N-CSR 1 intequity1.txt PUTNAM INTERNATIONAL EQUITY FUND Putnam International Equity 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 6-30-03 [GRAPHIC OMITTED: TRAVEL STICKERS] [SCALE LOGO OMITTED] *Formerly Putnam International Growth Fund From the Trustees [GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III] John A. Hill and George Putnam, III Dear Fellow Shareholder: The continuing global unrest that has kept the world's stock markets in turmoil over the past three years is reflected in the negative results posted by Putnam International Equity Fund for the fiscal year ended June 30, 2003. The fund also lagged its benchmark index and its Lipper peer group category average. You will find the details on page 8. In this uncertain environment, some comfort can be taken in the fact that the management team, in keeping with your fund's objectives, chose to position the portfolio somewhat defensively by emphasizing more stable and higher-quality stocks with greater potential for delivering steady gains over the long term. The managers discuss their strategy in the following report and also offer their views of prospects for the fiscal year that has just begun. Meanwhile, as we look back on one of the most challenging periods in recent investment history, we would like you to know how much we appreciate your patience and continued confidence in Putnam. It is heartening now to see signs that this negative cycle may at last be ending. We remain firm in our belief that over the long haul your persistence will be rewarded. Respectfully yours, /S/ JOHN A. HILL /S/ GEORGE PUTNAM, III John A. Hill George Putnam, III Chairman of the Trustees President of the Funds August 20, 2003 Report from Fund Management Fund highlights * During its fiscal year, which ended June 30, 2003, Putnam International Equity Fund returned -8.93% for class A shares at net asset value and -14.17% at public offering price. * The fund underperformed its benchmark, the MSCI EAFE Index, which returned -6.46% during the period, primarily because many fund holdings lagged during the rally that lifted international markets during the last few months of the fiscal period. * The fund also underperformed the average of its Lipper category, International Funds, which was -7.98%, during the fiscal year because of underperformance of fund holdings during the international market rally near the end of the period. * See the Performance Summary that begins on page 8 for complete fund performance, comparative performance, and Lipper data. * On April 30, 2003, your fund's name was changed from Putnam International Growth Fund to Putnam International Equity Fund. The new name better reflects the fund's investment style and strategy, which has no bias toward growth- or value-style stocks. The fund's objective remains the same. Performance commentary International stock markets remained quite volatile throughout the fund's fiscal year. We sought to emphasize high-quality companies with solid, recurring revenues and cash flows. We considered these characteristics particularly important given the persistent weakness of the global economy and the increase in geopolitical risks that accompanied the Iraq crisis. For most of the period, this relatively defensive posture helped to produce competitive if unspectacular returns. Unfortunately, in the last few months of the period, the fund did not keep pace as international markets rallied in the wake of the Iraq war. Stocks we considered lower quality because they generated poor cash flows and had unattractive business models became oversold from January to March, but then performed the best in subsequent months. We do not expect the trend that favored such stocks to continue, but we regret its impact on the fund's relative performance. FUND PROFILE Putnam International Equity Fund seeks capital appreciation by investing primarily in common stocks of companies outside the United States. Without a predetermined bias toward growth or value stocks, the fund targets large and midsize companies priced below what we believe they are worth. It may be suitable for investors seeking capital appreciation and willing to accept the risks of investing in international markets. Market overview Stock market performance varied considerably across regions and countries during the fiscal year. European markets seesawed throughout the period. The initial descent, sparked by heavy selling of equities by insurance companies last summer, culminated in early October 2002. Europe then recovered until early January, when the diplomatic crisis over Iraq began to take its toll. Stocks declined until March, then rallied as U.S. and British troops took control of Iraq. Subsequently, a June interest-rate cut by the European Central Bank helped to sustain the rally in European markets. Most Asian markets were more stable than Europe during much of the year. Exports to the United States helped to buoy these markets, which, with the exception of Japan, had stronger economic growth than Europe. However, other risks affected Asia. South Korea's stock market declined during the winter months when tensions with North Korea increased. The SARS epidemic caused pessimism that contributed to a market decline in March and April. Fortunately, SARS appears to have been contained and its economic impact was limited. China's economy is still growing at a rate of about 7%. In Japan, stocks soared in June when the Bank of Japan took new, serious steps to combat deflation. For the fund's fiscal year, Asian markets in general had positive returns. In the Americas, Canada and Mexico were strong markets, benefiting from exports to the United States and foreign investment. Brazil's market and currency were under pressure during its presidential election last autumn, but the new president, Luiz Inacio da Silva, also known as Lula, adopted sound economic policies that have restored stability. ------------------------------------------------------------------------ MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 6/30/03 ------------------------------------------------------------------------ Equities ------------------------------------------------------------------------ MSCI EAFE Index (international stocks) -6.46% ------------------------------------------------------------------------ Citigroup PMI World Value ex-U.S. Index (international value stocks) -5.17% ------------------------------------------------------------------------ Citigroup PMI World Growth ex-U.S. Index (international growth stocks) -4.25% ------------------------------------------------------------------------ S&P 500 Index (broad U.S. stock market) 0.25% ------------------------------------------------------------------------ Russell 2000 Index (U.S. small-company stocks) -1.64% ------------------------------------------------------------------------ Bonds ------------------------------------------------------------------------ Lehman Aggregate Bond Index (broad U.S. bond market) 10.40% ------------------------------------------------------------------------ Lehman Government Bond Index (U.S. government bonds) 11.34% ------------------------------------------------------------------------ CSFB High Yield Index (high-yield corporate bonds) 20.78% ------------------------------------------------------------------------ Citigroup World Government Bond Index (global bonds) 16.51% ------------------------------------------------------------------------ These indexes provide an overview of performance in different market sectors for the 12 months ended 6/30/03. Strategy overview In a year characterized by global economic weakness and serious geopolitical risks, we decided not to build large market or sector overweights that could be hurt by an unexpected adverse event. We increased our emphasis on analyzing company cash flows, which we use to determine stock valuations. We wanted to identify high-quality companies that could generate strong cash flows even in stagnant economies, and to favor individual stocks with attractive valuations that had the potential to withstand volatility. Following this strategy caused us to maintain underweight exposure to Japan and overweight exposure to emerging markets when compared with the fund's benchmark index. We disliked Japan because of its weak economy, low levels of corporate earnings, and the continuing burden of bad loans on its banking sector. At the same time, we maintained overweight positions in emerging markets, primarily South Korea, but also Mexico and Brazil. In our view, stocks that we selected for the portfolio in these markets had very attractive valuations and superior operating fundamentals. This positioning helped performance because emerging markets outperformed Japan for the year, but the gap narrowed significantly at the end of the period. Our emphasis on companies with strong cash flows generally worked well until March, when international markets began recovering from the tensions that had preceded war in Iraq. In this recovery, stocks with less attractive qualities -- lower profitability and more questionable cash flows -- performed the best. As an example, in the financial sector, in particular, we favored relatively conservative retail bank stocks in continental Europe, but these underperformed many of the more leveraged banks, as well as financial companies more exposed to the stock markets. [GRAPHIC OMITTED: horizontal bar chart TOP COUNTRY WEIGHTINGS COMPARED] TOP COUNTRY WEIGHTINGS COMPARED as of 12/31/02 as of 6/30/03 United Kingdom 22.2% 23.3% Japan 15.8% 15.5% Switzerland 9.9% 11.8% France 13.4% 11.7% South Korea 6.8% 5.5% Footnote reads: This chart shows how the fund's top country weightings have changed over the last six months. Weightings are shown as a percentage of net assets. Holdings will vary over time. How fund holdings affected performance Our selection of individual stocks had a bigger effect on the fund's relative performance than the fund's market or sector weightings. This was especially true in the last few months of the period when, as mentioned above, stocks of companies with strong cash flows lagged behind in the rally. Our choices were most effective in the energy industry. Our top holding in the sector throughout the fiscal year has been TotalFinaElf, based in France. This company continues to realize new costs savings from the merger several years ago of its French and Belgian predecessors. Based on our research, we consider it the best-managed European oil company. Our decision contributed positively to performance because TotalFinaElf outperformed most industry competitors. The fund had little exposure to other oil companies, such as ENI of Italy and BP of the United Kingdom, during the fiscal year. In South Korea, our top holding, and one of the fund's largest holdings throughout the year, was Samsung Electronics. This company is a diversified electronics manufacturer, but has been achieving both earnings growth and expanded market share in several product segments, including semiconductors and wireless phone equipment. Samsung declined with the rest of South Korea's market when tensions rose with North Korea, but it performed quite well during the rally late in the fiscal period. We still consider it a strong competitor and believe its valuation is attractive based on global comparisons. The fund's other holdings in South Korea did not perform as well. The stocks of SK Telecom and Korea Telecom, two companies growing with South Korea's telephone industry, were hurt by a harsh regulatory environment. [GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY WEIGHTINGS COMPARED AS OF 6/30/03] TOP INDUSTRY WEIGHTINGS COMPARED AS OF 6/30/03 Banking 12.4% Telecommunications 10.6% Pharmecuticals 10.5% Oil and gas 8.8% Automotive 4.7% Footnote reads: Weightings are shown as a percentage of net assets. Holdings will vary over time. Fortunately, our holdings in other telecommunications stocks performed better. Vodafone Group of the United Kingdom, Europe's largest wireless company, was a top holding much of the year and did well for the fund. In the technology sector, cellular telephone maker Nokia of Finland also helped performance. Although Nokia issued a cautious outlook after the period ended, we consider it attractive because it is achieving sales growth and the company's global manufacturing sources keep its costs competitive. Our stock selections in Japan were positive early in the fiscal year, but less so in the second half. Holding Canon, Olympus Optical, and Toyota contributed positively to performance. However, toward the end of the fiscal year, Toyota, one of the world's best car companies, in our view, underperformed industry competitor Nissan, in which we had a much smaller position. Last, our decision to avoid Japanese bank stocks, which carry huge amounts of non-performing loans, turned against us late in the year. Japan's bank stocks performed well on hopes that the Bank of Japan's new efforts to overcome deflation would succeed. We are not yet convinced that the Bank of Japan will resolve the industry's problems. We favored several basic materials stocks because of their strong cash flows. They did well early in the period but then lagged significantly during the rally. In the cement industry, Lafarge of France struggled as construction spending in North America and Europe slowed. Iron ore exporter CVRD of Brazil was hurt by currency appreciation, as new confidence in Brazil caused the real to rise in value versus the U.S. dollar. 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. [GRAPHIC OMITTED: TOP 10 HOLDINGS] TOP 10 HOLDINGS 1 TotalFinaElf SA Class B France Oil and gas 2 Vodafone Group PLC United Kingdom Telecommunications 3 Novartis AG Switzerland Pharmaceuticals 4 Nestle SA Switzerland Food 5 AstraZeneca PLC United Kingdom Pharmaceuticals 6 Samsung Electronics South Korea Electronics 7 NTT DoCoMo, Inc. Japan Telecommunications 8 GlaxoSmithKline PLC United Kingdom Pharmaceuticals 9 Nokia OYJ Finland Communications equipment 10 Toyota Motor Corp. Japan Automotive Footnote reads: These holdings represent 28.7% of the fund's net assets as of 6/30/03. The fund's holdings will change over time. The fund's management team The fund is managed by the Putnam International Core Team. The members of the team are Omid Kamshad (Portfolio Leader), Joshua Byrne (Portfolio Member), Simon Davis (Portfolio Member), Steve Oler (Portfolio Member), George Stairs (Portfolio Member), Daniel Grana, Pamela Holding, Carmel Peters, and Melissa Reilly. 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. Our outlook for international markets differs between short-term and long-term expectations. We think markets in the next few months will be vulnerable to a pullback after the recent rally. Stock prices in many markets rose extremely fast, much faster than improvement in corporate earnings could justify, especially since many of the leaders in the rally lack strong earnings growth potential. At the same time, we have a more optimistic long-term view because we recognize that the recent stock rally was based in part on justifiable expectations of an economic recovery. That is because the global economy is experiencing massive and unprecedented stimulus. The European Central Bank cut short-term interest rates in June, the Bank of England cut short-term rates in early July (after the end of the fund's fiscal period), and the Bank of Japan has taken the unprecedented step of buying corporate bonds to provide monetary stimulus. Efforts to stimulate the U.S. economy, including tax cuts and low interest rates, are also positive for the global economy because the United States is the world's largest importer. Also, Germany, Europe's largest economy, has introduced positive labor and health-care reforms to enhance its competitiveness and stimulate growth. Deficit spending by the German and French governments are also providing stimulus to growth. In Asia, containment of the SARS epidemic has helped to restore confidence. Generally speaking, the risk factors that created uncertainty in financial markets during the past year, particularly Iraq and SARS, have subsided and market sentiment has improved. Our fundamental research on companies indicates that many of our holdings are managing themselves with strategies to take advantage of the firmer conditions in the global economy. Also, our global industry comparisons indicate that international stocks still have more favorable valuations than their U.S. counterparts. So while we remain cautious about the near-term prospects for stocks, especially those that led in the recent rally, we believe that the fund's holdings are attractive long-term investments. The views expressed in this report are exclusively those of Putnam Management. They are not meant as investment advice. International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Additional risks may be associated with emerging-market securities, including illiquidity and volatility. Performance summary This section provides information about your fund's performance during its fiscal year, which ended June 30, 2003. Performance should always be considered in light of a fund's investment strategy. Past performance does not indicate 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. A profile of your fund's strategy appears on the first page of this report. See page 10 for definitions of some terms used in this section.
