UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-2503
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RIVERSOURCE DIVERSIFIED INCOME SERIES, INC.
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(Exact name of registrant as specified in charter)
50606 Ameriprise Financial Center, Minneapolis, Minnesota 55474
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(Address of principal executive offices) (Zip code)
Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268
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(Name and address of agent for service)
Registrant's telephone number, including area code: (612) 330-9283
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Date of fiscal year end: 8/31
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Date of reporting period: 8/31
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Annual Report
RIVERSOURCE [LOGO](SM)
INVESTMENTS
RIVERSOURCE(SM)
DIVERSIFIED BOND FUND
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ANNUAL REPORT FOR
THE PERIOD ENDED
AUG. 31, 2006
> RIVERSOURCE DIVERSIFIED BOND
FUND SEEKS TO PROVIDE
SHAREHOLDERS WITH A HIGH LEVEL
OF CURRENT INCOME WHILE
CONSERVING THE VALUE OF THE
INVESTMENT FOR THE LONGEST
PERIOD OF TIME.
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TABLE OF CONTENTS
Fund Snapshot ...................................3
Performance Summary .............................5
Questions & Answers
with Portfolio Management ....................7
The Fund's Long-term Performance ...............10
Investments in Securities ......................12
Financial Statements ...........................29
Notes to Financial Statements ..................33
Report of Independent Registered
Public Accounting Firm ......................51
Federal Income Tax Information .................52
Fund Expenses Example ..........................55
Board Members and Officers .....................57
Approval of Investment Management
Services Agreement ..........................60
Proxy Voting ...................................60
[LOGO]
DALBAR RATED
2006
FOR COMMUNICATION
The RiverSource mutual fund shareholder reports have been awarded the
Communications Seal from Dalbar Inc., an independent financial services
research firm. The Seal recognizes communications demonstrating a level of
excellence in the industry.
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2 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
FUND SNAPSHOT AT AUG. 31, 2006
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FUND OVERVIEW
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RiverSource Diversified Bond Fund combines securities from all fixed income
sectors including U.S. government, corporate, and mortgage-backed securities.
Although the Fund emphasizes high and medium quality bonds, it
opportunistically adds exposure to high yield and emerging markets. The Fund's
intermediate-term portfolio is less volatile when interest rates fluctuate.
The multisector structure of the Fund provides a one-stop investment
opportunity for fixed income investors.
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SECTOR BREAKDOWN
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Percentage of portfolio assets
Mortgage-Backed 40.2%
U.S. Government Obligations & Agencies 22.2%
Corporate Bonds* 16.0%
Commercial Mortgage-Backed 12.7% [PIE CHART]
Short-Term Securities** 6.3%
Asset-Backed 2.4%
Foreign Government 0.2%
* Includes Telecommunication 5.2%, Utilities 3.4%, Consumer Discretionary
2.0%, Financials 1.7%, Health Care 1.2%, Consumer Staples 1.1%, Energy
0.8%, Industrials 0.5% and Materials 0.1%.
** Of the 6.3%, 1.3% is due to security lending activity and 5.0% is the
Fund's cash equivalent position.
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QUALITY BREAKDOWN
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Percentage of bond portfolio assets
AAA bonds 81.6%
AA bonds 0.6%
A bonds 4.7% [PIE CHART]
BBB bonds 11.1%
Non-investment grade bonds 2.0%
Bond ratings apply to underlying holdings of the Fund and not the Fund itself.
Whenever possible, the Standard and Poor's rating is used to determine the
credit quality of a security. Standard and Poor's rates the creditworthiness
of corporate bonds, with 15 categories, ranging from AAA (highest) to D
(lowest). Ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within the major rating
categories. If Standard and Poor's doesn't rate a security, then Moody's
rating is used. RiverSource Investments, LLC, the Fund's investment manager,
rates a security using an internal rating system when Moody's doesn't provide
a rating. 0.2% of the portfolio rating above was determined through internal
analysis.
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RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 3
FUND SNAPSHOT AT AUG. 31, 2006
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STYLE MATRIX
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[chart] Shading within the style matrix indicates areas in which the
Fund generally invests.
DURATION
SHORT INT. LONG
X HIGH
X MEDIUM QUALITY
LOW
The style matrix can be a valuable tool for constructing and monitoring your
portfolio. It provides a frame of reference for distinguishing the types of
stocks or bonds owned by a mutual fund, and serves as a guideline for helping
you build a portfolio.
Investment products, including shares of mutual funds, involve investment
risks including possible loss of principal and fluctuation in value.
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SEC YIELDS
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AT AUG. 31, 2006 AT SEPT. 29 2006*
Class A 4.35% 4.26%
Class B 3.81% 3.71%
Class C 3.81% 3.70%
Class I 4.92% 4.82%
Class Y 4.73% 4.63%
* The last business day of the period.
The Securities and Exchange Commission (SEC) yield is calculated by dividing
anticipated net investment income during a 31-day period by the public
offering price (POP) per share on the last day of the period, and converting
the results to yearly figures. See Average Annual Total Returns on page 6 for
additional performance information.
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PORTFOLIO MANAGERS
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YEARS IN INDUSTRY
Jamie Jackson, CFA 18
Scott Kirby 27
Tom Murphy, CFA 20
Nicholas Pifer, CFA 16
Jennifer Ponce de Leon 17
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FUND FACTS
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TICKER SYMBOL INCEPTION DATE
Class A INBNX 10/3/74
Class B ININX 3/20/95
Class C AXBCX 6/26/00
Class I RDBIX 3/4/04
Class Y IDBYX 3/20/95
Total net assets $2.881 billion
Number of holdings 450
Weighted average life(1) 6.2 years
Effective duration(2) 4.4 years
Weighted average bond rating(3) AA+
(1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into
consideration the possibility that the issuer may call the bond before
its maturity date.
(2) EFFECTIVE DURATION measures the sensitivity of a security's price to
parallel shifts in the yield curve (the graphical depiction of the
levels of interest rates from two years out to 30 years). Positive
duration means that as rates rise, the price decreases, and negative
duration means that as rates rise, the price increases.
(3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of
the underlying bonds in the portfolio.
There are risks associated with an investment in a bond fund, including credit
risk, interest rate risk and prepayment and extension risk. See the Fund's
prospectus for information on these and other risks associated with the Fund.
In general, bond prices rise when interest rates fall and vice versa. This
effect is usually more pronounced for longer-term securities. Non-investment
grade securities, commonly called "high-yield" or "junk" bonds, generally have
more volatile prices and carry more risk to principal and income than
investment grade securities.
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4 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
PERFORMANCE SUMMARY
PERFORMANCE COMPARISON
For the year ended Aug. 31, 2006
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
RiverSource Diversified
Bond Fund Lehman Brothers
Class A (excluding Aggregate Bond Lipper Intermediate
sales charge) Index (unmanaged) Investment Grade Index
+1.64% +1.71% +1.62%
(see "The Fund's Long-term Performance" for Index descriptions)
The performance information shown represents past performance and is not a
guarantee of future results. The investment return and principal value of your
investment will fluctuate so that your shares, when redeemed, may be worth
more or less than their original cost. Current performance may be lower or
higher than the performance information shown. You may obtain performance
information current to the most recent month-end by contacting your financial
institution or visiting riversource.com/funds.
The 4.75% sales charge applicable to Class A shares of the Fund is not
reflected in the bar chart. If reflected, returns would be lower than those
shown. The performance of other classes may vary from that shown because of
differences in expenses.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes.
It is not possible to invest directly in an index.
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RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 5
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AVERAGE ANNUAL TOTAL RETURNS
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AT AUG. 31, 2006
SINCE
Without sales charge 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
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Class A (inception 10/3/74) +1.64% +3.84% +3.91% +5.44% +9.18%
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Class B (inception 3/20/95) +0.88% +3.06% +3.13% +4.64% +5.31%
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Class C (inception 6/26/00) +0.66% +3.05% +3.12% N/A +4.45%
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Class I (inception 3/4/04) +2.19% N/A N/A N/A +3.27%
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Class Y (inception 3/20/95) +1.81% +4.01% +4.08% +5.59% +6.26%
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With sales charge
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Class A (inception 10/3/74) -3.19% +2.17% +2.91% +4.93% +9.02%
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Class B (inception 3/20/95) -4.00% +1.79% +2.78% +4.64% +5.31%
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Class C (inception 6/26/00) -0.31% +3.05% +3.12% N/A +4.45%
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AT SEPT. 30, 2006
SINCE
Without sales charge 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
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Class A (inception 10/3/74) +3.41% +3.31% +4.16% +5.30% +9.18%
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Class B (inception 3/20/95) +2.63% +2.53% +3.37% +4.51% +5.33%
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Class C (inception 6/26/00) +2.41% +2.46% +3.32% N/A +4.52%
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Class I (inception 3/4/04) +3.96% N/A N/A N/A +3.49%
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Class Y (inception 3/20/95) +3.58% +3.47% +4.28% +5.45% +6.29%
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With sales charges
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Class A (inception 10/3/74) -1.50% +1.65% +3.15% +4.79% +9.02%
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Class B (inception 3/20/95) -2.32% +1.27% +3.02% +4.51% +5.33%
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Class C (inception 6/26/00) +1.42% +2.46% +3.32% N/A +4.52%
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Class A share performance reflects the maximum sales charge of 4.75%. Class B
reflects a contingent deferred sales charge (CDSC) applied as follows: first
year 5%; second and third years 4%; fourth year 3%; fifth year 2%; sixth year
1%. No sales charge thereafter. Class C shares may be subject to a 1% CDSC.
Sales charges do not apply to Class I and Class Y shares. These share classes
are available to institutional investors only.
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6 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
QUESTIONS & ANSWERS WITH PORTFOLIO MANAGEMENT
Below, the portfolio management team for RiverSource Diversified Bond Fund
discusses the Fund's results and positioning for the 12 months ended Aug. 31,
2006. On March 10, 2006, the assets of RiverSource Selective Fund were merged
into RiverSource Diversified Bond Fund. This reorganization was completed
after shareholders of RiverSource Selective Fund approved the merger plan on
Feb. 15, 2006.
Q: How did RiverSource Diversified Bond Fund perform for the annual period?
A: RiverSource Diversified Bond Fund's Class A shares (excluding sales
charge) returned 1.64% for the 12 months ended Aug. 31, 2006. The Fund
underperformed its benchmark, the unmanaged Lehman Brothers Aggregate
Bond Index (Lehman Index), which gained 1.71%. The Fund outperformed its
peer group, as represented by the Lipper Intermediate Investment Grade
Index, which returned 1.62% during the same period.
Q: What factors most significantly affected the Fund's performance?
A: Increases in short-term interest rates had the greatest impact on the
Fund. Short-term interest rates were forced higher by the Federal
Reserve Board (the Fed), which raised its target for the federal funds
rate, an interest rate that affects short-term rates, to 5.25% from
3.50%. In early August, the Fed observed its first pause in its two-year
tightening cycle, noting that economic growth appeared to be moderating
somewhat and inflation pressures -- though elevated -- were expected to
recede over the balance of the year and into 2007. As a result of this
Fed pause, rates declined during August in a sharp reversal of what had
been a steady rise in interest rates. Thus, most of the Fund's returns
were achieved during this last month of the fiscal year.
Given the rising interest rate environment throughout the majority of
the fiscal year, we maintained a defensive posture on duration, which
helped mitigate the Fund's interest rate risk. Duration is a measure of
the Fund's sensitivity to interest rate changes. Also, while interest
rates moved higher across the fixed income yield curve during most of
the annual period, they did so significantly more so at the short-term
end of the curve than at the long-term end. This resulted in a continued
flattening of the yield curve. The Fund also benefited during much of
the period from its moderate exposure to bonds with shorter maturities
in favor of those with longer maturities, i.e., its yield curve
flattening bias.
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RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 7
QUESTIONS & ANSWERS
Also helping the Fund's results was its issue selection within the
mortgage-backed securities sector of the fixed income market. The Fund's
defensive positioning in higher coupon mortgages, adjustable rate
mortgages (ARMs) and collateralized mortgage obligations (CMOs) helped
results, as these securities outperformed Treasuries during the 12
months ended Aug. 31, 2006.
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GIVEN THE RISING INTEREST RATE ENVIRONMENT THROUGHOUT THE MAJORITY OF
THE FISCAL YEAR, WE MAINTAINED A DEFENSIVE POSTURE ON DURATION, WHICH
HELPED MITIGATE THE FUND'S INTEREST RATE RISK.
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Also contributing positively to the Fund's performance during the annual
period was its positioning in non-U.S. dollar bonds, or bonds
denominated in foreign currencies. The U.S. dollar weakened vs. most
major international currencies, including the euro and the British
pound, during the fiscal year, increasing the value of the Fund's
non-U.S. dollar bonds in U.S. dollar terms. Remember, a weakening U.S.
dollar increases the value of the Fund's foreign currency denominated
securities when expressed in U.S. dollar terms and vice versa.
Finally, an allocation to high yield corporate bonds further boosted the
Fund's returns, as high yield corporate bonds were among the
best-performing fixed income sectors during the period.
Conversely, detracting from the Fund's returns was its comparatively
greater emphasis on higher quality investments than its benchmarks.
While the portfolio's securities performed well, they did not keep pace
with even stronger performance by the riskier segments of the market,
and so the Fund's performance lagged relative to the Lehman Index.
