PUTNAM DIVERSIFIED INCOME TRUST II, 485BPOS, 1997-07-30

PUTNAM DIVERSIFIED INCOME TRUST II
485BPOS, 1997-07-30

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As filed with the Securities and Exchange Commission on
July 30, 1997
Registration No. 33-55791
811-7221
- -----------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
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Pre-Effective Amendment No. / /
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Post-Effective Amendment No. 4 / X /
and ----
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY / X /
ACT OF 1940 ----
----
Amendment No. 5 / X /
(Check appropriate box or boxes) ----
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PUTNAM DIVERSIFIED INCOME TRUST II
(Exact name of registrant as specified in charter)

One Post Office Square, Boston, Massachusetts 02109
(Address of principal executive offices)

Registrant's Telephone Number, including Area Code
(617) 292-1000
----------------------

It is proposed that this filing will become effective
(check appropriate box)

----
/ / immediately upon filing pursuant to paragraph (b)
- ----
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/ X / on July 30, 1997 pursuant to paragraph (b)
- ----
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/ / 60 days after filing pursuant to paragraph (a)(1)
- ----
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/ / on (date) pursuant to paragraph (a)(1)
- ----
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/ / 75 days after filing pursuant to paragraph (a)(2)
- ----
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/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
- ----
If appropriate, check the following box:
----
/ / this post-effective amendment designates a new
- ---- effective date for a previously filed post-effective
amendment.

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JOHN R. VERANI, Vice President
PUTNAM DIVERSIFIED INCOME TRUST II
One Post Office Square
Boston, Massachusetts 02109
(Name and address of agent for service)
---------------
Copy to:
JOHN W. GERSTMAYR, Esquire
ROPES & GRAY
One International Place
Boston, Massachusetts 02110
----------------------
The Registrant has registered an indefinite number or amount of
securities under the Securities Act of 1933 pursuant to Rule
24f-2. A Rule 24f-2 notice for the fiscal year ended March 31,
1997 was filed on or before May 22, 1997 .

---------------------
<PAGE>
PUTNAM DIVERSIFIED INCOME TRUST II

CROSS REFERENCE SHEET

(AS REQUIRED BY RULE 481(A))

PART A

N-1A ITEM NO. LOCATION

1. Cover Page . . . . . . . . . . . . . . Cover page

2. Synopsis . . . . . . . . . . . . . . . Expenses summary

3. Condensed Financial Information. . . . Financial highlights;
How performance is
shown

4. General Description of Registrant. . . Objective; How the
fund pursues its
objective;
Organization and
history

5. Management of the Fund . . . . . . . . Expenses summary;
How the fund is
managed; About Putnam
Investments, Inc.

5A. Management's Discussion of Fund
Performance. . . . . . . . . . . . . . (Contained in the
annual report of the
Registrant)

6. Capital Stock and Other Securities . . Cover page;
Organization and
history; How the fund
makes distributions
to shareholders; tax
information

7. Purchase of Securities Being Offered . How to buy shares;
Distribution plans;
How to sell shares;
How to exchange
shares; How the fund
values its shares

8. Redemption or Repurchase . . . . . . . How to buy shares;
How to sell shares;
How to exchange
shares; Organization
and history

9. Pending Legal Proceedings. . . . . . . Not applicable

PART B

N-1A ITEM NO. LOCATION

10. Cover Page . . . . . . . . . . . . . . Cover page

11. Table of Contents. . . . . . . . . . . Cover page

12. General Information and History. . . . Organization and
history (Part A)

13. Investment Objectives and Policies . . How the fund
pursues its objective
(Part A); Investment
restrictions;
Miscellaneous
investment practices

14. Management of the Registrant . . . . . Management
(Trustees; Trustee fees;
Officers); Additional
officers

15. Control Persons and Principal. . . . . Management
(Trustees;
Holders of Securities Officers);
Charges and expenses
(Share ownership)

16. Investment Advisory and Other. . . . . Organization and
Services history (Part A);
Management
(Trustees;
Officers;
The management
contract; Principal
underwriter; Investor
servicing agent and
custodian); Charges
and expenses;
Distribution plans;
Independent
accountants and
financial statements

17. Brokerage Allocation . . . . . . . . . Management (Portfolio
transactions);
Charges and expenses

18. Capital Stock and Other Securities . . Organization and
history (Part A); How
the fund makes
distributions to
shareholders; tax
information (Part A);
Suspension of
redemptions
<PAGE>
19. Purchase, Redemption, and Pricing. . . How to buy shares
of Securities Being Offered (Part A); How to sell
shares (Part A); How
to exchange shares
(Part A); How to buy
shares; Determination
of net asset value;
Suspension of
redemptions

20. Tax Status . . . . . . . . . . . . . . How the fund makes
distributions to
shareholders; tax
information (Part A);
Taxes

21. Underwriters . . . . . . . . . . . . . Management (Principal
underwriter); Charges
and expenses

22. Calculation of Performance Data. . . . How performance is
shown (Part A);
Investment
performance; Standard
performance measures

23. Financial Statements . . . . . . . . . Independent
accountants and
financial statements

PART C

Information required to be included in Part C is set forth
under the appropriate Item, so numbered, in Part C of the
Registration Statement.
<PAGE>
PROSPECTUS

JULY 30, 1997
PUTNAM DIVERSIFIED INCOME TRUST II
CLASS A, B AND M SHARES
INVESTMENT STRATEGY: INCOME

This prospectus explains concisely what you should know before
investing in Putnam Diversified Income Trust II (the "fund").
Please read it carefully and keep it for future reference. You
can find more detailed information in the July 30, 1997
statement of additional information (the "SAI"), as amended from
time to time. For a free copy of the SAI or other information,
call Putnam Investor Services at 1-800-225-1581. The SAI has
been filed with the Securities and Exchange Commission (the
"Commission") and is incorporated into this prospectus by
reference. The Commission maintains a Web site
(http://www.sec.gov) that contains the SAI, material incorporated
by reference into this prospectus and the SAI, and other
information regarding registrants that file electronically with
the Commission.

THE FUND INVESTS PRIMARILY IN LOWER-RATED BONDS, COMMONLY
KNOWN AS "JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT TO A
GREATER RISK OF LOSS OF PRINCIPAL AND NONPAYMENT OF INTEREST.
INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE FUND.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.

BOSTON * LONDON * TOKYO

<PAGE>
ABOUT THE FUND

EXPENSES SUMMARY
..............................................................
...
This section describes the sales charges, management fees, and
annual operating expenses that apply to various classes
of the fund's shares. Use it to help you estimate the
impact of transaction costs on your investment over time.

FINANCIAL HIGHLIGHTS
..............................................................
...Study this table to see, among other things, how the fund
performed each year for the past 10 years or since it began
investment operations if it has been in operation for less than
10 years.

OBJECTIVE
..............................................................
...Read this section to make sure the fund's objective is
consistent with your own.

HOW THE FUND PURSUES ITS OBJECTIVE
..............................................................
...
This section explains in detail how the fund seeks its investment
objective.
RISK FACTORS . All investments entail some risk.
Read this section to make sure you understand the
risks that are associated with an investment in the
fund.

HOW PERFORMANCE IS SHOWN
..............................................................
...
This section describes and defines the measures used to assess
fund performance. All data are based on past
investment results and do not predict future performance.

HOW THE FUND IS MANAGED
..............................................................
...
Consult this section for information about the fund's management,
allocation of its expenses, and how purchases and sales of
securities are made .

ORGANIZATION AND HISTORY
..............................................................
...
In this section, you will learn when the fund was introduced, how
it is organized, how it may offer shares, and who its Trustees
are.

ABOUT YOUR INVESTMENT

ALTERNATIVE SALES ARRANGEMENTS
..............................................................
...
Read this section for descriptions of the classes of shares this
prospectus offers and for points you should consider when making
your choice.

HOW TO BUY SHARES
..............................................................
...
This section describes the ways you may purchase shares and tells
you the minimum amounts required to open various types of
accounts. It explains how sales charges are determined and how
you may become eligible for reduced sales charges on each class
of shares.

DISTRIBUTION PLANS
..............................................................
...
This section tells you what distribution fees are charged against
each class of shares.

HOW TO SELL SHARES
..............................................................
...
In this section you can learn how to sell fund shares
, either directly to the fund or through an investment
dealer.

HOW TO EXCHANGE SHARES
..............................................................
...
Find out in this section how you may exchange fund shares
for shares of other Putnam funds. The section also
explains how exchanges can be made without sales charges and the
conditions under which sales charges may be required.

HOW THE FUND VALUES ITS SHARES
..............................................................
...
This section explains how the fund determines the value of its
shares.

HOW THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION
..............................................................
...This section describes the various options you have in
choosing how to receive fund dividends . It also
discusses the tax status of the payments and counsels
you to seek specific advice about your own
situation.

ABOUT PUTNAM INVESTMENTS, INC.
..............................................................
...
Read this section to learn more about the companies that provide
marketing, investment management, and shareholder account
services to Putnam funds and their shareholders.

APPENDIX
Securities ratings
<PAGE>
ABOUT THE FUND

EXPENSES SUMMARY

Expenses are one of several factors to consider when investing.
The following table summarizes your maximum transaction costs
from investing in the fund and expenses based on
the most recent fiscal year. The examples show the
cumulative expenses attributable to a hypothetical $1,000
investment over specified periods.

CLASS A CLASS B CLASS M
SHARES SHARES SHARES
SHAREHOLDER TRANSACTION
EXPENSES

Maximum sales charge
imposed on purchases
(as a percentage of
offering price) 4.75% NONE* 3.25%*

Deferred sales charge 5.0% in the first
(as a percentage year, declining
of the lower of to 1.0% in the
original purchase sixth year, and
price or redemption eliminated
proceeds) NONE** thereafter NONE

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Total fund
Management 12b-1 Other operating
fees+ fees expenses expenses+
- ---------- ----- -------------------
Class A 0.41% 0.25% 0.59% 1.25%
Class B 0.41% 1.00% 0.59% 2.00%
Class M 0.41% 0.50% 0.59% 1.50%
+ after expense limitation

The table is provided to help you understand the expenses of
investing and your share of fund operating
expenses . The expenses shown in the table do not reflect
the application of credits that reduce fund expenses. The
management fees and total fund operating expenses shown in the
table reflect an expense limitation currently in effect. In
the absence of an expense limitation, management fees and
total fund operating expenses would have been 0.70% and
1.54%, respectively, for class A shares; 0.70% and 2.29%,
respectively, for class B shares; and 0.70 % and 1.79%,
respectively, for class M shares.

EXAMPLES

Your investment of $1,000 would incur the following expenses,
assuming 5% annual return and, except as indicated, redemption at
the end of each period:

1 3 5 10
year years years years

CLASS A $60 $85 $113 $191
CLASS B $70 $93 $128 $213
***
CLASS B (NO REDEMPTION) $20 $63 $108 $213
***
CLASS M $47 $78 $112 $206

The examples do not represent past or future expense levels.
Actual expenses may be greater or less than those shown. Federal
regulations require the examples to assume a 5% annual return,
but actual annual return varies.

* The higher 12b-1 fees borne by class B and class M shares
may cause long-term shareholders to pay more than the
economic equivalent of the maximum permitted front-end
sales charge on class A shares.

** A deferred sales charge of up to 1.00% is assessed on
certain redemptions of class A shares that were purchased
without an initial sales charge. See "How to buy shares -
Class A shares."

*** Reflects conversion of class B shares to class A shares
(which pay lower ongoing expenses) approximately eight
years after purchase. See "Alternative sales
arrangements."

FINANCIAL HIGHLIGHTS

The following table presents per share financial information for
class A, B and M shares. This information has been audited and
reported on by the independent accountants. The "Report
of independent accountants" and financial statements included in
the fund's annual report to shareholders for the 1997
fiscal year are incorporated by reference into this
prospectus. The fund's annual report , which contains
additional unaudited performance information, is available
without charge upon request.
<PAGE>

FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<PAGE>
CLASS A

FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period For the period For the period
February 26, 1996 February 26, 1996 February 26, 1996
(commencement of (commencement of (commencement of
operations) operations) operations)
to March 31 to March 31 to March 31
1996* 1996* 1996*
Class M Class B Class A
<S> <C> <C> <C>
Net asset value,
beginning of period $8.50 $8.50 $8.50
Investment operationsNet investment income .04(d) .03(d) .04(d)
Net realized and unrealized gain
on investments (.13) (.12) (.13)
Total from investment operations (.09) (.09) (.09)
Less distributions from:
Net investment income (.03) (.03) (.03)
Total distributions (.03) (.03) (.03)
Net asset value, end of period $8.38 $8.38 $8.38
Total Investment return at net
asset value(%)(a)(b) (1.41) (1.41) (1.41)
Net assets, end of period
(in thousands) $482 $5,048 $3,799
Ratio of expenses to average
net assets (%)(a)(c)(d) 0.14 .20 .13
Ratio of net investment income to
average net assets(%)(a)(c) .50 .44 .50
Portfolio turnover 18.98 18.98 18.98
<PAGE>
* Per share net investment income for the period ended February 26,1996 (commencement
of operations) to March 31, 1996 for class A, class B and class M has been determined
on the basis of the weighted average number of shares outstanding during the period.

(a) Not annualized.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect
of sales charges.
(c) The ratio of expenses to average net assets for the period February 26, 1996
(commencement of operations) to March 31, 1996 includes amounts paid through expense
offset and broker service arrangements.
(d) Reflects an expenses limitation applicable during the period. As a result of such
limitation, expenses for each class of the fund for the period February 26, 1996
(commencement of operations) to March 31, 1996 reflect a reduction of approximately
$.02 per share.For the period
February 26, 1996
Per-share Year ended to May 31
operating performance March 31, 1997 1996

Net asset value,
beginning of period $8.38 $8.50

Investment operations
Net investment income(d) .63 .04(c)

Net realized and unrealized
gain (loss) on investments (.02) (.13)

Total from investment operations .61 (.09)

Less distributions
From net investment income (.63) (.03)

From net realized gain
on investments (.02) --

Total distributions (.65) (.03)

Net asset value,
end of period $8.34 $8.38
<PAGE>
Ratios and supplemental data

Total investment return at
net asset value (%)(a) 7.36 (1.41)*

Net assets, end of period
(in thousands) $39,178 $3,799

Ratio of expenses to average
net assets (%)(b)(d) 1.25 .13*

Ratio of net investment income
to average net assets (%)(d) 7.74 .50*

Portfolio turnover (%) 169.27 18.98 *

+ Commencement of operations
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements.
(c) Per share net investment income has been determined on the basis of the weighted
average number of shares outstanding during the period.
(d) Reflects an expense limitation during the period. As a result of such limitation,
expenses for each class of shares reflect a reduction of approximately $0.01 and
$0.02 per share for the year ended March 31, 1997 and the period February 26, 1996
(commencement of operations) to March 31, 1996 respectively.

<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)

CLASS B
For the period
February 26, 1996
Per-share Year ended to May 31
operating performance March 31, 1997 1996

Net asset value,
beginning of period $8.38 $8.50

Investment operations
Net investment income(d) .57 .03(c)

Net realized and unrealized
gain (loss) on investments (.03) (.12)

Total from investment operations .54 (.09)

Less distributions
From net investment income (.56) (.03)

From net realized gain
on investments (.02) --

Total distributions (.58) (.03)

Net asset value,
end of period $8.34 $8.38
<PAGE>
Ratios and supplemental data

Total investment return at
net asset value (%)(a) 6.56 (1.41)*

Net assets, end of period
(in thousands) $57,052 $5,048

Ratio of expenses to average
net assets (%)(b)(d) 2.00 .20*

Ratio of net investment income
to average net assets (%)(d) 6.99 .44*

Portfolio turnover (%) 169.27 18.98 *

+ Commencement of operations
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect
of sales charges.
(b) Includes amounts paid through expense offset arrangements.
(c) Per share net investment income has been determined on the basis of the weighted
average number of shares outstanding during the period.
(d) Reflects an expense limitation during the period. As a result of such limitation,
expenses for each class of shares reflect a reduction of approximately $0.01 and
$0.02 per share for the year ended March 31, 1997 and the period February 26, 1996
(commencement of operations) to March 31, 1996 respectively.

<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)

CLASS M
For the period
February 26, 1996
Per-share Year ended to May 31
operating performance March 31, 1997 1996

Net asset value,
beginning of period $8.38 $8.50

Investment operations
Net investment income(d) .61 .04(c)

Net realized and unrealized
gain (loss) on investments (.03) (.13)

Total from investment operations .58 (.09)

Less distributions
From net investment income (.60) (.03)

From net realized gain
on investments (.02) --

Total distributions (.62) (.03)

Net asset value,
end of period $8.34 $8.38
<PAGE>
Ratios and supplemental data

Total investment return at
net asset value (%)(a) 7.09 (1.41)*

Net assets, end of period
(in thousands) $5,802 $482

Ratio of expenses to average
net assets (%)(b)(d) 1.05 .14*

Ratio of net investment income
to average net assets (%)(d) 7.48 .50*

Portfolio turnover (%) 169.27 18.98 *

<PAGE>
OBJECTIVE

Putnam Diversified Income Trust II seeks high current income consistent with
preservation of capital. The fund is not intended to be a complete
investment program, and there is no assurance it will achieve its objective.

HOW THE FUND PURSUES ITS OBJECTIVE

BASIC INVESTMENT STRATEGY

Under normal market conditions, the fund will invest at least 65% of its total assets in
debt securities of domestic or foreign issuers, including government and corporate
obligations. Putnam Investment Management, Inc., the fund's investment manager ("Putnam
Management"), expects that the fund will invest in debt securities having longer
maturities (10 years or more), but the fund may invest in debt securities having a broad
range of maturities.

The fund also may invest in preferred stocks, common stocks and other
equity securities, as well as in cash or money market instruments.

The fund may invest up to 60% of its total assets in securities rated below BBB or Baa
by each nationally recognized securities rating agency, such as Standard & Poor's
("S&P") or Moody's Investors Service, Inc. ("Moody's") , rating such
securities and in unrated securities determined by Putnam Management to
be of comparable quality. Securities rated below BBB and Baa (and comparable
unrated securities) are commonly known as "junk bonds." The fund will not invest
more than 15% of its total assets in securities rated below CCC or Caa by each of the
agencies rating such securities (and in unrated securities determined by Putnam
Management to be of comparable quality), which may include securities in the lowest
rating category of each rating agency. Such securities may be in default and are
generally regarded by the rating agencies as having extremely poor prospects of ever
attaining any real investment standing. The foregoing investment limitations will be
measured at the time of purchase and, to the extent that a security is assigned a
different rating by one or more of the various rating agencies, Putnam Management will use
the highest rating assigned by any agency. The rating services' descriptions of
securities in the lower- rated categories, including the speculative characteristics
of such securities , are included in the appendix to this prospectus.

In pursuing the fund's investment objective of high current income consistent with
preservation of capital, the fund will seek to manage the volatility of the portfolio
through extensive credit analysis and diversification among lower- and higher-rated
securities, and domestic and foreign corporate and governmental obligations.

ALTERNATIVE INVESTMENT STRATEGIES

At times Putnam Management may judge that conditions in the securities markets make
pursuing the fund's basic investment strategy inconsistent with the best interests of its
shareholders. At such times, Putnam Management may temporarily use alternative
strategies primarily designed to reduce fluctuations in the value of fund
assets.

In implementing these defensive strategies, the fund may increase the portion of its assets
invested in money market instruments and in U.S. government or agency obligations, or
invest in any other securities which Putnam Management considers consistent with such
defensive strategies.

It is impossible to predict when, or for how long, these alternative strategies
will be used.

RISK FACTORS

THE VALUES OF FIXED-INCOME SECURITIES FLUCTUATE IN RESPONSE TO CHANGES IN
INTEREST RATES. A decrease in interest rates will generally result in an increase in the
value of fund assets. Conversely, during periods of rising interest rates, the value of
fund assets will generally decline. The magnitude of these fluctuations generally is
greater for securities with longer maturities. However, the yields on such securities are
also generally higher. In addition, the values of fixed-income securities are affected by
changes in general economic and business conditions affecting the specific industries of
their issuers.

Changes by recognized rating services in their ratings of a fixed-income security and
changes in the ability of an issuer to make payments of interest and principal may
also affect the value of these investments. Changes in the value of portfolio securities
generally will not affect income derived from these securities, but will affect the fund's
net asset value.

INVESTORS SHOULD CAREFULLY CONSIDER THEIR ABILITY TO ASSUME THE RISKS OF OWNING SHARES OF
A MUTUAL FUND THAT INVESTS IN LOWER-RATED SECURITIES BEFORE MAKING AN INVESTMENT.

The lower ratings of certain securities held by the fund reflect a greater possibility
that adverse changes in the financial condition of the issuer, or in general economic
conditions, or an unanticipated rise in interest rates may impair the ability of the
issuer to make payments of interest and principal.

The inability (or perceived inability) of issuers to make timely payments of interest and
principal would likely make the values of securities held by the fund more volatile and
could limit the fund's ability to sell its securities at prices approximating the values
placed on such securities. In the absence of a liquid trading market for its portfolio
securities, the fund at times may be unable to establish the fair value of such
securities.

The rating assigned to a security by a rating agency does not reflect an assessment of the
volatility of the security's market value or of the liquidity of an investment in the
security.

The table below shows the percentages of fund assets invested during fiscal 1997 in
securities assigned to the various rating categories by S&P, or, if unrated by S&P,
assigned to comparable rating categories by another rating agency , and in unrated
securities determined by Putnam Management to be of comparable quality .

UNRATED SECURITIES
RATED SECURITIES, OF COMPARABLE QUALITY,
AS PERCENTAGE OF AS PERCENTAGE OF
RATING NET ASSETS NET ASSETS

"AAA" 30.87% 0.07%
"AA" 4.21% 0.01%
"A" 0.94% 0.12%
"BBB" 2.36% 0.16%
"BB" 12.73% 0.50%
"B" 30.85% 5.15%
"CCC" 2.94% 0.16%
"CC" 0.11% 0.17%
______ ______
Totals 85.01% 6.34%
====== =====

Putnam Management seeks to minimize the risks of investing in lower-rated securities
through careful investment analysis. When the fund invests in securities in the lower
rating categories, the achievement of the fund's goals is more dependent on Putnam
Management's ability than would be the case if the fund were investing in securities in
the higher rating categories.

The fund will not necessarily dispose of a security when its rating is reduced below
its rating at the time of purchase. However, Putnam Management will monitor the
investment to determine whether continued investment in the security will assist in
meeting the fund's investment objective.

