Putnam
Municipal
Income Fund

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


ANNUAL REPORT ON PERFORMANCE AND OUTLOOK

3-31-04

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From the Trustees

[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]

John A. Hill and
George Putnam, III

Dear Fellow Shareholder:

We are pleased to report further progress in Putnam's reforms on behalf
of shareholders. The most significant news is the settlement that has
been reached with the Securities and Exchange Commission and with
regulatory authorities in the Commonwealth of Massachusetts regarding
market timing in certain Putnam funds. Putnam President and Chief
Executive Officer Ed Haldeman has sent a letter to all shareholders
describing the terms of the settlement. Much of the $110 million to be
paid by Putnam Investment Management, LLC will be distributed to the
funds as restitution to shareholders, thereby fulfilling an important
element of the initial settlement that Putnam reached with the SEC in
November 2003.

Over the past several months, Putnam has also introduced a number of
voluntary reforms. We would like to call your attention to two of them.
Expense comparisons and risk comparisons for your fund can be found
following the Performance Summary of this report. The expense comparison
information enables you to estimate the amount you have actually paid
for ongoing expenses such as management fees and distribution (or 12b-1)
fees and to compare these expenses with the average expenses of funds in
the same Lipper peer group. The risk comparison shows the fund's risk
relative to similar funds as tracked by Morningstar, an independent
fund-rating company. We believe the expense and risk information will
provide valuable tools for you and your financial advisor when you make
decisions about your financial program.

We are also pleased to report strong results for Putnam Municipal Income
Fund during the 12 months ended March 31, 2004. Your fund's performance
at net asset value surpassed that of its benchmark and its Lipper
category average. These results reflect the fund's greater emphasis on
higher-yielding, lower-rated bonds in an environment that favored this
segment of the market. You will find details on the facing page.

Respectfully yours,

/S/ JOHN A. HILL              /S/ GEORGE PUTNAM, III

John A. Hill                  George Putnam, III
Chairman of the Trustees      President of the Funds

May 19, 2004


Report from Fund Management

Fund highlights

 * Putnam Municipal Income Fund's total return for the 12 months ended
   March 31, 2004, was 6.59% for class A shares at net asset value (NAV)
   and 1.51% at public offering price (POP).

 * Exposure to strong-performing, lower-rated bonds helped the fund's
   results at NAV outpace those of its benchmark, the Lehman Municipal Bond
   Index, which returned 5.86% for the period.

 * For the same reason, the fund's return at NAV also exceeded the
   average return of 5.46% recorded by funds in its Lipper category,
   General Municipal Debt Funds.

 * See the Performance Summary beginning on page 8 for complete fund
   performance, comparative performance, and Lipper data.

Performance commentary

Against a backdrop of rising economic growth, falling default rates,
improving credit fundamentals, and demand from yield-hungry investors,
higher-yielding, lower-rated municipal bonds significantly outperformed
their higher-quality counterparts during the fiscal year. Since Putnam
Municipal Income Fund has significant exposure to this segment of the
municipal bond market, the fund turned in solid absolute performance and
outpaced its broadly diversified benchmark, the Lehman Municipal Bond
Index. Airline-related industrial development bonds (IDBs) were standout
performers among the many sectors in which the fund invests, buoyed by
strengthening in the travel industry. Bonds funded by tobacco
settlements also boosted fund performance, particularly in the latter
half of the period, as investor concerns about pending litigation
against tobacco companies dissipated. The fund's lower-quality bias also
helped NAV performance surpass that of the average for its Lipper peer
group.

FUND PROFILE

Putnam Municipal Income Fund seeks to provide as high a level of income
free from federal income tax as we believe is consistent with
preservation of capital. The fund invests in a nationally diversified
portfolio of investment-grade municipal bonds and higher-yielding,
lower-rated municipal bonds that give the portfolio higher income
potential. The fund may be suitable for investors who are seeking
tax-exempt income and are willing to accept the risks associated with
below-investment-grade bonds.


Market overview

Municipal bond yields -- which move in the opposite direction of their
prices -- were volatile during the fiscal year ended March 31, 2004.
Concern about deflation led to falling yields through mid June. After
rising through August, yields receded again in September on unfavorable
housing and unemployment data. Through the remainder of the year, yields
drifted and ended slightly higher. The ratio between yields of 10-year
municipal bonds and 10-year Treasuries fluctuated, as municipals yielded
about 80% of comparable Treasury yields at the end of December, then
jumped back to about 90% by the end of March. Overall, the yield curve
- -- which shows the difference in yields between shorter- and
longer-maturity bonds -- flattened somewhat, and credit spreads -- the
difference in yields between higher- and lower-rated bonds -- generally
narrowed. The economy continued to improve on nearly all fronts, yet a
lack of job growth continued to cause uncertainty. The Federal Reserve
Board held the federal funds rate steady at 1%. The dollar weakened
during the period. Municipal bond issuance remained strong. California
residents approved $15 billion in deficit financing to help alleviate
the state's budget crisis. Although ongoing tobacco litigation continued
to make headlines, the municipal bond market largely discounted the
news. Airline-related industrial development bonds continued to perform
well.

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MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 3/31/04
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Bonds
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Lehman Municipal Bond Index (tax-exempt bonds)                          5.86%
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Lehman Aggregate Bond Index (broad bond market)                         5.40%
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Lehman Government Bond Index (U.S Treasury and agency
securities)                                                             4.24%
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Lehman Intermediate Treasury Bond Index
(intermediate-maturity U.S. Treasury bonds)                             3.48%
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Equities
- -------------------------------------------------------------------------------
S&P 500 Index (broad stock market)                                     35.12%
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S&P Utilities Index (utilities stocks)                                 37.06%
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Russell 2000 Growth Index (small-company growth stocks)                63.16%
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These indexes provide an overview of performance in different market
sectors for the 12 months ended 3/31/04.
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Strategy overview

We shortened the fund's duration (a measure of a fund's sensitivity to
changes in interest rates) during the period, because in a strengthening
economy there is a greater likelihood that interest rates may rise at
some point. At the start of October, the fund was slightly defensive. In
January 2004, we shortened the duration further. This change did not
help the fund's performance until later in the period.

We took the opportunity afforded by strong demand for higher-yielding
municipal bonds to take profits where appropriate. We also continued to
seek opportunities to diversify the portfolio across multiple sectors
and issuers. We sought bonds that were undervalued, because lower-priced
bonds generally offer less price risk. The portfolio remains
overweighted in lower-rated, higher yielding bonds, relative to its
benchmark.

The fund remains underweighted in California general obligation bonds.
Voters recently approved Proposition 57, which paved the way for a $15
billion bond issue to provide long-term financing of the state's
accumulated deficit. Although this was good news in the short term
because it removed some uncertainty in the municipal bond market, we
remain concerned that the new issuance will flood the market and cause
California general obligation bonds to underperform. We are also
concerned because the state's structural budget deficit problem is not
yet solved.


[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
                  COMPARED]

THE FUND'S MATURITY AND DURATION COMPARED

                              3/31/03     9/30/03      3/31/04
Average effective
maturity in years               10.3        9.5          8.1

Duration in years                6.3        6.3          5.8

Footnote reads:
This chart compares changes in the fund's duration (a measure of its
sensitivity to interest-rate changes) and its average effective maturity
(a weighted average of the holdings' maturities).

Average effective maturity also takes into account put and call
features, where applicable, and reflects prepayments for mortgage-backed
securities.


How fund holdings affected performance

Airline-related industrial development bonds (IDBs) had the most
significant impact on performance during the year. IDBs are municipal
bonds issued to encourage local expansion by various businesses. They
are typically backed only by the credit of the company benefiting from
the financing, not by the issuing municipality. As a result, investor
perceptions about the backing company's health, or that of its industry
group as a whole, affect the prices of these bonds. Early in the fiscal
year, the airline industry continued to feel the effects of declining
air traffic, high fixed costs, and high-profile bankruptcies. However,
as geopolitical tensions eased following what appeared to be the end of
full-scale conflict in Iraq and as the global economy began to show
signs of increased growth, investors began to be more optimistic about
the prospects for increased travel and improving airline industry
fundamentals. This led to a sharp rise in the price of airline-backed
IDBs as many of these bonds recovered from distressed price levels.

The fund held IDBs backed by American Airlines, Northwest Airlines, and
Continental Airlines issued to fund airport facility improvements in
Illinois, Minnesota, New Jersey, Texas, and Washington. We took
advantage of price appreciation in this sector to selectively trim the
fund's exposure, carefully considering the individual issues to
determine which airlines and debt structures best complemented the
fund's portfolio. Since all of these holdings had been in the portfolio
for some time, none of the sales resulted in a profit based on the
acquisition cost, but the fund was able to sell on strength rather than
in distress. We ended the period with a modest underweight position in
airline-backed IDBs relative to the benchmark.


[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]

CREDIT QUALITY OVERVIEW

Aaa/AAA (41.1%)

Aa/AA (3.5%)

A (12.4%)

Baa/BBB (22.2%)

Ba/BB (11.7%)

B (6.4%)

Other (VMIG1) (2.7%)

Footnote reads:
As a percentage of market value as of 3/31/04. A bond rated Baa or
higher is considered investment grade. The chart reflects Moody's and
Standard & Poor's ratings; percentages may include unrated bonds
considered by Putnam Management to be of comparable quality. Ratings
will vary over time.


Another strong contributor to fund performance during the period was a
hospital revenue bond issued by Valley Health Systems in California for
refinancing and improvement. This fund holding advanced on generally
improving credit conditions and on stabilized credit fundamentals.

Tobacco settlement bonds also generated strong results during the latter
half of the period as they recovered from investor concerns about
pending litigation -- some involving multibillion-dollar judgments --
against tobacco companies. Investors worried that these potential
liabilities would affect tobacco companies' ability to meet their
settlement payment obligations to the states. This would have a negative
impact on tobacco settlement bonds, which are secured by this promised
income stream.

During the period, the litigation environment remained mixed. However,
we believed investors had overreacted to adverse litigation headlines,
driving down prices and making the sector attractive from a valuation
perspective. In response, we purchased $1.5 million of tobacco revenue
bonds issued by the Tobacco Settlement Financing Authority of New
Jersey, with a coupon of 6.25%, a maturity date of 6/1/2043, and ratings
of BBB from Standard & Poor's and Baa2 from Moody's. Currently, the
portfolio is modestly overweighted in tobacco revenue bonds relative to
the benchmark.

The utilities sector was an area of emphasis in our purchases during the
latter half of the period given the attractive relative value in the
sector. Market conditions for utilities bonds have been improving as
this industry continues to recover from the negative effects of
deregulation. Credit-rating agencies continued to slow the pace of
downgrades for utilities bonds, as utilities companies began to abandon
riskier endeavors launched in the wake of deregulation and to refocus on
their core businesses. Lower interest rates and an improved climate for
corporate credit also enabled many utilities companies to repair damaged
balance sheets. We purchased $5 million of revenue bonds issued by North
Carolina Municipal Power Agency for the Catawba Electric Plant. The
bonds had a coupon of 6.50%, a maturity date of 1/1/2020, and ratings of
Baa1 from Moody's and BBB+ from Standard & Poor's. We also purchased
$2.85 million of bonds issued by the Beaver Industrial Develop ment
Authority for the obligor Cleveland Electric. These bonds had a coupon
of 3.75%, a maturity date of 10/1/2030, and ratings of Baa2 from Moody's
and BBB- from Standard & Poor's. They also have a mandatory put feature,
which means that bondholders must put the issue back to the issuer on
10/1/08 at which time the issuer may elect to pay off or refinance the
debt. This feature is attractive to issuers in that it allows them to
refinance their debt without the cost of a new issuance cycle. We are
attracted by the shorter effective maturity date and by the fact that
this segment of the market is less followed by market participants and,
therefore, tends to be more attractively priced.

Against a backdrop of generally good conditions for municipal debt and
strong performance for the fund, there were a few holdings that
detracted from results during the period. The fund's exposure to revenue
bonds issued by Charleston County Industrial Development Authority for
Hoover Group, Inc. hurt performance during the period. The Hoover Group
is currently in discussions with debt holders to determine an
appropriate restructuring. Another meaningful detractor was a revenue
bond issued by the Michigan State Strategic Fund Solid Waste Disposal
for the Genesee Power Station. In this instance, the management team
sought to reduce the fund's exposure to this weaker credit and needed to
offer these bonds at an attractive price, which was lower than the
fund's purchase price, to entice a buyer.

Please note that all holdings discussed in this report are subject to
review in  accordance with the fund's investment strategy and may vary
in the future.

The fund's management team

The fund is managed by the Putnam Tax Exempt Fixed-Income Team. The
members of the team are David Hamlin (Portfolio Leader), Paul Drury
(Portfolio Member), Susan McCormack (Portfolio Member), James St. John
(Portfolio Member), Richard Wyke (Portfolio Member), and Kevin Cronin.


The outlook for your fund

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

Lingering unemployment had been an anomaly in an otherwise robust
economic recovery. However, in early April 2004, after the fiscal period
had ended, employment data at last showed marked improvement. We believe
the underlying strength in the economy will foster higher interest rates
in the future. In keeping with our views, the fund's duration is now
relatively short to keep the portfolio defensively positioned. We
believe that the credit quality of general obligation municipal bonds
will remain under pressure, partly because tax revenues cannot be
expected to grow significantly until taxpayers begin to report improved
earnings. Although yield spreads between high- and low-quality municipal
bonds have narrowed somewhat, we believe they could narrow further as
credit fundamentals continue to improve. As a result, we may see more
opportunity for potential gain in this area because if the yields
required to attract buyers to lower-quality bonds continue to fall,
prices on the portfolio's existing higher-yielding holdings would likely
rise. We currently plan to maintain the fund's diversified credit risk
profile while also sustaining a portfolio that is diversified by sector
and issue. We will continue to monitor market conditions as we pursue a
high level of tax-free income and manage the fund's risk exposures.

