Putnam
Tax-Free
High Yield
Fund
ANNUAL REPORT
July 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "As we monitored the fund's holdings during the period, we were able
to take advantage of the sector changes occurring within the market
environment."
-- Triet M. Nguyen, lead manager
* "[Investors should consider municipal bond funds if they are] in a tax
bracket that warrants tax-free fund investing and want to build a
balanced portfolio. Pros say that a diversified portfolio always
includes stock as well as bond investments no matter what market
conditions are."
-- The Miami Herald, July 1996
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
15 Portfolio holdings
29 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
Concern over the possible implications of a flat tax on municipal bonds
and worry that economic growth would touch off a new round of inflation
produced a stretch of unsettled weather for the tax-exempt bond market
during the 12 months ended July 31, 1996. The period, which encompassed
Putnam Tax-Free High Yield Fund's most recent fiscal year, generated
predictable market volatility and plenty of challenges for your fund's
management.
During the first half of fiscal 1996, the flat-tax issue kept municipals
from participating fully in the continuing bond market rally. Later,
however, when concern over renewed inflation stopped the rally in its
tracks, the already discounted munis gave back less ground. Fund Manager
Triet Nguyen took the market's volatility in stride, maintaining the
fund's current dividend while positioning the portfolio for what he
expects will be somewhat calmer waters in the months ahead.
Finally, I am pleased to inform you that Leslie J. Burke has joined
Triet as a member of your fund's management team. Leslie came to Putnam
in 1992 as a credit analyst in the tax-exempt bond group. Before joining
Putnam, she was with Fidelity Management and Research Company. Leslie
has 10 years of investment experience.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
September 18, 1996
Report from the Fund Managers
Triet M. Nguyen, lead manager
Leslie J. Burke
Putnam Tax-Free High Yield Fund operated within an unusual municipal
bond market environment during the fiscal year ended July 31, 1996, as
the economy strengthened without undue inflation, rising-interest-rate
concerns resurfaced, and flat-tax rhetoric faded. In response, we
implemented a defensive strategy designed to maintain the fund's current
dividend and shield the portfolio from as much of the surrounding market
volatility as possible. For the most part, the strategy proved
successful; the fund did maintain its dividend and it did deliver
positive, if not outstanding, total return performance.
Total returns for the period were 5.76% for class A shares, 5.08% for
class B shares, and 5.44% for class M shares, all at net asset value.
Taking maximum sales charges into account, the returns were 0.70% and
2.05% for class A and class M shares, respectively, and 0.11% for class
B shares, which represents the maximum contingent deferred sales charge.
For results over longer periods, see the performance tables on pages 9
and 10.
* RESPONDING TO A CHANGING MARKET ENVIRONMENT
The U.S. bond market rally continued through the fiscal year's first
half, a result of increased investor confidence in the Federal Reserve
Board's ability to thwart inflation and effectively manage economic
growth. Although the market rise fueled significant gains for most
fixed-income investments, municipal bonds participated on a smaller
scale than their taxable counterparts. The reason for this subdued
response was mounting concern over the perceived effects of the flat-tax
proposal that had been introduced in Congress in April 1995. A flat tax
in its purest form would deprive municipal bonds of their beneficial tax
treatment.
As the flat tax became an issue in the presidential primary election
campaign, investors began to realize that despite the concept's
widespread appeal there were several practical limitations. In any case,
disagreement over critical details virtually eliminated prospects for
enactment in 1996. This realization eased investors' concerns and during
the fiscal year's latter half, investors began to return to the
municipal market in which they found attractive opportunities they had
previously overlooked. We believe tax reform will definitely reappear on
the national agenda, but it is unlikely that the flat-tax concept will
be revived before the November elections. In our view, municipal bond
investors should continue to enjoy the current tax advantages for the
foreseeable future.
* INFLATION FEARS PROVE GROUNDLESS
Just as flat-tax concerns were fading, however, the rest of the bond
market turned its attention to prospects for inflation and interest
rates. Productivity, personal income, employment, and technology had
been advancing at a record pace, and fixed-income investors perceived
this as a prelude to stepped-up inflation. (Generally, strong economic
growth will stimulate inflation and be accompanied by a rise in interest
rates.) However, despite the economy's continued growth during the past
several months, a pickup in inflation has not yet materialized.
In anticipation of an increase in inflation, we recently increased
portfolio weightings in industrial development bonds. Municipal bonds of
this type are backed by the credit of a private corporation rather than
a municipality; consequently, their prices reflect the strength of that
corporation and the industry within which it operates. Because of the
prospect of higher prices as well as increased demand, securities backed
by sectors such as paper and forest products can provide appreciation
potential when the economy is growing.
[GRAPHIC PIE CHART OMITTED: PORTFOLIO QUALITY OVERVIEW*
Aaa -- 33.6%
Ba and under -- 40.6%
Baa -- 18.3%
A -- 4.2%
Aa -- 3.3%
Footnote reads:
*As a percentage of market value as of 7/31/96, a bond rated Baa or
higher is considered investment grade. All ratings reflect Moody's
descriptions, unless noted otherwise; percentages may include unrated
bonds considered by Putnam Management to be of comparable quality.
Ratings will vary over time.
This time around, however, the supply of paper and forest products was
already abundant; manufacturers had stepped up production in
anticipation of increased demand. As a consequence of this oversupply,
prices dropped and the securities did not appreciate to the extent we
had anticipated. Thus, your fund, which had been positioned to benefit
from inflationary pressures, experienced some volatility -- along with
the rest of the municipal bond market.
* DURATION AND SECTOR ALLOCATIONS REFLECT ECONOMIC ENVIRONMENT
Another key strategy we employed in response to the changing market and
economic environment was to focus on managing the portfolio's duration.
Duration is a measure of the price sensitivity of a portfolio of bonds
to changes in interest rates. Like maturity, with which it is often
confused, duration is measured in years. During the fiscal year's first
quarter, our strategy included lengthening duration to approximately
seven years. In hindsight, our move may have been premature. Although
this range was appropriate for a stable interest-rate environment, it
was less well suited to handling an unexpected rise in interest rates.
Nevertheless, the fund weathered that brief storm and its duration,
still around seven years, remains poised for the slowing economic trend
expected over the near term.
Transportation-related municipal bonds continue to offer exceptional
value, especially bonds related to major airport developments. Denver
International Airport bonds, in particular, have proved to be quite
rewarding for your fund. This facility has been under a great deal of
public scrutiny for a number of years, mainly relating to construction
delays and problems with its automated baggage system. During the
airport's turbulent period, we continued to see solid fundamentals and
remained convinced that the problems would eventually be overcome. In
fact, what many perceived as a municipal bond disaster in the making is
now the performance driver for the fund. As a result of this investment,
your fund was able to realize significant profits throughout the fiscal
year.
[GRAPHIC OF WORM CHART OMITTED: YIELD CURVE COMPARISON: TAXABLE
AND TAX-FREE BONDS]
(vertical axis: max. 10%, min. 3%)
(horizontal axis: max. 30 years, min. 1 year)
(plot points)
AAA-rated U.S. Taxable-
municipal Treasury equivalent
YEARS bonds securities municipal bond yield
- ------ --------------- ---------- ----------------
1 3.67 5.85 6.08
2 4.02 6.22 6.66
3 4.27 6.40 7.07
4 4.42 6.48 7.32
5 4.56 6.57 7.55
7 4.76 6.66 7.88
10 5.06 6.80 8.38
15 5.44 6.84 9.01
20 5.61 6.89 9.29
25 5.65 6.94 9.35
30 5.67 6.98 9.39
Footnote reads:
Chart compares yields (vertical axis) of taxable U.S. Treasury
securities and tax-free AAA-rated municipal bonds of varying
maturities (horizontal axis, stated in years) on 7/31/96. The
taxable-equivalent yield for municipal bonds assumes the maximum 39.6%
federal income tax rate. Returns would not be as advantageous for
investors in lower tax brackets. No assurance can be made that the
fund will attain any particular yield. Principal and interest payments
on U.S. Treasury securities are backed by the full faith and credit
of the U.S. government; market prices and investment returns will
vary and are not guaranteed. Source: Bloomberg.
Historically, utilities, electric power concerns in particular, have
provided the fund with excellent value and strong performance. Electric
utilities generally operate as regulated monopolies and thus offer
investors price stability and consistent performance. In April, however,
federal regulators handed down an order opening electric transmission
systems to outside providers in an effort to reduce rates through
greater competition. As a consequence, we have decreased the fund's
electric utility bond exposure and are proceeding with caution as we
wait to see how this industry will change. We believe the trend toward
deregulation may favor high-yield securities more than others and thus
ultimately could potentially yield significant benefits for the fund's
performance. High-yield securities, of course, provide greater risks in
return for this potentially greater reward.
While the 1995 supply of new and existing municipal securities decreased
by 10% from the 1994 level, the supply has risen significantly so far in
1996. The main reason is a lower-interest-rate environment that issuers
find more attractive. Since the additional supply lowered municipal bond
prices slightly, we continue to pursue our careful evaluation of
individual bonds to identify those we believe offer the most attractive
balance of credit quality, yield, and relative price stability.
* OUTLOOK: GREATER STABILITY LIKELY FOR NEAR TERM
Although the fund experienced a fairly volatile year and traveled
through an unusual investment environment, we see growing signs of
market stability in the months ahead. We believe modest economic growth,
low inflation risk, and no sharp interest-rate movements during the
early months of the new fiscal year may generate the calmer waters we
have been expecting.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 7/31/96, there is no guarantee the fund will
continue to hold these securities in the future. The lower credit
ratings of high-yield municipal bonds reflect a greater possibility that
adverse changes in the economy or in the financial condition of their
issuers may affect the issuers' ability to pay principal and interest on
the bonds.
Performance Summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Tax-Free High Yield Fund is designed for investors
seeking high current income free from federal income tax through
investments primarily in High Yield investment-grade tax-exempt
securities.
