORMER COMPANY: FORMER CONFORMED NAME: PUTNAM TAX FREE INCOME TRUST DATE OF NAME CHANGE: 19920101 N-CSR 1 ptx1.txt PUTNAM TAX FREE INCOME TRUST Putnam Tax-Free Insured Fund Item 1. Report to Stockholders: - ------------------------------- The following is a copy of the report transmitted to stockholders pursuant to Rule 30e-1 under the Investment Company Act of 1940: ANNUAL REPORT ON PERFORMANCE AND OUTLOOK 7-31-04 [GRAPHIC OMITTED: BOOK] [SCALE LOGO OMITTED] From the Trustees [GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III] John A. Hill and George Putnam, III Dear Fellow Shareholder: Over the past several months, Putnam has introduced a number of reforms for the benefit of shareholders, including increasing the amount of disclosure for our funds. We would like to call your attention to new information now being included in shareholder reports. Following the performance tables in the Performance Summary, you can find expense and risk comparisons as well as portfolio turnover information for your fund. The expense information lets you estimate the amount you have paid for ongoing expenses such as management fees and distribution (or 12b-1) fees and lets you compare these expenses with the average expense level for your fund's peer group, as tracked by Lipper, an independent fund-rating company. The risk comparison information illustrates your fund's risk relative to similar funds as tracked by Morningstar, another independent fund-rating company. The portfolio turnover information explains how the rate at which a fund buys and sells portfolio securities might affect its return and its taxable distributions to shareholders. It also compares your fund's portfolio turnover rate with that of its industry peers, as measured by Lipper. We believe all of this information can be valuable to you and your financial advisor when you make decisions about your financial program. In the municipal bond market, as interest rates moved up high-yield securities performed relatively better than issues with high credit ratings. However, thanks to its duration strategy, the improving performance of California municipal bonds, and advance refundings of two key holdings, Putnam Tax-Free Insured Fund delivered solid returns for the fiscal year ended July 31, 2004. In the following pages, the managers describe how market conditions changed during the year and how the fund responded. They also outline their expectations for the coming months. Respectfully yours, /S/ JOHN A. HILL /S/ GEORGE PUTNAM, III John A. Hill George Putnam, III Chairman of the Trustees President of the Funds September 15, 2004 Report from Fund Management Fund highlights * Putnam Tax-Free Insured Fund's total return for the fiscal year ended July 31, 2004 was 5.20% for class A shares at net asset value (NAV) and 0.22% at public offering price (POP). * The fund's relatively short duration strategy and differences in credit quality caused its results to lag its benchmark, the Lehman Municipal Bond Index, which returned 5.78% for the same period. * Price appreciation from two bond refundings and the performance of its California holdings helped keep the return at NAV in line with the average for the Lipper Insured Municipal Debt Funds category, which was 5.13% for the 12-month period. * See the Performance Summary beginning on page 7 for additional fund performance, comparative performance, and Lipper data. Performance commentary When interest rates generally declined earlier in the fiscal year, lower-quality bonds outperformed the high-quality, insured bonds that make up your fund's portfolio. This, along with our conservative duration strategy, put the fund at a slight disadvantage. Consequently, its performance for fiscal 2004 lagged that of the Lehman Municipal Bond Index -- a broad-based index that includes lower-quality bonds. However, its relatively short duration -- which translated into reduced interest-rate sensitivity -- benefited the fund in the spring and early summer when interest rates rose. Within the universe of bonds available to this fund, its emphasis on bonds maturing in the 15- to 20-year range was a positive during the year, as shorter-term bonds maturing in five years or less lagged the market. Moreover, as California's credit rating began to improve later in the year, the fund's relatively substantial position in California insured bonds rose with the market. Some of the fund's individual California holdings saw their underlying ratings upgraded, and two Pennsylvania School District bonds that were advance refunded provided additional appreciation. These factors combined to produce results that kept the fund in line with the average for its Lipper category. FUND PROFILE Putnam Tax-Free Insured Fund invests in bonds that are insured as to timely payment of principal and interest, escrowed by securities guaranteed by the U.S. government, and/or bonds that are rated AAA (or the equivalent), which is the highest credit rating available. The fund is intended and may be appropriate for investors seeking high current income free from federal income tax. Market overview Municipal bond yields drifted irregularly lower between the beginning of August 2003 and early March 2004, and then rose dramatically in the spring and early summer before subsiding again at the end of the fiscal year. Since bond prices move in the opposite direction of interest rates, this meant that returns were positive in the first part of the year, fell off in the early summer, and then rose again in the closing weeks of the fiscal year. Economic growth seemed lackluster and inflation was tame for most of the fiscal year, but data released in March was surprisingly strong, bringing back inflation fears and sending yields higher. The yield on 10-year, AAA municipal bonds rose about 1% from mid March through early June, but declined by about 0.5% in between early June and the end of July. On June 30, the Federal Reserve Board raised the federal funds rate (the rate banks charge one another on overnight loans) from 1.0% to 1.25%, and followed this with an increase to 1.50% just after the end of the period. Note, however, that these moves have more influence on the short end of the market than on the longer-term bonds that make up the majority of your fund's holdings. For the fiscal year as a whole, the yield curve flattened, as rates on bonds maturing in the one- to five-year range rose, while rates on bonds maturing in 15 to 30 years fell. The best-performing area of the curve was the 15-20 year range. California bonds -- including insured bonds -- improved as the state appeared to be taking steps to improve its financial health. In May, California issued the first portion of its recently approved $15 billion bond issue to help alleviate the state's budget crisis. - ------------------------------------------------------------------------------- MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 7/31/04 - ------------------------------------------------------------------------------- Bonds - ------------------------------------------------------------------------------- Lehman Municipal Bond Index (tax-exempt bonds) 5.78% - ------------------------------------------------------------------------------- Lehman Aggregate Bond Index (broad bond market) 4.84% - ------------------------------------------------------------------------------- Lehman GNMA Index (Government National Mortgage Association bonds) 4.67% - ------------------------------------------------------------------------------- Lehman Global Aggregate Bond Index (international bonds) 7.72% - ------------------------------------------------------------------------------- Equities - ------------------------------------------------------------------------------- S&P 500 Index (broad stock market) 13.17% - ------------------------------------------------------------------------------- Russell 2000 Index (stocks of small and midsize companies) 17.06% - ------------------------------------------------------------------------------- MSCI EAFE Index (international stocks) 25.05% - ------------------------------------------------------------------------------- These indexes provide an overview of performance in different market sectors for the 12 months ended 7/31/04. - ------------------------------------------------------------------------------- Strategy overview Duration is a measure of a fund's sensitivity to changes in interest rates. A short duration may protect principal when interest rates are rising, but it can reduce the fund's appreciation potential when rates fall. The fund began the fiscal period with a relatively short duration as a defensive measure. In August 2003, we changed to a more neutral stance, striving to make the fund about equal in sensitivity to interest rate changes as the overall market. We reduced the fund's duration further in the fall and winter months, as increasing evidence that the economy was growing rekindled inflation concerns and the prospect of rising interest rates. In fact, bond yields generally declined in the first half of the year, so our strategy at that time detracted somewhat from the fund's relative performance. However, we believed a more defensive posture was warranted. When rates spiked dramatically in March and April, this positioning paid off. Since then, we have allowed the fund's duration to edge back toward neutral, although it is still slightly defensive because we expect rates to rise further in coming months. During most of the fiscal year, the fund emphasized non-callable bonds - -- bonds that the issuer is not permitted to redeem (or call) before the maturity date. These issues performed well as rates fell through March 2004, but during the spring we began to moderate this position, selling non-callable bonds and purchasing callable issues scheduled to mature in the 15- to 20-year range. We believe callable bonds may perform better than non-callable bonds if interest rates continue to rise and the yield curve flattens further. [GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION COMPARED] THE FUND'S MATURITY AND DURATION COMPARED as of 7/31/03 as of 1/31/04 as of 7/31/04 Average effective maturity in years 9.2 8.1 7.3 Duration in years 6.4 5.9 5.5 Footnote reads: This chart compares changes in the fund's duration (a measure of its sensitivity to interest-rate changes) and its average effective maturity (a weighted average of the holdings' maturities). Average effective maturity also takes into account put and call features, where applicable, and reflects prepayments for mortgage-backed securities. How fund holdings affected performance The fund benefited during the year when two of its bonds -- both issued by the Philadelphia, Pennsylvania School District -- were advance refunded. One was scheduled to mature in 2031 and the other in 2018. Both will now be called away in 2012, but both have appreciated in value. Just as homeowners refinance mortgages when interest rates decline, a refunded bond is created when municipalities refinance older bonds they issued when rates were higher. Unlike a home mortgage, however, the original municipal bond remains outstanding, with a shorter potential maturity, as the call date effectively becomes the new maturity date. The municipality uses the proceeds of the older bond to buy a portfolio of U.S. Treasury securities, creating an escrow account that provides the backing for interest and principal payments on the refunded bonds. Refunded bonds typically enjoy the equivalent of AAA-rated quality. The fund also benefited from its relatively large position in California State Department of Water Resources insured bonds. Investors have begun to feel more confident that California is addressing its financial issues. As the state's plans to improve its finances gained acceptance in the market, demand has picked up for all California bonds, pushing prices up. Another boost to California bond prices came from credit upgrades. The state's credit rating was upgraded by Moody's in May to A3 from Baa1. Moody's also upgraded the Department of Water Resources bonds to A2 from A3 in July. While your fund's bonds are insured and therefore perceived as less risky than uninsured bonds, their prices still benefit from improvement in their underlying credit ratings and the resulting increase contributed to the fund's performance. [GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW] CREDIT QUALITY OVERVIEW Aaa (93.1%) A-1 (2.7%) VMIG1 (4.2%) Footnote reads: As a percentage of market value as of 7/31/04. A bond rated Baa or higher is considered investment grade. The chart reflects Moody's ratings; percentages may include unrated bonds considered by Putnam Management to be of comparable quality. Ratings will vary over time. Please note that all holdings discussed in this report are subject to review in accordance with the fund's investment strategy and may vary in the future. The fund's management team The fund is managed by the Putnam Tax Exempt Fixed-Income Team. The members of the team are David Hamlin (Portfolio Leader), Paul Drury (Portfolio Member), Susan McCormack (Portfolio Member), James St. John (Portfolio Member), and Kevin Cronin. The outlook for your fund The following commentary reflects anticipated developments that could affect your fund over the next six months, as well as your management team's plans for responding to them. Early in 2004, lingering unemployment had been an anomaly in an otherwise robust economic recovery. However, in early April, employment data began to show a marked improvement in job creation. We believe the economy will continue to grow -- albeit at a slower rate -- and that the underlying strength in the economy will foster higher interest rates in the future. We also expect the Fed to raise the federal funds rate several times between now and June 2005. This should contribute to further flattening in the yield curve, as we believe short-term interest rates are likely to rise faster than long rates. In keeping with our views, the fund's duration is now being managed to maintain the portfolio in a more defensive mode. We plan to continue our focus on callable bonds and will also continue our policy of seeking diversification by sector and issuer. As always, we will closely monitor market conditions and seek to manage the fund's risk/return profile as we pursue an attractive level of tax-free income from insured bonds. The views expressed in this report are exclusively those of Putnam Management. They are not meant as investment advice. Capital gains, if any, are taxable for federal and, in most cases, state purposes. For some investors, investment income may be subject to the federal alternative minimum tax. Income from federally exempt funds may be subject to state and local taxes. Mutual funds that invest in bonds are subject to certain risks, including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. Shares of this fund are not insured, and their prices will fluctuate with market conditions. Tax-free funds may not be suitable for IRAs and other non-taxable accounts. Performance summary This section shows your fund's performance during its fiscal year, which ended July 31, 2004. In accordance with regulatory requirements, we also include performance for the most current calendar quarter-end. Performance should always be considered in light of a fund's investment strategy. Data represents past performance. Past performance does not guarantee future results. More recent returns may be less or more than those shown. Investment return and principal value will fluctuate and you may have a gain or a loss when you sell your shares. For the most recent month-end performance, please visit www.putnaminvestments.com.
- --------------------------------------------------------------------------------------------------------------- TOTAL RETURN FOR PERIODS ENDED 7/31/04 - --------------------------------------------------------------------------------------------------------------- Class A Class B Class C Class M (inception dates) (9/20/93) (9/9/85) (7/26/99) (6/1/95) - --------------------------------------------------------------------------------------------------------------- NAV POP NAV CDSC NAV CDSC NAV POP - --------------------------------------------------------------------------------------------------------------- 1 year 5.20% 0.22% 4.52% -0.48% 4.40% 3.40% 4.93% 1.54% - --------------------------------------------------------------------------------------------------------------- 5 years 30.87 24.71 27.49 25.49 25.91 25.91 28.92 24.70 Annual average 5.53 4.51 4.98 4.65 4.72 4.72 5.21 4.51 - --------------------------------------------------------------------------------------------------------------- 10 years 73.00 64.83 66.34 66.34 59.60 59.60 67.55 62.17 Annual average 5.63 5.12 5.22 5.22 4.79 4.79 5.30 4.95 - --------------------------------------------------------------------------------------------------------------- Annual average (life of fund) 6.98 6.70 6.73 6.73 6.42 6.42 6.77 6.58 - ---------------------------------------------------------------------------------------------------------------
Performance assumes reinvestment of distributions and does not account for taxes. Returns at public offering price (POP) for class A and M shares reflect a sales charge of 4.75% and 3.25%, respectively (which for class A shares does not reflect a reduction in sales charges that went into effect on January 28, 2004; if this reduction had been in place for all periods indicated, returns would have been higher). Class B share returns reflect the applicable contingent deferred sales charge (CDSC), which is 5% in the first year, declining to 1% in the sixth year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the first year that is eliminated thereafter. Performance for class A, C, and M shares for the periods prior to the initial issuance of such shares is derived from the historical performance of class B shares, adjusted for the applicable sales charge (or CDSC) and higher or lower operating expenses for such shares. A 2% short-term trading fee will be applied to shares exchanged or sold within 5 days of purchase. - ----------------------------------------------------------------------- COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/04 - ----------------------------------------------------------------------- Lehman Lipper Insured Municipal Municipal Debt Funds Bond Index category average* - ----------------------------------------------------------------------- 1 year 5.78% 5.13% - ----------------------------------------------------------------------- 5 years 34.28 28.11 Annual average 6.07 5.07 - ----------------------------------------------------------------------- 10 years 85.64 69.84 Annual average 6.38 5.43 - ----------------------------------------------------------------------- Annual average (life of fund) 7.88 7.15 - ----------------------------------------------------------------------- Index and Lipper results should be compared to fund performance at net asset value. * Over the 1-, 5-, and 10-year periods ended 7/31/04, there were 53, 45, and 28 funds, respectively, in this Lipper category. [GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT] CHANGE IN THE VALUE OF A $10,000 INVESTMENT Cumulative total return of a $10,000 investment, 7/31/94 to 7/31/04 Fund's class A Lehman Municipal Date shares at POP Bond Index 7/31/94 9,550 10,000 7/31/95 10,062 10,787 7/31/96 10,963 11,499 7/31/97 11,787 12,678 7/31/98 12,514 13,438 7/31/99 12,592 13,824 7/31/00 13,221 14,420 7/31/01 14,459 15,874 7/31/02 15,310 16,939 7/31/03 15,715 17,549 7/31/04 $16,483 $18,564 Footnote reads: Past performance does not indicate future results. At the end of the same time period, a $10,000 investment in the fund's class B and class C shares would have been valued at $16,634 and $15,960, respectively, and no contingent deferred sales charges would apply. A $10,000 investment in the fund's class M shares would have been valued at $16,755 ($16,217 at public offering price). See first page of performance section for performance calculation method.
- ---------------------------------------------------------------------------------------------------- PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 7/31/04 - ---------------------------------------------------------------------------------------------------- Class A Class B Class C Class M - ---------------------------------------------------------------------------------------------------- Distributions (number) 12 12 12 12 - ---------------------------------------------------------------------------------------------------- Income 1 $0.527061 $0.429185 $0.406489 $0.482883 - ---------------------------------------------------------------------------------------------------- Capital gains 1 - ---------------------------------------------------------------------------------------------------- Long-term $0.204000 $0.204000 $0.204000 $0.204000 - ---------------------------------------------------------------------------------------------------- Short-term $0.052500 $0.052500 $0.052500 $0.052500 - ---------------------------------------------------------------------------------------------------- Total $0.783561 $0.685685 $0.662989 $0.739383 - ---------------------------------------------------------------------------------------------------- Share value: NAV POP NAV NAV NAV POP - ---------------------------------------------------------------------------------------------------- 7/31/03 $14.93 $15.67 $14.95 $14.95 $14.97 $15.47 - ---------------------------------------------------------------------------------------------------- 7/31/04 14.92 15.62* 14.94 14.94 14.96 15.46 - ---------------------------------------------------------------------------------------------------- Current return (end of period) - ---------------------------------------------------------------------------------------------------- Current dividend rate 2 3.30% 3.15% 2.65% 2.50% 3.00% 2.90% - ---------------------------------------------------------------------------------------------------- Taxable equivalent 3 5.08 4.85 4.08 3.85 4.62 4.46 - ---------------------------------------------------------------------------------------------------- Current 30-day SEC yield 4 3.01 2.88 2.37 2.22 2.72 2.63 - ---------------------------------------------------------------------------------------------------- Taxable equivalent 3 4.63 4.43 3.65 3.42 4.18 4.05 - ----------------------------------------------------------------------------------------------------
* Reflects a reduction in sales charges that took effect on January 28, 2004. 1 Capital gains, if any, are taxable for federal and, in most cases, state purposes. For some investors, investment income may be subject to the federal alternative minimum tax. Income from federally exempt funds may be subject to state and local taxes. 2 Most recent distribution, excluding capital gains, annualized and divided by NAV or POP at end of period. 3 Assumes maximum 35.00% federal tax rate for 2004. Results for investors subject to lower tax rates would not be advantageous. 4 Based only on investment income, calculated using SEC guidelines.
- --------------------------------------------------------------------------------------------------------------- TOTAL RETURN FOR PERIODS ENDED 6/30/04 (MOST RECENT CALENDAR QUARTER) - --------------------------------------------------------------------------------------------------------------- Class A Class B Class C Class M (inception dates) (9/20/93) (9/9/85) (7/26/99) (6/1/95) - --------------------------------------------------------------------------------------------------------------- NAV POP NAV CDSC NAV CDSC NAV POP - --------------------------------------------------------------------------------------------------------------- 1 year -0.36% -5.08% -1.00% -5.73% -1.19% -2.14% -0.61% -3.90% - --------------------------------------------------------------------------------------------------------------- 5 years 29.40 23.23 26.07 24.07 24.23 24.23 27.47 23.28 Annual average 5.29 4.27 4.74 4.41 4.43 4.43 4.97 4.28 - --------------------------------------------------------------------------------------------------------------- 10 years 73.51 65.33 66.84 66.84 60.16 60.16 67.97 62.53 Annual average 5.67 5.16 5.25 5.25 4.82 4.82 5.32 4.98 - --------------------------------------------------------------------------------------------------------------- Annual average (life of fund) 6.93 6.65 6.68 6.68 6.37 6.37 6.72 6.54 - ---------------------------------------------------------------------------------------------------------------
Understanding your fund's expenses As a mutual fund investor, you pay ongoing expenses, such as management fees, distribution fees (12b-1 fees), and other expenses. Using the information below, you can estimate how these expenses affect your investment and compare them with the expenses of other funds. You may also pay one-time transaction expenses, including sales charges (loads) and redemption fees, which are not shown in this section and would have resulted in higher total expenses. For more information, see your fund's prospectus or talk to your financial advisor. Review your fund's expenses The table below shows the expenses you would have paid on a $1,000 investment in Putnam Tax-Free Insured Fund from February 1, 2004, to July 31, 2004. It also shows how much a $1,000 investment would be worth at the close of the period, assuming actual returns and expenses. EXPENSES AND VALUE OF A $1,000 INVESTMENT assuming actual returns for the 6 months ended 7/31/04 - ----------------------------------------------------------------------- Class A Class B Class C Class M - ----------------------------------------------------------------------- Expenses paid per $1,000* $4.32 $7.57 $8.31 $5.82 - ----------------------------------------------------------------------- Ending value (after expenses) $996.80 $993.20 $992.30 $994.90 - ----------------------------------------------------------------------- * Expenses for each share class are calculated using the fund's annualized expense ratio for each class, which represents the ongoing expenses as a percentage of net assets for the six months ended 7/31/04. The expense ratio may differ for each share class (see the table at the bottom of the next page). Expenses are calculated by multiplying the expense ratio by the average account value for the period; then multiplying the result by the number of days in the period; and then dividing that result by the number of days in the year. Estimate the expenses you paid To estimate the ongoing expenses you paid for the six months ended July 31, 2004, use the calculation method below. To find the value of your investment on February 1, 2004, go to www.putnaminvestments.com and log on to your account. Click on the "Transaction History" tab in your Daily Statement and enter 02/01/2004 in both the "from" and "to" fields. Alternatively, call Putnam at 1-800-225-1581. - ---------------------------------------------------------------------------- HOW TO CALCULATE THE EXPENSES YOU PAID - ---------------------------------------------------------------------------- Total Value of your Expenses paid expenses investment on 2/1/04 [DIV] $1,000 X per $1,000 = paid - ---------------------------------------------------------------------------- Example Based on a $10,000 investment in class A shares of your fund. - ---------------------------------------------------------------------------- $10,000 [DIV] $1,000 X $4.32 (see table above) = $43.20 - ---------------------------------------------------------------------------- Comparing your fund's expenses with those of other funds Using the SEC's method to compare expenses The Securities and Exchange Commission (SEC) has established guidelines to help investors assess fund expenses. Per these guidelines, the table below shows your fund's expenses based on a $1,000 investment, assuming a hypothetical 5% annualized return. You can use this information to compare the ongoing expenses (but not transaction expenses or total costs) of investing in the fund with those of other funds. All mutual fund shareholder reports will provide this information to help you make this comparison. Please note that you cannot use this information to estimate your actual ending account balance and expenses paid during the period. - ---------------------------------------------------------------------------- EXPENSES AND VALUE OF A $1,000 INVESTMENT assuming a hypothetical 5% annualized return for the 6 months ended 7/31/04 - ---------------------------------------------------------------------------- Class A Class B Class C Class M - ---------------------------------------------------------------------------- Expenses paid per $1,000* $4.37 $7.66 $8.42 $5.89 - ---------------------------------------------------------------------------- Ending value (after expenses) $1,020.81 $1,017.55 $1,016.79 $1,019.30 - ---------------------------------------------------------------------------- * Expenses for each share class are calculated using the fund's annualized expense ratio for each class, which represents the ongoing expenses as a percentage of net assets for the six months ended 7/31/04. The expense ratio may differ for each share class (see the table at the bottom of this page). Expenses are calculated by multiplying the expense ratio by the average account value for the period; then multiplying the result by the number of days in the period; and then dividing that result by the number of days in the year. Using industry averages to compare expenses You can also compare your fund's expenses with industry averages, as determined by Lipper, an independent fund-rating agency that ranks funds relative to others that Lipper considers to have similar investment styles or objectives. The expense ratio for each share class shown below indicates how much of your fund's net assets have been used to pay ongoing expenses during the period. - ---------------------------------------------------------------------------- EXPENSE RATIO COMPARISONS USING ANNUALIZED DATA - ---------------------------------------------------------------------------- Class A Class B Class C Class M - ---------------------------------------------------------------------------- Your fund's annualized expense ratio+ 0.86% 1.51% 1.66% 1.16% - ---------------------------------------------------------------------------- Average annualized expense ratio for Lipper peer group++ 0.93% 1.58% 1.73% 1.23% - ---------------------------------------------------------------------------- + For the fund's most recent fiscal half year; may differ from expense ratios based on one-year data in the financial highlights. ++ For class A shares, expenses shown represent the average of the expenses of front-end load funds viewed by Lipper as having the same investment classification or objective as the fund, calculated in accordance with Lipper's standard reporting methodology for comparing expenses within a given universe. All Lipper data is for the most recent fiscal periods available as of 6/30/04. For class B, C and M shares, Putnam has adjusted the Lipper total expense average to reflect higher 12b-1 fees incurred by these classes of shares. The peer group may include funds that are significantly larger or smaller than the fund, which may limit the comparability of the fund's expenses to the Lipper average. Understanding your fund's portfolio turnover Putnam funds are actively managed by teams of experts who buy and sell securities based on intensive analysis of companies, industries, economies, and markets. Portfolio turnover is a measure of how often a fund's managers buy and sell securities for your fund. A portfolio turnover of 100%, for example, means that the managers sold and replaced securities valued at 100% of a fund's assets within a one-year period. Funds with high turnover may be more likely to generate capital gains and dividends that must be distributed to shareholders as taxable income. High turnover may also cause a fund to pay more brokerage commissions and other transaction costs, which may detract from performance. Funds that invest in bonds may have higher turnover than funds that invest only in stocks. Short-term bond funds tend to have higher turnover than longer-term bond funds, because shorter-term bonds will mature or be sold more frequently than longer-term bonds. You can use the table below to compare your fund's turnover with the average turnover for funds in its Lipper category. - ------------------------------------------------------------------------------ TURNOVER COMPARISONS percentage of holdings that change every year - ------------------------------------------------------------------------------ 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------ Putnam Tax-Free Insured Fund 27% 43% 55% 37% 22% - ------------------------------------------------------------------------------ Lipper Insured Municipal Debt Funds Average 58% 61% 54% 49% 69% - ------------------------------------------------------------------------------ Turnover data for the fund is calculated based on the fund's fiscal-year period, which ends on July 31. Turnover data for the fund's Lipper category is calculated based on the average of the turnover of each fund in the category for its fiscal year ended during the indicated year, with the exception of 2004 data. Lipper data for 2004 represents the average turnover for each fund in the category for its most recent fiscal year and for which data is available as of 6/30/04. Risk comparison As part of new initiatives to enhance disclosure, we are including a risk comparison to help you understand how your fund compares with other funds. The comparison utilizes a risk measure developed by Morningstar, an independent fund-rating agency. This risk measure is referred to as the fund's Overall Morningstar Risk. [GRAPHIC OMITTED: chart MORNINGSTAR [REGISTRATION MARK] RISK] MORNINGSTAR [REGISTRATION MARK] RISK Fund's Overall Morningstar Risk 0.25 Municipal bond fund average 0.22 0% INCREASING RISK 100% Your fund's Overall Morningstar Risk is shown alongside that of the average fund in its broad asset class, as determined by Morningstar. The risk bar broadens the comparison by translating the fund's Overall Morningstar Risk into a percentile, which is based on the fund's ranking among all funds rated by Morningstar as of 6/30/04. A higher Overall Morningstar Risk generally indicates that a fund's monthly returns have varied more widely. Morningstar determines a fund's Overall Morningstar Risk by assessing variations in the fund's monthly returns -- with an emphasis on downside variations -- over 3-, 5-, and 10-year periods, if available. Those measures are weighted and averaged to produce the fund's Overall Morningstar Risk. The information shown is provided for the fund's class A shares only; information for other classes may vary. Overall Morningstar Risk is based on historical data and does not indicate future results. Morningstar does not purport to measure the risk associated with a current investment in a fund, either on an absolute basis or on a relative basis. Low Overall Morningstar Risk does not mean that you cannot lose money on an investment in a fund. Copyright 2004 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Terms and definitions Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Net asset value (NAV) is the price, or value, of one share of a mutual fund, without a sales charge. NAVs fluctuate with market conditions. NAV is calculated by dividing the net assets of each class of shares by the number of outstanding shares in the class. Public offering price (POP) is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. POP performance figures shown here assume the 4.75% maximum sales charge for class A shares (since reduced to 4.50%) and 3.25% for class M shares. Contingent deferred sales charge (CDSC) is a charge applied at the time of the redemption of class B or C shares and assumes redemption at the end of the period. Your fund's class B CDSC declines from a 5% maximum during the first year to 1% during the sixth year. After the sixth year, the CDSC no longer applies. The CDSC for class C shares is 1% for one year after purchase. Class A shares are generally subject to an initial sales charge and no sales charge on redemption (except on certain redemptions of shares bought without an initial sales charge). Class B shares may be subject to a sales charge upon redemption. Class C shares are not subject to an initial sales charge and are subject to a contingent deferred sales charge only if the shares are redeemed during the first year. Class M shares have a lower initial sales charge and a higher 12b-1 fee than class A shares and no sales charge on redemption (except on certain redemptions of shares bought without an initial sales charge). Comparative indexes Lehman Aggregate Bond Index is an unmanaged index used as a general measure of U.S. fixed-income securities. Lehman Global Aggregate Bond Index is an unmanaged index used as a broad measure of international investment-grade bonds. Lehman GNMA Index is an unmanaged index of Government National Mortgage Association bonds. Lehman Municipal Bond Index is an unmanaged index of long-term fixed-rate investment-grade tax-exempt bonds. Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged index of international stocks from Europe, Australasia, and the Far East. Russell 2000 Index is an unmanaged index of common stocks that generally measure performance of small to midsize companies within the Russell 3000 Index. S&P 500 Index is an unmanaged index of common stock performance. Indexes assume reinvestment of all distributions and do not account for fees. Securities and performance of a fund and an index will differ. You cannot invest directly in an index. Lipper is a third-party industry ranking entity that ranks funds (without sales charges) with similar current investment styles or objectives as determined by Lipper. Lipper category averages reflect performance trends for funds within a category and are based on results at net asset value. Putnam's policy on confidentiality In order to conduct business with our shareholders, we must obtain certain personal information such as account holders' addresses, telephone numbers, Social Security numbers, and the names of their financial advisors. We use this information to assign an account number and to help us maintain accurate records of transactions and account balances. It is our policy to protect the confidentiality of your information, whether or not you currently own shares of our funds, and in particular, not to sell information about you or your accounts to outside marketing firms. We have safeguards in place designed to prevent unauthorized access to our computer systems and procedures to protect personal information from unauthorized use. Under certain circumstances, we share this information with outside vendors who provide services to us, such as mailing and proxy solicitation. In those cases, the service providers enter into confidentiality agreements with us, and we provide only the information necessary to process transactions and perform other services related to your account. We may also share this information with our Putnam affiliates to service your account or provide you with information about other Putnam products or services. It is also our policy to share account information with your financial advisor, if you've listed one on your Putnam account. If you would like clarification about our confidentiality policies or have any questions or concerns, please don't hesitate to contact us at 1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time. Proxy voting Putnam is committed to managing our mutual funds in the best interests of our shareholders. The Putnam funds' proxy voting guidelines and procedures, as well as information regarding how your fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2004, are available on the Putnam Individual Investor Web site, www.putnaminvestments.com/individual, and on the SEC's Web site, www.sec.gov. If you have questions about finding forms on the SEC's Web site, you may call the SEC at 1-800-SEC-0330. You may also obtain the Putnam funds' proxy voting guidelines and procedures by calling Putnam's Shareholder Services at 1-800-225-1581. Fund portfolio holdings For periods ending on or after July 9, 2004, the fund will file a complete schedule of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Shareholders may obtain the fund's Forms N-Q on the SEC's Web site at www.sec.gov. In addition, the fund's Forms N-Q may be reviewed and copied at the SEC's public reference room in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for information about the SEC's Web site or the operation of the public reference room. A guide to the financial statements These sections of the report, as well as the accompanying Notes, preceded by the Report of Independent Registered Public Accounting Firm, constitute the fund's financial statements. The fund's portfolio lists all the fund's investments and their values as of the last day of the reporting period. Holdings are organized by asset type and industry sector, country, or state to show areas of concentration and diversification. Statement of assets and liabilities shows how the fund's net assets and share price are determined. All investment and noninvestment assets are added together. Any unpaid expenses and other liabilities are subtracted from this total. The result is divided by the number of shares to determine the net asset value per share, which is calculated separately for each class of shares. (For funds with preferred shares, the amount subtracted from total assets includes the net assets allocated to remarketed preferred shares.) Statement of operations shows the fund's net investment gain or loss. This is done by first adding up all the fund's earnings -- from dividends and interest income -- and subtracting its operating expenses to determine net investment income (or loss). Then, any net gain or loss the fund realized on the sales of its holdings -- as well as any unrealized gains or losses over the period -- is added to or subtracted from the net investment result to determine the fund's net gain or loss for the fiscal year. Statement of changes in net assets shows how the fund's net assets were affected by the fund's net investment gain or loss, by distributions to shareholders, and by changes in the number of the fund's shares. It lists distributions and their sources (net investment income or realized capital gains) over the current reporting period and the most recent fiscal year-end. The distributions listed here may not match the sources listed in the Statement of operations because the distributions are determined on a tax basis and may be paid in a different period from the one in which they were earned. Financial highlights provide an overview of the fund's investment results, per-share distributions, expense ratios, net investment income ratios, and portfolio turnover in one summary table, reflecting the five most recent reporting periods. In a semiannual report, the highlight table also includes the current reporting period. For open-end funds, a separate table is provided for each share class. Report of Independent Registered Public Accounting Firm To the Trustees and Shareholders of Putnam Tax-Free Insured Fund In our opinion, the accompanying statement of assets and liabilities, including the fund's portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Putnam Tax-Free Insured Fund (the "fund") at July 31, 2004, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments owned at July 31, 2004, by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts September 10, 2004 The fund's portfolio July 31, 2004 Key to Abbreviations - ------------------------------------------------------------------------------- AMBAC AMBAC Indemnity Corporation COP Certificate of Participation FGIC Financial Guaranty Insurance Company FNMA Coll. Federal National Mortgage Association Collateralized FSA Financial Security Assurance GNMA Coll. Government National Mortgage Association Collateralized G.O. Bonds General Obligation Bonds MBIA MBIA Insurance Company PSFG Permanent School Fund Guaranteed RAN Revenue Anticipation Notes VRDN Variable Rate Demand Notes XLCA XL Capital Assurance Municipal bonds and notes (99.6%) (a) Principal amount Rating (RAT) Value Alabama (2.8%) - ------------------------------------------------------------------------------- $3,000,000 Alabama A&M U. Rev. Bonds, MBIA, 6 1/2s, 11/1/25 Aaa $3,236,250 7,500,000 Jefferson Cnty., Swr. Rev. Bonds, FGIC, 5 3/4s, 2/1/38 AAA 8,418,750 -------------- 11,655,000 Alaska (2.8%) - ------------------------------------------------------------------------------- AK State Hsg. Fin. Corp. Rev. Bonds, Ser. A 6,000,000 MBIA, 5.9s, 12/1/19 Aaa 6,172,500 4,945,000 4.4s, 12/1/31 Aaa 5,093,350 -------------- 11,265,850 Arkansas (0.5%) - ------------------------------------------------------------------------------- 2,000,000 Little Rock G.O. Bonds (Cap. Impt.), FSA, 3.95s, 4/1/19 Aaa 1,950,000 California (10.1%) - ------------------------------------------------------------------------------- 2,105,000 Alvord, G.O. Bonds, Ser. A, MBIA, 5.9s, 2/1/20 Aaa 2,465,481 12,000,000 CA State Dept. of Wtr. Resources Rev. Bonds, Ser. A, AMBAC, 5 1/2s, 5/1/13 Aaa 13,425,000 1,000,000 CA State Econ. Recvy. G.O. Bonds, Ser. A, MBIA, 5s, 7/1/12 Aaa 1,092,500 3,000,000 CA Statewide Cmnty. Dev. Auth. COP (Motion Picture & TV Fund), AMBAC, 5.35s, 1/1/24 Aaa 3,082,500 2,475,000 Golden State Tobacco Securitization Corp. Rev. Bonds (Tobacco Settlement), Ser. B, AMBAC, 5s, 6/1/38 Aaa 2,403,844 7,000,000 San Diego Cnty., Wtr. Auth. COP, FGIC, 5.681s, 4/23/08 Aaa 7,770,000 2,000,000 San Diego, Unified School Dist. G.O. Bonds (Election of 1998), Ser. E, FSA, 5 1/4s, 7/1/19 Aaa 2,152,500 3,680,000 Santa Ana, Fin. Auth. Lease Rev. Bonds (Police Admin. & Hldg. Fac.), Ser. A, MBIA, 6 1/4s, 7/1/17 Aaa 4,452,800 3,905,000 Vallejo City, Unified School Dist. G.O. Bonds, Ser. A, MBIA, 5.9s, 2/1/22 Aaa 4,568,850 -------------- 41,413,475 Colorado (2.8%) - ------------------------------------------------------------------------------- 1,000,000 CO Dept. of Trans. RAN, 6s, 6/15/06 Aaa 1,073,750 689,000 CO Hlth. Fac. Auth. Rev. Bonds (Cmnty. Provider Pooled Loan Program), Ser. A, FSA, 7 1/4s, 7/15/17 Aaa 691,177 5,000,000 Denver, City & Cnty. Arpt. Rev. Bonds, MBIA, 5 1/2s, 11/15/25 Aaa 5,231,250 4,000,000 Weld Cnty. School Dist. G.O. Bonds, FSA, 5 1/2s, 12/1/19 Aaa 4,375,000 -------------- 11,371,177 District of Columbia (1.0%) - ------------------------------------------------------------------------------- 1,000,000 DC COP, AMBAC, 5 1/4s, 1/1/09 AAA 1,078,750 3,000,000 DC G.O. Bonds, Ser. A, FSA, 5 7/8s, 6/1/05 Aaa 3,107,910 -------------- 4,186,660 Florida (7.3%) - ------------------------------------------------------------------------------- 13,675,000 Hernando Cnty., Rev. Bonds (Criminal Justice Complex Fin.), FGIC, 7.65s, 7/1/16 Aaa 18,239,031 5,000,000 Orlando & Orange Cnty., Expressway Auth. Rev. Bonds, FGIC, 8 1/4s, 7/1/14 Aaa 6,750,000 3,935,000 Sumter Cnty., School Dist. Rev. Bonds (Multi Dist. Loan Program), FSA, 7.15s, 11/1/15 Aaa 5,041,719 -------------- 30,030,750 Georgia (1.7%) - ------------------------------------------------------------------------------- 3,360,000 Fulton Cnty., Dev. Auth. Rev. Bonds (Klaus Pkg. & Fam. Hsg. Project), MBIA, 5 1/4s, 11/1/20 Aaa 3,603,600 415,000 GA Muni. Elec. Pwr. Auth. Rev. Bonds, Ser. Y, AMBAC, 6.4s, 1/1/13 Aaa 489,700 2,500,000 Muni. Elec. Auth. Rev. Bonds, AMBAC, 5s, 1/1/26 Aaa 2,681,250 -------------- 6,774,550 Illinois (7.5%) - ------------------------------------------------------------------------------- 5,500,000 Chicago, G.O. Bonds, Ser. A, AMBAC, 5 5/8s, 1/1/39 Aaa 5,781,875 Chicago, Board of Ed. G.O. Bonds, Ser. A 2,000,000 FGIC, 5 1/4s, 12/1/20 Aaa 2,215,000 1,500,000 MBIA, 5 1/4s, 12/1/19 Aaa 1,595,625 4,385,000 Cook Cnty., G.O. Bonds, Ser. D, AMBAC, 5 1/4s, 11/15/21 Aaa 4,615,212 1,000,000 Du Page Cnty., Cmnty. High School Dist. G.O. Bonds (Dist. No. 108 - Lake Park), FSA, 5.6s, 1/1/20 Aaa 1,091,250 5,000,000 IL G.O. Bonds, Ser. 1, MBIA, 5 1/4s, 10/1/19 Aaa 5,325,000 3,000,000 IL State G.O. Bonds, FGIC, 6s, 11/1/26 Aaa 3,480,000 5,000,000 Regl. Trans. Auth. Rev. Bonds, Ser. A, AMBAC, 8s, 6/1/17 Aaa 6,668,750 -------------- 30,772,712 Indiana (4.5%) - ------------------------------------------------------------------------------- Brownsburg Ind. 1999 School Bldg. Corp. Rev. Bonds (1st Mtge.), Ser. A, FSA 3,465,000 5 1/4s, 9/15/19 AAA 3,707,550 3,295,000 5 1/4s, 9/15/18 AAA 3,542,125 6,605,000 Center