The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Lower-rated bonds
may offer higher yields in return for more risk.


Performance summary

This section shows your fund's performance during its fiscal year, which
ended March 31, 2004. Performance should always be considered in light
of a fund's investment strategy. Data represents past performance. Past
performance does not guarantee future results. More recent returns may
be less or more than those shown. Investment return and principal value
will fluctuate and you may have a gain or a loss when you sell your
shares. For the most recent month-end performance, please visit
www.putnaminvestments.com.



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TOTAL RETURN FOR PERIODS ENDED 3/31/04
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                               Class A               Class B               Class C               Class M
(inception dates)             (5/22/89)              (1/4/93)              (2/1/99)             (12/1/94)
- --------------------------------------------------------------------------------------------------------------
                            NAV        POP        NAV       CDSC        NAV       CDSC        NAV        POP
- --------------------------------------------------------------------------------------------------------------
                                                                               
1 year                     6.59%      1.51%      5.95%      0.95%      5.80%      4.80%      6.32%      2.87%
- --------------------------------------------------------------------------------------------------------------
5 years                   23.32      17.51      19.82      17.93      18.93      18.93      21.81      17.87
Annual average             4.28       3.28       3.68       3.35       3.53       3.53       4.02       3.34
- --------------------------------------------------------------------------------------------------------------
10 years                  74.10      65.73      64.01      64.01      61.06      61.06      69.59      64.15
Annual average             5.70       5.18       5.07       5.07       4.88       4.88       5.42       5.08
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Annual average
(life of fund)             6.60       6.25       5.88       5.88       5.78       5.78       6.26       6.03
- --------------------------------------------------------------------------------------------------------------


Performance assumes reinvestment of distributions and does not account
for taxes. Returns at public offering price (POP) for class A and M
shares reflect a sales charge of 4.75% and 3.25%, respectively (which
for class A shares does not reflect a reduction in sales charges that
went into effect on January 28, 2004; if this reduction had been in
place for all periods indicated, returns would have been higher). Class
B share returns reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year, declining to 1% in the sixth
year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the
first year that is eliminated thereafter. Performance for class B, C,
and M shares before their inception is derived from the historical
performance of class A shares, adjusted for the applicable sales charge
(or CDSC) and higher operating expenses for such shares.

A 2% redemption fee will be applied to shares exchanged or sold within 5
days of purchase.


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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/04
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                                Lehman          Lipper General
                               Municipal     Municipal Debt Funds
                              Bond Index       category average*
- ------------------------------------------------------------------
1 year                           5.86%               5.46%
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5 years                         33.85               25.87
Annual average                   6.01                4.70
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10 years                        93.24               74.95
Annual average                   6.81                5.74
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Annual average
(life of fund)                   7.26                6.51
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  Index and Lipper results should be compared to fund performance at net
  asset value.

* Over the 1-, 5-, and 10-year periods ended 3/31/04, there were 299,
  229, and 120 funds, respectively, in this Lipper category.


[GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT]

CHANGE IN THE VALUE OF A $10,000 INVESTMENT

Cumulative total return of a $10,000 investment, 3/31/94 to 3/31/04

                       Fund's class A             Lehman Municipal
Date                    shares at POP                Bond Index

3/31/94                     9,525                     10,000
3/31/95                    10,155                     10,743
3/31/96                    10,901                     11,643
3/31/97                    11,524                     12,278
3/31/98                    12,671                     13,593
3/31/99                    13,438                     14,436
3/31/00                    13,110                     14,425
3/31/01                    14,186                     16,000
3/31/02                    14,959                     16,610
3/31/03                    15,622                     18,253
3/31/04                   $16,573                    $19,324

Footnote reads:
Past performance does not indicate future results. At the end of the
same time period, a $10,000 investment in the fund's class B and class C
shares would have been valued at $16,401 and $16,106, respectively, and
no contingent deferred sales charges would apply. A $10,000 investment
in the fund's class M shares would have been valued at $16,959 ($16,415
at public offering price). See first page of performance section for
performance calculation method.



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PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 3/31/04
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                                              Class A        Class B        Class C        Class M
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Distributions (number)                             12             12             12             12
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Income 1                                       $0.414056      $0.361542      $0.348819      $0.392181
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Capital gains 1                                    --             --             --             --
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Total                                          $0.414056      $0.361542      $0.348819      $0.392181
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Share value:                                 NAV        POP       NAV            NAV      NAV        POP
- --------------------------------------------------------------------------------------------------------------
3/31/03                                     $8.60      $9.03     $8.60          $8.61    $8.60      $8.89
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3/31/04                                      8.74       9.15+     8.74           8.75     8.74       9.03
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Current return (end of period)
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Current dividend rate 2                     4.62%      4.41%     4.00%          3.85%    4.36%      4.22%
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Taxable equivalent 3                        7.11       6.78      6.15           5.92     6.71       6.49
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Current 30-day SEC yield 4                  3.65       3.49      3.05           2.90     3.40       3.29
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Taxable equivalent 3                        5.62       5.37      4.69           4.46     5.23       5.06
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 + Reflects a reduction in sales charges that took effect on January 28, 2004.

 1 Capital gains, if any, are taxable for federal and, in most cases,
   state purposes. For some investors, investment income may be subject to
   the federal alternative minimum tax. Income from federally exempt funds
   may be subject to state and local taxes.

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

 3 Assumes maximum 35% federal tax rate for 2004. Results for investors
   subject to lower tax rates would not be as advantageous.

 4 Based only on investment income, calculated using SEC guidelines.
   Reflects an expense waiver in effect during the period, without which
   yields would have been lower.


Understanding your
fund's expenses

As a mutual fund investor, you pay ongoing expenses, such as management
fees, distribution fees (12b-1 fees), and other expenses. In the most
recent six-month period, your fund limited these expenses; had it not
done so, expenses may 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 Municipal Income Fund from September 30, 2003, to
March 31, 2004. It also shows how much a $1,000 investment would be
worth at the close of the period, assuming actual returns and expenses.

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EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming actual returns for the 6 months ended 3/31/04
- -----------------------------------------------------------------------------
                          Class A     Class B     Class C     Class M
- -----------------------------------------------------------------------------
Expenses paid
per $1,000*                    $5          $8          $8          $6
- -----------------------------------------------------------------------------
Ending value
(after expenses)           $1,029      $1,026      $1,026      $1,028
- -----------------------------------------------------------------------------

* 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 3/31/04. The expense
  ratio may differ for each share class (see the table at the bottom of the
  next page). Expenses are calculated by multiplying the expense ratio by the
  average account value for the period; then multiplying the result by the
  number of days in the reporting period; and then dividing that result by
  365 (or 366, for leap years).

Estimate the expenses you paid

To estimate the ongoing expenses you paid for the six months ended March
31, 2004, use the calculation method below. See your September 30, 2003,
Putnam statement or call Putnam at 1-800-225-1581 to find the value of
your investment in the fund on September 30, 2003.

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HOW TO CALCULATE THE EXPENSES YOU PAID
- -----------------------------------------------------------------------------
                                                                  Total
Value of your                               Expenses paid         expenses
investment on 9/30/03  [DIV]  $1,000   X    per $1,000      =     paid
- -----------------------------------------------------------------------------

Example Based on a $10,000 investment in class A shares of your fund.
- -----------------------------------------------------------------------------
$10,000                [DIV]  $1,000   X  $5 (see table above)  =  $50
- -----------------------------------------------------------------------------


Comparing your fund's expenses with those of other funds

Using the SEC's method to compare expenses

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

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EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming a hypothetical 5% annualized return for the 6 months ended 3/31/04
- -----------------------------------------------------------------------------
                         Class A     Class B     Class C     Class M
- -----------------------------------------------------------------------------
Expenses paid
per $1,000*                   $5          $8          $8          $6
- -----------------------------------------------------------------------------
Ending value
(after expenses)          $1,041      $1,035      $1,034      $1,039
- -----------------------------------------------------------------------------
* 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 3/31/04.
  The expense ratio may differ for each share class (see the table at the
  bottom of this page). Expenses are calculated by multiplying the expense
  ratio by the average account value for the period; then multiplying the
  result by the number of days in the reporting period; and then dividing
  that result by 365 (or 366, for leap years).

Using industry averages to compare expenses

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

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EXPENSE RATIO COMPARISONS USING ANNUALIZED DATA
- -----------------------------------------------------------------------------
                          Class A     Class B     Class C     Class M
- -----------------------------------------------------------------------------
Your fund's
annualized
expense ratio              0.90%       1.50%       1.65%       1.15%
- -----------------------------------------------------------------------------
Average annualized
expense ratio for
Lipper peer group+         0.90%       1.50%       1.65%       1.15%
- -----------------------------------------------------------------------------

+ For class A shares, expenses shown represent the average of the expenses
  of front-end load funds viewed by Lipper as having the same investment
  classification or objective as the fund, calculated in accordance with
  Lipper 's standard reporting methodology for comparing expenses within a
  given universe. All Lipper data are for the most recent fiscal periods
  available as of March 31, 2004. For class B, C, and M shares, Putnam has
  adjusted the Lipper total expense average to reflect higher 12b-1 fees
  incurred by these classes of shares. The peer group may include funds that
  are significantly larger or smaller than the fund, which may limit the
  comparability of the fund 's expenses to the Lipper average.


Risk comparison

As part of new initiatives to enhance disclosure, we are including a
risk comparison to help you understand how your fund compares with other
funds. The comparison utilizes a risk measure developed by Morningstar,
an independent fund-rating agency. This risk measure is referred to as
the fund's Overall Morningstar Risk.

[GRAPHIC OMITTED: chart MORNINGSTAR [REGISTRATION MARK] RISK]

MORNINGSTAR [REGISTRATION MARK] RISK

Fund's Overall
Morningstar Risk   0.18

Municipal bond
fund average       0.21

0%   Increasing Risk   100%

Your fund's Overall Morningstar Risk is shown alongside that of the
average fund in its broad asset class, as determined by Morningstar. The
risk bar broadens the comparison by translating the fund's Overall
Morningstar Risk into a percentile, which is based on the fund's ranking
among all funds rated by Morningstar as of 3/31/04. A higher Overall
Morningstar Risk generally indicates that a fund's monthly returns have
varied more widely.

Morningstar determines a fund's Overall Morningstar Risk by assessing
variations in the fund's monthly returns -- with an emphasis on downside
variations -- over 3-, 5-, and 10-year periods, if available. Those
measures are weighted and averaged to produce the fund's Overall
Morningstar Risk. The information shown is provided for the fund's class
A shares only; information for other classes may vary. Overall
Morningstar Risk is based on historical data and does not indicate
future results. Morningstar does not purport to measure the risk
associated with a current investment in a fund, either on an absolute
basis or on a relative basis. Low Overall Morningstar Risk does not mean
that you cannot lose money on an investment in a fund. Copyright 2004
Morningstar, Inc. All Rights Reserved. The information contained herein
(1) is proprietary to Morningstar and/or its content providers; (2) may
not be copied or distributed; and (3) is not warranted to be accurate,
complete, or timely. Neither Morningstar nor its content providers are
responsible for any damages or losses arising from any use of this
information.


Terms and definitions

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

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

Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares (since reduced to 4.50%) and 3.25% for class M shares.

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

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

Class B shares may be subject to a sales charge upon redemption.

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

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


Comparative indexes

Lehman Aggregate Bond Index is an unmanaged index used as a general
measure of U.S. fixed-income securities.

Lehman Government Bond Index is an unmanaged index of U.S. Treasury and
agency securities.

Lehman Intermediate Treasury Bond Index is an unmanaged index of
Treasury bonds with maturities between 1 and 10 years.

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

Russell 2000 Growth Index is an unmanaged index of those companies in
the Russell 2000 Index chosen for their growth orientation.

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

S&P Utilities Index is an unmanaged index of common stock issued by
utilities companies.

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

Lipper is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.


Putnam's policy on confidentiality

In order to conduct business with our shareholders, we must obtain
certain personal information such as account holders' addresses,
telephone numbers, Social Security numbers, and the names of their
financial advisors. We use this information to assign an account number
and to help us maintain accurate records of transactions and account
balances.

It is our policy to protect the confidentiality of your information,
whether or not you currently own shares of our funds, and in particular,
not to sell information about you or your accounts to outside marketing
firms. We have safeguards in place designed to prevent unauthorized
access to our computer systems and procedures to protect personal
information from unauthorized use.

Under certain circumstances, we share this information with outside
vendors who provide services to us, such as mailing and proxy
solicitation. In those cases, the service providers enter into
confidentiality agreements with us, and we provide only the information
necessary to process transactions and perform other services related to
your account. We may also share this information with our Putnam
affiliates to service your account or provide you with information about
other Putnam products or services. It is also our policy to share
account information with your financial advisor, if you've listed one on
your Putnam account.

If you would like clarification about our confidentiality policies or
have any questions or concerns, please don't hesitate to contact us at
1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or
Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.

Putnam is committed to managing our mutual funds in the best interests
of our shareholders. Our proxy voting guidelines and policies are
available on the Putnam Individual Investor Web site,
www.putnaminvestments.com, by calling Putnam's Shareholder Services at
1-800-225-1581, or on the SEC's Web site, www.sec.gov.


A guide to the financial statements

These sections of the report, as well as the accompanying Notes,
preceded by the Independent Auditors' Report, constitute the fund's
financial statements.