Q: What changes did you make to the Fund's portfolio during the period?
A: We maintained a shorter duration position than the Lehman Index for most
of the annual period. However, by May, once 10-year Treasury yields
breached the 5% level and we began to anticipate the Fed nearing an end
to its tightening cycle, we moved toward a neutral duration position
relative to the Lehman Index.
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8 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
QUESTIONS & ANSWERS
We increased the Fund's already sizable allocation to mortgage-backed
securities by reducing its exposure to agencies and investment-grade
corporate bonds. In June, we initiated a yield curve steepening bias by
selling longer-maturity bonds in favor of two-year Treasuries, in an
effort to take advantage of our expectation that long-term rates will
rise more than short-term rates over the coming months. The Fund's
portfolio turnover rate for the annual period was 281%.*
Q: How do you intend to manage the Fund in the coming months?
A: U.S. interest rates across the range of maturities, or yield curve, have
declined to levels that appear too low given our view that the economy
may slow modestly. We would characterize the slowing economy as a "soft
landing" and we think inflation may be nudged higher over the remainder
of 2006. Thus, we believe the Fed is likely to pause with its targeted
federal funds rate at its current 5.25% for an extended period of time.
Based on this view, we intend to maintain the Fund's duration only
modestly shorter than the Lehman Index for the near term and we continue
to favor shorter maturity notes over longer maturity bonds. We intend to
maintain the Fund's modest exposure to investment-grade corporate bonds
and its more significant allocations to mortgage-backed securities,
commercial mortgage-backed securities and asset-backed securities.
Mortgages remain an attractive source of yield, given our views that
interest rates will likely be rather range-bound during the next several
months. However, the strong performance of mortgages toward the end of
the annual period will likely lead us to moderately reduce the Fund's
still significant allocation to the sector. As always, we will maintain
a disciplined focus on individual security selection.
* A significant portion of the turnover was the result of "roll"
transactions in the liquid derivatives and Treasury securities. In the
derivative transactions, positions in expiring contracts are liquidated
and simultaneously replaced with positions in new contracts with
equivalent characteristics. In the Treasury transactions, existing
holdings are sold to purchase newly issued securities with slightly
longer maturity dates. Although these transactions affect the turnover
rate of the portfolio, they do not change the risk exposure or result in
material transaction costs. The remaining turnover resulted from
strategic reallocations and relative value trading. After transaction
costs, we expect this activity to enhance the returns on the overall
fund.
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RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 9
THE FUND'S LONG-TERM PERFORMANCE
The chart on the facing page illustrates the total value of an assumed $10,000
investment in RiverSource Diversified Bond Fund Class A shares (from 9/1/96 to
8/31/06) as compared to the performance of two widely cited performance
indices, the Lehman Brothers Aggregate Bond Index and the Lipper Intermediate
Investment Grade Index. In comparing the Fund's Class A shares to these
indices, you should take into account the fact that the Fund's performance
reflects the maximum sales charge of 4.75%, while such charges are not
reflected in the performance of the indices. Returns for the Fund include the
reinvestment of any distribution paid during each period.
The performance information shown represents past performance and is not a
guarantee of future results. The investment return and principal value of your
investment will fluctuate so that your shares, when redeemed, may be worth
more or less than their original cost. Current performance may be lower or
higher than the performance information shown. You may obtain performance
information current to the most recent month-end by contacting your financial
institution or visiting riversource.com/funds. Also see "Past Performance" in
the Fund's current prospectus.
COMPARATIVE RESULTS
Results at Aug. 31, 2006 SINCE
1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION(3)
RIVERSOURCE DIVERSIFIED BOND FUND
(INCLUDES SALES CHARGE)
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Class A Cumulative value of $10,000 $ 9,681 $10,665 $11,542 $16,174 $157,328
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Average annual total return -3.19% +2.17% +2.91% +4.93% +9.02%
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LEHMAN BROTHERS AGGREGATE BOND INDEX(1)
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Cumulative value of $10,000 $10,171 $11,242 $12,684 $18,792 N/A
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Average annual total return +1.71% +3.98% +4.87% +6.51% N/A
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LIPPER INTERMEDIATE INVESTMENT GRADE INDEX(2)
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Cumulative value of $10,000 $10,162 $11,258 $12,552 $18,118 N/A
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Average annual total return +1.62% +4.03% +4.65% +6.12% N/A
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Results for other share classes can be found on page 6.
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10 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN
RIVERSOURCE DIVERSIFIED BOND FUND
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
RiverSource Diversified Lehman Brothers Lipper Intermediate
Bond Fund Class A Aggregate Bond Investment Grade
Year (includes sales charge) Index(1) Index(2)
- ----------- ----------------------- --------------- -------------------
1996 $ 9,525 $10,000 $10,000
1997 $10,674 $11,000 $10,959
1998 $11,357 $12,163 $12,000
1999 $11,545 $12,260 $12,053
2000 $12,085 $13,187 $12,846
2001 $13,351 $14,815 $14,427
2002 $13,769 $16,017 $15,271
2003 $14,445 $16,715 $16,093
2004 $15,245 $17,740 $17,081
2005 $15,913 $18,476 $17,829
2006 $16,174 $18,792 $18,118
(1) The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up
of a representative list of government, corporate, asset-backed and
mortgage-backed securities. The index is frequently used as a general
measure of bond market performance. The index reflects reinvestment of
all distributions and changes in market prices, but excludes brokerage
commissions or other fees.
(2) The Lipper Intermediate Investment Grade Index includes the 30 largest
investment grade funds tracked by Lipper Inc. The index's returns
include net reinvested dividends.
(3) Fund data is from Oct. 3, 1974. The Fund began operating before the
inception of the Lehman Brothers Aggregate Bond Index and Lipper peer
group.
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RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 11
INVESTMENTS IN SECURITIES
AUG. 31, 2006
(Percentages represent value of investments compared to net assets)
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BONDS (103.3%)
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ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
SOVEREIGN (0.2%)
United Mexican States
09-27-34 6.75% $ 5,310,000(c) $ 5,633,910
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U.S. GOVERNMENT OBLIGATIONS & AGENCIES (24.6%)
Federal Farm Credit Bank
10-10-08 4.25 13,285,000 13,077,807
Federal Home Loan Bank
01-18-08 4.63 32,935,000 32,713,347
02-08-08 4.63 16,900,000 16,784,945
02-13-08 5.25 29,685,000 29,738,760
Federal Home Loan Mtge Corp
08-17-07 4.00 11,155,000 11,022,746
06-15-08 3.88 67,935,000 66,534,180
10-15-08 5.13 25,085,000 25,119,667
03-15-09 5.75 9,385,000 9,543,775
07-15-09 4.25 10,000,000 9,791,350
07-12-10 4.13 27,222,000 26,362,683
Federal Natl Mtge Assn
09-15-07 4.25 24,930,000 24,682,694
01-15-08 4.63 15,565,000 15,463,055
08-15-08 3.25 86,170,000 83,311,741
10-15-08 4.50 19,250,000 19,032,706
Overseas Private Investment
U.S. Govt Guaranty Series 1996A
09-15-08 6.99 2,777,778 2,833,528
U.S. Treasury
02-15-08 3.38 330,000 323,117
05-31-08 4.88 25,745,000 25,761,091
08-15-09 4.88 10,655,000 10,703,278
07-31-11 4.88 21,415,000(g) 21,573,942
08-31-11 4.75 46,000,000(e) 45,859,838
08-15-23 6.25 93,994,000(j) 107,777,374
02-15-26 6.00 71,171,000 80,384,299
U.S. Treasury Inflation-Indexed Bond
01-15-07 3.38 29,056,133(r) 29,045,454
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Total 707,441,377
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BONDS (CONTINUED)
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ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
ASSET-BACKED (2.6%)
Capital Auto Receivables Asset Trust
Series 2004-1 Cl CTFS
09-15-10 2.84% $ 4,200,000 $ 4,104,191
Capital Auto Receivables Asset Trust
Series 2006-SN1A Cl A4B
03-20-10 5.44 9,400,000(b,d) 9,400,000
Capital Auto Receivables Asset Trust
Series 2006-SN1A Cl D
04-20-11 6.33 2,500,000(d) 2,504,883
College Loan Corporation Trust
Collateralized Mtge Obligation
Interest Only
Series 2006-1 Cl AIO
07-25-08 5.62 14,700,000(l) 2,659,207
Countrywide Asset-backed Ctfs
Series 2005-10 Cl AF6
02-25-36 4.92 1,865,000 1,803,813
Countrywide Asset-backed Ctfs
Series 2006-4 Cl 1A1M
07-25-36 5.58 4,112,574(b) 4,116,809
Dunkin Securitization
Series 2006-1 Cl A2 (AMBAC)
06-20-31 5.78 5,575,000(d,n) 5,639,631
Ford Credit Floorplan Master Owner Trust
Series 2006-3 Cl A
06-15-11 5.51 22,200,000(b) 22,258,963
Hertz Vehicle Financing LLC
Series 2004-1A Cl A3 (MBIA)
05-25-09 2.85 2,600,000(d,n) 2,511,299
Metris Master Trust
Series 2004-2 Cl D
10-20-10 8.57 1,200,000(b,d) 1,203,264
Metris Master Trust
Series 2005-1A Cl D
03-21-11 7.23 1,375,000(b,d) 1,376,570
See accompanying notes to investments in securities.
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12 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
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BONDS (CONTINUED)
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ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
ASSET-BACKED (CONT.)
Natl Collegiate Student Loan Trust
Collateralized Mtge Obligation
Interest Only
Series 2006-2 Cl AIO
08-25-11 5.89% $ 8,875,000(l) $ 2,249,005
Popular ABS Mtge Pass-Through Trust
Series 2005-A Cl AF2
06-25-35 4.49 3,615,000 3,560,237
Renaissance Home Equity Loan Trust
Series 2005-4 Cl A3
02-25-36 5.57 4,670,000 4,654,029
Residential Asset Securities
Series 2006-KS1 Cl A2
02-25-36 5.46 7,225,000(b) 7,223,873
WFS Financial Owner Trust
Series 2004-1 Cl D
08-22-11 3.17 592,004 583,625
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Total 75,849,399
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COMMERCIAL MORTGAGE-BACKED (13.9%)(f)
Banc of America Commercial Mtge
Series 2005-1 Cl A4
11-10-42 5.04 4,850,000 4,792,085
Banc of America Commercial Mtge
Series 2005-4 Cl A5A
07-10-45 4.93 10,450,000 10,053,214
Banc of America Commercial Mtge
Series 2005-4 Cl ASB
07-10-45 4.87 4,050,000 3,937,796
Banc of America Commercial Mtge
Series 2006-2 Cl AAB
05-10-45 5.91 5,200,000 5,313,012
Banc of America Commercial Mtge
Series 2006-4 Cl AAB
07-10-15 5.60 5,375,000 5,402,165
Banc of America Large Loan
Series 2006-LAQ Cl E
02-09-21 5.75 3,350,000(b,d) 3,364,298
Banc of America Large Loan
Series 2006-LAQ Cl F
02-09-21 5.81 3,750,000(b,d) 3,763,016
Banc of America Large Loan
Series 2006-LAQ Cl G
02-09-21 5.90 2,625,000(b,d) 2,629,945
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
COMMERCIAL MORTGAGE-BACKED (CONT.)
Bear Stearns Commercial Mtge Securities
Series 2003-T10 Cl A1
03-13-40 4.00% $ 2,716,395 $ 2,618,034
Bear Stearns Commercial Mtge Securities
Series 2005-PW10 Cl A4
12-11-40 5.41 6,450,000 6,422,925
Bear Stearns Commercial Mtge Securities
Series 2005-T20 Cl E
10-12-42 5.30 3,200,000 3,081,760
CDC Commercial Mtge Trust
Series 2002-FX1 Cl A2
11-15-30 5.68 11,750,000 11,945,295
Citigroup Commercial Mtge Trust
Series 2005-EMG Cl A1
09-20-51 4.15 8,231,436(d) 8,065,960
Citigroup/Deutsche Bank Commercial Mtge Trust
Series 2005-CD1 Cl ASB
07-15-44 5.40 3,050,000 3,031,568
Commercial Mtge Pass-Through Ctfs
Series 2006-CN2A Cl BFL
02-05-19 5.72 2,550,000(b,d) 2,564,182
Credit Suisse Mtge Capital Ctfs
Series 2006-C2 Cl A3
03-15-39 5.85 5,000,000 5,088,172
CS First Boston Mtge Securities
Series 2005-C5 Cl A4
08-15-38 5.10 21,065,000 20,527,705
Federal Natl Mtge Assn #385683
02-01-13 4.83 6,221,674 6,081,824
Federal Natl Mtge Assn #385815
01-01-13 4.77 7,285,524 7,112,065
Federal Natl Mtge Assn #555806
10-01-13 5.11 529,737 523,922
Federal Natl Mtge Assn #745629
01-01-18 5.08 3,535,166 3,459,337
GE Capital Commercial Mtge
Series 2004-C2 Cl A2
03-10-40 4.12 6,250,000 6,033,688
General Electric Capital Assurance
Series 2003-1 Cl A3
05-12-35 4.77 10,350,000(d) 10,140,599
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 13
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
COMMERCIAL MORTGAGE-BACKED (CONT.)