Grove, Bldg. Rev. Bonds, AMBAC, 5 1/2s, 1/15/26 Aaa 6,877,455 1,000,000 Evansville Vanderburgh Pub. Leasing Corp. Rev. Bonds (1st Mtge.), MBIA, 5 3/4s, 7/15/18 Aaa 1,105,000 3,135,000 IN Bond Bk. Common School Rev. Bonds, AMBAC, 5s, 2/1/06 Aaa 3,276,075 -------------- 18,508,205 Louisiana (3.3%) - ------------------------------------------------------------------------------- 57,113 East Baton Rouge, Mtge. Fin. Auth. Rev. Bonds (Single Fam.), Ser. B, GNMA Coll., 8 1/4s, 2/25/11 AAA 57,328 5,730,000 Ernest N. Morial-New Orleans Exhibit Hall Auth. Special Tax, AMBAC, 5s, 7/15/20 AAA 6,023,662 3,000,000 LA Rev. Bonds, Ser. A, AMBAC, 5 3/8s, 6/1/19 Aaa 3,225,000 4,000,000 LA State U. & Agriculture & Mechanical College Rev. Bonds, MBIA, 5 1/2s, 7/1/26 Aaa 4,175,000 -------------- 13,480,990 Massachusetts (3.4%) - ------------------------------------------------------------------------------- MA State Special Oblig. Dedicated Tax Rev. Bonds, FGIC 1,000,000 5 1/4s, 1/1/24 Aaa 1,045,000 1,000,000 5 1/4s, 1/1/23 Aaa 1,051,250 11,000,000 5 1/4s, 1/1/22 Aaa 11,632,500 -------------- 13,728,750 Michigan (7.7%) - ------------------------------------------------------------------------------- 720,000 Detroit, Rev. Bonds, Ser. B, FGIC, 5 1/4s, 7/1/20 Aaa 761,400 7,990,000 Detroit, City School Dist. G.O. Bonds (School Bldg. & Site Impt.), Ser. B, FGIC, 5s, 5/1/25 Aaa 8,049,925 7,730,000 Detroit, Swr. Disp. VRDN, Ser. B, FSA, 1.10s, 7/1/33 VMIG1 7,730,000 500,000 Kent, Hosp. Fin. Auth. Rev. Bonds (Spectrum Hlth. Care), Ser. A, MBIA, 5 1/2s, 1/15/17 AAA 545,000 5,000,000 MI State Hosp. Fin. Auth. Rev. Bonds (Mercy Hlth. Svcs.), Ser. A, AMBAC, 6s, 8/15/34 Aaa 5,431,250 MI State Strategic Fund, Ltd. Rev. Bonds (Detroit Edison Co.), AMBAC 4,000,000 7s, 5/1/21 Aaa 5,125,000 3,500,000 4.85s, 9/1/30 Aaa 3,701,250 -------------- 31,343,825 Mississippi (2.0%) - ------------------------------------------------------------------------------- 4,000,000 Mississippi Dev. Bank Special Oblig. Rev. Bonds (Cap. & Equip.), Ser. A, AMBAC, 5 5/8s, 7/1/31 AAA 4,270,000 MS Dev. Bk. Special Obligation Rev. Bonds (Waste Wtr. & Solid Waste Mgt.), Ser. A, FSA 1,855,000 5 3/8s, 2/1/19 Aaa 1,991,805 1,755,000 5 3/8s, 2/1/18 Aaa 1,895,400 -------------- 8,157,205 Missouri (2.6%) - ------------------------------------------------------------------------------- 10,800,000 MO State Hlth. & Edl. Fac. Auth. VRDN (Cox Hlth. Syst.), AMBAC, 1.15s, 6/1/22 A-1 10,800,000 Montana (0.4%) - ------------------------------------------------------------------------------- 1,725,000 Forsyth, Poll. Control Mandatory Put Bonds (Avista Corp.), AMBAC, 5s, 12/30/08 Aaa 1,834,969 Nevada (2.1%) - ------------------------------------------------------------------------------- 8,295,000 Clark Cnty., Rev. Bonds, Ser. B, FGIC, 5 1/4s, 7/1/20 Aaa 8,689,013 New Hampshire (1.4%) - ------------------------------------------------------------------------------- 5,000,000 NH State Tpk. Syst. Rev. Bonds, FGIC, 6.806s, 11/1/17 Aaa 5,568,750 New Jersey (2.6%) - ------------------------------------------------------------------------------- 10,000,000 NJ Econ. Dev. Auth. Rev. Bonds (School Fac. Construction), Ser. F, FGIC, 5 1/4s, 6/15/21 Aaa 10,637,500 New York (3.1%) - ------------------------------------------------------------------------------- Nassau Cnty., Hlth. Care Syst. Rev. Bonds (Nassau Hlth. Care Corp.), FSA 4,610,000 6s, 8/1/13 Aaa 5,261,163 2,285,000 6s, 8/1/12 Aaa 2,604,900 NY State Dorm. Auth. Rev. Bonds (Brooklyn Law School), Ser. B, XLCA 2,270,000 5 3/8s, 7/1/22 Aaa 2,426,063 2,215,000 5 3/8s, 7/1/20 Aaa 2,394,969 -------------- 12,687,095 North Carolina (3.5%) - ------------------------------------------------------------------------------- 6,000,000 Metropolitan Pier & Exposition Auth. Rev. Bonds (McCormack Place Expansion Project), FGIC, 5 1/2s, 12/15/24 Aaa 6,330,000 7,500,000 NC State Muni. Pwr. Agcy. Rev. Bonds (No. 1, Catawba Elec.), Ser. A, MBIA, 5 1/4s, 1/1/19 AAA 7,978,125 -------------- 14,308,125 Ohio (2.4%) - ------------------------------------------------------------------------------- 6,765,000 Cleveland, Wtr. Wks. Rev. Bonds, Ser. J, FSA, 5s, 1/1/06 Aaa 7,060,969 1,000,000 Cleveland-Cuyahoga Cnty., Port. Auth. Rev. Bonds (Rock & Roll Hall of Fame), FSA, 3.6s, 12/1/14 Aaa 1,000,190 1,535,000 Morley Library Dist. G.O. Bonds (Lake Cnty. Dist. Library), AMBAC, 5 1/4s, 12/1/19 Aaa 1,646,288 45,000 OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds, Ser. 85-A, FGIC, zero %, 1/15/15 Aaa 16,031 -------------- 9,723,478 Oklahoma (0.8%) - ------------------------------------------------------------------------------- 3,000,000 OK City Arpt. Trust Rev. Bonds, Ser. A, FSA, 5 1/4s, 7/1/21 Aaa 3,112,500 Oregon (0.5%) - ------------------------------------------------------------------------------- 1,880,000 Salem-Keizer, School Dist. G.O. Bonds (No. 24J), FSA, 4s, 6/15/06 Aaa 1,948,150 Pennsylvania (3.5%) - ------------------------------------------------------------------------------- PA State Pub. School Bldg. Auth. Rev. Bonds 1,750,000 (Philadelphia School Dist.), FSA, 5 1/2s, 6/1/28 Aaa 1,900,938 3,000,000 (Philadelphia School Dist.), 5 1/4s, 6/1/25 Aaa 3,108,750 Philadelphia, School Dist. G.O. Bonds, Ser. A, FSA 6,400,000 5 1/2s, 2/1/31 Aaa 7,216,000 2,000,000 5 1/2s, 2/1/18 Aaa 2,255,000 -------------- 14,480,688 Texas (10.2%) - ------------------------------------------------------------------------------- 2,500,000 Dallas, Indpt. School Dist. G.O. Bonds, PSFG, 5 1/4s, 2/15/19 Aaa 2,656,250 1,250,000 Harris Cnty., Mandatory Put Bonds (Toll Road), FGIC, 5s, 8/15/09 Aaa 1,350,000 5,280,000 Houston, Arpt. Syst. Rev. Bonds, FSA, 5s, 7/1/21 Aaa 5,418,600 1,000,000 Houston, Cmnty. College Syst. Rev. Bonds (Student Fee), MBIA, 5.1s, 4/15/06 Aaa 1,050,000 North Central TX Hlth. Fac. Dev. Corp. VRDN 4,290,000 (Dates Hosp. Prsbytrn Med. Ctr), Ser. C, MBIA, 1.08s, 12/1/15 VMIG1 4,290,000 5,100,000 (Hosp. Presbyterian Med. Ctr.), Ser. D, MBIA, 1.08s, 12/1/15 VMIG1 5,100,000 4,000,000 San Antonio Wtr. Rev. Bonds, FSA, 5 1/2s, 5/15/20 Aaa 4,325,000 8,000,000 San Antonio, Hotel Occupancy Mandatory Put Bonds, Ser. B, AMBAC, 5s, 8/15/08 Aaa 8,640,000 5,000,000 Tarrant Cnty., Hlth. Fac. Dev. Rev. Bonds (TX Hlth. Res. Sys.), Ser. A, MBIA, 5 3/4s, 2/15/15 Aaa 5,625,000 3,150,000 Victoria G.O. Bonds, FGIC, 5 1/2s, 8/15/20 Aaa 3,402,000 -------------- 41,856,850 Utah (3.3%) - ------------------------------------------------------------------------------- UT State Pwr. Supply Rev. Bonds (Intermountain Pwr. Agcy.), Ser. A, MBIA 7,900,000 6.15s, 7/1/14 (prerefunded) Aaa 8,620,875 4,495,000 6.15s, 7/1/14 Aaa 4,899,550 -------------- 13,520,425 Washington (5.8%) - ------------------------------------------------------------------------------- 10,000,000 Port of Seattle Rev. Bonds, Ser. A, FGIC, 5 1/2s, 10/1/22 Aaa 10,712,500 WA State Pub. Pwr. Supply Syst. Rev. Bonds 6,000,000 (Nuclear No. 3), Ser. B, MBIA, 7 1/8s, 7/1/16 Aaa 7,567,500 5,000,000 (Nuclear No. 1), Ser. A, AMBAC, 5.7s, 7/1/09 Aaa 5,393,750 -------------- 23,673,750 - ------------------------------------------------------------------------------- Total Investments (cost $389,048,642) $407,480,442 - ------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $409,310,843. (RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at July 31, 2004 for the securities listed. Ratings are generally ascribed to securities at the time of issuance. While the agencies may from time to time revise such ratings, they undertake no obligation to do so, and the ratings do not necessarily represent what the agencies would ascribe to these securities at July 31, 2004. Ratings are not covered by the Report of Independent Registered Public Accounting Firm. The rates shown on VRDN are the current interest rates shown at July 31, 2004. The fund had the following industry group concentrations greater than 10% at July 31, 2004 (as a percentage of net assets): Utilities 22.6% Transportation 11.7 The fund had the following insurance concentrations greater than 10% at July 31, 2004 (as a percentage of net assets): FGIC 28.4% AMBAC 27.0 MBIA 21.7 FSA 19.6 The dates shown on Mandatory Put Bonds are the next Mandatory Put dates. The accompanying notes are an integral part of these financial statements. Statement of assets and liabilities July 31, 2004 Assets - ------------------------------------------------------------------------------- Investments in securities, at value (identified cost $389,048,642) (Note 1) $407,480,442 - ------------------------------------------------------------------------------- Cash 997,044 - ------------------------------------------------------------------------------- Interest and other receivables 3,863,535 - ------------------------------------------------------------------------------- Receivable for shares of the fund sold 8,621 - ------------------------------------------------------------------------------- Total assets 412,349,642 Liabilities - ------------------------------------------------------------------------------- Distributions payable to shareholders 430,957 - ------------------------------------------------------------------------------- Payable for securities purchased 1,089,148 - ------------------------------------------------------------------------------- Payable for shares of the fund repurchased 797,416 - ------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 344,252 - ------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 90,904 - ------------------------------------------------------------------------------- Payable for Trustee compensation and expenses (Note 2) 58,180 - ------------------------------------------------------------------------------- Payable for administrative services (Note 2) 754 - ------------------------------------------------------------------------------- Payable for distribution fees (Note 2) 138,797 - ------------------------------------------------------------------------------- Other accrued expenses 88,391 - ------------------------------------------------------------------------------- Total liabilities 3,038,799 - ------------------------------------------------------------------------------- Net assets $409,310,843 Represented by - ------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $391,599,358 - ------------------------------------------------------------------------------- Undistributed net investment income (Note 1) 177,935 - ------------------------------------------------------------------------------- Accumulated net realized loss on investments (Note 1) (898,250) - ------------------------------------------------------------------------------- Net unrealized appreciation of investments 18,431,800 - ------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $409,310,843 Computation of net asset value and offering price - ------------------------------------------------------------------------------- Net asset value and redemption price per class A share ($287,528,081divided by 19,273,831 shares) $14.92 - ------------------------------------------------------------------------------- Offering price per class A share (100/95.50 of $14.92)* $15.62 - ------------------------------------------------------------------------------- Net asset value and offering price per class B share ($110,497,695 divided by 7,395,905 shares)** $14.94 - ------------------------------------------------------------------------------- Net asset value and offering price per class C share ($10,096,734 divided by 675,621 shares)** $14.94 - ------------------------------------------------------------------------------- Net asset value and redemption price per class M share ($1,188,333 divided by 79,441 shares) $14.96 - ------------------------------------------------------------------------------- Offering price per class M share (100/96.75 of $14.96)*** $15.46 - ------------------------------------------------------------------------------- * On single retail sales of less than $25,000. On sales of $25,000 or more and on group sales, the offering price is reduced. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. *** On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales, the offering price is reduced. The accompanying notes are an integral part of these financial statements. Statement of operations Year ended July 31, 2004 Interest income: $20,386,706 - ------------------------------------------------------------------------------- Expenses: - ------------------------------------------------------------------------------- Compensation of Manager (Note 2) 2,352,992 - ------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 554,164 - ------------------------------------------------------------------------------- Trustee compensation and expenses (Note 2) 18,600 - ------------------------------------------------------------------------------- Administrative services (Note 2) 8,805 - ------------------------------------------------------------------------------- Distribution fees -- Class A (Note 2) 654,763 - ------------------------------------------------------------------------------- Distribution fees -- Class B (Note 2) 1,110,649 - ------------------------------------------------------------------------------- Distribution fees -- Class C (Note 2) 118,319 - ------------------------------------------------------------------------------- Distribution fees -- Class M (Note 2) 7,184 - ------------------------------------------------------------------------------- Non-recurring costs (Note 5) 7,417 - ------------------------------------------------------------------------------- Costs assumed by Manager (Note 5) (7,417) - ------------------------------------------------------------------------------- Other 132,330 - ------------------------------------------------------------------------------- Total expenses 4,957,806 - ------------------------------------------------------------------------------- Expense reduction (Note 2) (43,432) - ------------------------------------------------------------------------------- Net expenses 4,914,374 - ------------------------------------------------------------------------------- Net investment income 15,472,332 - ------------------------------------------------------------------------------- Net realized gain on investments (Notes 1 and 3) 5,042,151 - ------------------------------------------------------------------------------- Net unrealized appreciation of investments during the year 4,246,111 - ------------------------------------------------------------------------------- Net gain on investments 9,288,262 - ------------------------------------------------------------------------------- Net increase in net assets resulting from operations $24,760,594 - ------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. Statement of changes in net assets Year ended July 31 Decrease in net assets 2004 2003 - ------------------------------------------------------------------------------- Operations: - ------------------------------------------------------------------------------- Net investment income $15,472,332 $19,790,355 - ------------------------------------------------------------------------------- Net realized gain on investments 5,042,151 9,620,709 - ------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) of investments 4,246,111 (15,397,222) - ------------------------------------------------------------------------------- Net increase in net assets resulting from operations 24,760,594 14,013,842 - ------------------------------------------------------------------------------- Distributions to shareholders: (Note 1) - ------------------------------------------------------------------------------- From ordinary income Class A (155,348) -- - ------------------------------------------------------------------------------- Class B (63,444) -- - ------------------------------------------------------------------------------- Class C (5,724) -- - ------------------------------------------------------------------------------- Class M (621) -- - ------------------------------------------------------------------------------- From tax-exempt income Class A (11,278,226) (14,369,544) - ------------------------------------------------------------------------------- Class B (3,653,149) (5,127,156) - ------------------------------------------------------------------------------- Class C (313,118) (404,425) - ------------------------------------------------------------------------------- Class M (45,600) (74,312) - ------------------------------------------------------------------------------- From net realized short-term gain on investments Class A (1,116,737) (1,102,803) - ------------------------------------------------------------------------------- Class B (456,430) (484,680) - ------------------------------------------------------------------------------- Class C (41,167) (39,443) - ------------------------------------------------------------------------------- Class M (4,466) (6,442) - ------------------------------------------------------------------------------- From net realized long-term gain on investments Class A (4,339,321) (7,592,845) - ------------------------------------------------------------------------------- Class B (1,773,555) (3,337,034) - ------------------------------------------------------------------------------- Class C (159,963) (271,570) - ------------------------------------------------------------------------------- Class M (17,352) (44,356) - ------------------------------------------------------------------------------- Increase (decrease) from capital share transactions (Note 4) (126,651,035) 4,531,446 - ------------------------------------------------------------------------------- Total decrease in net assets (125,314,662) (14,309,322) Net assets - ------------------------------------------------------------------------------- Beginning of year 534,625,505 548,934,827 - ------------------------------------------------------------------------------- End of year (including undistributed net investment income of $177,935 and $7,773, respectively) $409,310,843 $534,625,505 - ------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Financial highlights (For a common share outstanding throughout the period) CLASS A - --------------------------------------------------------------------------------------------------------------------------------- Per-share Year ended July 31 operating performance 2004 2003 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $14.93 $15.46 $15.18 $14.52 $14.72 - --------------------------------------------------------------------------------------------------------------------------------- Investment operations: - --------------------------------------------------------------------------------------------------------------------------------- Net investment income .53 .58 .67 .71 .73 - --------------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments .25 (.16) .27 .66 (.20) - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .78 .42 .94 1.37 .53 - --------------------------------------------------------------------------------------------------------------------------------- Less distributions: - --------------------------------------------------------------------------------------------------------------------------------- From net investment income (.53) (.59) (.66) (.71) (.73) - --------------------------------------------------------------------------------------------------------------------------------- From net realized gain on investments (.26) (.36) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.79) (.95) (.66) (.71) (.73) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $14.92 $14.93 $15.46 $15.18 $14.52 - --------------------------------------------------------------------------------------------------------------------------------- Total return at net asset value (%)(a) 5.20 2.71 6.38 9.63 3.86 - --------------------------------------------------------------------------------------------------------------------------------- Ratios and supplemental data - --------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $287,528 $368,419 $363,096 $322,302 $260,637 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(b) .85 .84 .82 .83 .81 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 3.49 3.76 4.39 4.74 5.15 - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover (%) 26.81 42.88 54.72 36.91 22.45 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) Includes amounts paid through expense offset arrangements (Note 2). The accompanying notes are an integral part of these financial statements.
Financial highlights (For a common share outstanding throughout the period) CLASS B - --------------------------------------------------------------------------------------------------------------------------------- Per-share Year ended July 31 operating performance 2004 2003 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $14.95 $15.48 $15.20 $14.54 $14.74 - --------------------------------------------------------------------------------------------------------------------------------- Investment operations: - --------------------------------------------------------------------------------------------------------------------------------- Net investment income .44 .48 .59 .65 .68 - --------------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments .24 (.16) .27 .66 (.20) - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .68 .32 .86 1.31 .48 - --------------------------------------------------------------------------------------------------------------------------------- Less distributions: - --------------------------------------------------------------------------------------------------------------------------------- From net investment income (.43) (.49) (.58) (.65) (.68) - --------------------------------------------------------------------------------------------------------------------------------- From net realized gain on investments (.26) (.36) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.69) (.85) (.58) (.65) (.68) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $14.94 $14.95 $15.48 $15.20 $14.54 - --------------------------------------------------------------------------------------------------------------------------------- Total return at net asset value (%)(a) 4.52 2.04 5.81 9.18 3.44 - --------------------------------------------------------------------------------------------------------------------------------- Ratios and supplemental data - --------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $110,498 $150,266 $171,801 $196,934 $238,508 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(b) 1.50 1.49 1.35 1.23 1.21 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 2.83 3.10 3.86 4.34 4.75 - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover (%) 26.81 42.88 54.72 36.91 22.45 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) Includes amounts paid through expense offset arrangements (Note 2). The accompanying notes are an integral part of these financial statements.
Financial highlights (For a common share outstanding throughout the period) CLASS C - --------------------------------------------------------------------------------------------------------------------------------- Per-share Year ended July 31 operating performance 2004 2003 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $14.95 $15.49 $15.21 $14.53 $14.72 - --------------------------------------------------------------------------------------------------------------------------------- Investment operations: - --------------------------------------------------------------------------------------------------------------------------------- Net investment income .41 .46 .55 .59 .62 - --------------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments .25 (.17) .27 .68 (.19) - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .66 .29 .82 1.27 .43 - --------------------------------------------------------------------------------------------------------------------------------- Less distributions: - --------------------------------------------------------------------------------------------------------------------------------- From net investment income (.41) (.47) (.54) (.59) (.62) - --------------------------------------------------------------------------------------------------------------------------------- From net realized gain on investments (.26) (.36) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.67) (.83) (.54) (.59) (.62) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $14.94 $14.95 $15.49 $15.21 $14.53 - --------------------------------------------------------------------------------------------------------------------------------- Total return at net asset value (%)(a) 4.40 1.82 5.53 8.89 3.11 - --------------------------------------------------------------------------------------------------------------------------------- Ratios and supplemental data - --------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $10,097 $13,793 $11,885 $9,638 $1,123 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(b) 1.65 1.64 1.62 1.63 1.61 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 2.69 2.95 3.58 3.88 4.33 - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover (%) 26.81 42.88 54.72 36.91 22.45 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) Includes amounts paid through expense offset arrangements (Note 2). The accompanying notes are an integral part of these financial statements.
Financial highlights (For a common share outstanding throughout the period) CLASS M - --------------------------------------------------------------------------------------------------------------------------------- Per-share Year ended July 31 operating performance 2004 2003 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $14.97 $15.50 $15.22 $14.56 $14.76 - --------------------------------------------------------------------------------------------------------------------------------- Investment operations: - --------------------------------------------------------------------------------------------------------------------------------- Net investment income .49 .54 .62 .66 .69 - --------------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments .24 (.16) .28 .67 (.20) - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .73 .38 .90 1.33 .49 - --------------------------------------------------------------------------------------------------------------------------------- Less distributions: - --------------------------------------------------------------------------------------------------------------------------------- From net investment income (.48) (.55) (.62) (.67) (.69) - --------------------------------------------------------------------------------------------------------------------------------- From net realized gain on investments (.26) (.36) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.74) (.91) (.62) (.67) (.69) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $14.96 $14.97 $15.50 $15.22 $14.56 - --------------------------------------------------------------------------------------------------------------------------------- Total return at net asset value (%)(a) 4.93 2.40 6.05 9.28 3.55 - --------------------------------------------------------------------------------------------------------------------------------- Ratios and supplemental data - --------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $1,188 $2,148 $2,154 $1,696 $2,692 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(b) 1.15 1.14 1.12 1.13 1.11 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 3.19 3.45 4.08 4.45 4.82 - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover (%) 26.81 42.88 54.72 36.91 22.45 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) Includes amounts paid through expense offset arrangements (Note 2). The accompanying notes are an integral part of these financial statements. Notes to financial statements July 31, 2004 Note 1 Significant accounting policies Putnam Tax-Free Insured Fund (the "fund") is a series of Putnam Tax-Free Income Trust (the "trust"), a Massachusetts business trust, which is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The fund pursues its objective of seeking high current income exempt from federal income tax by investing in tax exempt securities that are covered by insurance guaranteeing the timely payment of principal and interest, are rated AAA or Aaa, or are backed by the U.S. government. The fund offers class A, class B, class C and class M shares. Class A shares are sold with a maximum front-end sales charge of 4.50%. Prior to January 28, 2004, the maximum front-end sales charge for class A shares was 4.75%. Class B shares, which convert to class A shares after approximately eight years, do not pay a front-end sales charge but pay a higher ongoing distribution fee than class A and class M shares but lower than class C shares, and are subject to a contingent deferred sales charge, if those shares are redeemed within six years of purchase. Class C shares have a higher ongoing distribution fee than class A, class B, and class M shares, do not pay front-end sales charge but have a one-year 1.00% contingent deferred sales charge and do not convert to class A shares. Class M shares are sold with a maximum front-end sales charge of 3.25% and pay an ongoing distribution fee that is higher than class A shares but lower than class B and class C shares. Effective April 19, 2004 (May 3, 2004 for defined contribution plans administered by Putnam) a 2.00% redemption fee may apply to any shares that are redeemed (either by selling or exchanging into another fund) within 5 days of purchase. The redemption fee is accounted for as an addition to paid-in-capital. Expenses of the fund are borne pro-rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the distribution fees applicable to such class). Each class votes as a class only with respect to its own distribution plan or other matters on which a class vote is required by law or determined by the Trustees. Shares of each class would receive their pro-rata share of the net assets of the fund, if the fund were liquidated. In addition, the Trustees declare separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. A) Security valuation Tax-exempt bonds and notes are valued at fair value on the basis of valuations provided by an independent pricing service, approved by the Trustees. Such services use information with respect to transactions in bonds, quotations from bond dealers, market transactions in comparable securities and various relationships between securities in determining value. Other investments, including restricted securities, are valued at fair value following procedures approved by the Trustees. Such valuations and procedures are reviewed periodically by the Trustees. B) Security transactions and related investment income Security transactions are recorded on the trade date (date the order to buy or sell is executed). Gains or losses on securities sold are determined on the identified cost basis. Interest income is recorded on the accrual basis. All premiums/discounts are amortized/accreted on a yield-to-maturity basis. The premium in excess of the call price, if any, is amortized to the call date; thereafter, any remaining premium is amortized to maturity. C) Line of credit During the period, the fund was entered into a committed line of credit with certain banks. The line of credit agreement included restrictions that the fund would maintain an asset coverage ratio of at least 300% and that borrowings would not exceed prospectus limitations. For the period ended August 6, 2003 the fund had no borrowings against the line of credit. Effective August 6, 2003, the fund no longer participated in a committed line of credit. D) Federal taxes It is the policy of the fund to distribute all of its income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986 (the "Code"), as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains. E) Distributions to shareholders Income dividends are recorded daily by the fund and are paid monthly. Distributions from capital gains, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include temporary and permanent differences of losses on wash sale transactions, dividends payable, market discount and straddle loss deferrals. Reclassifications are made to the fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. For the year ended July 31, 2004, the fund reclassified $213,060 to decrease distribution in excess of net investment income with an increase to accumulated net realized losses of $213,060. The tax basis components of distributable earnings and the federal tax cost as of period end were as follows: Unrealized appreciation $19,748,113 Unrealized depreciation (1,316,451) ------------ Net unrealized appreciation 18,431,662 Undistributed tax exempt inco 605,538 Undistributed short-term gain 664,261 Undistributed long-term gain 833,998 Cost for federal income tax purposes $389,048,780 F) Expenses of the trust Expenses directly charged or attributable to any fund will be paid from the assets of that fund. Generally, expenses of the trust will be allocated among and charged to the assets of each fund on a basis that the Trustees deem fair and equitable, which may be based on the relative assets of each fund or the nature of the services performed and relative applicability to each fund. Note 2 Management fee, administrative services and other transactions Putnam Management is paid for management and investment advisory services quarterly based on the average net assets of the fund. Such fee is based on the lesser of (i) an annual rate of 0.50% of the average net asset value of the fund or (ii) the following annual rates: 0.60% of the first $500 million of average net assets, 0.50% of the next $500 million, 0.45% of the next $500 million, 0.40% of the next $5 billion, 0.375% of the next $5 billion, 0.355% of the next $5 billion, 0.34% of the next $5 billion and 0.33% thereafter. Effective January 28, 2004, Putnam Management has agreed to limit its compensation (and, to the extent necessary, bear other expenses) through December 31, 2004, to the extent that the fund's net expenses as a percentage of average net assets exceed the average expense ratio for the fund's Lipper peer group of front-end load funds. The fund reimburses Putnam Management an allocated amount for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust Company ("PFTC"), a subsidiary of Putnam, LLC. Putnam Investor Services, a division of PFTC, provides investor servicing agent functions to the fund. During the year ended July 31, 2004, the fund paid PFTC $502,032 for these services. The fund has entered into an arrangement with PFTC whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the fund's expenses. For the year ended July 31, 2004, the fund's expenses were reduced by $43,432 under these arrangements. Each independent Trustee of the fund receives an annual Trustee fee, of which $715 as a quarterly retainer, has been allocated to the fund, and an additional fee for each Trustees meeting attended. Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees fees payable on or after July 1, 1995. The deferred fees remain invested in certain Putnam funds until distribution in accordance with the Deferral Plan. The fund has adopted an unfunded noncontributory defined benefit pension plan (the "Pension Plan") covering all Trustees of the fund who have served as a Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in Trustee compensation and expenses in the statement of operations. Accrued pension liability is included in Payable for Trustee compensation and expenses in the statement of assets and liabilities. The Trustees have terminated the Pension Plan with respect to any Trustee first elected after 2003. The fund has adopted distribution plans (the "Plans") with respect to its class A, class B, class C and class M shares pursuant to rule 12b-1 under the Investment Company Act of 1940. The purpose of the Plans is to compensate Putnam Retail Management, a wholly-owned subsidiary of Putnam, LLC and Putnam Retail Management GP, Inc., for services provided and expenses incurred in distributing shares of the fund. The Plans provide for payments by the fund to Putnam Retail Management at an annual rate of up to 0.35%, 1.00%, 1.00%, and 1.00% of the average net assets attributable to class A, class B, class C and class M shares, respectively. The Trustees have approved payment by the fund at the annual rates of 0.20%, 0.85%, 1.00% and 0.50% of the average net assets attributable to class A, class B, class C and class M shares, respectively. For the year ended July 31, 2004, Putnam Retail Management, acting as underwriter, received net commissions of $5,728 and $98 from the sale of class A and class M shares, respectively, and received $343,640 and $7,229 in contingent deferred sales charges from redemptions of class B and class C shares, respectively. A deferred sales charge of up to 1.00% is assessed on certain redemptions of class A shares that were purchased without an initial sales charge as part of an investment of $1 million or more. For the year ended July 31, 2004, Putnam Retail Management, acting as underwriter, received $24,804 on class A redemptions. Note 3 Purchases and sales of securities During the year ended July 31, 2004, cost of purchases and proceeds from sales of investment securities other than short-term investments aggregated $115,053,299 and $255,005,184, respectively. There were no purchases or sales of U.S. government securities. Note 4 Capital shares At July 31, 2004, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows: Year ended July 31, 2004 - ---------------------------------------------------------------- Class A Shares Amount - ---------------------------------------------------------------- Shares sold 1,526,106 $22,970,728 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 806,782 12,201,957 - ---------------------------------------------------------------- 2,332,888 35,172,685 Shares repurchased (7,736,415) (116,948,642) - ---------------------------------------------------------------- Net decrease (5,403,527) $(81,775,957) - ---------------------------------------------------------------- Year ended July 31, 2003 - ---------------------------------------------------------------- Class A Shares Amount - ---------------------------------------------------------------- Shares sold 5,792,511 $89,388,859 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 632,380 9,775,790 - ---------------------------------------------------------------- 6,424,891 99,164,649 Shares repurchased (5,234,878) (81,026,185) - ---------------------------------------------------------------- Net increase 1,190,013 $18,138,464 - ---------------------------------------------------------------- Year ended July 31, 2004 - ---------------------------------------------------------------- Class B Shares Amount - ---------------------------------------------------------------- Shares sold 312,701 $4,732,438 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 261,180 3,956,188 - ---------------------------------------------------------------- 573,881 8,688,626 Shares repurchased (3,227,983) (48,853,704) - ---------------------------------------------------------------- Net decrease (2,654,102) $(40,165,078) - ---------------------------------------------------------------- Year ended July 31, 2003 - ---------------------------------------------------------------- Class B Shares Amount - ---------------------------------------------------------------- Shares sold 1,840,319 $28,474,156 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 193,767 3,000,465 - ---------------------------------------------------------------- 2,034,086 31,474,621 Shares repurchased (3,081,309) (47,565,208) - ---------------------------------------------------------------- Net decrease (1,047,223) $(16,090,587) - ---------------------------------------------------------------- Year ended July 31, 2004 - ---------------------------------------------------------------- Class C Shares Amount - ---------------------------------------------------------------- Shares sold 72,319 $1,100,638 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 27,782 420,728 - ---------------------------------------------------------------- 100,101 1,521,366 Shares repurchased (346,772) (5,260,747) - ---------------------------------------------------------------- Net decrease (246,671) $(3,739,381) - ---------------------------------------------------------------- Year ended July 31, 2003 - ---------------------------------------------------------------- Class C Shares Amount - ---------------------------------------------------------------- Shares sold 469,861 $7,304,731 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 19,513 302,204 - ---------------------------------------------------------------- 489,374 7,606,935 Shares repurchased (334,567) (5,197,211) - ---------------------------------------------------------------- Net increase 154,807 $2,409,724 - ---------------------------------------------------------------- Year ended July 31, 2004 - ---------------------------------------------------------------- Class M Shares Amount - ---------------------------------------------------------------- Shares sold 4,299 $64,701 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 3,905 59,209 - ---------------------------------------------------------------- 8,204 123,910 Shares repurchased (72,228) (1,094,529) - ---------------------------------------------------------------- Net decrease (64,024) $(970,619) - ---------------------------------------------------------------- Year ended July 31, 2003 - ---------------------------------------------------------------- Class M Shares Amount - ---------------------------------------------------------------- Shares sold 24,513 $380,235 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 3,962 61,418 - ---------------------------------------------------------------- 28,475 441,653 Shares repurchased (23,949) (367,808) - ---------------------------------------------------------------- Net increase 4,526 $73,845 - ---------------------------------------------------------------- Note 5 Regulatory matters and litigation On April 8, 2004, Putnam Management entered into agreements with the Securities and Exchange Commission ("SEC") and the Massachusetts Securities Division representing a final settlement of all charges brought against Putnam Management by those agencies on October 28, 2003 in connection with excessive short-term trading by Putnam employees and, in the case of the charges brought by the Massachusetts Securities Division, by participants in some Putnam-administered 401(k) plans. The settlement with the SEC requires Putnam Management to pay $5 million in disgorgement plus a civil monetary penalty of $50 million, and the settlement with the Massachusetts Securities Division requires Putnam Management to pay $5 million in restitution and an administrative fine of $50 million. The settlements also leave intact the process established under an earlier partial settlement with the SEC under which Putnam Management agreed to pay the amount of restitution determined by an independent consultant, which may exceed the disgorgement and restitution amounts specified above, pursuant to a plan to be developed by the independent consultant. Putnam Management, and not the investors in any Putnam fund, will bear all costs, including restitution, civil penalties and associated legal fees stemming from both of these proceedings. The SEC's and Massachusetts Securities Division's allegations and related matters also serve as the general basis for numerous lawsuits, including purported class action lawsuits filed against Putnam Management and certain related parties, including certain Putnam funds. Putnam Management has agreed to bear any costs incurred by Putnam funds in connection with these lawsuits. Based on currently available information, Putnam Management believes that the likelihood that the pending private lawsuits and purported class action lawsuits will have a material adverse financial impact on the fund is remote, and the pending actions are not likely to materially affect its ability to provide investment management services to its clients, including the Putnam funds. For the period ended July 31, 2004, Putnam Management has assumed $7,417 of legal, shareholder servicing and communication, audit, and Trustee fees incurred by the fund in connection with these matters. Review of these matters by counsel for Putnam Management and by separate independent counsel for the Putnam funds and their independent Trustees is continuing. The fund may experience increased redemptions as a result of these matters, which could result in increased transaction costs and operating expenses. Federal tax information (Unaudited) The fund has designated 98.55% of dividends paid from net investment income during the fiscal year as tax exempt for Federal income tax purposes. Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund hereby designates $3,031,493 as long term capital gain, for its taxable year ended July 31, 2004. The Form 1099 you receive in January 2005 will show the tax status of all distributions paid to your account in calendar 2004. About the Trustees Jameson A. Baxter (9/6/43), Trustee since 1994 Ms. Baxter is the President of Baxter Associates, Inc., a private investment firm that she founded in 1986. Ms. Baxter serves as a Director of ASHTA Chemicals, Inc., Banta Corporation (a printing and digital imaging firm), Ryerson Tull, Inc. (a steel service corporation), Advocate Health Care and BoardSource, formerly the National Center for Nonprofit Boards. She is Chairman Emeritus of the Board of Trustees, Mount Holyoke College, having served as Chairman for five years and as a board member for thirteen years. Until 2002, Ms. Baxter was a Director of Intermatic Corporation (a manufacturer of energy control products). Ms. Baxter has held various positions in investment banking and corporate finance, including Vice President and Principal of the Regency Group, and Vice President of and Consultant to First Boston Corporation. She is a graduate of Mount Holyoke College. Charles B. Curtis (4/27/40), Trustee since 2001 Mr. Curtis is President and Chief Operating Officer of the Nuclear Threat Initiative (a private foundation dealing with national security issues) and serves as Senior Advisor to the United Nations Foundation. Mr. Curtis is a member of the Council on Foreign Relations and the Trustee Advisory Council of the Applied Physics Laboratory, Johns Hopkins University. Until 2003, Mr. Curtis was a member of the Electric Power Research Institute Advisory Council and the University of Chicago Board of Governors for Argonne National Laboratory. Prior to 2002, Mr. Curtis was a Member of the Board of Directors of the Gas Technology Institute and the Board of Directors of the Environment and Natural Resources Program Steering Committee, John F. Kennedy School of Government, Harvard University. Until 2001, Mr. Curtis was a member of the Department of Defense Policy Board and Director of EG&G Technical Services, Inc. (a fossil energy research and development support company). From August 1997 to December 1999, Mr. Curtis was a Partner at Hogan & Hartson L.L.P., a Washington, D.C. law firm. Prior to May 1997, Mr. Curtis was Deputy Secretary of Energy. He served as Chairman of the Federal Energy Regulatory Commission from 1977 to 1981 and has held positions on the staff of the U.S. House of Representatives, the U.S. Treasury Department, and the SEC. John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000 Mr. Hill is Vice Chairman of First Reserve Corporation, a private equity buyout firm that specializes in energy investments in the diversified worldwide energy industry. Mr. Hill is a Director of Devon Energy Corporation, TransMontaigne Oil Company, Continuum Health Partners of New York and various private companies controlled by First Reserve Corporation, as well as a Trustee of TH Lee, Putnam Investment Trust (a closed-end investment company advised by an affiliate of Putnam Management). He is also a Trustee of Sarah Lawrence College. Prior to acquiring First Reserve Corporation in 1983, Mr. Hill held executive positions in investment banking and investment management with several firms and with the federal government, including Deputy Associate Director of the Office of Management and Budget and Deputy Director of the Federal Energy Administration. He is active in various business associations, including the Economic Club of New York, and lectures on energy issues in the United States and Europe. Mr. Hill holds a B.A. degree in Economics from Southern Methodist University and pursued graduate studies there as a Woodrow Wilson Fellow. Ronald J. Jackson (12/17/43), Trustee since 1996 Mr. Jackson is a private investor. Mr. Jackson is President of the Kathleen and Ronald J. Jackson Foundation (a charitable trust). He is also a member of the Board of Overseers of WGBH (a public television and radio station) as well as a member of the Board of Overseers of the Peabody Essex Museum. Mr. Jackson is the former Chairman, President and Chief Executive Officer of Fisher-Price, Inc. (a major toy manufacturer), from which he retired in 1993. He previously served as President and Chief Executive Officer of Stride-Rite, Inc. (a manufacturer and distributor of footwear) and of Kenner Parker Toys, Inc. (a major toy and game manufacturer). Mr. Jackson was President of Talbots, Inc. (a distributor of women's apparel) and has held financial and marketing positions with General Mills, Inc. and Parker Brothers (a toy and game company). Mr. Jackson is a graduate of the University of Michigan Business School. Paul L. Joskow (6/30/47), Trustee since 1997 Dr. Joskow is the Elizabeth and James Killian Professor of Economics and Management, and Director of the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology. Dr. Joskow serves as a Director of National Grid Transco (a UK-based holding company with interests in electric and gas transmission and distribution and telecommunications infrastructure) and TransCanada Corporation (an energy company focused on natural gas transmission and power services). He also serves on the board of the Whitehead Institute for Biomedical Research (a non-profit research institution) and has been President of the Yale University Council since 1993. Prior to February 2002, he was a Director of State Farm Indemnity Company (an automobile insurance company), and, prior to March 2000, he was a Director of New England Electric System (a public utility holding company). Dr. Joskow has published five books and numerous articles on topics in industrial organization, government regulation of industry, and competition policy. He is active in industry restructuring, environmental, energy, competition and privatization policies -- serving as an advisor to governments and corporations worldwide. Dr. Joskow holds a Ph.D. and M. Phil from Yale University and B.A. from Cornell University. Elizabeth T. Kennan (2/25/38), Trustee since 1992 Dr. Kennan is a Partner of Cambus-Kenneth Farm (thoroughbred horse and cattle breeding). She is President Emeritus of Mount Holyoke College. Dr. Kennan served as Chairman and is now Lead Director of Northeast Utilities and is a Director of Talbots, Inc. She has served as Director on a number of other boards, including Bell Atlantic, Chastain Real Estate, Shawmut Bank, Berkshire Life Insurance and Kentucky Home Life Insurance. She is a Trustee of the National Trust for Historic Preservation, of Centre College and of Midway College in Midway, Kentucky. She is also a member of The Trustees of Reservations. Dr. Kennan has served on the oversight committee of the Folger Shakespeare Library, as President of Five Colleges Incorporated, as a Trustee of Notre Dame University and is active in various educational and civic associations. As a member of the faculty of Catholic University for twelve years, until 1978, Dr. Kennan directed the post-doctoral program in Patristic and Medieval Studies, taught history and published numerous articles. Dr. Kennan holds a Ph.D. from the University of Washington in Seattle, an M.S. from St. Hilda's College at Oxford University and an A.B. from Mount Holyoke College. She holds several honorary doctorates. John H. Mullin, III (6/15/41), Trustee since 1997 Mr. Mullin is the Chairman and CEO of Ridgeway Farm (a limited liability company engaged in timber and farming). Mr. Mullin serves as a Director of The Liberty Corporation (a broadcasting company), Progress Energy, Inc. (a utility company, formerly known as Carolina Power & Light) and Sonoco Products, Inc. (a packaging company). Mr. Mullin is Trustee Emeritus of The National Humanities Center and Washington & Lee University, where he served as Chairman of the Investment Committee. Prior to May 2001, he was a Director of Graphic Packaging International Corp. Prior to February 2004, he was a Director of Alex Brown Realty, Inc. Mr. Mullin is also a past Director of Adolph Coors Company; ACX Technologies, Inc.; Crystal Brands, Inc.; Dillon, Read & Co., Inc.; Fisher-Price, Inc.; and The Ryland Group, Inc. Mr. Mullin is a graduate of Washington & Lee University and The Wharton Graduate School, University of Pennsylvania. Robert E. Patterson (3/15/45), Trustee since 1984 Mr. Patterson is Senior Partner of Cabot Properties, L.P. and Chairman of Cabot Properties, Inc. Mr. Patterson serves as Chairman of the Joslin Diabetes Center and as a Director of Brandywine Trust Company. Prior to June 2003, he was a Trustee of Sea Education Association. Prior to December 2001, he was President and Trustee of Cabot Industrial Trust (a publicly traded real estate investment trust). Prior to February 1998, he was Executive Vice President and Director of Acquisitions of Cabot Partners Limited Partnership (a registered investment adviser involved in institutional real estate investments). And, prior to 1990, he served as Executive Vice President of Cabot, Cabot & Forbes Realty Advisors, Inc. (the predecessor company of Cabot Partners) and as a Senior Vice President of the Beal Companies (a real estate management, investment and development firm). Mr. Patterson practiced law and held various positions in state government and was the founding Executive Director of the Massachusetts Industrial Finance Agency. Mr. Patterson is a graduate of Harvard College and Harvard Law School. W. Thomas Stephens (9/2/42), Trustee since 1997 Mr. Stephens serves on a number of corporate boards. Effective November 2004, Mr. Stephens is expected to become Chief Executive Officer of Boise Cascade, L.L.C. (a paper, forest products and timberland assets company). Mr. Stephens serves as a Director of Xcel Energy Incorporated (a public utility company) and TransCanada Pipelines Limited. Until 2004, Mr. Stephens was a Director of Qwest Communications and Norske Canada, Inc. (a paper manufacturer). Until 2003, Mr. Stephens was a Director of Mail-Well, Inc. (a diversified printing company). He served as Chairman of Mail-Well until 2001 and as CEO of MacMillan-Bloedel, Ltd. (a forest products company) until 1999. Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of Johns Manville Corporation. He holds B.S. and M.S. degrees from the University of Arkansas. George Putnam, III* (8/10/51), Trustee since 1984 and President since 2000 Mr. Putnam is President of New Generation Research, Inc. (a publisher of financial advisory and other research services), and of New Generation Advisers, Inc. (a registered investment advisor to private funds). Mr. Putnam founded the New Generation companies in 1986. Mr. Putnam is a Director of The Boston Family Office, LLC (a registered investment adviser). He is a Trustee of St. Mark's School, Shore Country Day School, and until 2002 was a Trustee of the Sea Education Association. Mr. Putnam previously worked as an attorney with the law firm of Dechert LLP (formerly known as Dechert Price & Rhoads) in Philadelphia. He is a graduate of Harvard College, Harvard Business School and Harvard Law School. A.J.C. Smith* (4/13/34), Trustee since 1986 Mr. Smith is the Chairman of Putnam Investments and Director of and Consultant to Marsh & McLennan Companies, Inc. Mr. Smith is also a Director of Trident Corp. (a limited partnership with over thirty institutional investors). He is also a Trustee of the Carnegie Hall Society, the Educational Broadcasting Corporation, and the National Museums of Scotland. He is Chairman of the Central Park Conservancy and a Member of the Board of Overseers of the Joan and Sanford I. Weill Graduate School of Medical Sciences of Cornell University. Prior to May 2000 and November 1999, Mr. Smith was Chairman and CEO, respectively, of Marsh & McLennan Companies, Inc. The address of each Trustee is One Post Office Square, Boston, MA 02109. As of July 31, 2004, there were 102 Putnam Funds. Each Trustee serves for an indefinite term, until his or her resignation, retirement at age 72, death, or removal. * Trustees who are or may be deemed to be "interested persons" (as defined in the Investment Company Act of 1940) of the fund, Putnam Management, Putnam Retail Management, or Marsh & McLennan Companies, Inc., the parent company of Putnam, LLC and its affiliated companies. Messrs. Putnam, III, and Smith are deemed "interested persons" by virtue of their positions as officers of the fund, Putnam Management, Putnam Retail Management or Marsh & McLennan Companies, Inc. and as shareholders of Marsh & McLennan Companies, Inc. George Putnam, III is the President of your fund and each of the other Putnam funds. Mr. Smith serves as a Director of and Consultant to Marsh & McLennan Companies, Inc. and as Chairman of Putnam Investments. Officers In addition to George Putnam, III, the other officers of the fund are shown below: Charles E. Porter (7/26/38) Executive Vice President, Associate Treasurer and Principal Executive Officer Since 1989 Managing Director, Putnam Investments and Putnam Management Jonathan S. Horwitz (6/4/55) Senior Vice President and Treasurer Since 2004 Managing Director, Putnam Investments Steven D. Krichmar (6/27/58) Vice President and Principal Financial Officer Since 2002 Senior Managing Director, Putnam Investments. Prior to July 2001, Partner, PricewaterhouseCoopers LLP Michael T. Healy (1/24/58) Assistant Treasurer and Principal Accounting Officer Since 2000 Managing Director, Putnam Investments Beth S. Mazor (4/6/58) Vice President Since 2002 Senior Vice President, Putnam Investments Daniel T. Gallagher (2/27/62) Vice President and Legal and Compliance Liaison Officer Since 2004 Vice President, Putnam Investments. Prior to 2004, Associate, Ropes & Gray LLP; prior to 2000, Law Clerk, Massachusetts Supreme Judicial Court Francis J. McNamara, III (8/19/55) Vice President and Chief Legal Officer Since 2004 Senior Managing Director, Putnam Investments, Putnam Management and Putnam Retail Management. Prior to 2004, General Counsel, State Street Research & Management Company James P. Pappas (2/24/53) Vice President Since 2004 Managing Director, Putnam Investments and Putnam Management. From 2001 to 2002, Chief Operating Officer, Atalanta/Sosnoff Management Corporation; prior to 2001, President and Chief Executive Officer, UAM Investment Services, Inc. Richard S. Robie, III (3/30/60) Vice President Since 2004 Senior Managing Director, Putnam Investments, Putnam Management and Putnam Retail Management. Prior to 2003, Senior Vice President, United Asset Management Corporation Mark C. Trenchard (6/5/62) Vice President and BSA Compliance Officer Since 2002 Senior Vice President, Putnam Investments Judith Cohen (6/7/45) Clerk and Assistant Treasurer Since 1993 Clerk and Assistant Treasurer, The Putnam Funds The address of each Officer is One Post Office Square, Boston, MA 02109. Putnam puts your interests first In January, Putnam announced a number of voluntary initiatives designed to reduce fund expenses, provide investors with more useful information, and help safeguard the interests of all Putnam investors. For details, visit www.putnaminvestments.com. Cost-cutting initiatives Reduced sales charges Effective immediately, the maximum sales charge for class A shares has been reduced to 5.25% for equity funds (formerly 5.75%) and 4.50% for most income funds (formerly 4.75%).* Lower class B purchase limit To help ensure that investors are in the most cost-effective share class, the maximum amount that can be invested in class B shares has been reduced to $100,000. (Larger trades or accumulated amounts will be directed to class A shares.) Ongoing expenses will be limited During calendar 2004, total ongoing expenses, including management fees for all funds, will be maintained at or below the average of each fund's industry peers in its Lipper load-fund universe. For more information, please see the Statement of Additional information. Additional measures are being taken to reduce expenses for shareholders in the six global and international funds that had short-term trading issues. Improved disclosure Putnam fund prospectuses and shareholder reports are being revised to disclose additional information that will help shareholders compare funds and weigh their costs and risks along with their potential benefits. Shareholders will find easy-to-understand information about fund expense ratios, portfolio manager compensation, risk comparisons, brokerage commissions, and employee and trustee ownership of Putnam funds. Disclosure of breakpoint discounts is also being enhanced to alert investors to potential cost savings. Protecting investors' interests New short-term trading fee introduced To discourage short-term trading, which can interfere with a fund's long-term strategy, a 2% short-term trading fee will be imposed on any Putnam fund shares redeemed or exchanged within five calendar days of purchase. * The maximum sales charge for class A shares of Putnam U.S. Intermediate Government Income Fund remains 3.25%. Fund information One of the largest mutual fund families in the United States, Putnam Investments has a heritage of investment leadership dating back to Judge Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition and practice since 1830. Founded over 65 years ago, Putnam Investments was built around the concept that a balance between risk and reward is the hallmark of a well-rounded financial program. We presently manage over 100 mutual funds in growth, value, blend, fixed income, and international. Investment Manager Putnam Investment Management, LLC One Post Office Square Boston, MA 02109 Marketing Services Putnam Retail Management One Post Office Square Boston, MA 02109 Custodian Putnam Fiduciary Trust Company Legal Counsel Ropes & Gray LLP Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP Trustees John A. Hill, Chairman Jameson Adkins Baxter Charles B. Curtis Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan John H. Mullin, III Robert E. Patterson George Putnam, III A.J.C. Smith W. Thomas Stephens Officers George Putnam, III President Charles E. Porter Executive Vice President, Associate Treasurer and Principal Executive Officer Jonathan S. Horwitz Senior Vice President and Treasurer Steven D. Krichmar Vice President and Principal Financial Officer Michael T. Healy Assistant Treasurer and Principal Accounting Officer Beth S. Mazor Vice President Daniel T. Gallagher Vice President and Legal and Compliance Liaison Officer James P. Pappas Vice President Richard S. Robie, III Vice President Mark C. Trenchard Vice President and BSA Compliance Officer Francis J. McNamara, III Vice President and Chief Legal Officer Judith Cohen Clerk and Assistant Treasurer This report is for the information of shareholders of Putnam Tax-Free Insured Fund. It may also be used as sales literature when preceded or accompanied by the current prospectus, the most recent copy of Putnam's Quarterly Performance Summary, and Putnam's Quarterly Ranking Summary. For more recent performance, please visit www.putnaminvestments.com. Investors should carefully consider the investment objective, risks, charges, and expenses of a fund, which are described in its prospectus. For this and other information or to request a prospectus, call 1-800-225-1581 toll free. Please read the prospectus carefully before investing. The fund's Statement of Additional Information contains additional information about the fund's Trustees and is available without charge upon request by calling 1-800-225-1581. [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 PRSRT STD U.S. POSTAGE PAID PUTNAM INVESTMENTS Call 1-800-225-1581 or visit our Web site www.putnaminvestments.com. AN043-216498 9/04 Not FDIC Insured May Lose Value No Bank Guarantee Item 2. Code of Ethics: - ----------------------- All officers of the Fund, including its principal executive, financial and accounting officers, are employees of Putnam Investment Management, LLC, the Fund's investment manager. As such they are subject to a comprehensive Code of Ethics adopted and administered by Putnam Investments which is designed to protect the interests of the firm and its clients. The Fund has adopted a Code of Ethics which incorporates the Code of Ethics of Putnam Investments with respect to all of its officers and Trustees who are employees of Putnam Investment Management, LLC. For this reason, the Fund has not adopted a separate code of ethics governing its principal executive, financial and accounting officers. Item 3. Audit Committee Financial Expert: - ----------------------------------------- The Funds' Audit and Pricing Committee is comprised solely of Trustees who are "independent" (as such term has been defined by the Securities and Exchange Commission ("SEC") in regulations implementing Section 407 of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe that each of the members of the Audit and Pricing Committee also possess a combination of knowledge and experience with respect to financial accounting matters, as well as other attributes, that qualify them for service on the Committee. In addition, the Trustees have determined that all members of the Funds' Audit and Pricing Committee meet the financial literacy requirements of the New York Stock Exchange's rules and that Mr. Patterson and Mr. Stephens qualify as "audit committee financial experts" (as such term has been defined by the Regulations) based on their review of their pertinent experience and education. Certain other Trustees, although not on the Audit and Pricing Committee, would also qualify as "audit committee financial experts." The SEC has stated that the designation or identification of a person as an audit committee financial expert pursuant to this Item 3 of Form N-CSR does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit and Pricing Committee and the Board of Trustees in the absence of such designation or identification. Item 4. Principal Accountant Fees and Services: - ----------------------------------------------- The following table presents fees billed in each of the last two fiscal years for services rendered to the fund by the fund's independent auditors: Audit Audit-Related Tax All Other Fiscal year ended Fees Fees Fees Fees - ----------------- ---------- ------------- ------- --------- July 31, 2004 $47,085* $-- $5,912 $88 July 31, 2003 $50,317 $-- $5,598 $-- * Includes fees of $ 376 billed by the fund's independent auditor to the fund for audit procedures necessitated by regulatory and litigation matters. These fees were reimbursed to the fund by Putnam. For the fiscal years ended July 31, 2004 and July 31, 2003, the fund's independent auditors billed aggregate non-audit fees in the amounts of $139,628 and $79,193, respectively, to the fund, Putnam Management and any entity controlling, controlled by or under common control with Putnam Management that provides ongoing services to the fund. Audit Fees represents fees billed for the fund's last two fiscal years. Audit-Related Fees represents fees billed in the fund's last two fiscal years for services traditionally performed by the fund's auditor, including accounting consultation for proposed transactions or concerning financial accounting and reporting standards and other audit or attest services not required by statute or regulation. Tax Fees represent fees billed in the fund's last two fiscal years for tax compliance, tax planning and tax advice services. Tax planning and tax advice services include assistance with tax audits, employee benefit plans and requests for rulings or technical advice from taxing authorities. All Other Fees Fees represent fees billed for services relating to fund expense processing. Pre-Approval Policies of the Audit and Pricing Committee. The Audit and Pricing Committee of the Putnam funds has determined that, as a matter of policy, all work performed for the funds by the funds' independent auditors will be pre-approved by the Committee and will generally not be subject to pre-approval procedures. Under certain circumstances, the Audit and Pricing Committee believes that it may be appropriate for Putnam Investment Management, LLC ("Putnam Management") and certain of its affiliates to engage the services of the funds' independent auditors, but only after prior approval by the Committee. Such requests are required to be submitted in writing to the Committee and explain, among other things, the nature of the proposed engagement, the estimated fees, and why this work must be performed by that particular audit firm. The Committee will review the proposed engagement at its next meeting. Since May 6, 2003, all work performed by the independent auditors for the funds, Putnam Management and any entity controlling, controlled by or under common control with Putnam Management that provides ongoing services to the fund was pre-approved by the Committee or a member of the Committee pursuant to the pre-approval policies discussed above. Prior to that date, the Committee had a general policy to pre-approve the independent auditor's engagements for non-audit services with the funds, Putnam Management and any entity controlling, controlled by or under common control with Putnam Management that provides ongoing services to the fund. The following table presents fees billed by the fund's principal auditor for services required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X. Audit-Related Tax All Other Total Non- Fiscal year ended Fees Fees Fees Audit Fees - ----------------- ------------- ---- --------- ---------- June 30, 2004 $-- $-- $-- $-- June 30, 2003 $-- $-- $-- $-- Item 5. Audit Committee: Not applicable - ------------------------- Items 6. Schedule of Investments: Not applicable - --------------------------------- Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End - ------------------------------------------------------------------------- Management Investment Companies: Not applicable -------------------------------- Item 8. Purchases of Equity Securities by Closed-End Management Investment - -------------------------------------------------------------------------- Companies and Affiliated Purchasers: Not applicable ------------------------------------ Item 9. Submission of Matters to a Vote of Security Holders: - ------------------------------------------------------------ Not applicable Item 10. Controls and Procedures: - -------------------------------- (a) The registrant's principal executive officer and principal financial officer have concluded, based on their evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report, that the design and operation of such procedures are generally effective to provide reasonable assurance that information required to be disclosed by the registrant in this report is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. (b) Changes in internal control over financial reporting: Not applicable Item 11. Exhibits: - ------------------ (a) The Code of Ethics of The Putnam Funds, which incorporates the Code of Ethics of Putnam Investments, is filed herewith. (b) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2 under the Investment Company Act of 1940, as amended, and the officer certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002 are filed herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NAME OF REGISTRANT By (Signature and Title): /s/Michael T. Healy -------------------------- Michael T. Healy Principal Accounting Officer Date: September 27, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title): /s/Charles E. Porter --------------------------- Charles E. Porter Principal Executive Officer Date: September 27, 2004 By (Signature and Title): /s/Steven D. Krichmar --------------------------- Steven D. Krichmar Principal Financial Officer Date: September 27, 2004 Putnam Tax-Free High Yield Fund Item 1. Report to Stockholders: - ------------------------------- The following is a copy of the report transmitted to stockholders pursuant to Rule 30e-1 under the Investment Company Act of 1940: ANNUAL REPORT ON PERFORMANCE AND OUTLOOK 7-31-04 [GRAPHIC OMITTED: HARMONICA] [SCALE LOGO OMITTED] From the Trustees [GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III] John A. Hill and George Putnam, III Dear Fellow Shareholder: Over the past several months, Putnam has introduced a number of reforms for the benefit of shareholders, including increasing the amount of disclosure for our funds. We would like to call your attention to new information now being included in shareholder reports. Following the performance tables in the Performance Summary, you can find expense and risk comparisons as well as portfolio turnover information for your fund. The expense information lets you estimate the amount you have paid for ongoing expenses such as management fees and distribution (or 12b-1) fees and lets you compare these expenses with the average expense level for your fund's peer group, as tracked by Lipper, an independent fund-rating company. The risk comparison information illustrates your fund's risk relative to similar funds as tracked by Morningstar, another independent fund-rating company. The portfolio turnover information explains how the rate at which a fund buys and sells portfolio securities might affect its return and its taxable distributions to shareholders. It also compares your fund's portfolio turnover rate with that of its industry peers, as measured by Lipper. We believe all of this information can be valuable to you and your financial advisor when you make decisions about your financial program. Putnam Tax-Free High Yield Fund's fiscal year, which ended July 31, 2004, was favorable for high-yield municipal bonds and for the fund. As interest rates drifted irregularly down and the economy generally gained in strength, bond prices on the lower end of the quality spectrum rose more than higher-quality issues. Furthermore, capital appreciation from two prerefunded bonds and some hospital bond holdings enabled your fund to deliver competitive returns. In the following pages, the management team discusses market conditions, their strategies over the period, and their outlook for the coming months. Respectfully yours, /S/ JOHN A. HILL /S/ GEORGE PUTNAM, III John A. Hill George Putnam, III Chairman of the Trustees President of the Funds September 15, 2004 Report from Fund Management Fund highlights * Putnam Tax-Free High Yield Fund's total return for the fiscal year ended July 31, 2004, was 6.87% for class A shares at net asset value (NAV) and 1.81% at public offering price (POP). * Strong performance from two bonds that were prerefunded and from several hospital issues helped keep the fund's NAV performance ahead of its benchmark, the Lehman Municipal Bond Index, which returned 5.78% for the 12-month period. * For the same reasons, the fund's return at NAV was also slightly above the average return for its Lipper peer group, High Yield Municipal Debt Funds, which averaged 6.38% for the period. * See the Performance Summary beginning on page 7 for additional fund performance, comparative performance, and Lipper data. Performance commentary Market conditions generally favored high-yield bonds during the 12 months ended July 31, 2004. Interest rates drifted irregularly downward during much of the year, sending bond prices up. Since lower-quality bonds tend to be more sensitive to economic fluctuations, the fund's emphasis on these bonds during most of the period provided a favorable backdrop for strong performance. Our emphasis on bonds maturing in the 15- to 20-year range was a positive during much of the year. In addition, appreciation from two bonds that were advance refunded and several hospital issues helped to give the fund a performance edge. Two health-care facility bonds detracted from performance, but overall, the positives outweighed the negatives for the period. FUND PROFILE Putnam Tax-Free High Yield Fund seeks to provide a high level of current income free from federal income tax by investing in a diversified portfolio of lower-rated and investment-grade municipal bonds. The fund is intended and may be appropriate for investors seeking tax-advantaged income who are willing to accept some credit risk. Market overview Municipal bond yields -- which move in the opposite direction of their prices -- were volatile throughout the fiscal year. Yields trended irregularly downward for much of the period but corrected sharply from mid March through mid May in response to stronger economic data, before trending downward again toward the end of the fiscal year. As of July 31, 2004, yields on 10-year AAA-rated municipal bonds were slightly lower than they were 12 months ago. Overall, the yield curve, which traces the difference in yield of bonds with different maturities, flattened during the fiscal year, as rates on bonds maturing in the one- to five-year range rose, while rates on bonds maturing in 15 to 30 years fell. The best-performing area of the curve was the 15-20 year range. At the same time, as confidence in the economy mounted, credit spreads generally narrowed, which means that the difference between higher- and lower-quality bonds diminished. The ratio of municipal bond yields to Treasury yields fell from 92% at the beginning of the fiscal year to 84% at year-end, after touching a low of about 80% in December. However, surprisingly strong economic data released in March brought back concerns about inflation. At the end of June, the Federal Reserve Board raised the federal funds rate (the rate banks charge one another on overnight loans) from 1.0% to 1.25%, and followed this with an increase to 1.50% just after the end of the period. These actions, in our view, demonstrate that the Fed is currently more concerned about maintaining orderly, non-inflationary economic growth than it is about recession. Moreover, yields are still historically low, and the Fed's moves have a more immediate influence on the short end of the market than on the longer-term bonds that make up the majority of your fund's holdings. - ------------------------------------------------------------------------------- MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 7/31/04 - ------------------------------------------------------------------------------- Bonds - ------------------------------------------------------------------------------- Lehman Municipal Bond Index (tax-exempt bonds) 5.78% - ------------------------------------------------------------------------------- Lehman Aggregate Bond Index (broad bond market) 4.84% - ------------------------------------------------------------------------------- Lehman Government Bond Index (U.S. Treasury and agency securities) 3.86% - ------------------------------------------------------------------------------- Lehman Intermediate Treasury Bond Index (intermediate-maturity U.S. Treasury bonds) 2.40% - ------------------------------------------------------------------------------- Equities - ------------------------------------------------------------------------------- S&P 500 Index (broad stock market) 13.17% - ------------------------------------------------------------------------------- S&P Utilities Index (utilities stocks) 21.24% - ------------------------------------------------------------------------------- Russell 2000 Growth Index (small-company growth stocks) 11.32% - ------------------------------------------------------------------------------- These indexes provide an overview of performance in different market sectors for the 12 months ended 7/31/04. - ------------------------------------------------------------------------------- Strategy overview Adjusting the fund's duration to suit changing market conditions is one of our risk-management tools. Duration is a measure of a fund's sensitivity to changes in interest rates. A short duration may protect principal when interest rates are rising, but it can reduce the fund's appreciation potential when rates fall. In August 2003, we shifted the portfolio from a short to a neutral duration, striving to make the fund about equal to its benchmark in sensitivity. We reduced the fund's duration again in the fall and winter months, as increasing evidence of economic growth rekindled inflation concerns and the prospect of rising interest rates. Since bond yields generally declined in the first half of the year, a longer duration might have benefited the fund more, in hindsight, and our move to shorten duration in the fall proved to be somewhat premature. However, when rates spiked dramatically in March and April, this positioning paid off. Since then, we have allowed the fund's duration to edge back toward neutral, although it is still slightly defensive because we expect rates to rise further in coming months. We took the opportunity afforded by strong demand for higher-yielding municipal bonds to sell into strength where appropriate. We sold about half the fund's airline-related bonds during the year as prices in the sector recovered. We may continue to reduce holdings this sector in the coming months, as our goal is to hold only small positions in what we believe are the strongest airline companies. [GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION COMPARED] THE FUND'S MATURITY AND DURATION COMPARED as of 7/31/03 as of 1/31/04 as of 7/31/04 Average effective maturity in years 12.0 10.0 9.3 Duration in years 6.9 6.0 5.4 Footnote reads: This chart compares changes in the fund's duration (a measure of its sensitivity to interest-rate changes) and its average effective maturity (a weighted average of the holdings' maturities). Average effective maturity also takes into account put and call features, where applicable, and reflects prepayments for mortgage-backed securities. How fund holdings affected performance Airline-related industrial development bonds (IDBs) had a significantly positive impact on performance, although these issues gave up some of their strong gains toward the end of the period. IDBs are municipal bonds backed by the credit of the company benefiting from the financing, not by the issuing municipality. During the summer of 2003, the airline industry continued to feel the effects of declining air traffic, high fixed costs, and high-profile bankruptcies. However, as geopolitical tensions eased and the global economy began to show signs of increased growth, investors became more optimistic about prospects for airline-industry fundamentals. This led to a sharp rise in the price of airline-backed IDBs, as many of these bonds recovered from distressed price levels. In the course of the year, we sold all of the fund's IDBs issued for Delta Airlines, US Air, and United Airlines. We also trimmed positions in Northwest Airlines and British Airways. Since these bonds had been in the portfolio for some time, the sales did not result in a profit based on the acquisition cost, but the fund was able to sell on strength rather than in distress. Two bonds issued on behalf of health-care facilities contributed positively to performance during the year, following their advance refundings. Just as homeowners refinance mortgages when interest rates decline, a refunded bond is created when municipalities refinance older bonds they issued when rates were higher. Unlike a home mortgage, however, the original municipal bond remains outstanding, with a shorter maturity, as the call date effectively becomes the new maturity date. The municipality uses the proceeds of the older bond to buy a portfolio of U.S. Treasury securities, creating an escrow account that provides the backing for interest and principal payments on the refunded bonds. Refunded bonds are generally considered equivalent to an AAA-rated bond in quality. The bonds issued by the New Jersey Economic Development Authority for Winchester Gardens and by the Massachusetts Health and Education Facilities Authority for Winchester Hospital will now be called in 2006 and 2010, respectively. [GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW] CREDIT QUALITY OVERVIEW Aaa (12.8%) A (8.8%) Baa (33.8%) Ba (24.0%) B (11.8%) Caa (1.3%) D (1.5%) VMIG1 (6.0%) Footnote reads: As a percentage of market value as of 7/31/04. A bond rated Baa or higher is considered investment grade. The chart reflects Moody's ratings; percentages may include unrated bonds considered by Putnam Management to be of comparable quality. Credit upgrades are another positive development for high-yield bondholders. Two of the fund's hospital holdings experienced improved operating and financial performance during the year. One is Allegheny County Hospital Development Authority bonds issued for West Pennsylvania Allegheny Health System. At the end of the fund's fiscal year, Standard & Poor's changed its outlook on this health system from "stable" to "positive," reflecting its improved situation. Another is Lufkin, Texas, Health Facilities Development Corporation bonds issued for Memorial Health System of East Texas. Standard & Poor's upgraded these bonds from BBB- to BBB in June. On the downside, two long-term care bonds detracted from performance. The price of Pima County, Arizona, Industrial Development Authority for Handmaker Jewish Services declined, reflecting the project's weakened financial position. The bonds were issued originally in 2000 to finance the repositioning of one of Handmaker's facilities located in Pima, Arizona. The project directors have not managed the facility's expenses successfully, which has led to a weak cash position. The second of our underperforming long-term health-care bonds was issued by the Louisiana Local Government Environmental Facilities Community Development Authority for St. James Place of Baton Rouge. St. James Place, a retirement community that has struggled both operationally and financially for several years, is currently negotiating with bondholders for debt relief. Please note that all holdings discussed in this report are subject to review in accordance with the fund's investment strategy and may vary in the future. The fund's management team The fund is managed by the Putnam Tax Exempt Fixed-Income Team. The members of the team are David Hamlin (Portfolio Leader), Paul Drury (Portfolio Member), Susan McCormack (Portfolio Member), James St. John (Portfolio Member), and Kevin Cronin. The outlook for your fund The following commentary reflects anticipated developments that could affect your fund over the next six months, as well as your management team's plans for responding to them. Early in 2004, lingering unemployment had been an anomaly in an otherwise robust economic recovery. However, in early April, employment data began to show a marked improvement in job creation. We believe the economy will continue to grow -- albeit at a slower rate -- and that the underlying strength in the economy will foster higher interest rates in the future. We also expect the Fed to raise the federal funds rate several times between now and June 2005. This should contribute to further flattening in the yield curve, as we believe short-term interest rates are likely to rise faster than long-term rates. In keeping with our views, we are now managing the fund's duration somewhat defensively. We believe the credit quality of higher-yielding municipal bonds will improve gradually as the economy improves. Although yield spreads between high- and low-quality municipal bonds have already narrowed, we believe they will remain attractive and that prices could rise farther. As a result, we believe credit risk is worth taking in appropriate amounts, while we continue to seek diversification by sector and issuer. As always, we will monitor market conditions as we pursue a high level of tax-free income and seek to manage the fund's risk exposure. The views expressed in this report are exclusively those of Putnam Management. They are not meant as investment advice. Capital gains, if any, are taxable for federal and, in most cases, state purposes. For some investors, investment income may be subject to the federal alternative minimum tax. Income from federally exempt funds may be subject to state and local taxes. Mutual funds that invest in bonds are subject to certain risks, including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Tax-free funds may not be suitable for IRAs and other non-taxable accounts. Performance summary This section shows your fund's performance during its fiscal year, which ended July 31, 2004. In accordance with regulatory requirements, we also include performance for the most current calendar quarter-end. Performance should always be considered in light of a fund's investment strategy. Data represents past performance. Past performance does not guarantee future results. More recent returns may be less or more than those shown. Investment return and principal value will fluctuate and you may have a gain or a loss when you sell your shares. For the most recent month-end performance, please visit www.putnaminvestments.com.
- -------------------------------------------------------------------------------------------------------------- TOTAL RETURN FOR PERIODS ENDED 7/31/04 - -------------------------------------------------------------------------------------------------------------- Class A Class B Class C Class M (inception dates) (9/20/93) (9/9/85) (2/1/99) (12/29/94) - -------------------------------------------------------------------------------------------------------------- NAV POP NAV CDSC NAV CDSC NAV POP - -------------------------------------------------------------------------------------------------------------- 1 year 6.87% 1.81% 6.16% 1.16% 6.11% 5.11% 6.56% 3.10% - -------------------------------------------------------------------------------------------------------------- 5 years 18.47 12.89 15.24 13.47 13.90 13.90 16.62 12.87 Annual average 3.45 2.45 2.88 2.56 2.64 2.64 3.12 2.45 - -------------------------------------------------------------------------------------------------------------- 10 years 58.72 51.20 49.90 49.90 46.43 46.43 53.63 48.66 Annual average 4.73 4.22 4.13 4.13 3.89 3.89 4.39 4.04 - -------------------------------------------------------------------------------------------------------------- Annual average (life of fund) 6.81 6.53 6.45 6.45 5.95 5.95 6.59 6.41 - --------------------------------------------------------------------------------------------------------------
Performance assumes reinvestment of distributions and does not account for taxes. Returns at public offering price (POP) for class A and M shares reflect a sales charge of 4.75% and 3.25%, respectively (which for class A shares does not reflect a reduction in sales charges that went into effect on January 28, 2004; if this reduction had been in place for all periods indicated, returns would have been higher). Class B share returns reflect the applicable contingent deferred sales charge (CDSC), which is 5% in the first year, declining to 1% in the sixth year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the first year that is eliminated thereafter. Performance for class A, C, and M shares is derived from the historical performance of class B shares for the periods prior to their inception, adjusted for the applicable sales charge (or CDSC) and higher or lower operating expenses for such shares. For a portion of the period, this fund limited expenses, without which returns would have been lower. A 2% short-term trading fee will be applied to shares exchanged or sold within 5 days of purchase. - ------------------------------------------------------------- COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/04 - ------------------------------------------------------------- Lipper High Yield Lehman Municipal Debt Municipal Funds category Bond Index average* - ------------------------------------------------------------- 1 year 5.78% 6.38% - ------------------------------------------------------------- 5 years 34.28 21.97 Annual average 6.07 3.99 - ------------------------------------------------------------- 10 years 85.64 62.83 Annual average 6.38 4.94 - ------------------------------------------------------------- Annual average (life of fund) 7.88 6.76 - ------------------------------------------------------------- Index and Lipper results should be compared to fund performance at net asset value. * Over the 1-, 5-, and 10-year periods ended 7/31/04, there were 80, 59, and 27 funds, respectively, in this Lipper category. [GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT] CHANGE IN THE VALUE OF A $10,000 INVESTMENT Cumulative total return of a $10,000 investment, 7/31/94 to 7/31/04 Fund's class A Lehman Municipal shares at POP Bond Index 7/31/94 9,550 10,000 7/31/95 10,005 10,787 7/31/96 10,794 11,499 7/31/97 11,672 12,678 7/31/98 12,490 13,438 7/31/99 12,762 13,824 7/31/00 12,807 14,420 7/31/01 13,695 15,874 7/31/02 13,927 16,939 7/31/03 14,124 17,549 7/31/04 $15,120 $18,564 Footnote reads: Past performance does not indicate future results. At the end of the same time period, a $10,000 investment in the fund's class B and class C shares would have been valued at $14,990 and $14,643, respectively, and no contingent deferred sales charges would apply. A $10,000 investment in the fund's class M shares would have been valued at $15,363 ($14,866 at public offering price). See first page of performance section for performance calculation method.
- ----------------------------------------------------------------------------------------------------------------- PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 7/31/04 - ----------------------------------------------------------------------------------------------------------------- Class A Class B Class C Class M Distributions (number) 12 12 12 12 - ----------------------------------------------------------------------------------------------------------------- Income 1 $0.680440 $0.599949 $0.580436 $0.642928 - ----------------------------------------------------------------------------------------------------------------- Capital gains 1 -- -- -- -- - ----------------------------------------------------------------------------------------------------------------- Total $0.680440 $0.599949 $0.580436 $0.642928 - ----------------------------------------------------------------------------------------------------------------- Share value: NAV POP NAV NAV NAV POP - ----------------------------------------------------------------------------------------------------------------- 7/31/03 $12.31 $12.92 $12.33 $12.31 $12.31 $12.72 - ----------------------------------------------------------------------------------------------------------------- 7/31/04 12.46 13.05* 12.48 12.47 12.46 12.88 - ----------------------------------------------------------------------------------------------------------------- Current return (end of period) - ----------------------------------------------------------------------------------------------------------------- Current dividend rate 2 5.26% 5.02% 4.61% 4.46% 4.96% 4.80% - ----------------------------------------------------------------------------------------------------------------- Taxable equivalent 3 8.09 7.72 7.09 6.86 7.63 7.38 - ----------------------------------------------------------------------------------------------------------------- Current 30-day SEC yield (with expense limitation) 4 4.65 4.44 4.00 3.85 4.35 4.21 - ----------------------------------------------------------------------------------------------------------------- Taxable equivalent 3,4 7.15 6.83 6.15 5.92 6.69 6.48 - ----------------------------------------------------------------------------------------------------------------- Current 30-day SEC yield (without expense limitation) 4.61 4.40 3.96 3.81 4.31 4.17 - ----------------------------------------------------------------------------------------------------------------- * Reflects a reduction in sales charges that took effect on January 28, 2004. 1 Capital gains, if any, are taxable for federal and, in most cases, state purposes. For some investors, investment income may be subject to the federal alternative minimum tax. Income from federally exempt funds may be subject to state and local taxes. 2 Most recent distribution, excluding capital gains, annualized and divided by NAV or POP at end of period. 3 Assumes maximum 35.00% federal tax rate for 2004. Results for investors subject to lower tax rates would be lower. 4 For a portion of the period, this fund limited expenses, without which yields would have been lower. Based only on investment income, calculated using SEC guidelines.
