Putnam Mortgage Securities Fund NCSR Certified annual shareholder report (management investment company)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: (811- 03897)

Exact name of registrant as specified in charter: Putnam U.S. Government Income Trust

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

Name and address of agent for service:	Beth S. Mazor, Vice President
	One Post Office Square
	Boston, Massachusetts 02109

Copy to:	John W. Gerstmayr, Esq.
	Ropes & Gray LLP
	One International Place
	Boston, Massachusetts 02110

Registrant’s telephone number, including area code:		(617) 292-1000

Date of fiscal year end: September 30, 2006

Date of reporting period: October 1, 2005—September 30, 2006

Item 1. Report to Stockholders:

The following is a copy of the report transmitted to stockholders pursuant to Rule 30e-1 under the Investment Company Act of 1940:

What makes
Putnam different?

A time-honored tradition in
money management

Since 1937, our values have been rooted in a profound sense of responsibility for the money entrusted to us.

A prudent approach to investing

We use a research-driven team approach to seek consistent, dependable, superior investment results over time, although there is no guarantee a fund will meet its objectives.

Funds for every investment goal

We offer a broad range of mutual funds and other financial products so investors and their financial representatives can build diversified portfolios.

A commitment to doing what’s right
for investors

We have below-average expenses and stringent investor protections, and provide a wealth of information about the Putnam funds.

Industry-leading service

We help investors, along with their financial representatives, make informed investment decisions with confidence.

In 1830, Massachusetts Supreme Judicial Court Justice Samuel Putnam established The Prudent Man Rule, a legal foundation for responsible money management.

THE PRUDENT MAN RULE

All that can be required of a trustee to invest is that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.

Putnam
U.S. Government
Income Trust

9| 30| 06

Annual Report

Message from the Trustees	1
About the fund	2
Report from the fund managers	5
Performance	10
Expenses	12
Portfolio turnover	14
Risk	14
Your fund’s management	15
Terms and definitions	17
Trustee approval of management contract	18
Other shareholder information	21
Financial statements	22
Federal tax information	44
About the Trustees	45
Officers	49

Cover photograph: © White-Packert Photography

Message from the Trustees

Putnam U.S. Government Income Trust: seeking

opportunities through mortgage-backed securities

Home ownership is the most common way to invest in the real estate market, but it is not the only way. It is also possible for individuals to invest in the mortgages used to finance homes and businesses through instruments called mortgage-backed securities (MBSs). Since 1984, Putnam U.S. Government Income Trust has invested in some of the highest-quality MBSs with the goal of maximizing income. However, investing in MBSs carries certain risks. As a result, your fund’s team of experienced analysts uses proprietary models to seek out investment opportunities, while striving to maintain an appropriate amount of risk for the fund.

MBSs are essentially securities that represent a stake in the principal from and interest paid on a collection of mortgages. Most MBSs are created when government-sponsored entities, including Fannie Mae, Ginnie Mae, and Freddie Mac, buy mortgages from financial institutions, such as banks or credit unions, and package them together by the thousands. These pools of mortgages act as collateral for the MBSs that government-sponsored entities sell to different investors, including Putnam U.S. Government Income Trust, which currently holds a significant percentage of its assets in MBSs.

With the exception of Ginnie Mae securities, MBSs are not guaranteed directly by the full faith and credit of the United States. Therefore, they carry a higher degree of risk than investments like Treasury bonds, while offering the potential for higher returns. These non-Ginnie Mae securities are backed by a pool of borrowers and are typically guaranteed by the government-sponsored entities that offer them. By seeking opportunities among

Mortgage-backed securities have historically delivered solid returns,
with fewer ups and downs than stocks along the way.

MBSs, your fund’s management team seeks higher returns than Treasuries can typically offer, but with less volatility than stocks.

Mutual funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. The use of derivatives involves special risks and may result in losses. Mutual funds that invest in bonds are subject to certain risks, including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses.

The ABCs of MBSs

MBSs (Mortgage-backed securities): MBSs are pools of mortgages used as collateral for issuing a security. These securities represent claims on the principal and interest payments made by the borrowers whose loans are in the pool.

Fannie Mae (Federal National Mortgage Association): Fannie Mae is a public company established by the U.S. government in 1938 to help make mortgage funds available to buyers. Fannie Mae does business with primary mortgage lenders (savings and loans, commercial banks, credit unions, and housing finance agencies).

Freddie Mac (Federal Home Loan Mortgage Corporation): Freddie Mac is another public company chartered by Congress to increase the funds available to mortgage financiers. Freddie Mac buys mortgages from primary lenders and develops MBSs that offer a guarantee on the payment of principal and interest.

Ginnie Mae (Government National Mortgage Association): Ginnie Mae is a government-owned corporation established in 1968 whose MBSs are backed by the full faith and credit of the U.S. government.

Putnam U.S. Government Income Trust seeks as high a level of current income as we believe is consistent with preservation of capital. The fund attempts to achieve its objective by investing in obligations of the U.S. government and its agencies and instrumentalities, such as Government National Mortgage Association certificates (Ginnie Maes), Federal National Mortgage Association certificates (Fannie Maes), Federal Home Loan Mortgage Corporation certificates (Freddie Macs), and U.S. Treasury securities. Ginnie Maes, Fannie Maes, and Freddie Macs are generally high quality and typically provide higher yields than Treasury securities of similar maturities. The fund may also invest a portion of its assets in highly rated non-government mortgage-backed securities and other asset-backed securities. The fund may be appropriate for investors seeking income, as well as those seeking lower volatility in a well-diversified portfolio.

Highlights

• For the 12 months ended September 30, 2006, Putnam U.S. Government Income Trust’s class A shares returned 3.30% without sales charges.

• The fund’s benchmark, the Lehman GNMA Index, returned 4.10% .

• The average return for the fund’s Lipper category, GNMA Funds, was 3.22% .

• The fund’s dividend increased during the period. See page 8 for details.

• Additional fund performance, comparative performance, and Lipper data can be found in the performance section beginning on page 10.

Performance

Total return for class A shares for periods ended 9/30/06

Since the fund’s inception (2/8/84), average annual return is 7.15% at NAV and 6.97% at POP.

	Average annual return		Cumulative return
	NAV	POP	NAV	POP

10 years	5.34%	4.94%	68.22%	61.94%

5 years	3.48	2.70	18.67	14.23

3 years	2.84	1.55	8.78	4.73

1 year	3.30	–0.56	3.30	–0.56

Data is historical. Past performance does not guarantee future results. More recent returns may be less or more than those shown. Investment return and principal value will fluctuate, and you may have a gain or a loss when you sell your shares. Performance assumes reinvestment of distributions and does not account for taxes. Returns at NAV do not reflect a sales charge of 3.75% . For the most recent month-end performance, visit www.putnam.com. A 1% short-term trading fee may apply.

Report from the fund managers

The year in review

For the annual period, your fund posted a modest gain, based on results at net asset value (NAV, or without sales charges). These results were in line with the average for the fund’s peer group, Lipper GNMA Funds, but lagged the results for its benchmark, the Lehman GNMA Index. Like the index, your fund concentrates its investments in GNMA mortgage-backed securities (MBSs), but takes a more flexible approach in that it may also invest in other U.S. government and agency securities. For the period under review, this approach dampened returns relative to the fund’s MBS-focused benchmark. However, the fund’s preference for Fannie Mae securities over Ginnie Maes during the period, and its allocation to “re-performing mortgages” supported by the Federal Housing Administration (FHA) and Veteran’s Administration (VA), contributed favorably to performance relative to its peer group.

Market overview

From October 1, 2005, to September 30, 2006, bond yields in general increased modestly across all maturities. Yields on 10-year Treasuries first rose about 90 basis points (a basis point is one one-hundredth of a percent), and then fell 60 basis points in the fourth quarter of the fund’s fiscal year, ending the period at 4.63% . The net increase for the year was about 30 basis points. Since 2003, the spread, or difference, between yields of 2-year notes and 10-year Treasuries, has continued to narrow. For example, at the end of September 2005, 10-year Treasuries yielded 15 basis points more than 2-year notes. One year later, they actually yielded 6 basis points less than 2-year notes. The yield curve (a graphical representation of the difference in yield between short-term and long-term securities) continued to flatten in 2006 and actually inverted. This is a fairly rare occurrence and is widely accepted as a predictor of slowing economic growth. We believe it indic ates that the market currently expects that the Fed will lower short-term interest rates.

Investors who are seeking higher yield have only two ways to pursue it: by selecting higher-coupon bonds, or benefiting from price changes that result from market

Market sector performance

These indexes provide an overview of performance in different market sectors for the 12 months ended 9/30/06.

Bonds
Lehman GNMA Index
(Government National Mortgage Association bonds)	4.10%

Lehman Aggregate Bond Index
(broad bond market)	3.67%

Lehman Municipal Bond Index
(tax-exempt bonds)	4.45%

JPMorgan Global High Yield Index
(global high-yield corporate bonds)	7.67%

Equities
S&P 500 Index
(broad stock market)	10.79%

Russell 1000 Growth Index
(large-company growth stocks)	6.04%

Russell 1000 Value Index
(large-company value stocks)	14.62%

volatility. As the period began, volatility in the fixed-income markets was quite low by historical measures and it continued to decline throughout the period. Consequently, investors preferred higher-yielding (higher-coupon) securities, i.e., corporate bonds, agency bonds, and mortgage-backed securities. The latter outpaced agency bonds, which in turn outperformed Treasuries of comparable maturities during the period.

Strategy overview

There are six key strategy decisions that we make in managing the fund. The first is called term structure. This reflects our views of the direction of interest rates based on factors such as economic indicators, Fed statements and strategy, and market sentiment. We also analyze the shape of the yield curve and strive to position your fund’s portfolio to benefit from expected shifts in the curve. Our second strategic decision involves sector allocation. We seek to determine the relative attractiveness of the different fixed-income sectors in which your fund can invest — Treasuries, agencies, and MBSs — and then position its portfolio to take advantage of our sector preferences. We also weigh the relative attractiveness of the Ginnie Maes, Fannie Maes, and Freddie Macs within the agency market.

We make three other strategic decisions that are specifically related to MBSs: We seek to determine which maturity is most attractive (e.g., 30-year, 15-year, or adjustable-rate); we assess which coupon level (e.g., 5.5%, 6.5%, 7%, etc.) or what combination of coupons provides the best risk/return tradeoff; and we consider the “seasoning” of mortgages. An older, or more seasoned, mortgage is typically less likely to be prepaid. Prepayment would interrupt the income stream and require investors to reinvest principal at current lower rates. Our sixth strategic decision concerns out-of-benchmark exposure. We consider the relative attractiveness of securities that are not in the fund’s benchmark but are allowed under the fund’s investment guidelines.

Your fund’s holdings

Throughout the year, we maintained the fund’s relatively short portfolio duration in order to limit its sensitivity to changes in interest rates. As rates rose and bond prices fell during the first three quarters of the fiscal period, this defensive positioning proved helpful. However, as rates fell in the final quarter and bond prices rallied, the fund’s shorter duration limited its ability to benefit from the resulting gains. Also, the fund was positioned to benefit from what we believed would be a steepening of the yield curve. However, as noted earlier, the curve flattened and inverted during the period, which detracted from the fund’s performance relative to its benchmark.

Average effective duration and average effective maturity take into account put and call features, where applicable, and reflect prepayments for mortgage-backed securities.
Duration is usually shorter than maturity because it reflects interest payments on a bond prior to its maturity.

We closely monitor the spread between yields of Treasuries, which are generally considered risk-free, and other, higher-risk fixed-income securities. Over time, this spread tends to widen and then narrow in a cyclical manner. For example, when corporations are financially healthy and the economy is stable, the risk of investing in corporate bonds is perceived to be less, and so the yield advantage that they offer in comparison to Treasuries is also less. At such times, the spread is said to be narrow. During the period, the spread to Treasuries had narrowed to such a degree that we believed the cycle was nearing an end. Because we anticipated that the spread would begin to widen (yields would go up and bond prices would fall) the portfolio emphasized lower-yielding government securities. This did not boost the fund’s returns during the period, as higher-yielding agency bonds and mortgages outperfor med. However, we still believe that spreads are poised to widen in the coming months and that the fund retains the ability to benefit should this occur.

With regard to the fund’s MBS holdings, we emphasized lower-coupon MBSs, which, in our view, had been discounted by the market. We sold MBSs with 6.5% and 6% coupons and bought those with 5% coupons. We believed that in a period of rising mortgage rates, existing lower-rate mortgages would have less prepayment risk. Prepayment risk is the risk that mortgage loans will be paid in full and terminated prematurely, reducing an investor’s expected interest income, and necessitating reinvestment of principal at prevailing market rates, which could be lower. In our view, the market was undervaluing the reduced prepayment risk, and once the discrepancy was recognized, these securities would be likely to outperform. However, in an environment where investors were not being appropriately compensated for accepting the risk of longer-term maturities, banks sought shorter-ter m maturities in the form of mortgages with 6.5% coupons. This strong demand drove a rally in 6.5% coupon MBSs while 5% coupon MBSs underperformed.

Our decision to favor Fannie Mae securities over Ginnie Maes worked to the fund’s advantage. In the early part of the year, Asian demand for MBSs — particularly government-guaranteed securities — drove the value of Ginnie Maes higher relative to Fannie Maes. We sold Ginnie Maes, locking in gains, and then bought cheaper Fannie Maes.

We also captured gains by actively managing the fund’s exposure to 15-year and 30-year mortgages, and hybrid adjustable rate mortgages (ARMs). Hybrid ARMs have characteristics of both fixed-rate and adjustable-rate loans, because they provide for an initial period of fixed-rate

* A significant portion of short-term investments reflects amounts used to settle TBA purchase commitments. For more information, see page 40.

payments, after which the interest rate adjusts annually. Nearly half of all new mortgage loans originated in recent years were hybrid loans; however, the popularity of these loans is waning because interest rates are rising. Many of the hybrid ARMs are now trading in the secondary market at what we believe are increasingly attractive levels, given their higher yields. To take advantage of the maturities that appeared most attractive, we adjusted the fund’s holdings in this area several times throughout the year.

The fund’s positions in FHA-VA re-performing mortgages helped performance. These formerly delinquent mortgages have been pooled together and given credit protection from the Federal Housing Administration (FHA), the Veteran’s Administration (VA), and Fannie Mae. We like the limited credit risk of these securities. Also, because mortgage borrowers who have been delinquent in the past are not able to refinance easily and thus, hold their mortgages for longer periods, this type of MBS is less likely to be negatively affected by prepayments. Consequently, these securities are less sensitive to interest-rate changes than typical MBSs. Up to 15% of the portfolio was invested in these securities, which also offer higher yields than typical MBSs.

The fund also owned and benefited from commercial mortgage-backed securities (CMBSs). Unlike residential mortgages, most commercial mortgages are precluded from prepayment. With no prepayment risk, they are typically more stable than home mortgages. CMBSs were inexpensive relative to residential MBSs, and they performed well during the year.

In addition, fund returns were helped by our emphasis on older, more seasoned mortgages, which often have smaller loan balances. Both the seasoning and the lower loan balances tend to reduce prepayment risk, so these securities are relatively stable in price. We find the most attractive way to invest in seasoned mortgages is through collateralized mortgage obligations (CMOs) and FHA-VA re-performing mortgages.

Please note that the holdings discussed in this report may not have been held by the fund for the entire period. Portfolio composition is subject to review in accordance with the fund’s investment strategy and may vary in the future.

Of special interest

Fund’s dividend increased

The fund’s monthly dividend increased incrementally during the period, from $0.034 to $0.043 by the close of the fiscal year. This was due in part to an increase in the fund’s interest income. The fund’s other share classes had similar increases.

The outlook for your fund

The following commentary reflects anticipated developments that could affect your fund over the next six months, as well as your management team’s plans for responding to them.

While we believe that economic growth could slow in coming months, we also believe that interest rates are currently too low and that the present flat yield curve overstates the potential for slower growth. Although the market may not share this view, we believe that rates will trend higher across the range of bond maturities. Accordingly, we are seeking to limit the portfolio’s interest-rate sensitivity by maintaining its short portfolio duration. We also believe that we are near the end of a credit cycle and that the very small difference between yields of low-risk and high-risk securities will gradually begin to widen. Currently, yield spreads are not compensating investors for buying riskier securities. In light of this, we are fairly conservative in our sector strategies, and we are favoring Treasuries and Aaa-rated securities, such as CMOs, over agencies and mortgages. In our view, Treasuries and Aaa-rated securities appear to offer the best values in the marketplace , and currently, without substantial yield advantages available elsewhere, we believe they are the most prudent choice.

Within the MBS market, we continue to favor Fannie Mae securities over Ginnie Maes. With regard to maturities, we prefer 15-year to 30-year MBSs. We prefer lower coupons to higher coupons, and increased the fund’s exposure to these when, in our view, the market undervalued them in the last quarter of the fiscal year. We continue to prefer seasoned mortgages to newer ones. Out-of-benchmark investments such as FHA-VA re-performing loans, CMBs, and hybrid ARMs still appear attractive, and we believe they are likely to continue to contribute to overall returns. As always, we strive to position the fund to take advantage of attractive opportunities without assuming undue risk.

The views expressed in this report are exclusively those of Putnam Management. They are not meant as investment advice.

Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. The use of derivatives involves special risks and may result in losses. Funds that invest in bonds are subject to certain risks including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses.

Your fund’s performance

This section shows your fund’s performance for periods ended September 30, 2006, the end of its fiscal year. Performance should always be considered in light of a fund’s investment strategy. Data represents past performance. Past performance does not guarantee future results. More recent returns may be less or more than those shown. Investment return and principal value will fluctuate, and you may have a gain or a loss when you sell your shares. For the most recent month-end performance, please visit www.putnam.com or call Putnam at 1-800-225-1581. Class Y shares are generally only available to corporate and institutional clients. See the Terms and Definitions section in this report for definitions of the share classes offered by your fund.

Fund performance Total return for periods ended 9/30/06


	Class A		Class B		Class C		Class M		Class R	Class Y
(inception dates)	(2/8/84)		(4/27/92)		(7/26/99)		(2/6/95)		(1/21/03)	(4/11/94)
	NAV	POP	NAV	CDSC	NAV	CDSC	NAV	POP	NAV	NAV

Annual average
(life of fund)	7.15%	6.97%	6.27%	6.27%	6.34%	6.34%	6.80%	6.65%	6.88%	7.30%

10 years	68.22	61.94	55.92	55.92	56.10	56.10	63.83	58.56	64.07	72.52
Annual average	5.34	4.94	4.54	4.54	4.55	4.55	5.06	4.72	5.08	5.60

5 years	18.67	14.23	14.23	12.24	14.26	14.26	17.18	13.36	17.21	20.16
Annual average	3.48	2.70	2.70	2.34	2.70	2.70	3.22	2.54	3.23	3.74

3 years	8.78	4.73	6.42	3.45	6.35	6.35	7.98	4.49	7.92	9.62
Annual average	2.84	1.55	2.10	1.14	2.07	2.07	2.59	1.47	2.57	3.11

1 year	3.30	–0.56	2.52	–2.43	2.50	1.51	3.10	–0.25	3.04	3.60

Performance assumes reinvestment of distributions and does not account for taxes. Returns at public offering price (POP) for class A and M shares reflect a sales charge of 3.75% and 3.25%, respectively. Class B share returns reflect the applicable contingent deferred sales charge (CDSC), which is 5% in the first year, declining to 1% in the sixth year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the first year that is eliminated thereafter. Class R and Y shares have no initial sales charge or CDSC. Performance for class B, C, M, R, and Y shares before their inception is derived from the historical performance of class A shares, adjusted for the applicable sales charge (or CDSC) and, except for class Y shares, the higher operating expenses for such shares.