GMAC Commercial Mtge Securities
Series 1999-C1 Cl B
05-15-33 6.30% $ 8,000,000 $ 8,175,513
Greenwich Capital Commercial Funding
Series 2004-GG1 Cl A5
06-10-36 4.88 3,400,000 3,344,768
Greenwich Capital Commercial Funding
Series 2006-GG7 Cl A4
07-10-38 6.11 15,700,000 16,285,319
Greenwich Capital Commercial Funding
Series 2006-GG7 Cl AAB
07-10-38 6.11 5,250,000 5,423,330
GS Mtge Securities II
Series 2004-GG2 Cl A4
08-10-38 4.96 5,900,000 5,819,451
JPMorgan Chase Commercial Mtge Securities
Series 2002-CIB5 Cl A1
10-12-37 4.37 6,525,232 6,397,393
JPMorgan Chase Commercial Mtge Securities
Series 2003-CB6 Cl A2
07-12-37 5.26 11,000,000 10,920,710
JPMorgan Chase Commercial Mtge Securities
Series 2003-LN1 Cl A1
10-15-37 4.13 3,986,677 3,843,624
JPMorgan Chase Commercial Mtge Securities
Series 2003-ML1A Cl A1
03-12-39 3.97 3,945,402 3,819,004
JPMorgan Chase Commercial Mtge Securities
Series 2003-ML1A Cl A2
03-12-39 4.77 6,869,000 6,646,765
JPMorgan Chase Commercial Mtge Securities
Series 2004-CBX Cl A3
01-12-37 4.18 4,000,000 3,880,588
JPMorgan Chase Commercial Mtge Securities
Series 2005-LDP2 Cl A1
07-15-42 4.33 6,648,477 6,527,474
JPMorgan Chase Commercial Mtge Securities
Series 2005-LDP5 Cl A4
12-15-44 5.34 10,825,000 10,684,012
JPMorgan Chase Commercial Mtge Securities
Series 2006-LDP6 Cl A4
04-15-43 5.48 4,250,000 4,245,243
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
COMMERCIAL MORTGAGE-BACKED (CONT.)
JPMorgan Chase Commercial Mtge Securities
Series 2006-LDP6 Cl ASB
04-15-43 5.49% $ 6,450,000 $ 6,461,517
LB-UBS Commercial Mtge Trust
Series 2002-C2 Cl A3
06-15-26 5.39 10,150,000 10,199,162
LB-UBS Commercial Mtge Trust
Series 2002-C4 Cl A4
09-15-26 4.56 7,000,000 6,826,282
LB-UBS Commercial Mtge Trust
Series 2002-C4 Cl A5
09-15-31 4.85 6,000,000 5,859,690
LB-UBS Commercial Mtge Trust
Series 2004-C2 Cl A3
03-15-29 3.97 4,475,000 4,195,492
LB-UBS Commercial Mtge Trust
Series 2004-C8 Cl A2
12-15-29 4.20 8,100,000 7,851,654
LB-UBS Commercial Mtge Trust
Series 2005-C5 Cl AAB
09-15-30 4.93 7,300,000 7,123,778
LB-UBS Commercial Mtge Trust
Series 2006-C3 Cl AAB
03-15-39 5.64 5,950,000 6,022,947
LB-UBS Commercial Mtge Trust
Series 2006-C4 Cl AAB
06-15-32 6.07 4,100,000 4,229,110
Merrill Lynch Mtge Trust
Series 2006-C1 Cl A4
05-12-39 5.84 11,625,000 11,853,501
Morgan Stanley Capital I
Series 2003-IQ4 Cl A1
05-15-40 3.27 4,656,731 4,459,442
Morgan Stanley Capital I
Series 2003-T11 Cl A2
06-13-41 4.34 4,550,000 4,436,474
Morgan Stanley Capital I
Series 2004-HQ4 Cl A5
04-14-40 4.59 4,950,000 4,773,681
Morgan Stanley Capital I
Series 2005-IQ10 Cl A4A
09-15-42 5.23 6,125,000 6,018,666
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
14 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
COMMERCIAL MORTGAGE-BACKED (CONT.)
Morgan Stanley Capital I
Series 2005-T19 Cl AAB
06-12-47 4.85% $ 9,125,000 $ 8,879,141
Morgan Stanley Capital I
Series 2006-T23 Cl AAB
08-12-41 5.97 3,425,000 3,519,990
Morgan Stanley Capital I
Series 2006-XLF Cl A2
07-15-19 5.53 6,500,000(b,d) 6,500,000
Morgan Stanley Dean Witter Capital I
Series 2002-TOP7 Cl A2
01-15-39 5.98 19,810,000 20,396,007
Prudential Commercial Mtge Trust
Series 2003-PWR1 Cl A1
02-11-36 3.67 5,523,712 5,291,069
Wachovia Bank Commercial Mtge Trust
Series 2003-C4 Cl A2
04-15-35 4.57 14,000,000 13,588,151
Wachovia Bank Commercial Mtge Trust
Series 2005-C20 Cl A5
07-15-42 5.09 4,642,000 4,591,735
Wachovia Bank Commercial Mtge Trust
Series 2006-C24 Cl APB
03-15-45 5.58 4,350,000 4,393,043
Wachovia Bank Commercial Mtge Trust
Series 2006-C25 Cl APB2
05-15-43 5.95 4,225,000 4,320,694
Wachovia Bank Commercial Mtge Trust
Series 2006-C27 Cl A3
07-15-45 5.77 2,900,000 2,898,289
Wachovia Bank Commercial Mtge Trust
Series 2006-C27 Cl APB
07-15-45 5.73 5,075,000 5,075,609
---------------
Total 401,730,885
- -----------------------------------------------------------------------------
MORTGAGE-BACKED (43.7%)(f,o)
Adjustable Rate Mtge Trust
Collateralized Mtge Obligation
Series 2005-12 Cl 2A1
03-25-36 5.73 9,435,847(m) 9,446,582
Adjustable Rate Mtge Trust
Collateralized Mtge Obligation
Series 2006-1 Cl 2A1
03-25-36 5.98 10,761,056(m) 10,909,882
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
American Home Mtge Assets
Collateralized Mtge Obligation
Series 2006-2 Cl 2A2
09-25-46 5.62% $ 18,664,464(m) $ 18,664,464
American Home Mtge Assets
Collateralized Mtge Obligation
Series 2006-3 Cl 3A2
10-25-46 5.58 11,794,669(m) 11,794,669
Banc of America Funding
Collateralized Mtge Obligation
Series 2006-A Cl 3A2
02-20-36 5.93 7,524,999(m) 7,593,401
Bank of America Alternative Loan Trust
Collateralized Mtge Obligation
Series 2003-11 Cl 1A1
01-25-34 6.00 7,878,421 7,814,369
Bank of America Alternative Loan Trust
Collateralized Mtge Obligation
Series 2003-11 Cl 4A1
01-25-19 4.75 4,331,157 4,170,094
Bank of America Alternative Loan Trust
Collateralized Mtge Obligation
Series 2004-3 Cl 1A1
04-25-34 6.00 9,810,100 9,754,918
ChaseFlex Trust
Collateralized Mtge Obligation
Series 2005-2 Cl 2A2
06-25-35 6.50 2,429,536 2,456,868
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2003-11T1 Cl A1
07-25-18 4.75 4,769,371 4,592,013
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-54CB Cl 2A3
11-25-35 5.50 6,777,538 6,764,332
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-54CB Cl 3A7
11-25-35 5.50 6,868,820 6,855,459
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 15
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-64CB Cl 1A1
12-25-35 5.50% $ 11,860,574 $ 11,862,534
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-6CB Cl 1A1
04-25-35 7.50 6,530,499 6,771,737
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-85CB Cl 2A2
02-25-36 5.50 3,199,099 3,190,350
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2006-22R Cl 1A2
05-25-36 6.00 8,400,000 8,501,257
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2006-2CB Cl A11
03-25-36 6.00 10,033,217 10,002,676
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2005-R2 Cl 2A1
06-25-35 7.00 8,335,928(d) 8,588,136
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2006-HYB1 Cl 1A1
03-20-36 5.40 4,709,853(m) 4,702,930
CS First Boston Mtge Securities
Collateralized Mtge Obligation
Series 2003-29 Cl 8A1
11-25-18 6.00 2,678,380 2,676,857
CS First Boston Mtge Securities
Collateralized Mtge Obligation
Series 2005-12 Cl 3A1
01-25-36 7.00 11,176,479 11,403,242
Downey Savings & Loan Assn Mtge Loan Trust
Collateralized Mtge Obligation
Interest Only
Series 2005-AR5 Cl X1
08-19-45 6.38 70,276,624(l) 922,381
Federal Home Loan Mtge Corp
09-01-36 6.50 32,350,000(e) 32,855,468
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Home Loan Mtge Corp #170216
03-01-17 8.50% $ 9,538 $ 10,149
Federal Home Loan Mtge Corp #275036
07-01-16 8.00 96 100
Federal Home Loan Mtge Corp #284190
01-01-17 8.00 675 707
Federal Home Loan Mtge Corp #290970
04-01-17 8.00 14,550 15,206
Federal Home Loan Mtge Corp #295114
06-01-17 8.50 3,914 4,165
Federal Home Loan Mtge Corp #540861
09-01-19 8.50 34,966 37,350
Federal Home Loan Mtge Corp #A00304
04-01-21 9.00 68,329 73,253
Federal Home Loan Mtge Corp #B11835
01-01-19 5.50 591,618 590,227
Federal Home Loan Mtge Corp #C00103
03-01-22 8.50 148,836 159,688
Federal Home Loan Mtge Corp #C00144
08-01-22 8.50 124,577 133,800
Federal Home Loan Mtge Corp #C00356
08-01-24 8.00 472,055 498,359
Federal Home Loan Mtge Corp #C00666
10-01-28 7.00 56,233 58,023
Federal Home Loan Mtge Corp #C53878
12-01-30 5.50 1,908,725 1,884,932
Federal Home Loan Mtge Corp #C62993
01-01-32 6.50 1,387,775 1,415,700
Federal Home Loan Mtge Corp #C63552
01-01-32 6.50 1,827,716 1,872,482
Federal Home Loan Mtge Corp #C64703
03-01-32 6.50 1,147,222 1,175,083
Federal Home Loan Mtge Corp #C67723
06-01-32 7.00 1,016,444 1,051,159
Federal Home Loan Mtge Corp #C78031
04-01-33 5.50 10,522,591 10,385,185
Federal Home Loan Mtge Corp #C79930
06-01-33 5.50 8,870,482 8,740,206
Federal Home Loan Mtge Corp #C90767
12-01-23 6.00 9,002,140 9,096,025
Federal Home Loan Mtge Corp #D96300
10-01-23 5.50 5,833,012 5,789,321
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
16 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Home Loan Mtge Corp #E01127
02-01-17 6.50% $ 1,481,472 $ 1,507,879
Federal Home Loan Mtge Corp #E01419
05-01-18 5.50 5,058,418 5,049,661
Federal Home Loan Mtge Corp #E79810
11-01-14 7.50 1,251,303 1,307,872
Federal Home Loan Mtge Corp #E90216
05-01-17 6.00 1,639,531 1,657,674
Federal Home Loan Mtge Corp #E98725
08-01-18 5.00 11,342,450 11,135,907
Federal Home Loan Mtge Corp #E99684
10-01-18 5.00 11,422,611 11,211,867
Federal Home Loan Mtge Corp #G00286
02-01-25 8.00 185,986 196,350
Federal Home Loan Mtge Corp #G01108
04-01-30 7.00 3,720,599 3,836,219
Federal Home Loan Mtge Corp #G01441
07-01-32 7.00 3,486,575 3,588,649
Federal Home Loan Mtge Corp #G01535
04-01-33 6.00 11,738,584 11,827,738
Federal Home Loan Mtge Corp #G11302
07-01-17 7.00 3,999,155 4,106,710
Federal Home Loan Mtge Corp #G12101
11-01-18 5.00 3,779,846 3,709,654
Federal Home Loan Mtge Corp #G30225
02-01-23 6.00 12,058,781 12,192,150
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
03-15-22 7.00 1,009,867 1,006,899
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only
Series 2590 Cl Bl
02-15-14 17.16 3,134,265(l) 156,095
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only
Series 2718 Cl IA
10-15-22 14.56 7,015,991(l) 319,004
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Series 2576 Cl KJ
02-15-33 5.50 11,421,369 11,464,135
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Series 2641 Cl KC
01-15-18 6.50% $ 4,324,513 $ 4,449,854
Federal Natl Mtge Assn
09-01-21 5.50 500,000(e) 498,125
09-01-21 6.00 12,550,000(e) 12,687,272
09-01-36 5.50 78,900,000(e) 77,420,624
09-01-36 6.00 20,000,000(e) 20,018,760
09-01-36 6.50 73,000,000(e) 74,094,999
Federal Natl Mtge Assn #125479
04-01-27 7.50 288,679 299,731
Federal Natl Mtge Assn #190899
04-01-23 8.50 517,844 545,803
Federal Natl Mtge Assn #190944
05-01-24 6.00 6,617,082 6,654,930
Federal Natl Mtge Assn #190988
06-01-24 9.00 439,692 468,241
Federal Natl Mtge Assn #231309
09-01-23 6.50 159,457 162,502
Federal Natl Mtge Assn #231310
09-01-23 6.50 397,589 405,182
Federal Natl Mtge Assn #250330
09-01-25 8.00 317,048 336,044
Federal Natl Mtge Assn #250495
03-01-26 7.00 720,837 743,694
Federal Natl Mtge Assn #250765
12-01-26 8.00 264,866 280,908
Federal Natl Mtge Assn #251116
08-01-27 8.00 310,212 329,182
Federal Natl Mtge Assn #252498
06-01-29 7.00 6,776 6,983
Federal Natl Mtge Assn #252982
01-01-30 8.00 216,402 229,849
Federal Natl Mtge Assn #253883
08-01-16 6.00 3,569,187 3,612,548
Federal Natl Mtge Assn #254236
03-01-17 6.50 2,129,551 2,167,758
Federal Natl Mtge Assn #254383
06-01-32 7.50 469,536 485,163
Federal Natl Mtge Assn #254802
07-01-18 4.50 3,346,672 3,223,849
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 17
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #254916
09-01-23 5.50% $ 11,575,018 $ 11,479,159
Federal Natl Mtge Assn #255788
06-01-15 5.50 3,685,733 3,684,059
Federal Natl Mtge Assn #268071
01-01-24 6.50 108,149 110,215
Federal Natl Mtge Assn #303226
02-01-25 8.00 147,746 156,489
Federal Natl Mtge Assn #313049
08-01-11 8.50 1,124,252 1,149,085
Federal Natl Mtge Assn #323933
09-01-29 7.00 4,509,195 4,646,798
Federal Natl Mtge Assn #408207
01-01-28 6.50 167,218 171,380
Federal Natl Mtge Assn #455791
01-01-29 6.50 542,310 553,698