- --------------------------------------------------------------------------------------------------------------- TOTAL RETURN FOR PERIODS ENDED 6/30/04 (MOST RECENT CALENDAR QUARTER) - --------------------------------------------------------------------------------------------------------------- Class A Class B Class C Class M (inception dates) (9/20/93) (9/9/85) (2/1/99) (12/29/94) - --------------------------------------------------------------------------------------------------------------- NAV POP NAV CDSC NAV CDSC NAV POP - --------------------------------------------------------------------------------------------------------------- 1 year 3.37% -1.51% 2.72% -2.17% 2.54% 1.56% 3.06% -0.25% - --------------------------------------------------------------------------------------------------------------- 5 years 17.43 11.82 14.24 12.49 12.94 12.94 15.67 11.90 Annual average 3.27 2.26 2.70 2.38 2.46 2.46 2.95 2.27 - --------------------------------------------------------------------------------------------------------------- 10 years 59.48 51.93 50.63 50.63 47.14 47.14 54.33 49.36 Annual average 4.78 4.27 4.18 4.18 3.94 3.94 4.43 4.09 - --------------------------------------------------------------------------------------------------------------- Annual average (life of fund) 6.78 6.50 6.43 6.43 5.92 5.92 6.56 6.38 - ---------------------------------------------------------------------------------------------------------------
Understanding your fund's expenses As a mutual fund investor, you pay ongoing expenses, such as management fees, distribution fees (12b-1 fees), and other expenses. Using the information below, you can estimate how these expenses affect your investment and compare them with the expenses of other funds. You may also pay one-time transaction expenses, including sales charges (loads) and redemption fees, which are not shown in this section and would have resulted in higher total expenses. For more information, see your fund's prospectus or talk to your financial advisor. Review your fund's expenses The table below shows the expenses you would have paid on a $1,000 investment in Putnam Tax-Free High Yield Fund from February 1, 2004, to July 31, 2004. It also shows how much a $1,000 investment would be worth at the close of the period, assuming actual returns and expenses. - ----------------------------------------------------------------------------- EXPENSES AND VALUE OF A $1,000 INVESTMENT assuming actual returns for the 6 months ended 7/31/04 - ----------------------------------------------------------------------------- Class A Class B Class C Class M - ----------------------------------------------------------------------------- Expenses paid per $1,000* $4.60 $7.87 $8.63 $6.11 - ----------------------------------------------------------------------------- Ending value (after expenses) $1,011.40 $1,008.00 $1,007.40 $1,009.90 - ----------------------------------------------------------------------------- * Expenses for each share class are calculated using the fund's annualized expense ratio for each class, which represents the ongoing expenses as a percentage of net assets for the six months ended 7/31/04. The expense ratio may differ for each share class (see the table at the bottom of the next page). Expenses are calculated by multiplying the expense ratio by the average account value for the period; then multiplying the result by the number of days in the period; and then dividing that result by the number of days in the year. Estimate the expenses you paid To estimate the ongoing expenses you paid for the six months ended July 31, 2004, use the calculation method below. To find the value of your investment on February 1, 2004, go to www.putnaminvestments.com and log on to your account. Click on the "Transaction History" tab in your Daily Statement and enter 02/01/2004 in both the "from" and "to" fields. Alternatively, call Putnam at 1-800-225-1581. HOW TO CALCULATE THE EXPENSES YOU PAID - ------------------------------------------------------------------------------ Total Value of your Expenses paid expenses investment on 2/1/04 [DIV] $1,000 X per $1,000 = paid - ----------------------------------------------------------------------------- Example Based on a $10,000 investment in class A shares of your fund. - ----------------------------------------------------------------------------- $10,000 [DIV] $1,000 X $4.60 (see table above) = $46 - ----------------------------------------------------------------------------- Comparing your fund's expenses with those of other funds Using the SEC's method to compare expenses The Securities and Exchange Commission (SEC) has established guidelines to help investors assess fund expenses. Per these guidelines, the table below shows your fund's expenses based on a $1,000 investment, assuming a hypothetical 5% annualized return. You can use this information to compare the ongoing expenses (but not transaction expenses or total costs) of investing in the fund with those of other funds. All mutual fund shareholder reports will provide this information to help you make this comparison. Please note that you cannot use this information to estimate your actual ending account balance and expenses paid during the period. - ----------------------------------------------------------------------------- EXPENSES AND VALUE OF A $1,000 INVESTMENT assuming a hypothetical 5% annualized return for the 6 months ended 7/31/04 - ----------------------------------------------------------------------------- Class A Class B Class C Class M - ----------------------------------------------------------------------------- Expenses paid per $1,000* $4.62 $7.91 $8.67 $6.14 - ----------------------------------------------------------------------------- Ending value (after expenses) $1,020.56 $1,017.29 $1,016.54 $1,019.05 - ----------------------------------------------------------------------------- * Expenses for each share class are calculated using the fund's annualized expense ratio for each class, which represents the ongoing expenses as a percentage of net assets for the six months ended 7/31/04. The expense ratio may differ for each share class (see the table at the bottom of this page). Expenses are calculated by multiplying the expense ratio by the average account value for the period; then multiplying the result by the number of days in the period; and then dividing that result by the number of days in the year. Using industry averages to compare expenses You can also compare your fund's expenses with industry averages, as determined by Lipper, an independent fund-rating agency that ranks funds relative to others that Lipper considers to have similar investment styles or objectives. The expense ratio for each share class shown below indicates how much of your fund's net assets have been used to pay ongoing expenses during the period. - ----------------------------------------------------------------------------- EXPENSE RATIO COMPARISONS USING ANNUALIZED DATA - ----------------------------------------------------------------------------- Class A Class B Class C Class M - ----------------------------------------------------------------------------- Your fund's annualized expense ratio + 0.91% 1.56% 1.71% 1.21% - ----------------------------------------------------------------------------- Average annualized expense ratio for Lipper peer group ++ 0.91% 1.56% 1.71% 1.21% - ------------------------------------------------------------------------------- + For the fund's most recent fiscal half year; may differ from expense ratios based on one-year data in the financial highlights. ++ For class A shares, expenses shown represent the average of the expenses of front-end load funds viewed by Lipper as having the same investment classification or objective as the fund, calculated in accordance with Lipper's standard reporting methodology for comparing expenses within a given universe. All Lipper data is for the most recent fiscal periods available as of 6/30/04. For class B, C, M shares, Putnam has adjusted the Lipper total expense average to reflect higher 12b-1 fees incurred by these classes of shares. The peer group may include funds that are significantly larger or smaller than the fund, which may limit the comparability of the fund's expenses to the Lipper average. Understanding your fund's portfolio turnover Putnam funds are actively managed by teams of experts who buy and sell securities based on intensive analysis of companies, industries, economies, and markets. Portfolio turnover is a measure of how often a fund's managers buy and sell securities for your fund. A portfolio turnover of 100%, for example, means that the managers sold and replaced securities valued at 100% of a fund's assets within a one-year period. Funds with high turnover may be more likely to generate capital gains and dividends that must be distributed to shareholders as taxable income. High turnover may also cause a fund to pay more brokerage commissions and other transaction costs, which may detract from performance. Funds that invest in bonds may have higher turnover than funds that invest only in stocks. Short-term bond funds tend to have higher turnover than longer-term bond funds, because shorter-term bonds will mature or be sold more frequently than longer-term bonds. You can use the table below to compare your fund's turnover with the average turnover for funds in its Lipper category. - ------------------------------------------------------------------------------- TURNOVER COMPARISONS percentage of holdings that change every year - ------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------- Putnam Tax-Free High Yield Fund 18% 29% 20% 18% 12% - ------------------------------------------------------------------------------- Lipper High Yield Municipal Debt Funds category average 32% 34% 36% 30% 34% - ------------------------------------------------------------------------------- Turnover data for the fund is calculated based on the fund's fiscal-year period, which ends on July 31. Turnover data for the fund's Lipper category is calculated based on the average of the turnover of each fund in the category for its fiscal year ended during the indicated year, with the exception of 2004 data. Lipper data for 2004 represents the average turnover for each fund in the category for its most recent fiscal year and for which data is available as of 6/30/04. Risk comparison As part of new initiatives to enhance disclosure, we are including a risk comparison to help you understand how your fund compares with other funds. The comparison utilizes a risk measure developed by Morningstar, an independent fund-rating agency. This risk measure is referred to as the fund's Overall Morningstar Risk. [GRAPHIC OMITTED: chart MORNINGSTAR [REGISTRATION MARK] RISK] MORNINGSTAR [REGISTRATION MARK] RISK Fund's Overall Morningstar Risk 0.13 Municipal bond fund average 0.22 0% INCREASING RISK 100% Your fund's Overall Morningstar Risk is shown alongside that of the average fund in its broad asset class, as determined by Morningstar. The risk bar broadens the comparison by translating the fund's Overall Morningstar Risk into a percentile, which is based on the fund's ranking among all funds rated by Morningstar as of 6/30/04. A higher Overall Morningstar Risk generally indicates that a fund's monthly returns have varied more widely. Morningstar determines a fund's Overall Morningstar Risk by assessing variations in the fund's monthly returns -- with an emphasis on downside variations -- over 3-, 5-, and 10-year periods, if available. Those measures are weighted and averaged to produce the fund's Overall Morningstar Risk. The information shown is provided for the fund's class A shares only; information for other classes may vary. Overall Morningstar Risk is based on historical data and does not indicate future results. Morningstar does not purport to measure the risk associated with a current investment in a fund, either on an absolute basis or on a relative basis. Low Overall Morningstar Risk does not mean that you cannot lose money on an investment in a fund. Copyright 2004 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Terms and definitions Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Net asset value (NAV) is the price, or value, of one share of a mutual fund, without a sales charge. NAVs fluctuate with market conditions. NAV is calculated by dividing the net assets of each class of shares by the number of outstanding shares in the class. Public offering price (POP) is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. POP performance figures shown here assume the 4.75% maximum sales charge for class A shares (since reduced to 4.50%) and 3.25% for class M shares. Contingent deferred sales charge (CDSC) is a charge applied at the time of the redemption of class B or C shares and assumes redemption at the end of the period. Your fund's class B CDSC declines from a 5% maximum during the first year to 1% during the sixth year. After the sixth year, the CDSC no longer applies. The CDSC for class C shares is 1% for one year after purchase. Class A shares are generally subject to an initial sales charge and no sales charge on redemption (except on certain redemptions of shares bought without an initial sales charge). Class B shares may be subject to a sales charge upon redemption. Class C shares are not subject to an initial sales charge and are subject to a contingent deferred sales charge only if the shares are redeemed during the first year. Class M shares have a lower initial sales charge and a higher 12b-1 fee than class A shares and no sales charge on redemption (except on certain redemptions of shares bought without an initial sales charge). Comparative indexes Lehman Aggregate Bond Index is an unmanaged index used as a general measure of U.S. fixed-income securities. Lehman Government Bond Index is an unmanaged index of U.S. Treasury and agency securities. Lehman Intermediate Treasury Bond Index is an unmanaged index of Treasury bonds with maturities between 1 and 10 years. Lehman Municipal Bond Index is an unmanaged index of long-term fixed-rate investment-grade tax-exempt bonds. Russell 2000 Growth Index is an unmanaged index of those companies in the Russell 2000 Index chosen for their growth orientation. S&P 500 Index is an unmanaged index of common stock performance. S&P Utilities Index is an unmanaged index of common stock issued by utilities companies. Indexes assume reinvestment of all distributions and do not account for fees. Securities and performance of a fund and an index will differ. You cannot invest directly in an index. Lipper is a third-party industry ranking entity that ranks funds (without sales charges) with similar current investment styles or objectives as determined by Lipper. Lipper category averages reflect performance trends for funds within a category and are based on results at net asset value. Putnam's policy on confidentiality In order to conduct business with our shareholders, we must obtain certain personal information such as account holders' addresses, telephone numbers, Social Security numbers, and the names of their financial advisors. We use this information to assign an account number and to help us maintain accurate records of transactions and account balances. It is our policy to protect the confidentiality of your information, whether or not you currently own shares of our funds, and in particular, not to sell information about you or your accounts to outside marketing firms. We have safeguards in place designed to prevent unauthorized access to our computer systems and procedures to protect personal information from unauthorized use. Under certain circumstances, we share this information with outside vendors who provide services to us, such as mailing and proxy solicitation. In those cases, the service providers enter into confidentiality agreements with us, and we provide only the information necessary to process transactions and perform other services related to your account. We may also share this information with our Putnam affiliates to service your account or provide you with information about other Putnam products or services. It is also our policy to share account information with your financial advisor, if you've listed one on your Putnam account. If you would like clarification about our confidentiality policies or have any questions or concerns, please don't hesitate to contact us at 1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time. Proxy voting Putnam is committed to managing our mutual funds in the best interests of our shareholders. The Putnam funds' proxy voting guidelines and procedures, as well as information regarding how your fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2004, are available on the Putnam Individual Investor Web site, www.putnaminvestments.com/individual, and on the SEC's Web site, www.sec.gov. If you have questions about finding forms on the SEC's Web site, you may call the SEC at 1-800-SEC-0330. You may also obtain the Putnam funds' proxy voting guidelines and procedures by calling Putnam's Shareholder Services at 1-800-225-1581. Fund portfolio holdings For periods ending on or after July 9, 2004, the fund will file a complete schedule of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Shareholders may obtain the fund's Forms N-Q on the SEC's Web site at www.sec.gov. In addition, the fund's Forms N-Q may be reviewed and copied at the SEC's public reference room in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for information about the SEC's Web site or the operation of the public reference room. A guide to the financial statements These sections of the report, as well as the accompanying Notes, preceded by the Report of Independent Registered Public Accounting Firm, constitute the fund's financial statements. The fund's portfolio lists all the fund's investments and their values as of the last day of the reporting period. Holdings are organized by asset type and industry sector, country, or state to show areas of concentration and diversification. Statement of assets and liabilities shows how the fund's net assets and share price are determined. All investment and noninvestment assets are added together. Any unpaid expenses and other liabilities are subtracted from this total. The result is divided by the number of shares to determine the net asset value per share, which is calculated separately for each class of shares. (For funds with preferred shares, the amount subtracted from total assets includes the net assets allocated to remarketed preferred shares.) Statement of operations shows the fund's net investment gain or loss. This is done by first adding up all the fund's earnings -- from dividends and interest income -- and subtracting its operating expenses to determine net investment income (or loss). Then, any net gain or loss the fund realized on the sales of its holdings -- as well as any unrealized gains or losses over the period -- is added to or subtracted from the net investment result to determine the fund's net gain or loss for the fiscal year. Statement of changes in net assets shows how the fund's net assets were affected by the fund's net investment gain or loss, by distributions to shareholders, and by changes in the number of the fund's shares. It lists distributions and their sources (net investment income or realized capital gains) over the current reporting period and the most recent fiscal year-end. The distributions listed here may not match the sources listed in the Statement of operations because the distributions are determined on a tax basis and may be paid in a different period from the one in which they were earned. Financial highlights provide an overview of the fund's investment results, per-share distributions, expense ratios, net investment income ratios, and portfolio turnover in one summary table, reflecting the five most recent reporting periods. In a semiannual report, the highlight table also includes the current reporting period. For open-end funds, a separate table is provided for each share class. Report of Independent Registered Public Accounting Firm To the Trustees and Shareholders of Putnam Tax-Free High Yield Fund In our opinion, the accompanying statement of assets and liabilities, including the fund's portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Putnam Tax-Free High Yield Fund (the "fund") at July 31, 2004, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments owned at July 31, 2004, by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts September 13, 2004 The fund's portfolio July 31, 2004 Key to Abbreviations - ------------------------------------------------------------------------------- AMBAC AMBAC Indemnity Corporation COP Certificate of Participation FGIC Financial Guaranty Insurance Company FRB Floating Rate Bonds FSA Financial Security Assurance G.O. Bonds General Obligation Bonds IFB Inverse Floating Rate Bonds MBIA MBIA Insurance Company U.S. Govt. Coll. U.S. Government Collateralized VRDN Variable Rate Demand Notes Municipal bonds and notes (98.2%) (a) Principal amount Rating (RAT) Value Alabama (0.6%) - ------------------------------------------------------------------------------- $1,420,000 Anniston, Indl. Dev. Rev. Bonds (Hoover Group, Inc.), 8 1/2s, 9/1/10 D/P $781,000 5,000,000 Jackson Cnty., Hlth. Care Auth. Rev. Bonds, 5.7s, 5/1/19 BB+ 4,543,750 1,000,000 Phenix City, Indl. Dev. Board Rev. Bonds (Mead Coated Board), Ser. A, 5.3s, 4/1/27 Baa2 917,500 -------------- 6,242,250 Arizona (2.0%) - ------------------------------------------------------------------------------- 1,500,000 AZ State Hlth. Fac. Auth. Rev. Bonds (Bethesda Foundation), Ser. A, 6.4s, 8/15/27 BB-/P 1,438,125 Casa Grande, Indl. Dev. Auth. Rev. Bonds (Casa Grande Regl. Med. Ctr.), Ser. A 4,000,000 7 5/8s, 12/1/29 B-/P 4,145,000 500,000 7 1/4s, 12/1/19 B-/P 511,250 Cochise Cnty., Indl. Dev. Auth. Rev. Bonds (Sierra Vista Regl. Hlth. Ctr.) 3,425,000 7 3/4s, 12/1/30 BB+/P 3,733,250 1,000,000 Ser. A, 6.2s, 12/1/21 BB+/P 995,000 5,280,000 Pima Cnty., Indl. Dev. Auth. Hlth. Care Fac. Rev. Bonds, Ser. A, 8 1/2s, 11/15/32 B/P 4,653,000 Scottsdale, Indl. Dev. Auth. Rev. Bonds (Westminster Village 1st. Mtge.), Ser. A 1,500,000 U.S. Govt. Coll., 8 1/4s, 6/1/15 AAA/P 1,611,375 2,300,000 U.S. Govt. Coll., 8s, 6/1/11 AAA/P 2,466,083 -------------- 19,553,083 Arkansas (1.1%) - ------------------------------------------------------------------------------- 6,600,000 AR State Hosp. Dev. Fin. Auth. Rev. Bonds (Washington Regl. Med. Ctr.), 7 3/8s, 2/1/29 Baa3 7,243,500 3,650,000 Northwest Regl. Arpt. Auth. Rev. Bonds, 7 5/8s, 2/1/27 BB/P 3,932,875 -------------- 11,176,375 California (8.4%) - ------------------------------------------------------------------------------- 3,000,000 ABAG Fin. Auth. COP (American Baptist Homes), Ser. A, 5.85s, 10/1/27 BB+ 2,778,750 7,500,000 CA State Dept. of Wtr. Resources Rev. Bonds, Ser. A, 5 3/8s, 5/1/22 A2 7,818,750 4,300,000 CA Statewide Cmnty. Dev. Auth. Apt. Dev. Rev. Bonds (Irvine Apt. Cmntys.), Ser. A-3, 5.1s, 5/15/25 Baa2 4,498,875 1,000,000 CA Statewide Cmnty. Dev. Auth. Multi-Fam. Rev. Bonds (Hsg. Equity Res.), Ser. B, 5.2s, 12/1/29 Baa1 1,052,500 1,000,000 CA Statewide Cmnty. Dev. Auth. Special Tax Rev. Bonds (Citrus Garden Apt. Project - D1), 5 1/4s, 7/1/22 A 1,013,750 1,500,000 Capistrano, Unified School Dist. Cmnty. Fac. Special Tax (No 98-2 Ladera), 5.7s, 9/1/20 BB/P 1,520,625 1,750,000 Capistrano, Unified School Dist. Cmnty. Fac. Special Tax Bonds (Ladera), Ser. 98-2, 5 3/4s, 9/1/29 BB/P 1,750,000 1,100,000 Chula Vista, Cmnty. Fac. Dist. Special Tax (No. 07-I Otay Ranch Village Eleven), 5.8s, 9/1/28 BB-/P 1,108,250 2,855,000 Chula Vista, Cmnty. Fac. Dist. Special Tax Rev. Bonds (No. 08-1 Otay Ranch Village Six), 6s, 9/1/33 BB-/P 2,819,313 18,000,000 Corona, COP (Vista Hosp. Syst.), zero %, 7/1/29 (In default) (NON) D/P 360,000 3,000,000 Elk Grove CA Special Tax Rev. Bonds (Poppy Ridge Cmnty. Facs. - No 03-01), 6s, 9/1/34 BB/P 3,011,250 1,750,000 Folsom, Special Tax Rev. Bonds (Cmnty. Facs. Dist. No. 10), 5 7/8s, 9/1/28 BB/P 1,756,563 300,000 Foothill/Eastern Corridor Agcy. Rev. Bonds (CA Toll Roads), 5 3/4s, 1/15/40 Baa3 298,875 7,835,000 Gilroy, Rev. Bonds (Bonfante Gardens Park), 8s, 11/1/25 D/P 5,533,469 6,000,000 Golden State Tobacco Securitization Corp. Rev. Bonds, Ser. B, 5 5/8s, 6/1/38 Baa2 6,067,500 1,000,000 Irvine, Impt. Board Act of 1915 Special Assmt. Bonds (Assmt. Dist. No. 00-18-GRP 3), 5.55s, 9/2/26 BB+/P 987,500 3,500,000 Los Angeles, Regl. Arpt. Impt. Corp. Lease Rev. Bonds, Ser. C, 7 1/2s, 12/1/24 Caa2 2,983,750 1,520,000 Orange Cnty., Cmnty. Fac. Dist. Special Tax (No.03-1 Ladera Ranch), Ser. A, 5.4s, 8/15/22 BB/P 1,518,100 1,625,000 Orange Cnty., Cmnty. Fac. Dist. Special Tax Rev. Bonds (Ladera Ranch - No. 02-1), Ser. A, 5.55s, 8/15/33 BB+/P 1,618,906 Redondo Beach, Redev. Agcy. Multi-Fam. Hsg. Rev. Bonds (Heritage Point) 2,895,000 Ser. B, 8 1/2s, 9/1/23 B+/P 2,943,983 4,690,000 Ser. A, 6 1/2s, 9/1/23 B+/P 4,770,011 1,500,000 Roseville, Cmnty. Fac. Special Tax Bonds (Dist. 1), 6s, 9/1/33 BB/P 1,524,375 700,000 Sacramento, Special Tax Rev. Bonds (North Natomas Cmnty. Fac.), Ser. 4-A, 6s, 9/1/28 BB/P 712,250 1,500,000 San Joaquin Hills, Trans. Corridor Agcy. Rev. Bonds, Ser. A, 5 1/2s, 1/15/28 Ba2 1,365,000 4,970,000 Santaluz Cmnty., Facs. Dist. No. 2 Special Tax Rev. Bonds (Impt. Area No. 1), Ser. B, 6 3/8s, 9/1/30 BB+/P 5,075,613 350,000 Southern CA Pub. Pwr. Auth. IFB (Transmission), 9.84s, 7/1/12 Aa3 352,247 4,560,000 Sunnyvale, Special Tax Rev. Bonds (Cmnty. Fac. Dist. No. 1), 7 3/4s, 8/1/32 BB-/P 4,588,500 10,500,000 Vallejo, COP (Marine World Foundation), 7.2s, 2/1/26 BBB-/P 10,526,250 3,825,000 Valley Hlth. Syst. COP, 6 7/8s, 5/15/23 B+ 3,203,438 -------------- 83,558,393 Colorado (0.7%) - ------------------------------------------------------------------------------- 5,000,000 CO Hlth. Fac. Auth. Rev. Bonds (Evangelical Lutheran), 5.9s, 10/1/27 A3 5,062,500 CO Springs, Hosp. Rev. Bonds 755,000 6 3/8s, 12/15/30 A3 805,019 745,000 6 3/8s, 12/15/30 (Prerefunded) A3 879,100 -------------- 6,746,619 Connecticut (3.2%) - ------------------------------------------------------------------------------- CT State Dev. Auth. Rev. Bonds (East Hills Woods) 4,183,644 Ser. A, 7 3/4s, 11/1/17 B-/P 3,294,620 457,428 Ser. B, zero %, 3/1/21 B-/P 24,015 2,000,000 CT State Dev. Auth. 1st. Mtg. Gross Rev. Hlth. Care Rev. Bonds (The Elm Street Park Baptist, Inc. Project), 5.85s, 12/1/33 BBB+ 2,027,500 6,000,000 CT State Dev. Auth. Poll. Control Rev. Bonds (Western MA), Ser. A, 5.85s, 9/1/28 A3 6,262,500 CT State Hlth. & Edl. Fac. Auth. VRDN, (Yale U.) 10,000,000 Ser. U, 0.96s, 7/1/33 VMIG1 10,000,000 10,000,000 Ser. U2, 0.96s, 7/1/33 VMIG1 10,000,000 -------------- 31,608,635 District of Columbia (2.4%) - ------------------------------------------------------------------------------- 17,000,000 DC G.O. Bonds, Ser. A, 6 3/8s, 6/1/26 AAA 18,700,000 5,500,000 DC Tobacco Settlement Fin. Corp. Rev. Bonds, 6 1/2s, 5/15/33 BBB 4,805,625 -------------- 23,505,625 Florida (5.1%) - ------------------------------------------------------------------------------- 9,260,000 Brevard Cnty., Hlth. Fac. Auth. Rev. Bonds (Courtenay Springs), 7 3/4s, 11/15/24 AAA/P 9,613,639 3,105,000 Cap. Trust Agcy. Multi-Fam. Rev. Bonds (American Opportunity-Senior), Ser. A, 5 7/8s, 12/1/38 Baa1 2,891,531 5,000,000 Cap. Trust Agcy. Rev. Bonds (Seminole Tribe Convention), Ser. A, 10s, 10/1/33 B/P 6,050,000 3,000,000 CFM Cmnty. Dev. Dist. Rev. Bonds, Ser. A, 6 1/4s, 5/1/35 BB-/P 3,022,500 Fishhawk, Cmnty. Dev. Dist. II Rev. Bonds, Ser. B 2,500,000 5 1/8s, 11/1/09 BB-/P 2,506,250 1,780,000 5s, 11/1/07 BB-/P 1,784,450 5,180,000 FL State Fin. Dept. Gen. Svcs. IFB (Rites-PA 414A), FSA, 9.119s, 7/1/11 (acquired 9/2/98, cost $6,687,794) (RES) AAA/P 6,798,750 1,000,000 Halifax, Hosp. Med. Ctr. Rev. Bonds, Ser. A, 7 1/4s, 10/1/29 BBB- 1,072,500 3,300,000 Lee Cnty., Indl. Dev. Auth. Hlth. Care Fac. Rev. Bonds (Shell Point Village Project), Ser. A, 5 1/2s, 11/15/29 BBB- 3,093,750 2,000,000 Middle Village Cmnty. Dev. Dist. Special Assmt., Ser. A, 6s, 5/1/35 BB-/P 2,010,000 Orange Cnty., Hlth. Fac. Auth. Rev. Bonds 1,400,000 (Orlando Regl. Hlth. Care), 5 3/4s, 12/1/32 A2 1,424,500 3,750,000 (Adventist Hlth. Syst.), 5 5/8s, 11/15/32 A 3,801,563 1,800,000 St. Johns Cnty., Hlth. Care Indl. Dev. Auth. Rev. Bonds (Glenmoor St. Johns Project), Ser. A, 8s, 1/1/30 B-/P 1,719,000 990,000 Verandah, West Cmnty. Dev. Dist. Rev. Bonds (Cap. Impt.), Ser. A, 6 5/8s, 5/1/33 BB-/P 1,011,038 2,250,000 Westchester Cmnty. Dev. Dist. No. 1 Special Assmt. (Cmnty. Infrastructure), 6 1/8s, 5/1/35 BB-/P 2,266,875 World Commerce Cmnty. Dev. Dist. Special Assmt., Ser. A-1 1,250,000 6 1/2s, 5/1/36 BB-/P 1,250,000 1,000,000 6 1/4s, 5/1/22 BB-/P 988,750 -------------- 51,305,096 Georgia (3.9%) - ------------------------------------------------------------------------------- 6,165,000 Atlanta, Waste Wtr. VRDN, Ser. C, FSA, 1.10s, 11/1/41 VMIG1 6,165,000 8,000,000 Burke Cnty., Poll. Control Dev. Auth. Mandatory Put Bonds (GA Power Co.), 4.45s, 12/1/08 A2 8,340,000 3,400,000 Effingham Cnty., Indl. Dev. Auth. Rev. Bonds (Pacific Corp.), 6 1/2s, 6/1/31 Ba3 3,455,250 6,000,000 Forsyth Cnty., Hosp. Auth. Rev. Bonds (GA Baptist Hlth. Care Syst.), U.S. Govt. Coll., 6 3/8s, 10/1/28 AAA 7,230,000 4,370,000 Forsyth Cnty., Indl. Dev. Auth. Rev. Bonds (Hoover Group, Inc.), 8 1/2s, 12/1/05 D/P 2,403,500 800,000 Fulton Cnty., Res. Care Fac. Rev. Bonds (Canterbury Court), Class A, 6 1/8s, 2/15/34 B+/P 792,000 6,875,000 Rockdale Cnty., Dev. Auth. Solid Waste Disp. Rev. Bonds (Visay Paper, Inc.), 7 1/2s, 1/1/26 BB+/P 7,101,188 3,160,000 Savannah, Econ. Dev. Auth. Poll. Control Rev. Bonds (Stone Container Corp.), 8 1/8s, 7/1/15 B/P 3,269,146 -------------- 38,756,084 Illinois (1.5%) - ------------------------------------------------------------------------------- 1,500,000 Chicago, Special Assmt. Bonds (Lake Shore East), 6 3/4s, 12/1/32 B+/P 1,541,250 1,025,000 IL Dev. Fin. Auth. Rev. Bonds (Mercy Hsg. Corp.), 7s, 8/1/24 Baa1 1,045,500 IL Hlth. Fac. Auth. Rev. Bonds 740,000 (Cmnty. Rehab. Providers Fac.), 8 1/4s, 8/1/12 D/P 666,000 4,105,000 (Cmnty. Rehab. Providers Fac.), Ser. A, 7 7/8s, 7/1/20 (Prerefunded) AAA/P 4,420,346 610,000 (Cmnty. Rehab. Providers Fac.), Ser. A, 7 7/8s, 7/1/20 D/P 488,000 1,000,000 (St. Benedict), Ser. 03A-1, 6.9s, 11/15/33 B+/P 992,500 6,000,000 (Elmhurst Memorial Hlth. Care), 5 5/8s, 1/1/28 A2 6,090,000 -------------- 15,243,596 Indiana (1.4%) - ------------------------------------------------------------------------------- 6,500,000 Indianapolis, Arpt. Auth. Rev. Bonds (Federal Express Corp.), 5.1s, 1/15/17 Baa2 6,581,250 900,000 Plainfield, Indl. Econ. Dev. Rev. Bonds (Earl M. Jorgensen Co.), 8 1/2s, 9/1/04 B-/P 900,999 2,200,000 Rockport, Poll. Control Mandatory Put Bonds (Indiana Michigan Pwr. Co.), Ser. C, 2 5/8s, 10/1/06 BBB 2,180,750 4,000,000 Rockport, Poll. Control Rev. Bonds (Indiana-Michigan Pwr.), Ser. A, 4.9s, 6/1/25 Baa2 4,155,000 -------------- 13,817,999 Iowa (1.7%) - ------------------------------------------------------------------------------- IA Fin. Auth. Hlth. Care Fac. Rev. Bonds (Care Initiatives) 13,860,000 9 1/4s, 7/1/25 BBB-/P 16,250,850 775,000 9.15s, 7/1/09 BBB-/P 884,469 105,000 Marion Hlth. Care Fac. Rev. Bonds (First Mtg.), Ser. IA, 1.76s, 1/1/29 CCC 95,288 -------------- 17,230,607 Kansas (0.4%) - ------------------------------------------------------------------------------- Lenexa, Hlth. Care Rev. Bonds (LakeView Village) 2,250,000 Ser. C, 6 7/8s, 5/15/32 BB+ 2,328,750 1,200,000 Ser. B, 6 1/4s, 5/15/26 BB+ 1,201,500 -------------- 3,530,250 Kentucky (0.8%) - ------------------------------------------------------------------------------- 610,000 Kentucky Econ. Dev. Fin. Auth. Rev. Bonds (First Mtg.), Ser. IA, 6 1/2s, 1/1/29 CCC 553,575 KY Econ. Dev. Fin. Auth. Hlth. Syst. Rev. Bonds (Norton Healthcare, Inc.), Ser. A 3,250,000 6 5/8s, 10/1/28 BBB+ 3,384,063 3,740,000 6 1/8s, 10/1/10 BBB+ 3,973,750 -------------- 7,911,388 Louisiana (2.8%) - ------------------------------------------------------------------------------- 3,000,000 LA Hlth. Ed. Auth. Rev. Bonds (Lambert House), Ser. A, 6.2s, 1/1/28 B+/P 2,928,750 5,335,000 LA Local Govt. Env. Fac. Cmnty. Dev. Auth. Rev. Bonds (St. James Place), Ser. A, 8s, 11/1/19 B-/P 3,481,088 4,420,000 LA Pub. Fac. Auth. Hosp. Rev. Bonds (Lake Charles Memorial Hosp.), 8 5/8s, 12/1/30 CCC/P 3,315,000 6,000,000 Port of New Orleans, Indl. Dev. Rev. Bonds (Continental Grain Co.), 7 1/2s, 7/1/13 BB- 6,134,040 3,000,000 St. Charles Parish, Poll. Control Rev. Bonds, Ser. A, 4.9s, 6/1/30 Baa3 3,055,590 9,000,000 W. Feliciana Parish, Solid Waste Disp. Rev. Bonds (Kaiser Aluminum), 7.7s, 12/1/14 Ba1 9,146,610 -------------- 28,061,078 Maine (0.4%) - ------------------------------------------------------------------------------- 3,500,000 Rumford, Solid Waste Disp. Rev. Bonds (Boise Cascade Corp.), 6 7/8s, 10/1/26 Ba2 3,574,375 Maryland (1.3%) - ------------------------------------------------------------------------------- 5,000,000 Howard Cnty., Rev. Bonds, Ser. A, U.S. Govt. Coll., 8s, 5/15/29 AAA 6,318,750 MD State Hlth. & Higher Edl. Fac. Auth. Rev. Bonds 2,000,000 (Mercy Ridge), Ser. A, 6s, 4/1/35 BB+/P 2,000,000 1,500,000 (Medstar Health), 5 1/2s, 8/15/33 Baa2 1,462,500 3,400,000 Westminster, Econ. Dev Rev. Bonds (Carroll Lutheran Village), Ser. A, 6 1/4s, 5/1/34 BB/P 3,417,000 -------------- 13,198,250 Massachusetts (4.4%) - ------------------------------------------------------------------------------- 1,890,000 MA State Dev. Fin. Agcy. Rev. Bonds (Lasell College), 6 3/4s, 7/1/31 1,875,825 5,600,000 MA State Hlth. & Edl. Fac. Auth. IFB (Boston U.), Ser. L, AMBAC, 10.296s, 7/1/25 5,632,704 MA State Hlth. & Edl. Fac. Auth. Rev. Bonds 5,750,000 (Civic Investments), Ser. A, 9s, 12/15/15 6,533,438 4,000,000 (Jordan Hosp.), Ser. E, 6 3/4s, 10/1/33 4,015,000 4,900,000 (Winchester Hosp.), Ser. E, 6 3/4s, 7/1/30 5,763,625 5,850,000 (UMass Memorial), Ser. C, 6 5/8s, 7/1/32 6,040,125 2,200,000 (Berkshire Hlth. Syst.), Ser. E, 6 1/4s, 10/1/31 2,238,500 4,500,000 (Hlth. Care Syst. Covenant Hlth.), Ser. E, 6s, 7/1/31 4,612,500 2,630,000 (Caritas Christi Oblig. Group), Ser. A, 5 1/4s, 7/1/08 2,771,363 1,855,000 MA State Indl. Fin. Agcy. R (TNG Marina Bay LLC Project), 7 1/2s, 12/1/27 1,871,231 MA State Indl. Fin. Agcy. Rev. Bonds 2,378,153 (Evanswood Bethzatha Corp.), 8s, 1/15/27 (In default) (NON) 2,973 750,000 (1st Mtge. Stone Institution & Newton), 7.9s, 1/1/24 767,820 1,664,711 (1st. Mtge. Evanswood Bethzatha-A), 7 7/8s, 1/15/20 (In default) (NON) 2,081 1,765,000 (Sr. Living Fac. Forge Hill), 7s, 4/1/17 1,745,144 -------------- 43,872,329 Michigan (6.6%) - ------------------------------------------------------------------------------- 2,251,000 Ann Arbor, Econ. Dev. Corp. Ltd. Oblig. Rev. Bonds (Glacier Hills, Inc.), State & Local Govt. Coll., 8 3/8s, 1/15/19 AAA 2,934,741 2,000,000 Delta Cnty., Econ. Dev. Corp. Rev. Bonds, Ser. A, 6 1/4s, 4/15/27 Baa2 2,072,500 7,600,000 Detroit, Swr. Disp. VRDN, Ser. B, FSA, 1.10s, 7/1/33 VMIG1 7,600,000 10,000,000 Dickinson Cnty., Econ. Dev. Corp. Rev. Bonds, 5 3/4s, 6/1/16 Baa2 10,575,000 1,500,000 Flint, Hosp. Bldg. Auth. Rev. Bonds (Hurley Med. Ctr.), 6s, 7/1/20 Baa3 1,477,500 Garden City, Hosp. Fin. Auth. Rev. Bonds (Garden City Hosp. OB Group), Ser. A 3,000,000 5 3/4s, 9/1/17 Ba2 2,797,500 2,000,000 5 5/8s, 9/1/10 Ba2 1,937,500 4,600,000 Macomb Cnty., Hosp. Fin. Auth. Rev. Bonds (Mt. Clemens Gen. Hosp.), Ser. B, 5 7/8s, 11/15/34 BBB- 4,209,000 15,000,000 MI State Strategic Fund Ltd. Oblig. Rev. Bonds (Detroit Edison Co.), MBIA, 6.4s, 9/1/25 Aaa 16,006,950 MI State Strategic Fund Solid Waste Disp. Rev. Bonds 2,650,000 (Genesee Pwr. Station), 7 1/2s, 1/1/21 B/P 2,298,875 3,500,000 (SD Warren Co.), Ser. C, 7 3/8s, 1/15/22 BB/P 3,622,500 5,000,000 Midland Cnty., Econ. Dev. Corp. Rev. Bonds, 6 3/4s, 7/23/09 Ba3 5,187,500 5,495,000 Waterford, Econ. Dev. Corp. Rev. Bonds (Canterbury Hlth.), 6s, 1/1/39 B-/P 4,025,088 2,000,000 Wayne Charter Cnty., Special Arpt. Fac. Rev. Bonds (Northwest Airlines, Inc.), 6s, 12/1/29 B+/P 1,435,000 -------------- 66,179,654 Minnesota (0.5%) - ------------------------------------------------------------------------------- 2,600,000 Chaska, Indl. Dev. Rev. Bonds (Lifecore Biomedical, Inc. Project), 10 1/4s, 9/1/20 BB/P 2,661,932 2,075,000 Minneapolis, Rev. Bonds (Walker Methodist Sr. Svcs.), Ser. A, 6s, 11/15/28 B+/P 1,579,594 800,000 Sauk Rapids Hlth. Care & Hsg. Fac. Rev. Bonds (Good Shepherd Lutheran Home), 6s, 1/1/34 B/P 790,000 -------------- 5,031,526 Mississippi (0.2%) - ------------------------------------------------------------------------------- 1,500,000 Jackson Cnty., VRDN, 1.10s, 12/1/16 VMIG1 1,500,000 Missouri (3.4%) - ------------------------------------------------------------------------------- 3,250,000 Cape Girardeau Cnty., Indl. Dev. Auth. Hlth. Care Fac. Rev. Bonds (St. Francis Med. Ctr.), Ser. A, 5 1/2s, 6/1/27 A 3,270,313 2,000,000 Kansas City, Indl. Dev. Auth. Hlth. Fac. Rev. Bonds (First Mtg. Bishop Spencer), Ser. A, 6 1/4s, 1/1/24 BB-/P 1,972,500 18,810,000 MO State Hlth. & Edl. Fac. Auth. VRDN (Cox Hlth. Syst.), AMBAC, 1.15s, 6/1/22 VMIG1 18,810,000 St. Louis Arpt. Rev. Bonds (Lambert St. Louis Intl.), Ser. A 4,150,000 FSA, 5 1/4s, 7/1/11 Aaa 4,575,375 4,495,000 FSA, 5 1/4s, 7/1/10 Aaa 4,938,881 -------------- 33,567,069 Montana (0.1%) - ------------------------------------------------------------------------------- 750,000 MT State Board Inv. Exempt Fac. Rev. Bonds (Still Water Mining Project), 8s, 7/1/20 B1 777,188 Nebraska (--%) - ------------------------------------------------------------------------------- Kearney, Indl. Dev. Rev. Bonds 142,042 (Great Platte River), 8s, 9/1/12 D/P 121,091 1,582,934 (Brookhaven), zero %, 9/1/12 D/P 7,915 -------------- 129,006 Nevada (2.0%) - ------------------------------------------------------------------------------- 5,350,000 Clark Cnty., Indl. Dev. Rev. Bonds (Southwest Gas Corp. Project), Ser. C, 5.45s, 3/1/38 Baa2 5,691,063 1,500,000 Clark Cnty., Local Impt. Dist. Special Assmt. Bonds (No. 142), 6.1s, 8/1/18 BB-/P 1,501,875 Henderson, Local Impt. Dist. Special Assmt. Bonds (No. T-14) 3,735,000 5.8s, 3/1/23 BB-/P 3,777,019 2,640,000 5.55s, 3/1/17 BB-/P 2,669,700 1,500,000 Las Vegas, Local Impt. Board Special Assmt. (Dist. No. 607), 5.9s, 6/1/17 BB-/P 1,524,375 810,000 Las Vegas, Special Impt. Dist. Rev. Bonds (No. 809 -- Summerlin Area), 5.65s, 6/1/23 BB/P 790,763 3,500,000 Washoe Cnty., Wtr. Fac. Mandatory Put Bonds (Sierra Pacific Pwr. Co.), 5s, 7/1/09 Ba2 3,491,250 -------------- 19,446,045 New Hampshire (2.0%) - ------------------------------------------------------------------------------- NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds 5,900,000 (Havenwood-Heritage Heights), 7.35s, 1/1/18 BB-/P 6,099,125 1,000,000 (Riverwoods at Exeter), Ser. A, 6 1/2s, 3/1/23 BB/P 995,000 3,000,000 (Rivermead at Peterborough), 5 3/4s, 7/1/28 BB/P 2,733,750 2,200,000 NH Hlth. & Ed. Fac. Auth. Rev. Bonds (Huntington at Nashua), Ser. A, 6 7/8s, 5/1/33 B/P 2,202,750 NH State Bus. Fin. Auth. Rev. Bonds 2,500,000 (Alice Peck Day Hlth. Syst.), Ser. A, 7s, 10/1/29 BBB-/P 2,478,125 2,505,000 (Franklin Regl. Hosp. Assn.), Ser. A, 6.05s, 9/1/29 BB-/P 2,307,731 3,550,000 (Proctor Academy), Ser. A, 5.6s, 6/1/28 Baa2 3,589,938 8,551,027 NH State Bus. Fin. Auth. Poll. Control & Solid Waste Rev. Bonds (Crown Paper Co.), 7 3/4s, 1/1/22 (In default) (NON) D 10,689 -------------- 20,417,108 New Jersey (4.5%) - ------------------------------------------------------------------------------- 5,000,000 Camden Cnty., Impt. Auth. Rev. Bonds, (Dockside Refrigerated) 8.4s, 4/1/24 (In default) (NON) D/P 4,150,000 NJ Econ. Dev. Auth. Rev. Bonds 7,000,000 (Winchester Gardens), Ser. A, 8 5/8s, 11/1/25 BB-/P 8,128,750 2,100,000 (Cranes Mill), Ser. A, 7 1/2s, 2/1/27 BB-/P 2,189,250 900,000 (Cedar Crest Village, Inc.), Ser. A, 7s, 11/15/16 BB-/P 913,500 7,000,000 (Newark Arpt. Marriot Hotel), 7s, 10/1/14 Ba3 7,175,000 500,000 (First Mtge. Presbyterian Home), Ser. A, 6 3/8s, 11/1/31 BB/P 503,125 3,000,000 (United Methodist Homes), Ser. A-1, 6 1/4s, 7/1/33 BB+ 2,943,750 500,000 (First Mtge. Presbyterian Home), Ser. A, 6 1/4s, 11/1/20 BB/P 503,125 5,125,000 NJ Econ. Dev. Auth. Assisted Living Rev. Bonds (Meridian Assisted Living), 6 3/4s, 8/1/30 B/P 4,606,094 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds 2,000,000 (Columbus Regl. Hosp.), Ser. A, 7 1/2s, 7/1/21 B2 1,812,500 5,000,000 (South Jersey Hosp.), 6s, 7/1/12 Baa1 5,525,000 Tobacco Settlement Fin. Corp. Rev. Bonds 2,000,000 6 3/4s, 6/1/39 BBB 1,797,500 6,260,000 (Asset Backed Bonds), 6s, 6/1/37 BBB 5,047,125 -------------- 45,294,719 New Mexico (0.8%) - ------------------------------------------------------------------------------- 5,500,000 Farmington, Poll. Control Rev. Bonds (Tucson Elec. Pwr. Co. San Juan), Ser. A, 6.95s, 10/1/20 Ba3 5,747,500 2,150,000 Farmington, Poll. Control VRDN (AZ Pub. Svc. Co.), Ser. A, 1.15s, 5/1/24 VMIG1 2,150,000 -------------- 7,897,500 New York (7.7%) - ------------------------------------------------------------------------------- 2,250,000 Colonie, Indl. Dev. Agcy. Rev. Bonds (Cap. Compost & Waste), Ser. A, 3 3/8s, 6/1/21 (In default) (NON) D/P 258,750 1,250,000 Huntington, Hsg. Auth. Rev. Bonds (Gurwin Jewish Sr. Residence), Ser. A, 6s, 5/1/39 B+/P 1,129,688 1,575,000 Nassau Cnty., Indl. Dev. Agcy. Rev. Bonds (North Shore Hlth. Syst. Project D), 5 1/4s, 11/1/07 A3 1,673,438 NY City, G.O. Bonds 12,560,000 Ser. B, FGIC, 6s, 8/1/06 Aaa 13,469,344 8,000,000 Ser. C, 5 1/2s, 8/1/13 A2 8,770,000 NY City, Indl. Dev. Agcy. Rev. Bonds 4,000,000 (Paper Inc.), 7.8s, 1/1/16 B+/P 4,180,000 2,075,000 (British Airways), 7 5/8s, 12/1/32 BB+ 2,025,719 3,250,000 (Brooklyn Navy Yard Cogen. Partners), 5.65s, 10/1/28 BBB- 2,937,188 500,000 NY City, Indl. Dev. Agcy. Civic Fac. Rev. Bonds (Brooklyn Polytech. U. Project J), 6 1/8s, 11/1/30 BB+ 448,125 5,400,000 NY City, Indl. Dev. Agcy. Special Arpt. Fac. Rev. Bonds (Airis JFK I LLC), Ser. A, 5 1/2s, 7/1/28 Baa3 5,204,250 3,325,000 NY City, Indl. Dev. Agcy. Special Fac. Rev. Bonds (British Airways), 5 1/4s, 12/1/32 BB+ 2,352,438 1,785,000 NY State Dorm. Auth. Rev. Bonds (Lenox Hill Hosp.), 5 3/4s, 7/1/12 A3 1,963,500 11,185,000 NY State Env. Fac. Corp. Poll. Control IFB (PA 198), MBIA, 10.393s, 6/15/10 (acquired 10/22/97, cost $13,449,963) (RES) AAA 14,498,556 5,000,000 Onondaga Cnty., Indl. Dev. Agcy. Rev. Bonds (Solvay Paperboard, LLC), 7s, 11/1/30 (acquired 12/9/98, cost $5,000,000) (RES) BB-/P 5,218,750 2,500,000 Port Auth. NY & NJ Rev. Bonds (Kennedy Intl. Arpt.- 4th Installment), 6 3/4s, 10/1/11 BB+/P 2,628,125 5,000,000 Suffolk Cnty., Indl. Dev. Agcy. Rev. Bonds (Peconic Landings), Ser. A, 8s, 10/1/20 B+/P 5,112,500 Suffolk Cnty., Indl. Dev. Agcy. Civic Fac. Rev. Bonds 3,800,000 (Southampton Hosp. Assn.), Ser. B, 7 5/8s, 1/1/30 B-/P 3,804,750 1,000,000 (Gurwin Jewish-Phase II), 6.7s, 5/1/39 B+/P 1,007,500 -------------- 76,682,621 North Carolina (2.4%) - ------------------------------------------------------------------------------- NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds, Ser. C 7,500,000 5 3/8s, 1/1/17 BBB 7,828,125 1,000,000 5 3/8s, 1/1/16 BBB 1,046,250 2,000,000 5.3s, 1/1/15 BBB 2,095,000 4,500,000 NC Med. Care Comm. Retirement Fac. Rev. Bonds (1st Mtge. -Givens Estates Project), Ser. A, 6 1/2s, 7/1/32 BB-/P 4,556,250 NC State Muni. Pwr. Agcy. Rev. Bonds (No. 1, Catawba Elec.) 4,000,000 Ser. B, 6 1/2s, 1/1/20 Baa1 4,420,000 4,000,000 Ser. A, 5 1/2s, 1/1/13 Baa1 4,325,000 -------------- 24,270,625 Ohio (2.4%) - ------------------------------------------------------------------------------- Marion Cnty., Hlth. Care Fac. Rev. Bonds (United Church Homes) 900,000 6 3/8s, 11/15/10 BBB- 913,500 750,000 6.3s, 11/15/15 BBB- 757,500 1,000,000 OH State Env. Impt. Rev. Bonds (USX Corp.), 5 5/8s, 5/1/29 Baa1 1,002,500 OH State Higher Edl. Fac. FRB (Kenyon College Project) 2,500,000 4.95s, 7/1/37 A2 2,565,625 5,000,000 4.85s, 7/1/37 A2 5,150,000 6,500,000 OH State Solid Waste Mandatory Put Bonds, 4.85s, 11/1/07 BBB 6,743,750 6,000,000 OH State Wtr. Dev. Auth. Poll. Control Fac. Rev. Bonds, 6.1s, 8/1/20 Baa2 6,067,500 700,000 OH State Wtr. Dev. Auth. Solid Waste Disp. Rev. Bonds (Bay Shore Power Co.), Ser. A, 5 7/8s, 9/1/20 BB+/P 652,750 -------------- 23,853,125 Oklahoma (0.5%) - ------------------------------------------------------------------------------- OK Dev. Fin. Auth. Rev. Bonds 385,000 (Continuing Care Retirement), Ser. A, 8s, 2/1/32 B-/P 355,644 3,075,000 (Hillcrest Hlth. Care), Ser. A, 5 5/8s, 8/15/29 B1 3,113,438 2,350,000 Ottawa Cnty., Fin. Auth. Indl. Rev. Bonds (Doane Products Co.), 7 1/4s, 6/1/17 B-/P 1,941,688 -------------- 5,410,770 Oregon (0.5%) - ------------------------------------------------------------------------------- 5,450,000 Multnomah Cnty., Hosp. Fac. Auth. Rev. Bonds (Terwilliger Plaza Project), 6 1/2s, 12/1/29 BB-/P 5,436,375 Pennsylvania (5.8%) - ------------------------------------------------------------------------------- 6,500,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds (Hlth. Syst.), Ser. B, 9 1/4s, 11/15/15 B2 7,353,125 1,150,000 Allentown, Hosp. Auth. Rev. Bonds (Sacred Heart Hosp.), Ser. A, 6 3/4s, 11/15/14 Baa3 1,152,875 7,925,000 Carbon Cnty., Indl. Dev. Auth. Rev. Bonds (Panther Creek Partners), 6.65s, 5/1/10 BBB- 8,549,094 1,700,000 Chester Cnty., Hlth. & Ed. Fac. Auth. Rev. Bonds (Jenners Pond, Inc.), 7 5/8s, 7/1/34 BB-/P 1,719,125 3,750,000 Dauphin Cnty., Gen. Auth. Rev. Bonds (Office & Pkg.), Ser. A, 6s, 1/15/25 CCC/P 1,743,750 1,500,000 Lancaster Cnty., Hosp. Auth. Rev. Bonds (Gen. Hosp.), 5 1/2s, 3/15/26 A- 1,498,125 Lehigh Cnty., Gen. Purpose Auth. Rev. Bonds 2,250,000 (St. Luke's Hosp. - Bethlehem), 5 3/8s, 8/15/33 Baa2 2,089,688 2,860,000 (Lehigh Valley Hosp. Hlth. Network), Ser. A, 5 1/4s, 7/1/32 A2 2,763,475 1,750,000 New Morgan, Indl. Dev. Auth. Solid Waste Disp. Rev. Bonds (New Morgan Landfill Co., Inc.), 6 1/2s, 4/1/19 BB- 1,719,375 2,000,000 PA Econ. Dev. Fin. Auth. Rev. Bonds (Amtrak Project), Ser. A, 6 3/8s, 11/1/41 A3 2,050,000 9,000,000 PA State Econ. Dev. Fin. Auth. Resource Recvy. Rev. Bonds (Colver Proj.), Ser. E, 8.05s, 12/1/15 BBB- 9,286,020 PA State Higher Edl. Fac. Auth. Rev. Bonds 1,500,000 (Widener U.), 5.4s, 7/15/36 BBB+ 1,496,250 1,345,000 (Philadelphia College of Osteopathic Med.), 5s, 12/1/13 A 1,422,338 Philadelphia, Hosp. & Higher Ed. Fac. Auth. Rev. Bonds 4,858,731 (Graduate Hlth. Syst. Oblig. Group), 7 1/4s, 7/1/18 (In default) (NON) D/P 6,073 3,000,000 (Jeanses Hosp. Project), 5 7/8s, 7/1/17 Baa2 3,000,000 Scranton, G.O. Bonds, Ser. C 3,060,000 7.1s, 9/1/31 AAA/P 3,756,150 1,000,000 7s, 9/1/22 AAA/P 1,221,250 2,500,000 West Cornwall, Tpk. Muni. Auth. Rev. Bonds (Elizabethtown College), 6s, 12/15/27 BBB+ 2,559,375 2,600,000 West Shore, Area Hosp. Auth. Rev. Bonds (Holy Spirit Hosp.), 6 1/4s, 1/1/32 BBB+ 2,639,000 2,000,000 York Cnty., Indl. Dev. Auth. Rev. Bonds, (PSEG Power, LLC.) Ser. A, 5 1/2s, 9/1/20 Baa1 2,020,000 -------------- 58,045,088 Puerto Rico (0.8%) - ------------------------------------------------------------------------------- 7,400,000 PR Indl. Tourist Edl. Med. & Env. Control Fac. Rev. Bonds (Cogen. Fac.-AES), 6 5/8s, 6/1/26 Baa3 7,686,750 Rhode Island (0.1%) - ------------------------------------------------------------------------------- 710,000 Tobacco Settlement Fin. Corp. Rev. Bonds, Ser. A, 6 1/4s, 6/1/42 BBB 584,863 South Carolina (2.7%) - ------------------------------------------------------------------------------- 1,645,000 Connector 2000 Assn., Inc. SC Toll Road Rev. Bonds (SR-Southern Connector), Ser. A, 5 3/8s, 1/1/38 B- 1,071,306 2,120,000 Florence Cnty., Indl. Dev. Auth. Rev. Bonds (Stone Container Corp.), 7 3/8s, 2/1/07 Ba3 2,155,510 2,275,000 Lexington Cnty. Rev. Bonds, 5 1/2s, 11/1/32 A2 2,289,219 4,000,000 SC Hosp. Auth. Rev. Bonds (Med. U.), Ser. A, 6 1/2s, 8/15/32 BBB+ 4,170,000 SC Jobs Econ. Dev. Auth. Hosp. Fac. Rev. Bonds (Palmetto Hlth. Alliance) 3,800,000 Ser. A, 7 3/8s, 12/15/21 Baa2 4,645,500 5,000,000 Ser. C, 6s, 8/1/20 Baa2 5,125,000 9,000,000 SC Tobacco Settlement Rev. Mgt. Rev. Bonds, Ser. B, 6 3/8s, 5/15/30 BBB 7,683,750 -------------- 27,140,285 South Dakota (0.1%) - ------------------------------------------------------------------------------- 1,650,000 SD Edl. Enhancement Funding Corp. Rev. Bonds, Ser. B, 6 1/2s, 6/1/32 BBB 1,433,438 Tennessee (1.5%) - ------------------------------------------------------------------------------- 1,000,000 Elizabethton, Hlth. & Edl. Fac. Board Rev. Bonds (Hosp. Ref. & Impt.), Ser. B, 8s, 7/1/33 Baa2 1,177,500 6,500,000 Johnson City, Hlth. & Edl. Fac. Board Hosp. Rev. Bonds (Mountain States Hlth.), Ser. A, 7 1/2s, 7/1/33 BBB+ 7,531,875 Memphis-Shelby Cnty., Arpt. Auth. Rev. Bonds (Federal Express Corp.) 4,000,000 5.05s, 9/1/12 Baa2 4,215,000 2,000,000 4 1/2s, 7/1/14 Baa2 1,967,500 -------------- 14,891,875 Texas (4.5%) - ------------------------------------------------------------------------------- 6,850,000 Abilene, Hlth. Fac. Dev. Corp. Rev. Bonds (Sears Methodist Retirement), Ser. A, 5.9s, 11/15/25 BB/P 6,293,438 3,985,000 Crawford Ed. Fac. Rev. Bonds (U. St. Thomas), 5 3/8s, 10/1/27 BBB+ 3,820,619 2,500,000 Dallas-Fort Worth, Intl. Arpt. Fac. Impt. Rev. Bonds (American Airlines, Inc.), 8 1/4s, 11/1/36 Caa2 1,843,750 3,000,000 Dallas-Fort Worth, Intl. Arpt. Fac. Impt. Corp. Rev. Bonds (American Airlines, Inc.), 6 3/8s, 5/1/35 Caa2 1,878,750 500,000 Georgetown, Hlth. Fac. Dev. Corp. Rev. Bonds, 6 1/4s, 8/15/29 BB 474,375 Houston, Arpt. Syst. Rev. Bonds 7,000,000 (Special Fac. - Continental Airlines, Inc.), Ser. E, 6 3/4s, 7/1/21 B- 5,635,000 3,000,000 (Continental Airlines, Inc.), Ser. C, 5.7s, 7/15/29 B- 1,983,750 5,500,000 Lufkin, Hlth. Fac. Dev. Corp. Rev. Bonds (Memorial Hlth. Syst. of East TX), 5.7s, 2/15/28 BBB 5,273,125 5,265,000 Round Rock, Hotel Occupancy Tax Rev. Bonds (Convention Ctr. Complex), 5.85s, 12/1/24 BBB/P 5,021,494 4,500,000 Sam Rayburn Muni. Pwr. Agcy. Rev. Bonds, 6s, 10/1/21 Baa2 4,691,250 Tomball, Hosp. Auth. Rev. Bonds (Tomball Regl. Hosp.) 6,250,000 6 1/8s, 7/1/23 Baa2 6,329,563 2,095,000 6s, 7/1/25 Baa2 2,097,619 -------------- 45,342,733 Utah (1.2%) - ------------------------------------------------------------------------------- Carbon Cnty., Solid Waste Disp. Rev. Bonds (Laidlaw Env.), Ser. A 1,000,000 7 1/2s, 2/1/10 BB- 1,024,910 600,000 7.45s, 7/1/17 BB- 621,000 5,500,000 Tooele Cnty., Harbor & Term. Dist. Port Fac. Rev. Bonds (Union Pacific), Ser. A, 5.7s, 11/1/26 Baa2 5,465,625 4,480,000 UT Cnty., Env. Impt. Rev. Bonds (Marathon Oil Project), 5.05s, 11/1/17 Baa1 4,810,400 -------------- 11,921,935 Virginia (2.7%) - ------------------------------------------------------------------------------- 5,250,000 Henrico Cnty. Econ. Dev. Auth. Rev. Bonds (United Methodist), Ser. A, 6.7s, 6/1/27 BB+/P 5,328,750 2,000,000 Henrico Cnty., Indl. Dev. Auth. IFB (Bon Secours Hlth. Syst.), FSA, 10.205s, 8/23/27 Aaa 2,547,500 2,500,000 James Cnty., Indl. Dev. Auth. Rev. Bonds (Williamsburg), Ser. A, 6 1/8s, 3/1/32 BB-/P 2,509,375 4,000,000 Peninsula Ports Auth. Rev. Bonds (VA Baptist Homes), Ser. A, 7 3/8s, 12/1/32 B+/P 4,125,000 3,910,000 Pocahontas Parkway Assn. Toll Rd. Rev. Bonds, Ser. A, 5 1/2s, 8/15/28 BB 3,323,500 Roanoke Cnty. Indl. Dev. Auth. Rev. Bonds (Res. Care Fac.), Ser. A 2,000,000 6.3s, 7/1/35 B+/P 1,990,000 1,000,000 4.4s, 7/1/08 B+/P 993,750 1,000,000 Russell Cnty. Indl. Dev. Auth. Poll. Control Rev. Bonds (Appalachian Pwr. Co.), Ser. I, 2.7s, 11/1/07 Baa2 992,500 5,510,000 Suffolk, Redev. & Hsg. Auth. Rev. Bonds (Beach-Oxford Apts.), 6 1/4s, 10/1/33 BB-/P 5,000,325 -------------- 26,810,700 Washington (0.9%) - ------------------------------------------------------------------------------- 4,870,000 Tobacco Settlement Auth. of WA Rev. Bonds, 6 1/2s, 6/1/26 BBB 4,559,538 5,500,000 Washington Cnty., Hsg. & Redev. Auth. Rev. Bonds (Healtheast), 5 1/2s, 11/15/27 Ba2 4,805,625 -------------- 9,365,163 West Virginia (0.7%) - ------------------------------------------------------------------------------- 3,475,000 Mason Cnty., Poll. Control FRB (Appalachian Pwr. Co. Project), Ser. L, 5 1/2s, 10/1/22 Baa2 3,475,000 4,495,000 Princeton, Hosp. Rev. Bonds (Cmnty. Hosp. Assn., Inc.), 6.1s, 5/1/29 B2 3,253,240 -------------- 6,728,240 Wisconsin (0.6%) - ------------------------------------------------------------------------------- Badger Tobacco Settlement Asset Securitization Corp. Rev. Bonds 1,000,000 7s, 6/1/28 BBB 952,500 5,500,000 6 3/8s, 6/1/32 BBB 4,675,000 -------------- 5,627,500 Wyoming (0.9%) - ------------------------------------------------------------------------------- 5,350,000 Sweetwater Cnty., Poll. Control Rev. Bonds (Idaho Power Co. Project), Ser. A, 6.05s, 7/15/26 A3 5,644,250 3,400,000 Sweetwater Cnty., Poll. Control VRDN (Pacificorp.), Ser. B, 1.15s, 1/1/14 VMIG1 3,400,000 -------------- 9,044,250 -------------- Total Municipal bonds and notes (cost $977,255,311) $979,408,183 Preferred stocks (1.1%) (a) Number of shares Value - ------------------------------------------------------------------------------- 2,000,000 Charter Mac. Equity Trust 144A Ser. A, 6.625% cum. pfd. A3 $2,195,000 8,000,000 MuniMae Tax Exempt Bond Subsidiary, LLC 144A Ser. B, 7 3/4s cum. pfd. BBB- 9,000,000 -------------- Total Preferred stocks (cost $10,000,000) $11,195,000 Common stocks (0.2%) (a) Number of shares Value - ------------------------------------------------------------------------------- 70,874 Hoover Group, Inc. (NON) (AFF) $7 184,103 Tembec, Inc. (Canada) (NON) 1,503,249 -------------- Total Common stocks (cost $9,057,285) $1,503,256 - ------------------------------------------------------------------------------- Total Investments (cost $996,312,596) $992,106,439 - ------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $997,151,328. (RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at July 31, 2004 for the securities listed. Ratings are generally ascribed to securities at the time of issuance. While the agencies may from time to time revise such ratings, they undertake no obligation to do so, and the ratings do not necessarily represent what the agencies would ascribe to these securities at July 31, 2004. Securities rated by Putnam are indicated by "/P" . Ratings are not covered by the Report of Independent Registered Public Accounting Firm. (NON) Non-income-producing security. (RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at July 31, 2004 was $26,516,056 or 2.7% of net assets. (AFF) Affiliated Companies (Note 5). 