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

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

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

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

Financial highlights provide an overview of the fund's investment
results,   per-share distributions, expense ratios, net investment
income ratios, and portfolio turnover in one summary table, reflecting
the five most recent reporting periods. In a semiannual report, the
highlight table also includes the current reporting period. For open-end
funds, a separate table is provided for each share class.


Independent auditors' report

The Board of Trustees and Shareholders
Putnam Municipal Income Fund:

We have audited the accompanying statement of assets and liabilities of
Putnam Municipal Income Fund, including the fund's portfolio, as of
March 31, 2004, 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 in 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 auditing standards generally
accepted in the United States of America. 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 March 31, 2004, 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 Municipal Income Fund as of March 31, 2004,
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 in the period then
ended, in conformity with accounting principles generally accepted in
the United States of America.

KPMG   LLP

Boston, Massachusetts
May 5, 2004


The fund's portfolio
March 31, 2004

Key to Abbreviations
- -------------------------------------------------------------------------------
AMBAC                 AMBAC Indemnity Corporation
COP                   Certificate of Participation
FGIC                  Financial Guaranty Insurance Company
FRB                   Floating Rate Bonds
FSA                   Financial Security Assurance
G.O. Bonds            General Obligation Bonds
IFB                   Inverse Floating Rate Bonds
MBIA                  MBIA Insurance Company
PSFG                  Permanent School Fund Guaranteed
VRDN                  Variable Rate Demand Notes

Municipal bonds and notes (98.4%) (a)
Principal amount                                     Rating (RAT)         Value

Alabama (1.5%)
- -------------------------------------------------------------------------------
    $4,640,000 Jackson Cnty., Hlth. Care Auth.
               Rev. Bonds,  5.7s, 5/1/19             BB+             $4,303,600
     7,500,000 Jefferson Cnty., Swr. Rev. Bonds,
               FGIC,  5 3/4s, 2/1/38                 AAA              8,681,250
                                                                 --------------
                                                                     12,984,850

Arizona (1.6%)
- -------------------------------------------------------------------------------
     3,300,000 Casa Grande, Indl. Dev. Auth.
               Rev. Bonds (Casa Grande Regl. Med.
               Ctr.), Ser. A, 7 5/8s, 12/1/29        B-/P             3,485,625
     2,800,000 Cochise Cnty., Indl. Dev. Auth.
               Rev. Bonds (Sierra Vista Cmnty.
               Hosp.), 6.45s, 12/1/17                BB+/P            2,971,500
     2,500,000 Navajo Cnty., Indl. Dev. Rev. Bonds
               (Stone Container Corp.), 7.2s,
               6/1/27                                B/P              2,556,250
     4,300,000 Phoenix, Indl. Dev. Auth. VRDN
               (Valley of the Sun YMCA Project),
               1.12s, 1/1/31                         A-1+             4,300,000
                                                                 --------------
                                                                     13,313,375

Arkansas (1.2%)
- -------------------------------------------------------------------------------
     3,900,000 AR State Hosp. Dev. Fin. Auth.
               Rev. Bonds (Washington Regl. Med.
               Ctr.), 7 3/8s, 2/1/29                 Baa3             4,397,250
     5,415,000 Northwest Regl. Arpt. Auth.
               Rev. Bonds, 7 5/8s, 2/1/27            BB/P             5,915,888
                                                                 --------------
                                                                     10,313,138

California (14.4%)
- -------------------------------------------------------------------------------
       425,000 ABAG Fin. Auth. for Nonprofit Corps.
               Rev. Bonds (San Diego Hosp. Assn.),
               Ser. C, 5 3/8s, 3/1/21                Baa1               429,781
     5,000,000 Anaheim, Pub. Fin. Auth. Lease 144A
               Rev. Bonds (Pub. Impts.), Ser. A,
               FSA, 6s, 9/1/24                       Aaa              5,925,000
               CA Rev. Bonds
     2,500,000 (Adventist Hlth. Syst.), Ser. A, 5s,
               3/1/33                                A                2,506,250
     2,500,000 (Stanford Hosp. & Clinics), Ser. A,
               5s, 11/15/23                          A3               2,543,750
               CA State G.O. Bonds
    10,000,000 FGIC, 5 1/2s, 3/1/11                  Aaa             11,512,500
     2,000,000 5.1s, 2/1/34                          Baa1             2,005,000
     2,000,000 CA State Dept. of Wtr. Resources
               Pwr. Supply Rev. Bonds, Ser. A,
               5 1/8s, 5/1/18                        A3               2,105,000
               CA State Dept. of Wtr. Resources
               Rev. Bonds, Ser. A
    18,000,000 AMBAC, 5 1/2s, 5/1/13                 Aaa             20,700,000
     7,000,000 5 1/2s, 5/1/11                        A3               7,945,000
     4,240,000 CA State Pub. Wks. Board Lease
               Rev. Bonds (Dept. of
               Corrections-State Prisons), Ser. A,
               AMBAC, 5s, 12/1/19                    Aaa              4,626,900
    13,900,000 Corona, COP (Vista Hosp. Syst.),
               zero %,  7/1/29 (In default) (NON)    D/P                278,000
     2,960,000 Gilroy, Rev. Bonds (Bonfante Gardens
               Park), 8s, 11/1/25                    D/P              1,916,600
     5,000,000 Golden State Tobacco Securitization
               Corp. Rev. Bonds, Ser. B, 5 5/8s,
               6/1/38                                Baa2             5,100,000
     1,400,000 LA Tax Alloc. Rev. Bonds (No. 5 &
               6), MBIA, 5 1/4s, 2/1/19              Aaa              1,578,500
     1,215,000 Lancaster, Fin. Auth. Tax Alloc.
               Rev. Bonds (No. 5 & 6), MBIA, 5s,
               2/1/16                                Aaa              1,359,281
     1,250,000 Orange Cnty., Cmnty. Fac. Dist.
               Special Tax Bonds (Ladera Ranch -
               No. 02-1), Ser. A, 5.55s, 8/15/33     BB+/P            1,256,250
     5,600,000 Orange Cnty., Local Trans. Auth.
               Sales Tax IFB, 11.102s, 2/14/11       AA+              7,630,000
     4,000,000 Orange Cnty., Local Trans. Auth.
               Sales Tax Rev. Bonds, AMBAC, 6.2s,
               2/14/11                               Aaa              4,745,000
    10,000,000 San Joaquin Hills, Trans. Corridor
               Agcy. Toll Rd. Rev. Bonds, 7.55s,
               1/1/10                                Aaa             12,237,500
     2,220,000 Sunnyvale, Special Tax Rev. Bonds
               (Cmnty. Fac. Dist. No. 1), 7 3/4s,
               8/1/32                                BB-/P            2,250,525
     6,560,000 U. of CA, Rev. Bonds (Multi-Purpose
               Projects), Ser. Q, FSA, 5s, 9/1/11    Aaa              7,462,000
    11,840,000 Vallejo, COP (Marine World
               Foundation), 7s, 2/1/17               BBB-/P          11,810,400
     3,650,000 Valley Hlth. Syst. Hosp. Rev. Bonds
               (Refunding & Impt.), Ser. A, 6 1/2s,
               5/15/25                               B+               2,942,813
                                                                 --------------
                                                                    120,866,050

Colorado (1.7%)
- -------------------------------------------------------------------------------
     6,000,000 Arapahoe Cnty., Cap. Impt. Trust
               Fund Hwy. Rev. Bonds, Ser. E-470,
               7s, 8/31/26                           Aaa              6,675,000
     3,310,000 Denver, City & Cnty. Arpt.
               Rev. Bonds, Ser. A, 7 1/2s, 11/15/23  A2               3,485,331
     3,000,000 Larimer Cnty., G.O. Bonds (Poudre
               Impt. - School Dist. No. 1), 7s,
               12/15/16                              Aa3              3,912,300
                                                                 --------------
                                                                     14,072,631

Connecticut (2.3%)
- -------------------------------------------------------------------------------
               CT State Dev. Auth. Rev. Bonds
     1,390,335 (East Hills Woods), Ser. A, 7 3/4s,
               11/1/17                               B-/P             1,103,578
     1,000,000 (Elm Park Baptist), 5s, 12/1/13       BBB+             1,046,250
       147,496 (East Hills Woods), Ser. B, zero %,
               3/1/21                                B-/P                 9,219
     6,000,000 CT State Dev. Auth. Poll. Control
               Rev. Bonds (Western MA), Ser. A,
               5.85s, 9/1/28                         A3               6,360,000
     3,800,000 CT State Hlth. & Edl. Fac. Auth.
               (Yale U.), VRDN, Ser. V-2, 1.1s,
               7/1/36                                VMIG1            3,800,000
     4,000,000 CT State Hlth. & Edl. Fac. Auth.
               Rev. Bonds (Edgehill), Ser. A,
               6 7/8s, 7/1/27                        AAA/P            4,175,560
     3,100,000 CT State Hlth. & Edl. Fac. Auth.
               VRDN, Ser. V-1, 1.1s, 7/1/36          VMIG1            3,100,000
                                                                 --------------
                                                                     19,594,607

District of Columbia (5.5%)
- -------------------------------------------------------------------------------
    31,750,000 DC G.O. Bonds, Ser. A, 6 3/8s,
               6/1/26                                AAA             35,718,750
               DC Rev. Bonds (American Geophysical
               Union)
     4,200,000 5 7/8s, 9/1/23                        BBB              4,242,000
     3,350,000 5 3/4s, 9/1/13                        BBB              3,383,500
     3,000,000 DC Tobacco Settlement Fin. Corp.
               Rev. Bonds, 6 1/2s, 5/15/33           Baa2             2,887,500
                                                                 --------------
                                                                     46,231,750

Florida (3.1%)
- -------------------------------------------------------------------------------
     2,500,000 Cap. Trust Agcy. Rev. Bonds
               (Seminole Tribe Convention), Ser. A,
               10s, 10/1/33 (acquired 4/23/02, cost
               $2,500,000) (RES)                     B/P              3,100,000
     1,650,000 Escambia Cnty., Hlth. Fac. Auth.
               Rev. Bonds (Baptist Hosp. & Baptist
               Manor), 5 1/8s, 10/1/19               A3               1,662,375
     1,135,000 Heritage Harbor, South Cmnty. Dev.
               Dist. Special Assmt. Rev. Bonds
               (Cap. Impt.), Ser. B, 5.4s, 11/1/08   BB-/P            1,159,119
     3,000,000 Highlands Cnty., Hlth. Fac. Auth.
               Rev. Bonds (Adventist Sunbelt),
               Ser. A, 6s, 11/15/31                  A                3,206,250
     1,050,000 Lee Cnty., Indl. Dev. Auth. Hlth.
               Care Fac. Rev. Bonds (Shell Point
               Village Project), Ser. A, 5 1/2s,
               11/15/29                              BBB-             1,025,063
     1,750,000 Leesburg, Hosp. Rev. Bonds (Regl.
               Med. Ctr.), Ser. A, 5s, 7/1/17        A                1,809,063
     2,000,000 Miami Beach, Hlth. Fac. Auth. Hosp.
               Rev. Bonds (Mount Sinai Med. Ctr.),
               Ser. A, 6.7s, 11/15/19                BB               2,017,500
     4,750,000 Orange Cnty., Hlth. Fac. Auth. IFB,
               10.166s, 10/1/14 (acquired 4/19/95,
               cost $6,129,272) (RES)                AAA/P            7,617,813
     1,300,000 Orange Cnty., Hlth. Fac. Auth.
               Rev. Bonds (Orlando Regl. Hlth.
               Care), 5 3/4s, 12/1/32                A2               1,361,750
     1,050,000 St. Johns Cnty., Hlth. Care Indl.
               Dev. Auth. Rev. Bonds (Glenmoor St.
               Johns Project), Ser. A, 8s, 1/1/30    B-/P             1,027,688
       975,000 Verandah, West Cmnty. Dev. Dist.
               Rev. Bonds (Cap. Impt.), Ser. B,
               5 1/4s, 5/1/08                        BB-/P              985,969
                                                                 --------------
                                                                     24,972,590

Georgia (1.3%)
- -------------------------------------------------------------------------------
     4,000,000 Burke Cnty., Poll. Control Dev.
               Auth. Mandatory Put Bonds (GA Power
               Co.), 4.45s, 1/1/32                   A2               4,255,000
               Rockdale Cnty., Dev. Auth. Solid
               Waste Disp. Rev. Bonds (Visay Paper,
               Inc.)
     3,000,000 7 1/2s, 1/1/26                        BB+/P            3,045,000
     3,905,000 7.4s, 1/1/16                          BB+/P            3,973,338
                                                                 --------------
                                                                     11,273,338

Illinois (2.4%)
- -------------------------------------------------------------------------------
     3,745,000 Chicago, O'Hare Intl. Arpt. Special
               Fac. Rev. Bonds (American Airlines,
               Inc.), 8.2s, 12/1/24                  Caa2             3,211,338
     4,385,000 Chicago, Waste Wtr. Rev. Bonds,
               MBIA, 5 1/2s, 1/1/19                  Aaa              5,042,750
     1,735,000 IL Dev. Fin. Auth. Rev. Bonds (Mercy
               Hsg. Corp.), 7s, 8/1/24               Baa1             1,803,255
               IL Hlth. Fac. Auth. Rev. Bonds
       605,000 (Cmnty. Rehab. Providers Fac.),
               8 1/4s, 8/1/12                        D/P                598,194
     2,610,000 (Cmnty. Rehab. Providers Fac.),
               Ser. A, 7 7/8s,  7/1/20
               (Prerefunded)                         AAA/P            2,877,525
     1,625,000 (Cmnty. Rehab. Providers Fac.),
               Ser. A, 7 7/8s, 7/1/20 (In default)
               (NON)                                 D/P                832,813
     4,790,000 (Hindsdale Hosp.), Ser. A, 6.95s,
               11/15/13                              Baa1             5,389,037
                                                                 --------------
                                                                     19,754,912