---------------------------------------------------------------------------------------------------- TOTAL RETURN FOR PERIODS ENDED 6/30/03 ---------------------------------------------------------------------------------------------------- Class A Class B Class C Class M Class R (inception dates) (2/28/91) (6/1/94) (7/26/99) (12/1/94) (1/21/03) NAV POP NAV CDSC NAV CDSC NAV POP NAV ---------------------------------------------------------------------------------------------------- 1 year -8.93% -14.17% -9.59% -14.11% -9.60% -10.50% -9.37% -12.56% -9.13% ---------------------------------------------------------------------------------------------------- 5 years 2.51 -3.39 -1.19 -2.90 -1.18 -1.18 0.03 -3.47 1.28 Annual average 0.50 -0.69 -0.24 -0.59 -0.24 -0.24 0.01 -0.70 0.26 ---------------------------------------------------------------------------------------------------- 10 years 143.02 129.14 125.56 125.56 125.50 125.50 131.91 123.79 137.24 Annual average 9.29 8.65 8.47 8.47 8.47 8.47 8.78 8.39 9.02 ---------------------------------------------------------------------------------------------------- Annual average (life of fund) 8.52 7.99 7.67 7.67 7.71 7.71 7.96 7.65 8.25 ---------------------------------------------------------------------------------------------------- Performance assumes reinvestment of distributions and does not account for taxes. Returns at public offering price (POP) for class A and M shares reflect a sales charge of 5.75% and 3.50%, respectively. Class B share returns reflect the applicable contingent deferred sales charge (CDSC), which is 5% in the first year, declining to 1% in the sixth year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the first year that is eliminated thereafter. Class R share returns have no initial sales charge or CDSC. Performance for class B, C, M, and R shares before their inception is derived from the historical performance of class A shares, adjusted for the applicable sales charge (or CDSC) and higher operating expenses for such shares. For a portion of the period, this fund limited expenses, without which returns would have been lower. A 1% redemption fee on total assets redeemed or exchanged within 90 days or purchase will be imposed for all share classes.
------------------------------------------------------------------------------- COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 6/30/03 ------------------------------------------------------------------------------- Lipper International MSCI EAFE Funds Index category average* ------------------------------------------------------------------------------- 1 year -6.46% -7.98% ------------------------------------------------------------------------------- 5 years -18.46 -16.10 Annual average -4.00 -3.79 ------------------------------------------------------------------------------- 10 years 31.53 54.37 Annual average 2.78 4.17 ------------------------------------------------------------------------------- Annual average (life of fund) 2.75 4.61 ------------------------------------------------------------------------------- * Lipper and index results should be compared to fund performance at net asset value. Over the 1-, 5-, and 10-year periods ended 6/30/03, there were 818, 461, and 103 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, 6/30/93 to 6/30/03 Fund's class A MSCI EAFE shares at POP Index '93 9,425 10,000 '94 11,863 11,700 '95 12,309 11,894 '96 14,796 13,473 '97 18,515 15,203 '98 22,353 16,130 '99 24,939 17,358 '00 35,919 20,337 '01 27,863 15,537 '02 25,161 14,061 '03 $22,914 $13,153 Footnote reads: Past performance does not indicate future results. At the end of the same time period, a $10,000 investment in the fund's class B and class C shares would have been valued at $22,556 and $22,550, 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 $23,191 ($22,379 at public offering price). A $10,000 investment in the fund's class R shares would have been valued at $23,724. See first page of performance summary for performance calculation method.
----------------------------------------------------------------------------------------- PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 6/30/03 ----------------------------------------------------------------------------------------- Class A Class B Class C Class M Class R ----------------------------------------------------------------------------------------- Distributions (number) 1 -- -- -- -- ----------------------------------------------------------------------------------------- Income $0.035 -- -- -- -- ----------------------------------------------------------------------------------------- Total $0.035 -- -- -- -- ----------------------------------------------------------------------------------------- Share value: NAV POP NAV NAV NAV POP NAV ----------------------------------------------------------------------------------------- 6/30/02 $19.18 $20.35 $18.57 $18.86 $18.90 $19.59 -- ----------------------------------------------------------------------------------------- 1/21/03* -- -- -- -- -- -- $16.52 ----------------------------------------------------------------------------------------- 6/30/03 17.43 18.49 16.79 17.05 17.13 17.75 17.42 ----------------------------------------------------------------------------------------- * Inception date of class R shares.
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. The NAV is calculated by dividing the net value of all the fund's assets by the number of outstanding shares. Public offering price (POP) is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. POP performance figures shown here assume the 5.75% maximum sales charge for class A shares and 3.50% for class M shares. Contingent deferred sales charge (CDSC) is a charge applied at the time of the redemption of class B or C shares and assumes redemption at the end of the period. Your fund's class B CDSC declines from a 5% maximum during the first year to 1% during the sixth year. After the sixth year, the CDSC no longer applies. The CDSC for class C shares is 1% for one year after purchase. Class A shares are generally subject to an initial sales charge and no sales charge on redemption (except on certain redemptions of shares bought without an initial sales charge). Class B shares may be subject to a sales charge upon redemption. Class C shares are not subject to an initial sales charge and are subject to a contingent deferred sales charge only if the shares are redeemed during the first year. Class M shares have a lower initial sales charge and a higher 12b-1 fee than class A shares and no sales charge on redemption (except on certain redemptions of shares bought without an initial sales charge). Class R shares are not subject to an initial sales charge or CDSC and are available only to certain qualified employee-benefit plans. Comparative indexes Morgan Stanley Capital International EAFE Index (MSCI EAFE) is an unmanaged list of equity securities from Europe, Australasia, and the Far East, with all values expressed in U.S. dollars. Citigroup World ex-U.S. Primary Markets Value Index is an unmanaged index of mostly large and some small capitalization stocks from developed countries excluding the U.S. chosen for their value orientation. Citigroup World ex-U.S. Primary Markets Growth Index is an unmanaged index of mostly large and some small capitalization stocks from developed countries excluding the U.S. chosen for their growth orientation. S&P 500 Index is an unmanaged index of common stock performance. Russell 2000 Index is an unmanaged index of common stocks that generally measure performance of small to midsize companies within the Russell 3000 Index. Lehman Aggregate Bond Index is an unmanaged index of U.S. fixed- income securities. Lehman Government Bond Index is an unmanaged list of U.S. Treasury and agency securities. Credit Suisse First Boston (CSFB) High Yield Index is an unmanaged index of high-yield debt securities. Citigroup World Government Bond Index is an unmanaged index of government bonds from 14 countries. 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 Inc. 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. A guide to the financial statements These sections of the report, as well as the accompanying Notes, preceded by the Independent Auditors' Report, 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 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. Independent auditors' report To the Trustees of and Shareholders of Putnam International Equity 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 International Equity Fund, formerly the Putnam International Growth Fund, (the "fund") at June 30, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the 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 auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material 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 June 30, 2003 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts August 12, 2003 The fund's portfolio June 30, 2003 Common stocks (98.2%) (a) Number of shares Value Australia (2.8%) ------------------------------------------------------------------------------- 436,523 Australia & New Zealand Banking Group, Ltd. $5,447,749 4,465,543 BHP Billiton, Ltd. 25,873,285 6,287,409 Brambles Industries, Ltd. 19,268,658 1,192,519 Foster's Brewing Group, Ltd. 3,366,751 354,944 National Australia Bank, Ltd. 7,973,852 1,163,286 News Corp., Ltd. (The) 8,737,115 4,446,329 News Corp., Ltd. (The) ADR 134,590,379 13,237,754 Qantas Airways, Ltd. 29,028,568 2,024,927 Rio Tinto, Ltd. 39,664,728 3,695,807 Westpac Banking Corp. 40,274,133 461,917 Woolworths, Ltd. 3,878,214 ------------ 318,103,432 Belgium (0.9%) ------------------------------------------------------------------------------- 11,799 Electrabel SA 3,006,215 2,558,204 Fortis 44,059,947 2,751,103 Interbrew 61,123,099 ------------ 108,189,261 Bermuda (1.2%) ------------------------------------------------------------------------------- 1,476,700 ACE, Ltd. 50,636,043 1,046,492 XL Capital, Ltd. Class A 86,858,836 ------------ 137,494,879 Brazil (1.7%) ------------------------------------------------------------------------------- 445,500 Aracruz Celulose SA ADR 917,114 343,900 Banco Bradesco SA ADR 6,424,052 393,670 Banco Itau SA ADR 13,345,413 2,357,289 Companhia de Bebidas das Americas (AmBev) ADR 47,970,831 1,374,378 Companhia Vale do Rio Doce (CVRD) ADR 40,764,051 874,065 Companhia Vale do Rio Doce (CVRD) (Preference A) ADR 24,255,304 2,905,140 Petroleo Brasileiro SA ADR 57,405,566 39,796 Petroleo Brasileiro SA (Preference) ADR 706,777 252,300 Unibanco-Uniao de Bancos Brasileiros SA GDR 4,329,468 ------------ 196,118,576 Canada (2.5%) ------------------------------------------------------------------------------- 825,455 Abitibi-Consolidated, Inc. 5,225,552 135,300 Alcan Aluminum, Ltd. 4,233,537 158,160 Bank of Nova Scotia 6,996,994 1,410,318 Canadian Imperial Bank of Commerce 55,955,937 1,585,400 Canadian National Railway Co. 75,949,821 1,800 Canadian National Railway Co. (Toronto Exchange) 86,868 102,000 Canadian Natural Resources, Ltd. 4,035,701 1,038,673 EnCana Corp. 39,528,446 79,611 Four Seasons Hotels, Inc. 3,414,160 2,315,635 National Bank of Canada 62,795,726 111,244 Nexen, Inc. 2,796,454 308,661 Sun Life Financial Services of Canada, Inc. 6,357,258 1,125,818 Suncor Energy, Inc. 20,999,800 ------------ 288,376,254 China (0.2%) ------------------------------------------------------------------------------- 94,490,000 China Telecom Corp., Ltd. 21,690,083 Denmark (1.1%) ------------------------------------------------------------------------------- 6,320,051 Danske Bank A/S 123,096,942 41,021 Novo-Nordisk A/S 1,436,252 ------------ 124,533,194 Finland (2.2%) ------------------------------------------------------------------------------- 15,329,491 Nokia OYJ 252,402,951 49,964 TietoEnator OYJ 841,025 32,658 TietoEnator OYJ 144A 549,719 ------------ 253,793,695 France (11.7%) ------------------------------------------------------------------------------- 2,229,122 Accor SA 80,623,553 41,867 Air Liquide 6,206,055 3,609,409 BNP Paribas SA 183,386,311 2,238,605 Bouygues SA 61,791,605 55,225 Christian Dior SA 2,207,913 3,200 Havas Advertising SA 14,293 961,603 Lafarge 56,309,741 195,205 Lafarge SA (NON) 526,716 1,073,156 LVMH Moet Hennessy Louis Vuitton SA 53,218,619 300,625 Orange SA (NON) 2,668,223 527,419 Peugeot SA 25,616,140 1,286,645 Sanofi-Synthelabo SA 75,343,615 104,710 Schneider Electric SA 4,922,135 1,397,104 Societe Generale 88,549,346 2,438,169 Societe Television Francaise I 75,026,751 3,333,617 TotalFinaElf SA Class B 503,719,930 5,224,484 Veolia Environnement (NON) 107,377,670 79,267 Vinci SA 5,347,094 ------------ 1,332,855,710 Germany (4.4%) ------------------------------------------------------------------------------- 27,800 Altana AG 1,739,638 3,767,358 BASF AG 160,266,461 4,178,862 Bayerische Motoren Werke (BMW) AG 160,498,765 4,191,671 Deutsche Post AG 61,123,533 282,449 Deutsche Telekom