144A after the name of a security represents those exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. The rates shown on IFB, which are securities paying interest rates that vary inversely to changes in the market interest rates, VRDN, mandatory put bonds, and Floating Rate Bonds (FRB) are the current interest rates at July 31, 2004. The fund had the following industry group concentrations greater than 10% at July 31, 2004 (as a percentage of net assets): Health care 35.9% Utilities 15.0 The dates shown on Mandatory Put Bonds are the next mandatory put dates. The accompanying notes are an integral part of these financial statements. Statement of assets and liabilities July 31, 2004 Assets - ------------------------------------------------------------------------------- Investment in securities, at value (Note 1): - ------------------------------------------------------------------------------- Unaffiliated Issuers (identified cost $996,312,596) $992,106,432 - ------------------------------------------------------------------------------- Affiliated Issuers (identified cost $--) (Note 5) 7 - ------------------------------------------------------------------------------- Cash 176,716 - ------------------------------------------------------------------------------- Interest and other receivables 14,103,716 - ------------------------------------------------------------------------------- Receivable for shares of the fund sold 199,944 - ------------------------------------------------------------------------------- Receivable for securities sold 11,287,526 - ------------------------------------------------------------------------------- Total assets 1,017,874,341 Liabilities - ------------------------------------------------------------------------------- Distributions payable to shareholders 1,697,276 - ------------------------------------------------------------------------------- Payable for securities purchased 16,220,845 - ------------------------------------------------------------------------------- Payable for shares of the fund repurchased 1,135,402 - ------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 895,878 - ------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 208,411 - ------------------------------------------------------------------------------- Payable for Trustee compensation and expenses (Note 2) 130,000 - ------------------------------------------------------------------------------- Payable for administrative services (Note 2) 2,118 - ------------------------------------------------------------------------------- Payable for distribution fees (Note 2) 279,013 - ------------------------------------------------------------------------------- Other accrued expenses 154,070 - ------------------------------------------------------------------------------- Total liabilities 20,723,013 - ------------------------------------------------------------------------------- Net assets $997,151,328 Represented by - ------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $1,182,130,934 - ------------------------------------------------------------------------------- Undistributed net investment income (Note 1) 2,539,732 - ------------------------------------------------------------------------------- Accumulated net realized loss on investments (Note 1) (183,313,181) - ------------------------------------------------------------------------------- Net unrealized depreciation of investments (4,206,157) - ------------------------------------------------------------------------------- Total - Representing net assets applicable to capital shares outstanding $997,151,328 Computation of net asset value and offering price - ------------------------------------------------------------------------------- Net asset value and redemption price per class A share ($798,736,694 divided by 64,085,614 shares) $12.46 - ------------------------------------------------------------------------------- Offering price per class A share (100/95.50 of $12.46)* $13.05 - ------------------------------------------------------------------------------- Net asset value and offering price per class B share ($180,830,324 divided by 14,485,594 shares)** $12.48 - ------------------------------------------------------------------------------- Net asset value and offering price per class C share ($10,599,538 divided by 850,042 shares)** $12.47 - ------------------------------------------------------------------------------- Net asset value and redemption price per class M share ($6,984,772 divided by 560,450 shares) $12.46 - ------------------------------------------------------------------------------- Offering price per class M share (100/96.75 of $12.46)*** $12.88 - ------------------------------------------------------------------------------- * On single retail sales of less than $25,000. On sales of $25000 or more and on group sales, the offering price is reduced. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. *** On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales, the offering price is reduced. The accompanying notes are an integral part of these financial statements. Statement of operations Year ended July 31, 2004 Interest income: $70,377,178 - ------------------------------------------------------------------------------- Expenses: - ------------------------------------------------------------------------------- Compensation of Manager (Note 2) 6,543,183 - ------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 1,247,115 - ------------------------------------------------------------------------------- Trustee compensation and expenses (Note 2) 40,661 - ------------------------------------------------------------------------------- Administrative services (Note 2) 22,508 - ------------------------------------------------------------------------------- Distribution fees -- Class A (Note 2) 1,779,034 - ------------------------------------------------------------------------------- Distribution fees -- Class B (Note 2) 1,713,061 - ------------------------------------------------------------------------------- Distribution fees -- Class C (Note 2) 111,705 - ------------------------------------------------------------------------------- Distribution fees -- Class M (Note 2) 40,621 - ------------------------------------------------------------------------------- Other 265,501 - ------------------------------------------------------------------------------- Non-recurring costs (Note 5) 17,961 - ------------------------------------------------------------------------------- Costs assumed by Manager (Note 5) (17,961) - ------------------------------------------------------------------------------- Fees waived and reimbursed by Manager (Note 2) (182,373) - ------------------------------------------------------------------------------- Total expenses 11,581,016 - ------------------------------------------------------------------------------- Expense reduction (Note 2) (41,179) - ------------------------------------------------------------------------------- Net expenses 11,539,837 - ------------------------------------------------------------------------------- Net investment income 58,837,341 - ------------------------------------------------------------------------------- Net realized loss on investments (Notes 1 and 3) (68,993,242) - ------------------------------------------------------------------------------- Net unrealized appreciation of investments during the year 85,385,128 - ------------------------------------------------------------------------------- Net gain on investments 16,391,886 - ------------------------------------------------------------------------------- Net increase in net assets resulting from operations $75,229,227 - ------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. Statement of changes in net assets Year ended July 31 Decrease in net assets 2004 2003 - ------------------------------------------------------------------------------- Operations: - ------------------------------------------------------------------------------- Net investment income $58,837,341 $76,752,234 - ------------------------------------------------------------------------------- Net realized loss on investments (68,993,242) (46,006,262) - ------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) of investments 85,385,128 (14,729,467) - ------------------------------------------------------------------------------- Net increase in net assets resulting from operations 75,229,227 16,016,505 - ------------------------------------------------------------------------------- Distributions to shareholders: (Note 1) - ------------------------------------------------------------------------------- From ordinary income - ------------------------------------------------------------------------------- Class A (203,556) (17,230) - ------------------------------------------------------------------------------- Class B (46,466) (3,945) - ------------------------------------------------------------------------------- Class C (2,543) (187) - ------------------------------------------------------------------------------- Class M (1,816) (171) - ------------------------------------------------------------------------------- From tax-exempt income - ------------------------------------------------------------------------------- Class A (48,239,448) (62,725,610) - ------------------------------------------------------------------------------- Class B (9,618,834) (13,041,582) - ------------------------------------------------------------------------------- Class C (514,977) (610,914) - ------------------------------------------------------------------------------- Class M (418,432) (601,649) - ------------------------------------------------------------------------------- Decrease from capital share transactions (Note 4) (265,227,788) (113,047,446) - ------------------------------------------------------------------------------- Total decrease in net assets (249,044,633) (174,032,229) - ------------------------------------------------------------------------------- Net assets - ------------------------------------------------------------------------------- Beginning of year 1,246,195,961 1,420,228,190 - ------------------------------------------------------------------------------- End of year (including undistributed net investment income of $2,539,732 and $3,083,364, respectively) $997,151,328 $1,246,195,961 - ------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Financial highlights (For a common share outstanding throughout the period) CLASS A - ------------------------------------------------------------------------------------------------------------------ Per-share Year ended July 31 operating performance 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $12.31 $12.88 $13.39 $13.27 $14.13 - ------------------------------------------------------------------------------------------------------------------ Investment operations: - ------------------------------------------------------------------------------------------------------------------ Net investment income .68 .74 .83 .80 .80 - ------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments .15 (.57) (.52) .11 (.85) - ------------------------------------------------------------------------------------------------------------------ Total from investment operations: .83 .17 .31 .91 (.05) - ------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------ From net investment income (.68) (.74) (.82) (.79) (.81) - ------------------------------------------------------------------------------------------------------------------ Total distributions (.68) (.74) (.82) (.79) (.81) - ------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $12.46 $12.31 $12.88 $13.39 $13.27 - ------------------------------------------------------------------------------------------------------------------ Total return at net asset value (%)(a) 6.87 1.34 2.38 7.10 (.24) - ------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $798,737 $1,000,769 $1,115,695 $1,145,710 $1,114,842 - ------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) .92 (c) .91 .90 .88 .86 - ------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 5.43 (c) 5.83 6.31 6.01 5.95 - ------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 18.25 28.90 19.87 17.95 12.05 - ------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) Includes amounts paid through expense offset arrangements (Note 2). (c) Reflects an expense limitation in effect during the period. As a result of such limitation the expenses of the fund for the period ended July 31, 2004 reflect a reduction of 0.02% of the average net assets for class A shares (Note 2). The accompanying notes are an integral part of these financial statements.
Financial highlights (For a common share outstanding throughout the period) CLASS B - ------------------------------------------------------------------------------------------------------------------ Per-share Year ended July 31 operating performance 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $12.33 $12.90 $13.41 $13.29 $14.15 - ------------------------------------------------------------------------------------------------------------------ Investment operations: - ------------------------------------------------------------------------------------------------------------------ Net investment income .60 .67 .76 .73 .73 - ------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments .15 (.57) (.52) .12 (.86) - ------------------------------------------------------------------------------------------------------------------ Total from investment operations: .75 .10 .24 .85 (.13) - ------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------ From net investment income (.60) (.67) (.75) (.73) (.73) - ------------------------------------------------------------------------------------------------------------------ Total distributions (.60) (.67) (.75) (.73) (.73) - ------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $12.48 $12.33 $12.90 $13.41 $13.29 - ------------------------------------------------------------------------------------------------------------------ Total return at net asset value (%)(a) 6.16 0.82 1.88 6.55 (.82) - ------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $180,830 $222,970 $281,825 $356,506 $441,174 - ------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) 1.57 (c) 1.43 1.40 1.39 1.44 - ------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 4.78 (c) 5.32 5.83 5.49 5.36 - ------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 18.25 28.90 19.87 17.95 12.05 - ------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) Includes amounts paid through expense offset arrangements (Note 2). (c) Reflects an expense limitation in effect during the period. As a result of such limitation the expenses of the fund for the period ended July 31, 2004 reflect a reduction of 0.02% of the average net assets for class B shares (Note 2). The accompanying notes are an integral part of these financial statements.
Financial highlights (For a common share outstanding throughout the period) CLASS C - ------------------------------------------------------------------------------------------------------------------ Per-share Year ended July 31 operating performance 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $12.31 $12.89 $13.39 $13.27 $14.13 - ------------------------------------------------------------------------------------------------------------------ Investment operations: - ------------------------------------------------------------------------------------------------------------------ Net investment income .58 .64 .72 .69 .69 - ------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments .16 (.58) (.51) .12 (.85) - ------------------------------------------------------------------------------------------------------------------ Total from investment operations: .74 .06 .21 .81 (.16) - ------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------ From net investment income (.58) (.64) (.71) (.69) (.70) - ------------------------------------------------------------------------------------------------------------------ Total distributions (.58) (.64) (.71) (.69) (.70) - ------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $12.47 $12.31 $12.89 $13.39 $13.27 - ------------------------------------------------------------------------------------------------------------------ Total return at net asset value (%)(a) 6.11 0.45 1.64 6.25 (1.05) - ------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $10,600 $12,028 $11,002 $6,779 $3,945 - ------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) 1.72 (c) 1.71 1.70 1.68 1.66 - ------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 4.64 (c) 5.02 5.46 5.20 5.16 - ------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 18.25 28.90 19.87 17.95 12.05 - ------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) Includes amounts paid through expense offset arrangements (Note 2). (c) Reflects an expense limitation in effect during the period. As a result of such limitation the expenses of the fund for the period ended July 31, 2004 reflect a reduction of 0.02% of the average net assets for class C shares (Note 2). The accompanying notes are an integral part of these financial statements.
Financial highlights (For a common share outstanding throughout the period) CLASS M - ------------------------------------------------------------------------------------------------------------------ Per-share Year ended July 31 operating performance 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $12.31 $12.89 $13.39 $13.27 $14.14 - ------------------------------------------------------------------------------------------------------------------ Investment operations: - ------------------------------------------------------------------------------------------------------------------ Net investment income .64 .70 .79 .76 .77 - ------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments .15 (.58) (.51) .12 (.87) - ------------------------------------------------------------------------------------------------------------------ Total from investment operations: .79 .12 .28 .88 (.10) - ------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------ From net investment income (.64) (.70) (.78) (.76) (.77) - ------------------------------------------------------------------------------------------------------------------ Total distributions (.64) (.70) (.78) (.76) (.77) - ------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $12.46 $12.31 $12.89 $13.39 $13.27 - ------------------------------------------------------------------------------------------------------------------ Total return at net asset value (%)(a) 6.56 0.96 2.16 6.79 (.62) - ------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $6,985 $10,429 $11,706 $11,474 $13,745 - ------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) 1.22 (c) 1.21 1.20 1.18 1.16 - ------------------------------------------------------------------------------------------------------------------ Ratio of net investment inco to average net assets (%) 5.13 (c) 5.54 6.00 5.70 5.65 - ------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 18.25 28.90 19.87 17.95 12.05 - ------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) Includes amounts paid through expense offset arrangements (Note 2). (c) Reflects an expense limitation in effect during the period. As a result of such limitation the expenses of the fund for the period ended July 31, 2004 reflect a reduction of 0.02% of the average net assets for class M shares (Note 2). The accompanying notes are an integral part of these financial statements. Notes to financial statements July 31, 2004 Note 1 Significant accounting policies Putnam Tax-Free High Yield Fund (the "fund") is a series of Putnam Tax-Free Income Trust (the "trust"), a Massachusetts business trust, which is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The fund pursues its objective of seeking high current income exempt from federal income tax by investing primarily in high-yielding, lower rated tax-exempt securities constituting a portfolio that Putnam Investment Management, LLC ("Putnam Management"), the fund's manager, an indirect wholly-owned subsidiary of Putnam, LLC, believes does not involve undue risk to income or principal. The fund invests in higher yielding, lower rated bonds that have a higher rate of default due to the nature of the investments. The fund offers class A, class B, class C and class M shares. Class A shares are sold with a maximum front-end sales charge of 4.50%. Prior to January 28, 2004, the maximum front-end sales charge for class shares was 4.75%. Class B shares, which convert to class A shares after approximately eight years, do not pay a front-end sales charge but pay a higher ongoing distribution fee than class A and class M shares but lower than class C shares, and are subject to a contingent deferred sales charge, if those shares are redeemed within six years of purchase. Class C shares have a higher ongoing distribution fee than class A, class B, and class M shares, do not pay front-end sales charge but have a one-year 1.00% contingent deferred sales charge and do not convert to class A shares. Class M shares are sold with a maximum front-end sales charge of 3.25% and pay an ongoing distribution fee that is higher than class A shares but lower than class B and class C shares. Effective April 19, 2004 (May 3, 2004 for defined contribution plans administered by Putnam) a 2.00% redemption fee may apply to any shares that are redeemed (either by selling or exchanging into another fund) within 5 days of purchase. The redemption fee is accounted for as an addition to paid-in-capital. Expenses of the fund are borne pro-rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the distribution fees applicable to such class). Each class votes as a class only with respect to its own distribution plan or other matters on which a class vote is required by law or determined by the Trustees. Shares of each class would receive their pro-rata share of the net assets of the fund, if the fund were liquidated. In addition, the Trustees declare separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. A) Security valuation Tax-exempt bonds and notes are valued at fair value on the basis of valuations provided by an independent pricing service, approved by the Trustees. Such services use information with respect to transactions in bonds, quotations from bond dealers, market transactions in comparable securities and various relationships between securities in determining value. Other investments, including restricted securities, are valued at fair value following procedures approved by the Trustees. Such valuations and procedures are reviewed periodically by the Trustees. B) Security transactions and related investment income Security transactions are recorded on the trade date (date the order to buy or sell is executed). Gains or losses on securities sold are determined on the identified cost basis. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the securities received. All premiums/discounts are amortized/accreted on a yield-to-maturity basis. The premium in excess of the call price, if any, is amortized to the call date; thereafter, any remaining premium is amortized to maturity. C) Line of credit During the period, the fund was entered into a committed line of credit with certain banks. The line of credit agreement included restrictions that the fund would maintain an asset coverage ratio of at least 300% and that borrowings would not exceed prospectus limitations. For the period ended August 6, 2003, the fund had no borrowings against the line of credit. Effective August 6, 2003, the fund no longer participated in a committed line of credit. D) Federal taxes It is the policy of the fund to distribute all of its income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986 (the "Code"), as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains. At July 31, 2004, the fund had a capital loss carryover of $138,126,405 available to the extent allowed by tax law to offset future capital gains, if any. The amount of the carryover and the expiration dates are: Loss Carryover Expiration - ------------------------------- $21,345,454 July 31, 2006 23,390,767 July 31, 2007 7,813,842 July 31, 2008 1,682,906 July 31, 2009 1,466,587 July 31, 2010 4,722,800 July 31, 2011 77,704,049 July 31, 2012 Pursuant to federal income tax regulations applicable to regulated investment companies, the fund has elected to defer to its fiscal year ending July 31, 2005, $41,584,036 of losses recognized during the period November 1, 2003 to July 31, 2004. E) Distributions to shareholders Income dividends are recorded daily by the fund and are paid monthly. Distributions from capital gains, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include temporary and permanent differences of post-October loss deferrals, the expiration of capital loss carryover, dividends payable, defaulted bond interest, market discount, straddle loss deferrals and amortization/accretion. Reclassifications are made to the fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. For the year ended July 31, 2004, the fund reclassified $334,901 to decrease undistributed net investment income and $16,178,513 to decrease paid-in-capital, with an decrease to accumulated net realized losses of $16,513,414. The tax basis components of distributable earnings and the federal tax cost as of period end were as follows: Unrealized appreciation $41,902,054 Unrealized depreciation (45,861,694) ------------ Net unrealized depreciation (3,959,640) Undistributed tax-exempt income 5,357,602 Undistributed ordinary income 77,571 Capital loss carryforward (138,126,405) Post-October loss (41,584,036) Cost for federal income tax purposes $996,066,079 F) Expenses of the trust Expenses directly charged or attributable to any fund will be paid from the assets of that fund. Generally, expenses of the trust will be allocated among and charged to the assets of each fund on a basis that the Trustees deem fair and equitable, which may be based on the relative assets of each fund or the nature of the services performed and relative applicability to each fund. Note 2 Management fee, administrative services and other transactions Putnam Management is paid for management and investment advisory services monthly based on the average net assets of the fund. Such fee is based on the following annual rates: 0.65% of the first $500 million of average net assets, 0.55% of the next $500 million, 0.50% of the next $500 million, 0.45% of the next $5 billion, 0.425% of the next $5 billion, 0.405% of the next $5 billion, and 0.39% of the next $5 billion and 0.38% thereafter. Effective January 28, 2004, Putnam Management has agreed to limit its compensation (and, to the extent necessary, bear other expenses) through December 31, 2004, to the extent that the fund's net expenses as a percentage of average net assets exceed the average expense ratio for the fund's Lipper peer group of front-end load funds. For the year ended July 31, 2004, Putnam Management waived $182,363 of its management fee to the fund. The fund reimburses Putnam Management an allocated amount for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust Company ("PFTC"), a subsidiary of Putnam, LLC. Putnam Investor Services, a division of PFTC, provides investor servicing agent functions to the fund. During the year ended July 31, 2004, the fund paid PFTC $1,061,406 for these services. The fund has entered into an arrangement with PFTC whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the fund's expenses. For the year ended July 31, 2004, the fund's expenses were reduced by $41,179 under these arrangements. Each independent Trustee of the fund receives an annual Trustee fee, of which $1,888, as a quarterly retainer, has been allocated to the fund, and an additional fee for each Trustees meeting attended. Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees fees payable on or after July 1, 1995. The deferred fees remain invested in certain Putnam funds until distribution in accordance with the Deferral Plan. The fund has adopted an unfunded noncontributory defined benefit pension plan (the "Pension Plan") covering all Trustees of the fund who have served as a Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in Trustee compensation and expenses in the statement of operations. Accrued pension liability is included in Payable for Trustee compensation and expenses in the statement of assets and liabilities. The Trustees have terminated the Pension Plan with respect to any Trustee first elected after 2003. The fund has adopted distribution plans (the "Plans") with respect to its class A, class B, class C and class M shares pursuant to rule 12b-1 under the Investment Company Act of 1940. The purpose of the Plans is to compensate Putnam Retail Management, a wholly-owned subsidiary of Putnam, LLC and Putnam Retail Management GP, Inc., for services provided and expenses incurred in distributing shares of the fund. The Plans provide for payments by the fund to Putnam Retail Management at an annual rate of up to 0.35%, 1.00%, 1.00% and 1.00% of the average net assets attributable to class A, class B, class C and class M shares, respectively. The Trustees have approved payment by the fund at the annual rates of 0.20%, 0.85%, 1.00% and 0.50% of the average net assets attributable to class A, class B, class C and class M shares, respectively. For the year ended July 31, 2004, Putnam Retail Management, acting as underwriter, received net commissions of $20,106 and $132 from the sale of class A and class M shares, respectively, and received $488,748 and $1,698 in contingent deferred sales charges from redemptions of class B and class C shares, respectively. Note 3 Purchases and sales of securities During the year ended July 31, 2004, cost of purchases and proceeds from sales of investment securities other than short-term investments aggregated $195,531,870 and $490,728,641, respectively. There were no purchases or sales of U.S. government securities. Note 4 Capital shares At July 31, 2004, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows: Year ended July 31, 2004 - ---------------------------------------------------------------- Class A Shares Amount - ---------------------------------------------------------------- Shares sold 2,732,805 $34,050,893 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 2,371,678 29,690,091 - ---------------------------------------------------------------- 5,104,483 63,740,984 Shares repurchased (22,318,200) (278,790,981) - ---------------------------------------------------------------- Net decrease (17,213,717) $(215,049,997) - ---------------------------------------------------------------- Year ended July 31, 2003 - ---------------------------------------------------------------- Class A Shares Amount - ---------------------------------------------------------------- Shares sold 7,302,265 $92,127,348 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 2,953,632 37,186,069 - ---------------------------------------------------------------- 10,255,897 129,313,417 Shares repurchased (15,560,514) (195,724,936) - ---------------------------------------------------------------- Net decrease (5,304,617) $(66,411,519) - ---------------------------------------------------------------- Year ended July 31, 2004 - ---------------------------------------------------------------- Class B Shares Amount - ---------------------------------------------------------------- Shares sold 930,003 $11,644,576 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 387,564 4,859,493 - ---------------------------------------------------------------- 1,317,567 16,504,069 Shares repurchased (4,916,360) (61,526,126) - ---------------------------------------------------------------- Net decrease (3,598,793) $(45,022,057) - ---------------------------------------------------------------- Year ended July 31, 2003 - ---------------------------------------------------------------- Class B Shares Amount - ---------------------------------------------------------------- Shares sold 1,854,677 $23,435,847 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 512,488 6,465,446 - ---------------------------------------------------------------- 2,367,165 29,901,293 Shares repurchased (6,122,644) (77,328,504) - ---------------------------------------------------------------- Net decrease (3,755,479) $(47,427,211) - ---------------------------------------------------------------- Year ended July 31, 2004 - ---------------------------------------------------------------- Class C Shares Amount - ---------------------------------------------------------------- Shares sold 180,330 $2,259,492 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 21,463 268,452 - ---------------------------------------------------------------- 201,793 2,527,944 Shares repurchased (328,482) (4,093,502) - ---------------------------------------------------------------- Net decrease (126,689) $(1,565,558) - ---------------------------------------------------------------- Year ended July 31, 2003 - ---------------------------------------------------------------- Class C Shares Amount - ---------------------------------------------------------------- Shares sold 345,325 $4,381,427 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 25,053 308,458 - ---------------------------------------------------------------- 370,378 4,689,885 Shares repurchased (247,328) (3,113,145) - ---------------------------------------------------------------- Net increase 123,050 $1,576,740 - ---------------------------------------------------------------- Year ended July 31, 2004 - ---------------------------------------------------------------- Class M Shares Amount - ---------------------------------------------------------------- Shares sold 18,623 $232,608 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 22,470 281,100 - ---------------------------------------------------------------- 41,093 513,708 Shares repurchased (327,841) (4,103,884) - ---------------------------------------------------------------- Net decrease (286,748) $(3,590,176) - ---------------------------------------------------------------- Year ended July 31, 2003 - ---------------------------------------------------------------- Class M Shares Amount - ---------------------------------------------------------------- Shares sold 47,097 $565,889 - ---------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 31,500 421,804 - ---------------------------------------------------------------- 78,597 987,693 Shares repurchased (139,917) (1,773,149) - ---------------------------------------------------------------- Net decrease (61,320) $(785,456) - ---------------------------------------------------------------- Note 5 Transactions with affiliated issuers Transactions during the year with companies in which the fund owned at least 5% of the voting securities were as follows: Purchase Sales Dividend Market Affiliate Cost Cost Income Value - ---------------------------------------------------------------------------- Hoover Group, Inc.* $-- $-- $-- $7 Market values are shown for those securities affiliated at period end. * Security was acquired as part of a corporate action. Note 6 Regulatory matters and litigation On April 8, 2004, Putnam Management entered into agreements with the Securities and Exchange Commission ("SEC") and the Massachusetts Securities Division representing a final settlement of all charges brought against Putnam Management by those agencies on October 28, 2003 in connection with excessive short-term trading by Putnam employees and, in the case of the charges brought by the Massachusetts Securities Division, by participants in some Putnam-administered 401(k) plans. The settlement with the SEC requires Putnam Management to pay $5 million in disgorgement plus a civil monetary penalty of $50 million, and the settlement with the Massachusetts Securities Division requires Putnam Management to pay $5 million in restitution and an administrative fine of $50 million. The settlements also leave intact the process established under an earlier partial settlement with the SEC under which Putnam Management agreed to pay the amount of restitution determined by an independent consultant, which may exceed the disgorgement and restitution amounts specified above, pursuant to a plan to be developed by the independent consultant. Putnam Management, and not the investors in any Putnam fund, will bear all costs, including restitution, civil penalties and associated legal fees stemming from both of these proceedings. The SEC's and Massachusetts Securities Division's allegations and related matters also serve as the general basis for numerous lawsuits, including purported class action lawsuits filed against Putnam Management and certain related parties, including certain Putnam funds. Putnam Management has agreed to bear any costs incurred by Putnam funds in connection with these lawsuits. Based on currently available information, Putnam Management believes that the likelihood that the pending private lawsuits and purported class action lawsuits will have a material adverse financial impact on the fund is remote, and the pending actions are not likely to materially affect its ability to provide investment management services to its clients, including the Putnam funds. For the period ended July 31, 2004, Putnam Management has assumed $17,961 of legal, shareholder servicing and communication, audit, and Trustee fees incurred by the Fund in connection with these matters. Review of these matters by counsel for Putnam Management and by separate independent counsel for the Putnam funds and their independent Trustees is continuing. The fund may experience increased redemptions as a result of these matters, which could result in increased transaction costs and operating expenses. Federal tax information (Unaudited) The fund has designated 99.6% of dividends paid from net investment income during the fiscal year as tax exempt for Federal income tax purposes. The Form 1099 you receive in January 2005 will show the tax status of all distributions paid to your account in calendar 2004. About the Trustees Jameson A. Baxter (9/6/43), Trustee since 1994 Ms. Baxter is the President of Baxter Associates, Inc., a private investment firm that she founded in 1986. Ms. Baxter serves as a Director of ASHTA Chemicals, Inc., Banta Corporation (a printing and digital imaging firm), Ryerson Tull, Inc. (a steel service corporation), Advocate Health Care and BoardSource, formerly the National Center for Nonprofit Boards. She is Chairman Emeritus of the Board of Trustees, Mount Holyoke College, having served as Chairman for five years and as a board member for thirteen years. Until 2002, Ms. Baxter was a Director of Intermatic Corporation (a manufacturer of energy control products). Ms. Baxter has held various positions in investment banking and corporate finance, including Vice President and Principal of the Regency Group, and Vice President of and Consultant to First Boston Corporation. She is a graduate of Mount Holyoke College. Charles B. Curtis (4/27/40), Trustee since 2001 Mr. Curtis is President and Chief Operating Officer of the Nuclear Threat Initiative (a private foundation dealing with national security issues) and serves as Senior Advisor to the United Nations Foundation. Mr. Curtis is a member of the Council on Foreign Relations and the Trustee Advisory Council of the Applied Physics Laboratory, Johns Hopkins University. Until 2003, Mr. Curtis was a member of the Electric Power Research Institute Advisory Council and the University of Chicago Board of Governors for Argonne National Laboratory. Prior to 2002, Mr. Curtis was a Member of the Board of Directors of the Gas Technology Institute and the Board of Directors of the Environment and Natural Resources Program Steering Committee, John F. Kennedy School of Government, Harvard University. Until 2001, Mr. Curtis was a member of the Department of Defense Policy Board and Director of EG&G Technical Services, Inc. (a fossil energy research and development support company). From August 1997 to December 1999, Mr. Curtis was a Partner at Hogan & Hartson L.L.P., a Washington, D.C. law firm. Prior to May 1997, Mr. Curtis was Deputy Secretary of Energy. He served as Chairman of the Federal Energy Regulatory Commission from 1977 to 1981 and has held positions on the staff of the U.S. House of Representatives, the U.S. Treasury Department, and the SEC. John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000 Mr. Hill is Vice Chairman of First Reserve Corporation, a private equity buyout firm that specializes in energy investments in the diversified worldwide energy industry. Mr. Hill is a Director of Devon Energy Corporation, TransMontaigne Oil Company, Continuum Health Partners of New York and various private companies controlled by First Reserve Corporation, as well as a Trustee of TH Lee, Putnam Investment Trust (a closed-end investment company advised by an affiliate of Putnam Management). He is also a Trustee of Sarah Lawrence College. Prior to acquiring First Reserve Corporation in 1983, Mr. Hill held executive positions in investment banking and investment management with several firms and with the federal government, including Deputy Associate Director of the Office of Management and Budget and Deputy Director of the Federal Energy Administration. He is active in various business associations, including the Economic Club of New York, and lectures on energy issues in the United States and Europe. Mr. Hill holds a B.A. degree in Economics from Southern Methodist University and pursued graduate studies there as a Woodrow Wilson Fellow. Ronald J. Jackson (12/17/43), Trustee since 1996 Mr. Jackson is a private investor. Mr. Jackson is President of the Kathleen and Ronald J. Jackson Foundation (a charitable trust). He is also a member of the Board of Overseers of WGBH (a public television and radio station) as well as a member of the Board of Overseers of the Peabody Essex Museum. Mr. Jackson is the former Chairman, President and Chief Executive Officer of Fisher-Price, Inc. (a major toy manufacturer), from which he retired in 1993. He previously served as President and Chief Executive Officer of Stride-Rite, Inc. (a manufacturer and distributor of footwear) and of Kenner Parker Toys, Inc. (a major toy and game manufacturer). Mr. Jackson was President of Talbots, Inc. (a distributor of women's apparel) and has held financial and marketing positions with General Mills, Inc. and Parker Brothers (a toy and game company). Mr. Jackson is a graduate of the University of Michigan Business School. Paul L. Joskow (6/30/47), Trustee since 1997 Dr. Joskow is the Elizabeth and James Killian Professor of Economics and Management, and Director of the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology. Dr. Joskow serves as a Director of National Grid Transco (a UK-based holding company with interests in electric and gas transmission and distribution and telecommunications infrastructure) and TransCanada Corporation (an energy company focused on natural gas transmission and power services). He also serves on the board of the Whitehead Institute for Biomedical Research (a non-profit research institution) and has been President of the Yale University Council since 1993. Prior to February 2002, he was a Director of State Farm Indemnity Company (an automobile insurance company), and, prior to March 2000, he was a Director of New England Electric System (a public utility holding company). Dr. Joskow has published five books and numerous articles on topics in industrial organization, government regulation of industry, and competition policy. He is active in industry restructuring, environmental, energy, competition and privatization policies -- serving as an advisor to governments and corporations worldwide. Dr. Joskow holds a Ph.D. and M. Phil from Yale University and B.A. from Cornell University. Elizabeth T. Kennan (2/25/38), Trustee since 1992 Dr. Kennan is a Partner of Cambus-Kenneth Farm (thoroughbred horse and cattle breeding). She is President Emeritus of Mount Holyoke College. Dr. Kennan served as Chairman and is now Lead Director of Northeast Utilities and is a Director of Talbots, Inc. She has served as Director on a number of other boards, including Bell Atlantic, Chastain Real Estate, Shawmut Bank, Berkshire Life Insurance and Kentucky Home Life Insurance. She is a Trustee of the National Trust for Historic Preservation, of Centre College and of Midway College in Midway, Kentucky. She is also a member of The Trustees of Reservations. Dr. Kennan has served on the oversight committee of the Folger Shakespeare Library, as President of Five Colleges Incorporated, as a Trustee of Notre Dame University and is active in various educational and civic associations. As a member of the faculty of Catholic University for twelve years, until 1978, Dr. Kennan directed the post-doctoral program in Patristic and Medieval Studies, taught history and published numerous articles. Dr. Kennan holds a Ph.D. from the University of Washington in Seattle, an M.S. from St. Hilda's College at Oxford University and an A.B. from Mount Holyoke College. She holds several honorary doctorates. John H. Mullin, III (6/15/41), Trustee since 1997 Mr. Mullin is the Chairman and CEO of Ridgeway Farm (a limited liability company engaged in timber and farming). Mr. Mullin serves as a Director of The Liberty Corporation (a broadcasting company), Progress Energy, Inc. (a utility company, formerly known as Carolina Power & Light) and Sonoco Products, Inc. (a packaging company). Mr. Mullin is Trustee Emeritus of The National Humanities Center and Washington & Lee University, where he served as Chairman of the Investment Committee. Prior to May 2001, he was a Director of Graphic Packaging International Corp. Prior to February 2004, he was a Director of Alex Brown Realty, Inc. Mr. Mullin is also a past Director of Adolph Coors Company; ACX Technologies, Inc.; Crystal Brands, Inc.; Dillon, Read & Co., Inc.; Fisher-Price, Inc.; and The Ryland Group, Inc. Mr. Mullin is a graduate of Washington & Lee University and The Wharton Graduate School, University of Pennsylvania. Robert E. Patterson (3/15/45), Trustee since 1984 Mr. Patterson is Senior Partner of Cabot Properties, L.P. and Chairman of Cabot Properties, Inc. Mr. Patterson serves as Chairman of the Joslin Diabetes Center and as a Director of Brandywine Trust Company. Prior to June 2003, he was a Trustee of Sea Education Association. Prior to December 2001, he was President and Trustee of Cabot Industrial Trust (a publicly traded real estate investment trust). Prior to February 1998, he was Executive Vice President and Director of Acquisitions of Cabot Partners Limited Partnership (a registered investment adviser involved in institutional real estate investments). And, prior to 1990, he served as Executive Vice President of Cabot, Cabot & Forbes Realty Advisors, Inc. (the predecessor company of Cabot Partners) and as a Senior Vice President of the Beal Companies (a real estate management, investment and development firm). Mr. Patterson practiced law and held various positions in state government and was the founding Executive Director of the Massachusetts Industrial Finance Agency. Mr. Patterson is a graduate of Harvard College and Harvard Law School. W. Thomas Stephens (9/2/42), Trustee since 1997 Mr. Stephens serves on a number of corporate boards. Effective November 2004, Mr. Stephens is expected to become Chief Executive Officer of Boise Cascade, L.L.C. (a paper, forest products and timberland assets company). Mr. Stephens serves as a Director of Xcel Energy Incorporated (a public utility company) and TransCanada Pipelines Limited. Until 2004, Mr. Stephens was a Director of Qwest Communications and Norske Canada, Inc. (a paper manufacturer). Until 2003, Mr. Stephens was a Director of Mail-Well, Inc. (a diversified printing company). He served as Chairman of Mail-Well until 2001 and as CEO of MacMillan-Bloedel, Ltd. (a forest products company) until 1999. Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of Johns Manville Corporation. He holds B.S. and M.S. degrees from the University of Arkansas. George Putnam, III* (8/10/51), Trustee since 1984 and President since 2000 Mr. Putnam is President of New Generation Research, Inc. (a publisher of financial advisory and other research services), and of New Generation Advisers, Inc. (a registered investment advisor to private funds). Mr. Putnam founded the New Generation companies in 1986. Mr. Putnam is a Director of The Boston Family Office, LLC (a registered investment adviser). He is a Trustee of St. Mark's School, Shore Country Day School, and until 2002 was a Trustee of the Sea Education Association. Mr. Putnam previously worked as an attorney with the law firm of Dechert LLP (formerly known as Dechert Price & Rhoads) in Philadelphia. He is a graduate of Harvard College, Harvard Business School and Harvard Law School. A.J.C. Smith* (4/13/34), Trustee since 1986 Mr. Smith is the Chairman of Putnam Investments and Director of and Consultant to Marsh & McLennan Companies, Inc. Mr. Smith is also a Director of Trident Corp. (a limited partnership with over thirty institutional investors). He is also a Trustee of the Carnegie Hall Society, the Educational Broadcasting Corporation, and the National Museums of Scotland. He is Chairman of the Central Park Conservancy and a Member of the Board of Overseers of the Joan and Sanford I. Weill Graduate School of Medical Sciences of Cornell University. Prior to May 2000 and November 1999, Mr. Smith was Chairman and CEO, respectively, of Marsh & McLennan Companies, Inc. The address of each Trustee is One Post Office Square, Boston, MA 02109. As of July 31, 2004, there were 102 Putnam Funds. Each Trustee serves for an indefinite term, until his or her resignation, retirement at age 72, death, or removal. * Trustees who are or may be deemed to be "interested persons" (as defined in the Investment Company Act of 1940) of the fund, Putnam Management, Putnam Retail Management, or Marsh & McLennan Companies, Inc., the parent company of Putnam, LLC and its affiliated companies. Messrs. Putnam, III, and Smith are deemed "interested persons" by virtue of their positions as officers of the fund, Putnam Management, Putnam Retail Management or Marsh & McLennan Companies, Inc. and as shareholders of Marsh & McLennan Companies, Inc. George Putnam, III is the President of your fund and each of the other Putnam funds. Mr. Smith serves as a Director of and Consultant to Marsh & McLennan Companies, Inc. and as Chairman of Putnam Investments. Officers In addition to George Putnam, III, the other officers of the fund are shown below: Charles E. Porter (7/26/38) Executive Vice President, Associate Treasurer and Principal Executive Officer Since 1989 Managing Director, Putnam Investments and Putnam Management Jonathan S. Horwitz (6/4/55) Senior Vice President and Treasurer Since 2004 Managing Director, Putnam Investments Steven D. Krichmar (6/27/58) Vice President and Principal Financial Officer Since 2002 Senior Managing Director, Putnam Investments. Prior to July 2001, Partner, PricewaterhouseCoopers LLP Michael T. Healy (1/24/58) Assistant Treasurer and Principal Accounting Officer Since 2000 Managing Director, Putnam Investments Beth S. Mazor (4/6/58) Vice President Since 2002 Senior Vice President, Putnam Investments Daniel T. Gallagher (2/27/62) Vice President and Legal and Compliance Liaison Officer Since 2004 Vice President, Putnam Investments. Prior to 2004, Associate, Ropes & Gray LLP; prior to 2000, Law Clerk, Massachusetts Supreme Judicial Court Francis J. McNamara, III (8/19/55) Vice President and Chief Legal Officer Since 2004 Senior Managing Director, Putnam Investments, Putnam Management and Putnam Retail Management. Prior to 2004, General Counsel, State Street Research & Management Company James P. Pappas (2/24/53) Vice President Since 2004 Managing Director, Putnam Investments and Putnam Management. From 2001 to 2002, Chief Operating Officer, Atalanta/Sosnoff Management Corporation; prior to 2001, President and Chief Executive Officer, UAM Investment Services, Inc. Richard S. Robie, III (3/30/60) Vice President Since 2004 Senior Managing Director, Putnam Investments, Putnam Management and Putnam Retail Management. Prior to 2003, Senior Vice President, United Asset Management Corporation Mark C. Trenchard (6/5/62) Vice President and BSA Compliance Officer Since 2002 Senior Vice President, Putnam Investments Judith Cohen (6/7/45) Clerk and Assistant Treasurer Since 1993 Clerk and Assistant Treasurer, The Putnam Funds The address of each Officer is One Post Office Square, Boston, MA 02109. The Putnam family of funds The following is a complete list of Putnam's open-end mutual funds. Investors should carefully consider the investment objective, risks, charges, and expenses of a fund before investing. For a prospectus containing this and other information for any Putnam fund or product, call your financial advisor at 1-800-225-1581 and ask for a prospectus. Please read the prospectus carefully before investing. Growth Funds Discovery Growth Fund Growth Opportunities Fund Health Sciences Trust International New Opportunities Fund* New Opportunities Fund OTC & Emerging Growth Fund Small Cap Growth Fund Vista Fund Voyager Fund Blend Funds Capital Appreciation Fund Capital Opportunities Fund Europe Equity Fund* Global Equity Fund* Global Natural Resources Fund* International Capital Opportunities Fund* International Equity Fund* Investors Fund Research Fund Tax Smart Equity Fund Utilities Growth and Income Fund Value Funds Classic Equity Fund Convertible Income-Growth Trust Equity Income Fund The George Putnam Fund of Boston The Putnam Fund for Growth and Income International Growth and Income Fund* Mid Cap Value Fund New Value Fund Small Cap Value Fund+ Income Funds American Government Income Fund Putnam Floating Rate Income Fund Diversified Income Trust Global Income Trust* High Yield Advantage Fund*+ High Yield Trust* Income Fund Intermediate U.S. Government Income Fund Money Market Fund++ U.S. Government Income Trust Tax-free Income Funds Municipal Income Fund Tax Exempt Income Fund Tax Exempt Money Market Fund Tax-Free High Yield Fund Tax-Free Insured Fund State tax-free income funds Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio and Pennsylvania Asset Allocation Funds Putnam Asset Allocation Funds--three investment portfolios that spread your money across a variety of stocks, bonds, and money market investments. The three portfolios: Asset Allocation: Balanced Portfolio Asset Allocation: Conservative Portfolio Asset Allocation: Growth Portfolio * A 1% redemption fee on total assets redeemed or exchanged between 6 and 90 days of purchase may be imposed for all share classes of these funds. + Closed to new investors. ++ An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve your investment at $1.00 per share, it is possible to lose money by investing in the fund. With the exception of money market funds, a 2% redemption fee will be applied to shares exchanged or sold within 5 days of purchase. Check your account balances and the most recent month-end performance at www.putnaminvestments.com. Services for shareholders Investor services Help your investment grow Set up a program for systematic investing with as little as $25 a month from a Putnam fund or from your own savings or checking account. (Regular investing does not guarantee a profit or protect against loss in a declining market.) Switch funds easily* You can move money from one Putnam fund to another within the same class of shares without a service charge. Access your money easily You can have checks sent regularly or redeem shares any business day at the then-current net asset value, which may be more or less than the original cost of the shares. Class B and class C shares carry a sales charge that is applied to certain withdrawals. How to buy additional shares You may buy shares through your financial advisor or directly from Putnam. To open an account by mail, send a check made payable to the name of the fund along with a completed fund application. To add to an existing account, complete the investment slip found at the top of your Confirmation of Activity statement and return it with a check payable to your fund. For more information Visit www.putnaminvestments.com A secure section of our Web site contains complete information on your account, including balances and transactions, updated daily. You may also conduct transactions, such as exchanges, additional investments, and address changes. Log on today to get your password. Use our toll-free number 1-800-225-1581 Ask a helpful Putnam representative or your financial advisor for details about any of these or other services, or see your prospectus. * This privilege is subject to change or termination. An exchange of funds may result in a taxable event. In addition, a 2% redemption fee will be applied to shares exchanged or sold within 5 days of purchase, and certain funds have imposed a 1% redemption fee on total assets redeemed or exchanged between 6 and 90 days of purchase. Putnam puts your interests first In January, Putnam announced a number of voluntary initiatives designed to reduce fund expenses, provide investors with more useful information, and help safeguard the interests of all Putnam investors. For details, visit www.putnaminvestments.com. Cost-cutting initiatives Reduced sales charges Effective immediately, the maximum sales charge for class A shares has been reduced to 5.25% for equity funds (formerly 5.75%) and 4.50% for most income funds (formerly 4.75%).