This section provides, at a glance, information about your fund's
performance. 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.
TOTAL RETURN FOR PERIODS ENDED 7/31/96
Class A Class B Class M
(inception date) (9/20/93) (9/9/85) (12/29/94)
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
1 year 5.76% 0.70% 5.08% 0.11% 5.44% 2.05%
- -----------------------------------------------------------------------
5 years -- -- 41.30 39.30 -- --
Annual average -- -- 7.16 6.85 -- --
- -----------------------------------------------------------------------
10 years -- -- 102.24 102.24 -- --
Annual average -- -- 7.30 7.30 -- --
- -----------------------------------------------------------------------
Life of class 11.24 6.00 -- -- 15.26 11.52
Annual average 3.79 2.06 -- -- 9.34 7.10
- -----------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/96
Lehman Bros. Consumer
Municipal Bond Index Price Index
- -----------------------------------------------------------------------
1 year 6.60% 2.95%
- -----------------------------------------------------------------------
5 years 45.06 15.27
Annual average 7.72 2.88
- -----------------------------------------------------------------------
10 years 120.87 43.38
Annual average 8.25 3.67
- -----------------------------------------------------------------------
Life of class A 13.50 8.20
Annual average 4.57 2.79
- -----------------------------------------------------------------------
Life of class M 18.00 4.88
Annual average 11.03 3.04
- -----------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions.
Investment returns and net asset value will fluctuate so that an
investor's shares, when sold, may be worth more or less than their
original cost. POP assumes 4.75% maximum sales charge for class A
shares and 3.25% for class M shares. CDSC for class B shares assumes the
applicable sales charge, with the maximum being 5%.
[GRAPHIC WORM CHART OMITTED: GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 7/31/86
Starting value
$10,000 Fund's class B shares at POP $20,224
$10,000 Lehman Bros. Municipal Bond Index $22,087
$10,000 Consumer Price Index $14,338
(plot points for Growth of a $10,000 Investment worm chart)
Fund's class B Lehman Brothers
Date/year Shares at CDSC Municipal Bond Index CPI
- --------- -------------- -------------------- ------
7/31/86 10,000 10,000 10,000
7/31/87 10,748 10,907 10,393
7/31/88 11,496 11,673 10,822
7/31/89 12,841 13,095 11,361
7/31/90 13,379 14,003 11,909
7/31/91 14,314 15,226 12,438
7/31/92 16,403 17,317 12,831
7/31/93 17,991 18,848 13,187
7/31/94 18,237 19,206 13,553
7/31/95 19,247 20,720 13,927
7/31/96 20,224 22,087 14,338
Footnote reads:
Past performance is no assurance of future results. A $10,000
investment in the fund's class A shares at inception on 9/20/93
would have been valued at $11,124 at net asset value on 7/31/96
($10,600 at the maximum public offering price). A $10,000 investment
in the fund's class M shares at inception on 12/29/94 would have
been valued at $11,526 at net asset value on 7/31/96 ($11,152 at
public offering price.).
TOTAL RETURN FOR PERIODS ENDED 6/30/96
(most recent calendar quarter)
Class A Class B Class M
(inception date) (9/20/93) (9/9/85) (12/29/94)
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
1 year 5.70% 0.65% 5.10% 0.13% 5.46% 2.06%
- -----------------------------------------------------------------------
5 years -- -- 42.73 40.73 -- --
Annual average -- -- 7.38 7.07 -- --
- -----------------------------------------------------------------------
10 years -- -- 100.79 100.79 -- --
Annual average -- -- 7.22 7.22 -- --
- -----------------------------------------------------------------------
Life of class 10.57 5.36 -- -- 14.68 10.96
Annual average 3.68 1.90 -- -- 9.49 7.13
- -----------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions.
Investment returns and net asset value will fluctuate so that an
investor's shares, when sold, may be worth more or less than their
original cost.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 7/31/96
Class A Class B Class M
- -----------------------------------------------------------------------
Distributions (number) 12 12 12
- -----------------------------------------------------------------------
Income $0.892125 $0.799411 $0.848026
- -----------------------------------------------------------------------
Capital gains1 -- -- --
- -----------------------------------------------------------------------
Total $0.892125 $0.799411 $0.848026
- -----------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- -----------------------------------------------------------------------
7/31/95 $14.14 $14.85 $14.14 $14.13 $14.60
- -----------------------------------------------------------------------
7/31/96 14.05 14.75 14.05 14.04 14.51
- -----------------------------------------------------------------------
Current return:
- -----------------------------------------------------------------------
End of period
- -----------------------------------------------------------------------
Current dividend rate2 6.28% 5.98% 5.64% 5.99% 5.79%
- -----------------------------------------------------------------------
Taxable equivalent3 10.40 9.90 9.34 9.92 9.59
- -----------------------------------------------------------------------
Current 30-day SEC yield4 6.43 6.12 5.78 6.13 5.93
- -----------------------------------------------------------------------
Taxable equivalent3 10.65 10.13 9.57 10.15 9.82
- -----------------------------------------------------------------------
1 Capital gains, if any, are taxable for federal and, in most cases,
state tax purposes. For some investors, investment income may also be
subject to the federal alternative minimum tax.
2 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3 Assumes maximum 39.6% federal income tax rate. Results for investors
subject to lower tax rates would not be as advantageous.
4 Based only on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
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.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
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 maximum 4.75% sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B shares and assumes redemption at the end of
the period. Your fund's 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.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index assumes reinvestment of all
distributions and interest payments and does not take into account
brokerage fees or taxes. Securities in the fund do not match those in
the indexes and performance of the fund will differ. It is not possible
to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund
OTC Emerging Growth Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
Intermediate U.S. Government Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds*
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
LIFESTAGESM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments to help maximize your return and reduce your risk.
The three portfolios:
Putnam Asset Allocation: Balanced Portfolio
Putnam Asset Allocation: Conservative Portfolio
Putnam Asset Allocation: Growth Portfolio
MOST CONSERVATIVE
INVESTMENTS+
Putnam money market funds:
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts++
* Not available in all states.
+ Relative to above.
++ Not offered by Putnam Investments. Certificates of deposit offer a
fixed rate of return and may be insured up to certain limits by
federal/state agencies. Savings accounts may also be insured up to
certain limits. Please call your financial advisor or Putnam at
1-800-225-1581 to obtain a prospectus for any Putnam fund. It
contains more complete information, including charges and expenses.
Please read it carefully before you invest or send money.
Report of independent accountants
To the Trustees and Shareholders of
Putnam Tax-Free High Yield Fund
(a series of Putnam Tax-Free Income Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, (except for bond ratings),
and the related statements of operations and of changes in net assets
and the financial highlights present fairly, in all material respects,
the financial position of Putnam Tax-Free High Yield Fund (the "fund")
(a series of Putnam Tax-Free Income Trust) at July 31, 1996, and the
results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. 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
generally accepted auditing standards 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 July 31,
1996 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Boston, Massachusetts
September 16, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
July 31, 1996
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FRB -- Floating Rate Bonds
FHA Insd. -- Federal Housing Administration Insured
FNMA Coll. -- Federal National Mortgage Association Collateralized
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
IF COP -- Inverse Floating Rate Certificate of Participation