A 1% short-term trading fee may be applied to shares exchanged or sold within 7 days of purchase.

Past performance does not indicate future results. At the end of the same time period, a $10,000 investment in the fund’s class B and class C shares would have been valued at $15,592 and $15,610, respectively, and no contingent deferred sales charges would apply. A $10,000 investment in the fund’s class M shares ($9,675 after sales charge) would have been valued at $15,856 at public offering price. A $10,000 investment in the fund’s class R and class Y shares would have been valued at $16,407 and $17,252, respectively. See first page of performance section for performance calculation method.

Comparative index returns For periods ended 9/30/06


	Lehman	Lipper GNMA Funds
	GNMA Index	category average*

Annual average
(life of fund)	8.70%	7.66%

10 years	83.31	68.85
Annual average	6.25	5.37

5 years	24.27	19.31
Annual average	4.44	3.59

3 years	12.10	8.59
Annual average	3.88	2.78

1 year	4.10	3.22

Index and Lipper results should be compared to fund performance at net asset value.

*Over the 1-, 3-, 5-, and 10-year periods ended 9/30/06, there were 62, 61, 54, and 30 funds, respectively, in this Lipper category.

Fund price and distribution information For the 12-month period ended 9/30/06


Distributions	Class A		Class B	Class C	Class M		Class R	Class Y

Number	12		12	12	12		12	12

Income	$0.539		$0.439	$0.438	$0.503		$0.506	$0.575

Capital gains	—		—	—	—		—	—

Total	$0.539		$0.439	$0.438	$0.503		$0.506	$0.575

Share value:	NAV	POP	NAV	NAV	NAV	POP	NAV	NAV

9/30/05	$13.15	$13.66	$13.08	$13.13	$13.13	$13.57	$13.14	$13.12

9/30/06	13.03	13.54	12.96	13.01	13.02	13.46	13.02	13.00

Current yield (end of period)
Current dividend rate¹	3.96%	3.81%	3.15%	3.14%	3.69%	3.57%	3.69%	4.25%

Current 30-day SEC yield²	4.32	4.15	3.57	3.57	4.07	3.93	4.07	4.57

1 Most recent distribution, excluding capital gains, annualized and divided by NAV or POP at end of period.

2 Based only on investment income, calculated using SEC guidelines.

Your fund’s expenses

As a mutual fund investor, you pay ongoing expenses, such as management fees, distribution fees (12b-1 fees), and other expenses. In the most recent six-month period, your fund limited these expenses; had it not done so, expenses would have been higher. Using the information below, you can estimate how these expenses affect your investment and compare them with the expenses of other funds. You may also pay one-time transaction expenses, including sales charges (loads) and redemption fees, which are not shown in this section and would have resulted in higher total expenses. For more information, see your fund’s prospectus or talk to your financial advisor.

Review your fund’s expenses

The table below shows the expenses you would have paid on a $1,000 investment in Putnam U.S. Government Income Trust from April 1, 2006, to September 30, 2006. It also shows how much a $1,000 investment would be worth at the close of the period, assuming actual returns and expenses.

	Class A	Class B	Class C	Class M	Class R	Class Y

Expenses paid per $1,000*	$ 4.88	$ 8.67	$ 8.67	$ 6.14	$ 6.14	$ 3.61

Ending value (after expenses)	$1,027.20	$1,023.30	$1,023.20	$1,025.80	$1,025.80	$1,028.70

* Expenses for each share class are calculated using the fund’s annualized expense ratio for each class, which represents the ongoing expenses as a percentage of net assets for the six months ended 9/30/06. The expense ratio may differ for each share class (see the last table in this section). Expenses are calculated by multiplying the expense ratio by the average account value for the period; then multiplying the result by the number of days in the period; and then dividing that result by the number of days in the year. Does not reflect the effect of a non-recurring reimbursement by Putnam. If this amount had been reflected in the table above, expenses for each share class would have been lower.

Estimate the expenses you paid

To estimate the ongoing expenses you paid for the six months ended September 30, 2006, use the calculation method below. To find the value of your investment on April 1, 2006, go to www.putnam.com and log on to your account. Click on the “Transaction History” tab in your Daily Statement and enter 04/01/2006 in both the “from” and “to” fields. Alternatively, call Putnam at 1-800-225-1581.

Compare expenses using the SEC’s method

The Securities and Exchange Commission (SEC) has established guidelines to help investors assess fund expenses. Per these guidelines, the table below shows your fund’s expenses based on a $1,000 investment, assuming a hypothetical 5% annualized return. You can use this information to compare the ongoing expenses (but not transaction expenses or total costs) of investing in the fund with those of other funds. All mutual fund shareholder reports will provide this information to help you make this comparison. Please note that you cannot use this information to estimate your actual ending account balance and expenses paid during the period.

	Class A	Class B	Class C	Class M	Class R	Class Y

Expenses paid per $1,000*	$ 4.86	$ 8.64	$ 8.64	$ 6.12	$ 6.12	$ 3.60

Ending value (after expenses)	$1,020.26	$1,016.50	$1,016.50	$1,019.00	$1,019.00	$1,021.51

Compare expenses using industry averages

You can also compare your fund’s expenses with the average of its peer group, as defined by Lipper, an independent fund-rating agency that ranks funds relative to others that Lipper considers to have similar investment styles or objectives. The expense ratio for each share class shown below indicates how much of your fund’s net assets have been used to pay ongoing expenses during the period.

	Class A	Class B	Class C	Class M	Class R	Class Y

Your fund’s annualized expense ratio*	0.96%	1.71%	1.71%	1.21%	1.21%	0.71%

Average annualized expense ratio for Lipper peer group†	1.01%	1.76%	1.76%	1.26%	1.26%	0.76%

* For the fund’s most recent fiscal half year; may differ from expense ratios based on one-year data in the financial highlights. Does not reflect the effect of a non-recurring reimbursement by Putnam. If this amount had been reflected in the table above, the expense ratio for each share class would have been lower.

† Simple average of the expenses of all front-end load funds in the fund’s Lipper peer group, calculated in accordance with Lipper’s standard method for comparing fund expenses (excluding 12b-1 fees and without giving effect to any expense offset and brokerage service arrangements that may reduce fund expenses). This average reflects each fund’s expenses for its most recent fiscal year available to Lipper as of 9/30/06. To facilitate comparison, Putnam has adjusted this average to reflect the 12b-1 fees carried by each class of shares other than class Y shares, which do not incur 12b-1 fees. The peer group may include funds that are significantly smaller or larger than the fund, which may limit the comparability of the fund’s expenses to the simple average, which typically is higher than the asset-weighted average.

Your fund’s portfolio turnover
and Overall Morningstar^®Risk

Putnam funds are actively managed by teams of experts who buy and sell securities based on intensive analysis of companies, industries, economies, and markets. Portfolio turnover is a measure of how often a fund’s managers buy and sell securities for your fund. A portfolio turnover of 100%, for example, means that the managers sold and replaced securities valued at 100% of a fund’s assets within a one-year period. Funds with high turnover may be more likely to generate capital gains and dividends that must be distributed to shareholders as taxable income. High turnover may also cause a fund to pay more brokerage commissions and other transaction costs, which may detract from performance.

Funds that invest in bonds or other fixed-income instruments may have higher turnover than funds that invest only in stocks. Short-term bond funds tend to have higher turnover than longer-term bond funds, because shorter-term bonds will mature or be sold more frequently than longer-term bonds. You can use the table below to compare your fund’s turnover with the average turnover for funds in its Lipper category.

Turnover comparisons

Percentage of holdings that change every year

	2006	2005	2004	2003	2002

Putnam U.S. Government Income Trust	579%*	782%*	198%*	332%†	277%†

Lipper GNMA Funds category average	307%	315%	286%	383%	313%

Turnover data for the fund is calculated based on the fund's fiscal-year period, which ends on September 30. Turnover data for the fund's Lipper category is calculated based on the average of the turnover of each fund in the category for its fiscal year ended during the indicated year. Fiscal years vary across funds in the Lipper category, which may limit the comparability of the fund's portfolio turnover rate to the Lipper average. Comparative data for 2006 is based on information available as of 9/30/06.

* Excludes dollar roll transactions.

† Excludes certain Treasury note transactions executed in connection with a short-term trading strategy.

Your fund’s Overall Morningstar^®Risk

This risk comparison is designed to help you understand how your fund compares with other funds. The comparison utilizes a risk measure developed by Morningstar, an independent fund-rating agency. This risk measure is referred to as the fund’s Overall Morningstar Risk.

Your fund’s Overall Morningstar Risk is shown alongside that of the average fund in its broad asset class, as determined by Morningstar. The risk bar broadens the comparison by translating the fund’s Overall Morningstar Risk into a percentile, which is based on the fund’s ranking among all funds rated by Morningstar as of September 30, 2006. A higher Overall Morningstar Risk generally indicates that a fund’s monthly returns have varied more widely.

Morningstar determines a fund’s Overall Morningstar Risk by assessing variations in the fund’s monthly returns — with an emphasis on downside variations — over 3-, 5-, and 10-year periods, if available. Those measures are weighted and averaged to produce the fund’s Overall Morningstar Risk. The information shown is provided for the fund’s class A shares only; information for other classes may vary. Overall Morningstar Risk is based on historical data and does not indicate future results. Morningstar does not purport to measure the risk associated with a current investment in a fund, either on an absolute basis or on a relative basis. Low Overall Morningstar Risk does not mean that you cannot lose money on an investment in a fund. Copyright 2006 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warran ted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Your fund’s management

Your fund is managed by the members of the Putnam Core Fixed-Income Team. Kevin Cronin is the Portfolio Leader and Rob Bloemker and Daniel Choquette are Portfolio Members of your fund. The Portfolio Leader and Portfolio Members coordinate the team’s management of the fund.

For a complete listing of the members of the Putnam Core Fixed-Income Team, including those who are not Portfolio Leaders or Portfolio Members of your fund, visit Putnam’s Individual Investor Web site at www.putnam.com.

Investment team fund ownership

The table below shows how much the fund’s current Portfolio Leader and Portfolio Members have invested in the fund and in all Putnam mutual funds (in dollar ranges). Information shown is as of September 30, 2006, and September 30, 2005.

Trustee and Putnam employee fund ownership

As of September 30, 2006, all of the 11 Trustees then on the Board of the Putnam funds owned fund shares. The table below shows the approximate value of investments in the fund and all Putnam funds as of that date by the Trustees and Putnam employees. These amounts include investments by the Trustees’ and employees’ immediate family members and investments through retirement and deferred compensation plans.

		Total assets in
	Assets in the fund	all Putnam funds

Trustees	$ 137,000	$ 90,000,000

Putnam employees	$1,422,000	$418,000,000

Fund manager compensation

The total 2005 fund manager compensation that is attributable to your fund is approximately $1,300,000. This amount includes a portion of 2005 compensation paid by Putnam Management to the fund managers listed in this section for their portfolio management responsibilities, calculated based on the fund assets they manage taken as a percentage of the total assets they manage. The compensation amount also includes a portion of the 2005 compensation paid to the Chief Investment Officer of the team and the Group Chief Investment Officer of the fund’s broader investment category for their oversight responsibilities, calculated based on the fund assets they oversee taken as a percentage of the total assets they oversee. This amount does not include compensation of other personnel involved in research, trading, administration, systems, compliance, or fund operations; nor does it include non-compensation costs. These percentages are determined as of the fund’s fiscal period-end. For personnel who joined Putnam Management during or after 2005, the calculation reflects annualized 2005 compensation or an estimate of 2006 compensation, as applicable.

Other Putnam funds managed by the Portfolio Leader and Portfolio Members

Kevin Cronin is also a Portfolio Leader of Putnam American Government Income Fund, Putnam Global Income Trust, Putnam Income Fund, and Putnam Limited Duration Government Income Fund. He is also a Portfolio Member of Putnam Equity Income Fund.

Rob Bloemker is also a Portfolio Member of Putnam American Government Income Fund, Putnam Diversified Income Trust, Putnam Income Fund, Putnam Limited Duration Government Income Fund, Putnam Master Intermediate Income Trust, and Putnam Premier Income Trust.

Daniel Choquette is also a Portfolio Member of Putnam American Government Income Fund and Putnam Limited Duration Government Income Fund.

Kevin Cronin, Rob Bloemker, and Daniel Choquette may also manage other accounts and variable trust funds advised by Putnam Management or an affiliate.

Changes in your fund’s Portfolio Leader and Portfolio Members

Your fund’s Portfolio Leader and Portfolio Members did not change during the year ended September 30, 2006.

Putnam fund ownership by Putnam’s Executive Board

The table below shows how much the members of Putnam’s Executive Board have invested in all Putnam mutual funds (in dollar ranges). Information shown is as of September 30, 2006, and September 30, 2005.

			$1 –	$10,001 –	$50,001 –	$100,001 –	$500,001 –	$1,000,001
	Year	$0	$10,000	$50,000	$100,000	$500,000	$1,000,000	and over

Philippe Bibi	2006							•

Chief Technology Officer	2005							•

Joshua Brooks	2006							•

Deputy Head of Investments	2005							•

William Connolly	2006							•

Head of Retail Management	2005							•

Kevin Cronin	2006							•

Head of Investments	2005							•

Charles Haldeman, Jr.	2006							•

President and CEO	2005							•

Amrit Kanwal	2006						•

Chief Financial Officer	2005						•

Steven Krichmar	2006						•

Chief of Operations	2005							•

Francis McNamara, III	2006							•

General Counsel	2005							•

Jeffrey Peters	2006							•

Head of International Business	N/A

Richard Robie, III	2006						•

Chief Administrative Officer	2005						•

Edward Shadek	2006							•

Deputy Head of Investments	2005							•

Sandra Whiston	2006						•

Head of Institutional Management	2005						•

N/A indicates the individual was not a member of Putnam’s Executive Board as of 9/30/05.

Terms and definitions

Important terms

Total return shows how the value of the fund’s shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund.

Net asset value (NAV) is the price, or value, of one share of a mutual fund, without a sales charge. NAVs fluctuate with market conditions. NAV is calculated by dividing the net assets of each class of shares by the number of outstanding shares in the class.

Public offering price (POP) is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. POP performance figures shown here assume the 3.75% maximum sales charge for class A shares and 3.25% for class M shares.

Contingent deferred sales charge (CDSC) is generally a charge applied at the time of the redemption of class B or C shares and assumes redemption at the end of the period. Your fund’s class B CDSC declines from a 5% maximum during the first year to 1% during the sixth year. After the sixth year, the CDSC no longer applies. The CDSC for class C shares is 1% for one year after purchase.

Share classes

Class A shares are generally subject to an initial sales charge and no CDSC (except on certain redemptions of shares bought without an initial sales charge).

Class B shares are not subject to an initial sales charge. They may be subject to a CDSC.

Class C shares are not subject to an initial sales charge and are subject to a CDSC only if the shares are redeemed during the first year.

Class M shares have a lower initial sales charge and a higher 12b-1 fee than class A shares and no CDSC (except on certain redemptions of shares bought without an initial sales charge).

Class R shares are not subject to an initial sales charge or CDSC and are available only to certain defined contribution plans.

Class Y shares are not subject to an initial sales charge or CDSC, and carry no 12b-1 fee. They are only available to eligible purchasers, including eligible defined contribution plans or corporate IRAs.

Comparative indexes

JPMorgan Global High Yield Index is an unmanaged index of global high-yield fixed-income securities.

Lehman Aggregate Bond Index is an unmanaged index of U.S. investment-grade fixed-income securities.

Lehman GNMA Index is an unmanaged index of Government National Mortgage Association bonds.

Lehman Municipal Bond Index is an unmanaged index of long-term fixed-rate investment-grade tax-exempt bonds.

Russell 1000 Growth Index is an unmanaged index of those companies in the large-cap Russell 1000 Index chosen for their growth orientation.

Russell 1000 Value Index is an unmanaged index of those companies in the large-cap Russell 1000 Index chosen for their value orientation.

S&P 500 Index is an unmanaged index of common stock performance.

Indexes assume reinvestment of all distributions and do not account for fees. Securities and performance of a fund and an index will differ. You cannot invest directly in an index.

Lipper is a third-party industry-ranking entity that ranks mutual funds. Its rankings do not reflect sales charges. Lipper rankings are based on total return at net asset value relative to other funds that have similar current investment styles or objectives as determined by Lipper. Lipper may change a fund’s category assignment at its discretion. Lipper category averages reflect performance trends for funds within a category.

Trustee approval
of management contract

General conclusions

The Board of Trustees of the Putnam funds oversees the management of each fund and, as required by law, determines annually whether to approve the continuance of your fund’s management contract with Putnam Management. In this regard, the Board of Trustees, with the assistance of its Contract Committee consisting solely of Trustees who are not “interested persons” (as such term is defined in the Investment Company Act of 1940, as amended) of the Putnam funds (the “Independent Trustees”), requests and evaluates all information it deems reasonably necessary under the circumstances. Over the course of several months ending in June 2006, the Contract Committee met four times to consider the information provided by Putnam Management and other information developed with the assistance of the Board’s independent counsel and independent staff. The Contract Committee reviewed and discussed key aspects of this information with all of the Independe nt Trustees. Upon completion of this review, the Contract Committee recommended, and the Independent Trustees approved, the continuance of your fund’s management contract, effective July 1, 2006.

This approval was based on the following conclusions:

• That the fee schedule in effect for your fund represents reasonable compensation in light of the nature and quality of the services being provided to the fund, the fees paid by competitive funds and the costs incurred by Putnam Management in providing such services, and

• That such fee schedule represents an appropriate sharing between fund shareholders and Putnam Management of such economies of scale as may exist in the management of the fund at current asset levels.

These conclusions were based on a comprehensive consideration of all information provided to the Trustees and were not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations and how the Trustees considered these factors are described below, although individual Trustees may have evaluated the information presented differently, giving different weights to various factors. It is also important to recognize that the fee arrangements for your fund and the other Putnam funds are the result of many years of review and discussion between the Independent Trustees and Putnam Management, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements in prior years.