Indiana (1.6%)
- -------------------------------------------------------------------------------
    10,000,000 Indianapolis, Arpt. Auth. Special
               Fac. Rev. Bonds (Federal Express
               Corp.), 7.1s, 1/15/17                 Baa2            10,361,800
     3,000,000 Rockport, Poll. Control
               Rev. Bonds (Indiana-Michigan Pwr.),
               Ser. A, 4.9s, 6/1/25                  Baa2             3,172,500
                                                                 --------------
                                                                     13,534,300

Iowa (0.9%)
- -------------------------------------------------------------------------------
     6,430,000 IA Fin. Auth. Hlth. Care Fac.
               Rev. Bonds (Care Initiatives),
               9 1/4s, 7/1/25                        BBB-/P           7,667,775

Kentucky (0.4%)
- -------------------------------------------------------------------------------
     3,000,000 KY Econ. Dev. Fin. Auth. Hlth. Syst.
               Rev. Bonds (Norton Healthcare,
               Inc.), Ser. A, 6 5/8s, 10/1/28        BBB/P            3,183,750

Louisiana (3.2%)
- -------------------------------------------------------------------------------
     5,700,000 LA Local Govt. Env. Fac. Cmnty. Dev.
               Auth. Rev. Bonds (St. James Place),
               Ser. A, 8s, 11/1/19                   B-/P             5,001,750
               LA Pub. Fac. Auth. Hosp. Rev. Bonds
     5,000,000 (Lake Charles Memorial Hosp.
               Project), 8 5/8s, 12/1/30             CCC/P            4,131,250
     5,000,000 (Franciscan Missionaries), FSA,
               5 3/4s, 7/1/18                        Aaa              5,881,250
     2,000,000 Port of New Orleans, Indl. Dev.
               Rev. Bonds (Continental Grain Co.),
               7 1/2s, 7/1/13                        BB-              2,027,580
     3,000,000 St. Charles Parish, Poll. Control
               Rev. Bonds, Ser. A, 4.9s, 6/1/30      Baa3             3,086,250
       900,000 Tangipahoa Parish Hosp. Svcs.
               Rev. Bonds (North Oaks Med. Ctr.
               Project), Ser. A, 5s, 2/1/25          A                  904,500
     6,000,000 W. Feliciana Parish, Poll. Control
               Rev. Bonds (Entergy Gulf States),
               Ser. B, 6.6s, 9/1/28                  Ba1              6,135,000
                                                                 --------------
                                                                     27,167,580

Maine (0.2%)
- -------------------------------------------------------------------------------
     2,000,000 Rumford, Solid Waste Disp.
               Rev. Bonds (Boise Cascade Corp.),
               6 7/8s, 10/1/26                       Ba2              2,067,500

Maryland (0.2%)
- -------------------------------------------------------------------------------
     2,000,000 MD State Hlth. & Higher Edl. Fac.
               Auth. Rev. Bonds (Medstar Hlth.),
               5 3/8s, 8/15/24                       Baa2             1,990,000

Massachusetts (4.3%)
- -------------------------------------------------------------------------------
     1,825,000 Atlas Boston Tax Exempt Rev. Bonds,
               Ser. 1, 6.65s, 1/1/35 (In default)
               (NON)                                 D/P                638,750
     3,270,000 MA G.O. Bonds, Ser. C, MBIA, 5 1/4s,
               8/1/18                                Aaa              3,715,538
     1,975,000 MA Dev. Fin. Agcy. Rev. Bonds
               (Semass Syst.), Ser. A, MBIA,
               5 5/8s, 1/1/12                        Aaa              2,263,844
     3,425,000 MA State Dev. Fin. Agcy.
               Rev. Bonds (Lasell College), 6 3/4s,
               7/1/31                                BB+/P            3,467,813
               MA State Hlth. & Edl. Fac. Auth.
               Rev. Bonds
     2,500,000 (Civic Investments), Ser. A, 9s,
               12/15/15                              BB/P             2,893,750
     2,000,000 (Jordan Hosp.), Ser. E, 6 3/4s,
               10/1/33                               BBB-             2,040,000
     3,900,000 (UMass Memorial), Ser. C, 6 5/8s,
               7/1/32                                Baa2             4,099,875
     2,200,000 (Berkshire Hlth. Syst.), Ser. E,
               6 1/4s, 10/1/31                       BBB+             2,296,250
     2,700,000 (Hlth. Care Syst. Covenant Hlth.),
               Ser. E, 6s, 7/1/31                    A-               2,835,000
     2,690,000 MA State Hlth. & Edl. Fac. Auth.
               VRDN, Ser. D, MBIA, 1.08s, 1/1/35     VMIG1            2,690,000
     6,565,000 MA State Residual Certificate G.O.
               Bonds, IFB, Ser. 314, 10.19s, 8/1/11
               (acquired 4/19/00, cost $7,166,354)
               (RES)                                 Aaa              8,780,688
                                                                 --------------
                                                                     35,721,508

Michigan (1.7%)
- -------------------------------------------------------------------------------
       297,000 Ann Arbor, Econ. Dev. Corp. Ltd.
               Oblig. Rev. Bonds (Glacier Hills,
               Inc.), State & Local Govt.
               Coll., 8 3/8s, 1/15/19                AAA                402,435
     1,000,000 Detroit, Swr. Disp. VRDN, Ser. B,
               FSA, 1.1s, 7/1/33                     VMIG1            1,000,000
     5,000,000 Dickinson Cnty., Econ. Dev. Corp.
               Rev. Bonds, 5 3/4s, 6/1/16            Baa2             5,475,000
     1,000,000 Flint, Hosp. Bldg. Auth. Rev. Bonds
               (Hurley Med. Ctr.), 6s, 7/1/20        Baa3               991,250
       500,000 Macomb Cnty., Hosp. Fin. Auth.
               Rev. Bonds (Mt. Clemens Gen. Hosp.),
               Ser. B, 5 7/8s, 11/15/34              BBB-               471,875
     2,500,000 MI State Hosp. Fin. Auth. Rev. Bonds
               (Oakwood Hosp.), Ser. A, 5 3/4s,
               4/1/32                                A2               2,600,000
               MI State Strategic Fund Solid Waste
               Disp. Rev. Bonds
     1,900,000 (Genesee Pwr. Station), 7 1/2s,
               1/1/21                                B/P              1,653,000
     2,000,000 (SD Warren Co.), Ser. C, 7 3/8s,
               1/15/22                               BB/P             1,987,500
                                                                 --------------
                                                                     14,581,060

Minnesota (1.1%)
- -------------------------------------------------------------------------------
     1,000,000 Cohasset, VRDN (MN Pwr. & Light Co.
               Project), 1.12s, 6/1/20               A-1+             1,000,000
     3,700,000 Minneapolis & St. Paul, Metro. Arpt.
               Comm. Special Fac. Rev. Bonds
               (Northwest Airlines, Inc.), Ser. A,
               7s, 4/1/25                            CCC/P            3,464,125
     4,100,000 St. Paul, Hsg. & Hosp. Redev. Auth.
               Rev. Bonds (Healtheast), Ser. A,
               6 5/8s, 11/1/17                       Ba2              4,110,250
                                                                 --------------
                                                                      8,574,375

Mississippi (1.2%)
- -------------------------------------------------------------------------------
     4,000,000 Mississippi Bus. Fin. Corp.
               Rev. Bonds (Syst. Energy Resources,
               Inc.), 5 7/8s, 4/1/22                 BBB-             4,050,000
     5,000,000 MS State G.O. Bonds, Ser. A, FSA,
               5 1/4s, 11/1/20                       Aaa              5,700,000
                                                                 --------------
                                                                      9,750,000

Missouri (1.5%)
- -------------------------------------------------------------------------------
     3,000,000 Cape Girardeau Cnty., Indl. Dev.
               Auth. Hlth. Care Fac. Rev. Bonds
               (St. Francis Med. Ctr.),
               Ser. A, 5 1/2s, 6/1/32                A                3,090,000
               MO State Hlth. & Edl. Fac. Auth.
               Rev. Bonds  (BJC Hlth. Syst.)
     6,775,000 Ser. A, 6 1/2s, 5/15/20               AA               6,947,695
     2,500,000 5 1/4s, 5/15/32                       A2               2,593,750
                                                                 --------------
                                                                     12,631,445

Montana (0.4%)
- -------------------------------------------------------------------------------
     3,325,000 Forsyth, Poll. Control Mandatory Put
               Bonds (Avista Corp.), AMBAC, 5s,
               10/1/32                               Aaa              3,636,719

Nevada (1.1%)
- -------------------------------------------------------------------------------
     2,000,000 Clark Cnty., Rev. Bonds, Ser. B,
               FGIC, 5 1/4s, 7/1/20                  Aaa              2,190,000
     3,745,000 Clark Cnty., Arpt. Rev. Bonds,
               Ser. B, FGIC, 5 1/4s, 7/1/19          Aaa              4,110,138
     1,000,000 Clark Cnty., Impt. Dist. Special
               Assmt. (Dist. No. 142-LOC), 6 3/8s,
               8/1/23                                BB-/P            1,015,000
     2,255,000 Henderson, Local Impt. Dist. Special
               Assmt. Bonds (No. T-14), 4s, 3/1/08   BB-/P            2,263,456
                                                                 --------------
                                                                      9,578,594

New Hampshire (2.6%)
- -------------------------------------------------------------------------------
               NH Higher Ed. & Hlth. Fac. Auth.
               Rev. Bonds
     4,000,000 (1st. Mtge.-Rivermead Peterborough),
               8 1/2s, 7/1/24                        AAA              4,150,600
       880,000 (Havenwood-Heritage Heights), 7.1s,
               1/1/06                                BB/P               904,200
     3,000,000 (Rivermead at Peterborough), 5 3/4s,
               7/1/28                                BB/P             2,752,500
               NH State Bus. Fin. Auth. Rev. Bonds
       500,000 (Alice Peck Day Hlth. Syst.),
               Ser. A, 7s, 10/1/29                   BB+/P              504,375
     4,000,000 (Franklin Regl. Hosp. Assn.),
               Ser. A, 6.05s, 9/1/29                 BB-/P            3,545,000
     7,000,000 NH State Bus. Fin. Auth. Poll.
               Control Rev. Bonds
               (Pub. Svc. Co.), Ser. D, 6s, 5/1/21   A3               7,341,250
     2,600,000 NH State Bus. Fin. Auth. Poll.
               Control Mandatory  Bonds 3 1/2s,
               7/1/27                                A3               2,600,000
                                                                 --------------
                                                                     21,797,925

New Jersey (3.2%)
- -------------------------------------------------------------------------------
               NJ Econ. Dev. Auth. Rev. Bonds
     5,000,000 (Newark Arpt. Marriot Hotel), 7s,
               10/1/14                               Ba3              5,087,500
     2,405,000 (1st Mtge.-Cranes Hill), Ser. A, 7s,
               2/1/10                                BB-/P            2,510,219
     3,840,000 NJ Econ. Dev. Auth. Assisted Living
               Rev. Bonds (Meridian Assisted
               Living), 6 3/4s, 8/1/30               B/P              3,441,600
       900,000 NJ Econ. Dev. Auth. Special Fac.
               Rev. Bonds (Continental Airlines,
               Inc.), 6 1/4s, 9/15/29                B                  721,125
               NJ Hlth. Care Fac. Fin. Auth.
               Rev. Bonds
     6,000,000 (Gen. Hosp. Ctr.-Passaic Inc.), FSA,
               6 3/4s, 7/1/19                        Aaa              7,717,500
     2,000,000 (Somerset Med. Ctr.), 5 1/2s, 7/1/33  Baa2             2,027,500
     1,500,000 NJ State Ed. Fac. Auth. Rev. Bonds
               (Stevens Inst. of Tech.), Ser. C,
               5 1/8s, 7/1/22                        A-               1,522,500
     1,970,000 NJ State Tpk. Auth. Rev. Bonds,
               Ser. C, MBIA, 6 1/2s, 1/1/16          Aaa              2,450,188
     1,535,000 Tobacco Settlement Fin. Corp.
               Rev. Bonds,  6 1/4s, 6/1/43           Baa2             1,429,469
                                                                 --------------
                                                                     26,907,601

New Mexico (0.2%)
- -------------------------------------------------------------------------------
     1,740,000 Farmington, Poll. Control Mandatory
               Put Bonds (Pub. Svc. San Juan),
               Class B, 2.1s, 4/1/33                 Baa2             1,735,650