Federal Natl Mtge Assn #489888
05-01-29 6.50 2,530,816 2,583,770
Federal Natl Mtge Assn #496029
01-01-29 6.50 3,403,518 3,474,063
Federal Natl Mtge Assn #50700
03-01-08 7.00 739,731 744,343
Federal Natl Mtge Assn #545008
06-01-31 7.00 2,862,158 2,961,185
Federal Natl Mtge Assn #545342
04-01-13 7.00 2,532,142 2,547,931
Federal Natl Mtge Assn #545684
05-01-32 7.50 388,757 402,427
Federal Natl Mtge Assn #545869
07-01-32 6.50 2,550,405 2,601,398
Federal Natl Mtge Assn #545885
08-01-32 6.50 4,510,149 4,601,750
Federal Natl Mtge Assn #545910
08-01-17 6.00 5,807,711 5,883,177
Federal Natl Mtge Assn #555343
08-01-17 6.00 5,652,882 5,719,687
Federal Natl Mtge Assn #555375
04-01-33 6.00 26,983,901 27,165,147
Federal Natl Mtge Assn #555458
05-01-33 5.50 23,707,583 23,344,619
Federal Natl Mtge Assn #555734
07-01-23 5.00 8,899,170 8,638,063
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #555740
08-01-18 4.50% $ 11,482,252 $ 11,079,027
Federal Natl Mtge Assn #555794
09-01-28 7.50 1,012,494 1,051,647
Federal Natl Mtge Assn #567840
10-01-30 7.00 1,553,028 1,600,420
Federal Natl Mtge Assn #587859
12-01-16 5.50 5,553,220 5,550,656
Federal Natl Mtge Assn #597374
09-01-31 7.00 841,465 870,446
Federal Natl Mtge Assn #606882
10-01-31 7.00 1,102,580 1,134,445
Federal Natl Mtge Assn #634650
04-01-32 7.50 263,079 271,835
Federal Natl Mtge Assn #638969
03-01-32 5.50 1,576,260 1,555,522
Federal Natl Mtge Assn #643362
04-01-17 6.50 890,099 906,068
Federal Natl Mtge Assn #646147
06-01-32 7.00 2,728,641 2,820,308
Federal Natl Mtge Assn #646446
06-01-17 6.50 1,312,495 1,336,043
Federal Natl Mtge Assn #649068
06-01-17 6.50 2,241,017 2,287,559
Federal Natl Mtge Assn #649263
08-01-17 6.50 2,214,618 2,259,061
Federal Natl Mtge Assn #654208
10-01-32 6.50 2,310,479 2,352,869
Federal Natl Mtge Assn #654682
10-01-32 6.00 1,370,585 1,376,547
Federal Natl Mtge Assn #654689
11-01-32 6.00 1,725,764 1,732,728
Federal Natl Mtge Assn #656908
09-01-32 6.50 2,265,222 2,318,116
Federal Natl Mtge Assn #662061
09-01-32 6.50 1,818,736 1,852,103
Federal Natl Mtge Assn #667787
02-01-18 5.50 2,141,148 2,137,575
Federal Natl Mtge Assn #670382
09-01-32 6.00 12,432,828 12,485,598
Federal Natl Mtge Assn #670387
08-01-32 7.00 1,673,145 1,723,100
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
18 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #678028
09-01-17 6.00% $ 6,117,358 $ 6,189,651
Federal Natl Mtge Assn #678065
02-01-33 6.50 520,327 532,246
Federal Natl Mtge Assn #678937
01-01-18 5.50 3,351,258 3,349,151
Federal Natl Mtge Assn #678941
02-01-18 5.50 4,050,252 4,047,309
Federal Natl Mtge Assn #678944
01-01-18 5.50 1,956,310 1,955,138
Federal Natl Mtge Assn #679095
04-01-18 5.00 6,050,261 5,941,252
Federal Natl Mtge Assn #680961
01-01-33 6.00 718,907 723,259
Federal Natl Mtge Assn #681400
03-01-18 5.50 5,834,395 5,828,628
Federal Natl Mtge Assn #682825
01-01-33 6.00 2,256,268 2,265,844
Federal Natl Mtge Assn #683274
02-01-18 5.50 2,769,956 2,767,161
Federal Natl Mtge Assn #684586
03-01-33 6.00 3,808,665 3,827,801
Federal Natl Mtge Assn #686172
02-01-33 6.00 2,990,410 3,003,103
Federal Natl Mtge Assn #686528
02-01-33 6.00 3,905,937 3,931,287
Federal Natl Mtge Assn #687051
01-01-33 6.00 11,692,142 11,694,943
Federal Natl Mtge Assn #689093
07-01-28 5.50 3,828,981 3,778,605
Federal Natl Mtge Assn #694628
04-01-33 5.50 7,468,703 7,366,599
Federal Natl Mtge Assn #694795
04-01-33 5.50 8,992,855 8,868,895
Federal Natl Mtge Assn #694988
03-01-33 5.50 12,817,971 12,629,131
Federal Natl Mtge Assn #695202
03-01-33 6.50 4,836,741 4,921,163
Federal Natl Mtge Assn #695220
04-01-33 5.50 1,938,118 1,908,157
Federal Natl Mtge Assn #695385
03-01-18 5.50 7,217,727 7,210,342
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #695909
05-01-18 5.50% $ 2,663,253 $ 2,660,344
Federal Natl Mtge Assn #697843
04-01-18 5.00 2,513,927 2,469,801
Federal Natl Mtge Assn #699424
04-01-33 5.50 5,129,653 5,059,297
Federal Natl Mtge Assn #702427
04-01-33 5.50 4,830,617 4,764,433
Federal Natl Mtge Assn #704049
05-01-18 5.50 3,181,262 3,177,817
Federal Natl Mtge Assn #709901
06-01-18 5.00 6,436,207 6,322,873
Federal Natl Mtge Assn #710823
05-01-33 5.50 749,566 739,359
Federal Natl Mtge Assn #712057
07-01-18 4.50 4,124,421 3,973,055
Federal Natl Mtge Assn #720006
07-01-33 5.50 10,217,575 10,059,624
Federal Natl Mtge Assn #720070
07-01-23 5.50 2,922,081 2,897,882
Federal Natl Mtge Assn #720378
06-01-18 4.50 6,861,491 6,609,674
Federal Natl Mtge Assn #723687
08-01-28 5.50 4,421,269 4,363,100
Federal Natl Mtge Assn #725232
03-01-34 5.00 25,258,889 24,292,249
Federal Natl Mtge Assn #725425
04-01-34 5.50 27,912,809 27,484,689
Federal Natl Mtge Assn #725684
05-01-18 6.00 11,930,655 12,088,176
Federal Natl Mtge Assn #725719
07-01-33 4.84 7,615,449(m) 7,390,184
Federal Natl Mtge Assn #725737
08-01-34 4.53 5,612,194(m) 5,562,975
Federal Natl Mtge Assn #725813
12-01-33 6.50 12,395,396 12,611,750
Federal Natl Mtge Assn #730153
08-01-33 5.50 1,421,677 1,399,700
Federal Natl Mtge Assn #735057
01-01-19 4.50 11,901,082 11,464,311
Federal Natl Mtge Assn #738921
11-01-32 6.50 978,905 998,992
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 19
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #743262
10-01-18 5.00% $ 4,005,493 $ 3,933,862
Federal Natl Mtge Assn #747642
11-01-28 5.50 2,856,023 2,818,448
Federal Natl Mtge Assn #747784
10-01-18 4.50 2,547,773 2,454,269
Federal Natl Mtge Assn #753074
12-01-28 5.50 8,320,855 8,211,380
Federal Natl Mtge Assn #753091
12-01-33 5.50 4,976,313 4,899,385
Federal Natl Mtge Assn #753919
12-01-33 4.94 6,720,790(m) 6,579,260
Federal Natl Mtge Assn #759342
01-01-34 6.50 2,002,256 2,045,170
Federal Natl Mtge Assn #765183
01-01-19 5.50 722,004 720,981
Federal Natl Mtge Assn #765759
12-01-18 5.00 4,675,147 4,590,914
Federal Natl Mtge Assn #765761
02-01-19 5.00 2,092,793 2,055,086
Federal Natl Mtge Assn #766641
03-01-34 5.00 7,430,266 7,136,241
Federal Natl Mtge Assn #776962
04-01-29 5.00 18,601,782 17,869,560
Federal Natl Mtge Assn #779327
06-01-34 4.56 4,668,825(m) 4,559,358
Federal Natl Mtge Assn #804442
12-01-34 6.50 1,866,068 1,896,196
Federal Natl Mtge Assn #837258
09-01-35 4.92 3,080,389(m) 3,060,521
Federal Natl Mtge Assn #845070
12-01-35 5.10 7,445,556(m) 7,393,009
Federal Natl Mtge Assn #882063
06-01-36 6.50 4,088,324 4,150,756
Federal Natl Mtge Assn #886291
07-01-36 7.00 8,080,751 8,296,490
Federal Natl Mtge Assn #886461
08-01-36 6.20 7,963,774(m) 8,045,881
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-24 Cl PI
12-25-12 13.29 2,097,186(l) 65,005
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-71 Cl IM
12-25-31 10.63% $ 3,471,840(l) $ 645,966
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2004-84 Cl GI
12-25-22 9.25 921,859(l) 139,076
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 367 Cl 2
01-25-36 9.07 16,109,477(l) 4,070,541
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Principal Only
09-01-18 5.63 23,035(q) 19,424
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Series 2003-133 Cl GB
12-25-26 8.00 4,084,256 4,338,661
Govt Natl Mtge Assn #345538
02-15-24 8.00 167,578 177,631
Govt Natl Mtge Assn #398831
08-15-26 8.00 199,649 211,896
Govt Natl Mtge Assn #423782
05-15-26 7.50 486,792 507,979
Govt Natl Mtge Assn #425004
10-15-33 5.50 4,087,588 4,053,076
Govt Natl Mtge Assn #426170
06-15-26 8.00 110,534 117,314
Govt Natl Mtge Assn #595256
12-15-32 6.00 7,559,018 7,640,989
Govt Natl Mtge Assn #604580
08-15-33 5.00 4,400,765 4,266,435
Govt Natl Mtge Assn #604708
10-15-33 5.50 11,436,257 11,339,700
Govt Natl Mtge Assn #606844
09-15-33 5.00 10,933,055 10,599,332
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
20 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Govt Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2002-70 Cl IC
08-20-32 11.80% $ 9,990,511(l) $ 1,880,462
Govt Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2002-80 Cl CI
01-20-32 16.24 1,993,664(l) 222,337
Harborview Mtge Loan Trust
Collateralized Mtge Obligation
Series 2006-3 Cl B1
06-19-36 6.49 4,261,019(m) 4,290,979
Harborview Mtge Loan Trust
Collateralized Mtge Obligation
Series 2006-5 Cl 2A1B
07-19-46 5.56 5,320,369(m) 5,319,421
IndyMac Index Mtge Loan Trust
Collateralized Mtge Obligation
Interest Only
Series 2005-AR8 Cl AX1
04-25-35 4.50 163,908,862(l) 1,664,699
IndyMac Index Mtge Loan Trust
Collateralized Mtge Obligation
Series 2005-AR25 Cl 1A21
12-25-35 5.88 7,430,047(m) 7,425,984
IndyMac Index Nim
Collateralized Mtge Obligation
Series 2006-AR6 Cl N1
06-25-46 6.65 3,350,754(d) 3,350,754
Lehman XS Net Interest Margin Nts
Collateralized Mtge Obligation
Series 2006-2N Cl A1
02-27-46 7.00 1,668,925(d) 1,669,968
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2004-2 Cl 4A1
02-25-19 5.00 6,847,515 6,654,949
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2004-4 Cl 2A1
05-25-34 6.00 4,049,987 4,000,658
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2004-7 Cl 8A1
08-25-19 5.00% $ 5,548,451 $ 5,370,956
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2004-8 Cl 7A1
09-25-19 5.00 7,514,803 7,279,214
Rali NIM
Collateralized Mtge Obligation
Series 2006-QO4 Cl N1
04-25-46 6.05 2,402,755(d) 2,401,254
Residential Accredit Loans
Collateralized Mtge Obligation
Series 2006-QO6 Cl A2
06-25-46 5.55 6,127,919(b) 6,129,744
Residential Accredit Loans
Collateralized Mtge Obligation
Series 2006-QS3 Cl 1A10
03-25-36 6.00 7,061,408 7,131,563
Structured Asset Securities
Collateralized Mtge Obligation
Series 2003-33H Cl 1A1
10-25-33 5.50 15,413,299 15,014,058
TBW Mtge Backed Pass Through
Ctfs
Collateralized Mtge Obligation
Series 2006-2 Cl 6A1
07-25-36 7.00 11,355,892 11,657,782
Washington Mutual
Alternative Mtge Loan Trust
Pass-Through Ctfs
Collateralized Mtge Obligation
Interest Only
Series 2005-AR1 Cl X2
12-25-35 7.10 57,810,087(l) 584,876
Washington Mutual
Collateralized Mtge Obligation
Series 2003-AR10 Cl A7
10-25-33 4.06 9,025,000(m) 8,839,101
Washington Mutual
Collateralized Mtge Obligation
Series 2004-CB2 Cl 6A
07-25-19 4.50 5,120,185 4,854,447
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 21
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Washington Mutual
Collateralized Mtge Obligation
Series 2005-AR14 Cl 2A1
12-25-35 5.30% $ 5,850,788(m) $ 5,791,601
Washington Mutual
Collateralized Mtge Obligation
Series 2005-AR17 Cl A1C1
12-25-45 5.51 4,608,505(m) 4,610,527
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-10 Cl A1
10-25-35 5.00 19,150,680 18,065,794
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-5 Cl 2A1
05-25-35 5.50 13,197,111 12,867,184
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2006-AR6 Cl 5A1
03-25-36 5.11 12,186,437(e,m) 12,021,229
---------------
Total 1,277,141,602
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.1%)
DRS Technologies
02-01-16 6.63 825,000 802,313
L-3 Communications
06-15-12 7.63 670,000 683,400
L-3 Communications
Sr Sub Nts
Series B
10-15-15 6.38 890,000 856,625
---------------
Total 2,342,338
- -----------------------------------------------------------------------------
AUTOMOTIVE (--%)
GMAC LLC
09-15-11 6.88 575,000 566,305
- -----------------------------------------------------------------------------
BANKING (1.6%)
Banknorth Group
Sr Nts
05-01-08 3.75 7,330,000 7,146,603
Landsbanki Islands
08-25-11 6.10 9,400,000(c,d) 9,418,471
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
BANKING (CONT.)