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
<S> <C> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (98.3%) *
PRINCIPAL AMOUNT RATINGS** VALUE
Alabama (0.4%)
- --------------------------------------------------------------------------------------------------------------------------------
$5,000,000 Anniston, Indl. Dev. Rev. Bonds (Hoover Group Inc. Project), 8 1/2s, 9/1/10 B/P $ 5,037,500
2,000,000 Jackson Cnty., Hlth. Care Auth. Hosp. Tax Antic. Rev. Bonds, 7 7/8s, 5/1/19 Ba/P 2,102,500
--------------
7,140,000
Alaska (0.2%)
- --------------------------------------------------------------------------------------------------------------------------------
5,050,000 Valdez, Marine Term Rev. Bonds (Amerada Hess Pipeline Corp.), 6.1s, 2/1/24 Ba/P 4,683,875
Arizona (1.8%)
- --------------------------------------------------------------------------------------------------------------------------------
Phoenix, Indl. Dev. Auth. Arpt. Fac. Rev. Bonds (American West Airlines)
7,197,716 Ser. A-95-1, 8.3s, 1/1/06 B/P 7,283,658
2,631,578 Ser. B-95-2, 8.2s, 1/1/99 B/P 2,663,026
3,960,000 Phoenix, Indl. Dev. Auth. Rev. Bonds (Christian Care Retirement Apts.), Ser. A,
10 1/4s, 1/1/18 Aa/P 4,266,900
3,625,000 Pinal Cnty., Indl. Dev. Auth. Rev. Bonds (Casa Grande Regl. Med. Ctr.), Ser. B,
8 1/8s, 12/1/22 Ba/P 3,928,594
4,500,000 Plainfield, Indl. Econ. Dev. Rev. Bonds, 8 1/2s, 9/1/04 BB/P 4,764,375
Scottsdale, Indl. Dev. Auth. 1st Mtge. Rev. Bonds
2,300,000 Ser. A, 8s, 6/1/11 BB/P 2,409,250
3,150,000 Ser. B, 7.05s, 6/1/16 BB/P 3,362,625
3,245,000 Ser. B, 6.7s, 6/1/17 BB/P 3,476,206
12,880,000 Tuscon & Pima Cnty., Indl. Dev. Auth Rev. Bonds, Ser. 83A, zero %, 12/1/14 Aaa 4,234,300
--------------
36,388,934
California (14.8%)
- --------------------------------------------------------------------------------------------------------------------------------
6,500,000 Alameda Cnty., COP (Santa Rita Jail Project), MBIA, 5s, 12/1/15 Aaa 5,906,875
14,440,000 CA Hlth. Fac. Auth. Rev. Bonds (Valley Presbyterian Hosp. Project), Ser. A,
9s, 5/1/12 Ba 14,474,945
16,065,000 CA State Pub. Wks. Board Lease Rev. Bonds (Dept. of Corrections-State Prisons),
Ser. A, AMBAC, 5s, 12/1/19 Aaa 14,458,500
6,545,000 CA State Res. Wtr. Dept. Rev. Bonds (Central Valley Project), Ser. P,
5 1/2s, 12/1/21 AA 6,299,563
7,640,000 Contra Costa, Wtr. Dist. Rev. Bonds, Ser. G, MBIA, 5s, 10/1/24 Aaa 6,809,150
6,000,000 Corona, COP (Vista Hosp. Syst.), Ser. B, 9 1/2s, 7/1/20 B/P 6,277,500
Foothill/Eastern, Trans. Corridor Agcy. Rev. Bonds (CA Toll Rd.),
13,000,000 Ser. A, 6 1/2s, 1/1/32 Baa/P 13,081,250
14,150,000 Ser. A, 5s, 1/1/35 Baa 11,443,813
Los Angeles Cnty., Metro. Trans. Auth. Sales Tax Rev. Bonds
20,350,000 Ser. 2, AMBAC, 5s, 7/1/25 AAA 17,984,313
17,000,000 FGIC, 5s, 7/1/21 Aaa 15,002,500
5,000,000 Los Angeles, Wastewtr. Syst. IFB, FGIC, 6.642s, 11/1/06 (acquired 11/8/93,
cost $5,417,200)(double dagger) Aaa 5,050,000
Los Angeles, Regl. Arpt. Impt. Corp. Lease Rev. Bonds
5,700,000 (Air Canada Inc. Los Angeles Intl.), 8 3/4s, 10/1/14 Ba 6,170,250
5,070,000 (United Airlines, Inc. Los Angeles Intl.), 6 7/8s, 11/15/12 BBB 5,298,150
20,000,000 Metro. Wtr. Dist. Rev. Bonds (Southern CA Wtrwks.), Ser. A, MBIA, 5 1/2s, 7/1/25 Aaa 19,200,000
10,000,000 Orange Cnty., Pub. Fac. Corp. COP (Solid Waste Management), 7 7/8s, 12/1/13 Baa 10,562,500
Redondo Beach, Redev. Agcy. Multi-Fam. Hsg. Rev. Bonds (Heritage Point Project)
3,130,000 Ser. B, 8 1/2s, 9/1/23 Ba/P 3,204,338
5,100,000 Ser. A, 6 1/2s, 9/1/23 BBB/P 5,042,625
8,725,000 Sacramento Cnty., Arpt. Syst. Rev. Bonds, Ser. B, MBIA , 5 3/4s, 7/1/26 Aaa 8,615,938
San Bernardino Cnty., COP (Med. Ctr. Fin. Project)
5,000,000 Ser. A, MBIA, 6 1/2s, 8/1/17 AAA 5,462,500
8,000,000 MBIA, 5s, 8/1/28 Aaa 6,930,000
21,000,000 San Bernardino Cnty., IF COP (PA-100-Med. Ctr. Fin. Project), MBIA, 8.869s,
8/1/28 (acquired 6/27/95, cost $22,664,040)(double dagger) Aaa 26,040,000
10,000,000 San Diego, Regl. Bldg. Auth. Lease Rev. Bonds, MBIA, 6.9s, 5/1/23 AAA 10,062,500
5,000,000 Southern CA Pub. Pwr. Auth. Rev. Bonds (San Juan Unit Project), Ser. A,
MBIA, 5 1/4s, 1/1/14 Aaa 4,706,250
5,650,000 Southern CA Pub. Pwr. Auth. IFB (Transmission Project), 7.569s, 7/1/12 AA 5,748,875
18,820,000 Vallejo, COP (Marine World Foundation), 8.1s, 2/1/21 BBB/P 20,278,550
10,500,000 Valley Hlth. Syst. COP, 6 7/8s, 5/15/23 BBB/P 10,276,875
Valley Hlth. Syst. Hosp. Rev. Bonds
5,000,000 6 1/2s, 5/15/25 Baa 4,793,750
4,000,000 Ser. A, 6 1/2s, 5/15/15 Baa 3,900,000
U. of CA., Hosp. Rev. Bonds (U. of CA Davis, Med. Ctr.)
10,000,000 AMBAC, 5 3/4s, 7/1/20 AAA 9,887,500
10,000,000 AMBAC, 5 3/4s, 7/1/24 AAA 9,812,500
--------------
292,781,510
Colorado (5.5%)
- --------------------------------------------------------------------------------------------------------------------------------
32,000,000 Arapahoe Cnty., Cap. Impt. Rev. Bonds, Ser. C, zero %, 8/31/15 Baa 8,320,000
Arapahoe Cnty., Cap. Impt. Trust Fund Hwy. Rev. Bonds (Ser. E-470 Project)
13,000,000 Ser. B, 7s, 8/31/26 Baa 13,698,750
5,025,000 Ser. B, 6.9s, 8/31/15 Baa 5,288,813
45,755,000 CO Hlth. Fac. Auth. Retirement Fac. Rev. Bonds (Liberty Heights),
Ser. B, zero %, 7/15/24 Aaa 6,405,700
Denver, City & Cnty. Arpt. Rev. Bonds
24,400,000 Ser. A, 8 3/4s, 11/15/23 Baa 28,670,000
10,000,000 Ser. A, MBIA, 8 3/4s, 11/15/23 Aaa 11,962,500
12,750,000 Ser. A, MBIA, 8 1/2s, 11/15/23 Aaa 14,774,063
3,915,000 Ser. A, 7 1/4s, 11/15/25 BBB 4,159,688
1,535,000 Refunded, Ser. A, 7 1/4s, 11/15/25 Aaa 1,761,413
8,000,000 Ser. D, MBIA, 7 3/4s, 11/15/13 AAA 9,720,000
12,800,000 Jefferson Cnty., Single Fam. Mtge. Rev. Bonds, Ser. A, MBIA, zero %, 3/1/16 Aaa 3,840,000
--------------
108,600,927
Connecticut (1.5%)
- --------------------------------------------------------------------------------------------------------------------------------
7,195,000 CT State Dev. Auth. 1st Mtge. Rev. Bonds (East Hill Woods Project),
8 3/4s, 7/1/19+ B/P 6,475,500
CT State Dev. Auth. Hlth. Care Rev. Bonds (Alzheimers Resource Ctr.)
6,500,000 Ser. A, 10s, 8/15/21 Aaa/P 8,100,625
2,000,000 Ser. A, 7 1/4s, 8/15/21 Ba/P 1,987,500
4,625,000 Ser. A, 7 1/8s, 8/15/14 Ba/P 4,567,188
2,290,000 Ser. A, 7s, 8/15/09 Ba/P 2,281,413
5,500,000 CT State Hlth. & Edl. Fac. Auth. IFB (Yale U.), 7.952s, 6/10/30 AAA 5,506,875
--------------
28,919,101
District of Columbia (2.9%)
- --------------------------------------------------------------------------------------------------------------------------------
10,500,000 DC, VRDN, 7.3s, 1/1/13 VMIGI 10,500,000
38,800,000 DC, TRAN, Ser. A, 5 1/2s, 9/30/96 B 38,864,408
DC, Natl. Pub. Radio Rev. Bonds
4,400,000 7.7s, 1/1/23 BB/P 4,526,500
2,500,000 7 5/8s, 1/1/18 BB/P 2,568,750
--------------
56,459,658
Florida (3.2%)
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9,260,000 Brevard Cnty., Hlth. Auth. Rev. Bonds (Courtenay Springs Village),
7 3/4s, 11/15/24 Ba/P 9,572,525
7,000,000 Brevard Cnty., School Board, COP, Ser. B, AMBAC, 5 1/2s, 7/1/21 Aaa 6,728,750
24,000,000 Hernando Cnty., Indl. Dev. Rev. Bonds (FL Crushed Stone Co.), 8 1/2s, 12/1/14 B/P 26,040,000
5,970,000 Hillsborough Cnty., Aviation Auth. Special Purpose Fac. Rev. Bonds (U.S.
Air Inc. Project), 8.6s, 1/15/22 B 6,425,213
1,100,000 Jacksonville, Hlth. Fac. Auth. Rev. Bonds (Mental Hlth. Ctr.), 9 1/8s, 10/15/19 B/P 1,134,375
2,250,000 Orange Cnty., Hlth. Fac. Auth. IFB, Ser. 91-C, MBIA, 8.91s, 10/29/21 Aaa 2,396,250
5,000,000 Palm Beach Cnty., Student Hsg. Rev. Bonds (Palm Beach Cmnty. College),
Ser. A, 8 1/2s, 3/1/23 B/P 4,918,750
Sanford, Arpt. Auth. Indl. Dev. Rev. Bonds (FL Terminals Inc. Project)
3,125,000 Ser. A, 7 3/4s, 5/1/21 Ba/P 2,921,875
2,880,000 Ser. A, 7 1/2s, 5/1/15 Ba/P 2,692,800
--------------
62,830,538
Georgia (5.8%)
- --------------------------------------------------------------------------------------------------------------------------------
5,100,000 Cobb Cnty., Dev. Auth. Indl. Dev. Rev. Bonds (Boise Cascade Corp. Project),
7s, 9/1/14 Baa 5,374,125
De Kalb Cnty., Muni. Hsg. Auth. Rev. Bonds (Briarcliff Park Apts. Project)
8,000,000 Ser. B, 10s, 4/1/17 B/P 8,300,000
5,900,000 Ser. A, 7 1/2s, 4/1/17 Baa/P 6,025,375
9,500,000 Forsyth Cnty., Dev. Auth. Indl. (Hoover Group Inc. Project), 8 1/2s, 12/1/05 B/P 9,559,375
6,415,000 Fulton Cnty., Res. Elderly Care Fac. Auth. Rev. Bonds (Lenbrook Sq. Foundation
Inc. Project), 9 3/4s, 1/1/17 B/P 6,519,244
GA Muni. Elec. Pwr. Auth. Rev. Bonds
5,000,000 Ser. EE, AMBAC, 7 1/4s, 1/1/24 AAA 5,975,000
9,200,000 Ser. B, FSA , 6 3/8s, 1/1/16 AAA 9,901,500
21,500,000 Ser. Z, MBIA, 5 1/2s, 1/1/20 AAA 20,881,875
7,070,000 GA State G.O. Bonds, Ser. C, 6 1/2s, 4/1/10 AAA 7,838,863
41,395,000 Richmond Cnty., Dev. Auth. Rev. Bonds, Ser. C, zero %, 12/1/21 AAA 7,088,894
Rockdale Cnty., Dev. Auth. Solid Waste Disp. Rev. Bonds (Visay Paper
Inc. Project)
3,875,000 7 1/2s, 1/1/26 Ba/P 3,855,625
15,000,000 7.4s, 1/1/16 Ba/P 15,187,500
3,160,000 Savannah Econ. Dev. Auth. Poll. Control Rev. Bonds (Stone Container Corp.