New York (10.7%)
- -------------------------------------------------------------------------------
     2,000,000 Albany, Indl. Dev. Agcy.
               Rev. Bonds (Charitable Leadership),
               Ser. A, 5 3/4s, 7/1/26                Baa3             2,075,000
               Long Island, Pwr. Auth. NY Elec.
               Syst. IFB
     3,500,000 9.318s, 12/1/24 (acquired
               5/19/98, cost $3,804,500) (RES)       BBB+/P           4,025,000
    10,000,000 Ser. 66, MBIA, 9.17s, 4/1/10
               (acquired 11/3/98, cost $11,298,800)
               (RES)                                 AAA             12,324,987
     9,580,000 Metro. Trans. Auth. Rev. Bonds,
               FGIC, 5 1/2s, 7/1/15                  Aaa             11,184,650
     7,500,000 NY City, G.O. Bonds, Ser. C, 5 1/2s,
               8/1/12                                A2               8,456,250
     2,800,000 NY City, State Dorm. Auth. Lease
               Rev. Bonds  (Court Fac.), 6s,
               5/15/39                               A                3,094,000
               NY State Dorm. Auth. Rev. Bonds
    10,785,000 (Personal Income Tax), FGIC, 5 1/2s,
               3/15/12                               Aaa             12,483,638
     4,350,000 (NY U.), Ser. B, MBIA, 5s, 7/1/11     Aaa              4,904,625
     5,000,000 NY State Energy Research & Dev.
               Auth. Poll. Control Rev. Bonds
               (Lilco), Ser. B, 5.15s, 3/1/16        A1               5,127,150
     5,000,000 NY State Env. Fac. Corp. Poll.
               Control IFB (PA 198), MBIA, 10.916s,
               6/15/10 (acquired 10/22/97, cost
               $6,012,500) (RES)                     AAA              6,825,000
    11,125,000 NY State Med. Care Fac. Fin. Agcy.
               Rev. Bonds  (NY Hosp.), Ser. A,
               AMBAC, 6 1/2s, 8/15/29                Aaa             11,871,821
     1,500,000 Oneida Cnty., Indl. Dev. Agcy.
               Rev. Bonds (St. Elizabeth Med.),
               Ser. A, 5 7/8s, 12/1/29               BB-/P            1,348,125
     5,500,000 Onondaga Cnty., Indl. Dev. Agcy.
               Rev. Bonds (Solvay Paperboard, LLC),
               7s, 11/1/30 (acquired 12/9/98, cost
               $5,500,000) (RES)                     BB-/P            5,857,500
                                                                 --------------
                                                                     89,577,746

North Carolina (2.8%)
- -------------------------------------------------------------------------------
               NC Eastern Muni. Pwr. Agcy. Syst.
               IFB
     3,000,000 FGIC, 10.661s, 1/1/25 (acquired
               3/3/93, cost $3,112,315) (RES)        Aaa              4,248,750
     5,000,000 MBIA, 10.508s, 1/1/22 (acquired
               5/4/00, cost $5,066,900) (RES)        AAA              7,150,000
     5,250,000 NC Eastern Muni. Pwr. Agcy. Syst.
               Rev. Bonds, AMBAC, 6s, 1/1/18         Aaa              6,345,938
     5,000,000 NC State Muni. Pwr. Agcy. Rev. Bonds
               (No. 1, Catawba Elec.), Ser. B,
               6 1/2s, 1/1/20                        Baa1             5,625,000
                                                                 --------------
                                                                     23,369,688

Ohio (3.3%)
- -------------------------------------------------------------------------------
     1,500,000 Cleveland-Cuyahoga Cnty., Port.
               Auth. Rev. Bonds (Rock & Roll Hall
               of Fame), FSA, 3.6s, 12/1/14          Aaa              1,504,890
     4,500,000 Cuyahoga Cnty., Rev. Bonds, Ser. A,
               6s, 1/1/15                            A1               5,135,625
     2,010,000 Marion Cnty., Hlth. Care Fac.
               Rev. Bonds (United Church Homes),
               6 3/8s, 11/15/10                      BBB-             2,060,250
     3,910,000 OH State Bldg. Auth. Rev. Bonds
               (Administration Bldg.), Ser. A, 5s,
               10/1/18                               Aa2              4,222,800
     5,000,000 OH State Higher Edl. Fac. FRB
               (Kenyon College Project), 4.7s,
               7/1/37                                A2               5,293,750
               OH State Higher Edl. Fac. Rev. Bonds
               (Case Western Reserve U.)
     3,000,000 5 1/2s, 10/1/22                       Aa2              3,303,750
     2,000,000 5 1/2s, 10/1/21                       Aa2              2,215,000
       750,000 OH State Wtr. Dev. Auth. Poll.
               Control Fac. Mandatory Put Bonds
               (Cleveland Elec.), Class A, 1.03s,
               10/1/30                               Baa2               766,875
     3,000,000 OH State Wtr. Dev. Auth. Solid Waste
               Disp. Rev. Bonds (North Star Broken
               Hill Steel), 6.45s, 9/1/20            A+               3,146,250
                                                                 --------------
                                                                     27,649,190

Oregon (0.6%)
- -------------------------------------------------------------------------------
     5,200,000 Multnomah Cnty., Hosp. Fac. Auth.
               Rev. Bonds (Terwilliger Plaza
               Project), 6 1/2s, 12/1/29             BB-/P            5,226,000

Pennsylvania (6.5%)
- -------------------------------------------------------------------------------
     5,000,000 Allegheny Cnty., Indl. Dev. Auth.
               Rev. Bonds  (Env. Imports), 4 3/4s,
               12/1/32                               Baa1             5,481,250
               Allentown, Hosp. Auth. Rev. Bonds
               (Sacred Heart Hosp.), Ser. A
       500,000 6 3/4s, 11/15/14                      Baa3               502,500
     1,000,000 6 1/2s, 11/15/08                      Baa3             1,015,000
     2,850,000 Beaver Cnty., Indl. Dev. Auth. Poll.
               Control Mandatory Put Bonds
               (Cleveland Elec.), 3 3/4s, 10/1/30    Baa2             2,896,313
     1,695,000 Carbon Cnty., Indl. Dev. Auth.
               Rev. Bonds (Panther Creek Partners),
               6.65s, 5/1/10                         BBB-             1,858,144
     1,725,000 Chester Cnty., Hlth. & Ed. Fac.
               Auth. Rev. Bonds (Jenners Pond,
               Inc.), 7 1/4s, 7/1/24                 BB-/P            1,768,125
     2,500,000 Dauphin Cnty., Gen. Auth. Rev. Bonds
               (Office & Pkg.), Ser. A, 6s,
               1/15/25                               D/P              1,162,500
     3,155,000 Dauphin Cnty., Hosp. Rev. Bonds
               (Northwestern  Med. Ctr.), 8 5/8s,
               10/15/13                              AAA              3,525,713
       650,000 Lebanon Cnty., Hlth. Fac. Auth.
               Rev. Bonds (Good Samaritan Hosp.
               Project), 6s, 11/15/35                Baa1               668,688
               Lehigh Cnty., Gen. Purpose Auth.
               Rev. Bonds
     3,000,000 (St. Luke's Hosp. - Bethlehem),
               5 3/8s, 8/15/33                       Baa2             3,037,500
     1,000,000 (Lehigh Valley Hosp. Hlth. Network),
               Ser. A, 5 1/4s, 7/1/32                A2               1,016,250
     3,000,000 Lehigh Cnty., Indl. Dev. Auth. Poll.
               Control Rev. Bonds (PA Pwr. & Lt.
               Co.), Ser. B, MBIA, 6.4s, 9/1/29      Aaa              3,123,480
       750,000 PA Convention Ctr. Auth. Rev. Bonds,
               Ser. A, 6 3/4s, 9/1/19                Baa2               776,348
     2,000,000 PA Econ. Dev. Fin. Auth. Resource
               Recvy. Rev. Bonds (Colver Project),
               Ser. D, 7.15s, 12/1/18                BBB-             2,077,460
               PA State Econ. Dev. Fin. Auth.
               Resource Recvy. Rev. Bonds
     4,000,000 (Colver), Ser. E, 8.05s, 12/1/15      BBB-/P           4,181,960
     3,590,000 (Northampton), Ser. B, 6 3/4s,
               1/1/07                                BBB-             3,787,450
     3,000,000 (Northampton Generating), Ser. A,
               6 1/2s, 1/1/13                        BBB-             3,063,750
       945,000 PA State Higher Edl. Fac. Auth.
               Rev. Bonds (Philadelphia College of
               Osteopathic Medicine), 5s, 12/1/06    A                1,017,056
     6,000,000 Philadelphia, Gas Wks. FRB, FSA,
               5 1/4s, 8/1/21                        Aaa              6,000,000
     6,000,000 Philadelphia, Gas Wks. IFB, FSA,
               9.623s, 8/1/21 (acquired 1/24/94,
               cost $5,621,520) (RES)                Aaa              6,172,500
     1,245,000 Washington Cnty., Indl. Dev. Auth.
               Hlth. Care Fac. Rev. Bonds (1st Mtg.
               AHF/Central), 6 1/2s, 1/1/29          CCC/P            1,184,306
                                                                 --------------
                                                                     54,316,293

Puerto Rico (1.7%)
- -------------------------------------------------------------------------------
     8,500,000 Cmnwlth. of PR, G.O. Bonds, IFB,
               MBIA, 9.939s,  1/1/18 (acquired
               6/12/95, cost $8,912,590) (RES)       AAA/P            9,753,750
     4,000,000 PR Elec. Pwr. Auth. Rev. Bonds,
               Ser. T, 6 3/8s, 7/1/24                AAA              4,131,880
                                                                 --------------
                                                                     13,885,630

Rhode Island (0.1%)
- -------------------------------------------------------------------------------
       600,000 Tobacco Settlement Fin. Corp.
               Rev. Bonds, Ser. A, 6 1/4s, 6/1/42    Baa2               558,750

South Carolina (3.9%)
- -------------------------------------------------------------------------------
     8,500,000 Charleston Cnty., Indl. Dev.
               Rev. Bonds (Hoover Group, Inc.),
               8 1/2s, 11/1/02 (In default) (DEF)
               (NON)                                 D/P              2,975,000
     1,450,000 Florence Cnty., Indl. Dev. Auth.
               Rev. Bonds (Stone Container Corp.),
               7 3/8s, 2/1/07                        B/P              1,469,459
     1,350,000 Lexington Cnty. Rev. Bonds, 5 1/2s,
               11/1/32                               A2               1,402,313
               Piedmont, Muni. Elec. Pwr. Agcy.
               Rev. Bonds, Ser. A, FGIC
     5,490,000 6 1/2s, 1/1/16                        Aaa              6,848,775
       630,000 6 1/2s, 1/1/16                        Aaa                786,713
     3,000,000 Richland Cnty. Rev. Bonds (Intl.
               Paper Co. Project), Ser. A, 4 1/4s,
               10/1/07                               Baa2             3,172,500
     1,750,000 SC Hosp. Auth. Rev. Bonds (Med. U.),
               Ser. A, 6 1/2s, 8/15/32               BBB+             1,868,125
               SC Jobs Econ. Dev. Auth. Rev. Bonds
     5,000,000 (St. Francis Hosp.-Franciscan
               Sisters), 7s, 7/1/15                  AAA              5,071,300
     3,000,000 (Palmetto Hlth.), Ser. C, 6 3/8s,
               8/1/34                                Baa2             3,198,750
     6,000,000 SC Tobacco Settlement Rev. Mgt.
               Rev. Bonds, Ser. B, 6 3/8s, 5/15/28   Baa2             5,767,500
                                                                 --------------
                                                                     32,560,435

South Dakota (0.2%)
- -------------------------------------------------------------------------------
     1,900,000 SD Edl. Enhancement Funding Corp.
               Rev. Bonds, Ser. B, 6 1/2s, 6/1/32    Baa2             1,852,500

Tennessee (0.8%)
- -------------------------------------------------------------------------------
     3,000,000 Elizabethton, Hlth. & Edl. Fac.
               Board Rev. Bonds (Hosp. Ref. &
               Impt.), Ser. B, 8s, 7/1/33            Baa2             3,573,750
     3,000,000 Johnson City, Hlth. & Edl. Fac.
               Hosp. Board Rev. Bonds (Mountain
               States Hlth.), Ser. A, 7 1/2s,
               7/1/25                                BBB+             3,476,250
                                                                 --------------
                                                                      7,050,000

Texas (4.9%)
- -------------------------------------------------------------------------------
     2,500,000 Abilene, Hlth. Fac. Dev. Corp.
               Rev. Bonds (Sears Methodist
               Retirement), Ser. A, 7s, 11/15/33     BB+/P            2,571,875
     5,000,000 Bexar Cnty., Hsg. Fin. Auth. Corp.
               Rev. Bonds (American
               Opty-Waterford), Ser. A1, 7s,
               12/1/36                               A3               5,087,500
     2,000,000 Dallas-Fort Worth, Intl. Arpt. Fac.
               Impt. Corp. Rev. Bonds (American
               Airlines, Inc.), 7 1/4s, 11/1/30      Caa2             1,500,000
     3,600,000 Georgetown, Hlth. Fac. Dev. Corp.
               Rev. Bonds, 6 1/4s, 8/15/29           BB+              3,514,500
     1,500,000 Harris Cnty., Hlth. Fac. Dev. Corp.
               Hosp. Rev. Bonds (Memorial Hermann
               Hlth. Care Syst.), Class A, 5 1/4s,
               12/1/17                               A2               1,620,000
       600,000 Houston Hlth. Fac. Dev. Corp.
               Retirement Rev. Bonds (Buckingham
               Sr. Living Cmnty), Class A, 7 1/8s,
               2/15/34                               B/P                606,000
     5,000,000 Houston, Arpt. Syst. Rev. Bonds
               (Continental Airlines, Inc.),
               Ser. E, 6 3/4s, 7/1/29                B-               4,225,000
       500,000 Houston, Hlth. Fac. Dev. Corp.
               Retirement Rev. Bonds (Buckingham
               Sr. Living Cmnty.), Class A,
               7s, 2/15/23                           B/P                505,000
     1,500,000 Matagorda Cnty., Navigation Dist. TX
               Poll. Control Mandatory Put Bonds
               (American Electric Power), 2.15s,
               5/1/30                                Baa2             1,501,260
     3,500,000 Sam Rayburn Muni. Pwr. Agcy.
               Rev. Bonds, 6s, 10/1/21               Baa2             3,688,125
     4,000,000 Tarrant Cnty., Hlth. Fac. Dev. (TX
               Hlth. Resources Sys.), Ser. A, MBIA,
               5 3/4s, 2/15/12                       Aaa              4,645,000
               Tomball, Hosp. Auth. Rev. Bonds
               (Tomball Regl. Hosp.)
     2,500,000 6 1/8s, 7/1/23                        Baa2             2,555,375
     1,650,000 6s, 7/1/25                            Baa2             1,695,375
     3,500,000 TX State IFB, Ser. B, 11s, 9/30/11    Aa1              4,891,250
     2,315,000 Ysleta, Indpt. School Dist. G.O.
               Bonds, PSFG,  5s, 8/15/07             AAA              2,549,394
                                                                 --------------
                                                                     41,155,654