Popular North America
Sr Nts
10-01-08 3.88% $ 21,427,000 $ 20,743,179
Wells Fargo Bank
Sub Nts
08-26-36 5.95 8,280,000 8,337,877
---------------
Total 45,646,130
- -----------------------------------------------------------------------------
BROKERAGE (--%)
LaBranche & Co
Sr Nts
05-15-12 11.00 935,000 1,002,788
- -----------------------------------------------------------------------------
CHEMICALS (0.1%)
Airgas
10-01-11 9.13 1,500,000 1,565,625
Georgia Gulf
Sr Nts
12-15-13 7.13 160,000 151,200
---------------
Total 1,716,825
- -----------------------------------------------------------------------------
ELECTRIC (3.2%)
Aquila Canada Finance
06-15-11 7.75 960,000(c) 1,005,600
Arizona Public Service
05-15-15 4.65 13,370,000 12,142,446
CMS Energy
Sr Nts
01-15-09 7.50 1,275,000 1,310,063
Commonwealth Edison
1st Mtge
04-15-15 4.70 1,845,000 1,707,581
08-15-16 5.95 2,420,000 2,432,330
Consumers Energy
1st Mtge
02-15-12 5.00 1,950,000 1,890,991
02-15-17 5.15 2,520,000 2,380,946
Consumers Energy
1st Mtge Series H
02-17-09 4.80 7,750,000 7,625,729
Dynegy Holdings
05-15-18 7.13 80,000 70,600
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
22 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
ELECTRIC (CONT.)
Dynegy Holdings
Sr Unsecured
05-01-16 8.38% $ 315,000(d) $ 310,275
Edison Mission Energy
Sr Nts
06-15-13 7.50 720,000(d) 720,000
Exelon
06-15-10 4.45 10,725,000 10,336,862
Florida Power
1st Mtge
07-15-11 6.65 2,250,000 2,365,355
IPALCO Enterprises
Secured
11-14-08 8.38 400,000 413,000
11-14-11 8.63 3,680,000 3,946,800
Midwest Generation LLC
Series B
01-02-16 8.56 163,621 173,847
Northern States Power
Sr Nts
08-01-09 6.88 5,730,000 5,937,088
NRG Energy
02-01-14 7.25 695,000 686,313
Ohio Edison
06-15-09 5.65 8,670,000(d) 8,676,503
Ohio Edison
Sr Nts
05-01-15 5.45 1,195,000 1,164,304
PacifiCorp
1st Mtge
06-15-35 5.25 2,940,000 2,666,074
PSI Energy
10-15-35 6.12 10,035,000 9,849,714
Sierra Pacific Power
05-15-16 6.00 3,525,000(d) 3,498,862
Southern California Edison
1st Mtge
04-01-35 5.75 2,060,000 2,001,418
Virginia Electric & Power
Sr Nts Series A
03-01-13 4.75 6,650,000 6,331,791
Xcel Energy
Sr Nts
07-01-08 3.40 2,725,000 2,628,017
-------------
Total 92,272,509
- -----------------------------------------------------------------------------
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
ENTERTAINMENT (0.2%)
United Artists Theatre Circuit
07-01-15 9.30% $ 6,734,516(i) $ 7,003,897
- -----------------------------------------------------------------------------
FOOD AND BEVERAGE (1.2%)
Cadbury Schweppes US Finance LLC
10-01-08 3.88 6,910,000(d) 6,696,916
10-01-13 5.13 5,900,000(d) 5,686,774
Cott Beverages USA
12-15-11 8.00 1,740,000 1,761,750
Kraft Foods
06-01-12 6.25 5,201,000 5,387,549
Kraft Foods
Sr Unsecured
11-01-11 5.63 15,230,000 15,320,315
---------------
Total 34,853,304
- -----------------------------------------------------------------------------
GAMING (0.1%)
MGM MIRAGE
10-01-09 6.00 670,000 652,413
MGM MIRAGE
Sr Nts
02-27-14 5.88 720,000 655,200
Mohegan Tribal Gaming Authority
02-15-15 6.88 365,000 348,575
Mohegan Tribal Gaming Authority
Sr Nts
02-15-13 6.13 540,000 515,025
Mohegan Tribal Gaming Authority
Sr Sub Nts
04-01-12 8.00 750,000 773,437
Pokagon Gaming Authority
Sr Nts
06-15-14 10.38 235,000(d) 248,513
---------------
Total 3,193,163
- -----------------------------------------------------------------------------
GAS PIPELINES (0.5%)
ANR Pipeline
03-15-10 8.88 875,000 917,916
Colorado Interstate Gas
Sr Nts
03-15-15 5.95 470,000 442,119
11-15-15 6.80 830,000 822,585
Southern Natural Gas
03-15-10 8.88 875,000 917,916
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 23
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
GAS PIPELINES (CONT.)
Southern Star Central
03-01-16 6.75% $ 1,175,000(d) $ 1,152,969
Southern Star Central Gas Pipeline
06-01-16 6.00 5,610,000(d) 5,617,012
Transcontinental Gas Pipe Line
Series B
08-15-11 7.00 1,915,000 1,955,694
Transcontinental Gas Pipe Line
Sr Nts
04-15-16 6.40 656,000(d) 638,780
Williams Companies
Sr Nts
07-15-19 7.63 2,079,000 2,110,185
---------------
Total 14,575,176
- -----------------------------------------------------------------------------
HEALTH CARE (0.6%)
Cardinal Health
07-15-08 6.25 1,595,000 1,615,081
06-15-15 4.00 10,809,000 9,518,946
12-15-17 5.85 2,535,000 2,518,228
Omnicare
Sr Sub Nts
12-15-13 6.75 1,105,000 1,060,800
12-15-15 6.88 700,000 669,375
Triad Hospitals
Sr Nts
05-15-12 7.00 720,000 707,400
Triad Hospitals
Sr Sub Nts
11-15-13 7.00 860,000 821,300
---------------
Total 16,911,130
- -----------------------------------------------------------------------------
HEALTH CARE INSURANCE (0.7%)
UnitedHealth Group
Sr Unsecured
03-15-11 5.25 19,725,000 19,615,033
- -----------------------------------------------------------------------------
INDEPENDENT ENERGY (0.9%)
Devon Financing
09-30-11 6.88 9,160,000 9,714,061
Encore Acquisition
Sr Sub Nts
04-15-14 6.25 240,000 225,600
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
INDEPENDENT ENERGY (CONT.)
EXCO Resources
01-15-11 7.25% $ 1,420,000 $ 1,380,950
Pioneer Natural Resources
05-01-18 6.88 2,675,000 2,641,295
Pioneer Natural Resources
Sr Nts
07-15-16 5.88 1,150,000 1,072,726
Range Resources
03-15-15 6.38 425,000 405,875
Stone Energy
Sr Nts
07-15-10 8.24 855,000(b,d) 846,450
XTO Energy
01-31-15 5.00 2,795,000 2,647,810
XTO Energy
Sr Unsecured
06-30-15 5.30 6,930,000 6,692,848
---------------
Total 25,627,615
- -----------------------------------------------------------------------------
INTEGRATED ENERGY (--%)
Denbury Resources
Sr Sub Nts
12-15-15 7.50 100,000 101,000
- -----------------------------------------------------------------------------
LIFE INSURANCE (0.2%)
Prudential Financial
09-20-14 5.10 6,400,000 6,185,837
- -----------------------------------------------------------------------------
LODGING (--%)
ITT
11-15-15 7.38 715,000 761,475
- -----------------------------------------------------------------------------
MEDIA CABLE (0.4%)
Comcast
06-15-16 4.95 9,535,000 8,794,454
DIRECTV Holdings LLC/Financing
Sr Nts
03-15-13 8.38 406,000 426,300
Videotron Ltee
01-15-14 6.88 1,310,000(c) 1,285,438
---------------
Total 10,506,192
- -----------------------------------------------------------------------------
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
24 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MEDIA NON CABLE (0.4%)
Dex Media West LLC/Finance
Sr Nts Series B
08-15-10 8.50% $ 560,000 $ 574,000
Lamar Media
01-01-13 7.25 242,000 240,185
08-15-15 6.63 788,000 738,750
News America
12-15-35 6.40 9,355,000 8,964,457
Radio One
Series B
07-01-11 8.88 1,000,000 1,015,000
Sun Media
02-15-13 7.63 745,000(c) 756,175
---------------
Total 12,288,567
- -----------------------------------------------------------------------------
OIL FIELD SERVICES (--%)
Pride Intl
Sr Nts
07-15-14 7.38 845,000 859,788
- -----------------------------------------------------------------------------
PAPER (--%)
Boise Cascade LLC
10-15-14 7.13 50,000 46,500
Georgia-Pacific
06-15-15 7.70 395,000 391,544
---------------
Total 438,044
- -----------------------------------------------------------------------------
PROPERTY & CASUALTY (0.1%)
Willis North America
07-15-15 5.63 1,560,000 1,476,045
- -----------------------------------------------------------------------------
RETAILERS (1.5%)
CVS
09-15-09 4.00 10,170,000 9,781,699
09-15-14 4.88 6,225,000 5,878,660
CVS
Sr Unsecured
08-15-11 5.75 5,525,000 5,574,338
May Department Stores
07-15-09 4.80 14,064,000 13,823,942
07-15-34 6.70 2,620,000 2,622,997
United Auto Group
03-15-12 9.63 715,000 752,538
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
RETAILERS (CONT.)
Wal-Mart Stores
Series C
06-29-11 8.88% $ 3,500,000 $ 3,521,140
---------------
Total 41,955,314
- -----------------------------------------------------------------------------
TRANSPORTATION SERVICES (0.5%)
Avis Budget Car Rental LLC/Finance
Sr Nts
05-15-14 7.63 160,000(d) 152,000
Erac USA Finance
11-15-15 5.90 375,000(d) 373,511
11-01-16 6.20 5,860,000(d) 5,954,205
FedEx
08-15-09 5.50 8,165,000 8,206,919
---------------
Total 14,686,635
- -----------------------------------------------------------------------------
WIRELESS (1.3%)
American Tower
Sr Nts
10-15-12 7.13 220,000 222,750
Nextel Communications
Sr Nts Series F
03-15-14 5.95 35,195,000 34,217,106
Rogers Wireless
Secured
03-01-14 6.38 795,000(c) 779,100
Windstream
Sr Nts
08-01-16 8.63 1,065,000(d) 1,126,238
---------------
Total 36,345,194
- -----------------------------------------------------------------------------
WIRELINES (4.0%)
BellSouth
Sr Unsecured
11-15-12 4.75 6,680,000 6,327,911
Qwest
03-15-12 8.88 1,095,000 1,185,338
Qwest
Sr Nts
10-01-14 7.50 950,000(d) 967,813
Sprint Capital
03-15-32 8.75 3,980,000 4,826,021
Telecom Italia Capital
10-01-15 5.25 25,440,000(c) 23,779,582
See accompanying notes to investments in securities.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 25
- ------------------------------------------------------------------------------
BONDS (CONTINUED)
- ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
WIRELINES (CONT.)