Project), 8 1/8s, 7/1/15 B/P 3,448,350
4,500,000 Savannah Econ. Dev. Auth. Rev. Bonds (Stone Container Corp. Project),
7.4s, 4/1/26 B/P 4,522,500
--------------
114,478,226
Illinois (1.4%)
- --------------------------------------------------------------------------------------------------------------------------------
5,000,000 Chicago, Gas Supply Rev. Bonds (Peoples Gas), Ser. A, 6 7/8s, 3/1/15 Aa 5,406,250
2,170,000 Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds (United Air Lines, Inc.),
Ser. 84A, 8.85s, 5/1/18 Baa 2,430,400
5,000,000 IL Dev. Fin. Auth. Retirement Hsg. Rev. Bonds (Regency Park-Lincolnwood),
Ser. A, 10 1/4s, 4/15/19 + CCC/P 3,743,750
IL Dev. Fin. Auth. Rev. Bonds (Cmnty. Rehab. Providers Fac.)
2,685,000 8 1/4s, 8/1/12 Ba/P 2,768,906
8,000,000 Ser. A, 7 7/8s, 7/1/20 Ba/P 7,670,000
3,065,000 Ser. A, 7 1/2s, 3/1/14 Ba/P 2,973,050
1,010,000 Ser. A, 7 1/4s, 3/1/04 Ba/P 1,007,475
1,200,000 IL Dev. Fin. Auth. Rev. Bonds (Mercy Hsg. Corp. Project), 7s, 8/1/24 Baa 1,237,500
--------------
27,237,331
Indiana (1.8%)
- --------------------------------------------------------------------------------------------------------------------------------
East Chicago, Poll. Control Rev. Bonds
12,000,000 (Inland Steel Co. Project Number 11), 7 1/8s, 6/1/07 Ba 12,420,000
11,000,000 (Inland Steel Co. Project Number 10), 6.8s, 6/1/13 Ba 10,986,250
7,194,177 Hammond, Indl. Port Auth. COP, 9.65s, 6/1/14 Ba/P 7,508,923
2,325,000 Mishawaka, Indl. Rev. Bonds (Stone Container Corp. Project), 9 1/4s, 2/1/97 B/P 2,359,689
1,730,772 Westfield, Econ. Dev. Rev. Bonds (Westfield Village Hlth. Care Ctr.), FHA
Insd., 12s, 5/15/14 A/P 1,988,225
--------------
35,263,087
Iowa (0.7%)
- --------------------------------------------------------------------------------------------------------------------------------
IA Fin. Auth. Hlth. Care Rev. Bonds (Care Initiatives Project)
11,500,000 9 1/4s, 7/1/25 Ba/P 12,851,250
1,500,000 9.15s, 7/1/09 Ba/P 1,689,375
215,000 Marion, 1st Mtge. Rev. Bonds (AHF/Kentucky Iowa, Inc. Project), 10 1/4s, 1/1/20 B/P 223,869
--------------
14,764,494
Kentucky (1.1%)
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5,000,000 Jefferson Cnty., Hosp. IFB (Alliant Hlth. Syst. Project), MBIA, 9.09s, 10/1/14 Aaa 5,400,000
10,000,000 Kenton Cnty., Arpt. Rev. Bonds (Delta Airlines Project), Ser. A, 7 1/2s, 2/1/12 Baa 10,662,500
1,275,000 Lexington-Fayette Urban Cnty., Govt. 1st Mtge. Rev. Bonds (AHF/Kentucky Iowa,
Inc. Project), 10 1/4s, 1/1/20 B/P 1,327,594
3,430,000 Muhlenberg Cnty., Hosp. Rev. Bonds (Muhlenberg Cmnty. Hosp. Project),
9 1/2s, 8/1/10 Baa/P 3,665,813
--------------
21,055,907
Louisiana (5.1%)
- --------------------------------------------------------------------------------------------------------------------------------
2,900,000 Beauregard, Parish Rev. Bonds (Boise Cascade Corp. Project), 7 3/4s, 6/1/21 Baa 3,110,250
2,900,000 De Soto Parish, Poll. Ctrl. VRDN (Central LA Elec. Co. Project), Ser. A,
3.45s, 7/1/18 VMIGI 2,900,000
3,800,000 Hodge, Combined Util. Rev. Bonds (Stone Container Corp.), 9s, 3/1/10 Ba/P 4,108,750
LA Pub. Fac. Auth. 1st Mtge. Rev. Bonds
2,391,110 (Emily Morten Foundation), 10 1/4s, 5/1/19 B/P 2,540,555
2,000,000 (St. James Place Project), 10s, 11/1/21 B/P 2,182,500
20,500,000 Lake Charles, Harbor & Term. Dist. Port Facs. Rev. Bonds (Trunkline Co.
Project), 7 3/4s, 8/15/22 BBB 22,857,500
Port of New Orleans, Indl. Dev. Rev. Bonds (Continental Grain Co. Project)
3,700,000 Ser. A, 14 1/2s, 2/1/02 Ba 3,828,797
4,500,000 14 1/2s, 1/1/02 Ba 4,629,150
7,000,000 7 1/2s, 7/1/13 Ba 7,227,500
6,500,000 St. Charles Parish, Poll. Control Rev. Bonds (LA Pwr. & Lt. Co.), 8s, 12/1/14 Baa 7,076,875
13,000,000 St. James Parish, Solid Waste Disp. Rev. Bonds (Kaiser Aluminum Project),
7 3/4s, 8/1/22 B/P 13,455,000
West Feliciana Parish, Poll. Control Rev. Bonds (Gulf States Util. Co.)
6,000,000 8s, 12/1/24 Ba 6,382,500
19,000,000 7.7s, 12/1/14 Ba/P 20,425,000
--------------
100,724,377
Maryland (0.1%)
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2,940,000 Denton, 1st Mtge. Rev. Bonds (Wesleyan Hlth. Care Ctr. Project), 10 1/4s, 4/1/20 B/P 2,940,000
Massachusetts (7.6%)
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4,150,000 Agawam, Resource Recvy. Rev. Bonds (Springfield Resources Recvy. Project),
8 1/2s, 12/1/08 Baa 4,310,356
18,450,000 MA Bay Trans. Auth. IFB, Ser. B, MBIA, 7.03s, 3/1/22 (acquired various dates
from 12/14/93 to 2/2/94, cost $18,580,614)(double dagger) Aaa 16,236,000
3,000,000 MA Indl. Fin. Agcy. Rev. Bonds (Emerson College), 8 1/4s, 1/1/17 Ba/P 3,251,250
5,000,000 MA Muni. Elec. Co. Rev. Bonds, Ser. B, 6 3/4s, 7/1/17 AAA 5,593,750
12,605,000 MA Muni. Whsl. Elec. Co. Pwr. Supply Syst. Rev. Bonds, Ser. A, 8 3/4s, 7/1/18 AAA 13,400,376
MA State Hlth. & Edl. Fac. Auth. IFB
5,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 9.879s, 8/15/21 Aaa 5,512,500
5,600,000 (Beth Israel Hosp.), AMBAC, 8.522s, 7/1/25 Aaa 5,663,000
2,000,000 (Boston U.), Ser. L, MBIA, 9.485s, 10/1/31 Aaa 2,172,500
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
3,250,000 (Summerfield Nursing Home), Ser. A, 9 1/2s, 7/1/14 B/P 1,629,063
3,325,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Ba 3,337,469
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds (Southeastern MA Project)
4,000,000 Ser. B, 9 1/4s, 7/1/15 Ba/P 4,525,000
30,225,000 Ser. A, 9s, 7/1/15 Ba/P 34,078,688
MA State Indl. Fin. Agcy. Rev. Bonds
2,000,000 (Atlanticare Med. Ctr.), Ser. A, 10 1/8s, 11/1/14 B/P 1,907,500
6,000,000 (Atlanticare Med. Ctr.), Ser. B, 10 1/8s, 11/1/14 B/P 5,722,500
8,800,000 (Orchard Cove Inc.), 9s, 5/1/22 Ba/P 9,812,000
2,385,000 (Mass Tpk.), 9s, 10/1/20 Aaa/P 2,808,338
2,155,000 (Morton Hosp. & Med. Ctr.), Ser. A, 8 3/4s, 7/1/11 Aaa 2,402,825
7,500,000 (Molten Metal Tech. Project), 8 1/4s, 8/1/14 B/P 7,771,875
MA State Wtr. Resources Auth. Rev. Bonds
7,500,000 Ser. C, MBIA, 5 1/4s, 12/1/15 Aaa 7,134,375
8,500,000 Ser. B, MBIA, 5s, 3/1/22 Aaa 7,565,000
4,000,000 Worcester Mtge. Rev. Bonds (Briarwood Issue), 9 1/4s, 12/1/22 Ba/P 4,340,000
--------------
149,174,365
Michigan (6.0%)
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2,591,000 Ann Arbor, Econ. Dev. Corp. Ltd. Oblig. Rev. Bonds (Glacier Hills Inc.