Management fee schedules and categories; total expenses

The Trustees reviewed the management fee schedules in effect for all Putnam funds, including fee levels and breakpoints, and the assignment of funds to particular fee categories. In reviewing fees and expenses, the Trustees generally focused their attention on material changes in circumstances — for example, changes in a fund’s size or investment style, changes in Putnam Management’s operating costs, or changes in competitive practices in the mutual fund industry — that suggest that consideration of fee changes might be warranted. The Trustees concluded that the circumstances did not warrant changes to the management fee structure of your fund, which had been carefully developed over the years, re-examined on many occasions and adjusted where appropriate. The Trustees focused on two areas of particular interest, as discussed further below:

• Competitiveness. The Trustees reviewed comparative fee and expense information for competitive funds, which indicated that, in a custom peer group of competitive funds selected by Lipper Inc., your fund ranked in the 60th percentile in management fees and in the 40th percentile in total expenses (less any applicable 12b-1 fees) as of December 31, 2005 (the first percentile being the least expensive funds and the 100th percentile being the most expensive funds). (Because the fund’s custom peer group is smaller than the fund’s broad Lipper Inc. peer group, this expense information may differ from the Lipper peer expense information found elsewhere in this report.) The Trustees noted that expense ratios for a number of Putnam funds, which show the percentage of fund assets used to pay for management and administrative services, distribution (12b- 1) fees and other expenses, had been increasing recently as a result of declining net assets and the natural operation of fee breakpoints.

The Trustees noted that the expense ratio increases described above were currently being controlled by expense limitations implemented in January 2004 and which Putnam Management, in consultation with the Contract Committee, has committed to maintain at least through 2007. These expense limitations give effect to a commitment by Putnam Management that the expense ratio of each open-end fund would be no higher than the average expense ratio of the competitive funds included in the fund’s relevant Lipper universe (exclusive of any applicable 12b-1 charges in each case). The Trustees observed that this commitment to limit fund expenses has served shareholders well since its inception. In order to ensure that the expenses of

the Putnam funds continue to meet evolving competitive standards, the Trustees requested, and Putnam Management agreed, to implement an additional expense limitation for certain funds for the twelve months beginning January 1, 2007 equal to the average expense ratio (exclusive of 12b-1 charges) of a custom peer group of competitive funds selected by Lipper based on the size of the fund. This additional expense limitation will be applied to those open-end funds that had above-average expense ratios (exclusive of 12b-1 charges) based on the Lipper custom peer group data for the period ended December 31, 2005. This additional expense limitation will not be applied to your fund.

• Economies of scale. Your fund currently has the benefit of breakpoints in its management fee that provide shareholders with significant economies of scale, which means that the effective management fee rate of a fund (as a percentage of fund assets) declines as a fund grows in size and crosses specified asset thresholds. Conversely, as a fund shrinks in size — as has been the case for many Putnam funds in recent years — these breakpoints result in increasing fee levels. In recent years, the Trustees have examined the operation of the existing breakpoint structure during periods of both growth and decline in asset levels. The Trustees concluded that the fee schedules in effect for the funds represented an appropriate sharing of economies of scale at current asset levels. In reaching this conclusion, the Trustees considered the Contract Committee’s stated intent to continue to work with Putnam Management to plan for an eventual resumption in the growth of assets, including a study of potential economies that might be produced under various growth assumptions.

In connection with their review of the management fees and total expenses of the Putnam funds, the Trustees also reviewed the costs of the services to be provided and profits to be realized by Putnam Management and its affiliates from the relationship with the funds. This information included trends in revenues, expenses and profitability of Putnam Management and its affiliates relating to the investment management and distribution services provided to the funds. In this regard, the Trustees also reviewed an analysis of Putnam Management’s revenues, expenses and profitability with respect to the funds’ management contracts, allocated on a fund-by-fund basis. Because many of the costs incurred by Putnam Management in managing the funds are not readily identifiable to particular funds, the Trustees observed that the methodology for allocating costs is an important factor in evaluating Putnam Management’s costs and profitability, both as to the Putnam fu nds in the aggregate and as to individual funds. The Trustees reviewed Putnam Management’s cost allocation methodology with the assistance of independent consultants and concluded that this methodology was reasonable and well-considered.

Investment performance

The quality of the investment process provided by Putnam Management represented a major factor in the Trustees’ evaluation of the quality of services provided by Putnam Management under your fund’s management contract. The Trustees were assisted in their review of the Putnam funds’ investment process and performance by the work of the Investment Process Committee of the Trustees and the Investment Oversight Committee of the Trustees, which meet on a regular monthly basis with the funds’ portfolio teams throughout the year. The Trustees concluded that Putnam Management generally provides a high-quality investment process — as measured by the experience and skills of the individuals assigned to the management of fund portfolios, the resources made available to such personnel, and in general the ability of Putnam Management to attract and retain high-quality personnel — but also recognize that this does not guarantee favorable investment r esults for every fund in every time period. The Trustees considered the investment performance of each fund over multiple time periods and considered information comparing each fund’s performance with various benchmarks and with the performance of competitive funds.

The Trustees noted the satisfactory investment performance of many Putnam funds. They also noted the disappointing investment performance of certain funds in recent years and discussed with senior management of Putnam Management the factors contributing to such underperformance and actions being taken to improve performance. The Trustees recognized that, in recent years, Putnam Management has made significant changes in its investment personnel and processes and in the fund product line to address areas of underperformance. In particular, they noted the important contributions of Putnam Management’s leadership in attracting, retaining and supporting high-quality investment professionals and in systematically implementing an investment process that seeks to merge the best features of fundamental and quantitative analysis. The Trustees indicated their intention to continue to monitor performance trends to assess the effectiveness of these changes and to evaluate whether additional changes to address areas of underperformance are warranted.

In the case of your fund, the Trustees considered that your fund’s class A share cumulative total return performance at net asset value was in the following percentiles of its Lipper Inc. peer group

(Lipper GNMA Funds) for the one-, three- and five-year periods ended March 31, 2006 (the first percentile being the best performing funds and the 100th percentile being the worst performing funds):

One-year period	Three-year period	Five-year period

59th	53rd	60th

(Because of the passage of time, these performance results may differ from the performance results for more recent periods shown elsewhere in this report. Over the one-, three- and five-year periods ended March 31, 2006, there were 62, 62, and 51 funds, respectively, in your fund’s Lipper peer group.* Past performance is no guarantee of future performance.)

As a general matter, the Trustees concluded that cooperative efforts between the Trustees and Putnam Management represent the most effective way to address investment performance problems. The Trustees noted that investors in the Putnam funds have, in effect, placed their trust in the Putnam organization, under the oversight of the funds’ Trustees, to make appropriate decisions regarding the management of the funds. Based on the responsiveness of Putnam Management in the recent past to Trustee concerns about investment performance, the Trustees concluded that it is preferable to seek change within Putnam Management to address performance shortcomings. In the Trustees’ view, the alternative of terminating a management contract and engaging a new investment adviser for an underperforming fund would entail significant disruptions and would not provide any greater assurance of improved investment performance.

Brokerage and soft-dollar allocations; other benefits

The Trustees considered various potential benefits that Putnam Management may receive in connection with the services it provides under the management contract with your fund. These include benefits related to brokerage and soft-dollar allocations, whereby a portion of the commissions paid by a fund for brokerage may be used to acquire research services that may be useful to Putnam Management in managing the assets of the fund and of other clients. The Trustees indicated their continued intent to monitor the potential benefits associated with the allocation of fund brokerage to ensure that the principle of seeking “best price and execution” remains paramount in the portfolio trading process.

The Trustees’ annual review of your fund’s management contract also included the review of its distributor’s contract and distribution plan with Putnam Retail Management Limited Partnership and the custodian agreement and investor servicing agreement with Putnam Fiduciary Trust Company, all of which provide benefits to affiliates of Putnam Management.

Comparison of retail and institutional fee schedules

The information examined by the Trustees as part of their annual contract review has included for many years information regarding fees charged by Putnam Management and its affiliates to institutional clients such as defined benefit pension plans, college endowments, etc. This information included comparison of such fees with fees charged to the funds, as well as a detailed assessment of the differences in the services provided to these two types of clients. The Trustees observed, in this regard, that the differences in fee rates between institutional clients and the mutual funds are by no means uniform when examined by individual asset sectors, suggesting that differences in the pricing of investment management services to these types of clients reflect to a substantial degree historical competitive forces operating in separate market places. The Trustees considered the fact that fee rates across all asset sectors are higher on a verage for mutual funds than for institutional clients, as well as the differences between the services that Putnam Management provides to the Putnam funds and those that it provides to institutional clients of the firm, but did not rely on such comparisons to any significant extent in concluding that the management fees paid by your fund are reasonable.

* The percentile rankings for your fund’s class A share annualized total return performance in the Lipper GNMA Funds category for the one-, five- and ten-year periods ended September 30, 2006, were 45%, 55%, and 59%, respectively. Over the one-, five- and ten-year periods ended September 30, 2006, the fund ranked 28th out of 62, 30th out of 54, and 18th out of 30 funds, respectively. Note that this more recent information was not available when the Trustees approved the continuance of your fund’s management contract.

Other information for shareholders

Putnam’s policy on confidentiality

In order to conduct business with our shareholders, we must obtain certain personal information such as account holders’ addresses, telephone numbers, Social Security numbers, and the names of their financial advisors. We use this information to assign an account number and to help us maintain accurate records of transactions and account balances. It is our policy to protect the confidentiality of your information, whether or not you currently own shares of our funds, and in particular, not to sell information about you or your accounts to outside marketing firms. We have safeguards in place designed to prevent unauthorized access to our computer systems and procedures to protect personal information from unauthorized use. Under certain circumstances, we share this information with outside vendors who provide services to us, such as mailing and proxy solicitation. In those cases, the service providers enter into confidentiali ty agreements with us, and we provide only the information necessary to process transactions and perform other services related to your account. We may also share this information with our Putnam affiliates to service your account or provide you with information about other Putnam products or services. It is also our policy to share account information with your financial advisor, if you’ve listed one on your Putnam account. If you would like clarification about our confidentiality policies or have any questions or concerns, please don’t hesitate to contact us at 1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.

Proxy voting

Putnam is committed to managing our mutual funds in the best interests of our shareholders. The Putnam funds’ proxy voting guidelines and procedures, as well as information regarding how your fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2006, are available on the Putnam Individual Investor Web site, www.putnam.com/individual, and on the SEC’s Web site, www.sec.gov. If you have questions about finding forms on the SEC’s Web site, you may call the SEC at 1-800-SEC-0330. You may also obtain the Putnam funds’ proxy voting guidelines and procedures at no charge by calling Putnam’s Shareholder Services at 1-800-225-1581.

Fund portfolio holdings

The fund will file a complete schedule of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Shareholders may obtain the fund’s Forms N-Q on the SEC’s Web site at www.sec.gov. In addition, the fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for information about the SEC’s Web site or the operation of the Public Reference Room.

Financial statements

These sections of the report, as well as the accompanying Notes, preceded by the Report of Independent Registered Public Accounting Firm, constitute the fund’s financial statements.

The fund’s portfolio lists all the fund’s investments and their values as of the last day of the reporting period. Holdings are organized by asset type and industry sector, country, or state to show areas of concentration and diversification.

Statement of assets and liabilities shows how the fund’s net assets and share price are determined. All investment and noninvestment assets are added together. Any unpaid expenses and other liabilities are subtracted from this total. The result is divided by the number of shares to determine the net asset value per share, which is calculated separately for each class of shares. (For funds with preferred shares, the amount subtracted from total assets includes the liquidation preference of preferred shares.)

Statement of operations shows the fund’s net investment gain or loss. This is done by first adding up all the fund’s earnings — from dividends and interest income — and subtracting its operating expenses to determine net investment income (or loss). Then, any net gain or loss the fund realized on the sales of its holdings — as well as any unrealized gains or losses over the period — is added to or subtracted from the net investment result to determine the fund’s net gain or loss for the fiscal year.

Statement of changes in net assets shows how the fund’s net assets were affected by the fund’s net investment gain or loss, by distributions to shareholders, and by changes in the number of the fund’s shares. It lists distributions and their sources (net investment income or realized capital gains) over the current reporting period and the most recent fiscal year-end. The distributions listed here may not match the sources listed in the Statement of operations because the distributions are determined on a tax basis and may be paid in a different period from the one in which they were earned.

Financial highlights provide an overview of the fund’s investment results, per-share distributions, expense ratios, net investment income ratios, and portfolio turnover in one summary table, reflecting the five most recent reporting periods. In a semiannual report, the highlight table also includes the current reporting period.

Report of Independent Registered Public Accounting Firm

The Board of Trustees and Shareholders
Putnam U.S. Government Income Trust:

We have audited the accompanying statement of assets and liabilities of Putnam U.S. Government Income Trust, including the fund's portfolio, as of September 30, 2006, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years or periods in the period then ended. These financial statements and financial highlights are the responsibility of the fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform our audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of September 30, 2006 by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Putnam U.S. Government Income Trust as of September 30, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years or periods in the period then ended, in conformity with U.S. generally accepted accounting principles.

Boston, Massachusetts
November 9, 2006

The fund’s portfolio 9/30/06

U.S. GOVERNMENT AND AGENCY
MORTGAGE OBLIGATIONS (70.2%)*

		Principal amount		Value

U.S. Government Guaranteed
Mortgage Obligations (62.5%)
Government National
Mortgage Association
Adjustable Rate Mortgages
4 1/2s, with due dates from
August 20, 2034 to
February 20, 2035	$	86,711,897	$	86,355,431
3 3/4s, January 20, 2034		19,301,411		19,100,667
Government National
Mortgage Association
Graduated Payment Mortgages
13 3/4s, November 20, 2014		5,668		6,850
13 1/2s, April 15, 2011		20,900		23,733
13 1/4s, December 20, 2014		17,126		20,484
12 3/4s, with due dates from
December 15, 2013 to
December 20, 2014		41,943		49,283
12 1/4s, with due dates from
February 15, 2014 to
March 15, 2014		49,792		57,695
11 1/4s, with due dates from
September 15, 2015 to
January 15, 2016		144,550		166,251
10s, with due dates from
November 15, 2009 to
November 15, 2009		16,914		17,805
9 1/4s, with due dates from
April 15, 2016 to May 15, 2016		27,007		29,497
Government National
Mortgage Association
Pass-Through Certificates
8 1/2s, with due dates from
December 15, 2006 to
December 15, 2019		14,554		15,483
8s, with due dates from May 15,
2024 to August 15, 2032		22,779,957		24,160,577
8s, with due dates from January 15,
2008 to November 15, 2009		1,477,940		1,512,310
7 1/2s, with due dates from
October 15, 2021 to
November 15, 2032		29,944,674		31,484,770
7 1/2s, with due dates from
March 15, 2017 to May 15, 2017		35,007		36,597
7s, with due dates from March 15,
2022 to May 15, 2032		35,823,024		37,293,338
7s, with due dates from
October 15, 2007 to August 15, 2012		1,610,786		1,637,965
6 1/2s, with due dates from
October 15, 2023 to March 15, 2035		13,006,377		13,396,360
6s, with due dates from
November 15, 2023 to
October 15, 2033		1,336,080		1,353,339
6s, TBA, October 1, 2036		49,000,000		49,585,702
5 1/2s, with due dates from
June 15, 2029 to March 15, 2036		36,967,317		36,787,695
5 1/2s, TBA, October 1, 2036		358,400,000		354,871,982
5 1/2s, TBA, October 1, 2036		126,600,000		125,749,400
				783,713,214

U.S. GOVERNMENT AND AGENCY
MORTGAGE OBLIGATIONS (70.2%)* continued

		Principal amount	Value

U.S. Government Agency
Mortgage Obligations (7.7%)
Federal Home Loan
Mortgage Corporation
Pass-Through Certificates
5 1/2s, with due dates from
August 1, 2013 to May 1, 2020	$	641,839 $	642,470
5s, May 1, 2034		723,884	697,983
Federal National
Mortgage Association
Pass-Through Certificates
7s, with due dates from
September 1, 2028 to
March 1, 2029		204,174	210,355
6 1/2s, with due dates from
March 1, 2024 to
September 1, 2032		166,793	170,811
6 1/2s, March 1, 2016		35,656	36,558
6s, with due dates from
September 1, 2021 to
August 1, 2036		7,898,584	7,937,243
6s, TBA, October 1, 2021		20,800,000	21,112,000
5 1/2s, with due dates from
November 1, 2035 to
August 1, 2036		39,367,291	38,792,783
5 1/2s, with due dates from
January 1, 2009 to
January 1, 2021		974,177	975,279
5s, August 1, 2033		1,940	1,871
4 1/2s, with due dates from
March 1, 2021 to
September 1, 2035		1,705,820	1,598,802
4 1/2s, TBA, October 1, 2021		12,500,000	12,056,640
4 1/2s, TBA, November 1, 2021		12,500,000	12,056,641
			96,289,436


Total U.S. government and agency
mortgage obligations (cost $874,487,819) $			880,002,650



COLLATERALIZED MORTGAGE OBLIGATIONS (29.1%)*

		Principal amount	Value

Banc of America Commercial
Mortgage, Inc.
Ser. 06-4, Class A4, 5.634s, 2046	$	1,830,000 $	1,866,398
Ser. 06-5, Class A4, 5.414s, 2016		2,228,000	2,235,778
FRB Ser. 05-1, Class A5, 5.135s, 2042		583,000	578,421
Ser. 04-4, Class A6, 4.877s, 2042		36,000	34,812
Commercial Mortgage
Pass-Through Certificates
Ser. 06-C7, Class A4, 5.962s, 2046		19,036,000	19,705,972
FRB Ser. 04-LB3A, Class A5,
5.281s, 2037		20,000	20,064
Countrywide Alternative Loan Trust
IFB Ser. 06-19CB, Class A2, IO
(Interest only), zero %, 2036		884,184	2,590
IFB Ser. 06-20CB, Class A14, IO,
zero %, 2036		1,805,511	3,385