AG 4,300,323 211,510 E.On AG 10,843,511 116,500 Metro AG 3,706,636 11,631 Porsche AG (Preference) 4,901,180 286,650 SAP AG 33,571,416 1,107,586 Schering AG 54,048,535 107,900 Siemens AG 5,283,942 ------------ 500,283,940 Greece (--%) ------------------------------------------------------------------------------- 272,650 Hellenic Telecommunication Organization SA 3,224,484 Hong Kong (0.9%) ------------------------------------------------------------------------------- 6,819,090 Cheung Kong Holdings, Ltd. 41,013,006 801,100 China Mobile, Ltd. 1,890,283 1,123,000 CLP Holdings, Ltd. 4,910,848 12,498,500 Hong Kong Electric Holdings, Ltd. 49,045,782 216,000 Sun Hung Kai Properties, Ltd. 1,091,371 ------------ 97,951,290 India (0.1%) ------------------------------------------------------------------------------- 89,800 HDFC Bank, Ltd. 500,510 1,300,000 Housing Development Finance Corp., Ltd. 11,448,450 41,637 Infosys Technologies, Ltd. 2,925,927 ------------ 14,874,887 Ireland (1.7%) ------------------------------------------------------------------------------- 7,188,573 Allied Irish Banks PLC 108,043,807 655,392 Bank of Ireland 7,939,098 5,066,165 CRH PLC 79,401,649 ------------ 195,384,554 Italy (2.2%) ------------------------------------------------------------------------------- 4,404,324 ENI SpA 66,752,992 9,511,765 Mediaset SpA 80,490,781 9,079,545 Telecom Italia Mobile SpA 44,723,823 737,910 Telecom Italia SpA 6,676,474 9,218,500 Telecom Italia SpA-RNC 50,488,932 ------------ 249,133,002 Japan (15.5%) ------------------------------------------------------------------------------- 590,630 Acom Co., Ltd. 21,352,222 254,620 Acom Co., Ltd. 144A 9,204,921 45,000 Advantest Corp. 1,994,169 496,800 Aeon Co. Ltd. 11,380,258 5,232,000 Canon, Inc. 240,135,943 250,800 Denso Corp. 3,975,613 3,447 East Japan Railway Co. 15,332,761 1,577,000 Fuji Photo Film Cos., Ltd. 45,582,591 100 Fujisawa Pharmaceutical Co. 1,874 35,400 FUNAI Electric Co., Ltd. 3,951,354 26,600 Hirose Electric Co., Ltd. 2,200,233 2,141,500 Honda Motor Co., Ltd. 81,164,723 1,587 Japan Tobacco, Inc. 8,579,450 422,600 Kansai Electric Power, Inc. 6,667,259 5,496,200 KAO Corp. 102,324,090 96,700 Matsushita Electric Works, Ltd. 572,709 11,664 Millea Holdings, Inc. 89,192,436 100 Mitsubishi Corp. 694 1,358,100 Mitsui Sumitomo Insurance Co., Ltd. 6,301,222 749,400 Nintendo Co., Ltd. 54,496,143 831,000 Nissan Motor Co., Ltd. 7,946,589 564,000 Nomura Securities Co., Ltd. 7,159,817 132,351 NTT DoCoMo, Inc. 286,641,066 4,020 NTT DoCoMo, Inc. 144A 8,706,372 4,273,800 Olympus Optical Co., Ltd. 88,466,414 584,100 Orix Corp. 32,306,739 11,800 Orix Corp. 144A 652,661 3,550,000 Ricoh Co., Ltd. 58,018,326 314,300 Rohm Co., Ltd. 34,270,612 1,876,000 SECOM Co., Ltd. 55,006,414 150,000 Seven-Eleven Japan Co., Ltd. 3,735,943 652,500 Shin-Etsu Chemical Co. 22,284,465 171,500 Sony Corp. 4,828,571 870,700 Takeda Chemical Industries, Ltd. 32,129,954 336,000 Tokyo Electric Power Co. 6,423,324 22,745,000 Tokyo Gas Co., Ltd. 65,364,640 2,736,000 Toppan Printing Co., Ltd. 19,599,833 9,619,600 Toyota Motor Corp. 249,204,132 3,125,000 Yamanouchi Pharmaceutical Co., Ltd. 81,476,468 ------------ 1,768,633,005 Mexico (1.3%) ------------------------------------------------------------------------------- 84,350 America Movil SA de CV ADR Ser. L 1,581,563 912,600 Fomento Economico Mexicano SA de CV ADR 37,599,120 5,563,671 Grupo Financiero BBVA Bancomer SA de CV (NON) 4,715,156 2,907,581 Telefonos de Mexico SA de CV (Telmex) 4,582,252 2,960,277 Telefonos de Mexico SA de CV (Telmex) ADR Class L 93,011,903 1,897,319 Wal-Mart de Mexico SA de CV Ser. V 5,610,557 ------------ 147,100,551 Netherlands (1.5%) ------------------------------------------------------------------------------- 380,215 ABN AMRO Holdings NV 7,268,772 1,445,215 ABN AMRO Holdings NV (acquired 5/9/03, cost $23,522,803) (RES) 27,628,941 4,123,944 ING Groep NV 71,642,252 2,534,675 Koninklijke (Royal) Philips Electronics NV 48,194,797 1,201,900 Reed Elsevier NV 14,172,822 193,543 TPG NV 3,360,058 ------------ 172,267,642 New Zealand (0.2%) ------------------------------------------------------------------------------- 4,389,091 Telecom Corp. of New Zealand, Ltd. 13,454,320 4,533,434 Telecom Corp. of New Zealand, Ltd. 144A 13,896,789 ------------ 27,351,109 Portugal (0.2%) ------------------------------------------------------------------------------- 4,210,691 Electricidade de Portugal SA 8,992,571 1,356,536 Portugal Telecom SGPS SA 9,719,266 ------------ 18,711,837 Russia (0.4%) ------------------------------------------------------------------------------- 186,372 YUKOS 2,609,208 780,095 YUKOS ADR 43,529,301 ------------ 46,138,509 Singapore (1.5%) ------------------------------------------------------------------------------- 4,739,648 DBS Group Holdings, Ltd. 27,726,685 7,129,185 Overseas-Chinese Banking Corp. 40,490,629 3,279,000 Singapore Press Holdings, Ltd. 34,080,593 10,130,000 United Overseas Bank, Ltd. 71,342,080 ------------ 173,639,987 South Africa (--%) ------------------------------------------------------------------------------- 309,887 Sappi, Ltd. 3,733,529 South Korea (5.5%) ------------------------------------------------------------------------------- 27 Kookmin Bank 815 5,231,680 Korea Electric Power Corp. 82,882,441 6,564,592 KT Corp. ADR 129,388,108 30,090 Pohang Iron & Steel Co., Ltd. 3,127,544 1,082,582 POSCO ADR 28,352,823 1,013,428 Samsung Electronics Co., Ltd. 301,564,912 2,970 Samsung Electronics Co., Ltd. (Preference) 424,464 220,380 SK Telecom Co., Ltd. 37,684,426 2,293,317 SK Telecom Co., Ltd. ADR 43,251,959 ------------ 626,677,492 Spain (1.4%) ------------------------------------------------------------------------------- 2,390,045 Altadis SA 61,251,653 76,659 Banco Popular Espanol 3,872,874 4,994,273 Iberdrola SA 86,475,118 674,433 Telefonica SA 7,829,022 ------------ 159,428,667 Sweden (1.6%) ------------------------------------------------------------------------------- 260,420 Hennes & Mauritz AB Class B 5,987,041 4,108,383 Investor AB Class B 30,029,413 200,200 Sandvik AB 5,240,445 348,300 Securitas AB Class B 3,568,514 4,033,071 Svenska Handelsbanken AB Class A 66,012,657 68,716,523 Telefonaktiebolaget LM Ericsson AB Class B 73,837,958 ------------ 184,676,028 Switzerland (11.8%) ------------------------------------------------------------------------------- 1,276,980 Ciba Specialty Chemicals AG 77,324,147 1,685,532 Cie Financier Richemont AG 27,258,271 1,327,855 Holcim Ltd. 49,076,313 128,921 Julius Baer Holdings, Ltd. AG Class B 31,606,684 1,649,142 Nestle SA 340,374,530 9,673,430 Novartis AG 382,879,817 866,708 Swatch Group AG (The) 15,776,364 481,698 Swatch Group AG (The) Class B 43,662,996 1,381,514 Swiss Reinsurance Co. 76,563,747 101,062 Swisscom AG 28,731,997 45,626 Synthes-Stratec, Inc. 32,782,527 4,408,991 UBS AG 245,323,787 ------------ 1,351,361,180 Taiwan (0.1%) ------------------------------------------------------------------------------- 14,200 China Steel Corp. 9,861 172,200 Compal Electronics, Inc. 231,194 16,384 Formosa Chemicals & Fibre Corp. 18,394 27,300 Formosa Plastics Corp. 38,075 1,052,050 Hon Hai Precision Industry Co., Ltd. 3,820,378 30,590 Nan Ya Plastic Corp. 33,192 17,515 President Chain Store Corp. 23,566 67,650 Quanta Computer, Inc. 139,959 13 Sinopac Holdings Co. 5 5,563,712 Taiwan Semiconductor Manufacturing Co., Ltd. 9,176,261 ------------ 13,490,885 Turkey (--%) ------------------------------------------------------------------------------- 64,555,997 Haci Omer Sabanci Holdings 155,117 United Kingdom (23.3%) ------------------------------------------------------------------------------- 2,590,768 3i Group PLC 24,152,435 208,136 Anglo American PLC 3,176,676 7,590,421 AstraZeneca PLC 304,337,930 1,316,525 Barclays PLC 9,775,198 7,244,470 BAT Industries PLC 82,179,457 1,733,854 BG Group PLC 7,681,407 21,396,400 BHP Billiton PLC 112,619,951 2,098,093 BP PLC 14,548,439 7,017,743 Brambles Industries PLC 18,990,013 11,111,771 Carlton Communications PLC 27,776,650 16,515,487 Diageo PLC 176,311,081 13,219,234 GlaxoSmithKline PLC 266,757,533 6,211,780 GUS PLC 69,593,677 10,852,222 Hilton Group PLC 32,947,346 19,559,680 HSBC Holdings PLC (London Stock Exchange) 231,078,060 4,019,600 HSBC Holdings PLC (Hong Kong Exchange) 47,681,171 221,771 Imperial Tobacco Group PLC 3,962,937 3,795,125 Reckitt Benckiser PLC 69,632,954 11,104,282 Reed International PLC 92,389,014 2,942,472 Rio Tinto PLC 55,347,898 5,494,257 Royal Bank of Scotland Group PLC 154,113,909 2,424,200 SABMiller PLC 16,229,692 871,000 Scottish and Southern Energy PLC 8,967,816 6,173,434 Scottish Power PLC 37,077,645 36,657,046 Shell Transport & Trading Co. PLC 241,936,504 14,729,472 Tesco PLC 53,285,706 203,206,215 Vodafone Group PLC 397,318,947 13,147,930 WPP Group PLC 103,046,901 ------------ 2,662,916,947 United States (0.3%) ------------------------------------------------------------------------------- 4,354,143 Amcor, Ltd. 23,709,493 82,900 Biovail Corp. (NON) 3,840,799 1 Citigroup, Inc. 43 56,400 SMC Corp. 4,749,721 ------------ 32,300,056 ------------ Total Common Stocks (cost $10,857,868,555) $11,230,589,782 Units (0.1%) (a) Number of units Value ------------------------------------------------------------------------------- 118,268 Infosys Technologies, Ltd. 144A Structured Warrants (issued by UBS AG) expiration 4/13/04 $8,310,962 508,400 Singapore Press Holdings Structured Call Warrants (issued by Merrill Lynch International & Co., C.V.) expiration 6/15/04 5,284,106 ------------ Total Units (cost $11,901,367) $13,595,068 Short-term investments (4.5%) (a) Principal amount Value ------------------------------------------------------------------------------- $274,529,861 Short-term investments held as collateral for loaned securities with yields ranging from 0.91% to 1.40% and due dates ranging from July 1, 2003 to August 22, 2003 (d) $274,381,003 244,937,226 Short-term investments held in Putnam commingled cash account with yields ranging from 1.00%to 1.32% and due dates ranging from July 1, 2003 to August 18, 2003 (d) 244,937,226 ------------ Total Short-Term Investments (cost $519,318,229) $519,318,229 ------------------------------------------------------------------------------- Total Investments (cost $11,389,088,151) $11,763,503,079 ------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $11,438,857,294. (NON) Non-income-producing security. (RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at June 30, 2003 was $27,628,941 or less than 0.2% of net assets. (d) See Note 1 to the financial statements. 144A after the name of a security represents those exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. ADR or GDR after the name of a foreign holding stands for American Depositary Receipts or Global Depositary Receipts, respectively, representing ownership of foreign securities on deposit with a custodian bank. The fund had the following industry group concentrations greater than 10% at June 30, 2003 (as a percentage of net assets): Banking 12.4% Telecommunications 10.6 Pharmaceuticals 10.5 ------------------------------------------------------------------------------- Forward Currency Contracts to Buy at June 30, 2003 (aggregate face value $544,794,185) Unrealized Aggregate Face Delivery Appreciation/ Market Value Value Date (Depreciation) ------------------------------------------------------------------------------ Australian Dollars $175,179,998 $171,865,472 9/17/03 $3,314,526 British Pounds 115,858,608 114,198,002 9/17/03 1,660,606 Canadian Dollar 115,555,546 113,884,707 9/17/03 1,670,839 Euro Dollars 29,466,087 30,077,565 9/17/03 (611,478) Swedish Krona 111,804,384 114,768,439 9/17/03 (2,964,055) ------------------------------------------------------------------------------ $3,070,438 ------------------------------------------------------------------------------ Forward Currency Contracts to Sell at June 30, 2003 (aggregate face value $427,004,678) ------------------------------------------------------------------------------ Unrealized Aggregate Face Delivery Appreciation/ Market Value Value Date (Depreciation) ------------------------------------------------------------------------------ Euro Dollars $86,319,031 $88,043,629 9/17/03 $1,724,598 Japanese Yen 171,784,664 173,212,669 9/17/03 1,428,005 Mexican Peso 108,521,636 108,108,328 9/17/03 (413,308) Swiss Franc 55,822,542 57,640,052 9/17/03 1,817,510 ------------------------------------------------------------------------------ $4,556,805 ------------------------------------------------------------------------------ The accompanying notes are an integral part of these financial statements. Statement of assets and liabilities June 30, 2003 Assets ----------------------------------------------------------------------------- Investments in securities, at value, including $265,109,087 of securities on loan (identified cost $11,389,088,151) (Note 1) $11,763,503,079 ----------------------------------------------------------------------------- Foreign currency (cost $1,324,156) (Note 1) 1,326,121 ----------------------------------------------------------------------------- Dividends, interest and other receivables 38,344,070 ----------------------------------------------------------------------------- Receivable for shares of the fund sold 52,262,783 ----------------------------------------------------------------------------- Receivable for securities sold 97,990,645 ----------------------------------------------------------------------------- Receivable for open forward currency contracts (Note 1) 11,616,084 ----------------------------------------------------------------------------- Total assets 11,965,042,782 Liabilities ----------------------------------------------------------------------------- Payable to subcustodian (Note 2) 4,816,194 ----------------------------------------------------------------------------- Payable for securities purchased 102,166,208 ----------------------------------------------------------------------------- Payable for shares of the fund repurchased 113,512,551 ----------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 16,687,809 ----------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 2,831,323 ----------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 300,633 ----------------------------------------------------------------------------- Payable for administrative services (Note 2) 3,354 ----------------------------------------------------------------------------- Payable for distribution fees (Note 2) 6,301,330 ----------------------------------------------------------------------------- Payable for open forward currency contracts (Note 1) 3,988,841 ----------------------------------------------------------------------------- Payable for closed forward currency contracts (Note 1) 165,392 ----------------------------------------------------------------------------- Collateral on securities loaned, at value (Note 1) 274,381,003 ----------------------------------------------------------------------------- Other accrued expenses 1,030,850 ----------------------------------------------------------------------------- Total liabilities 526,185,488 ----------------------------------------------------------------------------- Net