* Lower class B purchase limit To help ensure that investors are in the most cost-effective share class, the maximum amount that can be invested in class B shares has been reduced to $100,000. (Larger trades or accumulated amounts will be directed to class A shares.) Ongoing expenses will be limited During calendar 2004, total ongoing expenses, including management fees for all funds, will be maintained at or below the average of each fund's industry peers in its Lipper load-fund universe. For more information, please see the Statement of Additional information. Additional measures are being taken to reduce expenses for shareholders in the six global and international funds that had short-term trading issues. Improved disclosure Putnam fund prospectuses and shareholder reports are being revised to disclose additional information that will help shareholders compare funds and weigh their costs and risks along with their potential benefits. Shareholders will find easy-to-understand information about fund expense ratios, portfolio manager compensation, risk comparisons, brokerage commissions, and employee and trustee ownership of Putnam funds. Disclosure of breakpoint discounts is also being enhanced to alert investors to potential cost savings. Protecting investors' interests New short-term trading fee introduced To discourage short-term trading, which can interfere with a fund's long-term strategy, a 2% short-term trading fee will be imposed on any Putnam fund shares redeemed or exchanged within five calendar days of purchase. * The maximum sales charge for class A shares of Putnam U.S. Intermediate Government Income Fund remains 3.25%. Fund information One of the largest mutual fund families in the United States, Putnam Investments has a heritage of investment leadership dating back to Judge Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition and practice since 1830. Founded over 65 years ago, Putnam Investments was built around the concept that a balance between risk and reward is the hallmark of a well-rounded financial program. We presently manage over 100 mutual funds in growth, value, blend, fixed income, and international. Investment Manager Putnam Investment Management, LLC One Post Office Square Boston, MA 02109 Marketing Services Putnam Retail Management One Post Office Square Boston, MA 02109 Custodian Putnam Fiduciary Trust Company Legal Counsel Ropes & Gray LLP Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP Trustees John A. Hill, Chairman Jameson Adkins Baxter Charles B. Curtis Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan John H. Mullin, III Robert E. Patterson George Putnam, III A.J.C. Smith W. Thomas Stephens Officers George Putnam, III President Charles E. Porter Executive Vice President, Associate Treasurer and Principal Executive Officer Jonathan S. Horwitz Senior Vice President and Treasurer Steven D. Krichmar Vice President and Principal Financial Officer Michael T. Healy Assistant Treasurer and Principal Accounting Officer Beth S. Mazor Vice President Daniel T. Gallagher Vice President and Legal and Compliance Liaison Officer James P. Pappas Vice President Richard S. Robie, III Vice President Mark C. Trenchard Vice President and BSA Compliance Officer Francis J. McNamara, III Vice President and Chief Legal Officer Judith Cohen Clerk and Assistant Treasurer This report is for the information of shareholders of Putnam Tax-Free High Yield Fund. It may also be used as sales literature when preceded or accompanied by the current prospectus, the most recent copy of Putnam's Quarterly Performance Summary, and Putnam's Quarterly Ranking Summary. For more recent performance, please visit www.putnaminvestments.com. Investors should carefully consider the investment objective, risks, charges, and expenses of a fund, which are described in its prospectus. For this and other information or to request a prospectus, call 1-800-225-1581 toll free. Please read the prospectus carefully before investing. The fund's Statement of Additional Information contains additional information about the fund's Trustees and is available without charge upon request by calling 1-800-225-1581. [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 PRSRT STD U.S. POSTAGE PAID PUTNAM INVESTMENTS Call 1-800-225-1581 or visit our Web site www.putnaminvestments.com. AN042-216502 9/04 Not FDIC Insured May Lose Value No Bank Guarantee Item 2. Code of Ethics: - ----------------------- All officers of the Fund, including its principal executive, financial and accounting officers, are employees of Putnam Investment Management, LLC, the Fund's investment manager. As such they are subject to a comprehensive Code of Ethics adopted and administered by Putnam Investments which is designed to protect the interests of the firm and its clients. The Fund has adopted a Code of Ethics which incorporates the Code of Ethics of Putnam Investments with respect to all of its officers and Trustees who are employees of Putnam Investment Management, LLC. For this reason, the Fund has not adopted a separate code of ethics governing its principal executive, financial and accounting officers. Item 3. Audit Committee Financial Expert: - ----------------------------------------- The Funds' Audit and Pricing Committee is comprised solely of Trustees who are "independent" (as such term has been defined by the Securities and Exchange Commission ("SEC") in regulations implementing Section 407 of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe that each of the members of the Audit and Pricing Committee also possess a combination of knowledge and experience with respect to financial accounting matters, as well as other attributes, that qualify them for service on the Committee. In addition, the Trustees have determined that all members of the Funds' Audit and Pricing Committee meet the financial literacy requirements of the New York Stock Exchange's rules and that Mr. Patterson and Mr. Stephens qualify as "audit committee financial experts" (as such term has been defined by the Regulations) based on their review of their pertinent experience and education. Certain other Trustees, although not on the Audit and Pricing Committee, would also qualify as "audit committee financial experts." The SEC has stated that the designation or identification of a person as an audit committee financial expert pursuant to this Item 3 of Form N-CSR does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit and Pricing Committee and the Board of Trustees in the absence of such designation or identification. Item 4. Principal Accountant Fees and Services: - ----------------------------------------------- The following table presents fees billed in each of the last two fiscal years for services rendered to the fund by the fund's independent auditors: Audit Audit-Related Tax All Other Fiscal year ended Fees Fees Fees Fees - ----------------- ---------- ------------- ------- --------- July 31, 2004 $69,779* $-- $6,306 $206 July 31, 2003 $66,955 $-- $5,703 $-- * Includes fees of $ 888 billed by the fund's independent auditor to the fund for audit procedures necessitated by regulatory and litigation matters. These fees were reimbursed to the fund by Putnam. For the fiscal years ended July 31, 2004 and July 31, 2003, the fund's independent auditors billed aggregate non-audit fees in the amounts of $140,140 and $ 79,298 , respectively, to the fund, Putnam Management and any entity controlling, controlled by or under common control with Putnam Management that provides ongoing services to the fund. Audit Fees represents fees billed for the fund's last two fiscal years. Audit-Related Fees represents fees billed in the fund's last two fiscal years for services traditionally performed by the fund's auditor, including accounting consultation for proposed transactions or concerning financial accounting and reporting standards and other audit or attest services not required by statute or regulation. Tax Fees represent fees billed in the fund's last two fiscal years for tax compliance, tax planning and tax advice services. Tax planning and tax advice services include assistance with tax audits, employee benefit plans and requests for rulings or technical advice from taxing authorities. All Other Fees Fees represent fees billed for services relating to fund expense processing. Pre-Approval Policies of the Audit and Pricing Committee. The Audit and Pricing Committee of the Putnam funds has determined that, as a matter of policy, all work performed for the funds by the funds' independent auditors will be pre-approved by the Committee and will generally not be subject to pre-approval procedures. Under certain circumstances, the Audit and Pricing Committee believes that it may be appropriate for Putnam Investment Management, LLC ("Putnam Management") and certain of its affiliates to engage the services of the funds' independent auditors, but only after prior approval by the Committee. Such requests are required to be submitted in writing to the Committee and explain, among other things, the nature of the proposed engagement, the estimated fees, and why this work must be performed by that particular audit firm. The Committee will review the proposed engagement at its next meeting. Since May 6, 2003, all work performed by the independent auditors for the funds, Putnam Management and any entity controlling, controlled by or under common control with Putnam Management that provides ongoing services to the fund was pre-approved by the Committee or a member of the Committee pursuant to the pre-approval policies discussed above. Prior to that date, the Committee had a general policy to pre-approve the independent auditor's engagements for non-audit services with the funds, Putnam Management and any entity controlling, controlled by or under common control with Putnam Management that provides ongoing services to the fund. The following table presents fees billed by the fund's principal auditor for services required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X. Audit-Related Tax All Other Total Non- Fiscal year ended Fees Fees Fees Audit Fees - ----------------- ------------- ---- --------- ---------- June 30, 2004 $-- $-- $-- $-- June 30, 2003 $-- $-- $-- $-- Item 5. Audit Committee: Not applicable - ------------------------- Items 6. Schedule of Investments: Not applicable - --------------------------------- Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End - ------------------------------------------------------------------------- Management Investment Companies: Not applicable -------------------------------- Item 8. Purchases of Equity Securities by Closed-End Management Investment - -------------------------------------------------------------------------- Companies and Affiliated Purchasers: Not applicable ------------------------------------ Item 9. Submission of Matters to a Vote of Security Holders: - ------------------------------------------------------------ Not applicable Item 10. Controls and Procedures: - -------------------------------- (a) The registrant's principal executive officer and principal financial officer have concluded, based on their evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report, that the design and operation of such procedures are generally effective to provide reasonable assurance that information required to be disclosed by the registrant in this report is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. (b) Changes in internal control over financial reporting: Not applicable Item 11. Exhibits: - ------------------ (a) The Code of Ethics of The Putnam Funds, which incorporates the Code of Ethics of Putnam Investments, is filed herewith. (b) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2 under the Investment Company Act of 1940, as amended, and the officer certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002 are filed herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NAME OF REGISTRANT By (Signature and Title): /s/Michael T. Healy -------------------------- Michael T. Healy Principal Accounting Officer Date: September 27, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title): /s/Charles E. Porter --------------------------- Charles E. Porter Principal Executive Officer Date: September 27, 2004 By (Signature and Title): /s/Steven D. Krichmar --------------------------- Steven D. Krichmar Principal Financial Officer Date: September 27, 2004 EX-99.CERT 2 exnn2.txt EX-99.CERT Certifications - -------------- I, Charles E. Porter, a principal executive officer of the funds listed on Attachment A, certify that: 1. I have reviewed each report on Form N-CSR of the funds listed on Attachment A: 2. Based on my knowledge, each report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by each report; 3. Based on my knowledge, the financial statements, and other financial information included in each report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in each report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act) for the registrants and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which each report are being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed to each registrant's auditors and the audit committee of each registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect each registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in each registrant's internal controls. /s/Charles E. Porter Date: September 24, 2004 - ---------------------- ------------------------ Charles E. Porter, Principal Executive Officer Certifications - -------------- I, Steven D. Krichmar, the principal financial officer of the funds listed on Attachment A, certify that: 1. I have reviewed each report on Form N-CSR of the funds listed on Attachment A: 2. Based on my knowledge, each report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by each report; 3. Based on my knowledge, the financial statements, and other financial information included in each report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in each report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act) for the registrants and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which each report are being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed to each registrant's auditors and the audit committee of each registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect each registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in each registrant's internal controls. /s/Steven D. Krichmar Date: September 24, 2004 - ---------------------- ------------------------ Steven D. Krichmar, Principal Financial Officer Attachment A - -------------- Period(s) ended July 31, 2004 001 The George Putnam Fund of Boston 003 Putnam Investors Fund 006 Putnam Vista Fund 007 Putnam Voyager Fund 024 Putnam OTC & Emerging Growth Fund 035 Putnam Tax-Free Insured Fund 036 Putnam Tax-Free High Yield Fund 073 Putnam Premier Income Fund 2AP Putnam Growth Opportunities Fund 2SL Putnam International Fund 2000 EX-99.906 CERT 3 exnnos3.txt EX-99.906 CERT Section 906 Certifications - --------------------------- I, Charles E. Porter, a principal executive officer of the Funds listed on Attachment A, certify that, to my knowledge: 1. The form N-CSR of the Funds listed on Attachment A for the period ended July 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR of the Funds listed on Attachment A for the period ended July 31, 2004 fairly presents, in all material respects, the financial condition and results of operations of the Funds listed on Attachment A. /s/Charles E. Porter Date: September 24, 2004 - ---------------------- ------------------------ Charles E. Porter, Principal Executive Officer Section 906 Certifications - --------------------------- I, Steven D. Krichmar, the principal financial officer of the Funds listed on Attachment A, certify that, to my knowledge: 1. The form N-CSR of the Funds listed on Attachment A for the period ended July 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR of the Funds listed on Attachment A for the period ended July 31, 2004 fairly presents, in all material respects, the financial condition and results of operations of the Funds listed on Attachment A. /s/Steven D. Krichmar Date: September 24, 2004 - ---------------------- ------------------------ Steven D. Krichmar, Principal Financial Officer Attachment A - -------------- Period(s) ended July 31, 2004 001 The George Putnam Fund of Boston 003 Putnam Investors Fund 006 Putnam Vista Fund 007 Putnam Voyager Fund 024 Putnam OTC & Emerging Growth Fund 035 Putnam Tax-Free Insured Fund 036 Putnam Tax-Free High Yield Fund 073 Putnam Premier Income Fund 2AP Putnam Growth Opportunities Fund 2SL Putnam International Fund 2000 EX-99.CODE ETH 4 md.txt THE PUTNAM FUNDS Code of Ethics Each of The Putnam Funds (the "Funds") has determined to adopt this Code of Ethics with respect to certain types of personal securities transactions by officers and Trustees of the Funds which might be deemed to create possible conflicts of interest and to establish reporting requirements and enforcement procedures with respect to such transactions. I. Rules Applicable to Officers and Trustees Affiliated with Putnam Investments, Inc. A. Incorporation of Adviser's Code of Ethics. The provisions of the Code of Ethics for employees of Putnam Investments, Inc. and its Subsidiaries (the "Putnam Investments Code of Ethics"), which is attached as Appendix A hereto, are hereby incorporated herein as the Funds' Code of Ethics applicable to officers and Trustees of the Funds who are employees of the Funds or officers, directors or employees of Putnam Investments, Inc. or its subsidiaries. A violation of the Putnam Investments Code of Ethics shall constitute a violation of the Funds' Code. B. Reports. Officers and Trustees of each of the Funds who are made subject to the Putnam Investments Code of Ethics pursuant to the preceding paragraph shall file the reports required by the Putnam Investments Code of Ethics with the Compliance Director designated therein. A report filed with the Compliance Director shall be deemed to be filed with each of the Funds of which the reporting individual is an officer or Trustee. C. Review. (1) The Compliance Director shall compare the reported personal securities transactions with completed and contemplated portfolio transactions of each of the Funds to determine whether a violation of this Code may have occurred. Before making any determination that a violation has been committed by any person, the Compliance Director shall give such person an opportunity to supply additional explanatory material. (2) If the Compliance Director determines that a violation of this Code has or may have occurred, he shall submit his written determination, together with the confidential quarterly report and any additional explanatory material provided by the individual, to the Chairman of the Funds, who shall make an independent determination of whether a violation has occurred. D. Sanctions. If the Chairman of the Funds finds that a violation has occurred, he shall report the violation and any sanction imposed under the Putnam Code of Ethics to the Trustees of the Funds who may impose such additional sanctions as they deem appropriate. If a securities transaction of the Chairman is under consideration, the Vice Chairman of the Funds shall act in all respects in the manner prescribed herein for the Chairman. II. Rules Applicable to Unaffiliated Trustees A. Definitions. (1) "Beneficial ownership" shall be interpreted in the same manner as it would be in determining whether a person is subject to the provisions of Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder. Application of this definition is explained in more detail in Exhibit A hereto. (2) "Control" means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. (3) "Interested Trustee" means a Trustee of a Fund who is an "interested person" of the Fund within the meaning of the Investment Company Act. (4) "Purchase or sale of a security" includes, among other things, the writing of an option to purchase or sell a security. (5) "Security" shall have the same meaning as that set forth in Section 2(a)(36) of the Investment Company Act (in effect, all securities) except that it shall not include securities issued by the Government of the United States or an agency thereof, bankers' acceptances, bank certificates of deposit, commercial paper and shares of registered open-end investment companies. (6) "Unaffiliated Trustee" means a Trustee who is not made subject to the Putnam Investments Code of Ethics pursuant to Part I hereof. B. Prohibited Purchases and Sales. No Unaffiliated Trustee of any of the Funds shall purchase or sell, directly or indirectly, any security in which he has or by reason of such transaction acquires, any direct or indirect beneficial ownership and which to his actual knowledge at the time of such purchase or sale: (1) is being considered for purchase or sale by the Fund; (2) is being purchased or sold by the Fund; or (3) was purchased or sold by the Fund within the most recent five days if such person participated in the recommendation to, or the decision by, Putnam Management to purchase or sell such security for the Fund. C. Exempted Transactions. The prohibitions of Section II-B of this Code shall not apply to: (1) purchases or sales effected in any account over which the Unaffiliated Trustee has no direct or indirect influence or control; (2) purchases or sales which are non-volitional on the part of either the Unaffiliated Trustee or the Fund; (3) purchases which are part of an automatic dividend reinvestment plan; (4) purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired; (5) purchases or sales other than those exempted in (1) through (4) above which do not cause the Unaffiliated Trustee to gain improperly a personal benefit through his relationship with the Fund and are only remotely potentially harmful to a Fund because they would be very unlikely to affect a highly institutional market, and are previously approved by the Compliance Director under the Putnam Code of Ethics or the Chairman of the Funds, which approval shall be confirmed in writing. D. Reporting. (1) Whether or not one of the exemptions listed in Section II-C applies, every Unaffiliated Trustee of a Fund shall file with the Chairman of the Funds a report containing the information described in Section II-D(2) of this Code with respect to transactions in any security in which such Unaffiliated Trustee has, or by reason of such transaction acquires, any direct or indirect beneficial ownership, if such Trustee, at the time of that transaction, knew or, in the ordinary course of fulfilling his official duties as a Trustee of the Fund, should have known that, during the 15-day period immediately preceding or after the date of the transaction by the Trustee: (a) such security was or is to be purchased or sold by the Fund or (b) such security was or is being considered for purchase or sale by the Fund; provided, however, that an Unaffiliated Trustee shall not be required to make a report with respect to transactions effected for any account over which such person does not have any direct or indirect influence or control. (2) Every report shall be made not later than 10 days after the end of the calendar quarter in which the transaction to which the report relates was effected, and shall contain the following information: (a) The date of the transaction, the title and the number of shares, and the principal amount of each security involved; (b) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); (c) The price at which the transaction was effected; and (d) The name of the broker, dealer or bank with or through whom the transaction was effected. (3) Every report concerning a purchase or sale prohibited under Section II-B hereof with respect to which the reporting person relies upon one of the exemptions provided in Section IIC shall contain a brief statement of the exemption relied upon and the circumstances of the transaction. (4) Any such report may contain a statement that the report shall not be construed as an admission by the person making such report that he has any direct or indirect beneficial ownership in the security to which the report relates. (5) Notwithstanding anything to the contrary contained herein, an Unaffiliated Trustee who is an Interested Trustee shall also file the reports required by Rule 17j-1(c)(1) under the Investment Company Act of 1940. E. Review. (1) The Chairman of the Funds shall compare the reported personal securities transactions with completed and contemplated portfolio transactions of the Funds to determine whether any transaction ("Reviewable Transactions") listed in Section II-B (disregarding exemptions provided by Section II-C(1) through (5)) may have occurred. (2) If the Chairman determines that a Reviewable Transaction may have occurred, he shall then determine whether a violation of this Code may have occurred, taking into account all the exemptions provided under Section II-C. Before making any determination that a violation has occurred, the Chairman shall give the person involved an opportunity to supply additional information regarding the transaction in question. F. Sanctions. If the Chairman determines that a violation of this Code has occurred, he shall so advise a committee consisting of the Unaffiliated Trustees, other than the person whose transaction is under consideration, and shall provide the committee with a report of the matter, including any additional information supplied by such person. The committee may impose such sanction as it deems appropriate. III. Miscellaneous. A. Amendments to The Putnam Companies Code of Ethics. Any amendment to the Putnam Companies Code of Ethics shall be deemed an amendment to Section I-A of this Code effective 30 days after written notice of such amendment shall have been received by the Chairman of the Funds, unless the Trustees of the Funds expressly determine that such amendment shall become effective at an earlier or later date or shall not be adopted. B. Records. The Funds shall maintain records in the manner and to the extent set forth below, which records may be maintained on microfilm under the conditions described in Rule 31a-2(f)(1) under the Investment Company Act and shall be available for examination by representatives of the Securities and Exchange Commission. (1) A copy of this Code and any other code which is, or at any time within the past five years has been, in effect shall be preserved in an easily accessible place; (2) A record of any violation of this Code and of any action taken as a result of such violation shall be preserved in an easily accessible place for a period of not less than five years following the end of the fiscal year in which the violation occurs; (3) A copy of each report made by an officer or Trustee pursuant to this Code shall be preserved for a period of not less than five years from the end of the fiscal year in which it is made, the first two years in an easily accessible place; and (4) A list of all person who are, or within the past five years have been, required to make reports pursuant to this Code shall be maintained in an easily accessible place. C. Confidentiality. All reports of securities transactions and any other information filed with any Fund pursuant to this Code shall be treated as confidential, but are subject to review as provided herein and by personnel of the Securities and Exchange Commission. D. Interpretation of Provisions. The Directors and Trustees may from time to time adopt such interpretations of this Code as they deem appropriate. E. Delegation by Chairman. The Chairman of the Funds may from time to time delegate any or all of his responsibilities under this Code, either generally or as to specific instances, to such officer or Trustee of the Funds as he may designate. As revised July 8, 1994 Code of Ethics PUTNAM INVESTMENTS [SCALE LOGO OMITTED] It is the personal responsibility of every Putnam employee to avoid any conduct that could create a conflict, or even the appearance of a conflict, with our clients, or to do anything that could damage or erode the trust our clients place in Putnam and its employees. 44156 9/2003 * Table of Contents Overview iii Preamble vii Definitions: Code of Ethics ix Section I. Personal Securities Rules for All Employees 1 A. Restricted List 1 B. Prohibited Transactions 6 C. Discouraged Transactions 10 D. Exempted Transactions 11 Section II. Additional Special Rules for Personal Securities Transactions of Access Persons and Certain Investment Professionals 13 Section III. Prohibited Conduct for All Employees 19 Section IV. Special Rules for Officers and Employees of Putnam Investments Limited. 31 Section V. Reporting Requirements for All Employees 33 Section VI. Education Requirements 37 Section VII. Compliance and Appeal Procedures 39 Appendix A 41 Preamble 43 Definitions: Insider Trading 45 Section 1. Rules Concerning Inside Information 47 Section 2. Overview of Insider Trading 51 Appendix B. Policy Statement Regarding Employee Trades in Shares of Putnam Closed-End Funds 57 Appendix C. Clearance Form for Portfolio Manager Sales Out of Personal Account of Securities Also Held by Fund (For compliance with "Contra-Trading" Rule) 59 Appendix D. Procedures for Approval of New Financial Instruments 61 Appendix E. AIMR Code of Ethics and Standards of Professional Responsibility 63 Index 71 * Overview Every Putnam employee is required, as a condition of continued employment, to read, understand, and comply with the entire Code of Ethics. Additionally, employees are expected to comply with the policies and procedures contained within the Putnam Employee Handbook, which can be accessed on-line through www.ibenefitcenter.com. This Overview is provided only as a convenience and is not intended to substitute for a careful reading of the complete document. It is the personal responsibility of every Putnam employee to avoid any conduct that could create a conflict, or even the appearance of a conflict, with our clients, or do anything that could damage or erode the trust our clients place in Putnam and its employees. This is the spirit of the Code of Ethics. In accepting employment at Putnam, every employee accepts the absolute obligation to comply with the letter and the spirit of the Code of Ethics. Failure to comply with the spirit of the Code of Ethics is just as much a violation of the Code as failure to comply with the written rules of the Code. The rules of the Code cover activities, including personal securities transactions, of Putnam employees, certain family members of employees, and entities (such as corporations, trusts, or partnerships) that employees may be deemed to control or influence. Sanctions will be imposed for violations of the Code of Ethics. Sanctions may include bans on personal trading, reductions in salary increases or bonuses, disgorgement of trading profits, suspension of employment, and termination of employment. - -- Insider trading: Putnam employees are forbidden to buy or sell any security while either Putnam or the employee is in possession of non-public information ("inside information") concerning the security or the issuer. A violation of Putnam's insider trading policies may result in criminal and civil penalties, including imprisonment and substantial fines. - -- Conflicts of interest: The Code of Ethics imposes limits on activities of Putnam employees where the activity may conflict with the interests of Putnam or its clients. These include limits on the receipt and solicitation of gifts and on service as a fiduciary for a person or entity outside of Putnam. For example, Putnam employees generally may not accept gifts over $100 in total value in a calendar year from any entity or any supplier of goods or services to Putnam. In addition, a Putnam employee may not serve as a director of any corporation without prior approval of the Code of Ethics Officer, and Putnam employees may not be members of investment clubs. - -- Confidentiality: Information about Putnam clients and Putnam investment activity and research is proprietary and confidential and may not be disclosed or used by any Putnam employee outside Putnam without a valid business purpose. - -- Personal securities trading: Putnam employees may not buy or sell any security for their own account without clearing the proposed transaction in advance through the on-line pre-clearance system or with the Code of Ethics Administrator. Certain securities are excepted from this requirement (e.g., Marsh & McLennan stock and shares of open-end (not closed-end) Putnam Funds). Clearance must be obtained in advance, between 11:30 a.m. and 4:00 p.m. EST on the day of the trade. Clearance may be obtained between 9:00 a.m. and 4:00 p.m. on the day of the trade for up to 1,000 shares of stock of an issuer whose capitalization exceeds $5 billion. A clearance is valid only for the day it is obtained. The Code also strongly discourages excessive trading by employees for their own account (i.e., more than 10 trades in any calendar quarter). Trading in excess of this level will be reviewed with the Code of Ethics Oversight Committee. - -- Short Selling: Putnam employees are prohibited from short selling any security, whether or not it is held in a Putnam client portfolio, except that short selling against broad market indexes and "against the box" are permitted. - -- Confirmations of trading and periodic account statements: All Putnam employees must have their brokers send confirmations of personal securities transactions, including transactions of immediate family members and accounts over which the employee has investment discretion, to the Code of Ethics Officer. Employees must contact the Code of Ethics Administrator to obtain an authorization letter from Putnam for setting up a personal brokerage account. - -- Quarterly and annual reporting: Certain Putnam employees (so-called "Access Persons" as defined by the SEC and in the Code of Ethics) must report all their securities transactions in each calendar quarter to the Code of Ethics Officer within 10 days after the end of the quarter. All Access Persons must disclose all personal securities holdings upon commencement of employment and thereafter on an annual basis. You will be notified if these requirements apply to you. If these requirements apply to you and you fail to report as required, salary increases and bonuses will be reduced. - -- IPOs and private placements: Putnam employees may not buy any securities in an initial public offering or in a private placement, except in limited circumstances when prior written authorization is obtained. - -- Procedures for Approval of New Financial Instruments: No new types of securities or instruments may be purchased for any Putnam fund or other client account without the prior approval of the Risk Management Committee. - -- Personal securities transactions by Access Persons and certain investment professionals: The Code imposes several special restrictions on personal securities transactions by Access Persons and certain investment professionals, which are summarized as follows: - -- "60-Day Holding Period". No Access Person shall purchase and then sell at a profit, or sell and then repurchase at a lower price, any security or related derivative security within 60 calendar days. - -- "7-Day" Rule. Before a portfolio manager places an order to buy a security for any portfolio he manages, he must sell from his personal account any such security or related derivative security purchased within the preceding 7 calendar days and disgorge any profit from the sale. - -- "Blackout" Rules. No portfolio manager may sell any security or related derivative security for her personal account until 7 calendar days have passed since the most recent purchase of that security or related derivative security by any portfolio she manages. No portfolio manager may buy any security or related derivative security for his personal account until 7 calendar days have passed since the most recent sale of that security or related derivative security by any portfolio he manages. - -- "Contra-Trading" Rule. No portfolio manager may sell out of her personal account any security or related derivative security that is held in any portfolio she manages unless she has received the written approval of a CIO and the Code of Ethics Officer. - -- No manager may cause a Putnam client to take action for the manager's own personal benefit. - -- SIMILAR RULES LIMIT PERSONAL SECURITIES TRANSACTIONS BY ANALYSTS, CO-MANAGERS, AND CHIEF INVESTMENT OFFICERS. PLEASE READ THESE RULES CAREFULLY. YOU ARE RESPONSIBLE FOR UNDERSTANDING THE RESTRICTIONS. This Overview is qualified in its entirety by the provisions of the Code of Ethics. The Code requires that all Putnam employees read, understand, and comply with the entire Code of Ethics. * Preamble It is the personal responsibility of every Putnam employee to avoid any conduct that would create a conflict, or even the appearance of a conflict, with our clients, or embarrass Putnam in any way. This is the spirit of the Code of Ethics. In accepting employment at Putnam, every employee also accepts the absolute obligation to comply with the letter and the spirit of the Code of Ethics. Failure to comply with the spirit of the Code of Ethics is just as much a violation of the Code as failure to comply with the written rules of the Code. Sanctions will be imposed for violations of the Code of Ethics, including the Code's reporting requirements. Sanctions may include bans on personal trading, reductions in salary increases or bonuses, disgorgement of trading profits, suspension of employment and termination of employment. Putnam Investments is required by law to adopt a Code of Ethics. The purposes of the law are to ensure that companies and their employees comply with all applicable laws and to prevent abuses in the investment advisory business that can arise when conflicts of interest exist between the employees of an investment adviser and its clients. Having an effective Code of Ethics is good business practice, as well. By adopting and enforcing a Code of Ethics, we strengthen the trust and confidence reposed in us by demonstrating that, at Putnam, client interests come before personal interests. Putnam has had a Code of Ethics for many years. The first Putnam Code was written more than 30 years ago by George Putnam. It has been revised periodically, and was re-drafted in its entirety in 1989 to take account of legal and regulatory developments in the investment advisory business. Since 1989, the Code has been revised regularly to reflect developments in our business and the law. The Code that follows represents a balancing of important interests. On the one hand, as a registered investment adviser, Putnam owes a duty of undivided loyalty to its clients, and must avoid even the appearance of a conflict that might be perceived as abusing the trust they have placed in Putnam. On the other hand, Putnam does not want to prevent conscientious professionals from investing for their own account where conflicts do not exist or are so attenuated as to be immaterial to investment decisions affecting Putnam clients. When conflicting interests cannot be reconciled, the Code makes clear that, first and foremost, Putnam employees owe a fiduciary duty to Putnam clients. In most cases, this means that the affected employee will be required to forego conflicting personal securities transactions. In some cases, personal investments will be permitted, but only in a manner which, because of the circumstances and applicable controls, cannot reasonably be perceived as adversely affecting Putnam client portfolios or taking unfair advantage of the relationship Putnam employees have to Putnam clients. The Code contains specific rules prohibiting defined types of conflicts. Because every potential conflict cannot be anticipated in advance, the Code also contains certain general provisions prohibiting conflict situations. In view of these general provisions, it is critical that any individual who is in doubt about the applicability of the Code in a given situation seek a determination from the Code of Ethics Officer about the propriety of the conduct in advance. The procedures for obtaining such a determination are described in Section VII of the Code. It is critical that the Code be strictly observed. Not only will adherence to the Code ensure that Putnam renders the best possible service to its clients, it will ensure that no individual is liable for violations of law. It should be emphasized that adherence to this policy is a fundamental condition of employment at Putnam. Every employee is expected to adhere to the requirements of this Code of Ethics despite any inconvenience that may be involved. Any employee failing to do so may be subject to such disciplinary action, including financial penalties and termination of employment, as determined by the Code of Ethics Oversight Committee or the Chief Executive Officer of Putnam Investments. * Definitions: Code of Ethics The words given below are defined specifically for the purposes of Putnam's Code of Ethics. Gender references in the Code of Ethics alternate. Rule of construction regarding time periods. Unless the context indicates otherwise, time periods used in the Code of Ethics shall be measured inclusively, i.e., including the dates from and to which the measurement is made. Access Persons. Access Persons are (i) all officers of Putnam Investment Management, LLC (the investment manager of Putnam's mutual funds), (ii) all employees within Putnam's Investment Division, and (iii) all other employees of Putnam who, in connection with their regular duties, have access to information regarding purchases or sales of portfolio securities by a Putnam mutual fund, or who have access to information regarding recommendations with respect to such purchases or sales. Code of Ethics Administrator. The individual designated by the Code of Ethics Officer to assume responsibility for day-to-day, non-discretionary administration of this Code. The current Code of Ethics Administrator is Laura Rose, who can be reached at extension 11104. Code of Ethics Officer. The Putnam officer who has been assigned the responsibility of enforcing and interpreting this Code. The Code of Ethics Officer shall be the General Counsel or such other person as is designated by the President of Putnam Investments. If the Code of Ethics Officer is unavailable, the Deputy Code of Ethics Officer (to be appointed by the Code of Ethics Officer) shall act in his stead. Code of Ethics Oversight Committee. Has oversight responsibility for administering the Code of Ethics. Members include the Code of Ethics Officer, the Head of Investments, and other members of Putnam's senior management approved by the Chief Executive Officer of Putnam. Immediate family. Spouse, minor children, or other relatives living in the same household as the Putnam employee. Policy Statements. The Policy Statement Concerning Insider Trading Prohibitions attached to the Code as Appendix A and the Policy Statement Regarding Employee Trades in Shares of Putnam Closed-End Funds attached to the Code as Appendix B. Private placement. Any offering of a security not to the public, but to sophisticated investors who have access to the kind of information which would be contained in a prospectus, and which does not require registration with the relevant securities authorities. Purchase or sale of a security. Any acquisition or transfer of any interest in the security for direct or indirect consideration, and includes the writing of an option. Putnam. Any or all of Putnam Investments, Inc., and its subsidiaries, any one of which shall be a "Putnam company." Putnam client. Any of the Putnam Funds, or any advisory, trust, or other client of Putnam. Putnam employee (or "employee"). Any employee of Putnam. Restricted List. The list established in accordance with Rule 1 of Section I.A. Security. Any type or class of equity or debt security and any rights relating to a security, such as put and call options, warrants, and convertible securities. Unless otherwise noted, the term "security" does not include: currencies, direct and indirect obligations of the U.S. government and its agencies, commercial paper, certificates of deposit, repurchase agreements, bankers' acceptances, any other money market instruments, shares of open-end mutual funds (including Putnam open-end mutual funds), exchange traded index funds containing a portfolio or securities of 25 or more issuers (e.g., SPDRs, WEBs, QQQs), securities of The Marsh & McLennan Companies, Inc., commodities, and any option on a broad-based market index or an exchange-traded futures contract or option thereon. Transaction for a personal account (or "personal securities transaction"). Securities transactions: (a) for the personal account of any employee; (b) for the account of a member of the immediate family of any employee; (c) for the account of a partnership in which a Putnam employee or immediate family member is a general partner or a partner with investment discretion; (d) for the account of a trust in which a Putnam employee or immediate family member is a trustee with investment discretion; (e) for the account of a closely-held corporation in which a Putnam employee or immediate family member holds shares and for which he has investment discretion; and (f) for any account other than a Putnam client account which receives investment advice of any sort from the employee or immediate family member, or as to which the employee or immediate family member has investment discretion. * Section I. Personal Securities Rules for All Employees A. Restricted List RULE 1 No Putnam employee shall purchase or sell for his personal account any security without prior clearance obtained through Putnam's Intranet pre-clearance system (in the "Workplace Community" section of ibenefitcenter.com) or from the Code of Ethics Administrator. No clearance will be granted for securities appearing on the Restricted List. Securities shall be placed on the Restricted List in the following circumstances: (a) when orders to purchase or sell such security have been entered for any Putnam client, or the security is being actively considered for purchase or sale for any Putnam client; (b) with respect to voting securities of corporations in the banking, savings and loan, communications, or gaming (i.e., casinos) industries, when holdings of Putnam clients exceed 7% (for public utilities, the threshold is 4%); (c) when, in the judgment of the Code of Ethics Officer, other circumstances warrant restricting personal transactions of Putnam employees in a particular security; (d) the circumstances described in the Policy Statement Concerning Insider Trading Prohibitions, attached as Appendix A. Reminder: Securities for an employee's "personal account" include securities owned by certain family members of a Putnam employee. Thus, this Rule prohibits certain trades by family members of Putnam employees. See Definitions. Compliance with this rule does not exempt an employee from complying with any other applicable rules of the Code, such as those described in Section III. In particular, Access Persons and certain investment professionals must comply with the special rules set forth in Section II. EXCEPTIONS A. "Large Cap" Exception. If a security appearing on the Restricted List is an equity security for which the issuer has a market capitalization (defined as outstanding shares multiplied by current price per share) of over $5 billion, then a Putnam employee may purchase or sell up to 1,000 shares of the security per day for his personal account. This exception does not apply if the security appears on the Restricted List in the circumstances described in subpart (b), (c), or (d) of Rule 1. B. Investment Grade Or Higher Fixed-Income Exception. If a security being traded or considered for trade for a Putnam client is a non-convertible fixed-income security which bears a rating of BBB (Standard & Poor's) or Baa (Moody's) or any comparable rating or higher, then a Putnam employee may purchase or sell that security for his personal account without regard to the activity of Putnam clients. This exception does not apply if the security has been placed on the Restricted List in the circumstances described in subpart (b), (c), or (d) of Rule 1. C. Pre-Clearing Transactions Effected by Share Subscription. The purchase and sale of securities made by subscription rather than on an exchange are limited to issuers having a market capitalization of $5 billion or more and are subject to a 1,000 share limit. The following are procedures to comply with Rule 1 when effecting a purchase or sale of shares by subscription: (a) The Putnam employee must pre-clear the trade on the day he or she submits a subscription to the issuer, rather than on the actual day of the trade since the actual day of the trade typically will not be known to the employee who submits the subscription. At the time of pre-clearance, the employee will be told whether the purchase is permitted (in the case of a corporation having a market capitalization of $5 billion or more), or not permitted (in the case of a smaller capitalization issuer). (b) The subscription for any purchase or sale of shares must be reported on the employee's quarterly personal securities transaction report, noting the trade was accomplished by subscription. (c) As no brokers are involved in the transaction, the confirmation requirement will be waived for these transactions, although the Putnam employee must provide the Legal and Compliance Department with any transaction summaries or statements sent by the issuer. SANCTION GUIDELINES A. Failure to Pre-Clear a Personal Trade 1. First violation: One month trading ban with written warning that a future violation will result in a longer trading ban. 2. Second violation: Three month trading ban and written notice to Managing Director of the employee's division. 3. Third violation: Six month trading ban with possible longer or permanent trading ban based upon review by Code of Ethics Oversight Committee. B. Failure to Pre-Clear Securities on the Restricted List 1. First violation: Disgorgement of any profit from the transaction, one month trading ban, and written warning that a future violation will result in a longer trading ban. 2. Second violation: Disgorgement of any profit from the transaction, three month trading ban, and written notice to Managing Director of the employee's division. 