At times, a substantial portion of fund assets may be invested in securities as to which
the fund, by itself or together with other funds and accounts managed by Putnam Management
and its affiliates, holds all or a major portion. Under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the issuer,
it may be more difficult to sell these securities when Putnam Management believes
it advisable to do so . The fund also may be able to sell the securities only at
prices lower than if they were more widely held. Under these circumstances, it
also may be more difficult to determine the fair value of such securities for
purposes of computing the fund's net asset value.

In order to enforce its rights in the event of a default of these securities, the fund may
be required to participate in various legal proceedings or take possession of and manage
assets securing the issuer's obligations on the securities. This could increase
fund operating expenses and adversely affect the fund's net asset value.

Certain securities held by the fund may permit the issuer at its option to "call," or
redeem, its securities. If an issuer were to redeem securities held by the fund during a
time of declining interest rates, the fund may not be able to reinvest the proceeds in
securities providing the same investment return as the securities redeemed.

The fund at times may invest in so-called "zero-coupon" bonds and "payment-in-kind" bonds.
Zero-coupon bonds are issued at a significant discount from their principal amount and pay
interest only at maturity rather than at intervals during the life of the security.
Payment-in-kind bonds allow the issuer, at its option, to make current interest payments
on the bonds either in cash or in additional bonds. Both zero-coupon bonds and
payment-in-kind bonds allow an issuer to avoid the need to generate cash to meet current
interest payments. Accordingly, such bonds may involve greater credit risks than bonds
paying interest in cash currently. The values of zero-coupon bonds and payment-in-kind
bonds are also subject to greater fluctuation in response to changes in market interest
rates than bonds that pay interest in cash currently.

Even though such bonds do not pay current interest in cash, the fund nonetheless is
required to accrue interest income on these investments and to distribute the interest
income on a current basis . Thus, the fund could be required at times to liquidate
other investments in order to satisfy its distribution requirements.

Certain investment grade securities in which the fund may invest share some of the risk
factors discussed above with respect to lower-rated securities.

FOR ADDITIONAL INFORMATION REGARDING THE RISKS ASSOCIATED WITH INVESTING IN
SECURITIES IN THE LOWER RATING CATEGORIES, SEE THE SAI.

INVESTMENTS IN PREMIUM SECURITIES

At times, the fund may invest in securities bearing coupon rates higher than prevailing
market rates. Such "premium" securities are typically purchased at prices greater than
the principal amounts payable on maturity.

The fund does not amortize the premium paid for these securities in calculating its net
investment income. As a result, the purchase of premium securities provides a higher
level of investment income distributable to shareholders on a current basis than if the
fund purchased securities bearing current market rates of interest. Because the value of
premium securities tends to approach the principal amount as they approach maturity (or
call price in the case of securities approaching their first call date), the purchase of
such securities may increase the risk of capital loss if such securities are held to
maturity (or first call date).

During a period of declining interest rates, many of the fund's portfolio investments will
likely bear coupon rates that are higher than the current market rates, regardless of
whether the securities were originally purchased at a premium. These securities would
generally carry premium market values that would be reflected in the net asset value of
fund shares. As a result, an investor who purchases fund shares during such periods would
initially receive higher taxable monthly distributions (derived from the higher coupon
rates payable on the fund's investments) than might be available from alternative
investments bearing current market interest rates, but the investor may face an increased
risk of capital loss as these higher coupon securities approach maturity (or first call
date). In evaluating the potential performance of an investment in the fund, investors
may find it useful to compare the fund's current dividend rate with its "yield," which is
computed on a yield-to-maturity basis in accordance with SEC regulations and which
reflects amortization of market premiums. See "How performance is shown."

PORTFOLIO TURNOVER

The length of time the fund has held a particular security is not generally a
consideration in investment decisions. A change in the securities held by the fund is
known as "portfolio turnover." As a result of the fund's investment policies, under
certain market conditions its portfolio turnover rate may be higher than that of other
mutual funds.

Portfolio turnover generally involves some expense, including brokerage commissions or
dealer markups and other transaction costs on the sale of securities and reinvestment in
other securities. These transactions may result in realization of taxable capital gains.
Portfolio turnover rates are shown in the section "Financial highlights."

FOREIGN INVESTMENTS

The fund may invest in securities of foreign issuers that are not actively traded in
U.S. markets. These foreign investments involve certain special risks described below.

Foreign securities are normally denominated and traded in foreign currencies . As a
result, the value of the fund's foreign investments and the value of its shares may be
affected favorably or unfavorably by changes in currency exchange rates relative
to the U.S. dollar. The fund may engage in a variety of foreign currency exchange
transactions in connection with its foreign investments, including transactions involving
futures contracts, forward contracts and options.

Investments in foreign securities may subject the fund to other risks as well. For
example, there may be less information publicly available about a foreign
issuer than about a U.S. issuer, and foreign issuers are not
generally subject to accounting, auditing and financial reporting standards and
practices comparable to those in the United States. The securities of some
foreign issuers are less liquid and at times more volatile than securities of
comparable U.S. issuers . Foreign brokerage commissions and other fees are also
generally higher than in the United States. Foreign settlement procedures and
trade regulations may involve certain risks (such as delay in payment or delivery of
securities or in the recovery of the fund's assets held abroad) and expenses not
present in the settlement of investments in U.S. markets.

In addition, the fund's investments in foreign securities may be subject to the
risk of nationalization or expropriation of assets, imposition of currency exchange
controls or restrictions on the repatriation of foreign currency , confiscatory
taxation, political or financial instability and diplomatic developments which
could affect the value of the fund's investments in certain foreign countries.
Dividends or interest on, or proceeds from the sale of, foreign securities may be
subject to foreign withholding taxes, and special U.S. tax considerations may apply.

Legal remedies available to investors in certain foreign countries may be more limited
than those available with respect to investments in the United States or in other foreign
countries. The laws of some foreign countries may limit the

fund's ability to invest in securities of certain issuers organized under the laws
of those foreign countries.

The risks described above are typically increased in connection with investments in
less developed and developing nations, which are sometimes referred to as "emerging
markets." For example, political and economic structures in these countries may be in
their infancy and developing rapidly, causing instability. High rates of inflation or
currency devaluations may adversely affect the economies and securities markets of such
countries. Investments in emerging markets may be considered speculative.

The fund expects that its investments in foreign securities generally will not exceed
30% of its total assets, although the fund's investments in foreign securities may exceed
this amount from time to time. Certain of the foregoing risks may also apply to some
extent to securities of U.S. issuers that are denominated in foreign currencies or that
are traded in foreign markets, or to securities of U.S. issuers having significant foreign
operations.

For more information about foreign securities and the risks associated with investment in
such securities, see the SAI.

MORTGAGE-BACKED AND ASSET-BACKED SECURITIES

The fund may invest without limit in mortgage-backed securities, including collateralized
mortgage obligations ("CMOs") and certain stripped mortgage-backed securities. CMOs and
other mortgage-backed securities represent participations in, or are secured by,
mortgage loans and include:

- - Certain securities issued or guaranteed by the U.S. government or one of its agencies
or instrumentalities;

- - Securities issued by private issuers that represent an interest in or are secured by
mortgage-backed securities issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities; and

- - Securities issued by private issuers that represent an interest in or are secured by
mortgage loans or mortgage-backed securities without a government guarantee but
usually having some form of private credit enhancement.

Stripped mortgage-backed securities are usually structured with two classes that receive
different portions of the interest and principal distributions on a pool of mortgage
loans. The fund may invest in both the interest-only or "IO" class and the principal-only
or "PO" class.

The fund may also invest in asset-backed securities. Asset-backed securities are
structured like mortgage-backed securities, but instead of mortgage loans or interests in
mortgage loans, the underlying assets may include such items as motor vehicle
installment sales or installment loan contracts, leases of various types of real and
personal property, and receivables from credit card agreements. The ability of an issuer
of asset-backed securities to enforce its security interest in the underlying assets may
be limited.

PREPAYMENT RISK. Mortgage-backed and asset-backed securities have yield and maturity
characteristics corresponding to the underlying assets. Unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the entire
principal amount comes due, payments on certain mortgage-backed and asset-backed
securities include both interest and a partial payment of principal. Besides the
scheduled repayment of principal, payments of principal may result from the voluntary
prepayment, refinancing, or foreclosure of the underlying mortgage loans or other assets.

Mortgage-backed and asset-backed securities are less effective than other types of
securities as a means of "locking in" attractive long-term interest rates. One reason is
the need to reinvest prepayments of principal; another is the possibility of significant
unscheduled prepayments resulting from declines in interest rates. These prepayments
would have to be reinvested at lower rates. As a result, these securities may have less
potential for capital appreciation during periods of declining interest rates than other
securities of comparable maturities, although they may have a similar risk of decline in
market value during periods of rising interest rates. Prepayments may also
significantly shorten the effective maturities of these securities, especially during
periods of declining interest rates. Conversely, during periods of rising interest rates,
a reduction in prepayments may increase the effective maturities of these securities,
subjecting them to a greater risk of decline in market value in response to rising
interest rates than traditional debt securities, and, therefore, potentially increasing
the volatility of the fund.

Prepayments may cause losses on securities purchased at a premium. At times, some
of the mortgage-backed and asset-backed securities in which the fund may invest will have
higher than market interest rates and therefore will be purchased at a premium above their
par value. Unscheduled prepayments, which are made at par, will cause the fund to
experience a loss equal to any unamortized premium.

CMOS . CMOs are issued with a number of classes or series that have different
maturities and that may represent interests in some or all of the interest or principal on
the underlying collateral. Payment of interest or principal on some classes or series of
CMOs may be subject to contingencies or some classes or series may bear some or all of the
risk of default on the underlying mortgages. CMOs of different classes or series are
generally retired in sequence as the underlying mortgage loans in the mortgage pool are
repaid. If enough mortgages are repaid ahead of schedule, the classes or series of a CMO
with the earliest maturities generally will be retired prior to their maturities. Thus,
the early retirement of particular classes or series of a CMO would have the same
effect as the prepayment of mortgages underlying other mortgage-backed securities.
Conversely, slower than anticipated prepayments can extend the effective maturities of
CMOs, subjecting them to a greater risk of decline in market value in response to rising
interest rates than traditional debt securities, and, therefore, potentially increasing
the volatility of the fund.

STRIPPED MORTGAGE-BACKED SECURITIES. The yield to maturity on an IO or
PO class of stripped mortgage-backed securities is extremely sensitive not only to
changes in prevailing interest rates but also to the rate of principal payments (including
prepayments) on the underlying assets. A rapid rate of principal prepayments may have a
measurably adverse effect on the fund's yield - to - maturity to the extent it
invests in IOs. If the assets underlying the IOs experience greater than
anticipated prepayments of principal, the fund may fail to recoup fully its initial
investment in these securities. Conversely, POs tend to increase in value if prepayments
are greater than anticipated and decline if prepayments are slower than anticipated.

In either event, the secondary market for stripped mortgage-backed securities may be more
volatile and less liquid than that for other mortgage-backed securities, potentially
limiting the fund's ability to buy or sell those securities at any particular time.

FUTURES AND OPTIONS

THE FUND MAY BUY AND SELL FUTURES CONTRACTS ON SECURITIES INDEXES, U.S. GOVERNMENT
SECURITIES, FOREIGN FIXED-INCOME SECURITIES AND ON FOREIGN CURRENCIES. A futures contract
is a contract to buy or sell units of a particular securities index or a certain amount of
a particular security or foreign currency at an agreed price on a specified future date.
Depending on the change in value of the index, security or currency when the fund
enters into and terminates a futures contract, the fund realizes a gain or loss. The fund
may purchase and sell options on futures contracts or on securities indexes directly, in
addition to or as an alternative to purchasing and selling futures contracts or to earn
additional income. The fund may purchase and sell futures contracts and options for
hedging purposes and for nonhedging purposes, such as to adjust the fund's exposure to
the relevant securities markets or as a substitute for direct
investment.

THE USE OF FUTURES AND RELATED OPTIONS INVOLVES CERTAIN SPECIAL RISKS. FUTURES AND
OPTIONS TRANSACTIONS INVOLVE COSTS AND MAY RESULT IN LOSSES.

The successful use of futures and related options will usually depend on Putnam
Management's ability to forecast interest rate and market movements correctly. The use of
futures and options strategies also involves the risk of imperfect correlation between
movements in the prices of futures and options and movements in the prices of the
underlying securities index, securities or currencies or , in the case of hedging
transactions, in the values of the securities or currencies that are the subject of a
hedge. The successful use of futures and options also depends on the availability of a
liquid secondary market to enable the fund to close its positions on a timely basis.
There can be no assurance that such a market will exist at a particular time. The fund's
ability to terminate option positions established in the over-the-counter market may be
more limited than for exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would fail to meet their obligations
to the fund. The use of futures or options on futures for purposes other than hedging may
be regarded as speculative.

Because the markets for futures and options on foreign fixed-income securities and foreign
currencies are relatively new and still developing and are subject to certain regulatory
constraints, the fund's ability to engage in such transactions may be limited. Certain
provisions of the Internal Revenue Code and certain regulatory requirements may limit the
use of futures and options transactions.

A MORE DETAILED DESCRIPTION OF FUTURES AND OPTIONS TRANSACTIONS , INCLUDING THE
RISKS ASSOCIATED WITH THEM, IS INCLUDED IN THE SAI.

OTHER INVESTMENT PRACTICES

THE FUND MAY ALSO ENGAGE IN THE FOLLOWING INVESTMENT PRACTICES, EACH OF WHICH INVOLVES
CERTAIN SPECIAL RISKS. THE SAI CONTAINS MORE DETAILED INFORMATION ABOUT THESE PRACTICES,
INCLUDING LIMITATIONS DESIGNED TO REDUCE THESE RISKS.

OPTIONS. The fund may seek to increase its current return by writing covered call and put
options on securities it owns or in which it may invest. The fund receives a premium from
writing a call or put option, which increases the return if the option expires unexercised
or is closed out at a net profit.

When the fund writes a call option, it gives up the opportunity to profit from any
increase in the price of a security above the exercise price of the option; when it writes
a put option, it takes the risk that it will be required to purchase a security
from the option holder at a price above the current market price of the security. The
fund may terminate an option that it has written prior to its expiration by entering into
a closing purchase transaction in which it purchases an option having the same terms as
the option written.

The fund may also buy and sell put and call options , including combinations of put
and call options on the same underlying security . The aggregate value of the
securities underlying the options may not exceed 25% of fund assets. The use of these
strategies may be limited by applicable law.

SECURITIES LOANS, REPURCHASE AGREEMENTS AND FORWARD COMMITMENTS. The fund may lend
portfolio securities amounting to not more than 25% of its assets to broker-
dealers and may enter into repurchase agreements on up to 25% of its assets.
These transactions must be fully collateralized at all times. The fund may also purchase
securities for future delivery, which may increase its overall investment exposure and
involves a risk of loss if the value of the securities declines prior to the settlement
date. These transactions involve some risk if the other party should default on
its obligation and the fund is delayed or prevented from recovering the collateral or
completing the transaction.

DIVERSIFICATION

The fund is a "diversified" investment company under the Investment Company Act of 1940.
This means that with respect to 75% of its total assets, the fund may not invest
more than 5% of its total assets in the securities of any one issuer (except U.S.
government securities). The remaining 25% of its total assets is not subject to
this restriction. To the extent the fund invests a significant portion of its assets in
the securities of a particular issuer, it will be subject to an increased risk of
loss if the market value of such issuer's securities declines.

DERIVATIVES

Certain of the instruments in which the fund may invest, such as futures contracts,
options, forward contracts and CMOs, are considered to be "derivatives." Derivatives are
financial instruments whose value depends upon, or is derived from, the value of an
underlying asset, such as a security or an index. Further information about these
instruments and the risks involved in their use is included elsewhere in this prospectus and
in the SAI.

LIMITING INVESTMENT RISK

SPECIFIC INVESTMENT RESTRICTIONS HELP TO LIMIT INVESTMENT RISKS FOR THE
FUND'S SHAREHOLDERS. These restrictions prohibit the fund , with respect to 75% of
its total assets, from acquiring more than 10% of the voting securities of any one
issuer.* They also prohibit the fund from investing more than:

(a) (with respect to 75% of its total assets) 5% of its total assets in
securities of any one issuer other than the U.S. government;* or

(b) 25% of its total assets in any one industry (other than securities of the U.S.
government, its agencies or instrumentalities);* or

(c) 15% of its net assets in any combination of securities that are not readily
marketable, in securities restricted as to resale (excluding securities determined by the
fund's Trustees (or the person designated by the Trustees to make such determinations) to
be readily marketable), and in repurchase agreements maturing in more than seven days.

The restrictions marked with an asterisk (*) above are summaries of
fundamental investment policies . See the SAI for the full text of these
policies and other fundamental investment policies. Except for investment policies
designated as fundamental in this prospectus or the SAI, the investment policies described
in this prospectus and in the SAI are not fundamental policies. The Trustees may change
any non-fundamental investment policy without shareholder approval. As a matter of
policy, the Trustees would not materially change the fund's investment objective without
shareholder approval.

HOW PERFORMANCE IS SHOWN

FUND ADVERTISEMENTS MAY, FROM TIME TO TIME, INCLUDE PERFORMANCE INFORMATION .
"Yield" for each class of shares is calculated by dividing the annualized net investment
income per share during a recent 30-day period by the maximum public offering price per
share of the class on the last day of that period.

For purposes of calculating yield, net investment income is calculated in accordance with
SEC regulations and may differ from net investment income as determined for tax
purposes. SEC regulations require that net investment income be calculated on a "yield-to-
maturity" basis, which has the effect of amortizing any premiums or discounts in the
current market value of fixed - income securities. The current dividend rate is based
on net investment income as determined for tax purposes, which may not reflect amortization
in the same manner. See "How the fund pursues its objective -- Investments in premium
securities."

Yield is based on the price of the shares, including the maximum initial sales charge in
the case of class A and class M shares, but does not reflect any contingent deferred sales
charge in the case of class B shares.

"Total return" for the one-, five- and ten-year periods (or for the life of a class, if
shorter) through the most recent calendar quarter represents the average annual compounded
rate of return on an investment of $1,000 in the fund invested at the maximum public offering
price (in the case of class A and class M shares) or reflecting the deduction of any
applicable contingent deferred sales charge (in the case of class B shares). Total return
may also be presented for other periods or based on investment at reduced sales charge
levels. Any quotation of investment performance not reflecting the maximum initial sales
charge or contingent deferred sales charge would be reduced if the sales charge were used.

ALL DATA ARE BASED ON PAST INVESTMENT RESULTS AND DO NOT PREDICT FUTURE
PERFORMANCE. Investment performance, which will vary, is based on many factors,
including market conditions, portfolio composition , fund operating expenses
and which class of shares the investor purchases. Investment performance also often
reflects the risks associated with the fund's investment objective and policies. These
factors should be considered when comparing the fund's investment results with those of
other mutual funds and other investment vehicles.

Quotations of investment performance for any period when an expense limitation was in
effect will be greater than if the limitation had not been in effect. Fund
performance may be compared to that of various indexes. See the SAI.

HOW THE FUND IS MANAGED

THE TRUSTEES ARE RESPONSIBLE FOR GENERALLY OVERSEEING THE CONDUCT OF FUND
BUSINESS. Subject to such policies as the Trustees may determine, Putnam Management
furnishes a continuing investment program for the fund and makes investment decisions on its
behalf. Subject to the control of the Trustees, Putnam Management also manages the fund's
other affairs and business.

The fund pays Putnam Management a quarterly fee for these services based on average net
assets. See "Expenses summary" and the SAI.

The following officers of Putnam Management have had primary responsibility for the day-
to-day management of the fund's portfolio since the years stated below:
<PAGE>
Business experience
Year (at least 5 years)
------ ----------------------
D. William Kohli
1994 Employed as an investment
Managing Director professional by Putnam
Management since 1994.
Prior to September , 1994, Mr. Kohli was
Executive Vice President and Co-Director of Global Bond
Management and, prior to October, 1993,
Senior Portfolio Manager at Franklin Advisors/Templeton
Investment Counsel.

Michael Martino
1994 Employed as an investment
Managing Director professional by Putnam Management since 1994. Prior to
January , 1994, Mr. Martino was employed by Back
Bay Advisors as Executive Vice President and Chief
Investment Officer .

Jennifer E. Leichter 1996 Employed as an investment
Senior Vice President professional by Putnam Management since 1987.

Kenneth J. Taubes
1997 Employed as an investment Senior Vice
President professional by Putnam
Management since 1991.

Gail S. Attridge 1997 Employed as an investment
Vice President professional by Putnam Management since 1993. Prior to
November, 1993, Ms. Attridge was an Analyst at
Keystone Custody International.

The fund pays all expenses not assumed by Putnam Management, including Trustees' fees,
auditing, legal, custodial, investor servicing and shareholder reporting expenses, and
payments under its distribution plans (which are in turn allocated to the relevant class
of shares). The fund also reimburses Putnam Management for the compensation and related
expenses of certain fund officers and their staff who provide
administrative services . The total reimbursement is determined annually by the
Trustees.

Putnam Management places all orders for purchases and sales of fund securities. In
selecting broker-dealers, Putnam Management may consider research and brokerage services
furnished to it and its affiliates. Subject to seeking the most favorable price and
execution available, Putnam Management may consider sales of fund shares
(and, if permitted by law, shares of the other Putnam funds) as a factor in
the selection of broker-dealers.

ORGANIZATION AND HISTORY

Putnam Diversified Income Trust II is a Massachusetts business trust organized on October
5, 1994. A copy of the Agreement and Declaration of Trust, which is governed by
Massachusetts law, is on file with the Secretary of State of The Commonwealth of
Massachusetts. Prior to January 4, 1996, the fund was known as Putnam Investment-Grade
Bond Fund.

The fund is an open-end, diversified management investment company with an unlimited
number of authorized shares of beneficial interest. The Trustees may, without
shareholder approval , create two or more series of shares representing separate
investment portfolios. Any such series of shares may be divided without
shareholder approval into two or more classes of shares having such preferences and
special or relative rights and privileges as the Trustees determine. The fund's shares
are not currently divided into series. Only class A, B and M shares are offered by
this prospectus. The fund may also offer other classes of shares with different sales
charges and expenses. Because of these different sales charges and expenses, the
investment performance of the classes will vary. For more information, including your
eligibility to purchase any other class of shares, contact your investment dealer or
Putnam Mutual Funds at 1-800-225-1581 .

Each share has one vote, with fractional shares voting proportionally. Shares of all
classes will vote together as a single class except when otherwise required by law or
as determined by the Trustees. Shares are freely transferable, are entitled to dividends
as declared by the Trustees, and, if the fund were liquidated, would receive the net
assets of the fund. The fund may suspend the sale of shares at any time and may refuse
any order to purchase shares. Although the fund is not required to hold annual meetings
of its shareholders, shareholders holding at least 10% of the outstanding shares entitled
to vote have the right to call a meeting to elect or remove Trustees, or to take other
actions as provided in the Agreement and Declaration of Trust.