assets $11,438,857,294 Represented by ----------------------------------------------------------------------------- Paid-in capital (Notes 1,4 and 5) $14,558,998,158 ----------------------------------------------------------------------------- Undistributed net investment income (Note 1) 117,250,277 ----------------------------------------------------------------------------- Accumulated net realized loss on investments and foreign currency transactions (Note 1) (3,621,584,408) ----------------------------------------------------------------------------- Net unrealized appreciation of investments and assets and liabilities in foreign currencies (Note 5) 384,193,267 ----------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $11,438,857,294 Computation of net asset value and offering price ----------------------------------------------------------------------------- Net asset value and redemption price per class A share ($6,855,607,701 divided by 393,249,978 shares) $17.43 ----------------------------------------------------------------------------- Offering price per class A share (100/94.25 of $17.43)* $18.49 ----------------------------------------------------------------------------- Net asset value and offering price per class B share ($1,892,053,635 divided by 112,699,718 shares)** $16.79 ----------------------------------------------------------------------------- Net asset value and offering price per class C share ($534,932,820 divided by 31,370,973 shares)** $17.05 ----------------------------------------------------------------------------- Net asset value and redemption price per class M share ($187,266,131 divided by 10,934,453 shares) $17.13 ----------------------------------------------------------------------------- Offering price per class M share (100/96.50 of $17.13)* $17.75 ----------------------------------------------------------------------------- Net asset value, offering price and redemption price per class R share ($1,054 divided by 61 shares) $17.42 ----------------------------------------------------------------------------- Net asset value, offering price and redemption price per class Y share ($1,968,995,953 divided by 112,075,458 shares) $17.57 ----------------------------------------------------------------------------- * On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales, the offering price is reduced. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. The accompanying notes are an integral part of these financial statements. Statement of operations Year ended June 30, 2003 Investment income: ----------------------------------------------------------------------------- Dividends (net of foreign tax of $31,384,731) $256,267,522 ----------------------------------------------------------------------------- Interest 2,607,076 ----------------------------------------------------------------------------- Securities lending 1,325,769 ----------------------------------------------------------------------------- Total investment income 260,200,367 Expenses: ----------------------------------------------------------------------------- Compensation of Manager (Note 2) 63,721,383 ----------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 29,163,125 ----------------------------------------------------------------------------- Compensation of Trustees (Note 2) 155,978 ----------------------------------------------------------------------------- Administrative services (Note 2) 55,600 ----------------------------------------------------------------------------- Distribution fees -- Class A (Note 2) 15,657,206 ----------------------------------------------------------------------------- Distribution fees -- Class B (Note 2) 18,941,686 ----------------------------------------------------------------------------- Distribution fees -- Class C (Note 2) 5,103,118 ----------------------------------------------------------------------------- Distribution fees -- Class M (Note 2) 1,472,146 ----------------------------------------------------------------------------- Distribution fees -- Class R (Note 2) 2 ----------------------------------------------------------------------------- Other 8,506,989 ----------------------------------------------------------------------------- Total expenses 142,777,233 ----------------------------------------------------------------------------- Expense reduction (Note 2) (6,544,034) ----------------------------------------------------------------------------- Net expenses 136,233,199 ----------------------------------------------------------------------------- Net investment income 123,967,168 ----------------------------------------------------------------------------- Net realized loss on investments (Notes 1 and 3) (1,688,367,380) ----------------------------------------------------------------------------- Net realized gain on foreign currency transactions (Note 1) 12,864,193 ----------------------------------------------------------------------------- Net realized gain on written options (Notes 1 and 3) 20,877 ----------------------------------------------------------------------------- Net unrealized appreciation of assets and liabilities in foreign currencies during the year 7,414,104 ----------------------------------------------------------------------------- Net unrealized appreciation of investments during the year (Note 5) 533,691,739 ----------------------------------------------------------------------------- Net loss on investments (1,134,376,467) ----------------------------------------------------------------------------- Net decrease in net assets resulting from operations $(1,010,409,299) ----------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. Statement of changes in net assets Year ended June 30 Decrease in net assets 2003 2002 ----------------------------------------------------------------------------- Operations: ----------------------------------------------------------------------------- Net investment income $123,967,168 $74,436,454 ----------------------------------------------------------------------------- Net realized loss on investments and foreign currency transactions (1,675,482,310) (990,956,274) ----------------------------------------------------------------------------- Net unrealized appreciation (depreciation) of investments and assets and liabilities in foreign currencies 541,105,843 (268,878,077) ----------------------------------------------------------------------------- Net decrease in net assets resulting from operations (1,010,409,299) (1,185,397,897) ----------------------------------------------------------------------------- Distributions to shareholders: (Note 1) ----------------------------------------------------------------------------- From net investment income Class A (13,233,985) -- ----------------------------------------------------------------------------- Class Y (7,609,608) -- ----------------------------------------------------------------------------- Increase from capital share transactions (Note 4) 697,146,527 885,939,292 ----------------------------------------------------------------------------- Total decrease in net assets (334,106,365) (299,458,605) Net assets ----------------------------------------------------------------------------- Beginning of year 11,772,963,659 12,072,422,264 ----------------------------------------------------------------------------- End of year (including undistributed net investment income of $117,250,277 and distributions in excess of net investment income of $4,878,241, respectively) $11,438,857,294 $11,772,963,659 ----------------------------------------------------------------------------- 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 June 30 operating performance 2003 2002 2001 ------------------------------------------------------------------------------- Net asset value, beginning of period $19.18 $21.24 $29.92 ------------------------------------------------------------------------------- Investment operations: ------------------------------------------------------------------------------- Net investment income (a) .22 .17 .16 ------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (1.93) (2.23) (6.64) ------------------------------------------------------------------------------- Total from investment operations (1.71) (2.06) (6.48) ------------------------------------------------------------------------------- Less distributions: ------------------------------------------------------------------------------- From net investment income (.04) -- (.39) ------------------------------------------------------------------------------- From net realized gain on investments -- -- (1.81) ------------------------------------------------------------------------------- From return of capital -- -- --(d) ------------------------------------------------------------------------------- Total distributions (.04) -- (2.20) ------------------------------------------------------------------------------- Net asset value, end of period $17.43 $19.18 $21.24 ------------------------------------------------------------------------------- Total return at net asset value (%)(b) (8.93) (9.70) (22.43) ------------------------------------------------------------------------------- Ratios and supplemental data ------------------------------------------------------------------------------- Net assets, end of period (in thousands) $6,855,608 $6,930,312 $6,896,924 ------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.22 1.16 1.13 ------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 1.33 .85 .63 ------------------------------------------------------------------------------- Portfolio turnover (%) 53.11 (e) 42.17 73.80 ------------------------------------------------------------------------------- Financial highlights (continued) (For a common share outstanding throughout the period) CLASS A ------------------------------------------------------------------------------- Per-share Year ended June 30 operating performance 2000 1999 ------------------------------------------------------------------------------- Net asset value, beginning of period $21.64 $20.00 ------------------------------------------------------------------------------- Investment operations: ------------------------------------------------------------------------------- Net investment income (a) .54 .07 ------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments 8.87 2.14 ------------------------------------------------------------------------------- Total from investment operations 9.41 2.21 ------------------------------------------------------------------------------- Less distributions: ------------------------------------------------------------------------------- From net investment income (.34) (.21) ------------------------------------------------------------------------------- From net realized gain on investments (.79) (.36) ------------------------------------------------------------------------------- From return of capital -- -- ------------------------------------------------------------------------------- Total distributions (1.13) (.57) ------------------------------------------------------------------------------- Net asset value, end of period $29.92 $21.64 ------------------------------------------------------------------------------- Total return at net asset value (%)(b) 44.03 11.57 ------------------------------------------------------------------------------- Ratios and supplemental data ------------------------------------------------------------------------------- Net assets, end of period (in thousands) $7,040,669 $2,928,662 ------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.14 1.27 ------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 2.01 .38 ------------------------------------------------------------------------------- Portfolio turnover (%) 99.53 97.24 ------------------------------------------------------------------------------- (a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding for the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through expense offset and brokerage service arrangements (Note 2). (d) Amount represents less than $0.01 per share. (e) Portfolio turnover excludes impact of assets received from the acquisition of Putnam Asia Pacific Fund and Putnam Emerging Markets Fund (Note 5). The accompanying notes are an integral part of these financial statements. Financial highlights (For a common share outstanding throughout the period) CLASS B ------------------------------------------------------------------------------- Per-share Year ended June 30 operating performance 2003 2002 2001 ------------------------------------------------------------------------------- Net asset value, beginning of period $18.57 $20.72 $29.23 ------------------------------------------------------------------------------- Investment operations: ------------------------------------------------------------------------------- Net investment income (loss) (a) .08 .01 (.04) ------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (1.86) (2.16) (6.46) ------------------------------------------------------------------------------- Total from investment operations (1.78) (2.15) (6.50) ------------------------------------------------------------------------------- Less distributions: ------------------------------------------------------------------------------- From net investment income -- -- (.20) ------------------------------------------------------------------------------- From net realized gain on investments -- -- (1.81) ------------------------------------------------------------------------------- From return of capital -- -- --(d) ------------------------------------------------------------------------------- Total distributions -- -- (2.01) ------------------------------------------------------------------------------- Net asset value, end of period $16.79 $18.57 $20.72 ------------------------------------------------------------------------------- Total return at net asset value (%)(b) (9.59) (10.38) (23.00) ------------------------------------------------------------------------------- Ratios and supplemental data ------------------------------------------------------------------------------- Net assets, end of period (in thousands) $1,892,054 $2,326,938 $2,983,524 ------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.97 1.91 1.88 ------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (%) .51 .04 (.16) ------------------------------------------------------------------------------- Portfolio turnover (%) 53.11 (e) 42.17 73.80 ------------------------------------------------------------------------------- Financial highlights (continued) (For a common share outstanding throughout the period) CLASS B ------------------------------------------------------------------------------- Per-share Year ended June 30 operating performance 2000 1999 ------------------------------------------------------------------------------- Net asset value, beginning of period $21.20 $19.63 ------------------------------------------------------------------------------- Investment operations: ------------------------------------------------------------------------------- Net investment income (loss) (a) .35 (.07) ------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments 8.67 2.10 ------------------------------------------------------------------------------- Total from investment operations 9.02 2.03 ------------------------------------------------------------------------------- Less distributions: ------------------------------------------------------------------------------- From net investment income (.20) (.10) ------------------------------------------------------------------------------- From net realized gain on investments (.79) (.36) ------------------------------------------------------------------------------- From return of capital -- -- ------------------------------------------------------------------------------- Total distributions (.99) (.46) ------------------------------------------------------------------------------- Net asset value, end of period $29.23 $21.20 ------------------------------------------------------------------------------- Total return at net asset value (%)(b) 43.00 10.75 ------------------------------------------------------------------------------- Ratios and supplemental data ------------------------------------------------------------------------------- Net assets, end of period (in thousands) $3,591,546 $1,821,024 ------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.89 2.02 ------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (%) 1.26 (.38) ------------------------------------------------------------------------------- Portfolio turnover (%) 99.53 97.24 -------------------------------------------------------------------------------- (a) Per share net investment income (loss) has been determined on the basis of the weighted average number of shares outstanding for the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through expense offset and brokerage service arrangements (Note 2). (d) Amount represents less than $0.01 per share. (e) Portfolio turnover excludes impact of assets received from the acquisition of Putnam Asia Pacific Fund and Putnam Emerging Markets Fund (Note 5). The accompanying notes are an integral part of these financial statements. Financial highlights (For a common share outstanding throughout the period) CLASS C ------------------------------------------------------------------------------- Per-share Year ended June 30 operating performance 2003 2002 2001 ------------------------------------------------------------------------------- Net asset value, beginning of period $18.86 $21.03 $29.74 ------------------------------------------------------------------------------- Investment operations: ------------------------------------------------------------------------------- Net investment income (loss)(a) .09 .01 (.02) ------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (1.90) (2.18) (6.59) ------------------------------------------------------------------------------- Total from investment operations (1.81) (2.17) (6.61) ------------------------------------------------------------------------------- Less distributions: ------------------------------------------------------------------------------- From net investment income -- -- (.29) ------------------------------------------------------------------------------- From net realized gain on investments -- -- (1.81) ------------------------------------------------------------------------------- From return of capital -- -- --(d) ------------------------------------------------------------------------------- Total distributions -- -- (2.10) ------------------------------------------------------------------------------- Net asset value, end of period $17.05 $18.86 $21.03 ------------------------------------------------------------------------------- Total return at net asset value (%)(b) (9.60) (10.32) (23.01) ------------------------------------------------------------------------------- Ratios and supplemental data ------------------------------------------------------------------------------- Net assets, end of period (in thousands) $534,933 $601,907 $637,547 ------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.97 1.91 1.88 ------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (%) .54 .07 (.07) ------------------------------------------------------------------------------- Portfolio turnover (%) 53.11 (e) 42.17 73.80 ------------------------------------------------------------------------------- Financial highlights (continued) (For a common share outstanding throughout the period) CLASS C ------------------------------------------------------------------------------- For the period July 26, 1999+ Per-share to June 30 operating performance 2000 ------------------------------------------------------------------------------- Net asset value, beginning of period $21.87 ------------------------------------------------------------------------------- Investment operations: ------------------------------------------------------------------------------- Net investment income (loss)(a) .32 ------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments 8.66 ------------------------------------------------------------------------------- Total from investment operations 8.98 ------------------------------------------------------------------------------- Less distributions: ------------------------------------------------------------------------------- From net investment income (.32) ------------------------------------------------------------------------------- From net realized gain on investments (.79) ------------------------------------------------------------------------------- From return of capital -- ------------------------------------------------------------------------------- Total distributions (1.11) ------------------------------------------------------------------------------- Net asset value, end of period $29.74 ------------------------------------------------------------------------------- Total return at net asset value (%)(b) 41.54* ------------------------------------------------------------------------------- Ratios and supplemental data ------------------------------------------------------------------------------- Net assets, end of period (in thousands) $439,522 ------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.76* ------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (%) 1.12* ------------------------------------------------------------------------------- Portfolio turnover (%) 99.53 ------------------------------------------------------------------------------- + Commencement of operations. * Not annualized. (a) Per share net investment income (loss) has been determined on the basis of the weighted average number of shares outstanding for the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through expense offset and brokerage service arrangements (Note 2). (d) Amount represents less than $0.01 per share. (e) Portfolio turnover excludes impact of assets received from the acquisition of Putnam Asia Pacific Fund and Putnam Emerging Markets Fund (Note 5). The accompanying notes are an integral part of these financial statements. Financial highlights (For a common share outstanding throughout the period) CLASS M ------------------------------------------------------------------------------- Per-share Year ended June 30 operating performance 2003 2002 2001 ------------------------------------------------------------------------------- Net asset value, beginning of period $18.90 $21.04 $29.61 ------------------------------------------------------------------------------- Investment operations: ------------------------------------------------------------------------------- Net investment income (loss) (a) .11 .06 .03 ------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (1.88) (2.20) (6.54) ------------------------------------------------------------------------------- Total from investment operations (1.77) (2.14) (6.51) ------------------------------------------------------------------------------- Less distributions: ------------------------------------------------------------------------------- From net investment income -- -- (.25) ------------------------------------------------------------------------------- From net realized gain on investments -- -- (1.81) ------------------------------------------------------------------------------- From return of capital -- -- --(d) ------------------------------------------------------------------------------- Total distributions -- -- (2.06) ------------------------------------------------------------------------------- Net asset value, end of period $17.13 $18.90 $21.04 ------------------------------------------------------------------------------- Total return at net asset value (%)(b) (9.37) (10.17) (22.75) ------------------------------------------------------------------------------- Ratios and supplemental data ------------------------------------------------------------------------------- Net assets, end of period (in thousands) $187,266 $248,921 $302,838 ------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.72 1.66 1.63 ------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (%) .73 .30 .11 ------------------------------------------------------------------------------- Portfolio turnover (%) 53.11 (e) 42.17 73.80 ------------------------------------------------------------------------------- Financial highlights (continued) (For a common share outstanding throughout the period) CLASS M ------------------------------------------------------------------------------- Per-share Year ended June 30 operating performance 2000 1999 ------------------------------------------------------------------------------- Net asset value, beginning of period $21.45 $19.85 ------------------------------------------------------------------------------- Investment operations: ------------------------------------------------------------------------------- Net investment income (loss) (a) .40 (.02) ------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments 8.79 2.11 ------------------------------------------------------------------------------- Total from investment operations 9.19 2.09 ------------------------------------------------------------------------------- Less distributions: ------------------------------------------------------------------------------- From net investment income (.24) (.13) ------------------------------------------------------------------------------- From net realized gain on investments (.79) (.36) ------------------------------------------------------------------------------- From return of capital -- -- ------------------------------------------------------------------------------- Total distributions (1.03) (.49) ------------------------------------------------------------------------------- Net asset value, end of period $29.61 $21.45 ------------------------------------------------------------------------------- Total return at net asset value (%)(b) 43.32 10.97 ------------------------------------------------------------------------------- Ratios and supplemental data ------------------------------------------------------------------------------- Net assets, end of period (in thousands) $367,638 $208,064 ------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) 1.64 1.77 ------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (%) 1.51 (.12) ------------------------------------------------------------------------------- Portfolio turnover (%) 99.53 97.24 ------------------------------------------------------------------------------- (a) Per share net investment income (loss) has been determined on the basis of the weighted average number of shares outstanding for the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through expense offset and brokerage service arrangements (Note 2). (d) Amount represents less than $0.01 per share. (e) Portfolio turnover excludes impact of assets received from the acquisition of Putnam Asia Pacific Fund and Putnam Emerging Markets Fund (Note 5). The accompanying notes are an integral part of these financial statements. Financial highlights (For a common share outstanding throughout the period) CLASS R ------------------------------------------------------------------------------- For the period January 21, 2003+ Per-share to June 30 operating performance 2003 ------------------------------------------------------------------------------- Net asset value, beginning of period $16.52 ------------------------------------------------------------------------------- Investment operations: ------------------------------------------------------------------------------- Net investment income (a) .08 ------------------------------------------------------------------------------- Net realized and unrealized gain on investments .82 ------------------------------------------------------------------------------- Total from investment operations .90 ------------------------------------------------------------------------------- Less distributions: ------------------------------------------------------------------------------- From net investment income -- ------------------------------------------------------------------------------- From net realized gain on investments -- ------------------------------------------------------------------------------- Total distributions -- ------------------------------------------------------------------------------- Net asset value, end of period $17.42 ------------------------------------------------------------------------------- Total return at net asset value (%)(b) 5.45* ------------------------------------------------------------------------------- Ratios and supplemental data ------------------------------------------------------------------------------- Net assets, end of period (in thousands) $1 ------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(c) .65* ------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) .47* ------------------------------------------------------------------------------- Portfolio turnover (%) 53.11*(d) ------------------------------------------------------------------------------- + Commencement of operations. * Not annualized. (a) Per share net investment income (loss) has been determined on the basis of the weighted average number of shares outstanding for the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through expense offset and brokerage service arrangements (Note 2). (d) Portfolio turnover excludes impact of assets received from the acquisition of Putnam Asia Pacific Fund and Putnam Emerging Markets Fund (Note 5). The accompanying notes are an integral part of these financial statements. Financial highlights (For a common share outstanding throughout the period) CLASS Y ------------------------------------------------------------------------------- Per-share Year ended June 30 operating performance 2003 2002 2001 ------------------------------------------------------------------------------- Net asset value, beginning of period $19.33 $21.35 $30.07 ------------------------------------------------------------------------------- Investment