COLLATERALIZED MORTGAGE OBLIGATIONS (29.1%)* continued

		Principal amount		Value

Countrywide Alternative Loan Trust
IFB Ser. 06-14CB, Class A9, IO,
zero %, 2036	$	3,326,041	$	20,008
IFB Ser. 06-6CB, Class 1A3, IO,
zero %, 2036		15,716,735		41,748
Credit Suisse Mortgage
Capital Certificates
Ser. 06-C4, Class A3, 5.467s, 2039		3,672,000		3,696,367
CS First Boston Mortgage
Securities Corp.
FRB Ser. 04-C3, Class A5,
5.113s, 2036		213,000		209,837
Ser. 05-C4, Class A5,
5.104s, 2038		65,000		63,875
FRB Ser. 05-C5, Class A4,
5.1s, 2038		65,000		63,825
Ser. 04-C3, Class A3, 4.302s, 2036		454,000		443,987
Fannie Mae
IFB Ser. 06-70, Class BS,
14.56s, 2036		345,386		412,415
IFB Ser. 06-62, Class PS,
7.92s, 2036		2,157,313		2,392,810
IFB Ser. 06-76, Class QB,
7.62s, 2036		2,373,616		2,620,340
Ser. 02-26, Class A2, 7 1/2s, 2048		480,749		502,949
Ser. 05-W3, Class 1A, 7 1/2s, 2045		4,026,269		4,247,113
Ser. 04-W8, Class 3A, 7 1/2s, 2044		6,808,736		7,164,351
Ser. 04-W11, Class 1A4, 7 1/2s, 2044		2,162,668		2,274,597
Ser. 04-W2, Class 5A, 7 1/2s, 2044		2,445,350		2,571,883
Ser. 04-T3, Class 1A4, 7 1/2s, 2044		2,909,214		3,058,055
Ser. 04-W9, Class 2A3, 7 1/2s, 2044		2,515,791		2,642,627
Ser. 04-T2, Class 1A4, 7 1/2s, 2043		806,782		848,057
Ser. 03-W4, Class 4A, 7 1/2s, 2042		1,168,613		1,220,886
Ser. 02-T18, Class A4, 7 1/2s, 2042		1,818,014		1,905,032
Ser. 03-W3, Class 1A3, 7 1/2s, 2042		5,302,387		5,554,970
Ser. 02-T16, Class A3, 7 1/2s, 2042		12,777		13,382
Ser. 03-W2, Class 1A3, 7 1/2s, 2042		6,486,388		6,797,523
Ser. 02-W6, Class 2A, 7 1/2s, 2042		20,052		20,971
Ser. 02-W4, Class A5, 7 1/2s, 2042		1,931,098		2,019,363
Ser. 02-W1, Class 2A, 7 1/2s, 2042		149,700		155,883
Ser. 02-14, Class A2, 7 1/2s, 2042		595,940		622,667
Ser. 01-T10, Class A2, 7 1/2s, 2041		3,632,400		3,786,886
Ser. 02-T4, Class A3, 7 1/2s, 2041		258,610		269,706
Ser. 01-T12, Class A2, 7 1/2s, 2041		366,052		381,575
Ser. 01-T8, Class A1, 7 1/2s, 2041		982,284		1,021,892
Ser. 01-T7, Class A1, 7 1/2s, 2041		11,999,875		12,463,483
Ser. 01-T3, Class A1, 7 1/2s, 2040		1,413,302		1,471,045
Ser. 01-T1, Class A1, 7 1/2s, 2040		4,226,813		4,406,063
Ser. 99-T2, Class A1, 7 1/2s, 2039		1,742,310		1,830,303
Ser. 03-W10, Class 1A1, 7 1/2s, 2032		2,374,372		2,480,497
Ser. 02-T1, Class A3, 7 1/2s, 2031		3,877,761		4,050,655
Ser. 00-T6, Class A1, 7 1/2s, 2030		1,048,525		1,094,664
Ser. 02-W7, Class A5, 7 1/2s, 2029		738,645		773,022
Ser. 01-T4, Class A1, 7 1/2s, 2028		3,981,241		4,195,397
Ser. 02-W3, Class A5, 7 1/2s, 2028		1,262,817		1,319,453
IFB Ser. 06-63, Class SP, 7.32s, 2036		2,581,382		2,835,521
IFB Ser. 06-60, Class TK, 7.28s, 2036		637,901		670,724
Ser. 02-26, Class A1, 7s, 2048		2,675,014		2,763,095
Ser. 04-W12, Class 1A3, 7s, 2044		1,712,813		1,779,464

COLLATERALIZED MORTGAGE OBLIGATIONS (29.1%)* continued

		Principal amount		Value

Fannie Mae
Ser. 04-T3, Class 1A3, 7s, 2044	$	1,211,742	$	1,257,975
Ser. 04-T2, Class 1A3, 7s, 2043		1,070,914		1,111,872
Ser. 03-W8, Class 2A, 7s, 2042		10,592,232		10,973,632
Ser. 03-W3, Class 1A2, 7s, 2042		1,021,394		1,057,103
Ser. 02-T16, Class A2, 7s, 2042		7,417,539		7,676,207
Ser. 02-T19, Class A2, 7s, 2042		4,829,281		5,000,511
Ser. 01-T10, Class A1, 7s, 2041		2,030,636		2,093,835
Ser. 02-T4, Class A2, 7s, 2041		4,750,863		4,898,949
Ser. 04-W1, Class 2A2, 7s, 2033		6,647,126		6,897,835
IFB Ser. 05-74, Class CS,
5.363s, 2035		2,926,969		2,945,591
IFB Ser. 05-74, Class CP,
5.207s, 2035		2,567,594		2,616,313
IFB Ser. 05-76, Class SA,
5.207s, 2034		1,819,111		1,823,616
IFB Ser. 06-27, Class SP,
5.023s, 2036		1,614,000		1,638,046
IFB Ser. 06-8, Class HP,
5.023s, 2036		2,018,984		2,035,267
IFB Ser. 06-8, Class WK,
5.023s, 2036		3,076,289		3,070,222
IFB Ser. 05-106, Class US,
5.023s, 2035		3,119,529		3,171,917
IFB Ser. 05-99, Class SA,
5.023s, 2035		1,534,138		1,533,757
IFB Ser. 05-114, Class SP,
4.923s, 2036		863,117		835,065
IFB Ser. 05-74, Class DM,
4.84s, 2035		2,947,221		2,946,430
IFB Ser. 06-60, Class CS,
4.547s, 2036		1,121,343		1,075,196
IFB Ser. 05-95, Class CP,
4.059s, 2035		241,078		238,031
IFB Ser. 05-106, Class JC,
3.597s, 2035		1,594,171		1,452,289
IFB Ser. 05-83, Class QP,
3.536s, 2034		989,691		921,707
IFB Ser. 05-57, Class MN,
3.277s, 2035		2,162,241		2,072,045
IFB Ser. 06-90, Class SE, IO,
2.47s, 2036		1,519,109		137,313
IFB Ser. 03-66, Class SA, IO,
2.32s, 2033		2,799,134		215,183
Ser. 03-W12, Class 2, IO,
2.235s, 2043		36,536,273		2,073,437
IFB Ser. 03-48, Class S, IO,
2.22s, 2033		1,229,679		95,108
IFB Ser. 05-113, Class AI, IO,
1.9s, 2036		505,382		34,748
IFB Ser. 05-113, Class DI, IO,
1.9s, 2036		686,312		40,569
IFB Ser. 06-60, Class DI, IO,
1.74s, 2035		1,518,366		80,194
IFB Ser. 05-65, Class KI, IO,
1.67s, 2035		1,087,935		56,515
IFB Ser. 05-90, Class SP, IO,
1.42s, 2035		4,854,577		298,556
IFB Ser. 05-82, Class SY, IO,
1.4s, 2035		13,365,862		670,452

COLLATERALIZED MORTGAGE OBLIGATIONS (29.1%)* continued

		Principal amount		Value

Fannie Mae
IFB Ser. 05-95, Class CI, IO,
1.37s, 2035	$	3,183,550	$	194,755
IFB Ser. 05-84, Class SG, IO,
1.37s, 2035		5,597,110		329,509
IFB Ser. 05-69, Class AS, IO,
1.37s, 2035		1,451,820		77,818
IFB Ser. 04-92, Class S, IO,
1.37s, 2034		4,492,660		259,029
IFB Ser. 05-104, Class SI, IO,
1.37s, 2033		7,479,053		442,311
IFB Ser. 05-83, Class QI, IO,
1.36s, 2035		820,439		56,089
IFB Ser. 05-92, Class SC, IO,
1.35s, 2035		7,500,818		438,281
IFB Ser. 05-83, Class SL, IO,
1.34s, 2035		14,488,874		714,776
IFB Ser. 06-20, Class IG, IO,
1.32s, 2036		18,703,879		811,449
IFB Ser. 06-44, Class IS, IO,
1.27s, 2036		4,374,114		226,142
IFB Ser. 06-45, Class SM, IO,
1.27s, 2036		4,530,058		201,588
IFB Ser. 06-20, Class IB, IO,
1.26s, 2036		8,016,073		335,405
IFB Ser. 05-95, Class OI, IO,
1.26s, 2035		463,010		31,844
IFB Ser. 06-92, Class JI, IO,
1 1/4s, 2036		1,080,000		62,716
IFB Ser. 06-85, Class TS, IO,
1.23s, 2036		4,752,093		202,322
IFB Ser. 06-61, Class SE, IO,
1.22s, 2036		6,082,808		266,123
IFB Ser. 03-124, Class ST, IO,
1.17s, 2034		1,898,736		81,883
IFB Ser. 03-112, Class SA, IO,
1.17s, 2028		2,725,233		82,573
IFB Ser. 05-67, Class BS, IO,
0.82s, 2035		3,728,156		108,862
IFB Ser. 05-74, Class SE, IO,
0.77s, 2035		1,547,345		43,794
IFB Ser. 05-82, Class SI, IO,
0.77s, 2035		12,020,753		364,379
IFB Ser. 05-74, Class NI, IO,
0 3/4s, 2035		13,638,137		593,773
IFB Ser. 05-87, Class SE, IO,
0.72s, 2035		27,941,676		778,484
IFB Ser. 04-54, Class SW, IO,
0.67s, 2033		1,705,123		49,390
Ser. 06-84, Class OP, zero %, 2036		192,476		181,649
Ser. 371, Class 1, PO (Principal only),
zero %, 2036		1,315,973		1,110,402
Ser. 05-113, Class DO, PO,
zero %, 2036		105,704		85,057
Ser. 367, Class 1, PO, zero %, 2036		827,874		611,590
Ser. 363, Class 1, PO, zero %, 2035		30,673,867		22,663,194
Ser. 361, Class 1, PO, zero %, 2035		9,197,028		7,366,536
Ser. 04-38, Class AO, PO,
zero %, 2034		1,535,573		1,112,091

COLLATERALIZED MORTGAGE OBLIGATIONS (29.1%)* continued

		Principal amount		Value

Fannie Mae
Ser. 342, Class 1, PO, zero %, 2033	$	902,820	$	705,749
Ser. 02-82, Class TO, PO,
zero %, 2032		3,800,159		3,050,817
Ser. 04-61, Class CO, PO,
zero %, 2031		3,326,000		2,668,595
FRB Ser. 05-117, Class GF,
zero %, 2036		345,876		325,610
FRB Ser. 05-79, Class FE,
zero %, 2035		882,189		914,694
FRB Ser. 05-45, Class FG,
zero %, 2035		786,708		784,788
FRB Ser. 05-81, Class DF,
zero %, 2033		298,320		310,850
FRB Ser. 06-1, Class HF,
zero %, 2032		518,063		508,941
Federal Home Loan Mortgage Corp.
Structured Pass-Through Securities
Ser. T-59, Class 1A3, 7 1/2s, 2043		7,018,784		7,397,360
Ser. T-58, Class 4A, 7 1/2s, 2043		9,233,086		9,668,442
Ser. T-42, Class A5, 7 1/2s, 2042		102,599		107,089
Ser. T-41, Class 3A, 7 1/2s, 2032		1,404,354		1,464,959
Ser. T-60, Class 1A2, 7s, 2044		4,748,694		4,927,940
Ser. T-59, Class 1A2, 7s, 2043		4,363,375		4,536,917
Ser. T-55, Class 1A2, 7s, 2043		2,613,157		2,691,470
Freddie Mac
FRB Ser. 3030, Class CF,
22.306s, 2035		856,098		852,285
IFB Ser. 3012, Class GP,
2.582s, 2035		1,399,166		1,331,622
Ser. 3202, Class PS, 7.26s, 2036		1,765,692		1,877,186
IFB Ser. 3153, Class SX, 6.6s, 2036		3,739,127		3,981,947
IFB Ser. 3081, Class DC,
5.175s, 2035		1,239,491		1,229,534
IFB Ser. 2996, Class SA,
5.143s, 2035		1,067,353		1,009,289
IFB Ser. 3114, Class GK,
5.08s, 2036		784,124		782,164
IFB Ser. 2979, Class AS,
4.73s, 2034		548,635		543,491
IFB Ser. 3153, Class UT,
4.473s, 2036		2,160,538		2,085,207
IFB Ser. 3065, Class DC,
3.87s, 2035		1,862,162		1,723,185
IFB Ser. 3050, Class SA,
3.55s, 2034		1,304,597		1,186,924
IFB Ser. 3031, Class BS,
3.4s, 2035		2,586,954		2,391,703
IFB Ser. 3012, Class UP,
3.27s, 2035		130,967		126,808
IFB Ser. 2594, Class SE, IO,
1.72s, 2030		3,576,081		175,943
IFB Ser. 2828, Class TI, IO,
1.72s, 2030		1,785,875		107,153
IFB Ser. 3033, Class SF, IO,
1.47s, 2035		2,648,322		105,933
IFB Ser. 3028, Class ES, IO,
1.42s, 2035		8,995,019		632,336
IFB Ser. 3042, Class SP, IO,
1.42s, 2035		2,010,732		128,084

COLLATERALIZED MORTGAGE OBLIGATIONS (29.1%)* continued

		Principal amount		Value
Freddie Mac
IFB Ser. 3045, Class DI, IO,
1.4s, 2035	$	693,814	$	30,778
IFB Ser. 3136, Class NS, IO,
1.37s, 2036		5,733,032		339,248
IFB Ser. 3054, Class CS, IO,
1.37s, 2035		2,016,841		100,527
IFB Ser. 3107, Class DC, IO,
1.37s, 2035		4,470,966		308,736
IFB Ser. 3066, Class SI, IO,
1.37s, 2035		12,182,444		822,625
IFB Ser. 3031, Class BI, IO,
1.36s, 2035		1,726,141		123,063
IFB Ser. 3067, Class SI, IO,
1.32s, 2035		7,108,371		491,112
IFB Ser. 3114, Class TS, IO,
1.32s, 2030		12,956,801		582,897
IFB Ser. 3114, Class BI, IO,
1.32s, 2030		5,055,996		214,658
IFB Ser. 3128, Class JI, IO,
1.3s, 2036		6,498,219		401,832
IFB Ser. 3065, Class DI, IO,
1.29s, 2035		1,340,725		87,566
IFB Ser. 3145, Class GI, IO,
1.27s, 2036		5,229,980		340,815
IFB Ser. 3114, Class GI, IO,
1.27s, 2036		1,885,431		126,653
IFB Ser. 3174, Class BS, IO,
1.19s, 2036		4,275,367		170,086
IFB Ser. 3152, Class SY, IO,
1.15s, 2036		3,693,772		237,134
IFB Ser. 3081, Class DI, IO,
1.15s, 2035		1,664,030		91,770
IFB Ser. 3199, Class S, IO,
1.12s, 2036		1,727,215		83,999
IFB Ser. 3012, Class UI, IO,
1.09s, 2035		3,226,473		172,245
IFB Ser. 3016, Class SP, IO,
0.78s, 2035		1,747,985		51,915
IFB Ser. 3016, Class SQ, IO,
0.78s, 2035		4,024,370		127,573
IFB Ser. 2937, Class SY, IO,
0.77s, 2035		1,629,655		42,697
IFB Ser. 3012, Class IG, IO,
0 3/4s, 2035		11,903,972		528,392
IFB Ser. 2957, Class SW, IO,
0.67s, 2035		9,041,570		263,110
IFB Ser. 2815, Class S, IO,
0.67s, 2032		3,946,738		110,777
Ser. 3174, PO, zero %, 2036		738,446		600,611
Ser. 3045, Class DO, PO,
zero %, 2035		74,748		60,159
Ser. 231, PO, zero %, 2035		9,893,129		7,378,290
Ser. 228, PO, zero %, 2035		4,107,252		3,214,152
Ser. 3130, Class KO, PO,
zero %, 2034		456,920		359,357
FRB Ser. 3213, Class FX,
zero %, 2036		536,000		520,255
FRB Ser. 3048, Class XG,
zero %, 2035		330,663		315,473

COLLATERALIZED MORTGAGE OBLIGATIONS (29.1%)* continued

		Principal amount		Value
Freddie Mac
FRB Ser. 3022, Class TC,
zero %, 2035	$	316,630	$	338,943
FRB Ser. 2986, Class XT,
zero %, 2035		191,053		195,650
FRB Ser. 2958, Class FL,
zero %, 2035		819,655		756,012
FRB Ser. 3046, Class WF,
zero %, 2035		441,230		430,936
FRB Ser. 3054, Class XF,
zero %, 2034		194,006		192,460
FRB Ser. 3024, Class CW,
zero %, 2034		216,849		212,701
FRB Ser. 3046, Class UF,
zero %, 2033		990,076		975,962
Government National
Mortgage Association
IFB Ser. 06-34, Class SA,
7.56s, 2036		6,067,859		6,350,394
IFB Ser. 05-84, Class SB,
3.675s, 2035		4,777,346		4,426,127
IFB Ser. 05-68, Class DP,
3.59s, 2035		7,096,457		6,697,592
IFB Ser. 05-84, Class SL,
3.067s, 2035		4,779,169		4,362,274
IFB Ser. 05-66, Class SP,
3.067s, 2035		2,209,837		2,019,259
IFB Ser. 05-7, Class NP,
2.938s, 2033		717,268		677,049
IFB Ser. 06-26, Class S, IO,
1.17s, 2036		19,033,637		940,861
IFB Ser. 05-65, Class SI, IO,
1.02s, 2035		16,938,315		680,770
IFB Ser. 06-7, Class SB, IO,
0.99s, 2036		15,981,411		518,908
IFB Ser. 05-82, Class KS, IO,
0.97s, 2035		9,264,961		358,429
IFB Ser. 05-68, Class KI, IO,
0.97s, 2035		83,812,105		4,734,088
IFB Ser. 05-68, Class SI, IO,
0.97s, 2035		30,271,956		1,358,578
IFB Ser. 06-14, Class S, IO,
0.92s, 2036		16,934,756		624,888
IFB Ser. 06-20, Class S, IO,
0.92s, 2036		13,851,018		559,410
IFB Ser. 05-57, Class PS, IO,
0.92s, 2035		10,212,166		441,884
IFB Ser. 05-51, Class SJ, IO,
0.87s, 2035		8,970,417		379,147
IFB Ser. 05-68, Class S, IO,
0.87s, 2035		17,594,171		722,911
IFB Ser. 04-90, Class SI, IO,
0.77s, 2034		14,500,553		511,257
IFB Ser. 05-60, Class SJ, IO,
0.45s, 2034		14,758,046		410,248
Greenwich Capital Commercial
Funding Corp. FRB
Ser. 05-GG5, Class A5,
5.224s, 2037		65,000		64,474