If you own fewer shares than the minimum set by the Trustees (presently 20
shares), the fund may choose to redeem your shares. You will receive at least 30 days'
written notice before the fund redeems your shares, and you may purchase additional shares
at any time to avoid a redemption. The fund may also redeem shares if you own shares
above a maximum amount set by the Trustees. There is presently no maximum, but the
Trustees may establish one at any time, which could apply to both present and future
shareholders.

THE FUND'S TRUSTEES: GEORGE PUTNAM,* CHAIRMAN. President of the Putnam funds. Chairman
and Director of Putnam Management and Putnam Mutual Funds Corp. ("Putnam Mutual Funds").
Director, Marsh & McLennan Companies, Inc.; WILLIAM F. POUNDS, VICE CHAIRMAN. Professor
of Management, Alfred P. Sloan School of Management, Massachusetts Institute of
Technology; JAMESON ADKINS BAXTER, President, Baxter Associates, Inc.; HANS H. ESTIN, Vice
Chairman, North American Management Corp.; JOHN A. HILL, Chairman and Managing Director,
First Reserve Corporation; RONALD J. JACKSON, Former Chairman, President and Chief
Executive Officer of Fisher-Price, Inc. , Director of Safety 1st, Inc. Trustee of
Salem Hospital and the Peabody Essex Museum ; ELIZABETH T. KENNAN,
President Emeritus and Professor, Mount Holyoke College; LAWRENCE J. LASSER,* Vice
President of the Putnam funds. President, Chief Executive Officer and Director of Putnam
Investments, Inc. and Putnam Management. Director, Marsh & McLennan Companies, Inc.;
ROBERT E. PATTERSON, Executive Vice President and Director of Acquisitions, Cabot Partners
Limited Partnership; DONALD S. PERKINS,* Director of various corporations, including
Cummins Engine Company, Lucent Technologies, Inc., Springs Industries, Inc. and
Time Warner Inc.; GEORGE PUTNAM, III,* President, New Generation Research, Inc. ;
A.J.C. SMITH,* Chairman and Chief Executive Officer, Marsh & McLennan Companies, Inc.; and
W. NICHOLAS THORNDIKE, Director of various corporations and charitable organizations,
including Data General Corporation, Bradley Real Estate, Inc. and Providence Journal Co.
Also, Trustee of Massachusetts General Hospital and Eastern Utilities Associates. The
Trustees are also Trustees of the other Putnam funds. Those marked with an
asterisk (*) are or may be deemed to be "interested persons" of the fund, Putnam
Management or Putnam Mutual Funds.

ABOUT YOUR INVESTMENT

ALTERNATIVE SALES ARRANGEMENTS

CLASS A SHARES. An investor who purchases class A shares pays a sales charge at the time
of purchase. As a result, class A shares are not subject to any charges when they are
redeemed, except for certain sales at net asset value that are subject to a contingent
deferred sales charge ("CDSC"). Certain purchases of class A shares qualify for reduced
sales charges. Class A shares bear a lower 12b-1 fee than class B and class M shares.
See "How to buy shares -- Class A shares" and "Distribution plans."

CLASS B SHARES. Class B shares are sold without an initial sales charge, but are subject
to a CDSC if redeemed within a specified period after purchase. Class B shares also bear
a higher 12b-1 fee than class A and class M shares. Class B shares automatically convert
into class A shares, based on relative net asset value, approximately eight years after
purchase. For more information about the conversion of class B shares, see the SAI. This
discussion includes information about how shares acquired through reinvestment of
distributions are treated for conversion purposes. The discussion also
notes certain circumstances under which a conversion may not occur. Class B shares
provide an investor the benefit of putting all of the investor's dollars to work from the
time the investment is made. Until conversion, class B shares will have a higher expense
ratio and pay lower dividends than class A and class M shares because of the higher 12b-1
fee. See "How to buy shares -- Class B shares" and "Distribution plans."

CLASS M SHARES. An investor who purchases class M shares pays a sales charge at the time
of purchase that is lower than the sales charge applicable to class A shares. Certain
purchases of class M shares qualify for reduced sales charges. Class M shares bear a 12b-
1 fee that is lower than class B shares but higher than class A shares. Class M shares
are not subject to any CDSC and do not convert into any other class of shares. See "How
to buy shares -- Class M shares" and "Distribution plans."

WHICH ARRANGEMENT IS BEST FOR YOU? The decision as to which class of shares provides a
more suitable investment for an investor depends on a number of factors, including the
amount and intended length of the investment. Investors making investments that qualify
for reduced sales charges might consider class A or class M shares. Investors who prefer
not to pay an initial sales charge might consider class B shares. Orders for class B
shares for $250,000 or more will be treated as orders for class A shares or declined. For
more information about these sales arrangements, consult your investment dealer or Putnam
Investor Services. Shares may only be exchanged for shares of the same class of another
Putnam fund. See "How to exchange shares."

HOW TO BUY SHARES

You can open a fund account with as little as $500 and make additional investments at any
time with as little as $50. You can buy fund shares three ways - through most investment
dealers, through Putnam Mutual Funds (at 1-800-225-1581), or through a systematic
investment plan. If you do not have a dealer, Putnam Mutual Funds can refer you to one.

BUYING SHARES THROUGH PUTNAM MUTUAL FUNDS. Complete an order form and write a check for
the amount you wish to invest, payable to the fund. Return the completed form and check
to Putnam Mutual Funds, which will act as your agent in purchasing shares through your
designated investment dealer.

BUYING SHARES THROUGH SYSTEMATIC INVESTING. You can make regular investments of $25 or
more per month through automatic deductions from your bank checking or savings account.
Application forms are available from your investment dealer or through Putnam Investor
Services.

Shares are sold at the public offering price based on the net asset value next determined
after Putnam Investor Services receives your order. In most cases, in order to receive
that day's public offering price, Putnam Investor Services must receive your order before
the close of regular trading on the New York Stock Exchange. If you buy shares through
your investment dealer, the dealer must receive your order before the close of regular
trading on the New York Stock Exchange to receive that day's public offering price.

CLASS A SHARES

The public offering price of class A shares is the net asset value plus a sales charge
that varies depending on the size of your purchase. The fund receives the net asset
value. The sales charge is allocated between your investment dealer and Putnam Mutual
Funds as shown in the following table, except when Putnam Mutual Funds, in its discretion,
allocates the entire amount to your investment dealer.

SALES CHARGE AMOUNT OF
AS A PERCENTAGE OF: SALES CHARGE
------------------- REALLOWED TO
NET DEALERS AS A
AMOUNT OF TRANSACTION AMOUNT OFFERING PERCENTAGE OF
AT OFFERING PRICE ($) INVESTED PRICE OFFERING PRICE
- -----------------------------------------------------------------
Under 50,000 4.99% 4.75% 4.25%
50,000 but under 100,000 4.71 4.50 4.00
100,000 but under 250,000 3.63 3.50 3.00
250,000 but under 500,000 2.56 2.50 2.25
500,000 but under 1,000,000 2.04 2.00 1.75
- -----------------------------------------------------------------

No initial sales charge applies to purchases of class A shares of $1 million
or more , or to purchases by employer-sponsored retirement plans that have at least 200
eligible employees . However, a CDSC of 1.00% or 0.50%, respectively, is
imposed within the first or second year after purchase on redemptions of these
shares, unless the dealer of record waived its commission with Putnam Mutual Funds'
approval, or unless the purchaser is a class A qualified benefit plan (a retirement plan
for which Putnam Fiduciary Trust Company or its affiliates provide recordkeeping or other
services in connection with purchases of class A shares).

Class A qualified benefit plans may also purchase class A shares with no initial sales
charge. However, except as stated below, a CDSC of 0.75% of the total amount redeemed
(1.00% in the case of plans for which Putnam Mutual Funds and its affiliates do not act
as trustee or recordkeeper) is imposed on redemptions of these shares if, within two
years of a plan's initial purchase of class A shares, it redeems 90% or more of its
cumulative purchases. Thereafter, such a plan is no longer liable for any CDSC. The
two-year CDSC applicable to class A qualified benefit plans for which Putnam Mutual Funds
or its affiliates serve as trustee or recordkeeper ("full service plans") is 0.50% of the
total amount redeemed for full service plans that initially invest at least $5 million
but less than $10 million in Putnam funds and other investments managed by Putnam
Management or its affiliates ("Putnam Assets"), and is 0.25% of the total amount redeemed
for full service plans that initially invest at least $10 million but less than $20
million in Putnam Assets. Class A qualified benefit plans that initially invest at least
$20 million in Putnam Assets, or whose dealer of record has, with Putnam Mutual
Funds' approval, waived its commission or agreed to refund its commission to Putnam
Mutual Funds in the event a CDSC would otherwise be applicable, are not subject to
any CDSC.

In determining whether a CDSC is payable, the fund will first redeem shares not
subject to any charge. Any CDSC will be calculated based on the lower of the shares'
cost and current net asset value and any shares acquired by reinvestment of distributions
will be redeemed without a CDSC. Putnam Mutual Funds receives the entire amount of
any CDSC you pay. See the SAI for more information about the CDSC.

As described in the SAI, Putnam Mutual Funds pays the dealer of record a commission of
up to 1% on sales to class A qualified benefit plans. Putnam Mutual Funds pays
investment dealers of record commissions on sales of class A shares of $1 million or more
and sales of class A shares to employer-sponsored retirement plans that have at least
200 eligible employees and that are not class A qualified benefit plans based on an
investor's cumulative purchases during the one-year period beginning with the date of the
initial purchase at net asset value. Each subsequent one-year measuring period for these
purposes will begin with the first net asset value purchase following the end of the prior
period. Such commissions are paid at the rate of 1.00% of the amount under $3 million,
0.50% of the next $47 million and 0.25% thereafter.

CLASS B SHARES

Class B shares are sold without an initial sales charge, although a CDSC will be imposed
if you redeem shares within a specified period after purchase, as shown in the table
below.

YEAR 1 2 3 4 5 6 7+
- -------------------------------------------------------------
CHARGE 5% 4% 3% 3% 2% 1% 0%

Putnam Mutual Funds pays a sales commission equal to 4.00% of the amount invested to
dealers who sell class B shares. These commissions are not paid on exchanges from other
Putnam funds or on sales to investors exempt from the CDSC.

CLASS M SHARES

The public offering price of class M shares is the net asset value plus a sales charge
that varies depending on the size of your purchase. The fund receives the net asset
value. The sales charge is allocated between your investment dealer and Putnam Mutual
Funds as shown in the following table, except when Putnam Mutual Funds, at its discretion,
allocates the entire amount to your investment dealer.

SALES CHARGE AMOUNT OF
AS A PERCENTAGE OF: SALES CHARGE
------------------- REALLOWED TO
NET DEALERS AS A
AMOUNT OF TRANSACTION AMOUNT OFFERING PERCENTAGE OF
AT OFFERING PRICE ($) INVESTED PRICE OFFERING PRICE
- -----------------------------------------------------------------
Under 50,000 3.36% 3.25% 3.00%
50,000 but under 100,000 2.30 2.25 2.00
100,000 but under 250,000 1.52 1.50 1.25
250,000 but under 500,000 1.01 1.00 1.00
500,000 and above NONE NONE NONE

Sales charges will not apply to class M shares purchased with redemption proceeds
received within the prior 90 days from non-Putnam mutual funds on which the investor paid
a front-end or a contingent deferred sales charge. Class M qualified retirement plans
(retirement plans for which Putnam Fiduciary Trust company provides recordkeeping or other
services in connection with the purchase of class M shares) and members of qualified
groups may also purchase class M shares without a sales charge.

GENERAL

YOU MAY BE ELIGIBLE TO BUY FUND SHARES AT REDUCED SALES CHARGES OR TO SELL
SHARES WITHOUT A CDSC .

Consult your investment dealer or Putnam Mutual Funds for details about Putnam's combined
purchase privilege, cumulative quantity discount, statement of intention, group sales
plan, qualified benefit plans, and other plans. Descriptions are also included in
the order form and in the SAI.

The fund may sell class A, class B and class M shares at net asset value without an
initial sales charge or a CDSC to current and retired Trustees (and their
families), current and retired employees (and their families) of Putnam Management and
affiliates, registered representatives and other employees (and their families) of
broker-dealers having sales agreements with Putnam Mutual Funds, employees (and their
families) of financial institutions having sales agreements with Putnam Mutual Funds (or
otherwise having an arrangement with a broker-dealer or financial institution with respect
to sales of fund shares), financial institution trust departments investing an aggregate
of $1 million or more in Putnam funds, clients of certain administrators of tax-qualified
plans, tax-qualified plans when proceeds from repayments of loans to participants are
invested (or reinvested) in Putnam funds, "wrap accounts" for the benefit of clients of
broker-dealers, financial institutions or financial planners adhering to certain standards
established by Putnam Mutual Funds, and investors meeting certain requirements who sold
shares of certain Putnam closed-end funds pursuant to a tender offer by the closed-end
fund.

In addition, the fund may sell shares at net asset value without an initial sales charge
or a CDSC in connection with the acquisition by the fund of assets of an investment
company or personal holding company. The CDSC will be waived on redemptions of shares
arising out of the death or post-purchase disability of a shareholder or settlor of a
living trust account, and on redemptions in connection with certain withdrawals from IRA
or other retirement plans. Up to 12% of the value of shares subject to a systematic
withdrawal plan may also be redeemed each year without a CDSC. The SAI contains
additional information about purchasing shares at reduced sales charges.

Shareholders of other Putnam funds may be entitled to exchange their shares for, or
reinvest distributions from their funds in, fund shares at net asset value.

If you are considering redeeming shares or transferring shares to another person
shortly after purchase, you should pay for those shares with a certified check to avoid
any delay in redemption or transfer. Otherwise , payment may be
delayed until the purchase price of those shares has been collected or, if you redeem
by telephone, until 15 calendar days after the purchase date. To eliminate the need for
safekeeping, certificates will not be issued for your shares unless you
request them.

In determining whether a CDSC is payable on any redemption, shares not subject to any
charge will be redeemed first, followed by shares held longest during the CDSC period. Any
CDSC will be based on the lower of the shares' cost and net asset value. For this
purpose, the amount of any increase in a share's value above its initial purchase price is
not regarded as a share exempt from the CDSC. Thus, when a share you redeem that has
appreciated in value during the CDSC period, a CDSC is assessed on its initial purchase
price. Any shares acquired by reinvestment of distributions will be redeemed without a
CDSC. For information on how sales charges are calculated if you exchange your shares,
see "How to exchange shares." Putnam Mutual Funds receives the entire amount of any CDSC
you pay. See the SAI for more information about the CDSC.

Putnam Mutual Funds will from time to time, at its expense, provide additional promotional
incentives or payments to dealers that sell shares of the Putnam funds. These incentives
or payments may include payments for travel expenses, including lodging, incurred in
connection with trips taken by invited registered representatives and their guests to
locations within and outside the United States for meetings or seminars of a business
nature. In some instances, these incentives or payments may be offered only to certain
dealers who have sold or may sell significant amounts of shares. Certain dealers may not
sell all classes of shares.

DISTRIBUTION PLANS

The fund has adopted distribution plans to compensate Putnam Mutual Funds for services
provided and expenses incurred by it as principal underwriter of fund shares, including
the payments to dealers mentioned below. The plans provide for payments by the fund
to Putnam Mutual Funds at annual rates (expressed as a percentage of average net
assets) of up to 0.35% on class A shares and 1.00% on class B and class M shares. The
Trustees currently limit payments on class A and Class M shares to 0.25% and 0.50% of
average net assets, respectively.

Putnam Mutual Funds compensates qualifying dealers (including, for this purpose,
certain financial institutions) for sales of shares and the maintenance of
shareholder accounts.

Putnam Mutual Funds makes quarterly payments to dealers at the annual rate of up to
0.25% of the average net asset value of class A shares . The payments to dealers
for shares held by class A qualified benefit plans are made at reduced rates, as described
in the SAI. No payments are made during the first year after purchase
on shares purchased at net asset value by shareholders investing $1 million
or more or by employer-sponsored retirement plans that have at least 200 eligible
employees or that are class A qualified benefit plans, unless the shareholder has
made arrangements with Putnam Mutual Funds and the dealer of record has waived the
sales commission.

Putnam Mutual Funds makes quarterly payments to dealers at the annual
rates of 0.25% and 0.40% of the average net asset value of class B and
class M shares, respectively .

Putnam Mutual Funds may suspend or modify its payments to dealers. The
payments are also subject to the continuation of the relevant distribution plan, the terms
of service agreements between dealers and Putnam Mutual Funds, and any applicable limits
imposed by the National Association of Securities Dealers, Inc.

HOW TO SELL SHARES

You can sell your shares to the fund any day the New York Stock Exchange is open, either
directly to the fund or through your investment dealer. The fund will only redeem shares
for which it has received payment.

SELLING SHARES DIRECTLY TO YOUR FUND. Send a signed letter of instruction or stock
power form to Putnam Investor Services, along with any certificates that represent shares
you want to sell. The price you will receive is the next net asset value calculated after
the fund receives your request in proper form less any applicable CDSC. In order to
receive that day's net asset value, Putnam Investor Services must receive your request
before the close of regular trading on the New York Stock Exchange.

If you sell shares having a net asset value of $100,000 or more, the signatures of
registered owners or their legal representatives must be guaranteed by a bank, broker-
dealer or certain other financial institutions. See the SAI for more information about
where to obtain a signature guarantee. Stock power forms are available from your
investment dealer, Putnam Investor Services and many commercial banks.

If you want your redemption proceeds sent to an address other than your address as it
appears on Putnam's records, a signature guarantee is required. Putnam Investor Services
usually requires additional documentation for the sale of shares by a corporation,
partnership, agent or fiduciary, or a surviving joint owner. Contact Putnam Investor
Services for details.

YOUR FUND GENERALLY SENDS YOU PAYMENT FOR YOUR SHARES THE BUSINESS DAY AFTER YOUR
REQUEST IS RECEIVED. Under unusual circumstances, the fund may suspend redemptions, or
postpone payment for more than seven days, as permitted by federal securities law.

You may use Putnam's Telephone Redemption Privilege to redeem shares valued up to $100,000
unless you have notified Putnam Investor Services of an address change within the
preceding 15 days. Unless an investor indicates otherwise on the account application,
Putnam Investor Services will be authorized to act upon redemption and transfer
instructions received by telephone from a shareholder, or any person claiming to act as
his or her representative, who can provide Putnam Investor Services with his or her
account registration and address as it appears on Putnam Investor Services' records.

Putnam Investor Services will employ these and other reasonable procedures to confirm that
instructions communicated by telephone are genuine; if it fails to employ reasonable
procedures, Putnam Investor Services may be liable for any losses due to unauthorized or
fraudulent instructions. For information, consult Putnam Investor Services.

During periods of unusual market changes and shareholder activity, you may experience
delays in contacting Putnam Investor Services by telephone. In this event, you may wish
to submit a written redemption request, as described above, or contact your investment
dealer, as described below. The Telephone Redemption Privilege is not available if you
were issued certificates for shares that remain outstanding. The Telephone Redemption
Privilege may be modified or terminated without notice.

SELLING SHARES THROUGH YOUR INVESTMENT DEALER. Your dealer must receive your request
before the close of regular trading on the New York Stock Exchange to receive that day's
net asset value. Your dealer will be responsible for furnishing all necessary
documentation to Putnam Investor Services, and may charge you for its services.

HOW TO EXCHANGE SHARES

You can exchange your shares for shares of the same class of certain other Putnam funds at
net asset value . Not all Putnam funds offer all classes of shares. If you exchange
shares subject to a CDSC, the transaction will not be subject to the CDSC. However, when
you redeem the shares acquired through the exchange, the redemption may be subject to the
CDSC, depending upon when you originally purchased the shares. The CDSC will be computed
using the schedule of any fund into or from which you have exchanged your shares that would
result in your paying the highest CDSC applicable to your class of shares. For purposes of
computing the CDSC, the length of time you have owned your shares will be measured from the
date of original purchase and will not be affected by any exchange.

To exchange your shares, simply complete an Exchange Authorization Form and send it to
Putnam Investor Services. The form is available from Putnam Investor Services. For federal
income tax purposes, an exchange is treated as a sale of shares and generally results in a
capital gain or loss. A Telephone Exchange Privilege is currently available for amounts up
to $500,000. Putnam Investor Services' procedures for telephonic transactions are described
above under "How to sell shares." The Telephone Exchange Privilege is not available if you
were issued certificates for shares that remain outstanding. Ask your investment dealer or
Putnam Investor Services for prospectuses of other Putnam funds. Shares of certain Putnam
funds are not available to residents of all states.

The exchange privilege is not intended as a vehicle for short-term trading. Excessive
exchange activity may interfere with portfolio management and have an adverse effect on all
shareholders. In order to limit excessive exchange activity and in other circumstances
where Putnam Management or the Trustees believe doing so would be in the best interests of
your fund, the fund reserves the right to revise or terminate the exchange privilege,
limit the amount or number of exchanges or reject any exchange. Consult Putnam
Investor Services before requesting an exchange. See the SAI to find out more about the
exchange privilege.

HOW THE FUND VALUES ITS SHARES

THE FUND CALCULATES THE NET ASSET VALUE OF A SHARE OF EACH CLASS BY DIVIDING THE TOTAL
VALUE OF ITS ASSETS, LESS LIABILITIES, BY THE NUMBER OF ITS SHARES OUTSTANDING. SHARES
ARE VALUED AS OF THE CLOSE OF REGULAR TRADING ON THE NEW YORK STOCK EXCHANGE EACH DAY THE
EXCHANGE IS OPEN.

Portfolio securities for which market quotations are readily available are valued at
market value. Short-term investments that will mature in 60 days or less are valued at
amortized cost, which approximates market value. All other securities and assets are
valued at their fair value following procedures approved by the Trustees.

Securities quoted in foreign currencies are translated into U.S. dollars at current
exchange rates or at such other rates as the Trustees may determine in computing net asset
value. As a result, fluctuations in the value of such currencies in relation to the U.S.
dollar may affect the net asset value of fund shares even though there has not been any
change in the values of such securities as quoted in such foreign currencies.

HOW THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION

The fund will declare a distribution each day in an amount which is based on Putnam
Management's projections of the fund's estimated net investment income. Normally, the
fund will pay these distributions monthly. The amount of each daily distribution may
differ from actual net investment income determined in accordance with generally accepted
accounting principles. See "Distributions" in the SAI. The fund will distribute, at
least annually, all net realized capital gains, if any, after applying any available
capital loss carryovers . Distributions paid on class A shares will generally be
greater than those paid on class B and class M shares because expenses attributable to
class B and class M shares will generally be higher.