Utah (0.3%)
- -------------------------------------------------------------------------------
     1,950,000 UT Cnty., Env. Impt. Rev. Bonds
               (Marathon Oil Project), 5.05s,
               11/1/17                               Baa1             2,176,688

Virginia (0.9%)
- -------------------------------------------------------------------------------
     3,000,000 Henrico Cnty. Econ. Dev. Auth.
               Rev. Bonds (United Methodist),
               Ser. A, 6 1/2s, 6/1/22                BB+/P            3,071,250
     5,000,000 Suffolk, Redev. & Hsg. Auth.
               Rev. Bonds (Beach-Oxford Apts.),
               6.1s, 4/1/26                          BB-/P            4,625,000
                                                                 --------------
                                                                      7,696,250

Washington (0.8%)
- -------------------------------------------------------------------------------
     5,000,000 WA State Pub. Pwr. Supply Syst.
               Rev. Bonds (Nuclear No. 3), Ser. B,
               MBIA, 7 1/8s, 7/1/16                  Aaa              6,493,750

West Virginia (0.5%)
- -------------------------------------------------------------------------------
     3,600,000 WV State G.O. Bonds, Ser. D, FGIC,
               6 1/2s, 11/1/26                       Aaa              4,387,500

Wisconsin (1.3%)
- -------------------------------------------------------------------------------
               Badger Tobacco Settlement
               Asset Securitization Corp.
               Rev. Bonds
     1,000,000 7s, 6/1/28                            Baa2             1,015,000
     7,750,000 6 3/8s, 6/1/32                        Baa2             7,343,125
     2,500,000 WI State Hlth. & Edl. Fac. Auth.
               Rev. Bonds (Wheaton Franciscan
               Svcs.), 5 1/8s, 8/15/33               A2               2,515,625
                                                                 --------------
                                                                     10,873,750

Wyoming (0.3%)
- -------------------------------------------------------------------------------
     2,000,000 Sweetwater Cnty., Poll. Control
               Rev. Bonds (Idaho Power Co.
               Project), Ser. A, 6.05s, 7/15/26      A3               2,130,000
                                                                 --------------
               Total Municipal bonds and notes
               (cost $790,838,880)                                 $824,862,847

Preferred stocks (0.8%) (a) (cost $6,000,000)
Number of shares                                                          Value
- -------------------------------------------------------------------------------
     6,000,000 MuniMae Tax Exempt Bond Subsidiary,
               LLC 144A 6.875% cum. pfd.                             $6,532,500
- -------------------------------------------------------------------------------
               Total Investments
               (cost $796,838,880)                                 $831,395,347
- -------------------------------------------------------------------------------

  (a) Percentages indicated are based on net assets of $838,576,627.

(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
      be the most recent ratings available at March 31, 2004 for the
      securities listed. Ratings are generally ascribed to securities at the
      time of issuance. While the agencies may from time to time revise such
      ratings, they undertake no obligation to do so, and the ratings do not
      necessarily represent what the agencies would ascribe to these
      securities at March 31, 2004. Securities rated by Putnam are indicated
      by "/P" and are not publicly rated. Ratings are not covered by the
      Independent auditors' report.

(DEF) Security is in default of principal and interest.

(NON) Non-income-producing security.

(RES) Restricted, excluding 144A securities, as to public resale. The
      total market value of restricted securities held at March 31, 2004 was
      $75,855,988 or 9.0% of net assets.

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

      The rates shown on VRDNs, mandatory put bonds and FRBs are the current
      interest rates shown at March 31, 2004.

      The rates shown on IFB's, which are securities paying interest rates
      that vary inversely to changes in the market interest rates, are the
      current interest rates at March 31, 2004.

      The fund had the following industry group concentrations greater than
      10% at March 31, 2004
      (as a percentage of net assets):

          Health care             23.0%
          Utilities               19.8

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


Statement of assets and liabilities
March 31, 2004

Assets
- -------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$796,838,880) (Note 1)                                           $831,395,347
- -------------------------------------------------------------------------------
Cash                                                                  286,886
- -------------------------------------------------------------------------------
Interest and other receivables                                     13,744,158
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold                                560,196
- -------------------------------------------------------------------------------
Receivable for securities sold                                        140,000
- -------------------------------------------------------------------------------
Total assets                                                      846,126,587

Liabilities
- -------------------------------------------------------------------------------
Distributions payable to shareholders                                 350,073
- -------------------------------------------------------------------------------
Payable for securities purchased                                    3,374,010
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased                          1,826,728
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2)                        1,004,587
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2)            251,974
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2)                110,236
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2)                            2,627
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2)                                547,479
- -------------------------------------------------------------------------------
Other accrued expenses                                                 82,246
- -------------------------------------------------------------------------------
Total liabilities                                                   7,549,960
- -------------------------------------------------------------------------------
Net assets                                                       $838,576,627

Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4)                                  $861,514,347
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1)                          899,539
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1)             (58,393,726)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments                         34,556,467
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding                                               $838,576,627

Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($671,931,116 divided by 76,877,364 shares)                             $8.74
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.50 of $8.74)*                  $9.15
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($144,351,525 divided by 16,524,418 shares)**                           $8.74
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($13,906,895 divided by 1,590,176 shares)**                             $8.75
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($8,387,091 divided by 959,995 shares)                                  $8.74
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.74)***                $9.03
- -------------------------------------------------------------------------------

  * On single retail sales of less than $25,000. On sales of $25,000 or
    more and on group sales, the offering price is reduced.

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

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

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


Statement of operations
Year ended March 31, 2004

Interest income:                                                  $55,202,163
- -------------------------------------------------------------------------------

Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2)                                    4,877,767
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2)                      1,132,187
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2)                             36,216
- -------------------------------------------------------------------------------
Administrative services (Note 2)                                       14,955
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2)                               1,921,484
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2)                               1,536,695
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2)                                 170,306
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2)                                  55,969
- -------------------------------------------------------------------------------
Other                                                                 235,918
- -------------------------------------------------------------------------------
Non-recurring costs (Note 5)                                           10,585
- -------------------------------------------------------------------------------
Costs assumed by Manager (Note 5)                                     (10,585)
- -------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 2)                        (63,210)
- -------------------------------------------------------------------------------
Total expenses                                                      9,918,287
- -------------------------------------------------------------------------------
Expense reduction (Note 2)                                            (48,996)
- -------------------------------------------------------------------------------
Net expenses                                                        9,869,291
- -------------------------------------------------------------------------------
Net investment income                                              45,332,872
- -------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3)                  (31,506,357)
- -------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1)                     2,342,134
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures
contracts during the year                                          43,774,741
- -------------------------------------------------------------------------------
Net gain on investments                                            14,610,518
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations              $59,943,390
- -------------------------------------------------------------------------------

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


Statement of changes in net assets

                                                         Year ended March 31
Decrease in net assets                                  2004             2003
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income                            $45,332,872      $55,840,372
- -------------------------------------------------------------------------------
Net realized gain (loss) on investments          (29,164,223)       3,773,774
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments                                    43,774,741      (5,251,798)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations                                        59,943,390       54,362,348
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From ordinary income
Class A                                             (529,766)              --
- -------------------------------------------------------------------------------
Class B                                             (123,318)              --
- -------------------------------------------------------------------------------
Class C                                              (11,434)              --
- -------------------------------------------------------------------------------
Class M                                               (6,917)              --
- -------------------------------------------------------------------------------
From tax-exempt income
Class A                                          (36,111,300)      (44,186,325)
- -------------------------------------------------------------------------------
Class B                                           (7,416,424)      (10,967,094)
- -------------------------------------------------------------------------------
Class C                                             (668,906)         (798,272)
- -------------------------------------------------------------------------------
Class M                                             (500,906)         (658,510)
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4)                                        (243,010,343)      (57,417,063)
- -------------------------------------------------------------------------------
Total decrease in net assets                    (228,435,924)      (59,664,916)

Net assets
- -------------------------------------------------------------------------------
Beginning of year                              1,067,012,551    1,126,677,467
- -------------------------------------------------------------------------------
End of year (including undistributed net
investment income of $899,539 and $417,869,
respectively)                                   $838,576,627   $1,067,012,551
- -------------------------------------------------------------------------------

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




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

CLASS A
- ---------------------------------------------------------------------------------------------------------------------------------


Per-share                                                                           Year ended March 31
operating performance                                       2004            2003            2002            2001            2000
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                           
Net asset value,
beginning of period                                        $8.60           $8.62           $8.85           $8.61           $9.25
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income                                        .41             .45             .49             .48             .49
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments                                   .14            (.01)           (.24)            .24            (.64)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities                                        .55             .44             .25             .72            (.15)
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income                                           (.41)           (.46)           (.48)           (.48)           (.49)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions                                         (.41)           (.46)           (.48)           (.48)           (.49)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period                                              $8.74           $8.60           $8.62           $8.85           $8.61
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a)                                      6.59            5.15            2.83            8.67           (1.53)
- ---------------------------------------------------------------------------------------------------------------------------------

Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands)                                          $671,931        $823,708        $841,445        $752,169        $715,475
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)                                    .89 (c)         .94             .95             .95             .94
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)                                   4.77 (c)        5.18            5.51            5.57            5.62
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%)                                     19.45           32.03           16.46           12.76           14.32
- ---------------------------------------------------------------------------------------------------------------------------------


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

(b) The ratio of expenses to average net assets includes amounts paid
    through expense offset arrangements (Note 2).

(c) Reflects an expense limitation in effect during the period. As a
    result of such limitation, expenses of the fund for the period ended
    March 31, 2004 reflect a reduction of 0.01% based on average net assets
    for class A shares (Note 2).

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




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

CLASS B
- ---------------------------------------------------------------------------------------------------------------------------------


Per-share                                                                           Year ended March 31
operating performance                                       2004            2003            2002            2001            2000
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                           
Net asset value,
beginning of period                                        $8.60           $8.62           $8.84           $8.61           $9.24
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income                                        .36             .40             .43             .43             .44
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments                                   .14            (.02)           (.23)            .23            (.63)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities                                        .50             .38             .20             .66            (.19)
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income                                           (.36)           (.40)           (.42)           (.43)           (.44)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions                                         (.36)           (.40)           (.42)           (.43)           (.44)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period                                              $8.74           $8.60           $8.62           $8.84           $8.61
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a)                                      5.95            4.53            2.33            7.90           (2.02)
- ---------------------------------------------------------------------------------------------------------------------------------

Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands)                                          $144,352        $211,399        $255,540        $372,129        $420,310
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)                                   1.49 (c)        1.54            1.55            1.55            1.54
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)                                   4.17 (c)        4.59            4.90            4.98            5.02
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%)                                     19.45           32.03           16.46           12.76           14.32
- ---------------------------------------------------------------------------------------------------------------------------------


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

(b) The ratio of expenses to average net assets includes amounts paid
    through expense offset arrangements (Note 2).

(c) Reflects an expense limitation in effect during the period. As a
    result of such limitation, expenses of the fund for the period ended
    March 31, 2004 reflect a reduction of 0.01% based on average net assets
    for class B shares (Note 2).

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




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

CLASS C
- ---------------------------------------------------------------------------------------------------------------------------------


Per-share                                                                           Year ended March 31
operating performance                                       2004            2003            2002            2001            2000
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                           
Net asset value,
beginning of period                                        $8.61           $8.62           $8.85           $8.61           $9.25
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income                                        .35             .39             .42             .42             .43
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments                                   .14            (.01)           (.24)            .24            (.64)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities                                        .49             .38             .18             .66            (.21)
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income                                           (.35)           (.39)           (.41)           (.42)           (.43)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions                                         (.35)           (.39)           (.41)           (.42)           (.43)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period                                              $8.75           $8.61           $8.62           $8.85           $8.61
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a)                                      5.80            4.49            2.06            7.86           (2.26)
- ---------------------------------------------------------------------------------------------------------------------------------

Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands)                                           $13,907         $18,881         $16,865         $12,330          $8,467
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)                                   1.64 (c)        1.69            1.70            1.70            1.69
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)                                   4.02 (c)        4.42            4.77            4.81            4.89
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%)                                     19.45           32.03           16.46           12.76           14.32
- ---------------------------------------------------------------------------------------------------------------------------------


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

(b) The ratio of expenses to average net assets includes amounts paid
    through expense offset arrangements (Note 2).

(c) Reflects an expense limitation in effect during the period. As a
    result of such limitation, expenses of the fund for the period ended
    March 31, 2004 reflect a reduction of 0.01% based on average net assets
    for class C shares (Note 2).

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




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

CLASS M
- ---------------------------------------------------------------------------------------------------------------------------------


Per-share                                                                           Year ended March 31
operating performance                                       2004            2003            2002            2001            2000
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                           
Net asset value,
beginning of period                                        $8.60           $8.62           $8.85           $8.61           $9.25
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income                                        .39             .43             .47             .46             .47
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments                                   .14            (.02)           (.24)            .24            (.64)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities                                        .53             .41             .23             .70            (.17)
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income                                           (.39)           (.43)           (.46)           (.46)           (.47)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions                                         (.39)           (.43)           (.46)           (.46)           (.47)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period                                              $8.74           $8.60           $8.62           $8.85           $8.61
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a)                                      6.32            4.89            2.57            8.40           (1.77)
- ---------------------------------------------------------------------------------------------------------------------------------

Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands)                                            $8,387         $13,025         $12,828         $14,775         $13,286
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)                                   1.14 (c)        1.19            1.20            1.20            1.19
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)                                   4.52 (c)        4.93            5.26            5.32            5.37
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%)                                     19.45           32.03           16.46           12.76           14.32
- ---------------------------------------------------------------------------------------------------------------------------------


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

(b) The ratio of expenses to average net assets includes amounts paid
    through expense offset arrangements (Note 2).