COLLATERALIZED MORTGAGE OBLIGATIONS (29.1%)* continued

			Principal amount		Value
GS Mortgage Securities Corp. II
Ser. 04-GG2, Class A6, 5.396s, 2038		$	38,000	$	38,129
Ser. 05-GG4, Class A4, 4.761s, 2039			456,000		437,344
JPMorgan Chase Commercial Mortgage
Securities Corp.
Ser. 06-CB14, Class AM, 5.63s, 2044			4,245,000		4,287,620
Ser. 06-CB16, Class A4, 5.552s, 2045			2,462,000		2,493,169
FRB Ser. 04-PNC1, Class A4,
5.544s, 2041			173,000		174,285
Ser. 05-CB12, Class A4, 4.895s, 2037			459,000		444,578
Ser. 04-C3, Class A5, 4.878s, 2042			437,000		423,138
LB-UBS Commercial Mortgage Trust
Ser. 01-C3, Class A2, 6.365s, 2028			154,000		160,780
FRB Ser. 04-C4, Class A4,
5.304s, 2029			61,000		61,205
Lehman Mortgage Trust
IFB Ser. 06-5, Class 2A2, IO,
1.82s, 2036			6,307,000		229,672
IFB Ser. 06-5, Class 1A3, IO,
0.07s, 2036			1,708,000		8,470
IFB Ser. 06-4, Class 1A3, IO,
0.07s, 2036			3,457,946		30,461
IFB Ser. 06-3, Class 1A7, IO,
0.07s, 2036			2,239,776		8,962
Merrill Lynch Mortgage Trust
FRB Ser. 04-BPC1, Class A5,
4.855s, 2041			446,000		431,587
FRB Ser. 05-MCP1, Class A4,
4.747s, 2043			434,000		416,328
Morgan Stanley Capital I Ser. 05-HQ6,
Class A4A, 4.989s, 2042			65,000		63,338

Total collateralized mortgage obligations
(cost $370,800,880)				$	364,839,484



ASSET-BACKED SECURITIES (3.9%)*

			Principal amount		Value

American Home Mortgage
Investment Trust
FRB Ser. 04-3, Class 3A,
3.71s, 2034	$		25,061	$	422,872
FRB Ser. 04-3, Class 2A,
3.59s, 2034			909,408		902,757
Banc of America Alternative
Loan Trust IFB
Ser. 06-6, Class CB2, IO, 0.02s, 2036			2,182,603		4,324
Banc of America Funding Corp. IFB
Ser. 06-4, Class A4, IO, 0.17s, 2036			2,467,566		7,248
Banc of America Mortgage Securities
IFB Ser. 06-2, Class A4, IO, 0.07s, 2036			1,963,768		12,908
Countrywide Alternative Loan Trust
IFB Ser. 06-26CB,
Class A2, IO, 0.47s, 2036			2,818,224		7,530
Countrywide Home Loans 144A
IFB Ser. 05-R1, Class 1AS, IO,
0.806s, 2035 (SN)			43,532,595		1,435,226
IFB Ser. 06-R1, Class AS, IO,
0.743s, 2036 (SN)			76,989,120		2,422,533

ASSET-BACKED SECURITIES (3.9%)* continued

		Principal amount		Value
Countrywide Home Loans 144A
IFB Ser. 05-R3, Class AS, IO,
0.707s, 2035 (SN)	$	33,648,388	$	930,011
IFB Ser. 05-R2, Class 1AS, IO,
0.415s, 2035 (SN)		36,478,038		1,194,325
GSR Mortgage Loan Trust
Ser. 05-AR2, Class 2A1,
4.863s, 2035		5,310,229		5,245,232
FRB Ser. 04-12, Class 2A2,
3.554s, 2034		3,209,975		3,168,117
Lehman Mortgage Trust
IFB Ser. 06-6, Class 1A2, IO,
1.17s, 2036		3,494,000		118,750
IFB Ser. 06-6, Class 1A3, IO,
1.17s, 2036		4,451,000		240,531
IFB Ser. 06-6, Class 4A2, IO,
0.02s, 2036		3,607,000		10,582
Provident Funding Mortgage Loan
Trust FRB Ser. 05-2,
Class 1A1A, 4.391s, 2035		4,784,141		4,764,332
Residential Accredit Loans, Inc.
Ser. 04-QA5,
Class A2, 4.925s, 2034		127,070		124,013
Residential Asset Mortgage
Products, Inc. FRB
Ser. 06-RZ2, Class A2, 5 1/2s, 2036		4,132,000		4,132,000
Residential Asset Securitization
Trust IFB
Ser. 06-A7CB, Class 1A6, IO,
0.22s, 2036		881,073		10,600
Residential Funding Mortgage
Securities I FRB
Ser. 05-SA2, Class 1A, 4.689s, 2035		2,424,848		2,408,082
Structured Adjustable Rate
Mortgage Loan Trust
FRB Ser. 05-18, Class 6A1,
5.303s, 2035		7,664,884		7,639,820
Ser. 04-20, Class 1A2,
5.054s, 2035		525,538		524,382
Ser. 04-12, Class 1A2,
4.963s, 2034		291,378		292,910
Ser. 04-6, Class 1A,
4.371s, 2034		589,064		591,509
Structured Asset Securities Corp.
Ser. 03-40A,
Class 1A, 5.112s, 2034		37,038		37,546
Terwin Mortgage Trust 144A FRB
Ser. 06-9HGA,
Class A1, 5.424s, 2037		3,413,000		3,413,000
Wells Fargo Mortgage Backed
Securities Trust
FRB Ser. 05-AR2, Class 2A1,
4.546s, 2035		4,397,118		4,325,885
Ser. 05-AR9, Class 1A2,
4.353s, 2035		208,301		204,221
FRB Ser. 04-R, Class 2A1,
4.354s, 2034		4,501,647		4,417,466

Total asset-backed securities (cost $47,825,333)			$	49,008,712

PURCHASED OPTIONS OUTSTANDING (0.1%)*

	Expiration date/		Contract
	strike price		amount		Value

Option on an interest
rate swap with JPMorgan
Chase Bank, N.A. for
the right to receive a
fixed rate of 5.28% versus
the three month USD-
LIBOR-BBA maturing on
March 8, 2017.	Mar-07/5.28		55,104,000	$	1,044,138
Option on an interest
rate swap with JPMorgan
Chase Bank, N.A. for
the right to pay a fixed
rate of 5.28% versus
the three month
USD-LIBOR-BBA
maturing on
March 8, 2017.	Mar-07/5.28		55,104,000		557,735

Total purchased options outstanding (cost $2,702,850)				$	1,601,873



SHORT-TERM INVESTMENTS (44.6%)*

			Principal amount		Value

Interest in $400,000,000 joint
tri-party repurchase agreement dated
September 29, 2006 with Bank of
America due October 2, 2006 with
respect to various U.S. Government
obligations — maturity value of
$59,026,253 for an effective yield
of 5.36% (collateralized by a Fannie Mae
security with a yield of 6.50% and a due
date of July 1, 2035 valued at
$408,000,000)		$	59,000,000	$	59,000,000

SHORT-TERM INVESTMENTS (44.6%)* continued

		Principal amount		Value

U.S. Treasury Bills, for an effective
yield of 4.81%, November 30, 2006 #	$	2,265,000	$	2,247,030
Federal National Mortgage Association,
for an effective yield of 5.21%,
November 29, 2006		122,048,000		121,016,939
Freddie Mac, for an effective yield
of 5.20%, November 20, 2006		125,000,000		124,105,035
Federal Home Loan Banks, for an
effective yield of 5.19%,
October 13, 2006		50,000,000		49,913,917
Federal Home Loan Banks, for
an effective yield of 5.18%,
October 11, 2006		121,000,000		120,826,567
Federal Home Loan Discount,
for an effective yield of 5.17%,
October 6, 2006		82,000,000		81,941,347


Total short-term investments
(cost $559,050,778)			$	559,050,835



TOTAL INVESTMENTS
Total investments (cost $1,854,867,660)			$	1,854,503,554

* Percentages indicated are based on net assets of $1,253,032,718.

# This security was pledged and segregated with the custodian to cover margin requirements for futures contracts at September 30, 2006.

(SN) The securities noted above were purchased during the period for an aggregate cost of $7,165,562. During the period, questions arose regarding a potential misidentification of the characteristics of these securities. As a result of initial inquiries into the matter, the values of these securities were adjusted. As of September 30, 2006 the aggregate values of these securities totaled $5,982,095. An investigation of the facts surrounding the acquisition and valuation of these securities is currently underway to determine whether the Fund may have claims against other parties in this regard.

At September 30, 2006, liquid assets totaling $560,478,832 have been designated as collateral for open forward commitments.

144A after the name of an issuer represents securities exempt from registration under Rule 144A under the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

TBA after the name of a security represents to be announced securities (Note 1).

The rates shown on Floating Rate Bonds (FRB) are the current interest rates at September 30, 2006.

Inverse Floating Rate Bonds (IFB) are securities that pay interest rates that vary inversely to changes in the market interest rates. As interest rates rise, inverse floaters produce less current income. The interest rates shown are the current interest rates at September 30, 2006.

FUTURES CONTRACTS OUTSTANDING at 9/30/06

						Unrealized
	Number of			Expiration		appreciation/
	contracts		Value	date		(depreciation)

Euro-Dollar 90 day (Long)	1,101		$261,005,813	Mar-07		$ (103,632)
Euro-Dollar 90 day (Short)	1,214		288,962,350	Dec-07		164,490
Euro-Dollar 90 day (Long)	124		29,488,750	Sep-07		47,713
Euro-Dollar 90 day (Long)	124		29,445,350	Jun-07		39,863
Euro-Dollar 90 day (Long)	123		29,109,488	Dec-06		16,578
U.S. Treasury Bond 20 yr (Long)	726		81,606,938	Dec-06		(430,119)
U.S. Treasury Note 2 yr (Short)	4,607		942,131,500	Dec-06		(440,744)
U.S. Treasury Note 10 yr (Long)	1,829		197,646,313	Dec-06		1,527,793
U.S. Treasury Note 5 yr (Short)	1,908		201,323,813	Dec-06		(994,876)

Total						$ (172,934)



WRITTEN OPTIONS OUTSTANDING at 9/30/06 (premiums received $16,631,550)

			Contract	Expiration date/
			amount	strike price		Value

Option on an interest rate swap with JPMorgan Chase Bank, N.A. for the obligation to pay a
fixed rate of 4.55% versus the three month USD-LIBOR-BBA maturing on July 5, 2017.		$	44,780,000	Jul-07/4.55	$	210,748
Option on an interest rate swap with Lehman Brothers Special Financing, Inc. for the
obligation to receive a fixed rate swap of 5.085% semi-annually versus the three month
USD-LIBOR-BBA maturing February 1, 2017.			187,183,000	Jan-07/5.085		2,898,529
Option on an interest rate swap with Lehman Brothers Special Financing, Inc. for the
obligation to pay a fixed rate swap of 5.085% semi-annually versus the three month
USD-LIBOR-BBA maturing February 1, 2017.			187,183,000	Jan-07/5.085		1,784,790
Option on an interest rate swap with Citibank, N.A. for the obligation to pay a fixed rate
of 5.7% versus the three month USD-LIBOR-BBA maturing on May 14, 2018.			23,590,000	May-08/5.70		1,196,013
Option on an interest rate swap with Lehman Brothers International for the obligation to
pay a fixed rate of 5.225% semi-annually versus the three month USD-LIBOR-BBA
maturing March 5, 2018.			24,625,000	Mar-08/5.225		708,978
Option on an interest rate swap with Lehman Brothers International for the obligation to
receive a fixed rate of 5.225% semi-annually versus the three month USD-LIBOR-BBA
maturing March 5, 2018.			24,625,000	Mar-08/5.225		656,330
Option on an interest rate swap with Citibank, N.A. for the obligation to receive a fixed
rate of 5.7% versus the three month USD-LIBOR-BBA maturing on May 14, 2018.			23,590,000	May-08/5.70		372,722
Option on an interest rate swap with JPMorgan Chase Bank, N.A. for the obligation to
receive a fixed rate of 4.55% versus the three month USD-LIBOR-BBA maturing on
July 5, 2017.			44,780,000	Jul-07/4.55		2,279,669

Total						$10,107,779



TBA SALE COMMITMENTS OUTSTANDING at 9/30/06 (proceeds receivable $13,655,199)

			Principal	Settlement
			amount	date		Value

FNMA, 6s, October 1, 2036			$ 1,600,000	10/12/06		$ 1,607,000
FNMA, 4 1/2s, October 1, 2021			12,500,000	10/17/06		12,056,606

Total						$13,663,606

INTEREST RATE SWAP CONTRACTS OUTSTANDING at 9/30/06

		Payments	Payments	Unrealized
Swap counterparty /	Termination	made by	received by	appreciation/
Notional amount	date	fund per annum	fund per annum	(depreciation)

Bank of America, N.A.
$ 2,440,000	10/2/16	5.15631%	3 month USD-LIBOR-BBA	$ 2,334

18,410,000	5/31/16	5.58909%	3 month USD-LIBOR-BBA	(848,988)

47,000,000	10/21/15	4.943%	3 month USD-LIBOR-BBA	199,332

Citibank, N.A.
106,930,000	7/27/09	5.504%	3 month USD-LIBOR-BBA	(1,194,437)

116,000,000	6/28/15	3 month USD-LIBOR-BBA	4.335%	(5,338,115)

Credit Suisse First Boston International
3,615,000	9/28/16	5.10886%	3 month USD-LIBOR-BBA	16,887

Goldman Sachs Capital Markets, L.P.
3,833,000	5/3/16	5.565%	3 month USD-LIBOR-BBA	(168,720)

JPMorgan Chase Bank, N.A.
43,000,000	10/21/15	4.916%	3 month USD-LIBOR-BBA	270,518

6,078,000	8/2/15	3 month USD-LIBOR-BBA	4.6570%	(212,834)

2,474,000	9/18/16	5.291%	3 month USD-LIBOR-BBA	(22,945)

77,841,000	8/15/11	5.412%	3 month USD-LIBOR-BBA	(1,102,914)

Lehman Brothers International (Europe)
163,933,000	8/3/16	5.5675%	3 month USD-LIBOR-BBA	(4,991,635)

21,188,000	8/3/11	5.445%	3 month USD-LIBOR-BBA	(327,606)

Lehman Brothers Special Financing, Inc.
66,070,000	9/8/16	5.3275%	3 month USD-LIBOR-BBA	(798,130)

156,600,000	8/3/08	3 month USD-LIBOR-BBA	5.425%	731,268

Total				$(13,785,985)

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

Statement of assets and liabilities 9/30/06


ASSETS
Investments in securities, at value (Note 1):

Unaffiliated issuers (identified cost $1,854,867,660) (Note 1)	$1,854,503,554

Cash	442,504

Interest and other receivables	4,958,557

Receivable for shares of the fund sold	458,207

Receivable for securities sold	515,749

Receivable for sales of delayed delivery securities (Note 1)	13,683,133

Unrealized appreciation on swap contracts (Note 1)	1,220,339

Receivable for variation margin (Note 1)	195,433

Total assets	1,875,977,476


LIABILITIES
Payable for securities purchased	2,967,158

Payable for purchase of delayed delivery securities (Note 1)	575,718,685

Payable for shares of the fund repurchased	2,434,643

Payable for compensation of Manager (Note 2)	1,606,458

Payable for investor servicing and custodian fees (Note 2)	157,142

Payable for Trustee compensation and expenses (Note 2)	281,084

Payable for administrative services (Note 2)	3,876

Payable for distribution fees (Note 2)	815,118

Written options outstanding, at value (premiums received $16,631,550) (Note 1)	10,107,779

Unrealized depreciation on swap contracts (Note 1)	15,006,324

TBA sales commitments, at value (proceeds receivable $13,655,199) (Note 1)	13,663,606

Other accrued expenses	182,885

Total liabilities	622,944,758

Net assets	$1,253,032,718


REPRESENTED BY
Paid-in capital (Unlimited shares authorized) (Notes 1 and 4)	$1,299,183,086

Undistributed net investment income (Note 1)	11,098,476

Accumulated net realized loss on investments (Note 1)	(49,441,183)

Net unrealized depreciation of investments	(7,807,661)

Total — Representing net assets applicable to capital shares outstanding	$1,253,032,718

(Continued on next page)

Statement of assets and liabilities (Continued)


COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
Net asset value and redemption price per class A share ($1,068,196,628 divided by 82,006,290 shares)	$13.03

Offering price per class A share (100/96.25 of $13.03)*	$13.54

Net asset value and offering price per class B share ($132,827,050 divided by 10,252,034 shares)**	$12.96

Net asset value and offering price per class C share ($15,984,521 divided by 1,228,983 shares)**	$13.01

Net asset value and redemption price per class M share ($31,086,619 divided by 2,388,396 shares)	$13.02

Offering price per class M share (100/96.75 of $13.02)***	$13.46

Net asset value, offering price and redemption price per class R share ($395,794 divided by 30,404 shares)	$13.02

Net asset value, offering price and redemption price per class Y share ($4,542,106 divided by 349,493 shares)	$13.00

* On single retail sales of less than $100,000. On sales of $100,000 or more the offering price is reduced.