You begin earning distributions on the business day that Putnam Mutual Funds receives
payment for your shares. It is your responsibility to see that your dealer forwards
payment promptly.

YOU CAN CHOOSE FROM THREE DISTRIBUTION OPTIONS:

- - Reinvest all distributions in additional shares without a sales charge;

- - Receive distributions from net investment income in cash while reinvesting capital
gains distributions in additional shares without a sales charge; or

- - Receive all distributions in cash.

You can change your distribution option by notifying Putnam Investor Services in writing.
If you do not select an option when you open your account, all distributions will be
reinvested. All distributions not paid in cash will be reinvested in shares of the class
on which the distributions are paid. You will receive a statement confirming reinvestment
of distributions in additional shares (or in shares of other Putnam funds for Dividends
Plus accounts) promptly following the quarter in which the reinvestment occurs.

If a check representing a fund distribution is not cashed within a specified period, Putnam
Investor Services will notify you that you have the option of requesting another check or
reinvesting the distribution in the fund or in another Putnam fund. If Putnam Investor
Services does not receive your election, the distribution will be reinvested in the fund.
Similarly, if correspondence sent by the fund or Putnam Investor Services is returned as
"undeliverable," fund distributions will automatically be reinvested in the fund or in
another Putnam fund.

The fund intends to qualify as a "regulated investment company" for federal income tax
purposes and to meet all other requirements necessary for it to be relieved of federal
taxes on income and gains it distributes to shareholders. The fund will distribute
substantially all of its ordinary income and capital gain net income on a current basis.

Fund distributions will be taxable to you as ordinary income, except that any
distributions of net long-term capital gains will be taxable as such, regardless of how long
you have held the shares. Distributions will be taxable as described above whether received
in cash or in shares through the reinvestment of distributions.

Fund investments in foreign securities may be subject to withholding taxes at the source on
dividend or interest payments. In that case, the fund's yield on those securities
would be decreased. The fund does not expect to be eligible to elect to permit
shareholders to claim a credit or deduction on their income tax return for their pro rata
share of such taxes.

Fund transactions in foreign currencies and hedging activities may give rise to ordinary
income or loss to the extent such income or loss results from fluctuations in value of the
foreign currency concerned. In addition, such activities will likely produce a difference
between book income and taxable income. This difference may cause a portion of the fund's
income distributions to constitute a return of capital for tax purposes or require the fund
to make distributions exceeding book income to qualify as a regulated investment company for
tax purposes.

Investment in an entity that qualifies as a "passive foreign investment
company" under the Internal Revenue Code could subject the fund to a U.S. federal
income tax or other charge on certain "excess distributions" with respect to the investment,
and on the proceeds from disposition of the investment.

Early in each year Putnam Investor Services will notify you of the amount and tax status
of distributions paid to you for the preceding year.

The foregoing is a summary of certain federal income tax consequences of investing in the
fund. You should consult your tax adviser to determine the precise effect of an
investment in the fund on your particular tax situation (including possible liability for
state and local taxes).

ABOUT PUTNAM INVESTMENTS, INC .

PUTNAM MANAGEMENT HAS BEEN MANAGING MUTUAL FUNDS SINCE 1937. Putnam Mutual Funds is the
principal underwriter of the fund and of other Putnam funds. Putnam Fiduciary Trust
Company is the custodian of the fund . Putnam Investor Services, a
division of Putnam Fiduciary Trust Company, is the investor servicing and transfer
agent for the fund .

Putnam Management, Putnam Mutual Funds and Putnam Fiduciary Trust Company are subsidiaries
of Putnam Investments, Inc., which is wholly owned by Marsh & McLennan Companies, Inc., a
publicly-owned holding company whose principal businesses are international insurance and
reinsurance brokerage, employee benefit consulting and investment management.
APPENDIX

SECURITIES RATINGS

THE FOLLOWING RATING SERVICES DESCRIBE RATED SECURITIES AS FOLLOWS:

MOODY'S INVESTORS SERVICE, INC.

BONDS

AAA - - Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally strong position
of such issues.

AA - - Bonds which are rated AA are judged to be of high quality by all standards.
Together with the AAA group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection may not be
as large as in AAA securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risk appear
somewhat larger than the AAA securities.

A - - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.

BAA - - Bonds which are rated BAA are considered as medium grade obligations ,
(i.e., they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective elements
may be lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.

BA - - Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate , and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes bonds in
this class.

B - - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.

CAA - - Bonds which are rated CAA are of poor standing. Such issues may be in
default, or there may be present elements of danger with respect to principal or interest.

CA - - Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C - - Bonds which are rated C are the lowest rated class of bonds , and issues
so rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

STANDARD & POOR'S

BONDS

AAA - - Debt rated `AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA - - Debt rated `AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.

A - - Debt rated `A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB - - Debt rated `BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in higher
rated categories.

BB -B-CCC-CC-C -- Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. 'BB' indicates the lowest degree of
speculation and 'C' the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.

BB -- Debt rated `BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The `BB' rating category is also used for
debt subordinated to senior debt that is assigned an actual or implied `BBB-' rating.

B - - Debt rated `B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business, financial,
or economic conditions will likely impair capacity or willingness to pay interest and
repay principal. The `B' rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied `BB' or `BB-' rating.

CCC - - Debt rated `CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet timely
payment of interest and repayment of principal. In the event of adverse business,
financial, or economic conditions, it is not likely to have the capacity to pay interest
and repay principal. The `CCC' rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied `B' or `B-' rating.

CC - - The rating `CC' typically is applied to debt subordinated to senior debt that
is assigned an actual or implied `CCC' rating.

C - - The rating `C' typically is applied to debt subordinated to senior debt which
is assigned an actual or implied `CCC-' debt rating. The `C' rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments are
continued.

D - - Bonds rated `D' are in payment default. The `D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The `D' rating also will be used on the filing of
a bankruptcy petition if debt service payments are jeopardized.

DUFF & PHELPS CORPORATION

LONG-TERM DEBT

AAA -- Highest credit quality. The risk factors are negligible, being only slightly more
than for risk-free U.S. Treasury debt.

AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.

A+, A, A- -- Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.

BBB+, BBB, BBB- -- Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.

BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to industry
conditions or company fortunes. Overall quality may move up or down frequently within
this category.

B+, B, B- -- Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to economic
cycles, industry conditions and/or company fortunes. Potential exists for frequent
changes in the rating within this category or into a higher or lower rating grade.

CCC -- Well below investment-grade securities. Considerable uncertainty exists as to
timely payment of principal, interest or preferred dividends. Protection factors are
narrow and risk can be substantial with unfavorable economic/industry conditions, and/or
with unfavorable company developments.

DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.

FITCH INVESTORS SERVICE, INC.

AAA -- Bonds considered to be investment grade and of the highest credit quality. The
obligor has an exceptionally strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.

AA -- Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although not quite
as strong as bonds rated AAA.

A -- Bonds considered to be investment grade and of high credit quality. The obligor's
ability to pay interest and repay principal is considered to be strong, but may be more
vulnerable
to adverse changes in economic conditions and circumstances than bonds with higher
ratings.

BBB -- Bonds considered to be investment grade and of satisfactory credit quality. The
obligor's ability to pay interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances, however, are more likely to have
adverse impact on these bonds, and therefore impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher than for bonds with
higher ratings.

BB -- Bonds considered to be speculative. The obligor's ability to pay interest and repay
principal may be affected over time by adverse economic changes. However, business and
financial alternatives can be identified which could assist the obligor in satisfying its
debt service requirements.

B -- Bonds are considered highly speculative. Bonds in this class are lightly protected as
to the obligor's ability to pay interest over the life of the issue and repay principal
when due.

CCC -- Bonds have certain characteristics which, with passing of time, could lead to the
possibility of default on either principal or interest payments.

CC -- Bonds are minimally protected. Default in payment of interest and/or principal seems
probable.

C -- Bonds are in actual or imminent default in payment of interest or principal.

DDD -- Bonds are in default and in arrears in interest and/or principal payments. Such
bonds are extremely speculative and should be valued only on the basis of their value in
liquidation or reorganization of the obligor.
<PAGE>
PUTNAM DIVERSIFIED INCOME TRUST II

One Post Office Square
Boston, MA 02109

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

INVESTOR SERVICING AGENT

Putnam Investor Services
Mailing address:
P.O. Box 41203
Providence, RI 02940-1203

CUSTODIAN

Putnam Fiduciary Trust Company
One Post Office Square
Boston, MA 02109

LEGAL COUNSEL

Ropes & Gray
One International Place
Boston, MA 02110

INDEPENDENT ACCOUNTANTS

Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109

PUTNAMINVESTMENTS
One Post Office Square
Boston, Massachusetts 02109
Toll-free 1-800-225-1581
<PAGE>

PUTNAM DIVERSIFIED INCOME TRUST II

FORM N-1A
PART B

STATEMENT OF ADDITIONAL INFORMATION ("SAI")

JULY 30, 1997

This SAI is not a prospectus and is only authorized for distribution when accompanied or
preceded by the prospectus of the fund dated July 30, 1997 , as revised from time to
time. This SAI contains information which may be useful to investors but which is not
included in the prospectus. If the fund has more than one form of current prospectus,
each reference to the prospectus in this SAI shall include all of the fund's prospectuses,
unless otherwise noted. The SAI should be read together with the applicable prospectus.
Investors may obtain a free copy of the applicable prospectus from Putnam Investor
Services, Mailing address: P.O. Box 41203, Providence, RI 02940-1203.

Part I of this SAI contains specific information about the fund. Part II includes
information about the fund and the other Putnam funds.
<PAGE>
TABLE OF CONTENTS

PART I

INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-3

DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I- 4

CHARGES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I- 5

INVESTMENT PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-11

ADDITIONAL OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I- 11

INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . I- 12

PART II

MISCELLANEOUS INVESTMENT PRACTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-1

TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II- 29

MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II- 34

DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . .II- 44

HOW TO BUY SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II- 45

DISTRIBUTION PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II- 57

INVESTOR SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II- 58

SIGNATURE GUARANTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II- 64

SUSPENSION OF REDEMPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II- 64

SHAREHOLDER LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II- 64

STANDARD PERFORMANCE MEASURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II- 65

COMPARISON OF PORTFOLIO PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . . . . . .II- 66

DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II- 71

<PAGE>

SAI
PART I

INVESTMENT RESTRICTIONS

AS FUNDAMENTAL INVESTMENT RESTRICTIONS, WHICH MAY NOT BE CHANGED WITHOUT A VOTE OF A
MAJORITY OF THE OUTSTANDING VOTING SECURITIES, THE FUND MAY NOT AND WILL NOT:

(1) Borrow money in excess of 10% of the value (taken at the lower of cost or current
value) of its total assets (not including the amount borrowed) at the time the borrowing
is made, and then only from banks as a temporary measure to facilitate the meeting of
redemption requests (not for leverage) which might otherwise require the untimely
disposition of portfolio investments or for extraordinary or emergency purposes. Such
borrowings will be repaid before any additional investments are purchased.

(2) Underwrite securities issued by other persons except to the extent that, in
connection with the disposition of its portfolio investments, it may be deemed to be an
underwriter under certain federal securities laws.

(3) Purchase or sell real estate, although it may purchase securities of issuers which
deal in real estate, securities which are secured by interests in real estate, and
securities which represent interests in real estate, and it may acquire and dispose of
real estate or interests in real estate acquired through the exercise of its rights as a
holder of debt obligations secured by real estate or interests therein.

(4) Purchase or sell commodities or commodity contracts, except that the fund may
purchase and sell financial futures contracts and options.

(5) Make loans, except by purchase of debt obligations in which the fund may invest
consistent with its investment policies, by entering into repurchase agreements with
respect to not more than 25% of its total assets (taken at current value) or through the
lending of its portfolio securities with respect to not more than 25% of its total assets
(taken at current value).

(6) With respect to 75% of its total assets, invest in securities of any issuer if,
immediately after such investment, more than 5% of the total assets of the fund (taken at
current value) would be invested in the securities of such issuer; provided that this
limitation does not apply to obligations issued or guaranteed as to interest or principal
by the U.S. government or its political subdivisions.

(7) With respect to 75% of its total assets, acquire more than 10% of the voting
securities of any issuer.

(8) Purchase securities (other than securities of the U.S. government, its agencies or
instrumentalities) if, as a result of such purchase, more than 25% of the fund's total
assets would be invested in any one industry.

(9) Issue any class of securities which is senior to the fund's shares of beneficial
interest.

For the purpose of fundamental investment restriction (8) above, the fund will consider
securities backed by the credit of different foreign governments as representing separate
industries.

Although certain of the fund's fundamental investment restrictions permit it to borrow
money to a limited extent, the fund does not currently intend to do so and did not do so
last year.

The Investment Company Act of 1940 provides that a "vote of a majority of the outstanding
voting securities" of the fund means the affirmative vote of the lesser of (1) more than
50% of the outstanding fund shares, or (2) 67% or more of the shares present at a meeting
if more than 50% of the outstanding fund shares are represented at the meeting in person
or by proxy.

IT IS CONTRARY TO THE FUND'S PRESENT POLICY, WHICH MAY BE CHANGED WITHOUT SHAREHOLDER
APPROVAL, TO:

Invest in (a) securities which are not readily marketable, (b)
securities restricted as to resale (excluding securities determined by the Trustees of the
fund (or the person designated by the Trustees of the fund to make such determinations) to
be readily marketable), and (c) repurchase agreements maturing in more than seven days,
if, as a result, more than 15% of the fund's net assets (taken at current value) would be
invested in securities described in (a), (b) and (c) above.

---------------------

All percentage limitations on investments other than pursuant to the non-fundamental
restriction will apply at the time of the making of an investment and shall not be
considered violated unless an excess or deficiency occurs or exists immediately after and
as a result of such investment.

---------------------

DISTRIBUTIONS

The distribution declared by the fund each day will be in an amount equal to the projected
net investment income for a specified period (which is generally expected to be one month,
although it may be longer or shorter if deemed appropriate by Putnam Management in light
of existing or anticipated market conditions to avoid sharp fluctuations in the amount of
daily distributions), plus for certain periods undistributed amounts of such income,
divided by the number of days in that period. The amount of the daily distribution will
generally differ from the fund's daily taxable investment income and book net investment
income computed in accordance with generally accepted accounting principles, since the
daily distribution is calculated on the assumption that estimated taxable income and book
net investment income for the period are earned pro-rata throughout the period on a daily
basis. Estimated net investment income for any period will be based upon Putnam
Management's projections of investment income to be accrued during the period less
projected expenses of the fund to be accrued for the period.

In estimating net investment income, Putnam Management may reduce the amounts to provide a
reserve of undistributed amounts which could be paid in subsequent periods. This procedure
may enable the fund to avoid sharp fluctuations in the total daily distributions from
period to period and to minimize the possibility of making distributions from paid-in
surplus or other capital sources. The reserve may increase the net asset value of the
fund, thereby causing redeeming shareholders to experience higher capital gains or lower
capital losses. For example, if Putnam Management estimates that the fund's net
investment income for a period will be $.27 per share and if the fund has a reserve of
$.06 per share of undistributed income, the daily distribution might be initially
established at $.01 ($.30 divided by 30 days) per share for each day during the period,
leaving a reserve of $.03 per share available for distribution in subsequent periods.
Putnam Management may revise its estimates of the amounts of net investment income, in
which case the subsequent daily distributions during the period may be revised
accordingly.

CHARGES AND EXPENSES

MANAGEMENT FEES

Under a Management Contract dated January 8, 1996, the fund pays a quarterly fee to Putnam
Management based on the average net assets of the fund, as determined at the close of each
business day during the quarter , at the annual rate of 0.70% of the first $500 million
of average net assets, 0.60% of the next $500 million, 0.55% of the next $500 million,
0.50% of the next $5 billion, 0.475% of the next $5 billion, 0.455% of the next $5
billion, 0.44% of the next $5 billion and 0.43% of any excess thereafter. For the past
two fiscal years , pursuant to the Management Contract , the fund incurred the
following fees:

REFLECTING A
REDUCTION IN THE
FOLLOWING AMOUNTS
Fiscal Management pursuant to an year
fee paid
expense limitation

1997 $424,705 $174,482
1996 $2,986 $11,148

EXPENSE LIMITATION. In order to limit the fund's expenses , Putnam Management has
agreed to limit its compensation (and, to the extent necessary, bear other expenses of the
fund) through March 31, 1998 to the extent that expenses of the fund (exclusive of
brokerage, interest, taxes, deferred organizational and extraordinary expenses, and
payments under the fund's distribution plans) would exceed an annual rate of 1.00% of the
fund's average net assets. For the purpose of determining any such limitation on Putnam
Management's compensation, expenses of the fund do not reflect the application of
commissions or cash management credits that may reduce designated fund expenses. With
Trustee approval, this expense limitation may be terminated earlier, in which event
shareholders would be notified and this SAI would be revised.

BROKERAGE COMMISSIONS

The following table shows brokerage commissions paid during the fiscal periods
indicated :

FISCAL BROKERAGE
YEAR COMMISSIONS

1997 $731
1996 $0

The following table shows transactions placed with brokers and dealers during the most
recent fiscal year to recognize research, statistical and quotation services
received by Putnam Management and its affiliates :

DOLLAR
VALUE PERCENT OF
OF THESE TOTAL AMOUNT OF
TRANSACTIONS TRANSACTIONS COMMISSIONS

$503,106 2.58% $1,270

ADMINISTRATIVE EXPENSE REIMBURSEMENT

The fund reimbursed Putnam Management in the following amount for administrative services
during fiscal 1997 , including the following amount for compensation of
certain fund officers and contributions to the Putnam Investments, Inc.
Profit Sharing Retirement Plan for their benefit:

PORTION OF TOTAL
REIMBURSEMENT FOR
COMPENSATION
TOTAL AND
REIMBURSEMENT CONTRIBUTIONS

$4,793 $4,219

<PAGE>
TRUSTEE FEES

Each Trustee receives a fee for his or her services. Each Trustee also receives fees for
serving as Trustee of other Putnam funds. The Trustees periodically review their fees to
assure that such fees continue to be appropriate in light of their responsibilities as
well as in relation to fees paid to trustees of other mutual fund complexes. The Trustees
meet monthly over a two-day period, except in August. The Compensation Committee, which
consists solely of Trustees not affiliated with Putnam Management and is responsible for
recommending Trustee compensation, estimates that Committee and Trustee meeting time
together with the appropriate preparation requires the equivalent of at least three
business days per Trustee meeting. The following table shows the year each Trustee was
first elected a Trustee of the Putnam funds, the fees paid to each Trustee
by the fund for fiscal 1997 and the fees paid to each Trustee by all of the
Putnam funds during calendar 1996:COMPENSATION TABLE

Pension or Estimated Total
Aggregate retirement annual benefits compensation
compensation benefits accrued from all from all
from the as part of Putnam funds Putnam
Trustees/Year fund(1) fund expenses(2) upon retirement(3) funds(4)

Jameson A. Baxter/1994 $538 $35 $85,646 $172,291(5)
Hans H. Estin/1972 530 86 85,646 171,291
John A. Hill/1985 532 32 85,646 170,791(5)
Ronald J. Jackson/1996(6) 521 15 85,646 94,807(5)
Elizabeth T. Kennan/1992 534 45 85,646 171,291
Lawrence J. Lasser/1992 532 34 85,646 169,791
Robert E. Patterson/1984 558 26 85,646 182,291
Donald S. Perkins/1982 538 94 85,646 170,291
William F. Pounds/1971 (7) 552 97 98,146 197,291
George Putnam/1957 538 99 85,646 171,291
George Putnam, III/1984 538 17 85,646 171,291
A.J.C. Smith/1986 524 58 85,646 169,791
W. Nicholas Thorndike/1992 550 64 85,646 181,291

(1) Includes an annual retainer and an attendance fee for each
meeting attended.
(2) The Trustees approved a Retirement Plan for Trustees of the
Putnam funds on October 1, 1996. Prior to that date,
voluntary retirement benefits were paid to
certain retired
Trustees.
(3) Assumes that each Trustee retires at the normal retirement date. Estimated benefits for
each Trustee are based on Trustee fee rates in effect during calendar 1996.
(4) As of December 31, 1996, there were 96

[/R] funds in the Putnam family.
(5) Includes compensation deferred pursuant to a Trustee
Compensation Deferral Plan.
(6) Elected as a Trustee in May 1996.
(7) Includes additional compensation for service as Vice
Chairman of the Putnam funds.
<PAGE>
Under a Retirement Plan for Trustees of the Putnam funds (the
"Plan"), each Trustee who retires with at least five years of
service as a Trustee of the funds is entitled to receive an annual
retirement benefit equal to one-half of the average annual
compensation paid to such Trustee for the last three years of service
prior to retirement. This retirement benefit is payable during a
Trustee's lifetime, beginning the year following retirement, for a
number of years equal to such Trustee's years of service. A death
benefit is also available under the Plan which assures that the
Trustee and his or her beneficiaries will receive benefit payments for
the lesser of an aggregate period of (i) ten years or (ii) such
Trustee's total years of service.

The Plan Administrator (a committee comprised of Trustees that are not
"interested persons" of the fund, as defined in the Investment Company
Act of 1940) may terminate or amend the Plan at any time, but no
termination or amendment will result in a reduction in the amount of
benefits (i) currently being paid to a Trustee at the time of such
termination or amendment, or (ii) which a current Trustee would have
been entitled to receive had he or she retired immediately prior to
such termination or amendment.

For additional information concerning the Trustees, see "Management"
in Part II of this SAI.