3. Third violation: Disgorgement of any profit from the transaction, and six month trading ban with possible longer or permanent trading ban based upon review by Code of Ethics Oversight Committee. NOTE: These are the sanction guidelines for successive failures to pre-clear personal trades within a 2-year period. The Code of Ethics Oversight Committee retains the right to increase or decrease the sanction for a particular violation in light of the circumstances. The Committee's belief that an employee intentionally has violated the Code of Ethics will result in more severe sanctions than outlined in the guidelines above. The sanctions described in Paragraph B apply to Restricted List securities that are: (i) small cap stocks (i.e., stocks not entitled to the "Large Cap" exception) and (ii) large cap stocks that exceed the daily 1,000 share maximum permitted under the "Large Cap" exception. Failure to pre-clear an otherwise permitted trade of up to 1,000 shares of a large cap security is subject to the sanctions described above in Paragraph A. IMPLEMENTATION A. Maintenance of Restricted List. The Restricted List shall be maintained by the Code of Ethics Administrator. B. Consulting Restricted List. An employee wishing to trade any security for his personal account shall first obtain clearance through Putnam's Intranet pre-clearance system. The system may be accessed from your desktop computer through the Putnam ibenefitcenter (https://www.ibenefitcenter.com) Workplace Community tab, Employee Essentials menu. Employees may pre-clear all securities between 11:30 a.m. and 4:00 p.m. EST, and may pre-clear purchases or sales of up to 1,000 shares of issuers having a market capitalization of more than $5 billion between 9:00 a.m. and 4:00 p.m. EST. Requests to make personal securities transactions may not be made using the system or presented to the Code of Ethics Administrator after 4:00 p.m. The pre-clearance system will inform the employee whether the security may be traded and whether trading in the security is subject to the "Large Cap" limitation. The response of the pre-clearance system as to whether a security appears on the Restricted List and, if so, whether it is eligible for the exceptions set forth after this Rule shall be final, unless the employee appeals to the Code of Ethics Officer, using the procedure described in Section VII, regarding the request to trade a particular security. A clearance is only valid for trading on the day it is obtained. Trades in securities listed on Asian or European stock exchanges, however, may be executed within one business day after pre-clearance is obtained. If a security is not on the Restricted List, other classes of securities of the same issuer (e.g., preferred or convertible preferred stock) may be on the Restricted List. It is the employee's responsibility to identify with particularity the class of securities for which permission is being sought for a personal investment. If the pre-clearance system does not recognize a security, or if an employee is unable to use the system or has any questions with respect to the system or pre-clearance, the employee may consult the Code of Ethics Administrator. The Code of Ethics Administrator shall not have authority to answer any questions about a security other than whether trading is permitted. The response of the Code of Ethics Administrator as to whether a security appears on the Restricted List and, if so, whether it is eligible for the exceptions set forth after this Rule shall be final, unless the employee appeals to the Code of Ethics Officer, using the procedure described in Section VII, regarding the request to trade a particular security. C. Removal of Securities from Restricted List. Securities shall be removed from the Restricted List when: (a) in the case of securities on the Restricted List pursuant to Rule 1(a), they are no longer being purchased or sold for a Putnam client or actively considered for purchase or sale for a Putnam client; (b) in the case of securities on the Restricted List pursuant to Rule 1(b), the holdings of Putnam clients fall below the applicable threshold designated in that Rule, or at such earlier time as the Code of Ethics Officer deems appropriate; or (c) in the case of securities on the Restricted List pursuant to Rule 1(c) or 1(d), when circumstances no longer warrant restrictions on personal trading. COMMENTS 1. Pre-Clearance. Subpart (a) of this Rule is designed to avoid the conflict of interest that might occur when an employee trades for his personal account a security that currently is being traded or is likely to be traded for a Putnam client. Such conflicts arise, for example, when the trades of an employee might have an impact on the price or availability of a particular security, or when the trades of the client might have an impact on price to the benefit of the employee. Thus, exceptions involve situations where the trade of a Putnam employee is unlikely to have an impact on the market. 2. Regulatory Limits. Owing to a variety of federal statutes and regulations in the banking, savings and loan, communications, and gaming industries, it is critical that accounts of Putnam clients not hold more than 10% of the voting securities of any issuer (5% for public utilities). Because of the risk that the personal holdings of Putnam employees may be aggregated with Putnam holdings for these purposes, subpart (b) of this Rule limits personal trades in these areas. The 7% limit (4% for public utilities) will allow the regulatory limits to be observed. 3. Options. For the purposes of this Code, options are treated like the underlying security. See Definitions. Thus, an employee may not purchase, sell, or "write" option contracts for a security that is on the Restricted List. A securities index will not be put on the Restricted List simply because one or more of its underlying securities have been put on the Restricted List. The exercise of an options contract (the purchase or writing of which was previously pre-cleared) does not have to be pre-cleared. Note, however, that the sale of securities obtained through the exercise of options must be pre-cleared. 4. Involuntary Transactions. "Involuntary" personal securities transactions are exempted from the Code. Special attention should be paid to this exemption. (See Section I.D.) 5. Tender Offers. This Rule does not prohibit an employee from tendering securities from his personal account in response to an any-and-all tender offer, even if Putnam clients are also tendering securities. A Putnam employee is, however, prohibited from tendering securities from his personal account in response to a partial tender offer, if Putnam clients are also tendering securities. B. Prohibited Transactions RULE 1 Putnam employees are prohibited from short selling any security, whether or not the security is held in a Putnam client portfolio. EXCEPTIONS Short selling against broad market indexes (such as the Dow Jone Industrial Average, the NASDAQ index and the S&P 100 and 500 indexes) and short selling "against the box" are permitted. RULE 2 No Putnam employee shall purchase any security for her personal account in an initial public offering. EXCEPTION Pre-existing Status Exception. A Putnam employee shall not be barred by this Rule or by Rule 1(a) of Section I.A. from purchasing securities for her personal account in connection with an initial public offering of securities by a bank or insurance company when the employee's status as a policyholder or depositor entitles her to purchase securities on terms more favorable than those available to the general public, in connection with the bank's conversion from mutual or cooperative form to stock form, or the insurance company's conversion from mutual to stock form, provided that the employee has had the status entitling her to purchase on favorable terms for at least two years. This exception is only available with respect to the value of bank deposits or insurance policies that an employee owns before the announcement of the initial public offering. This exception does not apply, however, if the security appears on the Restricted List in the circumstances set forth in subparts (b), (c), or (d) of Section I.A., Rule 1. IMPLEMENTATION A. General Implementation. An employee shall inquire, before any purchase of a security for her personal account, whether the security to be purchased is being offered pursuant to an initial public offering. If the security is offered through an initial public offering, the employee shall refrain from purchasing that security for her personal account unless the exception applies. B. Administration of Exception. If the employee believes the exception applies, she shall consult the Code of Ethics Administrator concerning whether the security appears on the Restricted List and if so, whether it is eligible for this exception. COMMENTS 1. The purpose of this rule is twofold. First, it is designed to prevent a conflict of interest between Putnam employees and Putnam clients who might be in competition for the same securities in a limited public offering. Second, the rule is designed to prevent Putnam employees from being subject to undue influence as a result of receiving "favors" in the form of special allocations of securities in a public offering from broker-dealers who seek to do business with Putnam. 2. Purchases of securities in the immediate after-market of an initial public offering are not prohibited, provided they do not constitute violations of other portions of the Code of Ethics. For example, participation in the immediate after-market as a result of a special allocation from an underwriting group would be prohibited by Section III, Rule 3 concerning gifts and other "favors." 3. Public offerings subsequent to initial public offerings are not deemed to create the same potential for competition between Putnam employees and Putnam clients because of the pre-existence of a market for the securities. RULE 3 No Putnam employee shall purchase any security for his personal account in a limited private offering or private placement. COMMENTS 1. The purpose of this Rule is to prevent a Putnam employee from investing in securities for his own account pursuant to a limited private offering that could compete with or disadvantage Putnam clients, and to prevent Putnam employees from being subject to efforts to curry favor by those who seek to do business with Putnam. 2. Exemptions to the prohibition will generally not be granted where the proposed investment relates directly or indirectly to investments by a Putnam client, or where individuals involved in the offering (including the issuers, broker, underwriter, placement agent, promoter, fellow investors and affiliates of the foregoing) have any prior or existing business relationship with Putnam or a Putnam employee, or where the Putnam employee believes that such individuals may expect to have a future business relationship with Putnam or a Putnam employee. 3. An exemption may be granted, subject to reviewing all the facts and circumstances, for investments in: (a) Pooled investment funds, including hedge funds, subject to the condition that an employee investing in a pooled investment fund would have no involvement in the activities or decision-making process of the fund except for financial reports made in the ordinary course of the fund's business. (b) Private placements where the investment cannot relate, or be expected to relate, directly or indirectly to Putnam or investments by a Putnam client. 4. Employees who apply for an exemption will be expected to disclose to the Code of Ethics Officer in writing all facts and relationships relating to the proposed investment. 5. Limited partnership interests are frequently sold in private placements. An employee should assume that investment in a limited partnership is barred by these rules, unless the employee has obtained, in advance of purchase, a written exemption under the ad hoc exemption set forth in Section I.D., Rule 2. The procedure for obtaining an ad hoc exemption is described in Section VII, Part 4. 6. Applications to invest in private placements will be reviewed by the Code of Ethics Oversight Committee. This review will take into account, among other factors, the considerations described in the preceding comments. RULE 4 No Putnam employee shall purchase or sell any security for her personal account or for any Putnam client account while in possession of material, nonpublic information concerning the security or the issuer. EXCEPTIONS NONE. Please read Appendix A, Policy Statement Concerning Insider Trading Prohibitions. RULE 5 No Putnam employee shall purchase from or sell to a Putnam client any securities or other property for his personal account, nor engage in any personal transaction to which a Putnam client is known to be a party, or which transaction may have a significant relationship to any action taken by a Putnam client. EXCEPTIONS None. IMPLEMENTATION It shall be the responsibility of every Putnam employee to make inquiry prior to any personal transaction sufficient to satisfy himself that the requirements of this Rule have been met. COMMENT This rule is required by federal law. It does not prohibit a Putnam employee from purchasing any shares of an open-end Putnam fund. The policy with respect to employee trading in closed-end Putnam funds is attached as Appendix B. RULE 6 No Putnam employee shall engage in market timing strategies within Putnam mutual funds, including within Putnam's Profit Sharing Retirement Plan accounts and deferred compensation accounts. EXCEPTIONS None. COMMENTS "Market timing" occurs when a person frequently purchases and sells shares of mutual funds based upon the activity of equity markets on the days that the purchases and sales are effected. Putnam has determined that market timing has a detrimental effect on the performance of the mutual funds managed by Putnam, and Putnam has taken steps to reduce instances of market timing by brokers and shareholders in the mutual funds. Putnam therefore expects that Putnam employees will avoid making frequent trades into and out of the Putnam mutual funds, including transactions made within Putnam's Profit Sharing Retirement Plan and other deferred compensation vehicles. C. Discouraged Transactions RULE 1 Putnam employees are strongly discouraged from engaging in naked option transactions for their personal accounts. EXCEPTIONS None. COMMENT Naked option transactions are particularly dangerous, because a Putnam employee may be prevented by the restrictions in this Code of Ethics from "covering" the naked option at the appropriate time. All employees should keep in mind the limitations on their personal securities trading imposed by this Code when contemplating such an investment strategy. Engaging in naked options transactions on the basis of material, nonpublic information is prohibited. See Appendix A, Policy Statement Concerning Insider Trading Prohibitions. RULE 2 Putnam employees are strongly discouraged from engaging in excessive trading for their personal accounts. EXCEPTIONS None. COMMENTS 1. Although a Putnam employee's excessive trading may not itself constitute a conflict of interest with Putnam clients, Putnam believes that its clients' confidence in Putnam will be enhanced and the likelihood of Putnam achieving better investment results for its clients over the long term will be increased if Putnam employees rely on their investment -- as opposed to trading -- skills in transactions for their own account. Moreover, excessive trading by a Putnam employee for his or her own account diverts an employee's attention from the responsibility of servicing Putnam clients, and increases the possibilities for transactions that are in actual or apparent conflict with Putnam client transactions. 2. Although this Rule does not define excessive trading, employees should be aware that if their trades exceed 10 trades per quarter the trading activity will be reviewed by the Code of Ethics Oversight Committee. D. Exempted Transactions RULE 1 Transactions which are involuntary on the part of a Putnam employee are exempt from the prohibitions set forth in Sections I.A., I.B., and I.C. EXCEPTIONS None. COMMENTS 1. This exemption is based on categories of conduct that the Securities and Exchange Commission does not consider "abusive." 2. Examples of involuntary personal securities transactions include: (a) sales out of the brokerage account of a Putnam employee as a result of bona fide margin call, provided that withdrawal of collateral by the Putnam employee within the ten days previous to the margin call was not a contributing factor to the margin call; (b) purchases arising out of an automatic dividend reinvestment program of an issuer of a publicly traded security. 3. Transactions by a trust in which the Putnam employee (or a member of his immediate family) holds a beneficial interest, but for which the employee has no direct or indirect influence or control with respect to the selection of investments, are involuntary transactions. In addition, these transactions do not fall within the definition of "personal securities transactions." See Definitions. 4. A good-faith belief on the part of the employee that a transaction was involuntary will not be a defense to a violation of the Code of Ethics. In the event of confusion as to whether a particular transaction is involuntary, the burden is on the employee to seek a prior written determination of the applicability of this exemption. The procedures for obtaining such a determination appear in Section VII, Part 3. RULE 2 Transactions which have been determined in writing by the Code of Ethics Officer before the transaction occurs to be no more than remotely potentially harmful to Putnam clients because the transaction would be very unlikely to affect a highly institutional market, or because the transaction is clearly not related economically to the securities to be purchased, sold, or held by a Putnam client, are exempt from the prohibitions set forth in Sections I.A., I.B., and I.C. EXCEPTIONS N.A. IMPLEMENTATION An employee may seek an ad hoc exemption under this Rule by following the procedures in Section VII, Part 4. COMMENTS 1. This exemption is also based upon categories of conduct that the Securities and Exchange Commission does not consider "abusive." 2. The burden is on the employee to seek a prior written determination that the proposed transaction meets the standards for an ad hoc exemption set forth in this Rule. * Section II. Additional Special Rules for Personal Securities Transactions of Access Persons and Certain Investment Professionals Access Persons (including all Investment Professionals and other employees as defined on page ix) RULE 1 ("60-DAY" RULE) No Access Person shall purchase and then sell at a profit, or sell and then repurchase at a lower price, any security or related derivative security within 60 calendar days. EXCEPTIONS None, unless prior written approval from the Code of Ethics Officer is obtained. Exceptions may be granted on a case-by-case basis when no abuse is involved and the equities of the situation support an exemption. For example, although an Access Person may buy a stock as a long-term investment, that stock may have to be sold involuntarily due to unforeseen activity such as a merger. IMPLEMENTATION 1. The 60-Day Rule applies to all Access Persons, as defined in the Definitions section of the Code. 2. Calculation of whether there has been a profit is based upon the market prices of the securities. The calculation is not net of commissions or other sales charges. 3. As an example, an Access Person would not be permitted to sell a security at $12 that he purchased within the prior 60 days for $10. Similarly, an Access Person would not be permitted to purchase a security at $10 that she had sold within the prior 60 days for $12. If the proposed transaction would be made at a loss, it would be permitted if the pre-clearance requirements are met. See, Section I, Rule 1. COMMENTS 1. The prohibition against short-term trading profits by Access Persons is designed to minimize the possibility that they will capitalize inappropriately on the market impact of trades involving a client portfolio about which they might possibly have information. 2. Although Chief Investment Officers, Portfolio Managers, and Analysts may sell securities at a profit within 60 days of purchase in order to comply with the requirements of the 7-Day Rule applicable to them (described below), the profit will have to be disgorged to charity under the terms of the 7-Day Rule. 3. Access Persons occasionally make a series of transactions in securities over extended periods of time. For example, an Access Person bought 100 shares of Stock X on Day 1 at $100 per share and then bought 50 additional shares on Day 45 at $95 per share. On Day 75, the Access Person sold 20 shares at $105 per share. The question arises whether the Access Person violated the 60-Day Rule. The characterization of the employee's tax basis in the shares sold determines the analysis. If, for personal income tax purposes, the Access Person characterizes the shares sold as having a basis of $100 per share (i.e., shares purchased on Day 1), the transaction would be consistent with the 60-Day Rule. However, if the tax basis in the shares is $95 per share (i.e., shares purchased on Day 45), the transaction would violate the 60-Day Rule. Certain Investment Professionals RULE 2 ("7-DAY" RULE) (a) Portfolio Managers: Before a portfolio manager (including a Chief Investment Officer with respect to an account he manages) places an order to buy a security for any Putnam client portfolio that he manages, he shall sell any such security or related derivative security purchased in a transaction for his personal account within the preceding seven calendar days. (b) Co-Managers: Before a portfolio manager places an order to buy a security for any Putnam client he manages, his co-manager shall sell any such security or related derivative security purchased in transaction for his personal account within the preceding seven calendar days. (c) Analysts: Before an analyst makes a buy recommendation for a security (including designation of a security for inclusion in the portfolio of the Putnam Research Fund), he shall sell any such security or related derivative security purchased in a transaction for his personal account within the preceding seven calendar days. EXCEPTIONS None. COMMENTS 1. This Rule applies to portfolio managers (including Chief Investment Officers with respect to accounts they manage) in connection with any purchase (no matter how small) in any client account managed by that portfolio manager or CIO (even so-called "clone accounts"). In particular, it should be noted that the requirements of this rule also apply with respect to purchases in client accounts, including "clone accounts," resulting from "cash flows." To comply with the requirements of this rule, it is the responsibility of each portfolio manager or CIO to be aware of the placement of all orders for purchases of a security by client accounts that he or she manages for 7 days following the purchase of that security for his or her personal account. 2. An investment professional who must sell securities to be in compliance with the 7-Day Rule must absorb any loss and disgorge to charity any profit resulting from the sale. 3. This Rule is designed to avoid even the appearance of a conflict of interest between an investment professional and a Putnam client. A more stringent rule is warranted because, with their greater knowledge and control, these investment professionals are in a better position than other employees to create an appearance of manipulation of Putnam client accounts for personal benefit. 4. "Portfolio manager" is used in this Section as a functional label, and is intended to cover any employee with authority to authorize a trade on behalf of a Putnam client, whether or not such employee bears the title "portfolio manager." "Analyst" is also used in this Section as a functional label, and is intended to cover any employee who is not a portfolio manager but who may make recommendations regarding investments for Putnam clients. RULE 3 ("BLACKOUT RULE") (a) Portfolio Managers: No portfolio manager (including a Chief Investment Officer with respect to an account she manages) shall: (i) sell any security or related derivative security for her personal account until seven calendar days have elapsed since the most recent purchase of that security or related derivative security by any Putnam client portfolio she manages or co-manages; or (ii) purchase any security or related derivative security for her personal account until seven calendar days have elapsed since the most recent sale of that security or related derivative security from any Putnam client portfolio that she manages or co-manages. (b) Analysts: No analyst shall: (i) sell any security or related derivative security for his personal account until seven calendar days have elapsed since his most recent buy recommendation for that security or related derivative security (including designation of a security for inclusion in the portfolio of the Putnam Research Fund); or (ii) purchase any security or related derivative security for his personal account until seven calendar days have elapsed since his most recent sell recommendation for that security or related derivative security (including the removal of a security from the portfolio of the Putnam Research Fund). EXCEPTIONS None. COMMENTS 1. This Rule applies to portfolio managers (including Chief Investment Officers with respect to accounts they manage) in connection with to any transaction (no matter how small) in any client account managed by that portfolio manager or CIO (even so-called "clone accounts"). In particular, it should be noted that the requirements of this rule also apply with respect to transactions in client accounts, including "clone accounts," resulting from "cash flows." In order to comply with the requirements of this rule, it is the responsibility of each portfolio manager and CIO to be aware of all transactions in a security by client accounts that he or she manages that took place within the 7 days preceding a transaction in that security for his or her personal account. 2. This Rule is designed to prevent a Putnam portfolio manager or analyst from engaging in personal investment conduct that appears to be counter to the investment strategy she is pursuing or recommending on behalf of a Putnam client. 3. Trades by a Putnam portfolio manager for her personal account in the "same direction" as the Putnam client portfolio she manages, and trades by an analyst for his personal account in the "same direction" as his recommendation, do not present the same danger, so long as any "same direction" trades do not violate other provisions of the Code or the Policy Statements. RULE 4 ("CONTRA TRADING" RULE) (a) Portfolio Managers: No portfolio manager shall, without prior clearance, sell out of his personal account securities or related derivative securities held in any Putnam client portfolio that he manages or co-manages. (b) Chief Investment Officers: No Chief Investment Officer shall, without prior clearance, sell out of his personal account securities or related derivative securities held in any Putnam client portfolio managed in his investment group. EXCEPTIONS None, unless prior clearance is given. IMPLEMENTATION A. Individuals Authorized to Give Approval. Prior to engaging in any such sale, a portfolio manager shall seek approval, in writing, of the proposed sale. In the case of a portfolio manager or director, prior written approval of the proposed sale shall be obtained from a Chief Investment Officer to whom he reports or, in his absence, another Chief Investment Officer. In the case of a Chief Investment Officer, prior written approval of the proposed sale shall be obtained from another Chief Investment Officer. In addition to the foregoing, prior written approval must also be obtained from the Code of Ethics Officer. B. Contents of Written Approval. In every instance, the written approval form attached as Appendix C (or such other form as the Code of Ethics Officer shall designate) shall be used. The written approval should be signed by the Chief Investment Officer giving approval and dated the date such approval was given, and shall state, briefly, the reasons why the trade was allowed and why the investment conduct pursued by the portfolio manager, director, or chief investment officer was deemed inappropriate for the Putnam client account controlled by the individual seeking to engage in the transaction for his personal account. Such written approval shall be sent by the Chief Investment Officer approving the transaction to the Code of Ethics Officer within twenty-four hours or as promptly as circumstances permit. Approvals obtained after a transaction has been completed or while it is in process will not satisfy the requirements of this Rule. COMMENT This Rule, like Rule 3 of this Section, is designed to prevent a Putnam portfolio manager from engaging in personal investment conduct that appears to be counter to the investment strategy that he is pursuing on behalf of a Putnam client. RULE 5 No portfolio manager shall cause, and no analyst shall recommend, a Putnam client to take action for the portfolio manager's or analyst's own personal benefit. EXCEPTIONS None. COMMENTS 1. A portfolio manager who trades in, or an analyst who recommends, particular securities for a Putnam client account in order to support the price of securities in his personal account, or who "front runs" a Putnam client order is in violation of this Rule. Portfolio managers and analysts should be aware that this Rule is not limited to personal transactions in securities (as that word is defined in "Definitions"). Thus, a portfolio manager or analyst who "front runs" a Putnam client purchase or sale of obligations of the U.S. government is in violation of this Rule, although U.S. government obligations are excluded from the definition of "security." 2. This Rule is not limited to instances when a portfolio manager or analyst has malicious intent. It also prohibits conduct that creates an appearance of impropriety. Portfolio managers and analysts who have questions about whether proposed conduct creates an appearance of impropriety should seek a prior written determination from the Code of Ethics Officer, using the procedures described in Section VII, Part 3. * Section III. Prohibited Conduct for All Employees RULE 1 All employees must comply with applicable laws and regulations as well as company policies. This includes tax, antitrust, political contribution, and international boycott laws. In addition, no employee at Putnam may engage in fraudulent conduct of any kind. EXCEPTIONS None. COMMENTS 1. Putnam may report to the appropriate legal authorities conduct by Putnam employees that violates this rule. 2. It should also be noted that the U.S. Foreign Corrupt Practices Act makes it a criminal offense to make a payment or offer of payment to any non-U.S. governmental official, political party, or candidate to induce that person to affect any governmental act or decision, or to assist Putnam's obtaining or retaining business. RULE 2 No Putnam employee shall conduct herself in a manner which is contrary to the interests of, or in competition with, Putnam or a Putnam client, or which creates an actual or apparent conflict of interest with a Putnam client. EXCEPTIONS None. COMMENTS 1. This Rule is designed to recognize the fundamental principle that Putnam employees owe their chief duty and loyalty to Putnam and Putnam clients. 2. It is expected that a Putnam employee who becomes aware of an investment opportunity that she believes is suitable for a Putnam client who she services will present it to the appropriate portfolio manager, prior to taking advantage of the opportunity herself. RULE 3 No Putnam employee shall seek or accept gifts, favors, preferential treatment, or special arrangements of material value from any broker-dealer, investment adviser, financial institution, corporation, or other entity, or from any existing or prospective supplier of goods or services to Putnam or Putnam Funds. Specifically, any gift over $100 in value, or any accumulation of gifts which in aggregate exceeds $100 in value from one source in one calendar year, is prohibited. Any Putnam employee who is offered or receives an item prohibited by this Rule must report the details in writing to the Code of Ethics Officer. EXCEPTIONS None. COMMENTS 1. This rule is intended to permit only proper types of customary business amenities. Listed below are examples of items that would be permitted under proper circumstances and of items that are prohibited under this rule. These examples are illustrative and not all-inclusive. Notwithstanding these examples, a Putnam employee may not, under any circumstances, accept anything that could create the appearance of any kind of conflict of interest. For example, acceptance of any consideration is prohibited if it would create the appearance of a "reward" or inducement for conducting Putnam business either with the person providing the gift or his employer. 2. This rule also applies to gifts or "favors" of material value that an investment professional may receive from a company or other entity being researched or considered as a possible investment for a Putnam client account. 3. Among items not considered of "material value" which, under proper circumstances, would be considered permissible are: (a) Occasional lunches or dinners conducted for business purposes; (b) Occasional cocktail parties or similar social gatherings conducted for business purposes; (c) Occasional attendance at theater, sporting or other entertainment events conducted for business purposes; and (d) Small gifts, usually in the nature of reminder advertising, such as pens, calendars, etc., with a value of no more than $100. 4. Among items which are considered of "material value" and which are prohibited are: (a) Entertainment of a recurring nature such as sporting events, theater, golf games, etc.; (b) The cost of transportation to a locality outside the Boston metropolitan area, and lodging while in another locality, unless such attendance and reimbursement arrangements have received advance written approval of the Code of Ethics Officer; (c) Personal loans to a Putnam employee on terms more favorable than those generally available for comparable credit standing and collateral; and (d) Preferential brokerage or underwriting commissions or spreads or allocations of shares or interests in an investment for the personal account of a Putnam employee. 5. As with any of the provisions of the Code of Ethics, a sincere belief by the employee that he was acting in accordance with the requirements of this Rule will not satisfy his obligations under the Rule. Therefore, an employee who is in doubt concerning the propriety of any gift or "favor" should seek a prior written determination from the Code of Ethics Officer, as provided in Part 3 of Section VII. RULE 4 No Putnam employee may pay, offer, or commit to pay any amount of consideration which might be or appear to be a bribe or kickback in connection with Putnam's business. EXCEPTIONS None. COMMENT Although the rule does not specifically address political contributions, Putnam employees should be aware that it is against corporate policy to use company assets to fund political contributions of any sort, even where such contributions may be legal. No Putnam employee should offer or agree to make any political contributions (including political dinners and similar fund-raisers) on behalf of Putnam, and no employee will be reimbursed by Putnam for such contributions made by the employee personally. RULE 5 No contributions may be made with corporate funds to any political party or campaign, whether directly or by reimbursement to an employee for the expense of such a contribution. No Putnam employee shall solicit any charitable, political or other contributions using Putnam letterhead or making reference to Putnam in the solicitation. No Putnam employee shall personally solicit any such contribution while on Putnam business. EXCEPTIONS None. COMMENT 1. Putnam has established a political action committee (PAC) that contributes to worthy candidates for political office. Any request received by a Putnam employee for a political contribution must be directed to Putnam's Legal and Compliance Department. 2. This rule does not prohibit solicitation on personal letterhead by Putnam employees. Nonetheless, Putnam employees should use discretion in soliciting contributions from individuals or entities who provide services to Putnam. There should never be a suggestion that any service provider must contribute to keep Putnam's business. RULE 6 No unauthorized disclosure may be made by any employee or former employee of any trade secrets or proprietary information of Putnam or of any confidential information. No information regarding any Putnam client portfolio, actual or proposed securities trading activities of any Putnam client, or Putnam research shall be disclosed outside the Putnam organization without a valid business purpose. EXCEPTIONS None. COMMENT All information about Putnam and Putnam clients is strictly confidential. Putnam research information should not be disclosed unnecessarily and never for personal gain. RULE 7 No Putnam employee shall serve as officer, employee, director, trustee or general partner of a corporation or entity other than Putnam, without prior approval of the Code of Ethics Officer. EXCEPTION Charitable or Non-profit Exception. This Rule shall not prevent any Putnam employee from serving as officer, director, or trustee of a charitable or not-for-profit institution, provided that the employee abides by the spirit of the Code of Ethics and the Policy Statements with respect to any investment activity for which she has any discretion or input as officer, director, or trustee. The pre-clearance and reporting requirements of the Code of Ethics do not apply to the trading activities of such charitable or not-for-profit institutions for which an employee serves as an officer, director, or trustee. COMMENTS 1. This Rule is designed to ensure that Putnam cannot be deemed an affiliate of any issuer of securities by virtue of service by one of its officers or employees as director or trustee. 2. Certain charitable or not-for-profit institutions have assets (such as endowment funds or employee benefit plans) which require prudent investment. To the extent that a Putnam employee (because of her position as officer, director, or trustee of an outside entity) is charged with responsibility to invest such assets prudently, she may not be able to discharge that duty while simultaneously abiding by the spirit of the Code of Ethics and the Policy Statements. Employees are cautioned that they should not accept service as an officer, director, or trustee of an outside charitable or not-for-profit entity where such investment responsibility is involved, without seriously considering their ability to discharge their fiduciary duties with respect to such investments. RULE 8 No Putnam employee shall serve as a trustee, executor, custodian, any other fiduciary, or as an investment adviser or counselor for any account outside Putnam. EXCEPTIONS Charitable or Religious Exception. This Rule shall not prevent any Putnam employee from serving as fiduciary with respect to a religious or charitable trust or foundation, so long as the employee abides by the spirit of the Code of Ethics and the Policy Statements with respect to any investment activity over which he has any discretion or input. The pre-clearance and reporting requirements of the Code of Ethics do not apply to the trading activities of such a religious or charitable trust or foundation. Family Trust or Estate Exception. This Rule shall not prevent any Putnam employee from serving as fiduciary with respect to a family trust or estate, so long as the employee abides by all of the Rules of the Code of Ethics with respect to any investment activity over which he has any discretion. COMMENT The roles permissible under this Rule may carry with them the obligation to invest assets prudently. Once again, Putnam employees are cautioned that they may not be able to fulfill their duties in that respect while abiding by the Code of Ethics and the Policy Statements. RULE 9 No Putnam employee may be a member of any investment club. EXCEPTIONS None. COMMENT This Rule guards against the danger that a Putnam employee may be in violation of the Code of Ethics and the Policy Statements by virtue of his personal securities transactions in or through an entity that is not bound by the restrictions imposed by this Code of Ethics and the Policy Statements. Please note that this restriction also applies to the spouse of a Putnam employee and any relatives of a Putnam employee living in the same household as the employee, as their transactions are covered by the Code of Ethics (see page x). RULE 10 No Putnam employee may become involved in a personal capacity in consultations or negotiations for corporate financing, acquisitions or other transactions for outside companies (whether or not held by any Putnam client), nor negotiate nor accept a fee in connection with these activities without obtaining the prior written permission of the president of Putnam Investments. EXCEPTIONS None. RULE 11 No new types of securities or instruments may be purchased for a Putnam fund or other client account without following the procedures set forth in Appendix D. EXCEPTIONS None. COMMENT See Appendix D. RULE 12 No employee may create or participate in the creation of any record that is intended to mislead anyone or to conceal anything that is improper. In addition, all employees responsible for the preparation, filing, or distribution of any regulatory filings or public communications must ensure that such filings or communications are timely, complete, fair, accurate, and understandable. EXCEPTIONS None. COMMENTS 1. In many cases, this is not only a matter of company policy and ethical behavior but also required by law. Our books and records must accurately reflect the transactions represented and their true nature. For example, records must be accurate as to the recipient of all payments; expense items, including personal expense reports, must accurately reflect the true nature of the expense. No unrecorded fund or asset shall be established or maintained for any reason. 2. All financial books and records must be prepared and maintained in accordance with Generally Accepted Accounting Principles and Putnam's existing accounting controls, to the extent applicable. RULE 13 No employee should have any direct or indirect (including by a family member or close relative) personal financial interest (other than normal investments not material to the employee in the entity's publicly traded securities) in any business, with which Putnam has dealings unless such interest is disclosed and approved by the Code of Ethics Officer. RULE 14 No employee shall, with respect to any affiliate of Putnam that provides investment advisory services and is listed below in Comment 4 to this Rule, as revised from time to time (each an "NPA"), (a) directly or indirectly seek to influence the purchase, retention, or disposition of, or exercise of voting, consent, approval or similar rights with respect to, any portfolio security in any account or fund advised by the NPA and not by Putnam, (b) transmit any information regarding the purchase, retention or disposition of, or exercise of voting, consent, approval or similar rights with respect to, any portfolio security held in a Putnam or NPA client account to any personnel of the NPA, (c) transmit any trade secrets, proprietary information, or confidential information of Putnam to the NPA without a valid business purpose, (d) use confidential information or trade secrets of the NPA for the benefit of the employee, Putnam, or any other NPA, or (e) breach any duty of loyalty to the NPA by virtue of service as a director or officer of the NPA. COMMENTS 1. Sections (a) and (b) of the Rule are designed to help ensure that the portfolio holdings of Putnam clients and clients of the NPA need not be aggregated for purposes of determining beneficial ownership under Section 13(d) of the Securities Exchange Act or applicable regulatory or contractual investment restrictions that incorporate such definition of beneficial ownership. Persons who serve as directors or officers of both Putnam and an NPA would take care to avoid even inadvertent violations of Section (b). Section (a) does not prohibit a Putnam employee who serves as a director or officer of the NPA from seeking to influence the modification or termination of a particular investment product or strategy in a manner that is not directed at any specific securities. Sections (a) and (b) do not apply when a Putnam affiliate serves as an adviser or subadviser to the NPA or one of its products, in which case normal Putnam aggregation rules apply. 2. As a separate entity, any NPA may have trade secrets or confidential information that it would not choose to share with Putnam. This choice must be respected. 3. When Putnam employees serve as directors or officers of an NPA, they are subject to common law duties of loyalty to the NPA, despite their Putnam employment. In general, this means that when performing their duties as NPA directors or officers, they must act in the best interest of the NPA and its shareholders. Putnam's Legal and Compliance Department will assist any Putnam employee who is a director or officer of an NPA and has questions about the scope of his or her responsibilities to the NPA. 4. Entities that are currently non-Putnam affiliates within the scope of this Rule are: Cisalpina Gestioni, S.p.A., PanAgora Asset Management Inc., PanAgora Asset Management Ltd., Nissay Asset Management Co., Ltd., Thomas H. Lee Partners, L.P., Ampega Asset Management, GMBH, and Sceptre Investment Counsel, Ltd. RULE 15 No employee shall use computer hardware, software, data, Internet, electronic mail, voice mail, electronic messaging ("e-mail" or "cc: Mail"), or telephone communications systems in a manner that is inconsistent with their use as set forth in policy statements governing their use that are adopted from time to time by Putnam. No employee shall introduce a computer "virus" or computer code that may result in damage to Putnam's information or computer systems. EXCEPTIONS None. COMMENT Putnam's policy statements relating to these matters are contained in the "Computer System and Network Responsibilities" section of the "Employment Issues" category within the Employee Handbook. The on-line Employee Handbook is located in the Putnam ibenefitcenter (https://www.ibenefitcenter.com) at the "Policies and Procedures" section of the "Workplace Community" tab. RULE 16 All employees must follow and abide by the spirit of the Code of Ethics and the Standards of Professional Conduct of the Association of Investment Management and Research (AIMR). The texts of the AIMR Code of Ethics and Standards of Professional Conduct are set forth in Exhibit E. RULE 17 Except as provided below, no employee may disclose to any outside organization or person any non-public personal information about any individual who is a current or former shareholder of any Putnam retail or institutional fund, or current or former client of a Putnam company. All employees shall follow the security procedures as established from time to time by a Putnam company to protect the confidentiality of all shareholder and client account information. Except as Putnam's Legal and Compliance Department may expressly authorize, no employee shall collect any non-public personal information about a prospective or current shareholder of a Putnam Fund or prospective or current client of a Putnam company, other than through an account application (or corresponding information provided by the shareholder's financial representative) or in connection with executing shareholder or client transactions, nor shall any information be collected other than the following: name, address, telephone number, social security number, and investment, broker, and transaction information. EXCEPTIONS Putnam Employees. Non-public personal information may be disclosed to Putnam employees in connection with processing transactions or maintaining accounts for shareholders of a Putnam fund and clients of a Putnam company, to the extent that access to such information is necessary to the performance of that employee's job functions. Shareholder Consent Exception. Non-public personal information about a shareholder's or client's account may be provided to a non-Putnam organization at the specific request of the shareholder or client or with the shareholder's or client's prior written consent. Broker or Adviser Exception. Non-public personal information about a shareholder's or client's account may be provided to the shareholder's or client's broker of record. Third Party Service Provider Exception. Non-public personal information may be disclosed to a service provider that is not affiliated with a Putnam fund or Putnam company only when such disclosure is necessary for the service provider to perform the specific services contracted for, and only (a) if the service provider executes Putnam's standard confidentiality agreement, or (b) pursuant to an agreement containing a confidentiality provision that has been approved by the Legal and Compliance Department. Examples of such service providers include proxy solicitors and proxy vote tabulators, mail services and providers of other administrative services, and Information Services Division consultants who have access to non-public personal information. COMMENTS 1. Non-public personal information is any information that personally identifies a shareholder of a Putnam fund or client of a Putnam company and is not derived from publicly available sources. This privacy policy applies to shareholders or clients that are individuals, not institutions. However, as a general matter, all information that we receive about a shareholder of a Putnam fund or client of a Putnam company shall be treated as confidential. No employee may sell or otherwise provide shareholder or client lists or any other information relating to a shareholder or client to any marketing organization.2. All Putnam employees with access to shareholder or client account information must be trained in and follow Putnam's security procedures designed to safeguard that information from unauthorized use. For example, a telephone representative must be trained in and follow Putnam's security procedures to verify the identity of a caller requesting account information. 3. Any questions regarding this privacy policy should be directed to Putnam's Legal and Compliance Department. A violation of this policy will be subject to the sanctions imposed for violations of Putnam's Code of Ethics. 4. Employees must report any violation of this policy or any possible breach of the confidentiality of client information (whether intentional or accidental) to the Managing Director in charge of the employee's business unit. Managing Directors who are notified of such a violation or possible breach must immediately report it in writing to Putnam's General Counsel and, in the event of a breach of computerized data, Putnam's Chief Technology Officer. RULE 18 No employee may engage in any money laundering activity or facilitate any money-laundering activity through the use of any Putnam account or client account. Any situations giving rise to a suspicion that attempted money laundering may be occurring in any account must be reported immediately to the Managing Director in charge of the employee's business unit. Managing Directors who are notified of such a suspicion of money laundering activity must immediately report it in writing to Putnam's General Counsel and Chief Financial Officer. RULE 19 All employees must comply with the record retention requirements applicable to the business unit. COMMENT Employees should check with their managers or the Chief Administrative Officer of their division to determine what record retention requirements apply to their business unit. * Section IV. Special Rules for Officers and Employees of Putnam Investments Limited RULE 1 In situations subject to Section I.A., Rule 1 (Restricted List Personal Securities Transactions), the Putnam Investments Limited. ("PIL") employee must obtain clearance not only as provided in that rule, but also from PIL's Compliance Officer or her designee, who must approve the transaction before any trade is placed and record the approval. EXCEPTIONS None. IMPLEMENTATION Putnam's Code of Ethics Administrator in Boston (the "Boston Administrator") has also been designated the Assistant Compliance Officer of PIL and has been delegated the right to approve or disapprove personal securities transactions in accordance with the foregoing requirement. Therefore, approval from the Code of Ethics Administrator for PIL employees to make personal securities investments constitutes approval under the Code of Ethics and also for purposes of compliance with IMRO, the U.K. self-regulatory organization that regulates PIL. The position of London Code of Ethics Administrator (the "London Administrator") has also been created (Jane Barlow is the current London Administrator). All requests for clearances must be made by e-mail to the Boston Administrator copying the London Administrator. The e-mail must include the number of shares to be bought or sold and the name of the broker(s) involved. Where time is of the essence clearances can be made by telephone to the Boston Administrator but they must be followed up by e-mail. Both the Boston and London Administrators will maintain copies of all clearances for inspection by senior management and regulators. RULE 2 No PIL employee may trade with any broker or dealer unless that broker or dealer has sent a letter to the London Administrator agreeing to deliver copies of trade confirmations to PIL. No PIL employee may enter into any margin or any other special dealing arrangement with any broker-dealer without the prior written consent of the PIL Compliance Officer. EXCEPTIONS None. IMPLEMENTATION PIL employees will be notified separately of this requirement once a year by the PIL Compliance Officer, and are required to provide an annual certification of compliance with the Rule. All PIL employees must inform the London Administrator of the names of all brokers and dealers with whom they trade prior to trading. The London Administrator will send a letter to the broker(s) in question requesting them to agree to deliver copies of confirms to PIL. The London Administrator will forward copies of the confirms to the Boston Administrator. PIL employees may trade with a broker only when the London Administrator has received the signed agreement from that broker. RULE 3 For purposes of the Code of Ethics, including Putnam's Policy Statement on Insider Trading Prohibitions, PIL employees must also comply with Part V of the Criminal Justice Act 1993 on insider dealing. EXCEPTIONS None. IMPLEMENTATION To ensure compliance with U.K. insider dealing legislation, PIL employees must observe the relevant procedures set forth in PIL's Compliance Manual, a copy of which is sent to each PIL employee, and sign an annual certification as to compliance. * Section V. Reporting Requirements for All Employees Reporting of Personal Securities Transactions RULE 1 Each Putnam employee shall ensure that broker-dealers send all confirmations of securities transactions for his personal accounts to the Code of Ethics Officer. (For the purpose of this Rule, "securities" shall include securities of The Marsh & McLennan Companies, Inc., and any option on a security or securities index, including broad-based market indexes.) EXCEPTIONS None. IMPLEMENTATION 1. Putnam employees must instruct their broker-dealers to send confirmations to Putnam and must follow up with the broker-dealer on a reasonable basis to ensure that the instructions are being followed. Putnam employees should contact the Code of Ethics Administrator to obtain a letter from Putnam authorizing the setting up of a personal brokerage account. Confirmations should be submitted to the Code of Ethics Administrator. (Specific procedures apply to employees of Putnam Investments Limited ("PIL"). Employees of PIL should contact the London Code of Ethics Administrator.) Failure of a broker-dealer to comply with the instructions of a Putnam employee to send confirmations shall be a violation by the Putnam employee of this Rule. COMMENTS 1. "Transactions for personal accounts" is defined broadly to include more than transaction in accounts under an employee's own name. See Definitions. 