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

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

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

Statement of operations Year ended 9/30/06


INTEREST INCOME	$ 66,973,587


EXPENSES
Compensation of Manager (Note 2)	6,820,873

Investor servicing fees (Note 2)	1,912,986

Custodian fees (Note 2)	524,492

Trustee compensation and expenses (Note 2)	77,271

Administrative services (Note 2)	34,655

Distribution fees — Class A (Note 2)	2,866,138

Distribution fees — Class B (Note 2)	1,665,465

Distribution fees — Class C (Note 2)	180,431

Distribution fees — Class M (Note 2)	179,573

Distribution fees — Class R (Note 2)	1,515

Other	389,437

Non-recurring costs (Notes 2 and 5)	16,381

Costs assumed by Manager (Notes 2 and 5)	(16,381)

Fees reimbursed by Manager or affiliate (Note 5)	(326,527)

Total expenses	14,326,309

Expense reduction (Note 2)	(1,100,790)

Net expenses	13,225,519

Net investment income	53,748,068

Net realized loss on investments (Notes 1 and 3)	(16,280,955)

Net realized gain on swap contracts (Note 1)	3,837,632

Net realized loss on futures contracts (Note 1)	(1,504,867)

Net unrealized appreciation of investments, futures contracts, swap contracts, written options,
and TBA sale commitments during the year	368,027

Net loss on investments	(13,580,163)

Net increase in net assets resulting from operations	$ 40,167,905

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

Statement of changes in net assets


DECREASE IN NET ASSETS

	Year ended	Year ended
	9/30/06	9/30/05

Operations:
Net investment income	$ 53,748,068	$ 45,455,188

Net realized gain (loss) on investments	(13,948,190)	27,402,729

Net unrealized appreciation (depreciation) of investments	368,027	(34,274,339)

Net increase in net assets resulting from operations	40,167,905	38,583,578

Distributions to shareholders: (Note 1)

From net investment income

Class A	(47,298,662)	(41,530,313)

Class B	(5,565,388)	(5,793,230)

Class C	(607,224)	(526,743)

Class M	(1,379,115)	(1,289,095)

Class R	(12,108)	(2,820)

Class Y	(257,515)	(533,749)

Redemption fees (Note 1)	5,292	8,222

Decrease from capital share transactions (Note 4)	(264,731,437)	(298,319,566)

Total decrease in net assets	(279,678,252)	(309,403,716)


NET ASSETS
Beginning of year	1,532,710,970	1,842,114,686

End of year (including undistributed net investment income of $11,098,476 and $12,123,249, respectively)	$1,253,032,718	$1,532,710,970

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

Financial highlights (For a common share outstanding throughout the period)

INVESTMENT OPERATIONS:					LESS DISTRIBUTIONS:					RATIOS AND SUPPLEMENTAL DATA:

			Net						Total			Ratio of net
	Net asset		realized and	Total	From			Net asset	return	Net	Ratio of	investment
	value,	Net	unrealized	from	net			value,	at net	assets,	expenses to	income (loss)	Portfolio
	beginning	investment	gain (loss) on	investment	investment	Total	Redemption	end	asset	end of period	average net	to average	turnover
Period ended	of period	income (loss)^(a)	investments	operations	income	distributions	fees	of period	value (%)^(b)	(in thousands)	assets (%)^(c)	net assets (%)	(%)

CLASS A
September 30, 2006	$13.15	.52	(.10)	.42	(.54)	(.54)	—^(d)	$13.03	3.30	$1,068,197	.94^(e)	4.02^(e)	579.42^{^(f)}
September 30, 2005	13.24	.37	(.05)	.32	(.41)	(.41)	—^(d)	13.15	2.43	1,255,038	.94	2.83	781.82^(f)
September 30, 2004	13.20	.42	(.06)	.36	(.32)	(.32)	—^(d)	13.24	2.81	1,441,252	.94	3.24	198.47^(f)
September 30, 2003	13.22	.28	.05	.33	(.35)	(.35)	—	13.20	2.52	2,022,134	.88	2.12	331.95^(g)
September 30, 2002	13.10	.62	.19	.81	(.69)	(.69)	—	13.22	6.41	2,432,891	.85	4.74	277.25^(g)


CLASS B
September 30, 2006	$13.08	.42	(.10)	.32	(.44)	(.44)	—^(d)	$12.96	2.52	$132,827	1.69^(e)	3.29^(e)	579.42^(f)
September 30, 2005	13.17	.27	(.05)	.22	(.31)	(.31)	—^(d)	13.08	1.64	205,275	1.69	2.07	781.82^(f)
September 30, 2004	13.12	.32	(.05)	.27	(.22)	(.22)	—^(d)	13.17	2.12	297,159	1.69	2.46	198.47^(f)
September 30, 2003	13.15	.18	.04	.22	(.25)	(.25)	—	13.12	1.67	529,386	1.63	1.38	331.95^(g)
September 30, 2002	13.04	.51	.20	.71	(.60)	(.60)	—	13.15	5.59	691,467	1.60	3.96	277.25^(g)


CLASS C
September 30, 2006	$13.13	.43	(.11)	.32	(.44)	(.44)	—^(d)	$13.01	2.50	$15,985	1.69^(e)	3.28^(e)	579.42^(f)
September 30, 2005	13.22	.27	(.05)	.22	(.31)	(.31)	—^(d)	13.13	1.64	19,784	1.69	2.08	781.82^(f)
September 30, 2004	13.17	.32	(.05)	.27	(.22)	(.22)	—^(d)	13.22	2.08	26,181	1.69	2.44	198.47^(f)
September 30, 2003	13.20	.18	.04	.22	(.25)	(.25)	—	13.17	1.70	53,235	1.63	1.34	331.95^(g)
September 30, 2002	13.08	.50	.21	.71	(.59)	(.59)	—	13.20	5.64	54,880	1.60	3.93	277.25^(g)


CLASS M
September 30, 2006	$13.13	.49	(.10)	.39	(.50)	(.50)	—^(d)	$13.02	3.10	$31,087	1.19^(e)	3.78^(e)	579.42^(f)
September 30, 2005	13.23	.34	(.07)	.27	(.37)	(.37)	—^(d)	13.13	2.08	39,845	1.19	2.58	781.82^(f)
September 30, 2004	13.18	.39	(.05)	.34	(.29)	(.29)	—^(d)	13.23	2.61	50,649	1.19	2.99	198.47^(f)
September 30, 2003	13.20	.27	.02	.29	(.31)	(.31)	—	13.18	2.25	73,355	1.13	2.03	331.95^(g)
September 30, 2002	13.08	.57	.21	.78	(.66)	(.66)	—	13.20	6.14	171,975	1.10	4.47	277.25^(g)


CLASS R
September 30, 2006	$13.14	.48	(.09)	.39	(.51)	(.51)	—^(d)	$13.02	3.04	$396	1.19^(e)	3.73^(e)	579.42^(f)
September 30, 2005	13.24	.35	(.07)	.28	(.38)	(.38)	—^(d)	13.14	2.14	166	1.19	2.60	781.82^(f)
September 30, 2004	13.20	.39	(.06)	.33	(.29)	(.29)	—^(d)	13.24	2.54	44	1.19	2.98	198.47^(f)
September 30, 2003^†	13.22	.18	(.02)	.16	(.18)	(.18)	—	13.20	1.23^*	1	.78^*	1.30^*	331.95^(g)


CLASS Y
September 30, 2006	$13.12	.55	(.09)	.46	(.58)	(.58)	—^(d)	$13.00	3.60	$4,542	.69^(e)	4.23^(e)	579.42^(f)
September 30, 2005	13.22	.40	(.06)	.34	(.44)	(.44)	—^(d)	13.12	2.64	12,603	.69	3.05	781.82^(f)
September 30, 2004	13.18	.46	(.06)	.40	(.36)	(.36)	—^(d)	13.22	3.09	26,829	.69	3.45	198.47^(f)
September 30, 2003	13.21	.31	.04	.35	(.38)	(.38)	—	13.18	2.73	52,590	.63	2.39	331.95^(g)
September 30, 2002	13.09	.62	.23	.85	(.73)	(.73)	—	13.21	6.71	70,445	.60	4.92	277.25^(g)

See notes to financial highlights at the end of this section.

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

Financial highlights (Continued)

* Not annualized.

† For the period January 21, 2003 (commencement of operations) to September 30, 2003.

(a) Per share net investment income (loss) has been determined on the basis of the weighted average number of shares outstanding during the period.

(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.

(c) Includes amounts paid through expense offset and brokerage service arrangements (Note 2).

(d) Amount represents less than $0.01 per share.

(e) Reflects a non-recurring reimbursement from Putnam Investments relating to the calculation of certain amounts paid by the fund to Putnam in previous years for transfer agent services, which amounted to less than $0.01 per share and 0.02% of average net assets for the period ended September 30, 2006 (Note 5).

(f) Portfolio turnover excludes dollar roll transactions

(g) Portfolio turnover excludes certain treasury note transactions executed in connection with a short-term trading strategy.

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

Notes to financial statements 9/30/06

Note 1: Significant accounting policies

Putnam U.S. Government Income Trust (the “fund”), a Massachusetts business trust, which is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The fund’s investment objective is to seek as high a level of current income as is consistent with preservation of capital by investing mainly in securities which have short to long-term maturities and are backed by the full faith and credit of the United States or by the credit of issuing U.S. government agency.

The fund offers class A, class B, class C, class M, class R and class Y shares. Class A and class M shares are sold with a maximum front-end sales charge of 3.75% and 3.25%, respectively, and generally do not pay a contingent deferred sales charge. Class B shares, which convert to class A shares after approximately eight years, do not pay a front-end sales charge and are subject to a contingent deferred sales charge, if those shares are redeemed within six years of purchase. Class C shares have a one-year 1.00% contingent deferred sales charge and do not convert to class A shares. Class R shares, which are offered to qualified employee-benefit plans, are sold without a front-end sales charge or a contingent deferred sales charge. The expenses for class A, class B, class C, class M and class R shares may differ based on the distribution fee of each class, which is identified in Note 2. Class Y shares, which are sold at net asset value, are generally subject to the sa me expenses as class A, class B, class C, class M and class R shares, but do not bear a distribution fee. Class Y shares are sold to certain eligible purchasers including certain defined contribution plans (including corporate IRAs), bank trust departments and trust companies.

A 2.00% redemption fee may apply to any shares that are redeemed (either by selling or exchanging into another fund) within 5 days of purchase. The redemption fee is accounted for as an addition to paid-in-capital.

The redemption fees discussed above will be replaced, effective October 2, 2006, by a 1.00% redemption fee on any shares purchased on or after such date that are redeemed (either by selling or exchanging into another fund) within 7 days of purchase.

Investment income, realized and unrealized gains and losses and expenses of the fund are borne pro-rata based on the relative net assets of each class to the total net assets of the fund, except that each class bears expenses unique to that class (including the distribution fees applicable to such classes). 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.

In the normal course of business, the fund enters into contracts that may include agreements to indemnify another party under given circumstances. The fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be, but have not yet been, made against the fund. However, the fund expects the risk of material loss to be remote.

The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.

A) Security valuation Investments, including mortgage backed securities, are valued on the basis of valuations provided by an independent pricing service approved by the Trustees or dealers selected by Putnam Management LLC (“Putnam Management”), the fund’s manager, an indirect wholly-owned subsidiary of Putnam, LLC. Such service providers use information with respect to transactions in bonds, quotations from bond dealers, market transactions in comparable securities and various relationships between securities in determining value. Restricted securities are valued at fair value following procedures approved by the Trustees. Such valuations and procedures are reviewed periodically by the Trustees. The fair value of securities is generally determined as the amount that the fund could reasonably expect to realize from an orderly disposition of such securities over a reasonable period of time. By its nature, a fair val ue price is a good faith estimate of the value of a security at a given point in time and does not reflect an actual market price, which may be different by a material amount.

B) Joint trading account Pursuant to an exemptive order from the Securities and Exchange Commission, the fund may transfer uninvested cash balances, including cash collateral received under security lending arrangements, into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Management. These balances may be invested in issues of high-grade short-term investments having maturities of up to 397 days for collateral received under security lending arrangements and up to 90 days for other cash investments.

C) 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. Collateral for certain tri-party repurchase agreements is held at the counterparty’s custodian in a segregated account for the benefit of the fund and the counterparty. 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 recorded on the trade date (the date the order to buy or sell is executed). Gains or losses on securities sold are determined on the identified cost basis. Interest income is recorded on the accrual basis. All premiums/discounts are amortized/accreted on a yield-to-maturity basis.

Securities purchased or sold on a delayed delivery basis may be settled a month or more after the trade date; interest income is accrued based on the terms of the securities. 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) Stripped securities The fund may invest in stripped securities which represent a participation in securities that may be structured in classes with rights to receive different portions of the interest and principal. Interest-only securities receive all of the interest and principal-only securities receive all of the principal. If the interest-only securities experience greater than anticipated prepayments of principal, the fund may fail to recoup fully its initial investment in these securities. Conversely, principal-only securities increase in value if prepayments are greater than anticipated and decline if

prepayments are slower than anticipated. The market value of these securities is highly sensitive to changes in interest rates.

F) Futures and options contracts The fund may use futures and options contracts to hedge against changes in the values of securities the fund owns or expects to purchase, or for other investment purposes. The fund may also write options on swaps or securities it owns or in which it may invest to increase its current returns.

The potential risk to the fund is that the change in value of futures and options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty to the contract is unable to perform. Risks may exceed amounts recognized on the statement of assets and liabilities. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments.

Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. The fund and the broker agree to exchange an amount of cash equal to the daily fluctuation in the value of the futures contract. Such receipts or payments are known as “variation margin.” Exchange traded options are valued at the last sale price or, if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by dealers. Futures and written option contracts outstanding at period end, if any, are listed after the fund’s portfolio.

G) Interest rate swap contracts The fund may enter into interest rate swap contracts, which are arrangements between two parties to exchange cash flows based on a notional principal amount, to manage the fund’s exposure to interest rates. Interest rate swap contracts are marked to market daily based upon quotations from an independent pricing service or market makers and the change, if any, is recorded as unrealized gain or loss. Payments received or made are recorded as realized gains or loss. Certain interest rate swap contracts may include extended effective dates. Income related to these swap contracts is accrued based on the terms of the contract. The fund could be exposed to credit or market risk due to unfavorable changes in the fluctuation of interest rates or if the counterparty defaults on its obligation to perform. Risk of loss may exceed amounts recognized on the statement of assets and liabilities. Interest rate swap contracts outstanding at period end, if any, are listed after the fund’s portfolio.

H) TBA purchase commitments The fund may enter into “TBA” (to be announced) commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not significantly differ from the principal amount. The fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of dec line in the value of the fund’s other assets. Unsettled TBA purchase commitments are valued at fair value of the underlying securities, according to the procedures described under “Security valuation” above. The contract is “marked-to-market” daily and the change in market value is recorded by the fund as an unrealized gain or loss.

Although the fund will generally enter into TBA purchase commitments with the intention of acquiring securities for its portfolio or for delivery pursuant to options contracts it has entered into, the fund may dispose of a commitment prior to settlement if Putnam Management deems it appropriate to do so.

I) TBA sale commitments The fund may enter into TBA sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as “cover” for the transaction.

Unsettled TBA sale commitments are valued at fair value of the underlying securities, generally according to the procedures described under “Security valuation” above. The contract is “marked-to-market” daily and the change in market value is recorded by the fund as an unrealized gain or loss. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the fund realizes a gain or loss. If the fund delivers securities under the commitment, the fund realizes a gain or a loss from the sale of the securities based upon the unit price established at the date the commitment was entered into. TBA sale commitments outstanding at period end, if any, are listed after the fund’s portfolio.

J) Dollar rolls To enhance returns, the fund may enter into dollar rolls (principally using TBAs) in which the fund sells securities for delivery in the current month and simultaneously contracts to purchase similar securities on a specified future date. During the period between the sale and subsequent purchase, the fund will not be entitled to receive income and principal payments on the securities sold. The fund will, however, retain the difference between the initial sales price and the forward price for the future purchase. The fund will also be able to earn interest on the cash proceeds that are received from the initial sale. The fund may be exposed to market or credit risk if the price of the security changes unfavorably or the counterparty fails to perform under the terms of the agreement.

K) 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 of 1986 (the “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 Code, as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains.

At September 30, 2006, the fund had a capital loss carryover of $39,763,943 available to the extent allowed by the Code to offset future net capital gain, if any. The amount of the carryover and the expiration dates are:

Loss Carryover	Expiration

$25,817,289	September 30, 2009

13,946,654	September 30, 2014

L) Distributions to shareholders Distributions to shareholders from net investment income are recorded by the fund on the ex-dividend date. Distributions from capital gains, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences include temporary and permanent differences of post-October loss deferrals, income on swap contract, and interest only securities. Reclassifications are made to the fund’s capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. For the year ended September 30, 2006, the fund reclassified $347,171 to increase undistributed net investment income, with an increase to accumulated net realized losses of $3 47,171.

The tax basis components of distributable earnings and the federal tax cost as of September 30, 2006 were as follows:

Unrealized appreciation	$9,854,921
Unrealized depreciation	(11,928,547)
	———————————————
Net unrealized depreciation	(2,073,626)
Undistributed ordinary income	11,056,352
Capital loss carryforward	(39,763,943)
Post-October loss	(8,161,946)
Cost for federal income tax purposes	$1,856,577,180

Note 2: Management fee, administrative services and other transactions

Putnam Management is paid for management and investment advisory services quarterly based on the average net assets of the fund. Such fee is based on the following annual rates: 0.57% of the first $500 million of average net assets, 0.475% of the next $500 million, 0.4275% of the next $500 million and 0.38% thereafter.

Putnam Management has agreed to waive fees and reimburse expenses of the fund through September 30, 2007 to the extent necessary to ensure that the fund’s expenses do not exceed the simple average of the expenses of all front-end load funds viewed by Lipper Inc. as having the same investment classification or objective as the fund. The expense reimbursement is based on a comparison of the fund’s expenses with the average annualized operating expenses of the funds in its Lipper peer group for each calendar quarter during the fund’s last fiscal year, excluding 12b-1 fees and without giving effect to any expense offset and brokerage service arrangements that may reduce fund expenses. For the year ended September 30, 2006, Putnam Management did not waive any of its management fee from the fund.

For the year ended September 30, 2006, Putnam Management has assumed $16,381 of legal, shareholder servicing and communication, audit and Trustee fees incurred by the fund in connection with certain legal and regulatory matters (including those described in Note 5).

The fund reimburses Putnam Management an allocated amount for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees.

Custodial functions for the fund’s assets are provided by Putnam Fiduciary Trust Company (“PFTC”), a subsidiary of Putnam, LLC. PFTC receives fees for custody services based on the fund’s asset level, the number of its security holdings and transaction volumes. Putnam Investor Services, a division of PFTC, provides investor servicing agent functions to the fund. Putnam Investor Services receives fees for investor servicing based on the number of shareholder accounts in the fund and the level of defined contribution plan assets in the fund. During the year ended September 30, 2006, the fund incurred $2,437,478 for these services.

The fund has entered into an arrangement with PFTC whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the fund’s expenses. For the year ended September 30, 2006, the fund’s expenses were reduced by $1,100,790 under these arrangements.

Each independent Trustee of the fund receives an annual Trustee fee, of which $498, as a quarterly retainer, has been allocated to the fund, and an additional fee for each Trustees meeting attended. Trustees receive additional fees for attendance at certain committee meetings, industry seminars and for certain compliance-related matters. Trustees also are reimbursed for expenses they incur relating to their services as Trustees. George Putnam, III, who is not an independent Trustee, also receives the foregoing fees for his services as Trustee.

The fund has adopted a Trustee Fee Deferral Plan (the “Deferral Plan”) which allows the Trustees to defer the receipt of all or a portion of Trustees fees payable on or after July 1, 1995. The deferred fees remain invested in certain Putnam funds until distribution in accordance with the Deferral Plan.

The fund has adopted an unfunded noncontributory defined benefit pension plan (the “Pension Plan”) covering all Trustees of the fund who have served as a Trustee for at least five years and were first elected prior to 2004. Benefits under the Pension Plan are equal to 50% of the Trustee’s average annual attendance and retainer fees for the three years ended December 31, 2005. Pension expense for the fund is included in Trustee compensation and expenses in the statement of operations. Accrued pension liability is included in Payable for Trustee compensation and expenses in the statement of assets and liabilities. The Trustees have terminated the Pension Plan with respect to any Trustee first elected after 2003.