SHARE OWNERSHIP

At June 30, 1997 , the officers and Trustees of the fund
as a group owned less than 1% of the outstanding shares
of each class of the fund, and , except as noted below, to the
knowledge of the fund no person owned of record or beneficially 5% or
more of any class of shares of the fund :

SHAREHOLDER NAME PERCENTAGE
CLASS AND ADDRESS OWNED

B MLPF&S is Merrill Lynch 7.30%
4800 Deer Lake Dr. E. Fl. 3
Jacksonville, FL 32246-6484

M Donaldson Lufkin Jenrette 7.00%
P.O. Box 2052
Jersey City, NJ 07303

DISTRIBUTION FEES

During fiscal 1997 , the fund paid the following 12b-1
fees to Putnam Mutual Funds:

CLASS A CLASS B CLASS M

$55,646 $348,936 $17,386

CLASS A SALES CHARGES AND CONTINGENT DEFERRED SALES CHARGES

Putnam Mutual Funds received sales charges with respect to class A
shares in the following amounts during the periods indicated:

SALES CHARGES
RETAINED BY PUTNAM CONTINGENT
TOTALMUTUAL FUNDS DEFERRED
FISCALFRONT-END AFTER SALES
YEAR SALES CHARGES DEALER CONCESSIONS CHARGES

1997 $946,314 $86,350 $88
1996 $89,221$3,693 $0

CLASS B CONTINGENT DEFERRED SALES CHARGES

Putnam Mutual Funds received contingent deferred sales charges upon
redemptions of class B shares in the following amounts during
the periods indicated:

CONTINGENT DEFERRED
FISCAL YEAR SALES CHARGES

1997 $55,923
1996 $0

CLASS M SALES CHARGES

Putnam Mutual Funds received sales charges with respect to class M
shares in the following amounts during the periods
indicated :

SALES CHARGES
RETAINED BY PUTNAM
MUTUAL FUNDS
TOTAL AFTER
SALES CHARGES DEALER CONCESSIONS

Fiscal year

1997 $85,410 $5,447
1996 $10,419 $80

INVESTOR SERVICING AND CUSTODY FEES AND EXPENSES

During the 1997 fiscal year , the fund incurred
$185,771 in fees and out-of-pocket expenses for investor
servicing and custody services provided by Putnam Fiduciary Trust
Company.
<PAGE>
INVESTMENT PERFORMANCE

STANDARD PERFORMANCE MEASURES
(for periods ended March 31, 1997)

Class A Class B Class M

Inception date: 2/26/96 2/26/96 2/26/96

ANNUALIZED
TOTAL RETURN+

1 year 2.24% 1.58% 3.63%
Life of class 1.20% 1.38% 2.31%

YIELD++

30-day
Yield 7.08% 6.71% 6.96%

+ Reflecting an expense limitation in effect during the
period . In the absence of the expense limitation, total return
would have been lower. The per share amount of the expense limitation
is set forth in the footnotes to the table in the section entitled
"Financial highlights."

++ Reflecting an expense limitation then in effect. In the absence of
the expense limitation, the fund's yield would have been 6.89% for
class A, 6.52 % for class B and 6.79% for class M shares.

Data represent past performance and are not indicative of future
results. Total return and yield for class A and class M
shares reflect the deduction of the maximum sales charge of 4.75% and
3.25%, respectively. Total return for class B shares reflects
the deduction of the applicable contingent deferred sales charge
("CDSC") . The maximum class B CDSC is 5.0%. See "Standard
performance measures" in Part II of this SAI for information on how
performance is calculated.

ADDITIONAL OFFICERS

In addition to the persons listed as fund officers in
Part II of this SAI, each of the following persons is also a Vice
President of the fund and certain of the other Putnam funds, the
total number of which is noted parenthetically . Officers of
Putnam Management hold the same offices in Putnam Management's parent
company, Putnam Investments, Inc.
<PAGE>
OFFICER NAME (AGE) (NUMBER OF FUNDS)

GARY N. COBURN (51) (60 funds). Senior Managing Director of
Putnam Management.

WILLIAM J. CURTIN (37) (58 funds). Managing Director of Putnam
Management. Prior to August, 1996, Mr. Curtin was Managing Director
of Lehman Brothers.

D. WILLIAM KOHLI (36) (10 funds). Managing Director of Putnam
Management. Prior to September, 1994, Mr. Kohli was Executive Vice
President and Co-Director of Global Bond Management and, prior to
October, 1993, Senior Portfolio Manager at Franklin
Advisors/Templeton Investment Counsel.

JENNIFER E. LEICHTER (36) (7 funds). Senior Vice President of
Putnam Management.

MICHAEL MARTINO (44) (6 funds). Managing Director of
Putnam Management. Prior to January, 1994, Mr. Martino was employed
by Back Bay Advisors in the positions of Executive Vice
President and Chief Investment Officer from 1992 to 1994, and Senior
Vice President and Senior Portfolio Manager prior to 1992.

KENNETH J. TAUBES (39) (15 funds). Senior Vice President of
Putnam Management. Senior Vice President of Putnam
Fiduciary Trust Company.

GAIL S. ATTRIDGE (35) (9 funds). Vice President of Putnam
Management. Prior to November, 1993, Ms. Attridge was an Analyst
at Keystone Custody International.

INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS

Coopers & Lybrand L.L.P., One Post Office Square, Boston, MA 02109,
are the fund's independent accountants, providing audit services, tax
return review and other tax consulting services and assistance and
consultation in connection with the review of various Securities and
Exchange Commission filings. The Report of Independent Accountants,
financial highlights and financial statements included in the fund's
Annual Report for the fiscal year ended March 31, 1997 ,
filed electronically on May 30, 1997 (File No. 811-7221), are
incorporated by reference into this SAI. The financial highlights
included in the prospectus and incorporated by reference into this SAI
and the financial statements incorporated by reference into the
prospectus and this SAI have been so included and incorporated in
reliance upon the report of the independent accountants, given on
their authority as experts in auditing and accounting.
<PAGE>
<PAGE>

Putnam
High Yield
Total
Return
Fund

Portfolio
of
investment
s owned

April 30,
1997
(Unaudited
)

Corporate Bonds and Notes (60.1%) (a)
PRINCIPAL VALUE
AMOUNT

Advertising (0.3%)
$ Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 $
50,000 49,860

Aerospace and Defense
(0.1%)
15,000 L-3 Communications Corp. 144A sr. sub. notes 10 15,450
3/8s, 2007
10,000 Tracor, Inc. 144A sr. sub. notes 8 1/2s, 2007 9,800

Agriculture (1.8%) 25,250
299,734 Premium Standard Farms, Inc. sr. secd. notes 11s, 319,217
2003 (PIK)

Apparel (0.1%)
25,000 GFSI, Inc. 144A sr. sub. notes 9 5/8s, 2007 24,750

Automotive (2.4%)
200,000 A.P.S Inc. company guaranty 11 7/8s, 2006 200,000
25,000 CSK Auto, Inc. 144A sr. sub. notes 11s, 2006 25,625
75,000 Exide Corp. sr. notes 10s, 2005 75,938
50,000 Harvard Industries Inc. sr. notes 11 1/8s, 2005 22,500
80,000 Hawk Corp. sr. notes 10 1/4s, 2003 80,600
15,000 Key Plastics Corp. 144A sr. sub. notes 10 1/4s, 15,150
2007

419,813
Broadcasting
(4.0%)
50,000 Capstar Broadcasting 144A sr. disc. notes stepped- 27,875
coupon zero % (12 3/4s, 2/1/02), 2009 (STP)
150,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero % 103,500
(11.2s, 11/15/00), 2007(Bermuda) (STP)
272,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon 173,400
zero % (13 1/4s, 5/15/01), 2008(Mexico) (STP)
150,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes 124,125
stepped-coupon zero % (13 1/2s, 8/1/99), 2004 (STP)
10,000 RBS Participacoes S.A. 144A company guaranty 11s, 10,098
2007(Brazil)
25,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 26,188
3/4s, 2006
15,000 Spanish Broadcasting Systems 144A sr. notes 11s, 15,075
2004
125,000 Sullivan Broadcasting sr. sub. notes 10 1/4s, 2005 125,000
10,000 TCI Satellite Entertainment 144A sr. sub. notes 10 9,500
7/8s, 2007
50,000 TV Azteca Sa De Cv 144A sr. notes 10 1/2s, 49,188
2007(Mexico)
50,000 Young Broadcasting Inc. company guaranty Ser. B, 47,250
9s, 2006

711,199
Building and Construction
(3.0%)
100,000 Consumers International 144A sr. notes 10 1/4s, 103,000
2005
5,000 Continental Homes Holding Corp. sr. notes 10s, 2006 4,925
75,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 74,250
125,000 Presley Cos. sr. notes 12 1/2s, 2001 120,938
100,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 105,000
50,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 54,938
75,000 Triangle Pacific Corp. sr. notes 10 1/2s, 2003 78,750

541,801
Cable Television (1.5%)
60,000 Adelphia Communications Corp. 144A sr. notes 9 56,700
7/8s, 2007
50,000 Cablevision Systems Corp. sr. sub. notes 9 1/4s, 48,750
2005
125,000 Diamond Cable Communication Co. sr. disc. notes 86,563
stepped-coupon zero % (11 3/4s, 12/15/00),
2005(United Kingdom) (STP)
115,000 Diamond Cable Communications Co. 144A sr. disc. 68,425
notes stepped-coupon zero % (10 3/4s, 2/15/02),
2007 (STP)

260,438
Chemicals (0.8%)
25,000 Harris Chemical Corp. sr. sub. notes 10 3/4s, 2003 24,750
120,000 NL Industries, Inc. sr. notes stepped-coupon zero % 110,850
(13s, 10/15/98), 2005 (STP)

135,600
Connecticut (0.4%)
50,000 Mohegan Tribal Gaming sr. secd. notes Ser. B, 13 65,500
1/2s, 2002

Consumer Products (0.4%)
100,000 Revlon Worldwide Corp. 144A sr. disc. notes zero %, 65,500
2001

Consumer Services (2.6%)
25,000 Affinity Group Holdings 144A sr. notes 11s, 2007 25,625
20,000 AMC Entertainment, Inc. 144A sr. sub. notes 9 1/2s, 19,800
2009
50,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 55,000
26,375 Falcon Holdings Group, Inc. sr. sub. notes 11s, 22,946
2003 (PIK)
125,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 129,375
10,000 Hollinger International Publishing, Inc. company 9,875
guaranty 8 5/8s, 2005
200,000 Sun International Hotels Ltd. 144A sr. sub. notes 197,500
9s, 2007

460,121
Electronics and Electrical Equipment
(1.0%)
20,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 17,666
11.74s, 2008
165,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 166,650
10 1/8s, 2007

184,316

Entertainment (1.2%)
50,000 Panda Global Energy Co. 144A sr. notes 12 1/2s, 47,500
2004

Food (0.3%)
50,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 49,000
45,000 Cobb Theatres LLC company guaranty 10 5/8s, 2003 46,575
50,000 Premier Parks, Inc. sr. notes 9 3/4s, 2007 50,625
75,000 Trump A.C. 1st mtge. 11 1/4s, 2006 72,938

219,138
Food and Beverage (0.9%)
50,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 53,125

Forest Products (0.3%)
5,000 Del Monte Corp. 144A sr. sub. notes 12 1/4s, 2007 5,150
150,000 Doane Products Co. sr. notes 10 5/8s, 2006 156,000

161,150
Health Care (2.1%)
50,000 Gaylord Container Corp. sr. sub. disc. deb. 12 53,750
3/4s, 2005 (STP)

Insurance and Finance
(3.5%)
10,000 IMED Corp. sr. sub. notes 9 3/4s, 2006 10,000
150,000 Integrated Health Services sr. sub. notes 10 3/4s, 160,500
2004
150,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 141,750
55,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 54,725

366,975
Insurance and Finance (3.5%)
225,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 209,250
10,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 10,000
2027
150,000 First Nationwide Holdings sr. sub. notes 9 1/8s, 150,000
2003
125,000 Imperial Credit Industries, Inc. 144A sr. notes 9 115,000
7/8s, 2007
25,000 Provident Capital Trust company guaranty 8.6s, 2026 24,125
50,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 36,000
50,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 51,375
2003
10,000 Sovereign Capital Trust 144A company guaranty 9s, 9,750
2027
10,000 Webster Capital Trust I 144A bonds 9.36s, 2027 10,206

615,706
Medical Supplies and Devices
(0.4%)
75,000 Wright Medical Technology, Inc. sr. secd. notes 75,750
Ser. B, 10 3/4s, 2000

Metals and Mining (1.7%)
10,000 Acindar Industria Argentina de Aceros S.A. bonds 11 10,150
1/4s, 2004(Argentina)
10,000 Altos Hornos De Mexico 144A bonds 11 7/8s, 10,125
2004(Mexico)
15,000 Continental Global Group 144A sr. notes Ser. A, 15,450
11s, 2007
10,000 Echo Bay Mines jr. sub. deb. 11s, 2027(Canada) 9,850
50,000 Maxxam Group Holdings sr. nores Ser. B, 12s, 2003 50,500
150,000 Royal Oak Mines, Inc. company guaranty Ser. B, 11s, 150,750
2006(Canada)
50,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 50,500

297,325
Oil and Gas
(6.1%)
125,000 Cliffs Drilling Co. company guaranty Ser. B, 10 129,688
1/4s, 2003
100,000 Falcon Drilling Co., Inc. sr. notes Ser. B, 9 3/4s, 102,000
2001
50,000 Flores & Rucks, Inc. sr. notes 13 1/2s, 2004 58,125
50,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 51,750
5,000 Forcenergy, Inc. 144A sr. sub. notes 8 1/2s, 2007 4,750
50,000 KCS Energy, Inc. company guaranty Ser. B, 11s, 2003 53,250
50,000 Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 51,375
2006
25,000 Transamerican Refining 144A 15s, 1998 25,000
600,000 Transamerican Refining Corp. var. rate 1st mtge. 556,500
zero % (18.5s 2/15/98), 2002 (STP)
50,000 TransTexas Gas Corp. sr. secd. notes 11 1/2s, 2002 55,625

1,088,06
3
Packaging and Containers
(0.5%)
15,000 Innova S De R.L. 144A sr. notes 12 7/8s, 14,775
2007(Mexico)
75,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 81,469

96,244
Paper and Forest Products
(1.0%)

50,000 Buckeye Cellulose Corp. sr. sub. notes 9 1/4s, 2008 51,000
50,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 48,000
2003
50,000 Repap New Brunswick sr. notes 10 5/8s, 2005(Canada) 47,000
25,000 Riverwood International Corp. company guaranty 10 23,500
1/4s, 2006

169,500
Publishing (0%)
5,000 Sun Media Corp. 144A sr. sub. notes 9 1/2s, 4,825
2007(Canada)

Real Estate (0.1%)
20,000 Prime Hospitality Corp. 144A sr. sub. notes 9 3/4s, 20,400
2007

Recreation (3.3%)
50,000 Alliance Gaming Corp. 12 7/8s, 2003 53,938
150,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 134,250
100,000 Colorado Gaming & Entertainment Co. sr. notes 12s, 99,000
2003 (PIK)
150,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 153,750
150,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 150,000

590,938
Retail (1.6%)
100,000 Eagle Food Centers. Inc. sr. notes 8 5/8s, 2000 97,000
50,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 52,000
10,000 Quality Food Centers, Inc. 144A sr. sub. notes 9,850
8.7s, 2007
125,000 Supermercados Norte 144A bonds 10 7/8s, 2004 125,000
(Argentina)
10,000 William Carter Co. 144A sr. sub. notes 12s, 2008 10,200

294,050
Telecommunications
(10.3%)
125,000 Arch Communications Group sr. disc. notes stepped- 56,875
coupon zero % (10 7/8s, 3/15/01), 2008 (STP)
50,000 Brooks Fiber Properties, Inc. sr. disc. notes 32,750
stepped-coupon zero % (10 7/8s, 3/1/01), 2006 (STP)
225,000 Cencall Communications Corp. sr. disc. notes 166,500
stepped-coupon
zero % (10 1/8s, 1/15/99), 2004 (STP)
75,000 Centennial Cellular Corp. sr. notes 10 1/8s, 2005 75,656
25,000 Charter Communications International, Inc. sr. 25,813
notes Ser. B, 11 1/4s, 2006
10,000 Consorcio Ecuatoriano 144A notes 14s, 2002 10,100
(Ecuador)
150,000 Dobson Communications Corp. 144A sr. notes 11 3/4s, 144,000
2007
25,000 Frontiervision Operating Partners L.P. sr. sub. 25,063
notes 11s, 2006
150,000 GST Telecommunications, Inc. company guaranty 93,000
stepped-coupon zero % (13 7/8s, 15/15/00), 2005
(STP)
25,000 Hyperion Telecommunication Corp. sr. disc. notes 12,750
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003
(STP)
275,000 Intelcom Group (USA), Inc. company guaranty stepped- 163,625
coupon zero % (12 1/2s, 5/1/01), 2006 (STP)
100,000 Intermedia Communications, Inc. sr. disc. notes 64,500
stepped-coupon zero % (12 1/2s, 5/15/01), 2006
(STP)
150,000 International Cabletel, Inc. sr. notes stepped- 98,250
coupon Ser. B, zero % (11 1/2s, 2/01/01), 2006
(STP)
40,000 International Cabletel, Inc. 144A sr. notes 10s, 39,100
2007
85,000 McLeod, Inc. 144A sr. disc. notes stepped-coupon 48,663
zero % (10 1/2s, 3/1/02), 2007 (STP)
50,000 MFS Communications sr. disc. notes stepped-coupon 37,927
zero % (8 7/8s, 1/1/01), 2006 (STP)
275,000 Millicom International Cellular S.A. sr. disc. 192,500
notes stepped-coupon zero % (13 1/2s, 6/1/01),
2006(Luxembourg) (STP)
100,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 99,000
2002
50,000 NEXTEL Communications, Inc. sr. disc. notes stepped- 36,375
coupon zero % (9 3/4s, 2/15/99), 2004 (STP)
150,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 117,000
25,000 Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 19,500
50,000 Paging Network, Inc. sr. sub. notes 10s, 2008 44,500
75,000 Pricellular Wireless Corp. sr. disc. notes stepped- 77,250
coupon Ser. B, zero % (14s, 11/15/97), 2001 (STP)
50,000 Rogers Cantel, Inc. deb. 9 3/8s, 2008(Canada) 51,375
125,000 Teleport Communications Group Inc. sr. disc. notes 85,938
stepped-coupon zero % (11 1/8s, 7/1/01), 2007 (STP)
15,000 Winstar Equipment Corp. 144A company guaranty 12 14,363
1/2s, 2004

1,832,37
3

Textiles (1.2%)
50,000 Foamex (L.P.) Capital Corp. sr. disc. notes stepped- 44,000
coupon
Ser. B, zero % (14s, 7/1/99), 2004 (STP)
60,000 Glenoit Corp. 144A sr. sub. notes 11s, 2007 60,600
100,000 Polysindo International Finance company guaranty 11 105,000
3/8s, 2006(Indonesia)

209,600

Transportation
(1.0%)
50,000 Atlantic Express, Inc. 144A company guaranty 10 51,250
3/4s, 2004
125,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 122,500
2003(Greece)

173,750
Utilities (5.9%)
325,000 AES China Generating Co. sr. notes 10 1/8s, 333,531
2006(China)
300,000 Calpine Corp. sr. notes 10 1/2s, 2006 320,250
50,000 Cleveland Electric Illuminating Co. 1st mtge. Ser. 51,365
17-A, 9 3/8s, 2017
100,000 Cleveland Electric Illuminating Co. 1st mtge. Ser. 106,996
B, 9 1/2s, 2005
150,000 Cleveland Electric Illuminating Co. 1st mtge. Ser. 153,933
E, 9s, 2023
50,000 Niagara Mohawk Power Corp. mtge. 9 1/2s, 2000 51,793
25,000 Toledo Edison Co. med. term notes 9.22s, 2021 25,570

1,043,43
8

Total Corporate Bonds and Notes (cost $10,903,400) 10,676,96
5

Brady Bonds (11.0%)
(a)
PRINCIPAL VALUE
AMOUNT
$ 567,450 Argentina (Republic of) deb. 6.75s, 2005 $
520,635
135,000 Argentina (Republic of) FRN Ser. L-GP, 5 1/4s, 2023 87,919
35,000 Bulgaria (Republic of) deb. Ser. PDI, 6.5625s, 2011 21,919
451,621 Brazil (Republic of) FRB 8s, 2014 (POR) 342,667
87,000 Ecuador (Government of) bonds 6.4375s, 2025 58,073
90,000 Poland (Government of) bonds 6.9375s, 2024 87,413
560,000 United Mexican States deb. Ser. A, 6 1/4s, 2019 406,700
250,000 United Mexican States FRB Ser. D, 6.35156s, 2019 221,406
238,095 Venezuela (Government of)deb. Ser. B, 6.75s, 2007 213,095

Total Brady Bonds (cost $1,973,487)
1,959,82
7

Convertible Bonds and Notes (7.6%)
(a)
PRINCIPAL VALUE
AMOUNT

Automotive (0.2%)
$ Magna International cv. sub. deb. 5s, 2002 $
23,000 25,013

Basic Industrial Products
(0%)
7,000 Cooper Industries, Inc. cv. sub. 7.05s, 2015 7,770

Broadcasting (0.2%)
22,000 International Cabletel Inc. 144A cv. deb. 7 1/4s, 21,148
2005
48,000 Jacor Communications, Inc. cv. sr. notes zero %, 22,320
2011

43,468

Business Equipment and Services
(0.6%)
100,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 84,250
28,000 U.S. Office Products Co. 144A cv. sub. notes 5 23,485
1/2s, 2003

107,735
Cellular Broadcasting (0.2%)
55,000 Comcast Corp. cv. notes 1 1/8s, 2007 28,050

Chemicals (0.1%)
9,000 Hercules, Inc. cv. deb. 8s, 2010 23,929

Computer Services and Software
(0.1%)

25,000 Intevac, Inc. 144A cv. sub. notes 6 1/2s, 2004 21,125

Computers (0.3%)
25,000 Safeguard Scientifics, Inc. 144A cv. sub. notes 6s,
2006 22,719
28,000 Softkey International, Inc. 144A cv. sr. notes 5 20,825
1/2s, 2000
20,000 Synoptics Communications Inc. 144A cv. sub. deb. 5 17,475
1/4s, 2003

61,019
Conglomerates
(0.3%)
18,000 Hexcel Corp. cv. sub. notes 7s, 2003
23,490
20,000 Thermo Electron Corp. 144A cv. subordinated 4 1/4s, 21,575
2003

45,065
Consumer Non Durables
(0.3%)
74,000 Coleman Worldwide Corp. cv. sr. sec. notes Liquid
Yeild Option Note ( LYON) zero %, 2013 22,385
24,000 Standard Commercial Corp. cv. sub. deb. 7 1/4s, 21,660
2007 (NON)

44,045
Consumer Services (0.5%)
60,000 Boston Chicken, Inc. cv. notes LYON zero %, 2015
14,775
20,000 Boston Chicken, Inc. cv. sub. deb. 7 3/4s, 2004 21,650
55,000 Hollinger, Inc. cv. LYON zero %, 2013 20,075
22,000 Pharmaceutical Marketing Services Inc. 144A cv. 18,040
deb. 6 1/4s, 2003
16,000 Protection One, Inc. cv. sr. sub. notes 6 3/4s, 15,220
2003