(c) Reflects an expense limitation in effect during the period. As a
    result of such limitation, expenses of the fund for the period ended
    March 31, 2004 reflect a reduction of 0.01% based on average net assets
    for class M shares (Note 2).

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


Notes to financial statements
March 31, 2004

Note 1
Significant accounting policies

Putnam Municipal Income Fund (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund seeks as high a level of current
income exempt from federal income tax as Putnam Investment Management,
LLC ("Putnam Management"), the fund's manager, an indirect wholly-owned
subsidiary of Putnam, LLC, believes is consistent with the preservation
of capital.

The fund offers class A, class B, class C and class M shares. Class A
shares are sold with a maximum front-end sales charge of 4.50%. Prior to
January 28, 2004, the maximum front-end sales charge for class A was
4.75%. Class B shares, which convert to class A shares after
approximately eight years, do not pay a front-end sales charge but pay a
higher ongoing distribution fee than class A and class M shares, and are
subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class C shares are subject to the
same fees and expenses as class B shares, except that class C shares
have a one-year 1.00% contingent deferred sales charge and do not
convert to class A shares. Class M shares are sold with a maximum
front-end sales charge of 3.25% and pay an ongoing distribution fee that
is higher than class A shares but lower than class B and class C shares.

Effective April 19, 2004 (May 3, 2004 for defined contribution plans
administered by Putnam) a 2.00% redemption fee may apply to any shares
that are redeemed (either by selling or exchanging into another fund)
within 5 days of purchase.

Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.

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

A) Security valuation Investments for which market quotations are
readily available are valued at the last reported sales price on their
principal exchange, or official closing price for certain markets. If no
sales are reported -- as in the case of some securities traded
over-the-counter -- a security is valued at its last reported bid price.
Tax-exempt bonds and notes are valued at fair value on the basis of
valuations provided by an independent pricing service, approved by the
Trustees. Such services use information with respect to transactions in
bonds, quotations from bond dealers, market transactions in comparable
securities and various relationships between securities in determining
value other investments including restricted securities are valued at
fair value following procedures approved by the Trustees. Such
valuations and procedures are reviewed periodically by the Trustees.

B) Security transactions and related investment income Security
transactions are recorded on the trade date (date the order to buy or
sell is executed). Gains or losses on securities sold are determined on
the identified cost basis. Interest income is recorded on the accrual
basis. All premiums/discounts are amortized/accreted on a
yield-to-maturity basis. The premium in excess of the call price, if
any, is amortized to the call date; thereafter, any remaining premium is
amortized to maturity.

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

The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform. 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

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.

D) Line of credit During the period, the fund was entered into a
committed line of credit with certain banks. The line of credit
agreement included restrictions that the fund would  maintain an asset
coverage ratio of at least 300% and that borrowings would not exceed
prospectus limitations. For the period ended August 6, 2003, the fund
had no borrowings against the line of credit. Effective August 6, 2003,
the fund no longer participated in a committed line of credit.

E) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986 (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 March 31, 2004, the fund had a capital loss carryover of $42,335,225
available to the extent allowed by tax law to offset future net capital
gain, if any. The amount of the carryover and the expiration dates are:

Loss Carryover     Expiration
- ---------------------------------
    $8,493,975     March 31, 2006
     1,799,903     March 31, 2007
    11,300,594     March 31, 2008
       765,567     March 31, 2009
    19,975,186     March 31, 2012

Pursuant to federal income tax regulations applicable to regulated
investment companies, the fund has elected to defer to its fiscal year
ending March 31, 2005 $9,505,452 of losses recognized during the period
November 1, 2003 to March 31, 2004.

F) Distributions to shareholders Income dividends are recorded daily by
the fund and are paid monthly. Distributions from capital gains, if any,
are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences include
temporary and permanent differences of losses on wash sale transactions,
post-October loss deferrals, the  expiration of a capital loss
carryover, dividends payable, realized gains and losses on certain
futures contracts, market discount, straddle loss deferrals, partnership
income and litigation expense reimbursement. 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 March 31, 2004, the fund reclassified
$517,769 to increase undistributed net investment income and $11,299,127
to decrease paid-in-capital, with a decrease to accumulated net realized
losses of $10,781,358.

The tax basis components of distributable earnings and the federal tax
cost as of period end were as follows:

Unrealized appreciation            $53,930,602
Unrealized depreciation            (19,463,336)
                                  ------------
Net unrealized appreciation         34,467,266
Undistributed tax-exempt
income                               1,307,835
Capital loss carryforward          (42,335,225)
Post October loss                   (9,505,452)
Cost for federal income
tax purposes                      $796,928,081

Note 2
Management fee, administrative
services and other transactions

Putnam Management is paid for management and investment advisory
services quarterly based on the average net assets of the fund. Such fee
is based on the lesser of (i) an annual rate of 0.50% of the average net
asset value of the fund or (ii) the following annual rates: 0.60% of the
first $500 million of average net assets, 0.50% of the next $500
million, 0.45% of the next $500 million, 0.40% of the next $5 billion,
0.375% of the next $5 billion, 0.355% of the next $5 billion, 0.34% of
the next $5 billion and 0.33% thereafter.

Effective January 28, 2004, Putnam Management has agreed to limit its
compensation (and, to the extent necessary, bear other expenses) through
December 31, 2004, to the extent that the fund's net expenses as a
percentage of average net assets exceed the average expense ratio for
the fund's Lipper peer group of front-end load funds.

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

Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam, LLC. Putnam
Investor Services, a division of PFTC, provides investor serving agent
functions to the fund. During the year ended March 31, 2004, the fund
paid PFTC $897,669 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 March 31, 2004, the
fund's expenses were reduced by $48,996 under these arrangements.

Each independent Trustee of the fund receives an annual Trustee fee, of
which $1,183, as a quarterly retainer, has been allocated to the fund,
and an additional fee for each Trustees meeting attended. Trustees
receive additional fees for attendance at certain committee meetings.

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

The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Trustee compensation and expenses in the
statement of operations. Accrued pension liability is included in
Payable for Trustee compensation and expenses in the statement of assets
and liabilities.

The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B, class C and class M shares pursuant to rule 12b-1
under the Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Retail Management, a wholly-owned subsidiary of
Putnam, LLC and Putnam Retail Management GP, Inc., for services provided
and expenses incurred in distributing shares of the fund. The Plans
provide for payments by the fund to Putnam Retail Management at an
annual rate of up to 0.35%, 1.00%, 1.00% and 1.00% of the average net
assets attributable to class A, class B, class C and class M shares,
respectively. The Trustees have approved payment by the fund at the
annual rates of 0.25%, 0.85%, 1.00% and 0.50% of the average net assets
attributable to class A, class B, class C and class M shares,
respectively.

For the year ended March 31, 2004, Putnam Retail Management, acting as
underwriter, received net commissions of $32,057 and $377 from the sale
of class A and class M shares, respectively, and received $383,330 and
$1,116 in contingent deferred sales charges from redemptions of class B
and class C shares, respectively. A deferred sales charge of up to 1.00%
is assessed on certain redemptions of class A shares that were purchased
without an initial sales charge as part of an investment of $1 million
or more. For the year ended March 31, 2004, Putnam Retail Management,
acting as underwriter, received $14,746 on class A redemptions.

Note 3
Purchases and sales of securities

During the year ended March 31, 2004, cost of purchases and proceeds
from sales of investment securities other than short-term investments
aggregated $183,768,148 and $399,487,385, respectively. There were no
purchases or sales of U.S. government securities.

Note 4
Capital shares

At March 31, 2004, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:

                                       Year ended March 31, 2004
- ----------------------------------------------------------------
Class A                                 Shares            Amount
- ----------------------------------------------------------------
Shares sold                          9,002,639       $78,008,319
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions                     2,725,707        23,658,553
- ----------------------------------------------------------------
                                    11,728,346       101,666,872

Shares repurchased                 (30,592,593)     (264,806,393)
- ----------------------------------------------------------------
Net decrease                       (18,864,247)    $(163,139,521)
- ----------------------------------------------------------------

                                       Year ended March 31, 2003
- ----------------------------------------------------------------
Class A                                 Shares            Amount
- ----------------------------------------------------------------
Shares sold                         17,288,011      $150,188,991
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions                     3,198,096        27,728,832
- ----------------------------------------------------------------
                                    20,486,107       177,917,823

Shares repurchased                 (22,329,539)     (193,781,123)
- ----------------------------------------------------------------
Net decrease                        (1,843,432)     $(15,863,300)
- ----------------------------------------------------------------

                                       Year ended March 31, 2004
- ----------------------------------------------------------------
Class B                                 Shares            Amount
- ----------------------------------------------------------------
Shares sold                            956,567        $8,271,245
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions                       542,731         4,731,629
- ----------------------------------------------------------------
                                     1,499,298        13,002,874

Shares repurchased                  (9,560,294)      (82,867,549)
- ----------------------------------------------------------------
Net decrease                        (8,060,996)     $(69,864,675)
- ----------------------------------------------------------------

                                       Year ended March 31, 2003
- ----------------------------------------------------------------
Class B                                 Shares            Amount
- ----------------------------------------------------------------
Shares sold                          2,992,800       $26,057,645
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions                          779,193         6,752,092
- ----------------------------------------------------------------
                                     3,771,993        32,809,737

Shares repurchased                  (8,840,829)      (76,684,004)
- ----------------------------------------------------------------
Net decrease                        (5,068,836)     $(43,874,267)
- ----------------------------------------------------------------

                                       Year ended March 31, 2004
- ----------------------------------------------------------------
Class C                                 Shares            Amount
- ----------------------------------------------------------------
Shares sold                            293,231        $2,563,316
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions                        50,106           434,996
- ----------------------------------------------------------------
                                       343,337         2,998,312

Shares repurchased                    (947,035)       (8,215,531)
- ----------------------------------------------------------------
Net decrease                          (603,698)      $(5,217,219)
- ----------------------------------------------------------------

                                       Year ended March 31, 2003
- ----------------------------------------------------------------
Class C                                 Shares            Amount
- ----------------------------------------------------------------
Shares sold                          1,133,128        $9,872,686
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions                        60,696           526,360
- ----------------------------------------------------------------
                                     1,193,824        10,399,046

Shares repurchased                    (955,508)       (8,320,157)
- ----------------------------------------------------------------
Net increase                           238,316        $2,078,889
- ----------------------------------------------------------------

                                       Year ended March 31, 2004
- ----------------------------------------------------------------
Class M                                 Shares            Amount
- ----------------------------------------------------------------
Shares sold                             89,605          $783,931
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions                        38,338           332,528
- ----------------------------------------------------------------
                                       127,943         1,116,459

Shares repurchased                    (682,268)       (5,905,387)
- ----------------------------------------------------------------
Net decrease                          (554,325)      $(4,788,928)
- ----------------------------------------------------------------

                                       Year ended March 31, 2003
- ----------------------------------------------------------------
Class M                                 Shares            Amount
- ----------------------------------------------------------------
Shares sold                            283,424        $2,476,924
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions                        54,050           468,374
- ----------------------------------------------------------------
                                       337,474         2,945,298

Shares repurchased                    (311,269)       (2,703,683)
- ----------------------------------------------------------------
Net increase                            26,205          $241,615
- ----------------------------------------------------------------

Note 5
Regulatory matters and litigation

On April 8, 2004, Putnam Management entered into agreements with the
Securities and Exchange Commission and the Massachusetts Securities
Division representing a final settlement of all charges brought against
Putnam Management by those agencies on October 28, 2003 in connection
with excessive short-term trading by Putnam employees and, in the case
of the charges brought by the Massachusetts Securities Division, by
participants in some Putnam-administered 401(k) plans. The settlement
with the SEC requires Putnam Management to pay $5 million in
disgorgement plus a civil monetary penalty of $50 million, and the
settlement with the Massachusetts Securities Division requires Putnam
Management to pay $5 million in restitution and an administrative fine
of $50 million. The settlements also leave intact the process
established under an earlier partial settlement with the SEC under which
Putnam Management agreed to pay the amount of restitution determined by
an independent consultant, which may exceed the disgorgement and
restitution amounts specified above, pursuant to a plan to be developed
by the independent consultant.

Putnam Management, and not the investors in any Putnam fund, will bear
all costs, including restitution, civil penalties and associated legal
fees stemming from both of these proceedings. The SEC's and
Massachusetts Securities Division's allegations and related matters also
serve as the general basis for numerous lawsuits, including purported
class action lawsuits filed against Putnam Management and certain
related parties, including certain Putnam funds. Putnam Management has
agreed to bear any costs incurred by Putnam funds in connection with
these lawsuits. Based on currently available information, Putnam
Management believes that the likelihood that the pending private
lawsuits and purported class action lawsuits will have a material
adverse financial impact on the fund is remote, and the pending actions
are not likely to materially affect its ability to provide investment
management services to its clients, including the Putnam funds.

For the period ended March 31, 2004, Putnam Management has assumed
$10,585 of legal,  shareholder servicing and communication, audit, and
Trustee fees incurred by the Fund in  connection with these matters.