The fund has adopted distribution plans (the “Plans”) with respect to its class A, class B, class C, class M and class R shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The purpose of the Plans is to compensate Putnam Retail Management, a wholly-owned subsidiary of Putnam, LLC and Putnam Retail Management GP, Inc., for services provided and expenses incurred in distributing shares of the fund. The Plans provide for payments by the fund to Putnam Retail Management at an annual rate of up to 0.35%, 1.00%, 1.00%, 1.00% and 1.00% of the average net assets attributable to class A, class B, class C, class M and class R shares, respectively. The Trustees have approved payment by the fund at an annual rate of 0.25%, 1.00%, 1.00%, 0.50% and 0.50% of the average net assets attributable to class A, class B, class C, class M and class R shares, respectively.

For the year ended September 30, 2006, Putnam Retail Management, acting as underwriter, received net commissions of $28,618 and $1,843 from the sale of class A and class M shares, respectively, and received $291,500 and $1,439 in contingent deferred sales charges from redemptions of class B and class C shares, respectively.

A deferred sales charge of up to 1.00% and 0.40% is assessed on certain redemptions of class A and class M shares, respectively. For the year ended September 30, 2006, Putnam Retail Management, acting as underwriter, received $301 and no monies on class A and class M redemptions, respectively.

Note 3: Purchases and sales of securities

During the year ended September 30, 2006, cost of purchases and proceeds from sales of U.S. government securities and agency obligations other than short-term investments aggregated $3,989,916,335 and $3,860,184,522 respectively.

Written option transactions during the year ended September 30, 2006 are summarized as follows:

	Contract	Premiums
	Amounts	Received

Written options outstanding
at beginning of year	$ 89,560,000	$ 3,463,733

Options opened	470,796,000	13,167,817

Options exercised
Options expired	—	—
Options closed	—	—

Written options outstanding
at end of year	$560,356,000	$16,631,550

Note 4: Capital shares

At September 30, 2006, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows:

CLASS A	Shares	Amount

Year ended 9/30/06:
Shares sold	6,951,096	$ 90,217,871

Shares issued in connection with
reinvestment of distributions	2,984,665	38,543,144

	9,935,761	128,761,015

Shares repurchased	(23,381,549)	(303,447,283)

Net decrease	(13,445,788)	$(174,686,268)

Year ended 9/30/05:
Shares sold	8,457,463	$ 112,623,293

Shares issued in connection with
reinvestment of distributions	2,533,553	32,826,380

	10,991,016	145,449,673

Shares repurchased	(24,369,108)	(322,594,455)

Net decrease	(13,378,092)	$(177,144,782)

CLASS B	Shares		Amount

Year ended 9/30/06:
Shares sold	904,650	$	11,655,303

Shares issued in connection with
reinvestment of distributions	369,142		4,742,349

	1,273,792		16,397,652

Shares repurchased	(6,718,001)		(86,748,022)

Net decrease	(5,444,209)	$	(70,350,370)

Year ended 9/30/05:
Shares sold	1,284,828	$	16,923,103

Shares issued in connection
with reinvestment of distributions	370,827		4,878,078

	1,655,655		21,801,181

Shares repurchased	(8,522,707)		(112,210,030)

Net decrease	(6,867,052)	$	(90,408,849)


CLASS C	Shares		Amount

Year ended 9/30/06:
Shares sold	203,962	$	2,641,808

Shares issued in connection with
reinvestment of distributions	37,978		489,556

	241,940		3,131,364

Shares repurchased	(520,234)		(6,721,882)

Net decrease	(278,294)	$	(3,590,518)

Year ended 9/30/05:
Shares sold	245,665	$	3,248,351

Shares issued in connection with
reinvestment of distributions	32,567		429,944

	278,232		3,678,295

Shares repurchased	(751,780)		(9,931,856)

Net decrease	(473,548)	$	(6,253,561)


CLASS M	Shares		Amount

Year ended 9/30/06:
Shares sold	569,285	$	7,395,576

Shares issued in connection with
reinvestment of distributions	21,500		268,139

	590,785		7,663,715

Shares repurchased	(1,236,078)		(16,043,692)

Net decrease	(645,293)	$	(8,379,977)

Year ended 9/30/05:
Shares sold	289,480	$	3,824,505

Shares issued in connection with
reinvestment of distributions	16,959		223,972

	306,439		4,048,477

Shares repurchased	(1,102,106)		(14,561,966)

Net decrease	(795,667)	$	(10,513,489)

CLASS R	Shares	Amount

Year ended 9/30/06:
Shares sold	20,357	$264,831

Shares issued in connection with
reinvestment of distributions	940	12,108

	21,297	276,939

Shares repurchased	(3,541)	(45,947)

Net increase	17,756	$230,992

Year ended 9/30/05:
Shares sold	9,758	$129,104

Shares issued in connection with
reinvestment of distributions	213	2,820

	9,971	131,924

Shares repurchased	(654)	(8,667)

Net increase	9,317	$123,257


CLASS Y	Shares	Amount

Year ended 9/30/06:
Shares sold	87,956	$ 1,130,540

Shares issued in connection with
reinvestment of distributions	19,953	257,515

	107,909	1,388,055

Shares repurchased	(718,848)	(9,343,351)

Net decrease	(610,939)	$ (7,955,296)

Year ended 9/30/05:
Shares sold	267,501	$ 3,534,079

Shares issued in connection with
reinvestment of distributions	40,437	533,749

	307,938	4,067,828

Shares repurchased	(1,376,773)	(18,189,970)

Net decrease	(1,068,835)	$(14,122,142)

Note 5: Regulatory matters and litigation

Putnam Management has entered into agreements with the Securities and Exchange Commission and the Massachusetts Securities Division settling charges connected with excessive short-term trading by Putnam employees and, in the case of the charges brought by the Massachusetts Securities Division, by participants in some Putnam-administered 401(k) plans. Pursuant to these settlement agreements, Putnam Management will pay a total of $193.5 million in penalties and restitution, with $153.5 million being paid to certain open-end funds and their shareholders. The amount will be allocated to shareholders and funds pursuant to a plan developed by an independent consultant, and will be paid following approval of the plan by the SEC and the Massachusetts Securities Division.

The Securities and Exchange Commission’s and Massachusetts Securities Division’s allegations and related matters also serve as the general basis for numerous lawsuits, including purported class action lawsuits filed against Putnam Management and certain related parties, including certain Putnam funds. Putnam Management will bear any costs incurred by Putnam funds in connection with these lawsuits. Putnam Management believes that the likelihood that the pending private lawsuits and purported class action lawsuits will have a material adverse financial impact on the fund is remote, and the pending actions are not likely to materially affect its ability to provide investment management services to its clients, including the Putnam funds.

In connection with a settlement between Putnam and the fund’s Trustees, the fund received $326,527 during the period from Putnam to address issues relating to the calculation of certain amounts paid by the Putnam mutual funds to Putnam for transfer agent services. This amount is included in Fees waived and reimbursed by Manager or affiliate on the Statement of operations.

Putnam Management and Putnam Retail Management are named as defendants in a civil suit in which the plaintiffs allege that the management and distribution fees paid by certain Putnam funds were excessive and seek recovery under the Investment Company Act of 1940. Putnam Management and Putnam Retail Management have contested the plaintiffs’ claims and the matter is currently pending in the U.S. District Court for the District of Massachusetts. Based on currently available information, Putnam Management believes that this action is without merit and that it is unlikely to have a material effect on Putnam Management’s and Putnam Retail Management’s ability to provide services to their clients, including the fund.

Note 6: New accounting pronouncement

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (the “Interpretation”). The Interpretation prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken by a filer in the filer’s tax return. The Interpretation will become effective for fiscal years beginning after December 15, 2006 but will also apply to tax positions reflected in the fund’s financial statements as of that date. No determination has been made whether the adoption of the Interpretation will require the fund to make any adjustments to its net assets or have any other effect on the fund’s financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (the “Standard”). The Standard defines fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. The Standard applies to fair value measurements already required or permitted by existing standards. The Standard is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Putnam Management is currently evaluating what impact the adoption of the Standard will have on the fund’s financial statements.

Federal tax information
(Unaudited)

Federal tax information

The Form 1099 you receive in January 2007 will show the tax status of all distributions paid to your account in calendar 2006.

About the Trustees

Jameson A. Baxter (Born 1943), Trustee since 1994, Vice Chairman since 2005

Ms. Baxter is the President of Baxter Associates, Inc., a private investment firm that she founded in 1986.

Ms. Baxter serves as a Director of ASHTA Chemicals, Inc., Banta Corporation (a printing and digital imaging firm), Ryerson Tull, Inc. (a steel service corporation), the Mutual Fund Directors Forum, Advocate Health Care and BoardSource, formerly the National Center for Nonprofit Boards. She is Chairman Emeritus of the Board of Trustees, Mount Holyoke College, having served as Chairman for five years and as a board member for thirteen years. Until 2002, Ms. Baxter was a Director of Intermatic Corporation (a manufacturer of energy control products).

Ms. Baxter has held various positions in investment banking and corporate finance, including Vice President and Principal of the Regency Group, and Vice President of and Consultant to First Boston Corporation. She is a graduate of Mount Holyoke College.

Charles B. Curtis (Born 1940), Trustee since 2001

Mr. Curtis is President and Chief Operating Officer of the Nuclear Threat Initiative (a private foundation dealing with national security issues) and serves as Senior Advisor to the United Nations Foundation.

Mr. Curtis is a member of the Council on Foreign Relations and the Trustee Advisory Council of the Applied Physics Laboratory, Johns Hopkins University. Until 2003, Mr. Curtis was a member of the Electric Power Research Institute Advisory Council and the University of Chicago Board of Governors for Argonne National Laboratory. Prior to 2002, Mr. Curtis was a Member of the Board of Directors of the Gas Technology Institute and the Board of Directors of the Environment and Natural Resources Program Steering Committee, John F. Kennedy School of Government, Harvard University. Until 2001, Mr. Curtis was a member of the Department of Defense Policy Board and Director of EG&G Technical Services, Inc. (a fossil energy research and development support company).

From August 1997 to December 1999, Mr. Curtis was a Partner at Hogan & Hartson L.L.P., a Washington, D.C. law firm. Prior to May 1997, Mr. Curtis was Deputy Secretary of Energy and Under Secretary of the U.S. Department of Energy. He served as Chairman of the Federal Energy Regulatory Commission from 1977 to 1981 and has held positions on the staff of the U.S. House of Representatives, the U.S. Treasury Department, and the SEC.

Myra R. Drucker (Born 1948), Trustee since 2004

Ms. Drucker is Chair of the Board of Trustees of Commonfund (a not-for-profit firm specializing in asset management for educational endowments and foundations), Vice Chair of the Board of Trustees of Sarah Lawrence College, and a member of the Investment Committee of the Kresge Foundation (a charitable trust). She is also a director of New York Stock Exchange LLC, a wholly-owned subsidiary of the publicly-traded NYSE Group, Inc. She is an advisor to Hamilton Lane LLC and RCM Capital Management (investment management firms).

Ms. Drucker is an ex-officio member of the New York Stock Exchange (NYSE) Pension Managers Advisory Committee, having served as Chair for seven years and a member of the Executive Committee of the Committee on Investment of Employee Benefit Assets.

Until August 31, 2004, Ms. Drucker was Managing Director and a member of the Board of Directors of General Motors Asset Management and Chief Investment Officer of General Motors Trust Bank. Ms. Drucker also served as a member of the NYSE Corporate Accountability and Listing Standards Committee and the NYSE/NASD IPO Advisory Committee.

Prior to joining General Motors Asset Management in 2001, Ms. Drucker held various executive positions in the investment management industry. Ms. Drucker served as Chief Investment Officer of Xerox Corporation (a technology and service company in the document industry), where she was responsible for the investment of the company’s pension assets. Ms. Drucker was also Staff Vice President and Director of Trust Investments for International Paper (a paper, paper distribution, packaging and forest products company) and previously served as Manager of Trust Investments for Xerox Corporation. Ms. Drucker received a B.A. degree in Literature and Psychology from Sarah Lawrence College and pursued graduate studies in economics, statistics and portfolio theory at Temple University.

John A. Hill (Born 1942), Trustee since 1985 and Chairman since 2000

Mr. Hill is Vice Chairman of First Reserve Corporation, a private equity buyout firm that specializes in energy investments in the diversified worldwide energy industry.

Mr. Hill is a Director of Devon Energy Corporation, TransMontaigne Oil Company and various private companies controlled by First Reserve Corporation, as well as Chairman of TH Lee, Putnam Investment Trust (a closed-end investment company advised by an affiliate of Putnam Management). He is also a Trustee of Sarah Lawrence College. Until 2005, he was a Director of Continuum Health Partners of New York.

Prior to acquiring First Reserve Corporation in 1983, Mr. Hill held executive positions in investment banking and investment management with several firms and with the federal government, including Deputy Associate Director of the Office of Management and Budget and Deputy Director of the Federal Energy Administration. He is active in various business associations, including the Economic Club of New York, and lectures on energy issues in the United States and Europe. Mr. Hill holds a B.A. degree in Economics from Southern Methodist University and pursued graduate studies there as a Woodrow Wilson Fellow.

Paul L. Joskow (Born 1947), Trustee since 1997

Dr. Joskow is the Elizabeth and James Killian Professor of Economics and Management, and Director of the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology.

Dr. Joskow serves as a Director of National Grid plc (a UK-based holding company with interests in electric and gas transmission and distribution and telecommunications infrastructure) and TransCanada Corporation (an energy company focused on natural gas transmission and power services). He also serves on the Board of Overseers of the Boston Symphony Orchestra. Prior to February 2005, he served on the board of the Whitehead Institute for Biomedical Research (a non-profit research institution) and has been President of the Yale University Council since 1993. Prior to February 2002, he was a Director of State Farm Indemnity Company (an automobile insurance company), and, prior to March 2000, he was a Director of New England Electric System (a public utility holding company).

Dr. Joskow has published five books and numerous articles on topics in industrial organization, government regulation of industry, and competition policy. He is active in industry restructuring, environmental, energy, competition and privatization policies — serving as an advisor to governments and corporations worldwide. Dr. Joskow holds a Ph.D. and M. Phil from Yale University and a B.A. from Cornell University.

Elizabeth T. Kennan (Born 1938), Trustee since 1992

Dr. Kennan is a Partner of Cambus-Kenneth Farm (thoroughbred horse and cattle breeding). She is President Emeritus of Mount Holyoke College.

Dr. Kennan served as Chairman and is now Lead Director of Northeast Utilities. Until 2005, she was a Director of Talbots, Inc. She has served as Director on a number of other boards, including Bell Atlantic, Chastain Real Estate, Shawmut Bank, Berkshire Life Insurance and Kentucky Home Life Insurance. She is a Trustee of the National Trust for Historic Preservation, of Centre College and of Midway College in Midway, Kentucky. Until 2006, she was a member of The Trustees of Reservations. Dr. Kennan has served on the oversight committee of the Folger Shakespeare Library, as President of Five Colleges Incorporated, as a Trustee of Notre Dame University and is active in various educational and civic associations.

As a member of the faculty of Catholic University for twelve years, until 1978, Dr. Kennan directed the post-doctoral program in Patristic and Medieval Studies, taught history and published numerous articles. Dr. Kennan holds a Ph.D. from the University of Washington in Seattle, an M.S. from St. Hilda’s College at Oxford University and an A.B. from Mount Holyoke College. She holds several honorary doctorates.

Kenneth R. Leibler (Born 1949), Trustee since 2006

Mr. Leibler is founding Chairman of the Boston Options Exchange, the nation’s newest electronic marketplace for the trading of derivative securities.

Mr. Leibler currently serves as a Trustee of Beth Israel Deaconess Hospital in Boston. He is also lead director of Ruder Finn Group, a global communications and advertising firm. Since 2003, he has served as a director of the Optimum Funds group. Prior to October 2006, he served as a director of ISO New England, the organization responsible for the operation of the electric generation system in the New England states. Prior to 2000, he was a director of the Investment Company Institute in Washington, D.C.

Prior to January 2005, Mr. Leibler served as Chairman and Chief Executive Officer of the Boston Stock Exchange. Prior to January 2000, he served as President and Chief Executive Officer of Liberty Financial Companies, a publicly traded diversified asset management organization. Prior to June 1990, he served as President and Chief Operating Officer of the American Stock Exchange, the youngest person in Exchange history to hold the title of President. Prior to serving as Amex President, he held the position of Chief Financial Officer, and headed its management and marketing operations. Mr. Leibler graduated magna cum laude in economics from Syracuse University, where he was elected Phi Beta Kappa.

Robert E. Patterson (Born 1945), Trustee since 1984

Mr. Patterson is Senior Partner of Cabot Properties, L.P. and Chairman of Cabot Properties, Inc. (a private equity firm investing in commercial real estate).

Mr. Patterson serves as Chairman Emeritus and Trustee of the Joslin Diabetes Center and as a Director of Brandywine Trust Group, LLC. Prior to June 2003, he was a Trustee of Sea Education Association. Prior to December 2001, he was President and Trustee of Cabot Industrial Trust (a publicly traded real estate investment trust). Prior to February 1998, he was Executive Vice President and Director of Acquisitions of Cabot Partners Limited Partnership (a registered investment adviser involved in institutional real estate investments). Prior to 1990, he served as Executive Vice President of Cabot, Cabot & Forbes Realty Advisors, Inc. (the predecessor company of Cabot Partners).

Mr. Patterson practiced law and held various positions in state government and was the founding Executive Director of the Massachusetts Industrial Finance Agency. Mr. Patterson is a graduate of Harvard College and Harvard Law School.

W. Thomas Stephens (Born 1942), Trustee since 1997

Mr. Stephens is Chairman and Chief Executive Officer of Boise Cascade, L.L.C. (a paper, forest products and timberland assets company).

Until 2005, Mr. Stephens was a director of TransCanadaPipelines, Ltd. Until 2004, Mr. Stephens was a Director of Xcel Energy Incorporated (a public utility company), Qwest Communications, and Norske Canada, Inc. (a paper manufacturer). Until 2003, Mr. Stephens was a Director of Mail-Well, Inc. (a diversified printing company). He served as Chairman of Mail-Well until 2001 and as CEO of MacMillan-Bloedel, Ltd. (a forest products company) until 1999.

Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of Johns Manville Corporation. He holds B.S. and M.S. degrees from the University of Arkansas.

Richard B. Worley (Born 1945), Trustee since 2004

Mr. Worley is Managing Partner of Permit Capital LLC, an investment management firm.

Mr. Worley serves on the Executive Committee of the University of Pennsylvania Medical Center, is a Trustee of The Robert Wood Johnson Foundation (a philanthropic organization devoted to health care issues) and is a Director of The Colonial Williamsburg Foundation (a historical preservation organization). Mr. Worley also serves on the investment committees of Mount Holyoke College and World Wildlife Fund (a wildlife conservation organization).

Prior to joining Permit Capital LLC in 2002, Mr. Worley served as Chief Strategic Officer of Morgan Stanley Investment Management. He previously served as President, Chief Executive Officer and Chief Investment Officer of Morgan Stanley Dean Witter Investment Management and as a Managing Director of Morgan Stanley, a financial services firm. Mr. Worley also was the Chairman of Miller Anderson & Sherrerd, an investment management firm.