TELUS
06-01-11 8.00% $ 31,344,000(c) $ 34,468,369
Valor Telecommunications Enterprises LLC/Finance
02-15-15 7.75 230,000 242,650
Verizon Pennsylvania
Series A
11-15-11 5.65 44,690,000 44,517,496
---------------
Total 116,315,180
- -----------------------------------------------------------------------------
TOTAL BONDS
(Cost: $3,001,044,742) $ 2,975,042,657
- -----------------------------------------------------------------------------
- ------------------------------------------------------------------------------
OTHER (--%)
- ------------------------------------------------------------------------------
ISSUER SHARES VALUE(a)
Wayland Investment
LLC 6,000,000(i,p) $ 401,620
- -----------------------------------------------------------------------------
TOTAL OTHER
(Cost: $2,150,783) $ 401,620
- -----------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SHORT-TERM SECURITIES (6.9%)(h)
- ------------------------------------------------------------------------------
ISSUER EFFECTIVE AMOUNT VALUE(a)
YIELD PAYABLE AT
MATURITY
COMMERCIAL PAPER
Bear Stearns Companies
09-12-06 5.27% $ 50,000,000 $ 49,912,332
Deer Valley Funding LLC
09-15-06 5.29 20,000,000 19,956,001
Ebury Finance LLC
09-01-06 5.30 9,600,000 9,598,587
09-13-06 5.29 50,000,000 49,904,668
09-14-06 5.31 20,000,000 19,958,777
Fairway Finance
09-13-06 5.27 30,000,000(k) 29,943,016
Park Sienna LLC
09-20-06 5.33 20,000,000(k) 19,941,000
- -----------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(Cost: $199,243,644) $ 199,214,381
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(Cost: $3,202,439,169)(s) $ 3,174,658,658
=============================================================================
- ------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES
- ------------------------------------------------------------------------------
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Interest rate varies either based on a predetermined schedule or to
reflect current market conditions; rate shown is the effective rate on
Aug. 31, 2006.
(c) Foreign security values are stated in U.S. dollars. For debt securities,
principal amounts are denominated in U.S. dollar currency unless
otherwise noted. At Aug. 31, 2006, the value of foreign securities
represented 2.7% of net assets.
(d) Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended. This security
has been determined to be liquid under guidelines established by the
Fund's Board of Directors. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers. At Aug. 31, 2006, the value of these securities
amounted to $127,759,051 or 4.4% of net assets.
(e) At Aug. 31, 2006, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$274,555,239.
(f) Mortgage-backed securities represent direct or indirect participations
in, or are secured by and payable from, mortgage loans secured by real
property, and include single- and multi-class pass-through securities
and collateralized mortgage obligations. These securities may be issued
or guaranteed by U.S. government agencies or instrumentalities, or by
private issuers, generally originators and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks,
investment bankers and special purpose entities. The maturity dates
shown represent the original maturity of the underlying obligation.
Actual maturity may vary based upon prepayment activity on these
obligations. Unless otherwise noted, the coupon rates presented are
fixed rates.
(g) At Aug. 31, 2006, security was partially or fully on loan. See Note 5 to
the financial statements.
- ------------------------------------------------------------------------------
26 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
- ------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES (CONTINUED)
- ------------------------------------------------------------------------------
(h) Cash collateral received from security lending activity is invested in
short-term securities and represents 1.4% of net assets. See Note 5 to
the financial statements. 5.5% of net assets is the Fund's cash
equivalent position.
(i) Identifies issues considered to be illiquid as to their marketability
(see Note 1 to the financial statements). These securities may be valued
at fair value according to methods selected in good faith by the Fund's
Board of Directors. Information concerning such security holdings at
Aug. 31, 2006, is as follows:
ACQUISITION
SECURITY DATES COST
------------------------------------------------------------------------
United Artists Theatre Circuit
9.30% 2015 02-23-96 thru 08-12-96 $ 6,530,267
Wayland Investment LLC 05-19-00 2,150,783
(j) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 6 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT
------------------------------------------------------------------------
PURCHASE CONTRACTS
U.S. Long Bond, Dec. 2006, 20-year $ 36,900,000
U.S. Treasury Note, Dec. 2006, 5-year 26,700,000
U.S. Treasury Note, Dec. 2006, 10-year 136,500,000
SALE CONTRACTS
U.S. Treasury Note, Dec. 2006, 2-year 66,600,000
(k) Commercial paper sold within terms of a private placement memorandum,
exempt from registration under Section 4(2) of the Securities Act of
1933, as amended, and may be sold only to dealers in that program or
other "accredited investors." This security has been determined to be
liquid under guidelines established by the Fund's Board of Directors.
These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At Aug. 31, 2006, the value
of these securities amounted to $49,884,016 or 1.7% of net assets.
(l) Interest only represents securities that entitle holders to receive only
interest payments on the underlying mortgages. The yield to maturity of
an interest only is extremely sensitive to the rate of principal
payments on the underlying mortgage assets. A rapid (slow) rate of
principal repayments may have an adverse (positive) effect on yield to
maturity. The principal amount shown is the notional amount of the
underlying mortgages. Interest rate disclosed represents yield based
upon the estimated timing and amount of future cash flows at Aug. 31,
2006.
(m) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on Aug. 31, 2006.
(n) The following abbreviations are used in the portfolio security
descriptions to identify the insurer of the issue:
AMBAC -- Ambac Assurance Corporation
MBIA -- MBIA Insurance Corporation
(o) Comparable securities are held to satisfy future delivery requirements
of the following open forward sale commitments at Aug. 31, 2006:
PRINCIPAL SETTLEMENT PROCEEDS
SECURITY AMOUNT DATE RECEIVABLE VALUE
-----------------------------------------------------------------------------
Federal Natl Mtge Assn
09-01-21 5.00% $15,650,000 09-18-06 $15,190,281 $15,322,320
09-01-36 5.00 28,000,000 09-13-06 26,565,000 26,818,736
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 27
- ------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES (CONTINUED)
- ------------------------------------------------------------------------------
(p) The share amount for Limited Liability Companies (LLC) or Limited
Partnerships (LP) represents capital contributions.
(q) Principal only represents securities that entitle holders to receive
only principal payments on the underlying mortgages. The yield to
maturity of a principal only is sensitive to the rate of principal
payments on the underlying mortgage assets. A slow (rapid) rate of
principal repayments may have an adverse (positive) effect on yield to
maturity. Interest rate disclosed represents yield based upon the
estimated timing of future cash flows at Aug. 31, 2006.
(r) Inflation-indexed bonds are securities in which the principal amount is
adjusted for inflation and the semiannual interest payments equal a
fixed percentage of the inflation-adjusted principal amount.
(s) At Aug. 31, 2006, the cost of securities for federal income tax purposes
was $3,213,698,280 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
Unrealized appreciation $ 12,629,719
Unrealized depreciation (51,669,341)
-------------------------------------------------------------------------
Net unrealized depreciation $(39,039,622)
-------------------------------------------------------------------------
HOW TO FIND INFORMATION ABOUT THE FUND'S PORTFOLIO HOLDINGS
(i) The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission (Commission) for the first and third
quarters of each fiscal year on Form N-Q;
(ii) The Fund's Forms N-Q are available on the Commission's website at
http://www.sec.gov;
(iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's
Public Reference Room in Washington, DC (information on the operations
of the Public Reference Room may be obtained by calling 1-800-SEC-0330);
and
(iv) The Fund's complete schedule of portfolio holdings, as disclosed in its
annual and semiannual shareholder reports and in its filings on Form
N-Q, can be found at riversource.com/funds.
- ------------------------------------------------------------------------------
28 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUG. 31, 2006
ASSETS
Investments in securities, at value (Note 1)* (identified cost $3,202,439,169) $ 3,174,658,658
Cash in bank on demand deposit 314,785
Foreign currency holdings (identified cost $2,064,039) (Note 1) 2,087,460
Capital shares receivable 374,162
Accrued interest receivable 20,327,149
Receivable for investment securities sold 169,876,994
Unrealized appreciation on swap transactions, at value (Note 7) 317,799
- --------------------------------------------------------------------------------------------------------------
Total assets 3,367,957,007
- --------------------------------------------------------------------------------------------------------------
LIABILITIES
Dividends payable to shareholders 1,116,326
Capital shares payable 350,195
Payable for investment securities purchased 127,938,454
Payable for securities purchased on a forward-commitment basis (Note 1) 274,555,239
Payable upon return of securities loaned (Note 5) 39,957,500
Accrued investment management services fee 35,972
Accrued distribution fee 575,801
Accrued service fee 473
Accrued transfer agency fee 11,882
Accrued administrative services fee 4,938
Other accrued expenses 501,489
Forward sale commitments, at value (proceeds receivable $41,755,281) (Note1) 42,141,056
- --------------------------------------------------------------------------------------------------------------
Total liabilities 487,189,325
- --------------------------------------------------------------------------------------------------------------
Net assets applicable to outstanding capital stock $ 2,880,767,682
==============================================================================================================
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 29
REPRESENTED BY
Capital stock -- $.01 par value (Note 1) $ 6,038,385
Additional paid-in capital 3,088,318,125
Undistributed net investment income 4,503,837
Accumulated net realized gain (loss) (Note 10) (190,801,857)
Unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (Note 6) (27,290,808)
- --------------------------------------------------------------------------------------------------------------
Total -- representing net assets applicable to outstanding capital stock $ 2,880,767,682
==============================================================================================================
Net assets applicable to outstanding shares: Class A $ 2,013,110,199
Class B $ 401,897,200
Class C $ 17,292,094
Class I $ 275,800,310
Class Y $ 172,667,879
Net asset value per share of outstanding capital
stock: Class A shares 422,021,713 $ 4.77
Class B shares 84,250,141 $ 4.77
Class C shares 3,624,635 $ 4.77
Class I shares 57,740,014 $ 4.78
Class Y shares 36,202,020 $ 4.77
- --------------------------------------------------------------------------------------------------------------
*Including securities on loan, at value (Note 5) $ 39,336,180
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
- ------------------------------------------------------------------------------
30 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
STATEMENT OF OPERATIONS
YEAR ENDED AUG. 31, 2006
INVESTMENT INCOME
Income:
Interest $ 128,996,423
Fee income from securities lending (Note 5) 220,256
- --------------------------------------------------------------------------------------------------------------
Total income 129,216,679
- --------------------------------------------------------------------------------------------------------------
Expenses (Note 2):
Investment management services fee 12,388,294
Distribution fee
Class A 4,646,930
Class B 4,653,803
Class C 176,643
Transfer agency fee 3,835,450
Incremental transfer agency fee
Class A 247,680
Class B 129,070
Class C 5,550
Service fee -- Class Y 157,691
Administrative services fees and expenses 1,698,244
Compensation of board members 22,580
Custodian fees 199,790
Printing and postage 348,350
Registration fees 137,695
Audit fees 45,000
Other 57,864
- --------------------------------------------------------------------------------------------------------------
Total expenses 28,750,634
Expenses waived/reimbursed by the Investment Manager and its affiliates (Note 2) (2,443,090)
- --------------------------------------------------------------------------------------------------------------
26,307,544
Earnings and bank fee credits on cash balances (Note 2) (238,238)
- --------------------------------------------------------------------------------------------------------------
Total net expenses 26,069,306
- --------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net 103,147,373
- --------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) -- NET
Net realized gain (loss) on:
Security transactions (Note 3) (43,573,476)
Foreign currency transactions (286,744)
Futures contracts 4,479,668
Payment from affiliate (Note 2) 425,963
Swap transactions (196,530)
- --------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (39,151,119)
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (17,503,759)
- --------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments and foreign currencies (56,654,878)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 46,492,495
==============================================================================================================
See accompanying notes to financial statements.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 31
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED AUG. 31, 2006 2005
OPERATIONS AND DISTRIBUTIONS
Investment income (loss) -- net $ 103,147,373 $ 91,755,329
Net realized gain (loss) on investments (39,151,119) 28,923,177
Net change in unrealized appreciation (depreciation) on
investments and on translation of assets and liabilities
in foreign currencies (17,503,759) (14,927,428)
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 46,492,495 105,751,078
- -----------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (76,604,597) (70,478,732)
Class B (15,585,869) (17,993,962)
Class C (591,217) (605,297)
Class I (4,560,444) (421)
Class Y (6,737,531) (8,081,878)
- -----------------------------------------------------------------------------------------------------
Total distributions (104,079,658) (97,160,290)
- -----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Proceeds from sales
Class A shares (Note 2) 316,729,749 259,770,664
Class B shares 79,990,744 84,427,800
Class C shares 3,579,299 4,052,182
Class I shares 109,101,564 --
Class Y shares 19,247,047 41,037,278
Fund merger (Note 9)
Class A shares 482,178,674 N/A
Class B shares 84,180,791 N/A
Class C shares 3,014,375 N/A
Class I shares 161,023,234 N/A
Class Y shares 43,644,789 N/A
Reinvestment of distributions at net asset value
Class A shares 60,868,805 56,221,455
Class B shares 13,634,050 15,935,666
Class C shares 518,063 543,915
Class I shares 4,443,417 --
Class Y shares 6,613,878 6,719,948
Payments for redemptions
Class A shares (578,402,371) (480,335,355)
Class B shares (Note 2) (247,147,060) (245,851,411)
Class C shares (Note 2) (7,432,273) (7,443,384)
Class I shares (1,248,255) --
Class Y shares (95,308,639) (49,568,951)
- -----------------------------------------------------------------------------------------------------
Increase (decrease) in net assets from capital share
transactions 459,229,881 (314,490,193)
- -----------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 401,642,718 (305,899,405)
Net assets at beginning of year 2,479,124,964 2,785,024,369
- -----------------------------------------------------------------------------------------------------
Net assets at end of year $ 2,880,767,682 $ 2,479,124,964
=====================================================================================================
Undistributed net investment income $ 4,503,837 $ 5,270,078
- -----------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
- ------------------------------------------------------------------------------
32 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of RiverSource Diversified Income Series, Inc. (formerly
RiverSource Fixed Income Series, Inc.) and is registered under the Investment
Company Act of 1940 (as amended) as a diversified, open-end management
investment company. RiverSource Diversified Income Series, Inc. has 10 billion
authorized shares of capital stock that can be allocated among the separate
series as designated by the Board. The Fund invests primarily in bonds and
other debt securities including securities issued by the U.S. government,
corporate bonds and mortgage- and asset-backed securities.