Review of these matters by counsel for Putnam Management and by separate
independent counsel for the Putnam funds and their independent Trustees
is continuing. The fund may experience increased redemptions as a result
of these matters, which could result in increased transaction costs and
operating expenses.

Federal tax information
(Unaudited)

The fund has designated 98.5% of dividends paid from net investment
income during the fiscal year as tax exempt for federal income tax
purposes.

The Form 1099 you receive in January 2005 will show the tax status of
all distributions paid to your account in calendar 2004.


About the Trustees

Jameson A. Baxter (9/6/43), Trustee since 1994

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

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

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

Charles B. Curtis (4/27/40), Trustee since 2001

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

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

Prior to May 1997, Mr. Curtis was Deputy Secretary of Energy. He served
as Chairman of the Federal Energy Regulatory Commission from 1977 to
1981 and has held positions on the staff of the U.S. House of
Representatives, the U.S. Treasury Department, and the Securities and
Exchange Commission.

John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000

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

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

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


Ronald J. Jackson (12/17/43), Trustee since 1996

Mr. Jackson is a private investor.

Mr. Jackson is President of the Kathleen and Ronald J. Jackson
Foundation (a charitable trust). He is also a member of the Board of
Overseers of WGBH (a public television and radio station) as well as a
member of the Board of Overseers of the Peabody Essex Museum.

Mr. Jackson is the former Chairman, President, and Chief Executive
Officer of Fisher-Price, Inc. (a major toy manufacturer), from which he
retired in 1993. He previously served as President and Chief Executive
Officer of Stride-Rite, Inc. (a manufacturer and distributor of
footwear) and of Kenner Parker Toys, Inc. (a major toy and game
manufacturer). Mr. Jackson was President of Talbots, Inc. (a distributor
of women's apparel) and has held financial and marketing positions with
General Mills, Inc. and Parker Brothers (a toy and game company). Mr.
Jackson is a graduate of the University of Michigan Business School.

Paul L. Joskow (6/30/47), Trustee since 1997

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

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

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

Elizabeth T. Kennan (2/25/38), Trustee since 1992

Dr. Kennan is a Partner in Cambus-Kenneth Farm, LLC (cattle and
thoroughbred horses). She is President Emeritus of Mount Holyoke
College.

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

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

John H. Mullin, III (6/15/41), Trustee since 1997

Mr. Mullin is the Chairman and CEO of Ridgeway Farm (a limited liability
company engaged in timber and farming).

Mr. Mullin serves as a Director of The Liberty Corporation (a
broadcasting company), Progress Energy, Inc. (a utility company,
formerly known as Carolina Power & Light), and Sonoco Products, Inc. (a
packaging company). Mr. Mullin is Trustee Emeritus of Washington & Lee
University, where he served as Chairman of the Investment Committee.
Prior to May 2001, he was a Director of Graphic Packaging International
Corp. Prior to February 2004, he was a Director of Alex Brown Realty,
Inc.

Mr. Mullin also served as a Director of Dillon, Read & Co., Inc. until
October 1997 and The Ryland Group, Inc. until January 1998. Mr. Mullin
is a graduate of Washington & Lee University and The Wharton Graduate
School, University of Pennsylvania.

Robert E. Patterson (3/15/45), Trustee since 1984

Mr. Patterson is Senior Partner of Cabot Properties, L.P. and Chairman
of Cabot Properties, Inc.

Mr. Patterson serves as Chairman of the Joslin Diabetes Center and as a
Director of Brandywine Trust Company. Prior to June 2003, he was a
Trustee of Sea Education Association. Prior to December 2001, he was
President and Trustee of Cabot Industrial Trust (a publicly traded real
estate investment trust). Prior to February 1998, Mr. Patterson was
Executive Vice President and Director of Acquisitions of Cabot Partners
Limited Partnership (a registered investment advisor 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) and as a Senior Vice
President of the Beal Companies (a real estate management, investment,
and development firm).

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

W. Thomas Stephens (9/2/42), Trustee since 1997

Mr. Stephens serves on a number of corporate boards.

Mr. Stephens serves as a Director of Xcel Energy Incorporated (a public
utility company), TransCanada Pipelines Limited, Norske Canada, Inc. (a
paper manufacturer), and Qwest Communications. 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.

W. Nicholas Thorndike (3/28/33), Trustee since 1992

Mr. Thorndike serves on the boards of various corporations and
charitable organizations.

Mr. Thorndike is a Director of Courier Corporation (a book publisher and
manufacturer). He is also a Trustee of Northeastern University and an
honorary Trustee of Massachusetts General Hospital, where he previously
served as Chairman and President. Prior to December 2003, he was a
Director of The Providence Journal Co. (a newspaper publisher). Prior to
September 2000, he was a Director of Bradley Real Estate, Inc.; prior to
April 2000, he was a Trustee of Eastern Utilities Associates; and prior
to December 2001, he was a Trustee of Cabot Industrial Trust.

Mr. Thorndike has also served as Chairman of the Board and Managing
Partner of Wellington Management Company/Thorndike, Doran, Paine & Lewis
(a registered investment advisor that manages mutual funds and
institutional assets), as a Trustee of the Wellington Group of Funds
(currently The Vanguard Group), and as Chairman and a Director of Ivest
Fund, Inc. Mr. Thorndike is a graduate of Harvard College.

George Putnam, III* (8/10/51), Trustee since 1984 and President
since 2000

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

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

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

A.J.C. Smith* (4/13/34), Trustee since 1986

Mr. Smith is Chairman of Putnam Investments and a Director of and
Consultant to Marsh & McLennan Companies, Inc.

Mr. Smith is also a Director of Trident Corp. (a limited partnership
with over thirty institutional investors). He is also a Trustee of the
Carnegie Hall Society, the Educational Broadcasting Corporation, and the
National Museums of Scotland. He is Chairman of the Central Park
Conservancy and a Member of the Board of Overseers of the Joan and
Sanford I. Weill Graduate School of Medical Sciences of Cornell
University. Prior to May 2000 and November 1999, Mr. Smith was Chairman
and CEO, respectively, of Marsh & McLennan Companies, Inc.

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

As of March 31, 2004, there were 101 Putnam Funds.

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

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

Officers

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

Charles E. Porter (7/26/38)

Executive Vice President, Treasurer
and Principal Executive Officer
Since 1989

Managing Director, Putnam Investments
and Putnam Management

Patricia C. Flaherty (12/1/46)

Senior Vice President
Since 1993

Senior Vice President, Putnam Investments
and Putnam Management

Steven D. Krichmar (6/27/58)
Vice President and Principal Financial Officer
Since 2002

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

Michael T. Healy (1/24/58)
Assistant Treasurer and Principal
Accounting Officer
Since 2000

Managing Director, Putnam Investments

Beth S. Mazor (4/6/58)
Vice President
Since 2002

Senior Vice President, Putnam Investments

Francis J. McNamara, III (8/19/55)
Vice President and Chief Legal Officer
Since 2004

Senior Managing Director, Putnam Investments, Putnam
Management and Putnam  Retail Management

James P. Pappas (2/24/53)
Vice President
Since 2004

Managing Director, Putnam Investments
and Putnam Management

Richard S. Robie, III (3/30/60)
Vice President
Since 2004

Senior Managing Director, Putnam Investments, Putnam
Management and Putnam  Retail Management

Mark C. Trenchard (6/5/62)
Vice President and BSA Compliance Officer
Since 2002

Senior Vice President, Putnam Investments

Judith Cohen (6/7/45)
Clerk and Assistant Treasurer
Since 1993

Clerk and Assistant Treasurer, The Putnam Funds

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


Fund information

One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.

Investment Manager

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

Marketing Services

Putnam Retail Management
One Post Office Square
Boston, MA 02109

Custodian

Putnam Fiduciary
Trust Company

Legal Counsel

Ropes & Gray LLP

Independent Auditors

KPMG LLP

Trustees

John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
John H. Mullin, III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike

Officers

George Putnam, III
President

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

Patricia C. Flaherty
Senior Vice President

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

Mark C. Trenchard
Vice President and
BSA Compliance Officer

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

Judith Cohen
Clerk and Assistant Treasurer

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


[LOGO OMITTED]

PUTNAM INVESTMENTS

The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109

PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS

Call 1-800-225-1581 or visit our Web site www.putnaminvestments.com.

AN040-213211  051/353/560  5/04


Not FDIC Insured    May Lose Value    No Bank Guarantee


Item 2. Code of Ethics:
- -----------------------
All officers of the Fund, including its principal executive, financial and
accounting officers, are employees of Putnam Investment Management, LLC,
the Fund's investment manager.  As such they are subject to a comprehensive
Code of Ethics adopted and administered by Putnam Investments which is
designed to protect the interests of the firm and its clients.  The Fund
has adopted a Code of Ethics which incorporates the Code of Ethics of
Putnam Investments with respect to all of its officers and Trustees who are
employees of Putnam Investment Management, LLC.  For this reason, the Fund
has not adopted a separate code of ethics governing its principal
executive, financial and accounting officers.

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

Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
The following table presents fees billed in each of the last two
fiscal years for services rendered to the fund by the fund's
independent auditors:


                    Audit       Audit-Related   Tax       All Other
Fiscal year ended   Fees        Fees            Fees      Fees
- -----------------   ----------  -------------   -------   ---------
March 31, 2003      $32,500     $--             $3,400    $1,730
March 31, 2004      $34,400     $--             $3,600    $  188

For the fiscal years ended March 31, 2004 and March 31, 2003, the
fund's independent auditors billed aggregate non-audit fees in the
amounts of $ 3,788 and $ 5,130 , respectively, to the fund, Putnam
Management and any entity controlling, controlled by or under common
control with Putnam Management that provides ongoing services to the
fund.

Audit Fees represents fees billed for the fund's last two fiscal
years.

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

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

All Other Fees represent fees billed for services relating to
calculation of investment performance and interfund trading.

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

Under certain circumstances, the Audit and Pricing Committee
believes that it may be appropriate for Putnam Investment
Management, LLC ("Putnam Management") and certain of its affiliates
to engage the services of the funds' independent auditors, but only
after prior approval by the Committee.  Such requests are required
to be submitted in writing to the Committee and explain, among other
things, the nature of the proposed engagement, the estimated fees,
and why this work must be performed by that particular audit firm.
The Committee will review the proposed engagement at its next
meeting.

Since May 6, 2003, all work performed by the independent auditors
for the funds, Putnam Management and any entity controlling,
controlled by or under common control with Putnam Management that
provides ongoing services to the fund was pre-approved by the
Committee or a member of the Committee pursuant to the pre-approval
policies discussed above.  Prior to that date, the Committee had a
general policy to pre-approve the independent auditor's engagements
for non-audit services with the funds, Putnam Management and any
entity controlling, controlled by or under common control with
Putnam Management that provides ongoing services to the fund.

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

                    Audit-Related   Tax   All Other   Total Non-
Fiscal year ended   Fees            Fees  Fees        Audit Fees
- -----------------   -------------   ----  ---------   ----------
March 31, 2003      $--             $--   $--         $--
March 31, 2004      $--             $--   $--         $--


Items 5-6. [Reserved]
- ---------------------

Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed End
- -------------------------------------------------------------------------
        Management Investment Companies: Not applicable
        --------------------------------

Item 8. [Reserved]
- ------------------

Item 9. Submission of Matters to a Vote of Security Holders:
- ------------------------------------------------------------
        Not applicable

Item 10. Controls and Procedures:
- --------------------------------

(a) The registrant's principal executive officer and principal financial
officer have concluded, based on their evaluation of the
effectiveness of the design and operation of the registrant's
disclosure controls and procedures as of a date within 90 days of
the filing date of this report on Form N-CSR, that the design and
operation of such procedures are generally effective to provide
reasonable assurance that information required to be disclosed by
the investment company in the reports that it files or submits under
the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
Commission's rules and forms.

Although such officers reached the conclusion expressed in the
preceding paragraph, they are aware of matters that raise concerns
with respect to controls, each of which arose in connection with the
administration of 401(k) plans by Putnam Fiduciary Trust Company.
The first matter, which occurred in early 2001, involved the willful
circumvention of controls by certain Putnam employees in connection
with the correction of operational errors with respect to a 401(k)
client's investment in certain Putnam Funds, which led to losses in
five Putnam Funds (not including the registrant). Such officers
became aware of this matter in February 2004. The second matter,
which occurred in 2002, involved the willful circumvention by
certain Putnam employees of policies and procedures in connection
with the payment of Putnam corporate expenses. Such officers did
not learn that this matter involved a Putnam Fund until January
2004. Putnam has made restitution to the affected Funds,
implemented a number of personnel changes, including senior
personnel, begun to implement changes in procedures to address these
items and informed the SEC, the Funds' Trustees and independent
auditors. An internal investigation and review of procedures and
controls are currently ongoing.

In reaching the conclusion expressed herein, the registrant's
principal executive officer and principal financial officer
considered a number of factors, including the nature of the matters
described above, when the matters occurred, the individuals
involved, personnel changes that have occurred since these matters
occurred, the results to date of the current ongoing investigation
and the overall quality of controls at Putnam at this time.

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

Item 11. Exhibits:
- ------------------

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

(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act
of 2002 are filed herewith.


SIGNATURES

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

NAME OF REGISTRANT

By (Signature and Title):            /s/Michael T. Healy
                                     --------------------------
                                     Michael T. Healy
                                     Principal Accounting Officer
Date: May 27, 2004



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

By (Signature and Title):            /s/Charles E. Porter
                                     ---------------------------
                                     Charles E. Porter
                                     Principal Executive Officer
Date: May 27, 2004



By (Signature and Title):            /s/Steven D. Krichmar
                                     ---------------------------
                                     Steven D. Krichmar
                                     Principal Financial Officer
Date: May 27, 2004