89,760

Electronics and Electrical Equipment
(1.4%)
9,000 Diagnostic Retrieval Systems cv. sr. sub. deb. 9s,
2003 11,070
29,000 HMT Technology Corp. 144A cv. sub. notes 5 3/4s, 23,345
2004
29,000 Integrated Device Technology, Inc. cv. sub. notes 5 24,469
1/2s, 2002
30,000 Motorola, Inc. cv. sub. deb. LYON zero %, 2013 22,275
14,000 Plasma & Materials Technologies, Inc. 144A cv. notes 9,520
7 1/8s, 2001
27,000 S3, Inc. 144A cv. sub. notes 5 3/4s, 2003 22,343
20,000 SCI Systems, Inc. cv. sub. notes 5s, 2006 27,525
10,000 Texas Instruments cv. sub. deb. 2 3/4s, 2002 21,538
20,000 Thermo Instrument Systems, Inc. 144A cv. deb. 4 18,750
1/2s, 2003
23,000 Thermo Optek Corp. 144A cv. bonds 5s, 2000 23,230
21,000 Thermo Quest Corp. cv. co. guaranty 5s, 2000 21,000
20,000 Xilinx, Inc. 144A cv. sub. notes 5 1/4s, 2002 22,900

247,96
5
Environmental Control (0.1%)
12,000 USA Waste Services, Inc. cv. sub. notes 4s, 2002
11,850
14,000 WMX Technologies, Inc. cv. sub. notes 2s, 2005 12,110

23,960
Health Care (0.9%)
50,000 Alza Corp. cv. sub. LYON zero %, 2014
21,938
30,000 NovaCare, Inc. cv. sub. deb. 5 1/2s, 2000 27,188
30,000 PhyMatrix, Inc. cv. sub. deb. 6 3/4s, 2003 24,525
20,000 Renal Treatment Centers, Inc. cv. sub. notes 5 5/8s, 18,100
2006
18,000 Rotech Medical Corp. cv. sub. deb. 5 1/4s, 2003 15,390
22,000 U.S. Diagnostic Laboratories, Inc. 144A cv. sub. 21,120
deb. 9s, 2003
23,000 Vivra, Inc. 144A cv. sub. notes 5s, 2001 21,936

150,19
7
Hospital Management and Medical Services
(0.1%)
19,000 Integrated Health Services, Inc. cv. sub. deb. 6s, 20,235
2003

Insurance and Finance (0.5%)
24,000 Berkshire Hathaway, Inc. cv. sr. notes 1s, 2001
23,010
22,000 Mitsubishi Bank Ltd. International Finance cv. trust 22,358
guaranteed notes 3s, 2002(Bermuda)
17,000 Pioneer Financial Services, Inc. cv. sub. notes 6 24,544
1/2s, 2003
40,000 USF&G Corp. cv. sub. notes zero %, 2009 26,200

96,112
Medical Supplies and Devices
(0.1%)
25,000 Uromed Corp. 144A cv. sub. notes 6s, 2003 15,031

Metals and Mining
(0.1%)
20,000 Quanex Corp. cv. sub. deb. 6.88s, 2007 20,300

Oil and Gas (0.3%)
21,000 Lomak Petroleum, Inc. 144A cv. sub. deb. 6s, 2007 23,730
3,000 Pride Petroleum Services, Inc. cv. sub. deb. 6 4,361
1/4s, 2006
16,000 Swift Energy Co. cv. sub. notes 6 1/4s, 2006 14,840

42,931
Paper and Forest Products (0.1%)
24,000 Stone Container Corp. cv. sr. sub. notes 8 7/8s, 25,500
2000

Pharmaceuticals (0.2%)
16,000 North American Vaccine, Inc. 144A cv. sub. notes 6 15,420
1/2s, 2003
40,000 Roche Holdings, Inc. 144A cv. unsub. LYON zero %, 18,400
2010(Switzerland)

33,820
Pharmaceuticals and Biotechnology
(0.1%)
23,000 Nabi, Inc. cv. sub. notes 6 1/2s, 2003 18,113
4,000 North American Vaccine, Inc. 144A cv. sub. notes 6 3,855
1/2s, 2003

21,968
Recreation (0.4%)
100,000 Argosy Gaming cv. sub. notes 12s, 2001 71,000

Retail (0.5%)
20,000 Home Depot, Inc. cv. sub. notes 3 1/4s, 2001 20,425
26,000 Michaels Stores, Inc. cv. sub. notes 6 3/4s, 2003 22,653
20,000 Pier 1 Imports, Inc. cv. sub. notes 5 3/4s, 2003 24,325
25,000 Rite Aid Corp. cv. deb. zero %, 2006 18,375

85,778
Telecommunications
(0%)

10,000 MIDCOM Communications, Inc. 144A cv. sub. deb. 8 8,300
1/4s, 2003

Total Convertible Bonds and Notes (cost $1,428,901) 1,360,07
6

Preferred Stocks (4.3%) (a)
NUMBER OF VALUE
SHARES

518 Alliance Gaming Corp. Ser. B, $15.00 pfd. (PIK)
51,800
1,159 American Radio Systems Corp. 144A $11.375 pfd. 114,451
1,798 Cablevision Systems Corp. Ser. M, $11.125 dep. shs. 165,416
pfd.(PIK)
400 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 10,000
1,070 Chancellor Radio Broadcasting 144A $12.00 pfd. 105,930
1,500 Chevy Chase Capital Corp. Ser. A, $10.375 pfd. 72,750
127 Granite Broadcasting Corp. 144A 12.75% pfd. (PIK) 115,888
25 ICG Holdings, Inc. 14.00% (Canada) 24,125
5 Intermedia Communications, Inc. 144A 13.50% pfd. 48,375
20 NTL Inc. 144A 13.00% pfd. (PIK) 19,400
800 Public Service Co. of New Hampshire $10.60 1st 18,000
mtge. pfd.
20 Spanish Broadcasting Systems 144A 14.25% pfd. 17,600
(PIK)

Total Preferred Stocks (cost $795,863) 763,735

Convertible Preferred Stocks
(3.6%) (a)
NUMBER OF VALUE
SHARES

Automotive (0.1%)
170 Ford Motor Co. Ser. A, $4.20 dep. shs. cv. pfd.
19,040
Banks (0.1%)
230 Sovereign Bancorp Inc. $3.13 cv. pfd. 17,020

Basic Industrial Products (0.1%)
170 Case Corp. $4.50 cv. pfd. ($4.50) 22,823

Broadcasting
(0.2%)
342 Chancellor Broadcasting Corp. 144A $3.50 cv. pfd. 18,212
360 SFX Broadcasting, Inc. Ser. D, $3.25 cv. pfd. 16,200

34,412
Building and Construction
(0.1%)
227 Greenfield Capital Trust $3.00 cv. pfd. 9,307

Business Equipment and Services
(0.1%)
150 Ikon Office Solutions Inc. Ser. BB, $5.04 cv. pfd. 10,200

Computer Services and Software
(0.1%)
240 Vanstar Corp. 144A $3.375 cv. pfd. 7,350
407 Wang Laboratories, Inc. Ser. B, $3.25 cv. pfd. 18,519

25,869

Consumer Non Durables (0.1%)
340 Corning Deleware(L.P.) $3.00 cv. pfd. 25,840

Consumer Services (0.1%)
220 Service Corp. $3.125 cv. pfd. 25,218

Food and Beverages (0.1%)
276 Chiquita Brands International, Inc. Ser. B, $3.75 16,146
cv. pfd.

Insurance and Finance
(1.1%)
285 Ahmanson (H.F.) & Co. $3.00 cv. pfd. 22,515
251 American Bankers Insurance Group, Inc. Ser. B, 15,782
$3.125 cv. pfd.
575 American General Delaware Corp. $3.00 cv. pfd. 33,566
160 Devon Financing Trust $3.25 cv. pfd. 10,200
452 Finova Finance Trust $2.75 cv. pfd. 24,069
700 Matewan Bancshares, Inc. Ser. A, $3.75 cv. pfd. 16,975
385 Penncorp Financial Group, Inc. 144A $3.50 cv.pfd. 22,426
120 Roosevelt Financial Group $3.25 cv. pfd. 10,230
340 St. Paul Capital LLC $3.00 cv. pfd. 20,910
400 Timet Capital Trust I 144A $3.3125 cv. pfd. 18,800

195,473
Metals and Mining (0.2%)
285 Amax Gold, Inc. Ser. B, $3.75 cv. pfd. 14,784
950 Freeport-McMoRan Copper Co., Inc. $1.25 cv. pfd. 25,650
($1.75)

40,434
Oil and Gas (0.6%)
360 Neuvo Energy Ser. A, $2.875 cv. pfd. 16,425
435 Occidental Petroleum Corp. 144A $3.875 cv. pfd. 23,816
360 Tejas Gas Corp. $2.65 cv. pfd. 19,260
380 Tosco Financing Trust 144A $2.875 cv. pfd. 20,995
500 Unocal Capital Trust $3.125 cv. pfd. 28,125

108,621
Real Estate (0.1%)
430 Insignia Financial Group, Inc. 144A $3.25 cv. pfd. 19,135

Retail (0.3%)
350 Ann Taylor Finance Trust $4.25 cv. pfd. 23,713
465 Kmart Financing I $3.875 cv. pfd. 26,796

50,509
Telecommunications (0.2%)
600 Airtouch Communications, Inc. Ser. C, $2.125 cv. 27,300
pfd.

Total Convertible Preferred Stocks (cost $660,470) 647,347

Foreign Government Bonds and Notes (1.3%)
(a)
PRINCIPAL VALUE
AMOUNT
Bank of Foreign Economic Affairs of Russia
USD (Vnesheconombank) principal loan 144A 8s, 2020 $
305,000 (NON)(WIS)(PIK) 178,806
USD Morocco (Government of) bonds Ser. A, 6.375s, 2009 35,150
40,000
ZAR South Africa (Republic of) bonds Ser. 153, 13s, 9,980
50,000 2010

Total Foreign Government Bonds and Notes (cost 223,936
$219,478)

Common Stocks (0.2%) (a)
NUMBER OF VALUE
UNITS
15 Advanced Radio Telecommunications units 14s, 2007
15,900
5 Anvil Holdings 144A units 13s, 2009 (PIK) 4,925
200 Colt Telecommunications Group PLC units stepped- 117,000
coupon zero % (12s, 12/15/01), 2006(United Kingdom)
(STP)
25 Esat Holdings Ltd. 144A units stepped-coupon zero % 14,000
(12 1/2s, 2/1/02), 2007(Ireland) (STP)
110 Globalstar L.P. Capital units 11 3/8s, 2004 108,900
20 McCaw International Ltd. 144A units stepped-coupon 9,800
zero % (13s, 4/15/02), 2007 (STP)
50 Nextlink Communications 144A pfd. units zero % 2,350
(.14s,), 2009 (PIK)(STP)
50,000 Winstar Communications, Inc. 144A sr. disc. notes 26,000
stepped-coupon zero % (14s, 10/15/00), 2005 (STP)

Total Units (cost $331,486) 298,875

Common Stocks (0.2%) (a)
NUMBER OF VALUE
SHARES
27,272 Capstar Broadcasting Partners (NON)
29,999
316 Catellus Development Corp. (NON) 4,661

Total Common Stocks (cost $34,711) 34,660

Warrants (0%) (a)
NUMBER OF VALUE
WARRANTS
Expiration
Date
25 Hyperion Telecommunications 144A 750
4/15/01
20 Spanish Broadcasting Systems 144A 2,200
6/30/99

Total Warrants (cost $2,700) 2,950

Short-Term Investments (8.0%) (a)
PRINCIPAL VALUE
AMOUNT
MXP Mexican Treasury Bill zero %, April 2, 1998 $
57,529 59,760
Interest in $473,073,000 joint repurchase agreement
1,367,000 dated April 30, 1997 with Merrill Lynch
due May 1, 1997 with respect to various U.S.
Treasury obligations -- maturity value of
$1,367,205
for an effective yeild of 5.40%.
1,367,20
5

Total Short-Term Investments (cost $1,426,965) 1,426,96
5

total Investments (cost $17,777,461) (b) 17,395,33
6

FOOTNOTES

NOTES

(a) Percentages indicated are based
on net assets of $17,762,038.

(b) The aggregate identified cost on
a tax basis is
$17,777,461, resulting in gross
unrealized appreciation and
depreciation of $130,645 and
$512,770, respectively,
or net unrealized depreciation
of $382,125.

(NON) Non-income-producing security.

(STP) The interest or dividend rate
and date shown parenthetically
represent the new interest or
dividend rate to be paid and the
date the fund will begin
receiving interest or dividend
income at this rate.

(PIK) Income may be received in cash
or additional securities at the
discretion of the issuer.

(WIS) When-issued securities (Note 1).
The coupon rate will be LIBOR
plus 13/16.

(BRA) Brady bonds are foreign bonds
collateralized by the U.S.
Government.
The rates are floating and are
the current rates at April 30,
1997.

144A after the name of a
security represents a security
purchased in a transaction
exempt from registration under
Rule 144A of the Securities Act
of 1933. These securities may be
resold only in transactions
exempt from registration,
normally to qualified
institutional buyers.

The accompanying notes are an
integral part of these financial
statements.

Putnam High Yield Total Return
Statement of assets and liabilities
April 30,1997 (Unaudited)
Assets
Investments in securities, at value
(identified cost $17,777,461) (Note 1) $17,395,33
6
Cash 107,295
Dividends, interest and other receivables 291,423
Receivable for shares of the fund sold 445,849
Receivable for securities sold 253,143
Receivable from Manager (Note 2) 33,864
Unamortized organization expenses (Note 1) 80,672

Total assets 18,607,582
Liabilities
Payable for securities purchased 693,696
Payable for investor servicing and custodian fees 9,942
(Note 2)
Payable for compensation of Trustees (Note 2) 4,000
Payable for administrative services (Note 2) 1,333
Payable for distribution fees (Note 2) 8,228
Payable for organization expenses (Note 1) 80,943
Other accrued expenses 45,893

Total liabilities 844,035
Net assets $17,763,54
7
Represented by
Paid-in capital (Notes 1 and 4) $18,071,79
5
Undistributed net investment income (Note 1) 111,334
Accumulated net realized loss on investments (37,457)
(Note 1)
Net unrealized depreciation of investments (382,125)

Total - Representing net assets applicable to
capital shares outstanding $17,763,54
7
Computation of net asset value and offering price
Net asset value and redemption price per class A
share
($7,816,161 divided by 936,769 shares) $8.34
Offering price per class A share (100/95.25 of $8.76
$8.34)*
Net asset value and offering price per class B
share
($8,901,350 divided by 1,068,486 shares)** $8.33
Net asset value and redemption price per class M
share
($1,044,527 divided by 125,260 shares) $8.34
Offering price per class M share (100/96.75 of $8.62
$8.34)*

* On single sales of less than $50,000. On sales
of $50,000 or more and on group
sales the offering price is reduced.

** Redemption price per share is equal to net
asset value less any applicable contingent
deferred sales charge.

The accompanying notes are an integral part of
these financial statements.

Putnam High Yield Total Return
Statement of operations
Period January 2, 1997 (commencement of
operations) to
April 30,1997 (Unaudited)

Investment income:
Interest $233,411
Dividends 18,004
Total investment income 251,415

Expenses:
Compensation of Manager (Note 2) 23,481
Investor servicing and custodian fees (Note 2) 19,408
Compensation of Trustees (Note 2) 4,000

Administrative services (Note 2) 1,333
Distribution fees -- Class A (Note 2) 3,185
Distribution fees -- Class B (Note 2) 15,015
Distribution fees -- Class M (Note 2) 775
Amortization of organization expenses (Note 1) 271
Reports to shareholders 6,333
Registration fees 5,456
Auditing 22,867
Legal 2,667
Postage 7,336
Other 1,703
Fees waived by Manager (Note 2) (57,345)
Total expenses 56,485
Expense reduction (Note 2) (13,079)
Net expenses 43,406
Net investment income 208,009
Net realized loss on investments (Notes 1 and 3) (37,457)
Net unrealized depreciation of investments during (382,125
the period )

Net loss on investments (419,582)
Net decrease in net assets resulting from $(211,57
operations 3)

The accompanying notes are an integral part of these financial
statements.

Putnam High Yield Total Return
Statement of changes in net assets For the
period
January 2,
1997
(commencement
of
operation) to
April 30,
1997*

Decrease in net assets
Operations:
Net investment income $208,009
Net realized loss on investments (37,457)
Net unrealized depreciation of investments (382,125)

Net decrease in assets resulting from operations (211,573)
Distributions to shareholders:
From net investment income
Class A (46,942)
Class B (44,326)
Class M (5,407)
Increase from capital share transactions (Note 4) 18,068,795
Total increase in net assets 17,760,547
Net Assets
Beginning of period 3,000

End of period (including undistributed net investment
income $17,763,54
of $109,825) 7
*Unaudited
The accompanying notes are an integral part of
these financial statements.

Putnam High Yield Total Return Fund
Financial highlights
(For a share outstanding throughout the period)

CLASS A

For the period
January 2, 1997+
Per share to April 30
operating performance (unaudited)
----------------
1997
----------------

Net asset value, beginning of period $8.50

Investment operations:

Net investment income .20(c)

Net realized and unrealized loss on investments (.29)

Total from investment operations (.09)

Less distributions:

From net investment income (.07)

Net realized gain on investments --

Total distributions (.07)

Net asset value, end of period $8.34

Total investment return at net asset value (%)(a) (1.10)*

Net assets, end of period (in thousands) $7,817

Ratio of expenses to average net assets (%)(b) .50*

Ratio of net investment income to average
net assets (%) 2.41*

Portfolio turnover (%) 38.59*

+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and
does not
reflect the effect of sales charges.
(b) The ratio of expenses to average net assets include amounts paid through
brokerage service and expense offset arrangements. (Note 2)
(c) Per share net investment loss has been determined on the basis
of weighted average number of shares outstanding during the
period.

Putnam High Yield Total Return Fund
Financial highlights
(For a share outstanding throughout the period)

CLASS B

For the period
January 2, 1997+
Per share to April 30
operating performance (unaudited)
----------------
1997
----------------

Net asset value, beginning of period
$8.50

Investment operations:

Net investment income .18(c)

Net realized and unrealized loss on investments (.29)

Total from investment operations (.11)

Less distributions:

From net investment income (.06)

Net realized gain on investments --

Total distributions (.06)

Net asset value, end of period $8.33

Total investment return at net asset value (%)(a) (1.35)*

Net assets, end of period (in thousands) $8,902

Ratio of expenses to average net assets (%)(b) .75*

Ratio of net investment income to average
net assets (%) 2.21*

Portfolio turnover (%) 38.59*

CLASS M

For the period
January 2, 1997+
Per share to April 30
operating performance (unaudited)
----------------
1997
----------------

Net asset value, beginning of period $8.50

Investment operations:

Net investment income .19(c)

Net realized and unrealized loss on investments (.29)

Total from investment operations (.10)

Less distributions:

From net investment income (.06)

Net realized gain on investments --

Total distributions (.06)

Net asset value, end of period $8.34

Total investment return at net asset value (%)(a) (1.15)*

Net assets, end of period (in thousands) $1,045

Ratio of expenses to average net assets (%)(b) .58*

Ratio of net investment income to average
net assets (%) 2.39*

Portfolio turnover (%) 38.59*

Notes to
financial statements

April 30, 1997 (Unaudited)

Note 1
Significant
accounting
policies

Putnam High Yield Total Return Fund (the "fund") is registered
under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The fund
seeks total return through high current income and capital
appreciation by investing primarily in high-yielding, lower-rated
fixed-income securities.

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 Investments for which market quotations are
readily available are stated at market value, which is determined
using the last reported sale price, or, if no sales are reported
_ as in the case of some securities traded over-the-counter _ the
last reported bid price. Securities quoted in foreign currencies
are translated into U.S. dollars at the current exchange rate.
Short-term investments having remaining maturities of 60 days or
less are stated at amortized cost, which approximates market
value, and other investments are stated at fair value following
procedures approved by the Trustees.

B) Joint trading account Pursuant to an exemptive order issued
by the Securities and Exchange Commission, the fund may transfer
uninvested cash balances into a joint trading account along with
the cash of other registered investment companies and certain
other accounts managed by Putnam Investment Management, Inc.
("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc. . These balances may be
invested in one or more repurchase agreements and/or short-term
money market instruments.

C) Repurchase agreements The fund, or any joint trading account,
through its custodian, receives delivery of the underlying
securities, the market value of which at the time of purchase is
required to be in an amount at least equal to the resale price,
including accrued interest. Putnam Management is responsible for
determining that the value of these underlying securities is at
all times at least equal to the resale price, including accrued
interest.

D) 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. Dividend
income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recorded as soon as the
fund is informed of the ex-dividend date. Discounts on zero
coupon bonds, stepped-coupon bonds and payment in kind bonds are
accreted according to the effective yield method.

Securities purchased or sold on a when-issued or delayed delivery
basis may be settled a month or more after the trade date;
interest income is accrued based on the terms of the security.
Losses may arise due to changes in the market value of the
underlying securities or if the counterparty does not perform
under the contract.

E) Federal taxes It is the policy of the fund to distribute all
of its taxable income within the prescribed time and otherwise
comply with the provisions of the Internal Revenue Code
applicable to regulated investment companies. It is also the
intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal
Revenue Code of 1986, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on
income and capital gains.

F) 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.
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.

G) Unamortized organization expenses Expenses incurred by the
fund in connection with its organization, its registration with
the Securities and Exchange Commission and with various states
and the initial public offering of its shares were $80,943. These
expenses are being amortized on projected net asset levels over
a five-year period.

Note 2
Management fee,
administrative services,
and other transactions

Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net
assets of the fund. Such fee is based on the following annual
rates: 0.80% of the first $500 million of the average net assets,
0.70% of the next $500 million, 0.65% of the next $500 million,
0.60% of the next $5 billion, 0.575% of the next $5 billion,
0.555% of the next $5 billion, 0.54% of the next $5 billion,
0.53% of any amount over $21.5 billion.

Putnam Management has agreed to limit its compensation (and, to
the extent necessary, bear other expenses) through June 30, 1997,
to the extent that expenses of the fund (exclusive of brokerage,
interest, taxes, deferred organizational and extraordinary
expense, credits from Putnam Fiduciary Trust Company (PFTC), a
wholly-owned subsidiary of Putnam Investments, Inc. and payments
under the Trust's distribution plan) would exceed an annual rate
of 1.25% of the fund's average net assets.

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 period ended April 30, 1997, fund expenses were reduced
by $13,079 under expense offset arrangements with PFTC and
brokerage service arrangements. 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 $650 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 certain Putnam funds
until distribution in accordance with the Plan.

The Fund has adopted an unfunded noncontributory defined benefit
pension plan covering all Trustees of the Fund who have served as
Trustee for at least five years. Benefits under the plan are
equal to 50% of the Trustee's average total retainer and meeting
fees for the three years preceding retirement. Pension expense
for the fund is included in Trustee fees in the Statement of
operations for the period ended April 30, 1997. Accrued pension
liability is included in Payable for compensation of Trustees in
the Statement of assets and liabilities.