The Fund offers Class A, Class B, Class C and Class Y shares.
o Class A shares are sold with a front-end sales charge.
o Class B shares may be subject to a contingent deferred sales charge
(CDSC) and automatically convert to Class A shares during the ninth year
of ownership.
o Class C shares may be subject to a CDSC.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.
The Fund offers an additional class of shares, Class I, exclusively to certain
institutional investors. Class I shares have no sales charge and are made
available through a separate prospectus supplement provided to investors
eligible to purchase the shares. At Aug. 31, 2006, Ameriprise Financial, Inc.
(Ameriprise Financial) and the affiliated funds-of-funds owned 100% of Class I
shares, which represents 9.57% of the Fund's net assets.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, transfer agency fees and service fee (class specific
expenses) differ among classes. Income, expenses (other than class specific
expenses) and realized and unrealized gains or losses on investments are
allocated to each class of shares based upon its relative net assets.
The Fund's significant accounting policies are summarized below:
USE OF ESTIMATES
Preparing financial statements that conform to U.S. generally accepted
accounting principles requires management to make estimates (e.g., on assets,
liabilities and contingent assets and liabilities) that could differ from
actual results.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 33
VALUATION OF SECURITIES
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the Board.
Short-term securities maturing in more than 60 days from the valuation date
are valued at the market price or approximate market value based on current
interest rates; those maturing in 60 days or less are valued at amortized
cost.
ILLIQUID SECURITIES
At Aug. 31, 2006, investments in securities included issues that are illiquid
which the Fund currently limits to 10% of net assets, at market value, at the
time of purchase. The aggregate value of such securities at Aug. 31, 2006 was
$7,405,517 representing 0.26% of net assets. These securities are valued at
fair value according to methods selected in good faith by the Board. According
to board guidelines, certain unregistered securities are determined to be
liquid and are not included within the 10% limitation specified above. Assets
are liquid if they can be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the asset is
valued by the Fund.
SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS
Delivery and payment for securities that have been purchased by the Fund on a
forward-commitment basis, including when-issued securities and other
forward-commitments, can take place one month or more after the transaction
date. During this period, such securities are subject to market fluctuations,
and they may affect the Fund's net assets the same as owned securities. The
Fund designates cash or liquid securities at least equal to the amount of its
forward-commitments. At Aug. 31, 2006, the Fund has entered into outstanding
when-issued securities of $262,504,597 and other forward-commitments of
$12,050,642.
The Fund also enters into transactions to sell purchase commitments to third
parties at current market values and concurrently acquires other purchase
commitments for similar securities at later dates. As an inducement for the
Fund to "roll over" its purchase commitments, the Fund receives negotiated
amounts in the form of reductions of the purchase price of the commitment.
OPTION TRANSACTIONS
To produce incremental earnings, protect gains, and facilitate buying and
selling of securities for investments, the Fund may buy and write options
traded on any U.S. or foreign exchange or in the over-the-counter market where
completing the obligation depends upon the credit standing of the other party.
The Fund also may buy and sell put and call options and write covered call
options on portfolio
- ------------------------------------------------------------------------------
34 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
securities as well as write cash-secured put options. The risk in writing a
call option is that the Fund gives up the opportunity for profit if the market
price of the security increases. The risk in writing a put option is that the
Fund may incur a loss if the market price of the security decreases and the
option is exercised. The risk in buying an option is that the Fund pays a
premium whether or not the option is exercised. The Fund also has the
additional risk of being unable to enter into a closing transaction if a
liquid secondary market does not exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Fund
will realize a gain or loss when the option transaction expires or closes.
When options on debt securities or futures are exercised, the Fund will
realize a gain or loss. When other options are exercised, the proceeds on
sales for a written call option, the purchase cost for a written put option or
the cost of a security for a purchased put or call option is adjusted by the
amount of premium received or paid.
FUTURES TRANSACTIONS
To gain exposure to or protect itself from market changes, the Fund may buy
and sell financial futures contracts traded on any U.S. or foreign exchange.
The Fund also may buy and write put and call options on these futures
contracts. Risks of entering into futures contracts and related options
include the possibility of an illiquid market and that a change in the value
of the contract or option may not correlate with changes in the value of the
underlying securities.
Upon entering into a futures contract, the Fund is required to deposit either
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (variation margin) are made or
received by the Fund each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Fund recognizes a realized gain or loss when the contract is
closed or expires.
FOREIGN CURRENCY TRANSLATIONS AND FOREIGN CURRENCY CONTRACTS
Securities and other assets and liabilities denominated in foreign currencies
are translated daily into U.S. dollars. Foreign currency amounts related to
the purchase or sale of securities and income and expenses are translated at
the exchange rate on the transaction date. The effect of changes in foreign
exchange rates on realized and unrealized security gains or losses is
reflected as a component of such gains or losses. In the statement of
operations, net realized gains or losses from foreign currency transactions,
if any, may arise from sales of foreign currency, closed forward contracts,
exchange gains or losses realized between the trade date and settlement date
on securities transactions, and other translation gains or losses on
dividends, interest income and foreign withholding taxes. At Aug. 31, 2006,
foreign currency holdings consisted of European monetary units and British
pounds.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 35
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuation.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete its contract obligations.
FORWARD SALE COMMITMENTS
The Fund may enter into forward sale commitments to hedge its portfolio
positions or to sell mortgage-backed securities it owns under delayed delivery
arrangements. Proceeds of forward sale commitments are not received until the
contractual settlement date. During the time a forward sale commitment is
outstanding, equivalent deliverable securities, or an offsetting forward
purchase commitment deliverable on or before the sale commitment date, are
used to satisfy the commitment.
Unsettled forward sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Valuation of securities" above. The forward sale commitment is
"marked-to-market" daily and the change in market value is recorded by the
Fund as an unrealized gain or loss. If the forward sale commitment is closed
through the acquisition of an offsetting purchase commitment, the Fund
realizes a gain or loss. If the Fund delivers securities under the commitment,
the Fund realizes a gain or a loss from the sale of the securities based upon
the market price established at the date the commitment was entered into.
Forward sale commitments outstanding at period end are listed in the "Notes to
investments in securities."
CMBS TOTAL RETURN SWAP TRANSACTIONS
The Fund may enter into swap agreements to earn the total return on a
specified security or index of fixed income securities. CMBS total return
swaps are bilateral financial contracts designed to replicate synthetically
the total returns of collateralized mortgage-backed securities. Under the
terms of the swaps, the Fund either receives or pays the total return on a
reference security or index applied to a notional principal amount. In return,
the Fund agrees to pay or receive from the counterparty a floating rate, which
is reset periodically based on short-term interest rates, applied to the same
notional amount.
The notional amounts of swap contracts are not recorded in the financial
statements. Swaps are valued daily, and the change in value is recorded as
unrealized appreciation (depreciation) until the termination of the swap, at
which time realized gain (loss) is recorded. Payments received or made are
recorded as realized gains (losses).
- ------------------------------------------------------------------------------
36 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
Swap agreements may be subject to liquidity risk, which exists when a
particular swap is difficult to purchase or sell. It may not be possible for
the Fund to initiate a transaction or liquidate a position at an advantageous
time or price, which may result in significant losses. Total return swaps are
subject to the risk that the counterparty will default on its obligation to
pay net amounts due to the Funds.
GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liabilities arising out of the performance of
their duties to the Fund. In addition, certain of the Fund's contracts with
its service providers contain general indemnification clauses. The Fund's
maximum exposure under these arrangements is unknown since the amount of any
future claims that may be made against the Fund cannot be determined and the
Fund has no historical basis for predicting the likelihood of any such claims.
FEDERAL TAXES
The Fund's policy is to comply with Subchapter M of the Internal Revenue Code
that applies to regulated investment companies and to distribute substantially
all of its taxable income to shareholders. No provision for income or excise
taxes is thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of the deferred losses
on certain futures contracts, the recognition of certain foreign currency
gains (losses) as ordinary income (loss) for tax purposes and losses deferred
due to "wash sale" transactions. The character of distributions made during
the year from net investment income or net realized gains may differ from
their ultimate characterization for federal income tax purposes. Also, due to
the timing of dividend distributions, the fiscal year in which amounts are
distributed may differ from the year that the income or realized gains
(losses) were recorded by the Fund.
On the statement of assets and liabilities, as a result of permanent
book-to-tax differences, undistributed net investment income has been
increased by $189,392 and accumulated net realized loss has been increased by
$96,262 resulting in a net reclassification adjustment to decrease paid-in
capital by $93,130.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 37
The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED AUG. 31, 2006 2005
- ------------------------------------------------------------------------------
CLASS A
Distributions paid from:
Ordinary income ................................$76,604,597 $ 70,478,732
Long-term capital gain ..................................-- --
CLASS B
Distributions paid from:
Ordinary income .................................15,585,869 17,993,962
Long-term capital gain ..................................-- --
CLASS C
Distributions paid from:
Ordinary income ....................................591,217 605,297
Long-term capital gain ..................................-- --
CLASS I
Distributions paid from:
Ordinary income ..................................4,560,444 421
Long-term capital gain ..................................-- --
CLASS Y
Distributions paid from:
Ordinary income ..................................6,737,531 8,081,878
Long-term capital gain ..................................-- --
At Aug. 31, 2006, the components of distributable earnings on a tax basis are
as follows:
Undistributed ordinary income ...................................$ 4,695,807
Accumulated long-term gain (loss) ...............................$(175,789,584)
Unrealized appreciation (depreciation) ..........................$ (41,378,725)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation 48 (FIN 48), "Accounting for Uncertainty in Income Taxes." FIN
48 clarifies the accounting for uncertainty in income taxes recognized in
accordance with FASB Statement 109, "Accounting for Income Taxes." FIN 48
prescribes a two-step process to recognize and measure a tax position taken or
expected to be taken in a tax return. The first step is to determine whether a
tax position has met the more-likely-than-not recognition threshold and the
second step is to measure a tax position that meets the threshold to determine
the amount of benefit to recognize. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after Dec. 15, 2006. Tax positions of the Fund are being evaluated
to determine the impact, if any, that will result from the adoption of FIN 48.
- ------------------------------------------------------------------------------
38 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
DIVIDENDS TO SHAREHOLDERS
Dividends from net investment income, declared daily and payable monthly, when
available, are reinvested in additional shares of the Fund at net asset value
or payable in cash. Capital gains, when available, are distributed along with
the last income dividend of the calendar year.
OTHER
Security transactions are accounted for on the date securities are purchased
or sold. Dividend income is recognized on the ex-dividend date or upon receipt
of ex-dividend notification in the case of certain foreign securities.
Interest income, including amortization of premium, market discount and
original issue discount using the effective interest method, is accrued daily.
2. EXPENSES AND SALES CHARGES
Under an Investment Management Services Agreement, RiverSource Investments,
LLC (the Investment Manager) determines which securities will be purchased,
held or sold. Prior to Oct. 1, 2005, investment management services were
provided by Ameriprise Financial. The management fee is a percentage of the
Fund's average daily net assets that declines from 0.48% to 0.29% annually as
the Fund's assets increase. Prior to March 1, 2006, the fee percentage of the
Fund's average daily net assets declined from 0.52% to 0.395% annually as the
Fund's assets increased.
Under the current Administrative Services Agreement, the Fund pays Ameriprise
Financial a fee for administration and accounting services at a percentage of
the Fund's average daily net assets that declines from 0.07% to 0.04% annually
as the Fund's assets increase. Prior to Oct. 1, 2005, the fee percentage of
the Fund's average daily net assets declined from 0.05% to 0.025% annually as
the Fund's assets increased. A minor portion of additional administrative
service expenses paid by the Fund are consultants' fees and fund office
expenses. Under this agreement, the Fund also pays taxes, audit and certain
legal fees, registration fees for shares, compensation of board members,
corporate filing fees and any other expenses properly payable by the Fund and
approved by the Board.