operations: ------------------------------------------------------------------------------- Net investment income (a) .28 .22 .23 ------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (1.96) (2.24) (6.69) ------------------------------------------------------------------------------- Total from investment operations (1.68) (2.02) (6.46) ------------------------------------------------------------------------------- Less distributions: ------------------------------------------------------------------------------- From net investment income (.08) -- (.45) ------------------------------------------------------------------------------- From net realized gain on investments -- -- (1.81) ------------------------------------------------------------------------------- From return of capital -- -- --(d) ------------------------------------------------------------------------------- Total distributions (.08) -- (2.26) ------------------------------------------------------------------------------- Net asset value, end of period $17.57 $19.33 $21.35 ------------------------------------------------------------------------------- Total return at net asset value (%)(b) (8.67) (9.46) (22.25) ------------------------------------------------------------------------------- Ratios and supplemental data ------------------------------------------------------------------------------- Net assets, end of period (in thousands) $1,968,996 $1,664,886 $1,251,589 ------------------------------------------------------------------------------- Ratio of expenses to average net assets (%) (c) .97 .91 .88 ------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 1.64 1.13 .92 ------------------------------------------------------------------------------- Portfolio turnover (%) 53.11 (e) 42.17 73.80 ------------------------------------------------------------------------------- Financial highlights (continued) (For a common share outstanding throughout the period) CLASS Y ------------------------------------------------------------------------------- Per-share Year ended June 30 operating performance 2000 1999 ------------------------------------------------------------------------------- Net asset value, beginning of period $21.72 $20.05 ------------------------------------------------------------------------------- Investment operations: ------------------------------------------------------------------------------- Net investment income (a) .61 .14 ------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments 8.92 2.13 ------------------------------------------------------------------------------- Total from investment operations 9.53 2.27 ------------------------------------------------------------------------------- Less distributions: ------------------------------------------------------------------------------- From net investment income (.39) (.24) ------------------------------------------------------------------------------- From net realized gain on investments (.79) (.36) ------------------------------------------------------------------------------- From return of capital -- -- ------------------------------------------------------------------------------- Total distributions (1.18) (.60) ------------------------------------------------------------------------------- Net asset value, end of period $30.07 $21.72 ------------------------------------------------------------------------------- Total return at net asset value (%)(b) 44.43 11.83 ------------------------------------------------------------------------------- Ratios and supplemental data ------------------------------------------------------------------------------- Net assets, end of period (in thousands) $1,027,174 $255,867 ------------------------------------------------------------------------------- Ratio of expenses to average net assets (%) (c) .89 1.02 ------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 2.26 .70 ------------------------------------------------------------------------------- Portfolio turnover (%) 99.53 97.24 ------------------------------------------------------------------------------- (a) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding for the period. (b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) Includes amounts paid through expense offset and brokerage service arrangements (Note 2). (d) Amount represents less than $0.01 per share. (e) Portfolio turnover excludes impact of assets received from the acquisition of Putnam Asia Pacific Fund and Putnam Emerging Markets Fund (Note 5). The accompanying notes are an integral part of these financial statements. Notes to financial statements June 30, 2003 Note 1 Significant accounting policies Putnam International Equity Fund (formerly known as Putnam International Growth Fund) ("the fund") is registered under the Investment Company Act of 1940, as amended, as a diversified open-end management investment company. The fund seeks capital appreciation by investing primarily in equity securities of companies located outside the United States. The fund offers class A, class B, class C, class M, class R and class Y shares. The fund began offering class R shares on January 21, 2003. Class A shares are sold with a maximum front-end sales charge of 5.75%. Class B shares, which convert to class A shares after approximately eight years, do not pay a front-end sales charge but pay a higher ongoing distribution fee than class A, class M and class R shares, and are subject to a contingent deferred sales charge, if those shares are redeemed within six years of purchase. Class C shares are subject to the same fees and expenses as class B shares, except that class C shares have a one-year 1.00% contingent deferred sales charge and do not convert to class A shares. Class M shares are sold with a maximum front end sales charge of 3.50% and pay an ongoing distribution fee that is higher than class A and class R shares but lower than class B and class C shares. Class R shares are sold without a front end sales charge and pay an ongoing distribution fee that is higher than class A shares, but lower than class B, class C and class M shares. Class R shares are offered to qualified employee-benefit plans. Class Y shares, which are sold at net asset value, are generally subject to the same expenses as class A, class B, class C, class M and class R shares, but do not bear a distribution fee. Class Y shares are sold to certain eligible purchasers including certain defined contribution plans (including corporate IRAs), certain college savings plans, bank trust departments and trust companies. A redemption fee of 1.00%, which is retained by the fund, may apply to shares of any class redeemed (either by selling or exchanging to another fund) within 90 days of purchase. Expenses of the fund are borne pro-rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the distribution fees applicable to such class). Each class votes as a class only with respect to its own distribution plan or other matters on which a class vote is required by law or determined by the Trustees. Shares of each class would receive their pro-rata share of the net assets of the fund, if the fund were liquidated. In addition, the Trustees declare separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. A) Security valuation Investments for which market quotations are readily available are valued at the last reported sales price on their principal exchange, or official closing price for certain markets. If no sales are reported -- as in the case of some securities traded over-the-counter -- a security is valued at its last reported bid price. For foreign investments, if trading or events occurring in other markets after the close of the principal exchange in which the foreign investments are traded are expected to materially affect the value of the investments, then those investments are valued, taking into consideration these events, at their fair value following procedures approved by the Trustees. Securities quoted in foreign currencies are translated into U.S. dollars at the current exchange rate. Short-term investments having remaining maturities of 60 days or less are valued at amortized cost, which approximates fair value. Other investments, including restricted securities, are valued at fair value following procedures approved by the Trustees. Such valuations and procedures are reviewed periodically by the Trustees. B) Joint trading account The fund may transfer uninvested cash balances, including cash collateral received under security lending arrangements, into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Investment Management, LLC ("Putnam Management"), the fund's manager, an indirect wholly-owned subsidiary of Putnam, LLC. These balances may be invested in issuers of high-grade short-term investments having maturities of up to 397 days for collateral received under security lending arrangements and up to 90 days for other cash investments. C) Security transactions and related investment income Security transactions are recorded on the trade date (date the order to buy or sell is executed). Gains or losses on securities sold are determined on the identified cost basis. Interest income is recorded on the accrual basis. Dividend income is recognized on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. D) Foreign currency translation The accounting records of the fund are maintained in U.S. dollars. The market value of foreign securities, currency holdings, and other assets and liabilities are recorded in the books and records of the fund after translation to U.S. dollars based on the exchange rates on that day. The cost of each security is determined using historical exchange rates. Income and withholding taxes are translated at prevailing exchange rates when earned or incurred. The fund does not isolate that portion of realized or unrealized gains or losses resulting from changes in the foreign exchange rate on investments from fluctuations arising from changes in the market prices of the securities. Such gains and losses are included with the net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net realized exchange gains or losses on closed forward currency contracts, disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized appreciation and depreciation of assets and liabilities in foreign currencies arise from changes in the value of open forward currency contracts and assets and liabilities other than investments at the period end, resulting from changes in the exchange rate. Investments in foreign securities involve certain risks, including those related to economic instability, unfavorable political developments, and currency fluctuations, not present with domestic investments. E) Forward currency contracts The fund may buy and sell forward currency contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date. These contracts are used to protect against a decline in value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of a currency in which securities a fund intends to buy are denominated, when a fund holds cash reserves and short term investments). The U.S. dollar value of forward currency contracts is determined using current forward currency exchange rates supplied by a quotation service. The market value of the contract will fluctuate with changes in currency exchange rates. The contract is marked to market daily and the change in market value is recorded as an unrealized gain or loss. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The fund could be exposed to risk if the value of the currency changes unfavorably, if the counterparties to the contracts are unable to meet the terms of their contracts or if the fund is unable to enter into a closing position. Forward currency contracts outstanding at period end are listed after The fund's portfolio. F) Futures and options contracts The fund may use futures and options contracts to hedge against changes in the values of securities the fund owns or expects to purchase. The fund may also write options on securities it owns or in which it may invest to increase its current returns. The potential risk to the fund is that the change in value of futures and options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty to the contract is unable to perform. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. The fund and the broker agree to exchange an amount of cash equal to the daily fluctuation in the value of the futures contract. Such receipts or payments are known as "variation margin." Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by dealers. Futures and written option contracts outstanding at period end are listed after The fund's portfolio. G) Security lending The fund may lend securities, through its agents, to qualified borrowers in order to earn additional income. The loans are collateralized by cash and/or securities in an amount at least equal to the market value of the securities loaned. The market value of securities loaned is determined daily and any additional required collateral is allocated to the fund on the next business day. The risk of borrower default will be borne by the fund's agents; the fund will bear the risk of loss with respect to the investment of the cash collateral. Income from securities lending is included in investment income on the Statement of operations. At June 30, 2003, the value of securities loaned amounted to $265,109,087. The fund received cash collateral of $274,381,003 which is pooled with collateral of other Putnam funds into 31 issuers of high-grade short-term investments. H) 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 maintain an asset coverage ratio of at least 300% and borrowings must not exceed prospectus limitations. For the period ended June 30, 2003, the fund had no borrowings against the line of credit. Effective August 6, 2003, the fund will no longer participate in a committed line of credit. I) Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986, 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 June 30, 2003, the fund had a capital loss carryover of $2,646,372,628 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 ------------------------------ $493,938 June 30, 2004 44,943,091 June 30, 2005 4,817,122 June 30, 2007 30,394,163 June 30, 2008 14,120,840 June 30, 2009 1,141,433,169 June 30, 2010 1,410,170,305 June 30, 2011 J) Distributions to shareholders Distributions to shareholders from net investment income are recorded by the fund on the ex-dividend date. Distributions from capital gains, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. 