Project), 8 3/8s, 1/15/19 B/P 2,633,104
18,587,000 Detroit, Hosp. Fac. Fin. Auth. Rev. Bonds (MI Hlth. Care Corp.), 10s, 12/1/20 + Caa 5,204,360
20,630,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment Rev. Bonds, Ser. A, 9.5s, 5/1/21 Baa/P 25,297,538
7,765,000 Dickinson Cnty., Econ. Dev. Rev. Bonds (Champion Intl. Corp. Project),
5.85s, 10/1/18 Baa 7,493,225
5,790,000 Highland Park, Hosp. Fin. Auth. Fac. Rev. Bonds (MI Hlth. Care Corp. Project),
Ser. A, 9 7/8s, 12/1/19(Chapter 11)+ Caa 1,621,200
10,740,000 MI State Hosp. Fin. Auth. Adj. Rate Rev. Bonds (Detroit-Macomb Hosp. Corp.),
Ser. A, 7.4s, 6/1/13 BB/P 10,740,000
5,000,000 MI State Hosp. Fin. Auth. Rev. Bonds (Detroit-Macomb Hosp. Corp.),
Ser. A, 7s, 6/1/15 Ba 4,825,000
MI State Stragetic Fund Ltd. Oblig. Rev. Bonds
5,800,000 (Mercy Svcs. for Aging Project), 9.4s, 5/15/20 Baa/P 6,539,500
910,000 (MI Hlth. Care Corp. Project), 9.1s, 12/1/14(In default) + CCC 254,800
15,500,000 (Blue Wtr. Fiber Project), 8s, 1/1/12 B/P 11,625,000
15,000,000 (Detroit Edison Co. Coll.- AA), MBIA, 6.4s, 9/1/25 Aaa 15,618,750
19,500,000 Midland Cnty., Econ. Dev. Corp. Poll. Control Rev. Bonds, Ser. B, 9 1/2s, 7/23/09 B/P 21,279,375
5,390,000 Waterford, Econ. Dev. Corp. Rev. Bonds (Canterbury Hlth. Care), 8 3/8s, 7/1/23 Ba/P 5,585,388
--------------
118,717,240
Minnesota (0.9%)
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2,950,000 Chaska, Indl. Dev. Rev. Bonds (Lifecore Biomedical Inc. Project),
10 1/4s, 9/1/20 Ba/P 3,359,313
2,900,000 Golden Valley, Indl. Dev. FRB (Unicare Homes Inc. Project), 4.05s, 9/1/14 VMIGI 2,900,000
5,000,000 Intl. Falls, Env. Fac. Rev. Bonds (Boise Cascade Corp. Project), 7.2s, 10/1/24 BBB 5,368,750
Minneapolis, Cmnty. Dev. Agcy. Multi-Fam. Hsg. Rev. Rental Bonds
(Lindsay Bros. Project)
1,820,000 Ser. A, 9 1/2s, 12/1/07 B/P 1,860,950
1,200,000 Ser. B, 1 1/2s, 12/1/07 B/P 420,000
800,000 New Brighton, Indl. Dev. Auth. VRDN (Unicare Homes Inc. Project), 4.05s, 12/1/14 VMIGI 800,000
3,200,000 Shakopee, Multi-Fam. Adj. Rate Rev. Bonds (Riva Ridge Apts. Project),
8 1/2s, 12/1/08 B/P 3,200,000
--------------
17,909,013
Mississippi (1.6%)
- --------------------------------------------------------------------------------------------------------------------------------
Clairborne Cnty., Poll. Control Rev. Bonds (Middle South Energy, Inc.)
4,500,000 Ser. C, 9 7/8s, 12/1/14 Ba 5,028,750
10,000,000 Ser. A, 9 1/2s, 12/1/13 Ba 11,100,000
9,150,000 Ser. A, 6.2s, 2/1/26 Baa 8,578,125
2,250,000 Lee Cnty., Indl. Rev. Bonds (Great Southern Box Co. Inc. Project),
9.55s, 5/1/97 B/P 2,304,855
4,000,000 MS Hosp. Equip. & Fac. Auth. Rev. Bonds (MS Methodist Hosp & Rehab.),
Ser. 1, 9 3/8s, 5/1/12 AAA 4,465,000
--------------
31,476,730
Missouri (0.4%)
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1,400,000 KC, Indl. Dev. Auth. Hosp. VRDN (Resh Hlth. Svcs.), MBIA, 3.8s, 4/15/15 VMIGI 1,400,000
7,550,000 MO State Hlth. & Ed. Fac. Auth. Rev. Bonds (St. Louis U.), AMBAC,
5.2s, 10/1/26 Aaa 6,861,063
--------------
8,261,063
Montana (0.7%)
- --------------------------------------------------------------------------------------------------------------------------------
3,000,000 Missoula Cnty., Rev. Bonds (Cmnty. Med. Ctr. Inc.), Ser. B, 9s, 6/1/18 Baa 3,165,000
12,000,000 MT State Hlth. Fac. Auth. Hosp. Fac. IFB, AMBAC, 6.61s, 2/25/25 Aaa 9,885,000
--------------
13,050,000
Nebraska (1.3%)
- --------------------------------------------------------------------------------------------------------------------------------
2,000,000 NE Investment Fin. Auth. Hosp. IFB, MBIA, 9.406s, 12/8/16 AAA 2,200,000
12,100,000 NE Investment Fin. Auth. Single Fam. Mtge. IFB, Ser. D, GNMA Coll.,
7.989s, 3/24/26 AAA 11,676,500
12,000,000 Omaha, Elec. Pub. Pwr. Dist. Rev. Bonds, Ser. C, 5 1/2s, 2/1/14 AA 11,880,000
--------------
25,756,500
New Hampshire (1.6%)
- --------------------------------------------------------------------------------------------------------------------------------
3,200,000 NH State Bus. Fin. Auth. Rev. Bonds (Crown Paper Co. Project), 7 3/4s, 1/1/22 Ba 3,276,000
NH Higher Edl. & Hlth. Fac. Auth. Rev. Bonds
2,885,000 (Havenwood-Heritage Heights), 9 3/4s, 12/1/19 Aaa 3,415,119
2,425,000 (Franklin Regl. Hosp.), 8 3/4s, 9/1/19 Baa 2,637,188
9,000,000 (1st Mtge. Rivermead Peterborough), 8 1/2s, 7/1/24 B 9,461,250
5,900,000 (Heritage Heights), 7.35s, 1/1/18 Ba 5,671,375
6,750,000 (Wentworth-Douglass Hosp.), MBIA, 5 3/8s, 1/1/15 Aaa 6,395,625
--------------
30,856,557
New Jersey (3.6%)
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5,000,000 Camden Cnty., Impt. Auth. Rev. Bonds, 8.4s, 4/1/24 (acquired 4/12/94,
cost $5,000,000)(double dagger) B/P 5,031,250
4,730,000 Mercer Cnty., Impt. Auth. Rev. Bonds (Solid Waste), Ser. B, 6.8s, 4/1/05 Ba 4,594,013
10,000,000 NJ Econ. Dev. Auth. Indl. Dev. Rev. Bonds (Newark Arpt. Marriot Hotel),
7s, 10/1/14 B/P 9,912,500
NJ Econ. Dev. Auth. Rev. Bonds
2,700,000 (Stolt Terminals Project), 10 1/2s, 1/15/18 Ba/P 2,936,250
4,700,000 (Holt Hauling Co.), Ser. D, 10 1/4s, 9/15/14 B/P 4,866,521
7,000,000 (Winchester Gardens), Ser. A, 8 5/8s, 11/1/25 B/P 7,008,750
5,000,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds (St. Elizabeth Hosp.), Ser. B,
8 1/4s, 7/1/20 Baa 5,406,250
4,000,000 NJ State Hsg. & Mtge. Fin. Agcy. Rev. IFB, Ser. I, 8.074s, 11/1/07
(acquired various dates from 2/11/93 to 8/24/95, cost $4,143,120)(double dagger) A 4,125,000
5,450,000 NJ State Hwy. Auth. Rev. Bonds (Garden State Pkwy.), 5.2s, 1/1/08 Aa 5,388,688
NJ State Trans. Trust Fund Auth. Rev. Bonds (Trans. Syst.)
10,000,000 Ser. B, MBIA, 6 1/2s, 6/15/10 Aaa 11,175,000
6,250,000 Ser. A, MBIA, 5s, 6/15/15 Aaa 5,781,250
4,000,000 Salem Cnty., Indl. Poll. Control Fin. Auth. IFB, MBIA, 9.015s, 10/1/29
(acquired 10/28/94, cost $3,785680)(double dagger) Aaa 4,420,000
--------------
70,645,472
New Mexico (0.1%)
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2,200,000 Farmington, Poll. Control VRDN (Arizona Public Services Co.), Ser. B,
3.7s, 9/1/24 VMIGI 2,200,000
New York (7.2%)
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Metro. Trans. Auth. Svcs. Contract Rev. Bonds
4,000,000 (Commuter Fac.), Ser. O, 5 3/4s, 7/1/13 BBB 3,905,000
8,250,000 (Trans. Fac.), Ser. O, 5 3/4s, 7/1/13 Baa 8,054,063
1,900,000 NY City, VRDN, Ser. C, FGIC, 3.7s, 10/1/22 VMIGI 1,900,000
5,000,000 NY City, Muni. Wtr. & Swr. Fin. Auth. Syst. Rev. Bonds, Ser. C, 7 3/4s, 6/15/20 Aaa 5,731,250
9,500,000 NY G.O. Bonds, 6 1/4s, 4/1/26 Baa 9,369,375
NY State Dorm. Auth. Rev. Bonds (City U. Syst.)