The fund has adopted distribution plans (the "Plans") with
respect to its class A, class B 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 0.25%, 0.25% and .050% of the
average net assets attributable to class A, class B and class M
shares respectively.

Note 3
Purchase and sales of securities

During the period ended April 30, 1997, purchases and sales of
investment securities other than U.S. government obligations and
short-term investments aggregated $20,253,306 and $3,911,133,
respectively. There were no purchases and sales of U.S.
government obligations. 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 April 30, 1997, there was an unlimited number of shares of
beneficial interest authorized.

For the period January 2,
1997
(commencement of
operations) to
April 30
1997
Class A Shares Amount
Shares sold 980,136 $8,308,988
Shares issued in connection with 4,596 38,222
reinvestment of distributions
984,732 8,347,210
Shares repurchased (48,081) (406,686)
Net increase 936,651 $7,940,524

For the period January 2,
1997
(commencement of
operations) to
April 30
1997
Class B Shares Amount
Shares sold 1,153,33 $9,781,816
4
Shares issued in connection with 4,514 37,505
reinvestment of distributions
1,157,84 9,819,321
8
Shares repurchased (89,480) (749,928)
Net increase 1,068,36 $9,069,393
8

For the period January 2,
1997
(commencement of
operations) to
April 30
1997
Class M Shares Amount
Shares sold 126,277 $1,068,346
Shares issued in connection with 513 4,266
reinvestment of distributions
126,790 1,072,612
Shares repurchased (1,648) (13,734)
Net increase 125,142 $1,058,878

Note 5
Initial capitalization and offering of shares

The fund was established as a Massachusetts business trust on
January 22, 1996. During the period January 22, 1996 to January
2, 1997, the fund had no operations other than those related to
organizational matters, including the initial capital
contribution of $1,000, $1,000 and $1,000 for class A, class B
and class M, respectively, and $80,943 of initial organizational
expenses, and the issuance of 118 shares for each class to Putnam
Mutual Funds Corp., a wholly-owned subsidiary of Putnam
Investments, Inc.

<PAGE>
PUTNAM DIVERSIFIED INCOME TRUST II

FORM N-1A
PART C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

(a) Index to Financial Statements and Supporting
Schedules:

(1)

Financial Statements:

Statement of assets and liabilities --
March 31, 1997 (a).
Statement of operations -- year ended March
31, 1997(a) .
Statement of changes in net assets -- year
ended March 31, 1997 and period ended
March 31, 1996(a).
Financial highlights(a)(b).
Notes to financial statements(a).

(2) Supporting Schedules:

Schedule I -- Portfolio of investments owned
-- March 31, 1997(a) .
Schedules II through IX omitted because the
required matter is not present.

(a) Incorporated by reference into Parts A
and B.
(b) Included in Part A.

- -------------------

(b) Exhibits:

1. Amended and Restated Agreement and
Declaration of Trust dated January 4, 1996 --
Incorporated by reference to Post-Effective
Amendment No. 2 to the Registrant's
Registration Statement.
2. By-Laws, as amended through October 5,
1994 -- Incorporated by reference to
Registrant's Initial Registration Statement.
3. Not applicable.
4a. Form of Specimen share certificate --
Incorporated by reference to Pre-Effective
Amendment No. 1 to the Registrant's
Registration Statement.<PAGE>

4b. Portions of Agreement and Declaration of
Trust Relating to Shareholders' Rights --
Incorporated by reference to Registrant's
Initial Registration Statement.
4c. Portions of By-Laws Relating to Shareholders'
Rights -- Incorporated by reference to
Registrant's Initial Registration Statement.
5. Management Contract dated January 8, 1996 --
Incorporated by reference to Post-Effective
Amendment No. 2 to the Registrant's
Registration Statement.
6a. Distributor's Contract dated October 7, 1994
-- Incorporated by reference to Pre-Effective
Amendment No. 1 to the Registrant's
Registration Statement.
6b. Form of Specimen Dealer Sales Contract --
Incorporated by reference to Pre-Effective
Amendment No. 1 to the Registrant's
Registration Statement.
6c. Form of Specimen Financial Institution Sales
Contract -- Incorporated by reference to Pre-
Effective Amendment No. 1 to the Registrant's
Registration Statement.
7. Trustee Retirement Plan dated October 4,
1996 -- Exhibit 1.
8. Custodian Agreement with Putnam Fiduciary
Trust Company dated May 3, 1991 , as
amended July 13, 1992 -- Incorporated by
reference to Pre-Effective Amendment No. 1 to
the Registrant's Registration Statement.
9. Investor Servicing Agreement dated June 3,
1991 with Putnam Fiduciary Trust Company --
Incorporated by reference to Pre-Effective
Amendment No. 1 to the Registrant's
Registration Statement.
10. Opinion of Ropes & Gray, including consent --
Incorporated by reference to Pre-Effective
Amendment No. 1 to the Registrant's
Registration Statement.
11. Not applicable.
12. Not applicable.
13. Investment Letter from Putnam Investments,
Inc. to the Registrant -- Incorporated by
reference to Pre-Effective Amendment No. 1 to
the Registrant's Registration Statement.
14a . Not applicable.
14b . Form of Prototype Individual Retirement
Account Plan -- Incorporated by
reference to Pre-Effective Amendment No.
1 to the Registrant's Registration
Statement.
14c . Form of Prototype Basic Plan
Documents and related Plan
Agreements -- Incorporated by
reference to Post-Effective
Amendment No. 2 to the Registrant's
Registration Statement.
15a. Class A Distribution Plan and Agreement dated
October 7, 1994 -- Incorporated by reference
to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement.
15b. Class B Distribution Plan and Agreement dated
October 7, 1994 -- Incorporated by reference
to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement.
15c. Class M Distribution Plan and Agreement dated
October 7, 1994 -- Incorporated by reference
to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement.
15d. Form of Specimen Dealer Service Agreement --
Exhibit 2.
15e. Form of Specimen Financial Institution
Service Agreement -- Exhibit 3.
16. Schedules for computation of performance
quotations -- Exhibit 4 .
17a. Financial Data Schedule for Class A shares --
Exhibit 5 .
17b. Financial Data Schedule for Class B shares --
Exhibit 6 .
17c. Financial Data Schedule for Class M shares --
Exhibit 7 .
18. Rule 18f-3(d) Plan --Incorporated by
reference to Post-Effective Amendment No. 2
to the Registrant's Registration Statement.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT

None.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES

As of June 30, 1997 , the number of record
holders of each class of securities of the Registrant(s) is as
follows:

NUMBER OF RECORD HOLDERS
---------------------------------------
CLASS A CLASS B CLASS M
------- ------- -------

ITEM 27. INDEMNIFICATION
<PAGE>
The information required by this item is incorporated
herein by reference to Pre-Effective Amendment No. 1 from the
Registrant's Registration Statement on Form N-1A under the
Investment Company Act of 1940 (File No. 811-7221).
<PAGE>
<PAGE>

<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

Persons maintaining physical possession of accounts,
books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are Registrant's Clerk, Beverly Marcus;
Registrant's investment adviser, Putnam Investment Management,
Inc.; Registrant's principal underwriter, Putnam Mutual Funds
Corp.; Registrant's custodian, Putnam Fiduciary Trust Company
("PFTC"); and Registrant's transfer and dividend disbursing
agent, Putnam Investor Services, a division of PFTC. The address
of the Clerk, investment adviser, principal underwriter,
custodian and transfer and dividend disbursing agent is One Post
Office Square, Boston, Massachusetts 02109.

ITEM 31. MANAGEMENT SERVICES

None.

ITEM 32. UNDERTAKINGS

(a) The Registrant undertakes to furnish to each
person to whom a prospectus of the Registrant is delivered a copy
of the Registrant's latest annual report to shareholders, upon
request and without charge.

(b) Registrant hereby undertakes, if requested
to do so by the holders of at least 10% of its outstanding
shares, to call a meeting of shareholders for the purposes of
voting upon the question of removal of a Trustee or Trustees and
to assist in communications with other shareholders as required
by Section 16(c) of the Investment Company Act of 1940.

----------------------------
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the
Prospectus and Statement of Additional Information constituting
parts of Post-Effective Amendment No. 4 to the
Registration Statement of Putnam Diversified Income Trust II on
Form N-1A (File No. 33-55791) of our report dated May 19,
1997 , on our audit of the financial statements and financial
highlights of the Fund, which report is included in the Annual
Report for Putnam Diversified Income Trust II for the
period ended March 31, 1997 , which is incorporated by
reference in the Registration Statement.

We also consent to the references to our firm under
the caption "Independent Accountants and Financial Statements" in
the Statement of Additional Information and under the heading
"Financial highlights" in such Prospectus.

COOPERS & LYBRAND
L.L.P.

Boston, Massachusetts
July 25, 1997

--------------------------

NOTICE

A copy of the Agreement and Declaration of Trust of
Putnam Diversified Income Trust II is on file with the Secretary
of State of The Commonwealth of Massachusetts and notice is
hereby given that this instrument is executed on behalf of the
Registrant by an officer of the Registrant as an officer and not
individually and the obligations of or arising out of this
instrument are not binding upon any of the Trustees, officers or
shareholders individually but are binding only upon the assets
and property of the Registrant.
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, the Registrant certifies
that it meets all of the requirements for effectiveness of this
Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston,
and The Commonwealth of Massachusetts, on the 30th day of
July, 1997 .

PUTNAM DIVERSIFIED INCOME TRUST II

By: Gordon H. Silver, Vice President

Pursuant to the requirements of the Securities Act of 1933,
this Amendment to the Registration Statement of Putnam
Diversified Income Trust II has been signed below by the
following persons in the capacities and on the dates indicated:

SIGNATURE TITLE

George Putnam President and Chairman of the
Board; Principal Executive
Officer; Trustee

John D. Hughes Senior Vice President;
Treasurer and Principal
Financial Officer

Paul G. Bucuvalas Assistant Treasurer and
Principal Accounting Officer

Jameson A. Baxter Trustee

Hans H. Estin Trustee

John A. Hill Trustee

Ronald J. Jackson Trustee

Elizabeth T. Kennan Trustee

Lawrence J. Lasser Trustee

Robert E. Patterson Trustee

Donald S. Perkins Trustee

William F. Pounds Trustee

George Putnam, III Trustee

A.J.C. Smith Trustee

W. Nicholas Thorndike Trustee

By: Gordon H. Silver,
as Attorney-in-Fact
July 30, 1997

<PAGE>

EXHIBIT INDEX

7. Trustee Retirement Plan dated October 4, 1996 - Exhibit 1.

15d. Form of Specimen Dealer Service Agreement - Exhibit 2.

15e. Form of Specimen Financial Institution Service Agreement -
Exhibit 3.

16. Schedules for computation of performance
quotations - Exhibit 4.

17a. Financial Data Schedule for Class A shares - Exhibit 5.

17b. Financial Data Schedule for Class B shares - Exhibit 6.

17c. Financial Data Schedule for Class M shares - Exhibit 7.

</TABLE>

RETIREMENT PLAN
FOR THE
TRUSTEES OF THE PUTNAM FUNDS

1. General; effective date. This Retirement Plan For The
Trustees Of The Putnam Funds is intended to provide, on the terms
and conditions specified below, cash retirement benefits to
certain individuals who have served as trustees ("Trustees") of
the Funds. Except as provided at Section 12 below, the Plan is
effective with respect to retirements occurring on or after
January 1, 1996.

2. Statement of Purpose. The purpose of this Plan is to
assist the Funds in attracting and retaining highly qualified
individuals to serve as Trustees of the Putnam Funds by providing
a form of deferred compensation which is competitive with
compensation practices of other major investment company
complexes as well as those of major business corporations and
which recognizes the benefits to the Funds and of having Trustees
with many years of experience with the affairs of the Funds.

3. Defined terms. When used in the Plan, the following
terms shall have the meanings set forth in this Section:

- "Administrator": such committee, consisting solely of
Trustees who are not "interested persons" of the Funds
within the meaning of Section 2(a)(19) of the
Investment Company Act of 1940, as may be designated
from time to time by the Trustees to administer the
Plan.

- "Service": active service as a Trustee for one or more
of the Funds, including service prior to the Effective
Date. For purposes of this definition, service for an
entity that was a Fund at the time of such service
shall not be disregarded merely because the entity
later ceases to be a Fund. A Participant who dies
prior to retirement or who retires by reason of total
and permanent disability (as determined by the
Administrator) shall be deemed to have served at least
one hundred twenty (120) months of Service regardless
of his or her actual period of service.

- "Effective Date": the date specified in the second
sentence of Section 1.

- "Final Average Remuneration": the quotient obtained by
dividing (i) a Participant's total retainer and meeting
fees paid to the individual by the Funds for the last
thirty-six (36) months of the individual's service as a
Trustee, by (ii) three.

<PAGE>
- "Fund": any of the Putnam Funds, other than any such
Fund that has either (i) elected by vote of a majority
of its Trustees who are not "interested persons" of the
Fund (as defined above) not to participate in the Plan,
or (ii) terminated its participation in the Plan in
accordance with Section 14(c).

- "Participant": a Trustee with at least sixty (60)
months of Service.

- "Plan": the Retirement Plan For The Trustees Of The
Putnam Funds set forth herein, as the same may from
time to time be amended and in effect.

- "Retirement": ceasing to be an active Trustee
(regardless of whether service to one or more Funds
continues in a capacity other than as a Trustee) for
any reason other than (i) termination for cause as
determined by the Administrator, or (ii) death. The
terms "retire," "retires" and "retired" shall be
similarly construed.

- "Trustee": a trustee of any of the Funds.

4. Eligibility for retirement benefit. Each Participant
shall receive the normal retirement benefit specified in Section
5 below commencing in the calendar year next following the date
of retirement.

5. Form and amount of retirement benefit. The retirement
benefit payable to a Participant shall be an annual cash payment
equal to fifty percent (50%) of the Participant's Final Average
Remuneration. Such retirement benefit shall be paid on January
15 of each calendar year commencing with the year specified in
Section 4 above and continuing for the lesser of (i) a number of
years equal to the Participant's years of Service (rounded to the
nearest whole year) or (ii) the lifetime of the Participant.

6. Death benefit. The only death benefits payable under
the Plan shall be those described in this Section:

(a) If a Participant dies after retirement but before
ten (10) annual retirement benefit payments have been made,
the Participant's designated beneficiary shall be entitled
to receive an annual death benefit, in the same amount,
payable on January 15 of each year for the lesser of (i) the
remainder, if any, of the period specified in clause (i) of
Section 5 above or (ii) the remainder of such 10-year
period.

<PAGE>
(b) If a Participant dies before retirement, there
shall be paid to his or her designated beneficiary an annual
death benefit equal in amount to the annual retirement
benefit specified in Section 5 above. The death benefit
described in this paragraph (b) shall be paid on January 15
of each year commencing in the calendar year next following
the Participant's death for a number of years equal to the
lesser of (i) the period specified in clause (i) of Section
5 above or (ii) ten (10) years.

(c) The Administrator in its discretion may commute any
death benefit under this Section to an immediate lump sum
payment or may otherwise accelerate such payments, in each
case applying such reasonable discount rates as it deems
appropriate.

7. Designation of beneficiary. For purposes of Section 6
above, a Participant's designated beneficiary shall be such
person or persons, including a trust, as the Participant shall
have designated in writing on a form acceptable to and delivered
to the Administrator. In the absence of an effective beneficiary
designation governing the payment of any portion of the death
benefit described in Section 6 above, payment of such portion
shall be made to the Participant's estate, which shall be deemed
to be the Participant's designated beneficiary for all purposes
hereunder. If the person designated as the beneficiary to
receive any portion of the death benefit should die prior to
completion of payments to such beneficiary without the
Participant having made effective provision (by a designation
delivered to the Administrator as hereinabove prescribed) for a
successor or contingent beneficiary, payment of such portion or
the remainder thereof shall be made to the decedent beneficiary's
estate.

8. Agreement not to compete, etc. Eligibility for and
payment of benefits under the Plan is conditioned on agreement by
the Participant (i) to refrain from engaging in any business
activity in competition with the Funds, and (ii) not to disclose
any proprietary or otherwise confidential information pertaining
to the Funds. Any breach by an active or retired Trustee of the
agreement or conditions specified in the preceding sentence shall
be grounds for termination or reduction by the Administrator of
benefits under the Plan.

9. Nature of rights. Nothing in the Plan shall be
construed as requiring the Funds, or any of them, to set aside or
to segregate any assets of any kind to meet any of its
obligations hereunder or otherwise to fund the Plan. The rights
of persons claiming benefits under the Plan shall be no greater
than those of general unsecured creditors of a Fund, and no such
person shall have any right in or to any specific assets of any
Fund. All rights to benefits under the Plan shall be construed
and interpreted consistent with the continued qualification of
each Fund as a registered investment company under the Investment
Company Act of 1940, as amended.

10. Rights non-assignable. No Participant, beneficiary or
other person shall have any right to assign, pledge, encumber, or
otherwise alienate or transfer any right to receive benefits or
payments hereunder or any other interest under the Plan, in whole
or in part, and any attempt by any such person to effectuate such
an assignment, pledge, encumbrance, or other alienation or
transfer shall be null and void.

11. No rights to continuation of status. Nothing in the
Plan shall be construed as giving any individual a right to
continue to serve as a Trustee of the Funds, or any of them, or
to receive any particular level of remuneration for any such
service.

12. Application of Plan to certain persons. This Plan
supersedes in its entirety the voluntary retirement program
heretofore maintained by the Funds and any benefits previously
authorized under such program but not yet paid for periods
commencing on or after January 1, 1996. Reference is made to
those former Trustees listed on Schedule A hereto who retired
prior to the effective date of this Plan and who are currently
receiving benefits under such voluntary retirement program. In
addition, reference is made to a current Trustee listed on
Schedule B hereto who previously received certain retirement
benefits under such voluntary retirement program following such
Trustee's initial retirement from the Funds. Each person listed
on Schedules A or B shall be entitled to a retirement benefit in
the amount and payable in accordance with the terms of the Plan
except that, to the extent inconsistent with the generally
applicable provisions of the Plan, the specific provisions of
Schedule A and B shall control.

13. Payment of benefits. Benefits shall be paid by the
Funds, in cash, upon direction by the Administrator. The
Administrator shall allocate the obligation to make payments with
respect to a Trustee under the Plan for any calendar year among
the Funds in proportion to their respective cumulative
liabilities accrued with respect to such Trustee's participation
in the Plan for financial reporting purposes or on such other
reasonable basis as the Administrator may determine.

14. Amendment and termination.

(a) AMENDMENT. The Plan may be amended at any time by the
Administrator. No amendment shall reduce the benefits or future
benefits of any Trustee who has retired, and in the case of a
participant who is still an active Trustee no amendment shall
reduce the amount such Trustee would have been entitled to
receive if he or she had ceased to serve as a Trustee immediately
prior to such amendment.

(b) TERMINATION OF THE PLAN AS A WHOLE. The Plan as a
whole may be terminated by the Administrator. Upon termination
of the plan as a whole, benefits in pay status shall continue to
be paid. Any Participant not yet in pay status shall continue to
be entitled to a benefit equal to the benefit to which he or she
would have been entitled had retirement as a Trustee occurred
immediately prior to such Plan termination. Notwithstanding the
foregoing, in its discretion the Administrator may commute and
pay as a single lump sum payment any benefits remaining payable
upon termination of the Plan as a whole, and in determining such
lump sum amounts the Administrator may apply such reasonable
discount factors and mortality assumptions as it determines in
its discretion.

(c) TERMINATION BY INDIVIDUAL FUND. A Fund may terminate
its participation in the Plan at any time by vote of a majority
of its Trustees who are not "interested persons" of the Fund (as
defined under "Administrator" in Section 3 above), provided that
upon any such termination such Fund shall remain liable for its
allocable share of the benefits to which Participants would have
been entitled is the Plan as a whole had been terminated as of
the date of such individual termination, as determined by the
Administrator in its sole discretion.

As Adopted October 4, 1996

DEALER SERVICE AGREEMENT

Between: and

PUTNAM MUTUAL FUNDS CORP.
General Distributor of
The Putnam Family of Mutual Funds
One Post Office Square
Boston, MA 02109

We are pleased to inform you that, pursuant to the terms of this
Dealer Service Agreement, we are authorized to pay you service
fees in connection with the accounts of your customers that hold
shares of certain Putnam Funds listed in SCHEDULE 1 that have
adopted distribution plans pursuant to Rule 12b-1 (the "12b-1
Funds"). Payment of the service fees is subject to your initial
and continuing satisfaction of the following terms and conditions
which may be revised by us from time to time:

1. QUALIFICATION REQUIREMENTS

(a) You have entered into a Sales Contract with us with respect
to the Putnam Family of Mutual Funds (the "Putnam Funds").

(b) You are the dealer of record for accounts in Putnam Funds
having an aggregate average net asset value of at least the
minimum amount set forth in SCHEDULE 2 (DEALER FIRM REQUIREMENTS)
during the period for which a service fee is to be paid. Putnam
Fund accounts are accounts in any open-end Putnam Fund, but
excluding any accounts for your firm's own retirement plans.

(c) One or more of your current employees must be the designated
registered representative(s) on accounts in Putnam Funds having
an aggregate average net asset value of at least the minimum
amount set forth in SCHEDULE 2 (REGISTERED REPRESENTATIVE
REQUIREMENTS) during the period for which a service fee is to be
paid.

For each Putnam Fund account registered in the name of
one of your customers, you will advise us, preferably
by electronic means, before the end of the second month
in each calendar quarter, of the registered
representative's name, identification number, branch
number, and telephone number.<PAGE>

2. SERVICE FEES

(a) If you meet the qualification requirements set forth above
in Paragraph 1, you will be paid a service fee on assets in the
12b-1 Funds for which you are the dealer of record and which are
serviced by a registered representative of your firm meeting the
Registered Representative Requirements, if any, at the annual
rates specified (excluding any accounts for your firm's own
retirement plans).

(b) You understand and agree that:

(i) all service fee payments are subject to the
limitations contained in each 12b-1 Fund's Distribution
Plan, which may be varied or discontinued at any time;

(ii) you shall waive the right to receive service fee
payments to the extent any 12b-1 Fund fails to make
payments to us under its distribution plan with us;

(iii) your failure to provide the services described in
Paragraph 4 below as may be amended by us from time to
time, or otherwise comply with the terms of this
Agreement, will render you ineligible to receive
service fees; and

(iv) failure of an assigned registered representative
to provide services required by this Agreement will
render that representative's accounts ineligible as
accounts on which service fees are paid.