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. These differences include temporary and permanent differences of losses on wash sale transactions, foreign currency gains and losses, post-October loss deferrals, realized and unrealized gains and losses on passive foreign investment companies. For the year ended June 30, 2003, the fund reclassified $19,004,943 to increase undistributed net investment income and $110,540,482 to increase paid-in-capital, with an increase to accumulated net realized losses of $129,545,425. The tax basis components of distributable earnings and the federal tax cost as of period end were as follows: Unrealized appreciation $985,477,913 Unrealized depreciation (852,349,737) -------------- Net unrealized appreciation 133,128,176 Undistributed ordinary income 125,090,704 Capital loss carryforward (2,646,372,628) Post October loss (734,138,215) Cost for federal income tax purposes $11,630,374,903 Note 2 Management fee, administrative services and other transactions Compensation of Putnam Management, for management and investment advisory services is paid quarterly based on the average net assets of the fund. Such fee is based on the following annual rates: 0.80% of the first $500 million of average net assets, 0.70% of the next $500 million, 0.65% of the next $500 million, 0.60% of the next $5 billion, 0.575% of the next $5 billion, 0.555% of the next $5 billion, 0.54% of the next $5 billion and 0.53% thereafter. 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. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. Under the subcustodian contract between the subcustodian bank and PFTC, the subcustodian bank has a lien on the securities of the fund to the extent permitted by the fund's investment restrictions to cover any advances made by the subcustodian bank for the settlement of securities purchased by the fund. At June 30, 2003, the payable to the subcustodian bank represents the amount due for cash advanced for the settlement of a security purchased. 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 June 30, 2003, the fund's expenses were reduced by $6,544,034 under these arrangements. Each independent Trustee of the fund receives an annual Trustee fee, of which $6,228 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 Compensation of Trustees in the Statement of operations. Accrued pension liability is included in Payable for compensation of Trustees in the Statement of assets and liabilities. The fund has adopted distribution plans (the "Plans") with respect to its class A, class B, class C, class M and class R shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The purpose of the Plans is to compensate Putnam Retail Management, a wholly-owned subsidiary of Putnam, LLC and Putnam Retail Management GP, Inc., for services provided and expenses incurred by it in distributing shares of the fund. The Plans provide for payments by the fund to Putnam Retail Management at an annual rate up to 0.35%, 1.00%, 1.00%, 1.00% and 1.00% of the average net assets attributable to class A, class B, class C, class M and class R shares, respectively. The Trustees have approved payment by the fund at an annual rate of 0.25%, 1.00%, 1.00%, 0.75% and 0.50% of the average net assets attributable to class A, class B, class C, class M and class R shares, respectively. For the year ended June 30, 2003, Putnam Retail Management, acting as underwriter, received net commissions of $667,773 and $11,918 from the sale of class A and class M shares, respectively, and received $4,035,764 and $60,908 in contingent deferred sales charges from redemptions of class B and class C shares, respectively. A deferred sales charge of up to 1.00% and 0.65% is assessed on certain redemptions of class A and class M shares, respectively. For the year ended June 30, 2003, Putnam Retail Management, acting as underwriter, received $264,427 and no monies on class A and class M redemptions, respectively. Note 3 Purchases and sales of securities During the year ended June 30, 2003, cost of purchases and proceeds from sales of investment securities other than short-term investments aggregated $6,252,879,957 and $5,513,183,659, respectively. There were no purchases and sales of U.S. government obligations. Written option transactions during the year are summarized as follows: Contract Premiums Amounts Received ------------------------------------------------------------------ Written options outstanding at beginning of year -- $-- ------------------------------------------------------------------ Options opened 480,000 11,744,251 Options expired -- -- Options closed (480,000) (11,744,251) ------------------------------------------------------------------ Written options outstanding at end of year -- $-- ------------------------------------------------------------------ Note 4 Capital shares At June 30, 2003, there were an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows: Year ended June 30, 2003 ------------------------------------------------------------------ Class A Shares Amount ------------------------------------------------------------------ Shares sold 297,352,233 $4,887,953,497 ------------------------------------------------------------------ Shares issued in connection with reinvestment of distributions 721,391 11,773,092 ------------------------------------------------------------------ Shares issued in connection with the merger of Putnam Asia Pacific Growth and Putnam Emerging Markets Funds 7,587,615 131,447,946 ------------------------------------------------------------------ 305,661,239 5,031,174,535 Shares repurchased (273,704,994) (4,514,452,777) ------------------------------------------------------------------ Net increase 31,956,245 $516,721,758 ------------------------------------------------------------------ Year ended June 30, 2002 ------------------------------------------------------------------ Class A Shares Amount ------------------------------------------------------------------ Shares sold 293,619,885 $5,733,822,534 ------------------------------------------------------------------ Shares issued in connection with reinvestment of distributions -- -- ------------------------------------------------------------------ 293,619,885 5,733,822,534 Shares repurchased (256,975,161) (5,033,826,065) ------------------------------------------------------------------ Net increase 36,644,724 $699,996,469 ------------------------------------------------------------------ Year ended June 30, 2003 ------------------------------------------------------------------ Class B Shares Amount ------------------------------------------------------------------ Shares sold 14,597,410 $233,792,223 ------------------------------------------------------------------ Shares issued in connection with reinvestment of distributions -- -- ------------------------------------------------------------------ Shares issued in connection with the merger of Putnam Asia Pacific Growth and Putnam Emerging Markets Funds 5,490,252 91,982,910 ------------------------------------------------------------------ 20,087,662 325,775,133 Shares repurchased (32,698,269) (520,951,265) ------------------------------------------------------------------ Net decrease (12,610,607) $(195,176,132) ------------------------------------------------------------------ Year ended June 30, 2002 ------------------------------------------------------------------ Class B Shares Amount ------------------------------------------------------------------ Shares sold 26,004,333 $494,743,905 ------------------------------------------------------------------ Shares issued in connection with reinvestment of distributions -- -- ------------------------------------------------------------------ 26,004,333 494,743,905 Shares repurchased (44,705,698) (847,391,828) ------------------------------------------------------------------ Net decrease (18,701,365) $(352,647,923) ------------------------------------------------------------------ Year ended June 30, 2003 ------------------------------------------------------------------ Class C Shares Amount ------------------------------------------------------------------ Shares sold 12,576,467 $205,414,214 ------------------------------------------------------------------ Shares issued in connection with reinvestment of distributions -- -- ------------------------------------------------------------------ Shares issued in connection with the merger of Putnam Asia Pacific Growth and Putnam Emerging Markets Funds 275,472 4,687,624 ------------------------------------------------------------------ 12,851,939 210,101,838 Shares repurchased (13,395,638) (218,466,652) ------------------------------------------------------------------ Net decrease (543,699) $(8,364,814) ------------------------------------------------------------------ Year ended June 30, 2002 ------------------------------------------------------------------ Class C Shares Amount ------------------------------------------------------------------ Shares sold 22,461,656 $432,620,576 ------------------------------------------------------------------ Shares issued in connection with reinvestment of distributions -- -- ------------------------------------------------------------------ 22,461,656 432,620,576 Shares repurchased (20,857,249) (402,292,910) ------------------------------------------------------------------ Net increase 1,604,407 $30,327,666 ------------------------------------------------------------------ Year ended June 30, 2003 ------------------------------------------------------------------ Class M Shares Amount ------------------------------------------------------------------ Shares sold 8,139,586 $133,436,717 ------------------------------------------------------------------ Shares issued in connection with reinvestment of distributions -- -- ------------------------------------------------------------------ Shares issued in connection with the merger of Putnam Asia Pacific Growth and Putnam Emerging Markets Funds 286,835 4,891,301 ------------------------------------------------------------------ 8,426,421 138,328,018 Shares repurchased (10,665,796) (174,618,786) ------------------------------------------------------------------ Net decrease (2,239,375) $(36,290,768) ------------------------------------------------------------------ Year ended June 30, 2002 ------------------------------------------------------------------ Class M Shares Amount ------------------------------------------------------------------ Shares sold 12,295,515 $235,623,812 ------------------------------------------------------------------ Shares issued in connection with reinvestment of distributions -- -- ------------------------------------------------------------------ 12,295,515 235,623,812 Shares repurchased (13,517,203) (259,964,932) ------------------------------------------------------------------ Net decrease (1,221,688) $(24,341,120) ------------------------------------------------------------------ For the period January 21, 2003 (commencement of operations) to June 30, 2003 ------------------------------------------------------------------ Class R Shares Amount ------------------------------------------------------------------ Shares sold 61 $1,011 ------------------------------------------------------------------ Shares issued in connection with reinvestment of distributions -- -- ------------------------------------------------------------------ 61 1,011 Shares repurchased -- -- ------------------------------------------------------------------ Net increase 61 $1,011 ------------------------------------------------------------------ Year ended June 30, 2003 ------------------------------------------------------------------ Class Y Shares Amount ------------------------------------------------------------------ Shares sold 105,663,022 $1,732,448,674 ------------------------------------------------------------------ Shares issued in connection with reinvestment of distributions 461,989 7,609,608 ------------------------------------------------------------------ Shares issued in connection with the merger of Putnam Asia Pacific Growth and Putnam Emerging Markets Funds 345,554 6,034,925 ------------------------------------------------------------------ 106,470,565 1,746,093,207 Shares repurchased (80,518,017) (1,325,837,735) ------------------------------------------------------------------ Net increase 25,952,548 $420,255,472 ------------------------------------------------------------------ Year ended June 30, 2002 ------------------------------------------------------------------ Class Y Shares Amount ------------------------------------------------------------------ Shares sold 86,557,160 $1,694,183,576 ------------------------------------------------------------------ Shares issued in connection with reinvestment of distributions -- -- ------------------------------------------------------------------ 86,557,160 1,694,183,576 Shares repurchased (59,049,885) (1,161,579,376) ------------------------------------------------------------------ Net increase 27,507,275 $532,604,200 ------------------------------------------------------------------ At June 30, 2003 Putnam Investments LLC owned 61 class R shares of the fund (100% of class R shares outstanding), valued at $1,063. Note 5 Acquisition of Putnam Asia Pacific Growth and Putnam Emerging Markets Funds On August 16, 2002, the fund issued 7,587,615; 5,490,252; 275,472; 286,835; and 345,554 of class A, class B, class C, class M and class Y shares to acquire Putnam Asia Pacific Fund and Putnam Emerging Markets Fund net assets in a tax-free exchange approved by the shareholders. The net assets of the fund, Putnam Asia Pacific Fund and Putnam Emerging Markets Fund on August 16, 2002, valuation date, were $10,713,632,846, $160,983,391 and $78,061,315, respectively. On August 16, 2002, Putnam Asia Pacific Fund and Putnam Emerging Markets Fund had unrealized appreciation of $1,405,114 and $10,106,846, respectively. The aggregate net assets of the fund immediately following the acquisition were $10,952,677,552. Federal tax information (Unaudited) For the period, interest and dividends from foreign countries were $287,652,253 or $0.436 per share. Taxes paid to foreign countries were $31,384,731 or $0.048 {for all classes of shares}. For its tax year ended June 30, 2003, the fund hereby designates 100%, or the maximum amount allowable, of its net taxable income as qualified dividends taxed at individual net capital gain rates. The Form 1099 you receive in January 2004 will show the tax status of all distributions paid to your account in calendar 2003. About the Trustees Jameson A. Baxter (9/6/43), Trustee since 1994 President, Baxter Associates, Inc. (a consulting and private investments firm) Director of ASHTA Chemicals, Inc., Banta Corporation (a printing and digital imaging firm), Ryerson Tull, Inc. (a steel service corporation), Advocate Health Care, and the National Center for Nonprofit Boards. Chairman Emeritus of the Board of Trustees, Mount Holyoke College. Until 2002, Mrs. Baxter was a director of Intermatic Corporation, a manufacturer of energy control products. Also held various positions in investment banking and corporate finance, including Vice President and principal of the Regency Group and Vice President and consultant to First Boston Corp. Charles B. Curtis (4/27/40), Trustee since 2001 President and Chief Operating Officer, Nuclear Threat Initiative (a private foundation dealing with national security issues), also serves as Senior Advisor to the United Nations Foundation Member of the Council on Foreign Relations and the Trustee Advisory Council of the Applied Physics Laboratory at 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's Policy Board and Director of EG&G Technical Services, Inc. (fossil energy research