2. A confirmation is required for all personal securities transactions, whether or not exempted or excepted by this Code. 3. To the extent that a Putnam employee has investment authority over securities transactions of a family trust or estate, confirmations of those transactions must also be made, unless the employee has received a prior written exception from the Code of Ethics Officer. RULE 2 Every Access Person shall file a quarterly report, within ten calendar days of the end of each quarter, recording all purchases and sales of any securities for personal accounts as defined in the Definitions. (For the purpose of this Rule, "securities" shall include any option on a security or securities index, including broad-based market indexes.) EXCEPTIONS None. IMPLEMENTATION All employees required to file such a report will receive by e-mail a blank form at the end of the quarter from the Code of Ethics Administrator. The form will specify the information to be reported. The form shall also contain a representation that employees have complied fully with all provisions of the Code of Ethics. COMMENT 1. The date for each transaction required to be disclosed in the quarterly report is the trade date for the transaction, not the settlement date. 2. If the requirement to file a quarterly report applies to you and you fail to report within the required 10-day period, salary increases and bonuses will be reduced in accordance with guidelines stated in the form. Reporting of Personal Securities Holdings RULE 3 Access Persons must disclose all personal securities holdings to the Code of Ethics Officer upon commencement of employment and thereafter on an annual basis. EXCEPTIONS None. COMMENT These requirements are mandated by SEC regulations and are designed to facilitate the monitoring of personal securities transactions. Putnam's Code of Ethics Administrator will provide Access Persons with the form for making these reports and the specific information that must be disclosed at the time that the disclosure is required. Other Reporting Policies The following rules are designed to ensure that Putnam's internal Control and Reporting professionals are aware of all items that might need to be addressed by Putnam or reported to appropriate entities. RULE 4 If a Putnam employee suspects that fraudulent or other irregular activity might be occurring at Putnam, the activity must be reported immediately to the Managing Director in charge of that employee's business unit. Managing Directors who are notified of any such activity must immediately report it in writing to Putnam's Chief Financial Officer or Putnam's General Counsel. RULE 5 Putnam employees must report all communications from regulatory or government agencies (federal, state, or local) to the Managing Director in charge of their business unit. Managing Directors who are notified of any such communication must immediately report it in writing to Putnam's Chief Financial Officer or Putnam's General Counsel. RULE 6 All claims, circumstances or situations that could give rise to a claim against Putnam that come to the attention of a Putnam employee must be reported through the employee's management structure up to the Managing Director in charge of the employee's business unit. Managing Directors who are notified of any such claim, circumstance or situation that might give rise to a claim against Putnam for more than $100,000 must immediately report in writing it to Putnam's Chief Financial Officer or Putnam's General Counsel. RULE 7 All possible violations of law or regulations at Putnam that come to the attention of a Putnam employee must be reported immediately to the Managing Director in charge of the employee's business unit. Managing Directors who are notified of any such activity must immediately report it in writing to Putnam's Chief Financial Officer or Putnam's General Counsel. RULE 8 Putnam employees must report all requests by anyone for Putnam to participate in or cooperate with an international boycott to the Managing Director in charge of their business unit. Managing Directors who are notified of any such request must immediately report it in writing to Putnam's Chief Financial Officer or Putnam's General Counsel. RULE 9 If a Putnam employee believes that there has been a violation of any of the rules of the Code of Ethics, that employee must promptly notify the Code of Ethics Officer, Bill Woolverton, or the Deputy Code of Ethics Officer, Andy Hachey, of the violation. * Section VI. Education Requirements Every Putnam employee has an obligation to fully understand the requirements of the Code of Ethics. The Rules set forth below are designed to enhance this understanding. RULE 1 A copy of the Code of Ethics will be distributed to every Putnam employee periodically. All Access Persons will be required to certify periodically that they have read, understood, and will comply with the provisions of the Code of Ethics, including the Code's Policy Statement Concerning Insider Trading Prohibitions. RULE 2 Every investment professional will attend a meeting periodically at which the Code of Ethics will be reviewed. * Section VII. Compliance and Appeal Procedures 1. Assembly of Restricted List. The Code of Ethics Administrator will coordinate the assembly and maintenance of the Restricted List. The list will be assembled each day by 11:30 a.m. EST. No employee may engage in a personal securities transaction without prior clearance on any day, even if the employee believes that the trade will be subject to an exception. Note that pre-clearance may be obtained after 9:00 a.m. for purchases or sales of up to 1,000 shares of issuers having a market capitalization in excess of $5 billion. 2. Consultation of Restricted List. It is the responsibility of each employee to pre-clear through the pre-clearance system or consult with the Code of Ethics Administrator prior to engaging in a personal securities transaction, to determine if the security he proposes to trade is on the Restricted List and, if so, whether it is subject to the "Large Cap" limitation. The pre-clearance system and the Code of Ethics Administrator will be able to tell an employee whether a security is on the Restricted List. No other information about the Restricted List is available through the pre-clearance system. The Code of Ethics Administrator shall not be authorized to answer any questions about the Restricted List, or to render an opinion about the propriety of a particular personal securities transaction. Any such questions shall be directed to the Code of Ethics Officer. 3. Request for Determination. An employee who has a question concerning the applicability of the Code of Ethics to a particular situation shall request a determination from the Code of Ethics Officer before engaging in the conduct or personal securities transaction about which he has a question. If the question pertains to a personal securities transaction, the request shall state for whose account the transaction is proposed, the relationship of that account to the employee, the security proposed to be traded, the proposed price and quantity, the entity with whom the transaction will take place (if known), and any other information or circumstances of the trade that could have a bearing on the Code of Ethics Officer's determination. If the question pertains to other conduct, the request for determination shall give sufficient information about the proposed conduct to assist the Code of Ethics Officer in ascertaining the applicability of the Code. In every instance, the Code of Ethics Officer may request additional information, and may decline to render a determination if the information provided is insufficient. The Code of Ethics Officer shall make every effort to render a determination promptly. No perceived ambiguity in the Code of Ethics shall excuse any violation. Any person who believes the Code to be ambiguous in a particular situation shall request a determination from the Code of Ethics Officer. 4. Request for Ad Hoc Exemption. Any employee who wishes to obtain an ad hoc exemption under Section I.D., Rule 2, shall request from the Code of Ethics Officer an exemption in writing in advance of the conduct or transaction sought to be exempted. In the case of a personal securities transaction, the request for an ad hoc exemption shall give the same information about the transaction required in a request for determination under Part 3 of this Section, and shall state why the proposed personal securities transaction would be unlikely to affect a highly institutional market, or is unrelated economically to securities to be purchased, sold, or held by any Putnam client. In the case of other conduct, the request shall give information sufficient for the Code of Ethics Officer to ascertain whether the conduct raises questions of propriety or conflict of interest (real or apparent). The Code of Ethics Officer shall make every effort to promptly render a written determination concerning the request for an ad hoc exemption. 5. Appeal to Code of Ethics Officer with Respect to Restricted List. If an employee ascertains that a security that he wishes to trade for his personal account appears on the Restricted List, and thus the transaction is prohibited, he may appeal the prohibition to the Code of Ethics Officer by submitting a written memorandum containing the same information as would be required in a request for a determination. The Code of Ethics Officer shall make every effort to respond to the appeal promptly. 6. Information Concerning Identity of Compliance Personnel. The names of Code of Ethics personnel are available by contacting the Legal and Compliance Department. Appendix A Policy Statement Concerning Insider Trading Prohibitions PUTNAM INVESTMENTS [SCALE LOGO OMITTED] * Preamble Putnam has always forbidden trading on material nonpublic information ("inside information") by its employees. Tougher federal laws make it important for Putnam to restate that prohibition in the strongest possible terms, and to establish, maintain, and enforce written policies and procedures to prevent the misuse of material nonpublic information. Unlawful trading while in possession of inside information can be a crime. Today, federal law provides that an individual convicted of trading on inside information go to jail for some period of time. There is also significant monetary liability for an inside trader; the Securities and Exchange Commission can seek a court order requiring a violator to pay back profits and penalties of up to three times those profits. In addition, private plaintiffs can seek recovery for harm suffered by them. The inside trader is not the only one subject to liability. In certain cases, "controlling persons" of inside traders (including supervisors of inside traders or Putnam itself) can be liable for large penalties. Section 1 of this Policy Statement contains rules concerning inside information. Section 2 contains a discussion of what constitutes unlawful insider trading. Neither material nonpublic information nor unlawful insider trading is easy to define. Section 2 of this Policy Statement gives a general overview of the law in this area. However, the legal issues are complex and must be resolved by the Code of Ethics Officer. If an employee has any doubt as to whether she has received material nonpublic information, she must consult with the Code of Ethics Officer prior to using that information in connection with the purchase or sale of a security for his own account or the account of any Putnam client, or communicating the information to others. A simple rule of thumb is if you think the information is not available to the public at large, don't disclose it to others and don't trade securities to which the inside information relates. If an employee has failed to consult the Code of Ethics Officer, Putnam will not excuse employee misuse of inside information on the ground that the employee claims to have been confused about this Policy Statement or the nature of the information in his possession. If Putnam determines, in its sole discretion, that an employee has failed to abide by this Policy Statement, or has engaged in conduct that raises a significant question concerning insider trading, he will be subject to disciplinary action, including termination of employment. THERE ARE NO EXCEPTIONS TO THIS POLICY STATEMENT AND NO ONE IS EXEMPT. * Definitions: Insider Trading Gender references in Appendix A alternate. Code of Ethics Administrator. The individual designated by the Code of Ethics Officer to assume responsibility for day-to-day, non-discretionary administration of this Policy Statement. Code of Ethics Officer. The Putnam officer who has been assigned the responsibility of enforcing and interpreting this Policy Statement. The Code of Ethics Officer shall be the General Counsel or such other person as is designated by the President of Putnam Investments. If he is unavailable, the Deputy Code of Ethics Officer (to be appointed by the Code of Ethics Officer) shall act in his stead. Immediate family. Spouse, minor children or other relatives living in the same household as the Putnam employee. Purchase or sale of a security. Any acquisition or transfer of any interest in the security for direct or indirect consideration, including the writing of an option. Putnam. Any or all of Putnam Investments, LLC, and its subsidiaries, any one of which shall be a "Putnam company." Putnam client. Any of the Putnam Funds, or any advisory or trust client of Putnam. Putnam employee (or "employee"). Any employee of Putnam. Security. Anything defined as a security under federal law. The term includes any type of equity or debt security, any interest in a business trust or partnership, and any rights relating to a security, such as put and call options, warrants, convertible securities, and securities indices. (Note: The definition of "security" in this Policy Statement varies significantly from that in the Code of Ethics. For example, the definition in this Policy Statement specifically includes securities of The Marsh & McLennan Companies, Inc.) Transaction for a personal account (or "personal securities transaction"). Securities transactions: (a) for the personal account of any employee; (b) for the account of a member of the immediate family of any employee; (c) for the account of a partnership in which a Putnam employee or immediate family member is a partner with investment discretion; (d) for the account of a trust in which a Putnam employee or immediate family member is a trustee with investment discretion; (e) for the account of a closely-held corporation in which a Putnam employee or immediate family member holds shares and for which he has investment discretion; and (f) for any account other than a Putnam client account which receives investment advice of any sort from the employee or immediate family member, or as to which the employee or immediate family member has investment discretion. Officers and employees of Putnam Investments Limited ("PIL") must also consult the relevant procedures on compliance with U.K. insider dealing legislation set forth in PEL's Compliance Manual (see Rule 3 of Section IV of the Code of Ethics). * Section 1. Rules Concerning Inside Information RULE 1 No Putnam employee shall purchase or sell any security listed on the Inside Information List (the "Red List") either for his personal account or for a Putnam client. IMPLEMENTATION When an employee contacts the Code of Ethics Administrator seeking clearance for a personal securities transaction, the Code of Ethics Administrator's response as to whether a security appears on the Restricted List will include securities on the Red List. COMMENT This Rule is designed to prohibit any employee from trading a security while Putnam may have inside information concerning that security or the issuer. Every trade, whether for a personal account or for a Putnam client, is subject to this Rule. RULE 2 No Putnam employee shall purchase or sell any security, either for a personal account or for the account of a Putnam client, while in possession of material, nonpublic information concerning that security or the issuer, without the prior written approval of the Code of Ethics Officer. IMPLEMENTATION In order to obtain prior written approval of the Code of Ethics Officer, a Putnam employee should follow the reporting steps prescribed in Rule 3. COMMENTS 1. Rule 1 concerns the conduct of an employee when Putnam possesses material nonpublic information. Rule 2 concerns the conduct of an employee who herself possesses material, nonpublic information about a security that is not yet on the Red List. 2. If an employee has any question as to whether information she possesses is material and/or nonpublic information, she must contact the Code of Ethics Officer in accordance with Rule 3 prior to purchasing or selling any security related to the information or communicating the information to others. The Code of Ethics Officer shall have the sole authority to determine what constitutes material, nonpublic information for the purposes of this Policy Statement. An employee's mistaken belief that the information was not material nonpublic information will not excuse a violation of this Policy Statement. RULE 3 Any Putnam employee who believes he may have received material, nonpublic information concerning a security or the issuer shall immediately report the information to the Code of Ethics Officer and to no one else. After reporting the information, the Putnam employee shall comply strictly with Rule 2 by not trading in the security without the prior written approval of the Code of Ethics Officer and shall: (a) take precautions to ensure the continued confidentiality of the information; and (b) refrain from communicating the information in question to any person. EXCEPTION This rule shall not apply to material, nonpublic information obtained by Putnam employees who are directors or trustees of publicly traded companies, to the extent that such information is received in their capacities as directors or trustees, and then only to the extent such information is not communicated to anyone else within the Putnam organization. IMPLEMENTATION 1. In order to make any use of potential material, nonpublic information, including purchasing or selling a security or communicating the information to others, an employee must communicate that information to the Code of Ethics Officer in a way designed to prevent the spread of such information. Once the employee has reported potential material, nonpublic information to the Code of Ethics Officer, the Code of Ethics Officer will evaluate whether information constitutes material, nonpublic information, and whether a duty exists that makes use of such information improper. If the Code of Ethics Officer determines either (a) that the information is not material or is public, or (b) that use of the information is proper, he will issue a written approval to the employee specifically authorizing trading while in possession of the information, if the employee so requests. If the Code of Ethics Officer determines (a) that the information may be nonpublic and material, and (b) that use of such information may be improper, he will place the security that is the subject of such information on the Red List. 2. An employee who reports potential inside information to the Code of Ethics Officer should expect that the Code of Ethics Officer will need significant information to make the evaluation described in the foregoing paragraph, including information about (a) the manner in which the employee acquired the information, and (b) the identity of individuals to whom the employee has revealed the information, or who have otherwise learned the information. The Code of Ethics Officer may place the affected security or securities on the Red List pending the completion of his evaluation. 3. If an employee possesses documents, disks, or other materials containing the potential inside information, an employee must take precautions to ensure the confidentiality of the information in question. Those precautions include (a) putting documents containing such information out of the view of a casual observer, and (b) securing files containing such documents or ensuring that computer files reflecting such information are secure from viewing by others. * Section 2. Overview of Insider Trading A. Introduction This section of the Policy Statement provides guidelines for employees as to what may constitute inside information. It is possible that in the course of her employment, an employee may receive inside information. No employee should misuse that information, either by trading for her own account or by communicating the information to others. B. What constitutes unlawful insider trading? The basic definition of unlawful insider trading is trading on material, nonpublic information (also called "inside information") by an individual who has a duty not to "take advantage" of the information. What does this definition mean? The following sections help explain the definition. 1. What is material information? Trading on inside information is not a basis for liability unless the information is material. Information is "material" if a reasonable person would attach importance to the information in determining his course of action with respect to a security. Information which is reasonably likely to affect the price of a company's securities is "material," but effect on price is not the sole criterion for determining materiality. Information that employees should consider material includes but is not limited to: dividend changes, earnings estimates, changes in previously released earnings estimates, reorganization, recapitalization, asset sales, plans to commence a tender offer, merger or acquisition proposals or agreements, major litigation, liquidity problems, significant contracts, and extraordinary management developments. Material information does not have to relate to a company's business. For example, a court considered as material certain information about the contents of a forthcoming newspaper column that was expected to affect the market price of a security. In that case, a reporter for The Wall Street Journal was found criminally liable for disclosing to others the dates that reports on various companies would appear in the Journal's "Heard on the Street" column and whether those reports would be favorable or not. 2. What is nonpublic information? Information is nonpublic until it has been effectively communicated to, and sufficient opportunity has existed for it to be absorbed by, the marketplace. One must be able to point to some fact to show that the information is generally public. For example, information found in a report filed with the Securities and Exchange Commission, or appearing in Dow Jones, Reuters Economic Services, The Wall Street Journal, or other publications of general circulation would be considered public. 3. Who has a duty not to "take advantage" of inside information? Unlawful insider trading occurs only if there is a duty not to "take advantage" of material nonpublic information. When there is no such duty, it is permissible to trade while in possession of such information. Questions as to whether a duty exists are complex, fact-specific, and must be answered by a lawyer. a. Insiders and Temporary Insiders. Corporate "insiders" have a duty not to take advantage of inside information. The concept of "insider" is broad. It includes officers, directors, and employees of a corporation. In addition, a person can be a "temporary insider" if she enters into a special confidential relationship with a corporation and as a result is given access to information concerning the corporation's affairs. A temporary insider can include, among others, accounting firms, consulting firms, law firms, banks and the employees of such organizations. Putnam would generally be a temporary insider of a corporation it advises or for which it performs other services, because typically Putnam clients expect Putnam to keep any information disclosed to it confidential. EXAMPLE An investment adviser to the pension fund of a large publicly-traded corporation, Acme, Inc., learns from an Acme employee that Acme will not be making the minimum required annual contribution to the pension fund because of a serious downturn in Acme's financial situation. The information conveyed is material and nonpublic. COMMENT Neither the investment adviser, its employees, nor clients can trade on the basis of that information, because the investment adviser and its employees could be considered "temporary insiders" of Acme. b. Misappropriators. Certain people who are not insiders (or temporary insiders) also have a duty not to deceptively take advantage of inside information. Included in this category is an individual who "misappropriates" (or takes for his own use) material, nonpublic information in violation of a duty owed either to the corporation that is the subject of inside information or some other entity. Such a misappropriator can be held liable if he trades while in possession of that material, nonpublic information. EXAMPLE The chief financial officer of Acme, Inc., is aware of Acme's plans to engage in a hostile takeover of Profit, Inc. The proposed hostile takeover is material and nonpublic. COMMENT The chief financial officer of Acme cannot trade in Profit, Inc.'s stock for his own account. Even though he owes no duty to Profit, Inc., or its shareholders, he owes a duty to Acme not to "take advantage" of the information about the proposed hostile takeover by using it for his personal benefit. c. Tippers and Tippees. A person (the "tippee") who receives material, nonpublic information from an insider or misappropriator (the "tipper") has a duty not to trade while in possession of that information if he knew or should have known that the information was provided by the tipper for an improper purpose and in breach of a duty owed by the tipper. In this context, it is an improper purpose for a person to provide such information for personal benefit, such as money, affection, or friendship. EXAMPLE The chief executive officer of Acme, Inc., tells his daughter that negotiations concerning a previously-announced acquisition of Acme have been terminated. This news is material and, at the time the father tells his daughter, nonpublic. The daughter sells her shares of Acme. COMMENT The father is a tipper because he has a duty to Acme and its shareholders not to "take advantage" of the information concerning the breakdown of negotiations, and he has conveyed the information for an "improper" purpose (here, out of love and affection for his daughter). The daughter is a "tippee" and is liable for trading on inside information because she knew or should have known that her father was conveying the information to her for his personal benefit, and that her father had a duty not to "take advantage" of Acme information. A person can be a tippee even if he did not learn the information directly from the tipper, but learned it from a previous tippee. EXAMPLE An employee of a law firm which works on mergers and acquisitions learns at work about impending acquisitions. She tells her friend and her friend's stockbroker about the upcoming acquisitions on a regular basis. The stockbroker tells the brother of a client on a regular basis, who in turn tells two friends, A and B. A and B buy shares of the companies being acquired before public announcement of the acquisition, and regularly profit from such purchases. A and B do not know the employee of the law firm. They do not, however, ask about the source of the information. COMMENT A and B, although they have never heard of the tipper, are tippees because they did not ask about the source of the information, even though they were experienced investors, and were aware that the "tips" they received from this particular source were always right. C. Who can be liable for insider trading? The categories of individuals discussed above (insiders, temporary insiders, misappropriators or tippees) can be liable if they trade while in possession of material nonpublic information. In addition, individuals other than those who actually trade on inside information can be liable for trades of others. A tipper can be liable if (a) he provided the information in exchange for a personal benefit in breach of a duty and (b) the recipient of the information (the "tippee") traded while in possession of the information. Most importantly, a controlling person can be liable if the controlling person "knew or recklessly disregarded" the fact that the controlled person was likely to engage in misuse of inside information and failed to take appropriate steps to prevent it. Putnam is a "controlling person" of its employees. In addition, certain supervisors may be "controlling persons" of those employees they supervise. EXAMPLE A supervisor of an analyst learns that the analyst has, over a long period of time, secretly received material inside information from Acme, Inc.'s chief financial officer. The supervisor learns that the analyst has engaged in a number of trades for his personal account on the basis of the inside information. The supervisor takes no action. COMMENT Even if he is not liable to a private plaintiff, the supervisor can be liable to the Securities and Exchange Commission for a civil penalty of up to three times the amount of the analyst's profit. (Penalties are discussed in the following section.) D. Penalties for Insider Trading Penalties for misuse of inside information are severe, both for individuals involved in such unlawful conduct and their employers. A person who violates the insider trading laws can be subject to some or all of the penalties below, even if he does not personally benefit from the violation. Penalties include: - -- jail sentences (of which at least one to three years must be served) - -- criminal penalties for individuals of up to $1,000,000, and for corporations of up to $2,500,000 - -- injunctions permanently preventing an individual from working in the securities industry - -- injunctions ordering an individual to pay over profits obtained from unlawful insider trading - -- civil penalties of up to three times the profit gained or loss avoided by the trader, even if the individual paying the penalty did not trade or did not benefit personally - -- civil penalties for the employer or other controlling person of up to the greater of $1,000,000 or three times the amount of profit gained or loss avoided - -- damages in the amount of actual losses suffered by other participants in the market for the security at issue. Regardless of whether penalties or money damages are sought by others, Putnam will take whatever action it deems appropriate (including dismissal) if Putnam determines, in its sole discretion, that an employee appears to have committed any violation of this Policy Statement, or to have engaged in any conduct which raises significant questions about whether an insider trading violation has occurred. * Appendix B. Policy Statement Regarding Employee Trades in Shares of Putnam Closed-End Funds 1. Pre-clearance for all employees Any purchase or sale of Putnam closed-end fund shares by a Putnam employee must be pre-cleared by the Code of Ethics Officer or, in his absence, the Deputy Code of Ethics Officer. A list of the closed-end funds can be obtained from the Code of Ethics Administrator. Trading in shares of closed-end funds is subject to all the rules of the Code of Ethics. 2. Special Rules Applicable to Managing Directors of Putnam Investment Management, LLC and officers of the Putnam Funds Please be aware that any employee who is a Managing Director of Putnam Investment Management, Inc. (the investment manager of the Putnam mutual funds) and officers of the Putnam Funds will not receive clearance to engage in any combination of purchase and sale or sale and purchase of the shares of a given closed-end fund within six months of each other. Therefore, purchases should be made only if you intend to hold the shares more than six months; no sales of fund shares should be made if you intend to purchase additional shares of that same fund within six months. You are also required to file certain forms with the Securities and Exchange Commission in connection with purchases and sales of Putnam closed-end funds. Please contact the Code of Ethics Officer or Deputy Code of Ethics Officer for further information. 3. Reporting by all employees As with any purchase or sale of a security, duplicate confirmations of all such purchases and sales must be forwarded to the Code of Ethics Officer by the broker-dealer utilized by an employee. If you are required to file a quarterly report of all personal securities transactions, this report should include all purchases and sales of closed-end fund shares. Please contact the Code of Ethics Officer or Deputy Code of Ethics Officer if there are any questions regarding these matters. * Appendix C. Clearance Form for Portfolio Manager Sales Out of Personal Account of Securities Also Held by Fund (For compliance with "Contra-Trading" Rule) TO: Code of Ethics Officer FROM: ------------------------------------------- DATE: ------------------------------------------- RE: Personal Securities Transaction of ------------------------------ This serves as prior written approval of the personal securities transaction described below: NAME OF PORTFOLIO MANAGER CONTEMPLATING PERSONAL TRADE: - ------------------------------------------------------------------------- SECURITY TO BE TRADED: - ------------------------------------------------------------------------- AMOUNT TO BE TRADED: ----------------------------------------------------- FUND HOLDING SECURITIES: ------------------------------------------------- AMOUNT HELD BY FUND: ----------------------------------------------------- REASON FOR PERSONAL TRADE: ----------------------------------------------- SPECIFIC REASON SALE OF SECURITIES IS INAPPROPRIATE FOR FUND: - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- (Please attach additional sheets if necessary.) CIO APPROVAL: DATE: ---------------------------------------------- -------- LEGAL/COMPLIANCE APPROVAL: DATE: --------------------------------- -------- * Appendix D. Procedures for Approval of New Financial Instruments 1. Summary a. Putnam has adopted procedures for the introduction of new instruments and securities, focusing on, but not limited to, derivatives. b. No new types of securities or instruments may be purchased for any Putnam fund or other client account without the approval of Putnam's New Securities Review Committee ("NSRC"). c. Putnam publishes from time to time a list of approved derivatives. The purchase of any derivative not listed is prohibited without specific authorization from the NSRC. 2. Procedures a. Introduction. The purchase and sale of financial instruments that have not been used previously at Putnam raise significant investment, business, operational, and compliance issues. In order to address these issues in a comprehensive manner, Putnam has adopted the following procedures for obtaining approval of the use of new instruments or investments. In addition, to provide guidance regarding the purchase of derivatives, Putnam publishes from time to time a list of approved derivatives. Only derivatives listed may be used for Putnam funds or accounts unless specifically authorized by the NSRC. b. Process of approval. An investment professional wishing to purchase a new type of investment should discuss it with the Investment Division's Administrative office (the current contact is Julie Malloy). Investment Division Administration will coordinate a review of a new instrument by appropriate NSRC members from an investment, operational and compliance perspective, including the review of instruments by the Administrative Services Division of PFTC. Based on this review, the NSRC will then approve or disapprove the proposed new investment. Investment professionals must build in adequate time for this review before planned use of a new instrument. Further, the approval of the NSRC is only a general one. Individual fund and account guidelines must be reviewed in accordance with standard compliance procedures to determine whether purchase is permitted. In addition, if the instrument involves legal documentation, that documentation must be reviewed and be completed before trading. The NSRC may prepare a compliance and operational manual for the new derivative. 3. Violations a. Putnam's Operating Committee has determined that adherence to rigorous internal controls and procedures for novel securities and instruments is necessary to protect Putnam's business standing and reputation. Violation of these procedures will be treated as violation of both compliance guidelines and Putnam's Code of Ethics. Putnam encourages questions and expects that these guidelines will be interpreted conservatively. Appendix E. AIMR Code of Ethics and Standards of Professional Conduct The Code of Ethics (Full Text) Members of the Association for Investment Management and Research shall: 1. Act with integrity, competence, dignity, and in an ethical manner when dealing with the public, clients, prospects, employers, employees, and fellow members. 2. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession. 3. Strive to maintain and improve their competence and the competence of others in the profession. 4. Use reasonable care and exercise independent professional judgment. The Standards of Professional Conduct All members of the Association for Investment Management and Research and the holders of and candidates for the Chartered Financial Analyst designation are obligated to conduct their activities in accordance with the following Code of Ethics. Disciplinary sanctions may be imposed for violations of the Code and Standards. Fundamental Responsibilities Relationships with and Responsibilities to a Profession Relationships with and Responsibilities to an Employer Relationships with and Responsibilities to Clients and Prospects Relationships with and Responsibilities to the Public Standards of Practice Handbook Standard I: Fundamental Responsibilities Members shall: A. Maintain knowledge of and comply with all applicable laws, rules, and regulations (including AIMR's Code of Ethics and Standards of Professional Conduct) of any government, governmental agency, regulatory organization, licensing agency, or professional association governing the members' professional activities. B. Not knowingly participate in or assist any violation of such laws, rules, or regulations. Standard II: Relationships with and Responsibilities to the Profession A. Use of Professional Designation. 1. AIMR members may reference their membership only in a dignified and judicious manner. The use of the reference may be accompanied by an accurate explanation of the requirements that have been met to obtain membership in these organizations. 2. Those who have earned the right to use the Chartered Financial Analyst designation may use the marks "Chartered Financial Analyst" or "CFA" and are encouraged to do so, but only in a proper, dignified, and judicious manner. The use of the designation may be accompanied by an accurate explanation of the requirements that have been met to obtain the right to use the designation. 3. Candidates in the CFA Program, as defined in the AIMR Bylaws, may reference their participation in the CFA Program, but the reference must clearly state that an individual is a candidate in the CFA Program and cannot imply that the candidate has achieved any type of partial designation. B. Professional Misconduct. 1. Members shall not engage in any professional conduct involving dishonesty, fraud, deceit, or misrepresentation or commit any act that reflects adversely on their honesty, trustworthiness, or professional competence. 2. Members and candidates shall not engage in any conduct or commit any act that compromises the integrity of the CFA designation or the integrity or validity of the examinations leading to the award of the right to use the CFA designation. C. Prohibition against Plagiarism. Members shall not copy or use, in substantially the same form as the original, material prepared by another without acknowledging and identifying the name of the author, publisher, or source of such material. Members may use, without acknowledgment, factual information published by recognized financial and statistical reporting services or similar sources. Standard III: Relationships with and Responsibilities to the Employer A. Obligation to Inform Employer of Code and Standards. Members shall: 1. Inform their employer in writing, through their direct supervisor, that they are obligated to comply with the Code and Standards and are subject to disciplinary sanctions for violations thereof. 2. Deliver a copy of the Code and Standards to their employer if the employer does not have a copy. B. Duty to Employer. Members shall not undertake any independent practice that could result in compensation or other benefit in competition with their employer unless they obtain written consent from both their employer and the persons or entities for whom they undertake independent practice. C. Disclosure of Conflicts to Employer. Members shall: 1. Disclose to their employer all matters, including beneficial ownership of securities or other investments, that reasonably could be expected to interfere with their duty to their employer or ability to make unbiased and objective recommendations. 2. Comply with any prohibitions on activities imposed by their employer if a conflict of interest exists. D. Disclosure of Additional Compensation Arrangements. Members shall disclose to their employer in writing all monetary compensation or other benefits that they receive for their services that are in addition to compensation or benefits conferred by a member's employer. E. Responsibilities of Supervisors. Members with supervisory responsibility, authority, or the ability to influence the conduct of others shall exercise reasonable supervision over those subject to their supervision or authority to prevent any violation of applicable statutes, regulations, or provisions of the Code and Standards. In so doing, members are entitled to rely on reasonable procedures to detect and prevent such violations. Standard IV: Relationships with and Responsibilities to Clients and Prospects A. Investment Process. A.1 Reasonable Basis and Representations. Members shall: a. Exercise diligence and thoroughness in making investment recommendations or in taking investment actions. b. Have a reasonable and adequate basis, supported by appropriate research and investigation, for such recommendations or actions. c. Make reasonable and diligent efforts to avoid any material misrepresentation in any research report or investment recommendation. d. Maintain appropriate records to support the reasonableness of such recommendations or actions. A.2 Research Reports. Members shall: a. Use reasonable judgment regarding the inclusion or exclusion of relevant factors in research reports. b. Distinguish between facts and opinions in research reports. c. Indicate the basic characteristics of the investment involved when preparing for public distribution a research report that is not directly related to a specific portfolio or client. A.3 Independence and Objectivity. Members shall use reasonable care and judgment to achieve and maintain independence and objectivity in making investment recommendations or taking investment action. B. Interactions with Clients and Prospects. B.1 Fiduciary Duties. In relationships with clients, members shall use particular care in determining applicable fiduciary duty and shall comply with such duty as to those persons and interests to whom the duty is owed. Members must act for the benefit of their clients and place their clients' interests before their own. B.2 Portfolio Investment Recommendations and Actions. Members shall: a. Make a reasonable inquiry into a client's financial situation, investment experience, and investment objectives prior to making any investment recommendations and shall update this information as necessary, but no less frequently than annually, to allow the members to adjust their investment recommendations to reflect changed circumstances. b. Consider the appropriateness and suitability of investment recommendations or actions for each portfolio or client. In determining appropriateness and suitability, members shall consider applicable relevant factors, including the needs and circumstances of the portfolio or client, the basic characteristics of the investment involved, and the basic characteristics of the total portfolio. Members shall not make a recommendation unless they reasonably determine that the recommendation is suitable to the client's financial situation, investment experience, and investment objectives. c. Distinguish between facts and opinions in the presentation of investment recommendations. d. Disclose to clients and prospects the basic format and general principles of the investment processes by which securities are selected and portfolios are constructed and shall promptly disclose to clients and prospects any changes that might significantly affect those processes. B.3 Fair Dealing. Members shall deal fairly and objectively with all clients and prospects when disseminating investment recommendations, disseminating material changes in prior investment recommendations, and taking investment action. B.4 Priority of Transactions. Transactions for clients and employers shall have priority over transactions in securities or other investments of which a member is the beneficial owner so that such personal transactions do not operate adversely to their clients' or employer's interests. If members make a recommendation regarding the purchase or sale of a security or other investment, they shall give their clients and employer adequate opportunity to act on their recommendations before acting on their own behalf. For purposes of the Code and Standards, a member is a "beneficial owner" if the member has a. a direct or indirect pecuniary interest in the securities; b. the power to vote or direct the voting of the shares of the securities or investments; c. the power to dispose or direct the disposition of the security or investment. B.5 Preservation of Confidentiality. Members shall preserve the confidentiality of information communicated by clients, prospects, or employers concerning matters within the scope of the client-member, prospect-member, or employer-member relationship unless a member receives information concerning illegal activities on the part of the client, prospect, or employer. B.6 Prohibition against Misrepresentation. Members shall not make any statements, orally or in writing, that misrepresent a. the services that they or their firms are capable of performing; b. their qualifications or the qualifications of their firm; c. the member's academic or professional credentials. Members shall not make or imply, orally or in writing, any assurances or guarantees regarding any investment except to communicate accurate information regarding the terms of the investment instrument and the issuer's obligations under the instrument. B.7 Disclosure of Conflicts to Clients and Prospects. Members shall disclose to their clients and prospects all matters, including beneficial ownership of securities or other investments, that reasonably could be expected to impair the members' ability to make unbiased and objective recommendations. B.8 Disclosure of Referral Fees. Members shall disclose to clients and prospects any consideration or benefit received by the member or delivered to others for the recommendation of any services to the client or prospect. Standard V: Relationships with and Responsibilities to the Public A. Prohibition against Use of Material Nonpublic Information. Members who possess material nonpublic information related to the value of a security shall not trade or cause others to trade in that security if such trading would breach a duty or if the information was misappropriated or relates to a tender offer. If members receive material nonpublic information in confidence, they shall not breach that confidence by trading or causing others to trade in securities to which such information relates. Members shall make reasonable efforts to achieve public dissemination of material nonpublic information disclosed in breach of a duty. B. Performance Presentation. 1. Members shall not make any statements, orally or in writing, that misrepresent the investment performance that they or their firms have accomplished or can reasonably be expected to achieve. 2. If members communicate individual or firm performance information directly or indirectly to clients or prospective clients, or in a manner intended to be received by clients or prospective clients, members shall make every reasonable effort to assure that such performance information is a fair, accurate, and complete presentation of such performance. * Index "7-Day Rule" for transactions by managers, analysts and CIOs, 14 "60-Day Rule", 13 Access Persons definition, ix special rules on trading, 13, 33 AIMR Code of Ethics and Standards of Professional Conduct, 63 Analysts special rules on trading by, 13 Appeals Procedures, 39 Bankers' acceptances excluded from securities, x Blackout rule on trading by portfolio managers, analysts and CIOs, 15 Boycotts reporting of requests to participate, 35 Bribes, 21 CDs excluded from securities, x Claims against Putnam reporting of, 35 Clearance how long pre-clearance is valid, 4 required for personal securities transactions, 1 Closed-end funds rules on trading, 57 Commercial paper excluded from securities, x Commodities (other than securities indices) excluded from securities, x Computer use compliance with corporate policies required, 27 Confidentiality required of all employees, 22, 27 Confirmations of personal transactions required, 33 Conflicts of interest with Putnam and Putnam clients prohibited, 19 Contra-trading rule transactions by managers and CIOs, 16 Convertible securities defined as securities, x Currencies excluded as securities, x Director serving as for another entity prohibited, 23 Employee serving as for another entity prohibited, 23 Excessive trading (over 10 trades) by employees strongly discouraged, 10 Exchange traded index funds, excluded from securities, x Exemptions basis for, 11 Family members covered in personal securities transactions, x, 45 Fiduciary serving as for another entity prohibited, 23 Fraudulent or irregular activities reporting of, 35 Gifts restrictions on receipt of by employees, 19 Government or regulatory agencies reporting of communications from, 35 Holdings disclosure of by Access Persons, 34 Initial public offerings/IPOs purchases in prohibited, 6 Insider trading policy statement and explanations, 41 prohibited, 9 Investment clubs prohibited, 24 Investment Grade Exception for clearance of fixed income securities on Restricted List, 2 Involuntary personal securities transactions exempted, 11 exemption defined, 6 Large Cap Exception for clearance of securities on Restricted List, 1 Market Timing, prohibition against, 9 Marsh & McLennan Companies stock excluded from securities, x Money market instruments excluded from securities, x Mutual fund shares (open end) excluded from securities, x Naked options by employees discouraged, 10 New financial instruments procedures for approval, 61 Non-Putnam affiliates (NPAs) transactions and relationships with, 25 Officer serving as for another entity prohibited, 26 Options defined as securities, x relationship to securities on Restricted or Red Lists, 5 Partner serving as general partner of another entity prohibited, 23 Partnerships covered in personal securities transactions, x, 45 Personal securities transaction defined, x, 45 Pink sheet reports quarterly reporting requirements, 34 Political contributions, 22 Portfolio managers special rules on trading by, 13 Privacy Policy, 27 Private offerings or placements purchases of prohibited, 7 Putnam Investments Limited special rules for, 31 Quarterly Report of securities transactions, 34 Repurchase agreements excluded from securities, x Sale defined, x, 45 Sanctions, viii for failure to pre-clear properly, 3 Shares by subscription procedures to preclear the purchase and sales of Shares by Subscription, 2 Short sales by employees prohibited conduct, 6 Tender offers partial exemption from clearance rules, 6 Trustee serving as for another entity prohibited, 23 Trusts covered in personal securities transactions, x, 45 U.S. government obligations excluded from securities, x Violations of Law reporting of, 35 Warrants defined as securities, x -----END PRIVACY-ENHANCED MESSAGE-----