21,500,000 Ser. A, 5 3/4s, 7/1/13 Baa 20,989,375
7,000,000 Ser. A, AMBAC, 5 3/4s, 7/1/09 Aaa 7,192,500
10,100,000 Ser. F, 5s, 7/1/20 Baa 8,471,375
2,000,000 NY State Dorm. Auth. VRDN (Osborn Mem. Home), Ser. A, 3.7s, 7/1/24 VMIGI 2,000,000
8,000,000 NY State Energy Research & Dev. Auth. Poll. Control IFB, FGIC, 9.754s, 7/1/29
(acquired 12/19/94, cost $8,353,120)(double dagger) Aaa 9,550,000
1,000,000 NY State Energy Research & Dev. Auth. Poll. Control VRDN (NY State Elec.
& Gas Co.), Ser. C, 3.45s, 6/1/29 VMIGI 1,000,000
NY State Local Govt. Assistance Corp. Rev. Bonds
7,000,000 5 1/2s, 4/1/21 A 6,597,500
8,000,000 Ser. C, 5 1/2s, 4/1/17 A 7,800,000
2,225,000 Ser. E, 5 1/4s, 4/1/16 A 2,105,406
5,500,000 NY State Med. Care Fac. Fin. Agcy. Rev. Bonds, Ser. A, AMBAC, 6 1/2s, 8/15/29 Aaa 5,836,875
1,600,000 NY State Med. Care Fac. Fin. Agcy. VRDN (Lenox Hill Hosp.), Ser. A, 3.45s, 11/1/08 VMIGI 1,600,000
9,750,000 NY State Pwr. Auth. Rev. Bonds, Ser. Z, 6 1/2s, 1/1/19 Aa 10,261,875
7,000,000 NY State Urban Dev. Corp. Rev. Bonds (State Fac.), 7 1/2s, 4/1/20 Aaa 7,945,000
9,000,000 NY City, Indl. Dev. Rev. Bonds (Solid Waste Disp-Visy Paper Project), 7.8s, 1/1/16 Ba 9,382,500
Port Auth., NY & NJ G.O. Bonds
6,890,000 Ser. 104, AMBAC, 5.2s, 7/15/13 AAA 6,571,338
6,555,000 AMBAC, 5 1/8s, 7/15/12 AAA 6,243,638
--------------
142,507,070
North Carolina (1.5%)
- --------------------------------------------------------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds
9,250,000 Ser. A, 6 1/2s, 1/1/18 A 9,562,188
14,940,000 Ser. B, 6 1/8s, 1/1/09 A 15,145,425
5,000,000 Ser. C, 5 1/2s, 1/1/07 A 4,856,250
--------------
29,563,863
Ohio (1.8%)
- --------------------------------------------------------------------------------------------------------------------------------
7,200,000 Dayton, Special Fac. Rev. Bonds (Emery Air Freight Corp.), Ser. A, 12 1/2s, 10/1/09 Ba 8,262,000
14,315,000 Lucas Plaza Hsg. Dev. Corp. Mtge. Rev. Bonds, FHA Insd. , zero %, 6/1/24 Aaa 2,200,931
6,200,000 OH State Pub. Fac. Higher Ed. Rev. Bonds, Ser. II-A, MBIA, 4 1/2s, 11/1/10 Aaa 5,471,500
20,000,000 OH State Tpk. Comm. Rev. Bonds, MBIA, 5 1/2s, 2/15/26 Aaa 19,175,000
--------------
35,109,431
Oklahoma (0.3%)
- --------------------------------------------------------------------------------------------------------------------------------
6,475,000 Tulsa, Indl. Auth. Rev. Bonds (U. of Tulsa), Ser. A, MBIA 6s, 10/1/11 Aaa 6,806,844
Pennsylvania (4.4%)
- --------------------------------------------------------------------------------------------------------------------------------
Allegheny Cnty., Indl. Dev. Auth. Arpt. Special Fac. Rev. Bonds
1,290,000 (U.S. Air, Inc. Project), Ser. A, 8 7/8s, 3/1/21 B 1,398,038
1,545,000 (Southwestern Arpt. Cargo Fac.), 8 3/4s, 2/15/09 Ba/P 1,624,181
4,935,000 (U.S. Air, Inc. Project), Ser. B, 8 1/2s, 3/1/21 B 5,231,100
Montgomery Cnty., Higher Edl. & Hlth. Auth. Hosp. Rev. Bonds
(United Hosp. Inc. Project)
3,745,000 8 1/2s, 11/1/17 Aaa 4,016,513
5,300,000 Ser. A, 8 3/8s, 11/1/11 AAA 5,995,625
29,200,000 PA Economic Dev. Fin. Auth. Recycling Rev. Bonds (Ponderosa Fibres Project),
Ser. A, 9 1/4s, 1/1/22 B/P 28,178,000
6,000,000 PA Economic Dev. Fin. Auth. Resource Recvy. Rev. Bonds (Colver Project),
Ser. E, 8.05s, 12/1/15 BBB 6,262,500
4,800,000 PA Hsg. Fin. Agcy. IFB, 8.414s, 4/1/25 Aa 4,656,000
2,500,000 PA State Higher Ed. Assistance Agcy. Student Loan IFB, AMBAC, 9.662s, 9/3/26 Aaa 2,643,750
5,370,000 PA Convention Ctr. Auth. Rev. Bonds, Ser. A, FSA, 6 3/4s, 9/1/19 Aaa 5,833,163
Philadelphia, Hosp. & Higher Edl. Fac. Auth. Rev. Bonds
7,000,000 Ser. A&B, 7 1/4s, 7/1/18 BBB 7,131,250
2,000,000 Ser. A, 6 1/4s, 7/1/13 BBB 1,905,000
5,300,000 Philadelphia, Muni. Auth. Rev. Bonds (Justice Lease), Ser. C, 8 5/8s, 11/15/16 AAA 6,333,500
4,760,000 Philadelphia, Wtr. & Wastewtr. Rev. Bond, FGIC, 10s, 6/15/05 AAA 6,318,900
--------------
87,527,520
Puerto Rico (1.7%)
- --------------------------------------------------------------------------------------------------------------------------------
8,000,000 PR, IFB, MBIA, 5.642s, 7/1/08 Aaa 8,220,000
PR, Hwy. & Trans. Auth. Rev. Bonds
3,305,000 Ser. Z, MBIA, 6 1/4s, 7/1/12 Aaa 3,585,925
15,000,000 Ser. Y, 5 1/2s, 7/1/26 A 14,025,000
7,000,000 PR, Pub. Bldgs. Auth. Hlth. Facs. , Ser. M, AMBAC, 5 3/4s, 7/1/10 Aaa 7,253,750
--------------
33,084,675
South Carolina (1.4%)
- --------------------------------------------------------------------------------------------------------------------------------
17,275,000 Florence Cnty., Indl. Dev. Auth. Rev. Bonds (Stone Container Corp. Project),
7 3/8s, 2/1/07 BB/P 17,685,261
4,000,000 Piedmont, Muni. Elec. Pwr. Agcy. Rev Bonds, MBIA, 5 1/2s, 1/1/11 AAA 4,015,000
5,000,000 Spartanburg Cnty., Hosp. Fac. IFB, FSA, 8.847s, 4/13/22 AAA 5,343,750
--------------
27,044,011
Tennessee (1.6%)
- --------------------------------------------------------------------------------------------------------------------------------
15,000,000 McMinn Cnty., Indl. Dev. Board Poll. Control Rev. Bonds (Calhoun Newsprint Co.
Project), Ser. A, 7 5/8s, 3/1/16 A 16,031,250
28,920,000 Metro. Nashville & Davidson Cnty., Hlth. & Edl. Fac. Board Rev. Bonds
(Volunteer Hlth. Care), zero %, 6/1/21 Aaa 5,061,000
TN State G.O. Bonds
5,660,000 Ser. A, 4.8s, 5/1/10 Aaa 5,292,100
5,660,000 Ser. A, 4 3/4s, 5/1/09 Aaa 5,285,025
--------------
31,669,375
Texas (3.8%)
- --------------------------------------------------------------------------------------------------------------------------------
Bell Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
1,495,000 (Adv. Living Tech. Inc. Project), Ser. A, 10 1/2s, 12/1/27 Caa/P 1,270,750
5,180,000 (Living Tech. Inc. Project), Ser. A, 10 1/2s, 6/15/18 Caa/P 4,403,000
4,785,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds (Heartway Corp.), Ser. A-1,
10 1/4s, 3/1/19+ Caa/P 3,349,500
5,760,000 Cherokee Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds (Nancy Travis Memorial Hosp.