Mr. Worley holds a B.S. degree from University of Tennessee and pursued graduate studies in economics at the University of Texas.

Charles E. Haldeman, Jr.* (Born 1948), Trustee since 2004

Mr. Haldeman is President and Chief Executive Officer of Putnam, LLC (“Putnam Investments”). He is a member of Putnam Investments’ Executive Board of Directors and Advisory Council. Prior to November 2003, Mr. Haldeman served as Co-Head of Putnam Investments’ Investment Division.

Prior to joining Putnam Investments in 2002, Mr. Haldeman held executive positions in the investment management industry. He previously served as Chief Executive Officer of Delaware Investments and President & Chief Operating Officer of United Asset Management. Mr. Haldeman was also a partner and director of Cooke & Bieler, Inc. (an investment management firm).

Mr. Haldeman currently serves on the Board of Governors of the Investment Company Institute and as a Trustee of Dartmouth College, and he is a member of the Partners HealthCare Systems Investment Committee. He is a graduate of Dartmouth College, Harvard Law School and Harvard Business School. Mr. Haldeman is also a Chartered Financial Analyst (CFA) charterholder.

George Putnam, III* (Born 1951), Trustee since 1984
and President since 2000

Mr. Putnam is President of New Generation Research, Inc.
(a publisher of financial advisory and other research services), and
of New Generation Advisers, Inc. (a registered investment advisor
to private funds). Mr. Putnam founded the New Generation
companies in 1986.

Mr. Putnam is a Director of The Boston Family Office, LLC
(a registered investment adviser). He is a Trustee of St. Mark’s
School and Shore Country Day School, and until 2002 was a
Trustee of the Sea Education Association.

Mr. Putnam previously worked as an attorney with the law firm of
Dechert LLP (formerly known as Dechert Price & Rhoads) in
Philadelphia. He is a graduate of Harvard College, Harvard
Business School and Harvard Law School.

The address of each Trustee is One Post Office Square, Boston, MA 02109.

As of September 30, 2006, there were 108 Putnam Funds. All Trustees serve as Trustees of all Putnam funds.

Each Trustee serves for an indefinite term, until his or her resignation, retirement at age 72, death, or removal.

* Trustees who are or may be deemed to be “interested persons” (as defined in the Investment Company Act of 1940) of the fund, Putnam Management, Putnam Retail Management, or Marsh & McLennan Companies, Inc., the parent company of Putnam, LLC and its affiliated companies. Messrs. Haldeman and Putnam, III are deemed “interested persons” by virtue of their positions as officers of the fund, Putnam Management or Putnam Retail Management and as shareholders of Marsh & McLennan Companies, Inc. Mr. Putnam, III is the President of your fund and each of the other Putnam funds. Mr. Haldeman is President and Chief Executive Officer of Putnam Investments.

Officers

In addition to George Putnam, III, the other officers of the fund are shown below:

Charles E. Porter (Born 1938)
Executive Vice President, Principal Executive Officer, Associate
Treasurer, and Compliance Liaison
Since 1989

Jonathan S. Horwitz (Born 1955)
Senior Vice President and Treasurer
Since 2004

Prior to 2004, Managing Director,
Putnam Investments

Steven D. Krichmar (Born 1958)
Vice President and Principal Financial Officer
Since 2002

Senior Managing Director, Putnam Investments.
Prior to July 2001, Partner, PricewaterhouseCoopers LLP

Michael T. Healy (Born 1958)
Assistant Treasurer and Principal Accounting Officer
Since 2000

Managing Director, Putnam Investments

Beth S. Mazor (Born 1958)
Vice President
Since 2002

Managing Director, Putnam Investments

James P. Pappas (Born 1953)
Vice President
Since 2004

Managing Director, Putnam Investments and Putnam Management. During 2002, Chief Operating Officer, Atalanta/Sosnoff Management Corporation; prior to 2001, President and Chief Executive Officer, UAM Investment Services, Inc.

Richard S. Robie, III (Born 1960)
Vice President
Since 2004

Senior Managing Director, Putnam Investments, Putnam Management and Putnam Retail Management. Prior to 2003, Senior Vice President, United Asset Management Corporation

Francis J. McNamara, III (Born 1955)
Vice President and Chief Legal Officer
Since 2004

Senior Managing Director, Putnam Investments, Putnam Management and Putnam Retail Management. Prior to 2004, General Counsel, State Street Research & Management Company

Charles A. Ruys de Perez (Born 1957)
Vice President and Chief Compliance Officer
Since 2004

Managing Director, Putnam Investments

Mark C. Trenchard (Born 1962)
Vice President and BSA Compliance Officer
Since 2002

Managing Director, Putnam Investments

Judith Cohen (Born 1945)
Vice President, Clerk and Assistant Treasurer
Since 1993

Wanda M. McManus (Born 1947)
Vice President, Senior Associate Treasurer and Assistant Clerk
Since 2005

Nancy E. Florek (Born 1957)
Vice President, Assistant Clerk, Assistant Treasurer
and Proxy Manager
Since 2005

The address of each Officer is One Post Office Square, Boston, MA 02109.

The Putnam Family of Funds

The following is a list of Putnam’s open-end mutual funds offered to the public. Investors should carefully consider the investment objective, risks, charges, and expenses of a fund before investing. For a prospectus containing this and other information for any Putnam fund or product, call your financial advisor at 1-800-225-1581 and ask for a prospectus. Please read the prospectus carefully before investing.

Growth funds
Discovery Growth Fund
Growth Opportunities Fund
Health Sciences Trust
International New Opportunities Fund*
New Opportunities Fund
OTC & Emerging Growth Fund
Small Cap Growth Fund*
Vista Fund
Voyager Fund

Blend funds
Capital Appreciation Fund
Capital Opportunities Fund*
Europe Equity Fund*
Global Equity Fund*
Global Natural Resources Fund*
International Capital Opportunities Fund*
International Equity Fund*
Investors Fund
Research Fund
Tax Smart Equity Fund®
Utilities Growth and Income Fund

Value funds
Classic Equity Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
International Growth and Income Fund*
Mid Cap Value Fund
New Value Fund
Small Cap Value Fund*†

Income funds
American Government Income Fund
Diversified Income Trust
Floating Rate Income Fund
Global Income Trust*
High Yield Advantage Fund*†
High Yield Trust*
Income Fund
Limited Duration Government Income Fund
Money Market Fund‡
U.S. Government Income Trust

Tax-free income funds
AMT-Free Insured Municipal Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund§
Tax-Free High Yield Fund

State tax-free income funds:
Arizona, California, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, New York, Ohio, and Pennsylvania

Asset allocation funds
Income Strategies Fund
Putnam Asset Allocation Funds — three investment portfolios that spread your money across a variety of stocks, bonds, and money market investments.

The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio

Putnam RetirementReady® Funds
Putnam RetirementReady Funds — ten investment portfolios that offer diversification among stocks, bonds, and money market instruments and adjust to become more conservative over time based on a target date for withdrawing assets.

The ten funds:
Putnam RetirementReady 2050 Fund
Putnam RetirementReady 2045 Fund
Putnam RetirementReady 2040 Fund
Putnam RetirementReady 2035 Fund
Putnam RetirementReady 2030 Fund
Putnam RetirementReady 2025 Fund
Putnam RetirementReady 2020 Fund
Putnam RetirementReady 2015 Fund
Putnam RetirementReady 2010 Fund
Putnam RetirementReady Maturity Fund

* A 1% redemption fee on total assets redeemed or exchanged within 90 days of purchase may be imposed for all share classes of these funds.

† Closed to new investors.

‡ An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve your investment at $1.00 per share, it is possible to lose money by investing in the fund.

With the exception of money market funds, a 1% redemption fee may be applied to shares exchanged or sold within 7 days of purchase (90 days, for certain funds).

Check your account balances and the most recent month-end performance at www.putnam.com.

Putnam puts your interests first

In January 2004, Putnam began introducing a number of voluntary initiatives designed to reduce fund expenses, provide investors with more useful information, and help safeguard the interests of all Putnam investors. Visit www.putnam.com for details.

Cost-cutting initiatives

Reduced sales charges The maximum sales charge for class A shares has been reduced to 5.25% for equity funds (formerly 5.75%) and 3.75% for most income funds (formerly 4.50%) . The maximum sales charge for class M shares has been reduced to 3.25% for equity funds (formerly 3.50%) .

* Lower class B purchase limit To help ensure that investors are in the most cost-effective share class, the maximum amount that can be invested in class B shares has been reduced to $100,000. (Larger trades or accumulated amounts will be refused.)

Ongoing expenses will be limited Through calendar 2007, total ongoing expenses, including management fees for all funds, will be maintained at or below the average of each fund’s industry peers in its Lipper load-fund universe. For more information, please see the Statement of Additional information.

Improved disclosure

Putnam fund prospectuses and shareholder reports have been revised to disclose additional information that will help shareholders compare funds and weigh their costs and risks along with their potential benefits. Shareholders will find easy-to-understand information about fund expense ratios, portfolio manager compensation, risk comparisons, turnover comparisons, brokerage commissions, and employee and trustee ownership of Putnam funds. Disclosure of breakpoint discounts has also been enhanced to alert investors to potential cost savings.

Protecting investors’ interests

Short-term trading fee introduced To discourage short-term trading, which can interfere with a fund’s long-term strategy, a 1% short-term trading fee may be imposed on any Putnam fund shares (other than money market funds) redeemed or exchanged within seven calendar days of purchase (for certain funds, this fee applies for 90 days).

* The maximum sales charge for class A shares of Putnam Limited Duration Government Income Fund and Putnam Floating Rate Income Fund remains 3.25% .

Services for shareholders

Investor services

Help your investment grow Set up a program for systematic investing from a Putnam fund or from your own savings or checking account. (Regular investing does not guarantee a profit or protect against loss in a declining market.)

Switch funds easily You can move money from one Putnam fund to another within the same class of shares without a service charge.

This privilege is subject to change or termination. An exchange of funds may result in a taxable event. In addition, a 1% redemption fee will be applied to shares exchanged or sold within 7 days of purchase, and, for certain funds, this fee applies on total assets redeemed or exchanged within 90 days of purchase.

Access your money easily You can have checks sent regularly or redeem shares any business day at the then-current net asset value, which may be more or less than the original cost of the shares. Class B and class C shares carry a sales charge that is applied to certain withdrawals.

How to buy additional shares You may buy shares through your financial advisor or directly from Putnam. To open an account by mail, send a check made payable to the name of the fund along with a completed fund application. To add to an existing account, complete the investment slip found at the top of your Confirmation of Activity statement and return it with a check payable to your fund.

For more information

Visit www.putnam.com A secure section of our Web site contains complete information on your account, including balances and transactions, updated daily. You may also conduct transactions, such as exchanges, additional investments, and address changes. Log on today to get your password.

Call us toll free at 1-800-225-1581 Ask a helpful Putnam representative or your financial advisor for details about any of these or other services, or see your prospectus.

Fund information

Founded over 65 years ago, Putnam Investments was built around the concept that a balance between risk and reward is the hallmark of a well-rounded financial program. We manage over 100 mutual funds in growth, value, blend, fixed income, and international.

Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109

Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109

Custodian
Putnam Fiduciary Trust Company

Legal Counsel
Ropes & Gray LLP

Independent Registered Public
Accounting Firm
KPMG LLP

Trustees
John A. Hill, Chairman
Jameson Adkins Baxter, Vice Chairman
Charles B. Curtis
Myra R. Drucker
Charles E. Haldeman, Jr.
Paul L. Joskow
Elizabeth T. Kennan
Kenneth R. Leibler
Robert E. Patterson
George Putnam, III
W. Thomas Stephens
Richard B. Worley

Officers
George Putnam, III
President

Charles E. Porter
Executive Vice President, Principal Executive
Officer, Associate Treasurer, and
Compliance Liaison

Jonathan S. Horwitz
Senior Vice President and Treasurer

Steven D. Krichmar
Vice President and Principal Financial Officer

Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer

Beth S. Mazor
Vice President

James P. Pappas
Vice President

Richard S. Robie, III
Vice President

Francis J. McNamara, III
Vice President and Chief Legal Officer

Charles A. Ruys de Perez
Vice President and Chief Compliance Officer

Mark C. Trenchard
Vice President and BSA Compliance Officer

Judith Cohen
Vice President, Clerk and Assistant Treasurer

Wanda M. McManus
Vice President, Senior Associate Treasurer
and Assistant Clerk

Nancy E. Florek
Vice President, Assistant Clerk, Assistant
Treasurer and Proxy Manager

This report is for the information of shareholders of Putnam U.S. Government Income Trust. It may also be used as sales literature when preceded or accompanied by the current prospectus, the most recent copy of Putnam’s Quarterly Performance Summary, and Putnam’s Quarterly Ranking Summary. For more recent performance, please visit www.putnam.com. Investors should carefully consider the investment objective, risks, charges, and expenses of a fund, which are described in its prospectus. For this and other information or to request a prospectus, call 1-800-225-1581 toll free. Please read the prospectus carefully before investing. The fund’s Statement of Additional Information contains additional information about the fund’s Trustees and is available without charge upon request by calling 1-800-225-1581.

Item 2. Code of Ethics:

(a) The fund’s principal executive, financial and accounting officers are employees of Putnam Investment Management, LLC, the Fund's investment manager. As such they are subject to a comprehensive Code of Ethics adopted and administered by Putnam Investments which is designed to protect the interests of the firm and its clients. The Fund has adopted a Code of Ethics which incorporates the Code of Ethics of Putnam Investments with respect to all of its officers and Trustees who are employees of Putnam Investment Management, LLC. For this reason, the Fund has not adopted a separate code of ethics governing its principal executive, financial and accounting officers.

Item 3. Audit Committee Financial Expert:

The Funds' Audit and Compliance Committee is comprised solely of Trustees who are "independent" (as such term has been defined by the Securities and Exchange Commission ("SEC") in regulations implementing Section 407 of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe that each of the members of the Audit and Compliance Committee also possess a combination of knowledge and experience with respect to financial accounting matters, as well as other attributes, that qualify them for service on the Committee. In addition, the Trustees have determined that each of Mr. Patterson, Mr. Stephens, Mr. Leibler and Mr. Hill meets the financial literacy requirements of the New York Stock Exchange's rules and qualifies as an "audit committee financial expert" (as such term has been defined by the Regulations) based on their review of his pertinent experience and education. Certain other Trustees, although not on the Audit and Compliance Committee, would also quali fy as "audit committee financial experts." The SEC has stated that the designation or identification of a person as an audit committee financial expert pursuant to this Item 3 of Form N-CSR does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit and Compliance Committee and the Board of Trustees in the absence of such designation or identification.

Item 4. Principal Accountant Fees and Services:

The following table presents fees billed in each of the last two fiscal years for services rendered to the fund by the fund’s independent auditor:

Fiscal		Audit-
year	Audit	Related	Tax	All Other
ended	Fees	Fees	Fees	Fees

September 30, 2006	$67,922*	$--	$3,485	$857
September 30, 2005	$39,530	$--	$3,030	$ -

* Includes fees of $12,837 billed by the fund’s independent auditor to the fund for audit procedures necessitated by regulatory and litigation matters for the fiscal year ended September 30, 2006. These fees were reimbursed to the fund by Putnam Investment Management, LLC (“Putnam Management”).

For the fiscal years ended September 30, 2006 and September 30, 2005, the fund’s independent auditor billed aggregate non-audit fees in the amounts of $4,342 and $3,030 respectively, to the fund, Putnam Management and any entity controlling, controlled by or under common control with Putnam Management that provides ongoing services to the fund.

Audit Fees represent fees billed for the fund’s last two fiscal years.

Audit-Related Fees represent fees billed in the fund’s last two fiscal years for services traditionally performed by the fund’s auditor, including accounting consultation for proposed transactions or concerning financial accounting and reporting standards and other audit or attest services not required by statute or regulation.

Tax Fees represent fees billed in the fund’s last two fiscal years for tax compliance, tax planning and tax advice services. Tax planning and tax advice services include assistance with tax audits, employee benefit plans and requests for rulings or technical advice from taxing authorities.

All Other Fees represent fees billed for services relating to expense allocation methodology.

Pre-Approval Policies of the Audit and Compliance Committee. The Audit and Compliance Committee of the Putnam funds has determined that, as a matter of policy, all work performed for the funds by the funds’ independent auditors will be pre-approved by the Committee itself and thus will generally not be subject to pre-approval procedures.

The Audit and Compliance Committee also has adopted a policy to pre-approve the engagement by Putnam Management and certain of its affiliates of the funds’ independent auditors, even in circumstances where pre-approval is not required by applicable law. Any such requests by Putnam Management or certain of its affiliates are typically submitted in writing to the Committee and explain, among other things, the nature of the proposed engagement, the estimated fees, and why this work should be performed by that particular audit firm as opposed to another one. In reviewing such requests, the Committee considers, among other things, whether the provision of such services by the audit firm are compatible with the independence of the audit firm.

The following table presents fees billed by the fund’s independent auditor for services required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.

Fiscal	Audit-		All	Total
year	Related	Tax	Other	Non-Audit
ended	Fees	Fees	Fees	Fees

September 30,
2006	$ -	$ -	$ -	$ -
September
30, 2005	$ -	$ -	$ -	$ -

Item 5. Audit Committee of Listed Registrants

Not applicable

Item 6. Schedule of Investments:

The registrant’s schedule of investments in unaffiliated issuers is included in the report to shareholders in Item 1 above.

Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End Management Investment Companies:

Not applicable

Item 8. Portfolio Managers of Closed-End Investment Companies

Not Applicable

Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers:

Not applicable

Item 10. Submission of Matters to a Vote of Security Holders:

Not applicable

Item 11. Controls and Procedures:

(a) The registrant's principal executive officer and principal financial officer have concluded, based on their evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report, that the design and operation of such procedures are generally effective to provide reasonable assurance that information required to be disclosed by the registrant in this report is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.

(b) Changes in internal control over financial reporting: Not applicable

Item 12. Exhibits:

(a)(1) The Code of Ethics of The Putnam Funds, which incorporates the Code of Ethics of Putnam Investments, is filed herewith.

(a)(2) Separate certifications for the principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940, as amended, are filed herewith.

(b) The certifications required by Rule 30a-2(b) under the Investment Company Act of 1940, as amended, are filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Putnam U.S. Government Income Trust

By (Signature and Title):

/s/Michael T. Healy
Michael T. Healy
Principal Accounting Officer

Date: December 5, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By (Signature and Title):

/s/Charles E. Porter

Charles E. Porter
Principal Executive Officer

Date: December 5, 2006

By (Signature and Title):

/s/Steven D. Krichmar
Steven D. Krichmar
Principal Financial Officer

Date: December 5, 2006

Putnam Mortgage Securities Fund (PGSIX) N-CSRCertified annual shareholder report (management investment company)