and development support). Prior to May 1997, Mr. Curtis was Deputy Secretary of Energy. He served as Chairman of the Federal Energy Regulatory Commission from 1977 to 1987 and has held positions on the staff of the U.S. House of Representatives, the U.S. Treasury Department, and the Securities and Exchange Commission. Mr. Curtis is also a lawyer with over 15 years of experience. John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000 Vice-Chairman and Managing Director, First Reserve Corporation (a registered investment advisor investing in companies in the world-wide energy industry on behalf of institutional investors) Director of Devon Energy Corporation (formerly known as Snyder Oil Corporation), TransMontaigne Oil Company, Continuum Health Partners of New York, Sarah Lawrence College, and various private companies owned by First Reserve Corporation. Trustee of TH Lee, Putnam Investment Trust (a closed-end investment company). Prior to acquiring First Reserve in 1983, Mr. Hill held executive positions with several advisory firms and various positions with the federal government, including Associate Director of the Office of Manage ment and Budget and Deputy Director of the Federal Energy Administration. Ronald J. Jackson (12/17/43), Trustee since 1996 Private investor Former Chairman, President, and Chief Executive Officer of Fisher-Price, Inc. (a toy manufacturer). Previously served as President and Chief Executive Officer of Stride-Rite, Inc. and Kenner Parker Toys. Also held financial and marketing positions with General Mills, Parker Brothers, and Talbots. President of the Kathleen and Ronald J. Jackson Foundation (charitable trust). Member of the Board of Overseers of WGBH (public television and radio). Member of the Board of Overseers of the Peabody Essex Museum. Paul L. Joskow (6/30/47), Trustee since 1997 Elizabeth and James Killian Professor of Economics and Management and Director of the Center for Energy and Environmental Policy Research, Massachusetts Institute of Technology Director, National Grid Transco (formerly National Grid Group, a UK-based holding company with interests in electric and gas transmission and distribution and telecommunications infrastructure), and the Whitehead Institute for Biomedical Research (a non-profit research institution). President of the Yale University Council. Prior to February 2002, March 2000, and September 1998, Dr. Joskow was a Director of State Farm Indemnity Company (an automobile insurance company), Director of New England Electric System (a public utility holding company) and a consultant to National Economic Research Associates, respectively. Elizabeth T. Kennan (2/25/38), Trustee since 1992 Chairman, Cambus-Kenneth Bloodstock (a limited liability company involved in thoroughbred horse breeding and farming), President Emeritus of Mount Holyoke College Director, Northeast Utilities, and Talbots (a distributor of women's apparel). Trustee of Centre College. Prior to 2001, Dr. Kennan was a member of the Oversight Committee of Folger Shakespeare Library. Prior to September 2000, June 2000, and November 1999, Dr. Kennan was a Director of Chastain Real Estate, Bell Atlantic, and Kentucky Home Life Insurance, respectively. Prior to 1995, Dr. Kennan was a Trustee of Notre Dame University. For 12 years, she was on the faculty of Catholic University. John H. Mullin, III (6/15/41), Trustee since 1997 Chairman and CEO of Ridgeway Farm (a limited liability company engaged in timber and farming) Director Alex. Brown Realty, Inc., Sonoco Products, Inc. (a packaging company), The Liberty Corporation (a company engaged in the broadcasting industry), and Progress Energy, Inc. (a utility company, formerly known as Carolina Power & Light). Trustee Emeritus of Washington & Lee University. Prior to October 1997, January 1998, and May 2001, Mr. Mullin was a Director of Dillon, Read & Co. Inc., The Ryland Group, Inc., and Graphic Packaging International Corp., respectively. Robert E. Patterson (3/15/45), Trustee since 1984 Senior Partner of Cabot Properties, L.P. and Chairman of Cabot Properties, Inc. Chairman of the Joslin Diabetes Center, Trustee of SEA Education Association, and Director of Brandywine Trust Company (a trust company). Prior to February 1998, Mr. Patterson was Executive Vice President and Director of Acquisitions of Cabot Partners Limited Partnership. Prior to December 2001, Mr. Patterson was President and Trustee of Cabot Industrial Trust (publicly traded real estate investment trust). Prior to 1990, Mr. Patterson was Executive Vice President of Cabot, Cabot & Forbes Realty Advisors, the predecessor of Cabot Partners, and prior to that was Senior Vice President of the Beal Companies. W. Thomas Stephens (9/2/42), Trustee since 1997 Corporate Director Director of Xcel Energy Incorporated (public utility company), TransCanada Pipelines, Norske Canada, Inc. (paper manufacturer), and Qwest Communications (communications company). Until 2003, Mr. Stephens was a Director of Mail-Well, a printing and envelope company. Prior to July 2001 and October 1999, Mr. Stephens was Chairman of Mail-Well and MacMillan-Bloedel (forest products company). Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of Johns Manville. W. Nicholas Thorndike (3/28/33), Trustee since 1992 Director of various corporations and charitable organizations, including Courier Corporation (a book manufacturer and publisher) and Providence Journal Co. (a newspaper publisher) Trustee of Northeastern University and Honorary Trustee of Massachusetts General Hospital. Prior to September 2000, April 2000, and December 2001, Mr. Thorndike was a Director of Bradley Real Estate, Inc., a Trustee of Eastern Utilities Associates, and a Trustee of Cabot Industrial Trust, respectively. Previously served as Chairman of the Board and managing partner of Wellington Management/Thorndike Doran Paine & Lewis, and Chairman and Director of Ivest Fund. Lawrence J. Lasser* (11/1/42), Trustee since 1992 and Vice President since 1981 President and Chief Executive Officer of Putnam Investments and Putnam Management Director of Marsh & McLennan Companies, Inc. and the United Way of Massachusetts Bay. Member of the Board of Governors of the Investment Company Institute, Trustee of the Museum of Fine Arts, Boston, a Trustee and Member of the Finance and Executive Committees of Beth Israel Deaconess Medical Center, Boston, and a Member of the CareGroup Board of Managers Investment Committee, the Council on Foreign Relations, and the Commercial Club of Boston. George Putnam, III* (8/10/51), Trustee since 1984 and President since 2000 President, New Generation Research, Inc. (a publisher of financial advisory and other research services relating to bankrupt and distressed companies) and New Generation Advisers, Inc. (a registered investment adviser) Director of The Boston Family Office, L.L.C. (registered investment advisor), Trustee of St. Mark's School, and Trustee of Shore Country Day School. Until 2002, Mr. Putnam was a Trustee of the SEA Education Association. Previously, Mr. Putnam was an attorney with the firm of Dechert Price & Rhoads. A.J.C. Smith* (4/13/34), Trustee since 1986 Director of Marsh & McLennan Companies, Inc. Director of Trident Corp. (a limited partnership with over 30 institutional investors). Trustee of the Carnegie Hall Society, the Educational Broadcasting Corporation and the National Museums of Scotland. Chairman of the Central Park Conservancy. Member of the Board of Overseers of the Joan and Sanford I. Weill Graduate School of Medical Sciences of Cornell University. Fellow of the Faculty of Actuaries in Edinburgh, the Canadian Institute of Actuaries, and the Conference of Actuaries. Associate of the Society of Actuaries. Member of the American Actuaries, the International Actuarial Association and the International Association of Consulting Actuaries. 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 June 30, 2003, there were 104 Putnam Funds. Each Trustee serves for an indefinite term, until his or her resignation, 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, Lasser and Smith are deemed "interested persons" by virtue of their positions as officers or shareholders of the fund or Putnam Management, Putnam Retail Management or Marsh & McLennan Companies, Inc. George Putnam, III is the President of your fund and each of the other Putnam funds. Lawrence J. Lasser is the President and Chief Executive Officer of Putnam Investments and Putnam Management. Mr. Lasser and Mr. Smith serve as Directors of Marsh & McLennan Companies, Inc. 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, Treasurer and Principal Financial Officer Since 1989 Managing Director, Putnam Investments and Putnam Management Patricia C. Flaherty (12/1/46) Senior Vice President Since 1993 Senior Vice President, Putnam Investments and Putnam Management Karnig H. Durgarian (1/13/56) Vice President and Principal Executive Officer Since 2002 Senior Managing Director, Putnam Investments Steven D. Krichmar (6/27/58) Vice President and Principal Financial Officer Since 2002 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 Gordon H. Silver (7/3/47) Vice President Since 1990 Senior Managing Director, Putnam Investments, Putnam Management and Putnam Retail Management Mark C. Trenchard (6/5/62) Vice President Since 2002 Senior Vice President, Putnam Investments William H. Woolverton (1/17/51) Vice President and Chief Legal Officer Since 2003 Managing Director, Putnam Investments, Putnam Management and Putnam Retail Management Judith Cohen (6/7/45) Clerk and Assistant Treasurer Since 1993 Clerk and Assistant Treasurer, The Putnam Funds The address of each Officer is One Post Office Square, Boston, MA 02109. Fund information About Putnam Investments 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 Auditors PricewaterhouseCoopers LLP Trustees John A. Hill, Chairman Jameson Adkins Baxter Charles B. Curtis Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan Lawrence J. Lasser John H. Mullin III Robert E. Patterson George Putnam, III A.J.C. Smith W. Thomas Stephens W. Nicholas Thorndike Officers George Putnam, III President Charles E. Porter Executive Vice President, Treasurer and Principal Financial Officer Patricia C. Flaherty Senior Vice President Karnig H. Durgarian Vice President and Principal Executive Officer Steven D. Krichmar Vice President and Principal Financial Officer Michael T. Healy Assistant Treasurer and Principal Accounting Officer Beth S. Mazor Vice President Gordon H. Silver Vice President Mark C. Trenchard Vice President William H. Woolverton Vice President and Chief Legal Officer Judith Cohen Clerk and Assistant Treasurer This report is for the information of shareholders of Putnam International Equity Fund. It may also be used as sales literature when preceded or accompanied by the current prospectus, which gives details of sales charges, investment objectives, and operating policies of the fund, and the most recent copy of Putnam's Quarterly Performance Summary and Putnam's Quarterly Ranking Summary. For more information or to request a prospectus, call toll free: 1-800-225-1581. 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. AN009-88686 841/524/891/2BA 8/03 May Lose Value Not FDIC Insured No Bank Guarantee PUTNAM INVESTMENTS [SCALE LOGO OMITTED] ---------------------------------------------------------------------------- Putnam International Equity Fund Supplement to Annual Report dated 6/30/03. The following information has been prepared to provide class Y shareholders with a performance overview specific to their holdings. Class Y shares are offered exclusively to clients that meet the eligibility requirements specified in the fund's prospectus for such shares. Performance of class Y shares, which do not incur a front-end load, a distribution fee, or a contingent deferred sales charge, will differ from the performance of class A, B, C, M, and R shares, which are discussed more extensively in the annual report. RESULTS AT A GLANCE ---------------------------------------------------------------------------- Total return for periods ended 6/30/03 NAV 1 year -8.67% 5 years 3.83 Annual average 0.76 10 years 147.47 Annual average 9.48 Life of fund (since class A inception, 2/28/91) Annual average 8.68 Share value: NAV 6/30/02 $19.33 6/30/03 $17.57 ---------------------------------------------------------------------------- Distributions: No. Income Capital gains Total 1 $0.078 -- $0.078 ---------------------------------------------------------------------------- Please note that past performance is not indicative of future results. More recent returns may be more or less than those shown. Returns shown for class Y shares for periods prior to their inception are derived from the historical performance of class A shares, and are not adjusted to reflect the initial sales charge currently applicable to class A shares. These returns have not been adjusted to reflect differences in operating expenses which, for class Y shares, typically are lower than the operating expenses applicable to class A shares. All returns assume reinvestment of distributions at net asset value. Investment return and principal value will fluctuate so your shares, when redeemed, may be worth more or less than their original cost. See full report for information on comparative benchmarks. If you have questions, please consult your fund prospectus or call Putnam toll free at 1-800-752-9894. Item 2. Code of Ethics: ----------------------- Not applicable Item 3. Audit Committee Financial Expert: ----------------------------------------- Not applicable Item 4. Principal Accountant Fees and Services: ----------------------------------------------- Not applicable Items 5-6. [Reserved] --------------------- Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed End ------------------------------------------------------------------------- Management Investment Companies: Not applicable -------------------------------- Item 8. [Reserved] ------------------ Item 9. Controls and Procedures: -------------------------------- (a) The registrant's principal executive officer and principal financial officers 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 on Form N-CSR, that the design and operation of such procedures are effective to provide reasonable assurance that information required to be disclosed by the investment company in the reports that it files or submits under the Securities Exchange Act of 1934 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 10. Exhibits: ------------------ (a) Not applicable (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 an 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: August 22, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 an 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/Karnig H. Durgarian --------------------------- Karnig H. Durgarian Principal Executive Officer Date: August 22, 2003 By (Signature and Title): /s/Charles E. Porter --------------------------- Charles E. Porter Principal Financial Officer Date: August 22, 2003 By (Signature and Title): /s/Steven D. Krichmar --------------------------- Steven D. Krichmar Principal Financial Officer Date: August 22, 2003