Project), 10s, 5/15/13 B/P 6,249,600
10,000,000 Dallas Cnty., G.O. Bonds (Flood Control Dist. #1), zero %, 4/1/16 Ba/P 8,437,500
Harris Cnty., Single Fam. Hsg. Fin. Corp. Rev. Bonds
835,000 Ser. 1983A, 10 3/8s, 7/15/14 Baa 835,159
710,000 9 7/8s, 3/15/14 Ba 710,547
Houston, Hsg. Fin. Corp. Single Fam. Mtge. Rev. Bonds
3,322,000 Ser. A, Verex Mtg. Ins., 10 7/8s, 2/15/16 Baa 3,342,165
2,015,000 10s, 9/15/14 B 2,014,154
35,160,000 Montgomery Cnty., Rev. Bonds (Heritage Manor), zero %, 7/15/23 Aaa 5,361,900
2,000,000 Port Corpus Christi, Indl. Dev. Corp. Rev. Bonds (Valero Refining & Marketing
Co.), Ser. A, 10 1/4s, 6/1/17 Baa 2,138,500
Southeast TX Multi-Fam. Hsg. Fin. Corp. Rev. Bonds
5,500,000 (Bayou Pk. Village Apt. Project), Ser. B, 10.175s, 8/1/16 B/P 4,730,000
4,500,000 (Promenade Place Apt. Project), Ser. B, 10.175s, 8/1/16 Ba/P 4,944,375
6,000,000 (Pavilion Place Apt. Project), Ser. A, 7.6s, 7/1/16 Baa/P 6,007,500
9,700,000 (Pavilion Place Apt. Project), Ser. B, 1.685s, 7/1/16 + CCC/P 472,875
5,000,000 Tarrant Cnty., Hlth. Facs. Dev. Corp. Hosp. Rev. Bonds (Cmnty. Hlth. Care
Foundation. Inc. Project), 10 1/8s, 4/1/21 (In default) CCC/P 1,500,000
11,500,000 TX A&M U., Rev. Bonds, 5s, 5/15/12 Aa 10,709,375
8,000,000 TX State Hsg. & Cmnty. Affairs Home Mtge. IFB, Ser. C, GNMA Coll., FNMA Coll.,
9.917s, 7/2/24 Aaa 8,520,000
--------------
74,996,900
Utah (0.3%)
- --------------------------------------------------------------------------------------------------------------------------------
5,000,000 Salt Lake City, Hosp. Rev. Bonds (IHC Hosps. Inc.), MBIA, 6 1/4s, 2/15/23 Aaa 5,187,500
Virginia (0.7%)
- --------------------------------------------------------------------------------------------------------------------------------
4,500,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB, FGIC, 9.466s, 8/15/23 Aaa 4,854,375
2,000,000 Henrico Cnty., Indl. Dev. Auth. IFB (Bon Secours Hlth. Syst. Project),
FSA, 7.924s, 8/23/27 Aaa 2,010,000
5,750,000 Hopewell, Indl. Dev. Auth. Rev. Bonds (Stone Container Corp. Project),
8 1/4s, 6/1/16 Ba/P 6,202,813
--------------
13,067,188
Washington (2.5%)
- --------------------------------------------------------------------------------------------------------------------------------
29,000,000 Port Walla Walla, Pub. Corp. Solid Waste Recycling Rev. Bonds (Ponderosa
Fibres Project), 9 1/8s, 1/1/26 B/P 27,586,250
1,800,000 WA State Hlth. Care Fac. Auth. VRDN (Sisters Providence), Ser. D, 3.7s, 10/1/05 VMIGI 1,800,000
8,200,000 WA State Hsg. Fin. Comm. Single Fam. Mtge. IFB, GNMA, 10.094s, 12/1/17
(acquired 4/12/95, cost $9,225,000)(double dagger) Aaa 8,589,500
WA State Pub. Pwr. Supply Syst. Rev. Bonds (Nuclear Project No. 3)
4,000,000 Ser. C, MBIA, 7 1/2s, 7/1/08 Aaa 4,700,000
5,000,000 Ser. B, MBIA, 7 1/8s, 7/1/16 Aaa 5,762,500
--------------
48,438,250
West Virginia (1.0%)
- --------------------------------------------------------------------------------------------------------------------------------
Marion Cnty., Cmnty. Solid Waste Disp. Fac. Rev. Bonds (American Pwr.
Paper Recycling Project)
12,000,000 9s, 12/1/11 (acquired various dates from 12/17/93 to 3/8/95, cost
$11,850,760)(double dagger) B/P 7,200,000
10,000,000 8 1/4s, 12/1/11 (acquired 12/17/93, cost $10,000,000)(double dagger) B/P 6,000,000
2,935,000 Preston Cnty., Bldg. Cmnty. Hosp. Rev. Bonds (Preston Mem. Hosp. Corp.),
Ser. B, 10s, 4/1/14 BB 3,111,100
4,045,000 WV State COP (Morris Sq. Complex), 9 1/4s, 8/15/08 BB/P 4,045,000
--------------
20,356,100
- --------------------------------------------------------------------------------------------------------------------------------
Total Municipal Bonds and Notes (cost $1,927,171,916) *** $1,937,673,632
- --------------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $1,972,037,986.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
July 31, 1996 for the securities listed. Ratings are generally ascribed to securities at the time of
issuance. While the agencies may from time to time revise such ratings, they undertake no obligation to do so, and the
ratings do not necessarily represent what the agencies would ascribe to these securities at July 31, 1996.
Securities rated by Putnam are indicated by "/P"and are not publicly rated. Ratings are not covered by the
Report of independent accountants.
The table below shows the percentage of the fund's investment on July 31, 1996 in securities assigned to various rating
categories by Moody's and Standard & Poor's and in unrated securities determined by Putnam Management to be of comparable
quality.
Unrated securities
Rated securities of comparable quality,
as a percentage of as a percentage of
Rating fund's net assets fund's net assets
- -------------------------------------------------------------------------
AAA/Aaa 32.5% 0.5%
AA/Aa 3.1 0.2
A/A 4.1 0.1
BBB/Baa 13.6 4.4
BB/Ba 6.4 13.2
B/B 3.2 14.3
Caa/CCC 0.4 0.7
VMIGI 1.6 --
- -------------------------------------------------------------------------
64.9% 33.4%
Ratings are not covered by the Report of independent accountants.
*** The aggregate identified cost on a tax basis is
$1,927,171,916, resulting in gross unrealized appreciation and
depreciation of $77,310,631 and $66,808,915, respectively,
or net unrealized appreciation of $10,501,715.
+ Non-income-producing security.
(double dagger) Restricted, excluding 144A securities, as to public resale.
The total market value of restricted securities held at
July 31, 1996, was $92,241,750 or 4.7% of
net assets.
The rates shown on FRB and adjustable rate
bonds are the current interest rates
shown at July 31, 1996 which are subject to
change based on the terms of the security.
The rates shown on IFB and IF COP, which are securities
paying interest rates that vary inversely to changes in the
market interest rates, and VRDN's are the current interest
rates at July 31, 1996.
The fund had the following industry group
concentrations greater than 10% at
July 31, 1996 (as a percentage of net assets):
Health Care 21.1%
Transportation 18.2%
Utilities 12.7%
The fund had the following insurance
concentration greater than 10% at
July 31, 1996 (as a percentage of net assets):
MBIA 15.5%
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
July 31, 1996
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $1,927,171,916) (Note 1) $1,937,673,632
- ---------------------------------------------------------------------------------------------------------------------------------
Cash 27,820
- ---------------------------------------------------------------------------------------------------------------------------------
Interest and other receivables 27,434,485
- ---------------------------------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 18,661,580
- ---------------------------------------------------------------------------------------------------------------------------------
Receivable for securities sold 245,206
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets 1,984,042,723
Liabilities
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 4,069,873
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for securities purchased 204,085
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 5,226,110
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 893,954
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 324,276
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 3,913
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,991
- ---------------------------------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,111,718
- ---------------------------------------------------------------------------------------------------------------------------------
Other accrued expenses 168,817
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 12,004,737
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets $1,972,037,986
Represented by
- ---------------------------------------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $2,007,599,887
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (428,650)
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (45,634,967)
- ---------------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 10,501,716
- ---------------------------------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $1,972,037,986
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share ($540,606,692 divided by 38,481,129 shares) $14.05
- ---------------------------------------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $14.05)* $14.75
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share ($1,421,447,534 divided by 101,150,560 shares)** $14.05
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share ($9,983,760 divided by 711,019 shares) $14.04
- ---------------------------------------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $14.04)*** $14.51
- ---------------------------------------------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or more and on group sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.