3. PAYMENTS AND COMMUNICATIONS TO REGISTERED REPRESENTATIVES

(a) You will pass through to your registered representatives a
significant share of the service fees paid to you pursuant to
this Agreement.

(b) You will assist us in distributing to your registered
representatives periodic statements which we will have prepared
showing the aggregate average net asset value of shares in Putnam
Funds with which they are credited on our records.<PAGE>
4. REQUIRED SERVICES

(a) You will assign one of your registered representatives to
each Putnam Fund account on your records and reassign the Putnam
Fund account should that representative leave your firm.

(b) You and your registered representatives will assist us and
our affiliates in providing the following services to
shareholders of the Putnam Funds:

(i) Maintain regular contact with shareholders in
assigned accounts and assist in answering inquiries
concerning the Putnam Funds.

(ii) Assist in distributing sales and service
literature provided by us, particularly to the
beneficial owners of accounts registered in your name
(nominee name accounts).

(iii)Assist us and our affiliates in the establishment
and maintenance of shareholder accounts and records.

(iv) Assist shareholders in effecting administrative
changes, such as changing dividend options, account
designations, address, automatic investment programs or
systematic investment plans.

(v) Assist in processing purchase and redemption
transactions.

(vi) Provide any other information or services as the
customer or we may reasonably request.

(c) You will support our marketing efforts by granting
reasonable requests for visits to your offices by our wholesalers
and by including all Putnam Funds on your "approved" list.

(d) Your compliance with the service requirements set forth in
this Agreement will be evaluated by us from time to time by
surveying shareholder satisfaction with service, by monitoring
redemption levels of shareholder accounts assigned to you and by
such other methods as we deem appropriate.

(e) The provisions of this Paragraph 4 may be amended by us from
time to time upon notice to you.

5. AMENDMENT

This Agreement, including any Schedule hereto, shall be deemed
amended as provided in any written notice delivered by us to you.<PAGE>
6. EFFECTIVE PERIOD AND TERMINATION

The provisions of this Agreement shall remain in effect for not
more than one year from the date of its execution or adoption and
thereafter for successive annual periods only so long as such
continuance is specifically approved at least annually by the
Trustees of each of the 12b-1 Funds in conformity with Rule 12b-1
under the Investment Company Act of 1940 (the "1940 Act"). This
Agreement shall automatically terminate in the event of its
assignment (as defined by the 1940 Act). In addition, this
Agreement may be terminated at any time, without the payment of
any penalty, by either party upon written notice delivered or
mailed by registered mail, postage prepaid, to the other party,
or, as provided in Rule 12b-1 under the 1940 Act, by the Trustees
of any 12b-1 Fund or by the vote of the holders of the
outstanding voting securities of any 12b-1 Fund.

7. WRITTEN REPORTS

Putnam Mutual Funds Corp. shall provide the Trustees of each of
the 12b-1 Funds, and such Trustees shall review at least
quarterly, a written report of the amounts paid to you under this
Agreement and the purposes for which such expenditures were made.

8. MISCELLANEOUS

(a) All communications mailed to us should be sent to the
address listed below. Any notice to you shall be duly given if
mailed or delivered to you at the address specified by you below.

(b) The provisions of this Agreement shall be governed by and
construed in accordance with the laws of The Commonwealth of
Massachusetts.

Very truly yours,

PUTNAM MUTUAL FUNDS CORP.

By: ------------------------------
William N. Shiebler, President
and Chief Executive Officer<PAGE>
We accept and agree to the foregoing Agreement as of the date set
forth below.

Dealer: -------------------------

By: ----------------------------
Authorized Signature, Title

------------------------------

------------------------------
Address

Dated: -------------------------

Please return the signed Putnam copy of this Agreement to Putnam
Mutual Funds Corp., P.O. Box 41203, Providence, RI 02940-1203.<PAGE>
SCHEDULE 1:
THE 12B-1 FUNDS

Service fees will be paid on the following Putnam Funds at the
rates set forth in the Prospectus of that Fund:

Putnam Adjustable Rate U.S. Government Fund
Putnam American Government Income Fund
Putnam Arizona Tax Exempt Income Fund
Putnam Asia Pacific Growth Fund
Putnam Asset Allocation Funds
-Putnam Asset Allocation: Growth Portfolio
-Putnam Asset Allocation: Balanced Portfolio
-Putnam Asset Allocation: Conservative Portfolio
Putnam Balanced Retirement Fund
Putnam California Tax Exempt Income Trust
-Putnam California Intermediate Tax Exempt Fund
-Putnam California Tax Exempt Income Fund
Putnam Capital Appreciation Fund
Putnam Convertible Income-Growth Trust
Putnam Diversified Equity Trust
Putnam Diversified Income Trust
Putnam Equity Income Fund
Putnam Europe Growth Fund
Putnam Federal Income Trust
Putnam Florida Tax Exempt Income Fund
The George Putnam Fund of Boston
Putnam Global Governmental Income Trust
Putnam Global Growth Fund
The Putnam Fund for Growth and Income
Putnam Growth and Income Fund II
Putnam Health Sciences Trust
Putnam High Yield Advantage Fund
Putnam High Yield Trust
Putnam Income Fund
Putnam Intermediate Tax Exempt Fund
Putnam Intermediate U.S. Government Fund
Putnam Investment Funds
-Putnam International New Opportunities Fund
Putnam Investors Fund
Putnam Massachusetts Tax Exempt Income Fund
Putnam Michigan Tax Exempt Income Fund
Putnam Minnesota Tax Exempt Income Fund
Putnam Money Market Fund
Putnam Municipal Income Fund
Putnam Natural Resources Fund
Putnam New Jersey Tax Exempt Income Fund
Putnam New Opportunities Fund
Putnam New York Tax Exempt Income Trust
-Putnam New York Intermediate Tax Exempt Fund
-Putnam New York Tax Exempt Income Fund
Putnam New York Tax Exempt Opportunities Fund
Putnam Ohio Tax Exempt Income Fund
Putnam OTC Emerging Growth Fund
Putnam Overseas Growth Fund
Putnam Pennsylvania Tax Exempt Income Fund
Putnam Preferred Income Trust
Putnam Tax Exempt Income Fund
Putnam Tax-Free Income Trust
-Putnam Tax-Free High Yield Fund
-Putnam Tax-Free Insured Fund
Putnam U.S. Government Income Trust
Putnam Utilities Growth and Income Fund
Putnam Vista Fund
Putnam Voyager Fund
Putnam Voyager Fund II

SCHEDULE 2: MINIMUM ASSETS

DEALER FIRM REQUIREMENTS. The minimum aggregate average net
asset value of all accounts in Putnam Funds specified by
Paragraph 1(b) is $250,000. We will review this requirement
prior to the start of each year and inform you of any changes.

REGISTERED REPRESENTATIVE REQUIREMENTS. With respect to
Paragraph 1(c), there is no minimum asset qualification
requirement in the Putnam Funds applicable to each of your
representatives. We will review this requirement prior to the
start of each year and inform you of any changes.

NF-57
2/7/97

FINANCIAL INSTITUTION
SERVICE AGREEMENT

Between: and

PUTNAM MUTUAL FUNDS CORP.
General Distributor of
The Putnam Family of Mutual Funds
One Post Office Square
Boston, MA 02109

We are pleased to inform you that, pursuant to the terms of this
FINANCIAL INSTITUTION SERVICE AGREEMENT, we are authorized to pay
you service fees in connection with the accounts of your
customers that hold shares of certain Putnam funds listed in
SCHEDULE 1 that have adopted distribution plans pursuant to Rule
12b-1 (the "12b-1 Funds"). Payment of the service fees is
subject to your initial and continuing satisfaction of the
following terms and conditions which may be revised by us from
time to time:

1. QUALIFICATION REQUIREMENTS

(a) You have entered into a Financial Institution Sales Contract
with us with respect to the Putnam Family of Mutual Funds (the
"Putnam Funds"), whose shares you have agreed to make available
to your customers on an agency basis.

(b) You are the financial institution of record for accounts in
Putnam Funds having an aggregate average net asset value of at
least the minimum amount set forth in SCHEDULE 2 (FINANCIAL
INSTITUTION REQUIREMENTS) during the period for which a service
fee is to be paid. Putnam Fund accounts are accounts in any
open-end Putnam Fund but excluding any accounts for your
organization's own retirement plans.

(c) One or more of your current employees must be the designated
registered representative(s) in the case of a bank affiliated
dealer, or agent representative(s) in the case of a bank (both
referred to as "representatives"), on accounts in Putnam Funds
having an aggregate average net asset value of at least the
minimum amount set forth in SCHEDULE 2 (REPRESENTATIVE
REQUIREMENTS) during the period for which a service fee is to be
paid.

(d) You will provide the following information and agree that we
will be entitled to rely on the accuracy of such information in
updating our records for determining the levels of service fees
payable to you under the terms of this Agreement. You understand
that such payments will be based solely on Putnam's records:<PAGE>
For each Putnam Fund account registered in the name of one
of your customers, you will advise us, preferably by
electronic means, before the end of the second month in each
calendar quarter, of the representative's name,
identification number, branch number, and telephone number.

2. SERVICE FEES

(a) If you meet the qualification requirements set forth above in
Paragraph 1, you will be paid, at the end of each calendar
quarter, a service fee on assets of your customers in the 12b-1
Funds for which you are the financial institution of record and
which are serviced by a representative of your organization
meeting the Representative Requirements, if any at the annual
rates specified (excluding any accounts for your organization's
own retirement plans), provided that you have evaluated such
service fees and have concluded that it is consistent with
applicable laws, rules, regulations and regulatory
interpretations for you to receive such service fees.

(b) You understand and agree that:

(i) all service fee payments are subject to the limitations
contained in each 12b-1 Fund's Distribution Plan, which may
be varied or discontinued at any time;

(ii) you shall waive the right to receive service fee
payments to the extent any 12b-1 Fund fails to make
payments to us under its distribution plan with us;

(iii)your failure to provide the services described in
Paragraph 4 below as may be amended by us from time to time,
or otherwise comply with the terms of this Agreement, will
render you ineligible to receive service fees; and

(iv) failure of an assigned representative to provide
services required by this Agreement will render that
representative's accounts ineligible as accounts on which
service fees are paid.

3. PAYMENTS AND COMMUNICATIONS TO REPRESENTATIVES

(a) Where consistent with applicable laws, rules, regulations and
regulatory interpretations, you will pass through to your
representatives a significant share of the service fees paid to
you pursuant to this Agreement, or you will otherwise use the
payments of service fees to advance the objective of providing
and improving service to shareholders of the Putnam Funds in a
manner specifically approved by Putnam Mutual Funds (for example,
via training courses for representatives or shareholder
seminars).
(b) You will assist us in distributing to your representatives
periodic statements which we will have prepared showing the
aggregate average net asset value of shares in Putnam Funds with
which they are credited on our records.

4. REQUIRED SERVICES

(a) You will assign one of your representatives to each Putnam
Fund account on your records and reassign the Putnam Fund account
should that representative leave your organization.

(b) You and your representatives will assist us and our
affiliates in providing the following services to shareholders of
the Putnam Funds:

(i) Maintain regular contact with shareholders in assigned
accounts and assist in answering inquiries concerning the
Putnam Funds.

(ii) Assist in distributing sales and service literature
provided by us, particularly to the beneficial owners of
accounts registered in your name (nominee name accounts).

(iii) Assist us and our affiliates in the establishment and
maintenance of shareholder accounts and records.

(iv) Assist shareholders in effecting administrative
changes, such as changing dividend options, account
designations, address, automatic investment programs or
systematic investment plans.

(v) Assist in processing purchase and redemption
transactions.

(vi) Provide any other information or services as the
customer or we may reasonably request.

(c) You will grant reasonable requests for visits to your offices
by our wholesalers and include all Putnam Funds on your menu or
list of investments made available by you to your customers.

(e) The provisions of this Paragraph 4 may be amended by us from
time to time upon notice to you.

5. AMENDM ENT

This Agreement, including any Schedule hereto, shall be deemed
amended as provided in any written notice delivered by us to you.<PAGE>
6. EFFECT IVE PERIOD AND TERMINATION

The provisions of this Agreement shall remain in effect for one
year from the date of its execution or adoption and thereafter
for successive annual periods only so long as such continuance is
specifically approved at least annually by the Trustees of each
of the 12b-1 Funds in conformity with Rule 12b-1 under the
Investment Company Act of 1940 (the "1940 Act"). This Agreement
shall automatically terminate in the event of its assignment (as
defined by the 1940 Act). In addition, this Agreement may be
terminated at any time, without the payment of any penalty, by
either party upon written notice to the other party, or, as
provided in Rule 12b-1 under the 1940 Act, by the Trustees of any
12b-1 Fund or by the vote of the holders of the outstanding
voting securities of any 12b-1 Fund.

7. WRITTE N REPORTS

8. COMPLI ANCE WITH LAWS

With respect to the receipt of service fees under the terms of
this Agreement, you will comply with all applicable federal and
state laws and rules, and all applicable regulations and
interpretations of regulatory agencies or authorities, which may
affect your business practices, including any requirement of
written authorization or consent by your customers to your
receipt of service fees, and any requirement to provide
disclosure to your customers of such service fees.

9. MISCEL LANEOUS

(a) All communications mailed to us should be sent to the address
listed below. Any notice to you shall be duly given if mailed or
delivered to you at the address specified by you below.<PAGE>
(b) The provisions of this Agreement shall be governed by and
construed in accordance with the laws of The Commonwealth of
Massachusetts.

Very truly yours,

PUTNAM MUTUAL FUNDS CORP.

By: --------------------------
William N. Shiebler,
President and
Chief Executive Officer

We accept and agree to the foregoing Agreement as of the date set
forth below.

Financial Institution: --------------------------

By: --------------------------
Authorized Signature, Title

--------------------------

--------------------------
Address

Dated: --------------------------

Please return the signed Putnam copy of this Agreement to Putnam
Mutual Funds Corp., P.O. Box 41203, Providence, RI 02940-1203. <PAGE>
SCHEDULE 1:
THE 12B-1 FUNDS

Service fees will be paid on the following Putnam Funds at the
rates set forth in the Prospectus of that Fund:

SCHEDULE 2: MINIMUM ASSETS

FINANCIAL INSTITUTION REQUIREMENTS. The minimum aggregate
average net asset value of all accounts in Putnam Funds specified
by Paragraph 1(b) is $250,000. We will review this requirement
prior to the start of each year and inform you of any changes.

REPRESENTATIVE REQUIREMENTS. With respect to Paragraph
1(c), there is no minimum asset qualification requirement in the
Putnam Funds applicable to each of your representatives. We will
review this requirement prior to the start of each year and
inform you of any changes. We reserve the right to set a minimum
at any time.

NF-58
2/7/97

SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS

Fund name: Diversified Income Trust II -- Class A Shares
Fiscal period ending: 3/31/97
Inception date (if less than 10 years of performance): 2/26/96

TOTAL RETURN

Formula -- Average Annual Total Return: ERV = P(1+T)^n

n = Number of Time Periods 1 Year 5 Years 10 Years*

P = Initial Investment $1,000 N/A $1,000

ERV = Ending Redeemable Value $1,022.38 N/A $1,013.21

T = Average Annual
Total Return 2.24% N/A 1.20%*

*Life of fund, if less than 10 years

YIELD

Formula:

Interest + Dividends - Expenses
2 (-------------------------------------------------- +1)(6) -1
POP x Average shares

Interest and Dividends $261,212

Expenses $37,650

Reimbursement $7

Average shares 4,402,728

NAV $8.34

Sales Charge 4.75%

POP $8.76

Yield at POP 7.08%
<PAGE>
SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS

Fund name: Diversified Income Trust II -- Class B Shares
Fiscal period ending: 3/31/97
Inception date (if less than 10 years of performance): 2/26/96

TOTAL RETURN

Formula -- Average Annual Total Return: ERV = P(1+T)^n

n = Number of Time Periods 1 Year 5 Years 10 Years*

P = Initial Investment $1,000 N/A $1,000

ERV = Ending Redeemable Value $1,015.79 N/A $1,015.17

T = Average Annual
Total Return 1.58% N/A 1.38%*

*Life of fund, if less than 10 years

YIELD

Formula:

Interest + Dividends - Expenses
2 (-------------------------------------------------- +1)(6) -1
POP x Average shares

Interest and Dividends $398,424

Expenses $92,040

Reimbursement $11

Average shares 6,661,741

NAV $8.34

Maximum Contingent Deferred
Sales Charge 5.0%

Yield at NAV 6.71%
<PAGE>
SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS

Fund name: Diversified Income Trust II -- Class M Shares
Fiscal period ending: 3/31/97
Inception date (if less than 10 years of performance): 2/26/96

TOTAL RETURN

Formula -- Average Annual Total Return: ERV = P(1+T)^n

n = Number of Time Periods 1 Year 5 Years 10 Years*

P = Initial Investment $1,000 N/A $1,000

ERV = Ending Redeemable Value $1,036.30 N/A $1,025.44

T = Average Annual
Total Return 3.63% N/A 2.31%*

*Life of fund, if less than 10 years

YIELD

Formula:

Interest + Dividends - Expenses
2 (-------------------------------------------------- +1)(6) -1
POP x Average shares

Interest and Dividends $41,067

Expenses $7,080

Reimbursement $1

Average shares 689,137

NAV $8.34

Sales Charge 3.25%

POP $8.62

Yield at POP 6.96%

WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6
<LEGEND>
Putnam Diversified Income Trust II
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> CLASS A

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 104,593,593
<INVESTMENTS-AT-VALUE> 102,950,871
<RECEIVABLES> 13,607,316
<ASSETS-OTHER> 45,953
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 106,604,140
<PAYABLE-FOR-SECURITIES> 3,212,621
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,360,230
<TOTAL-LIABILITIES> 4,572,851
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 103,209,518
<SHARES-COMMON-STOCK> 4,695,854
<SHARES-COMMON-PRIOR> 453,304
<ACCUMULATED-NII-CURRENT> 38,301
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 516,692
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,733,222)
<NET-ASSETS> 102,031,289
<DIVIDEND-INCOME> 106,921
<INTEREST-INCOME> 5,260,992
<OTHER-INCOME> 0
<EXPENSES-NET> 960,279
<NET-INVESTMENT-INCOME> 4,407,634
<REALIZED-GAINS-CURRENT> 622,841
<APPREC-INCREASE-CURRENT> (1,707,317)
<NET-CHANGE-FROM-OPS> 3,323,158
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,689,156)
<DISTRIBUTIONS-OF-GAINS> (65,289)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,212,882
<NUMBER-OF-SHARES-REDEEMED> (1,120,900)
<SHARES-REINVESTED> 150,568
<NET-CHANGE-IN-ASSETS> 92,702,757
<ACCUMULATED-NII-PRIOR> 4,666
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (3,746)
<GROSS-ADVISORY-FEES> 424,705
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,025,646
<AVERAGE-NET-ASSETS> 22,228,247
<PER-SHARE-NAV-BEGIN> 8.38
<PER-SHARE-NII> .63
<PER-SHARE-GAIN-APPREC> (.02)
<PER-SHARE-DIVIDEND> (.63)
<PER-SHARE-DISTRIBUTIONS> (.02)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.34
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6
<LEGEND>
Putnam Diversified Income Trust II
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> CLASS B

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 104,593,593
<INVESTMENTS-AT-VALUE> 102,950,871
<RECEIVABLES> 13,607,316
<ASSETS-OTHER> 45,953
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 106,604,140
<PAYABLE-FOR-SECURITIES> 3,212,621
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,360,230
<TOTAL-LIABILITIES> 4,572,851
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 103,209,518
<SHARES-COMMON-STOCK> 6,842,885
<SHARES-COMMON-PRIOR> 602,236
<ACCUMULATED-NII-CURRENT> 38,301
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 516,692
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,733,222)
<NET-ASSETS> 102,031,289
<DIVIDEND-INCOME> 106,921
<INTEREST-INCOME> 5,260,992
<OTHER-INCOME> 0
<EXPENSES-NET> 960,279
<NET-INVESTMENT-INCOME> 4,407,634
<REALIZED-GAINS-CURRENT> 622,841
<APPREC-INCREASE-CURRENT> (1,707,317)
<NET-CHANGE-FROM-OPS> 3,323,158
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,371,438)
<DISTRIBUTIONS-OF-GAINS> (97,835)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,538,742
<NUMBER-OF-SHARES-REDEEMED> (1,508,622)
<SHARES-REINVESTED> 210,529
<NET-CHANGE-IN-ASSETS> 92,702,757
<ACCUMULATED-NII-PRIOR> 4,666
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (3,746)
<GROSS-ADVISORY-FEES> 424,705
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,025,646
<AVERAGE-NET-ASSETS> 34,751,303
<PER-SHARE-NAV-BEGIN> 8.38
<PER-SHARE-NII> .57
<PER-SHARE-GAIN-APPREC> (.03)
<PER-SHARE-DIVIDEND> (.56)
<PER-SHARE-DISTRIBUTIONS> (.02)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.34
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<LEGEND>
Putnam Diversified Income Trust II
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> CLASS M

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 104,593,593
<INVESTMENTS-AT-VALUE> 102,950,871
<RECEIVABLES> 13,607,316
<ASSETS-OTHER> 45,953
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 106,604,140
<PAYABLE-FOR-SECURITIES> 3,212,621
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,360,230
<TOTAL-LIABILITIES> 4,572,851
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 103,209,518
<SHARES-COMMON-STOCK> 695,674
<SHARES-COMMON-PRIOR> 57,575
<ACCUMULATED-NII-CURRENT> 38,301
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 516,692
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,733,222)
<NET-ASSETS> 102,031,289
<DIVIDEND-INCOME> 106,921
<INTEREST-INCOME> 5,260,992
<OTHER-INCOME> 0
<EXPENSES-NET> 960,279
<NET-INVESTMENT-INCOME> 4,407,634
<REALIZED-GAINS-CURRENT> 622,841
<APPREC-INCREASE-CURRENT> (1,707,317)
<NET-CHANGE-FROM-OPS> 3,323,158
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (253,993)
<DISTRIBUTIONS-OF-GAINS> (9,432)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 776,371
<NUMBER-OF-SHARES-REDEEMED> (161,416)
<SHARES-REINVESTED> 23,144
<NET-CHANGE-IN-ASSETS> 92,702,757
<ACCUMULATED-NII-PRIOR> 4,666
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (3,746)
<GROSS-ADVISORY-FEES> 424,705
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,025,646
<AVERAGE-NET-ASSETS> 3,472,833
<PER-SHARE-NAV-BEGIN> 8.38
<PER-SHARE-NII> .61
<PER-SHARE-GAIN-APPREC> (.03)
<PER-SHARE-DIVIDEND> (.60)
<PER-SHARE-DISTRIBUTIONS> (.02)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.34
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>