*** On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the offering price is reduced.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended July 31, 1996
<S> <C>
Tax Exempt interest income: $139,031,636
Expenses:
- ------------------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 10,591,058
- ------------------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,528,607
- ------------------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 48,133
- ------------------------------------------------------------------------------------------------------------
Administrative services (Note 2) 25,075
- ------------------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,027,816
- ------------------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 12,305,091
- ------------------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 27,541
- ------------------------------------------------------------------------------------------------------------
Reports to shareholders 69,373
- ------------------------------------------------------------------------------------------------------------
Registration fees 25,012
- ------------------------------------------------------------------------------------------------------------
Auditing 59,254
- ------------------------------------------------------------------------------------------------------------
Legal 79,250
- ------------------------------------------------------------------------------------------------------------
Postage 161,172
- ------------------------------------------------------------------------------------------------------------
Other 64,442
- ------------------------------------------------------------------------------------------------------------
Total expenses 26,011,824
- ------------------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (647,542)
- ------------------------------------------------------------------------------------------------------------
Net expenses 25,364,282
- ------------------------------------------------------------------------------------------------------------
Net investment income 113,667,354
- ------------------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 17,913,550
- ------------------------------------------------------------------------------------------------------------
Net realized loss on futures (Notes 1 and 3) (2,897,346)
- ------------------------------------------------------------------------------------------------------------
Net unrealized depreciation on investments during the year (28,204,166)
- ------------------------------------------------------------------------------------------------------------
Net loss on investments (13,187,962)
- ------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $100,479,392
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended
July 31
-----------------------------------
1996 1995
<S> <C> <C>
Increase in net assets
Operations:
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income $113,667,354 $115,552,397
- ------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 15,016,204 (39,422,053)
- ------------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (28,204,166) 25,168,624
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 100,479,392 101,298,968
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ------------------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (32,034,038) (27,401,547)
- ------------------------------------------------------------------------------------------------------------------------------
Class B (80,787,224) (87,980,365)
- ------------------------------------------------------------------------------------------------------------------------------
Class M (327,003) (43,754)
- ------------------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 70,910,580 43,374,216
- ------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets 58,241,707 29,247,518
- ------------------------------------------------------------------------------------------------------------------------------
Net assets
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of year 1,913,796,279 1,884,548,761
- ------------------------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of net investment income of
$428,650 and $3,337,732, respectively) $1,972,037,986 $1,913,796,279
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
For the period
December 29, 1994
(commencement
Year ended of operations) to
July 31 July 31 Year ended July 31
-----------------------------------------------------
1996 1995 1996
-----------------------------------------------------
Class M
-----------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $14.13 $13.43 $14.14
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .84 .58 .90
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.08) .70 (.10)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .76 1.28 .80
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.85) (.58) (.89)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain on investment -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.85) (.58) (.89)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.04 $14.13 $14.05
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 5.44 9.69 (b) 5.76
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $9,984 $2,331 $540,607
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) 1.13 .71 (b) .84
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.87 3.98 (b) 6.27
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 67.70 60.41 67.70
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
For the period
September 20, 1993
(commencement
of operations) to
Year ended July 31 July 31
--------------------------------------------------
1995 1994 1996
--------------------------------------------------
Class A
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $14.24 $15.34 $14.14
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .94 .83 .80
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.10) (.98) (.09)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .84 (.15) .71
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.94) (.83) (.80)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- (.02) --
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain on investment -- (.05) --
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments -- (.05) --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.94) (.95) (.80)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.14 $14.24 $14.05
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 6.24 (.99)(b) 5.08
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $474,984 $361,593 $1,421,448
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) .87 .71(b) 1.50
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.73 5.58(b) 5.62
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 60.41 44.41 67.70
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Year ended July 31
-----------------------------------------------------
1995 1994 1993
-----------------------------------------------------
Class B
-----------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $14.24 $15.01 $14.64
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .85 .86 .95
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.10) (.65) .41
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .75 .21 1.36
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.85) (.85) (.95)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- (.03) --
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain on investment -- (.05) (.04)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments -- (.05) --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.85) (.98) (.99)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.14 $14.24 $15.01
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 5.54 1.36 9.68
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $1,436,481 $1,522,955 $1,501,535
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) 1.51 1.45 1.38
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.10 5.76 6.39
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 60.41 44.41 52.29
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
- ---------------------------------------------------------------------------------
1992
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
<S> <C>
- ---------------------------------------------------------------------------------
Net asset value, beginning of period $13.79
- ---------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------
Net investment income .99
- ---------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .94
- ---------------------------------------------------------------------------------
Total from investment operations 1.93
- ---------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------
From net investment income (.99)
- ---------------------------------------------------------------------------------
In excess of net investment income --
- ---------------------------------------------------------------------------------
From net realized gain on investment (.09)
- ---------------------------------------------------------------------------------
In excess of net realized gain on investments --
- ---------------------------------------------------------------------------------
Total distributions (1.08)
- ---------------------------------------------------------------------------------
Net asset value, end of period $14.64
- ---------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 14.60
- ---------------------------------------------------------------------------------
Net assets, end of period (in thousands) $1,015,866
- ---------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) (c) 1.45
- ---------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 7.03
- ---------------------------------------------------------------------------------
Portfolio turnover (%) 82.31
- ---------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Not annualized.
(c) The ratio of expenses to average net assets for the period ended July 31, 1996
includes amounts paid through expense offset arrangements. Prior period ratios
exclude these amounts. (Note 2)
</TABLE>
Notes to financial statements
July 31, 1996
Note 1
Significant accounting policies
The fund is a series of Putnam Tax-Free Income Trust (the "trust") which
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The fund pursues
its objective of seeking high current income exempt from federal income
tax by investing primarily in high-yielding, lower rated tax exempt
securities constituting a portfolio that Putnam Investment Management,
Inc. ("Putnam Management") the fund's Manager, a wholly-owned subsidiary
of Putnam Investments, Inc., believes does not involve undue risk to
income or principal.
The fund offers class A, class B and class M shares. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares,
which convert to class A shares after approximately eight years, do not
pay a front-end sales charge, but pay a higher ongoing distribution fee
than class A shares, and are subject to a contingent deferred sales
charge, if those shares are redeemed within six years of purchase. Class
M shares are sold with a maximum front-end sales charge of 3.25% and pay
an ongoing distribution fee that is lower than class B shares and higher
than class A shares.
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 generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis
of valuations provided by a pricing service, approved by the Trustees,
which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. Short-
term investments are stated at amortized cost, which approximates market
value, and restricted securities are stated at fair value following
procedures approved by the Trustees.
B) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Interest income is recorded on the accrual basis.
C) 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.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. 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.
D) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and for excise tax on income and capital
gains.
At July 31, 1996, the fund had a capital loss carryover of approximately
$38,113,000 available to offset future net capital gains, if any.
The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
-------------- ------------
$24,523,000 July 31, 2003
$13,590,000 July 31, 2004
E) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid at least annually. The amount and character of income and gains
to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. These differences include treatment of market discount,
defaulted bond interest, post-October loss deferrals, and realized and
unrealized losses on certain futures contracts. Reclassifications are
made to the fund's capital accounts to reflect income and gains
available for distribution (or available capital loss carryovers) under
income tax regulations. For the year ended July 31, 1996, the fund
reclassified $2,389,993 to decrease distributions in excess of net
investment income with an increase to accumulated net realized loss on
investments of $2,389,993. The calculation of net investment income per
share in the financial highlights table excludes these adjustments.
F) Amortization of bond premium and discount Any premium resulting from
the purchase of securities in excess of maturity value is amortized on a
yield-to-maturity basis. The premium in excess of the call price, if
any, is amortized to the call date; thereafter, the remaining excess
premium is amortized to maturity. Discounts on zero coupon bonds and
original issue bonds are accreted according to the effective yield
method.
G) Expenses of the trust Expenses directly charged or attributable to
any fund will be paid from the assets of that fund. Generally, expenses
of the trust will be allocated among and charged to the assets of each
fund on a basis that the Trustees deem fair and equitable, which may be
based on the relative assets of each fund or the nature of the services
performed and relative applicability to each fund.
Note 2
Management fee, administrative services and other transactions
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: 0.65% of the
first $500 million of average net assets; 0.55% of the next $500
million; 0.50% of the next $500 million and 0.45% of any amount over
$1.5 billion subject, under current law, to reduction in any year by the
amount of certain brokerage commissions and fees (less expenses)
received by affiliates of Putnam Management on the fund's portfolio
transactions.
The fund reimburses Putnam Management 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 wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended July 31, 1996, fund expenses were reduced by $647,542
under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $2,480 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "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 in the fund
and are invested in the fund or in other Putnam funds until distribution
in accordance with the Plan.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of
Putnam Investments 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 Mutual Funds Corp. at an annual rate up to 0.35%,
1.00% and 1.00% of the average net assets attributable to class A, class
B and class M shares, respectively. The Trustees have approved payment
by the fund at an annual rate of 0.20%, 0.85% and 0.50% of the average
net assets attributable to class A, class B and class M shares,
respectively.
For the year ended July 31, 1996, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $126,558 and $6,095 from the
sale of class A and class M shares, respectively and received $2,350,358
in contingent deferred sales charges from redemptions of class B shares.
A deferred sales charge of up to 1% is assessed on certain redemptions
of class A shares. For the year ended July 31, 1996, Putnam Mutual Funds
Corp., acting as underwriter received $1,254 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended July 31, 1996, purchases and sales of investment
securities other than short-term municipal obligations aggregated
$2,054,371,379 and $1,980,265,324, respectively. In determining the net
gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
Note 4
Capital shares
At July 31, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
July 31, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 13,029,114 $185,888,611
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,175,420 16,773,877
- ----------------------------------------------------
14,204,534 202,662,488
Shares
repurchased (9,324,390) (132,743,846)
- ----------------------------------------------------
Net increase 4,880,144 $69,918,642
- ----------------------------------------------------
Year ended
July 31, 1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 12,577,731 $173,500,764
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,065,564 14,825,327
- ----------------------------------------------------
13,643,295 188,326,091
Shares
repurchased (5,436,536) (75,318,844)
- ----------------------------------------------------
Net increase 8,206,759 $113,007,247
- ----------------------------------------------------
Year ended
July 31, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 26,982,574 $385,197,664
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,654,941 37,899,226
- ----------------------------------------------------
29,637,515 423,096,890
Shares
repurchased (30,078,430) (429,880,151)
- ----------------------------------------------------
Net decrease (440,915) $(6,783,261)
- ----------------------------------------------------
Year ended
July 31, 1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 21,898,422 $305,485,198
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,993,689 41,602,126
- ----------------------------------------------------
24,892,111 347,087,324
Shares
repurchased (30,242,197) (419,033,947)
- ----------------------------------------------------
Net decrease (5,350,086) $(71,946,623)
- ----------------------------------------------------
Year ended
July 31, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 603,316 $8,601,895
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 16,752 237,979
- ----------------------------------------------------
620,068 8,839,874
- ----------------------------------------------------
Shares
repurchased (74,012) (1,064,675)
- ----------------------------------------------------
Net increase 546,056 $7,775,199
- ----------------------------------------------------
For the period
December 29, 1994
(commencement of
operations) to
July 31, 1995
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 165,046 $2,314,737
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,323 32,847
- ----------------------------------------------------
167,369 2,347,584
Shares
repurchased (2,406) (33,992)
- ----------------------------------------------------
Net increase 164,963 $2,313,592
- ----------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 99% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes.
The fund paid ordinary taxable dividends of $.008 per share.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
James E. Erickson
Vice President
Triet M. Nguyen
Vice President and Fund Manager
Leslie J. Burke
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax-Free
High Yield Fund. It may also be used as sales literature when preceded
or accompanied by the current prospectus, 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. For
more information, or to request a prospectus, call toll free: 1-800-225-
1581.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution, are not High Yield by the
Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board
or any other agency, and involve risk, including the possible loss of
principal amount invested.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
27078-500/036/679 9/96