Under a Deferred Compensation Plan (the Plan), non-interested board members
may defer receipt of their compensation. Deferred amounts are treated as
though equivalent dollar amounts had been invested in shares of the Fund or
other RiverSource funds. The Fund's liability for these amounts is adjusted
for market value changes and remains in the Fund until distributed in
accordance with the Plan.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 39
Under a separate Transfer Agency Agreement, RiverSource Service Corporation
(the Transfer Agent) maintains shareholder accounts and records. The Fund pays
the Transfer Agent an annual fee per shareholder account for this service as
follows:
o Class A $20.50
o Class B $21.50
o Class C $21.00
o Class Y $18.50
The incremental transfer agency fee is the amount charged to the specific
classes for the additional expense above the fee for Class Y.
Class I pays a transfer agency fee at an annual rate per shareholder account
of $1. This amount is included in the transfer agency fee on the statement of
operations.
The Transfer Agent charges an annual closed account fee of $5 per inactive
account, charged on a pro rata basis for 12 months from the date the account
becomes inactive. These fees are included in the transfer agency fees on the
statement of operations.
The Fund has agreements with Ameriprise Financial Services, Inc. (the
Distributor) for distribution and shareholder services. Under a Plan and
Agreement of Distribution pursuant to Rule 12b-1, the Fund pays a fee at an
annual rate up to 0.25% of the Fund's average daily net assets attributable to
Class A shares and up to 1.00% for Class B and Class C shares.
Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for
service provided to shareholders by the Distributor and other servicing agents
with respect to those shares. The fee is calculated at a rate of 0.10% of the
Fund's average daily net assets attributable to Class Y shares.
Sales charges received by the Distributor for distributing Fund shares were
$2,083,362 for Class A, $670,839 for Class B and $3,787 for Class C for the
year ended Aug. 31, 2006.
For the year ended Aug. 31, 2006, the Investment Manager and its affiliates
waived certain fees and expenses to 0.89% for Class A, 1.65% for Class B,
1.66% for Class C, 0.54% for Class I and 0.73% for Class Y. Of these waived
fees and expenses, the transfer agency fees waived for Class A, Class B, Class
C and Class Y were $1,609,229, $435,882, $15,500 and $111,791, respectively
and the management fees waived at the Fund level were $270,688. Under this
agreement, which was effective until Feb. 28, 2006, net expenses would not
exceed 0.89% for Class A, 1.65% for Class B, 1.66% for Class C, 0.59% for
Class I and 0.73% for Class Y of the Fund's average daily net assets.
Effective as of March 1, 2006, the Investment Manager and its affiliates have
agreed to waive certain fees and expenses until Aug. 31, 2007, unless sooner
terminated at the discretion of the Board, such that net expenses will not
exceed 0.89% for Class A, 1.65% for Class B, 1.66% for Class C, 0.54% for
Class I and 0.73% for Class Y of the Fund's average daily net assets.
- ------------------------------------------------------------------------------
40 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
During the year ended Aug. 31, 2006, the Fund's custodian and transfer agency
fees were reduced by $238,238 as a result of earnings and bank fee credits
from overnight cash balances.
In addition, the Fund received a one time payment of $425,963 by Ameriprise
Financial for additional earnings from overnight cash balances determined to
be owed for prior years. This amount was insignificant to the Fund's net
assets value and total return.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $7,958,085,517 (including $810,371,102 from
RiverSource Selective Fund that was acquired in the fund merger as described
in Note 9) and $7,255,564,966, respectively, for the year ended Aug. 31, 2006.
Realized gains and losses are determined on an identified cost basis.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as
follows:
YEAR ENDED AUG. 31, 2006
CLASS A CLASS B CLASS C CLASS I CLASS Y
- ---------------------------------------------------------------------------------------------------------
Sold 66,603,100 16,761,356 749,835 23,207,815 4,039,333
Fund merger 101,470,543 17,711,859 633,369 33,851,639 9,182,696
Issued for reinvested distributions 12,810,045 2,867,046 108,893 941,851 1,392,410
Redeemed (121,661,365) (52,093,450) (1,561,227) (263,328) (19,763,678)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) 59,222,323 (14,753,189) (69,130) 57,737,977 (5,149,239)
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, 2005
CLASS A CLASS B CLASS C CLASS I CLASS Y
- ---------------------------------------------------------------------------------------------------------
Sold 53,307,133 17,309,061 829,459 -- 8,423,475
Issued for reinvested distributions 11,524,807 3,264,247 111,266 -- 1,376,611
Redeemed (98,492,883) (50,438,583) (1,524,135) -- (10,161,026)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) (33,660,943) (29,865,275) (583,410) -- (360,940)
- ---------------------------------------------------------------------------------------------------------
5. LENDING OF PORTFOLIO SECURITIES
At Aug. 31, 2006, securities valued at $39,336,180 were on loan to brokers.
For collateral, the Fund received $39,957,500 in cash. Cash collateral
received is invested in short-term securities, which are included in the
short-term section of the "Investments in securities." Income from securities
lending amounted to $220,256 for the year ended Aug. 31, 2006. The risks to
the Fund of securities lending are that the borrower may not provide
additional collateral when required or return the securities when due.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 41
6. INTEREST RATE FUTURES CONTRACTS
At Aug. 31, 2006, investments in securities included securities valued at
$1,605,297 that were pledged as collateral to cover initial margin deposits on
2,001 open purchase contracts and 333 open sale contracts. The notional market
value of the open purchase contracts at Aug. 31, 2006 was $215,613,142 with a
net unrealized gain of $665,336. The notional market value of the open sale
contracts at Aug. 31, 2006 was $68,046,469 with a net unrealized loss of
$131,079. See "Summary of significant accounting policies" and "Notes to
investments in securities."
7. SWAP CONTRACTS
At Aug. 31, 2006, the Fund had the following open CBMS total return swap
contracts:
UNREALIZED
TERMINATION NOTIONAL APPRECIATION
DATE AMOUNT (DEPRECIATION)
- --------------------------------------------------------------------------------
Receive total return on Lehman
Brothers Aaa 8.5+ Commercial
Mortgage-Backed Securities Index and
pay a floating rate based on 1-month
LIBOR less 0.33%.
Counterparty: Citigroup Sept. 1, 2006 $18,175,000 $317,799
- --------------------------------------------------------------------------------
8. BANK BORROWINGS
The Fund has a revolving credit agreement with a syndicate of banks headed by
JPMorgan Chase Bank, N.A. (JPMCB), whereby the Fund may borrow for the
temporary funding of shareholder redemptions or for other temporary or
emergency purposes. The agreement went into effect Sept. 20, 2005. The Fund
must maintain asset coverage for borrowings of at least 300%. The agreement,
which enables the Fund to participate with other RiverSource funds, permits
borrowings up to $500 million, collectively. Interest is charged to each Fund
based on its borrowings at a rate equal to either the higher of the Federal
Funds Effective Rate plus 0.40% or the JPMCB Prime Commercial Lending Rate.
Borrowings are payable within 60 days after such loan is executed. The Fund
also pays a commitment fee equal to its pro rata share of the amount of the
credit facility at a rate of 0.07% per annum. Prior to this agreement, the
Fund had a revolving credit agreement that permitted borrowings up to $500
million with The Bank of New York. The Fund had no borrowings outstanding
during the year ended Aug. 31, 2006.
- ------------------------------------------------------------------------------
42 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
9. FUND MERGER
At the close of business on March 10, 2006, RiverSource Diversified Bond Fund
acquired the assets and assumed the identified liabilities of RiverSource
Selective Fund. The reorganization was completed after shareholders approved
the plan on Feb. 15, 2006.
The aggregate net assets of RiverSource Diversified Bond Fund immediately
before the acquisition were $2,230,540,317 and the combined net assets
immediately after the acquisition were $3,004,582,180.
The merger was accomplished by a tax-free exchange of 91,783,512 shares of
RiverSource Selective Fund valued at $774,041,863.
In exchange for the RiverSource Selective Fund shares and net assets,
RiverSource Diversified Bond Fund issued the following number of shares:
SHARES
- --------------------------------------------------------------------------------
Class A 101,470,543
- --------------------------------------------------------------------------------
Class B 17,711,859
- --------------------------------------------------------------------------------
Class C 633,369
- --------------------------------------------------------------------------------
Class I 33,851,639
- --------------------------------------------------------------------------------
Class Y 9,182,696
- --------------------------------------------------------------------------------
RiverSource Selective Fund's net assets after adjustments for any permanent
book-to-tax differences at the merger date were as follows, which include the
following amounts of capital stock, unrealized depreciation, accumulated net
realized loss and undistributed net income.
ACCUMULATED TEMPORARY
TOTAL NET CAPITAL UNREALIZED NET REALIZED BOOK-TO-TAX
ASSETS STOCK DEPRECIATION LOSS DIFFERENCES
- -------------------------------------------------------------------------------------------------
RiverSource Selective Fund $774,041,863 $826,804,340 $(18,618,938) $(34,129,421) $(14,118)
10. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund had a capital loss carry-over of
$175,789,584 at Aug. 31, 2006, that if not offset by capital gains will expire
as follows:
2009 2010 2012 2014 2015
- --------------------------------------------------------------------------------
$78,698,873 $49,658,521 $5,227,159 $12,836,807 $29,368,224
- --------------------------------------------------------------------------------
RiverSource Diversified Bond Fund acquired $31,763,053 of capital loss
carry-overs in connection with the RiverSource Selective Fund merger (Note 9).
In addition to the acquired capital loss carry-overs, the Fund also acquired
unrealized capital gains as a result of the mergers. The yearly utilization of
the acquired capital losses as well as the utilization of the acquired
unrealized losses is limited by the Internal Revenue Code. It is unlikely the
Board will authorize a distribution of any net realized capital gains until
the available capital loss carry-over has been offset or expires.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 43
11. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS
In December 2005, without admitting or denying the allegations, American
Express Financial Corporation (AEFC, which is now known as Ameriprise
Financial, Inc. (Ameriprise Financial)), the parent company of RiverSource
Investments, LLC (RiverSource Investments), entered into settlement agreements
with the Securities and Exchange Commission (SEC) and Minnesota Department of
Commerce (MDOC) related to market timing activities. In connection with these
matters, the SEC and MDOC issued orders (the Orders) alleging that AEFC
violated certain provisions of the federal and Minnesota securities laws by
failing to adequately disclose market timing activities by allowing certain
identified market timers to continue to market time contrary to disclosures in
mutual fund and variable annuity product prospectuses. The Orders also alleged
that AEFC failed to implement procedures to detect and prevent market timing
in 401(k) plans for employees of AEFC and related companies and failed to
adequately disclose that there were no such procedures. Pursuant to the MDOC
Order, the MDOC also alleged that AEFC allowed inappropriate market timing to
occur by failing to have written policies and procedures and failing to
properly supervise its employees.
As a result of the Orders, AEFC was censured and ordered to cease and desist
from committing or causing any violations of certain provisions of the
Investment Advisers Act of 1940, the Investment Company Act of 1940, and
various Minnesota laws. Pursuant to the terms of the Orders, AEFC agreed to
pay disgorgement of $10 million and civil money penalties of $7 million. AEFC
also agreed to make presentations at least annually to its board of directors
and the relevant mutual funds' board that include an overview of policies and
procedures to prevent market timing, material changes to these policies and
procedures and whether disclosures related to market timing are consistent
with the SEC order and federal securities laws. AEFC also agreed to retain an
independent distribution consultant to assist in developing a plan for
distribution of all disgorgement and civil penalties ordered by the SEC in
accordance with various undertakings detailed at
http://www.sec.gov/litigation/admin/ia-2451.pdf. In addition, AEFC agreed to
complete and submit to the MDOC a compliance review of its procedures
regarding market timing within one year of the MDOC Order, including a summary
of actions taken to ensure compliance with applicable laws and regulations and
certification by a senior officer regarding compliance and supervisory
procedures.
Ameriprise Financial and its affiliates have cooperated with the SEC and the
MDOC in these legal proceedings, and have made regular reports to the
RiverSource Funds' Boards of Directors/Trustees.
- ------------------------------------------------------------------------------
44 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
Ameriprise Financial and certain of its affiliates have historically been
involved in a number of legal, arbitration and regulatory proceedings,
including routine litigation, class actions, and governmental actions,
concerning matters arising in connection with the conduct of their business
activities. Ameriprise Financial believes that the Funds are not currently the
subject of, and that neither Ameriprise Financial nor any of its affiliates
are the subject of, any pending legal, arbitration or regulatory proceedings
that are likely to have a material adverse effect on the Funds or the ability
of Ameriprise Financial or its affiliates to perform under their contracts
with the Funds. Ameriprise Financial is required to make 10-Q, 10-K and, as
necessary, 8-K filings with the Securities and Exchange Commission on legal
and regulatory matters that relate to Ameriprise Financial and its affiliates.
Copies of these filings may be obtained by accessing the SEC website at
www.sec.gov.
There can be no assurance that these matters, or the adverse publicity
associated with them, will not result in increased fund redemptions, reduced
sale of fund shares or other adverse consequences to the Funds.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 45
12. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating
the Fund's results.
CLASS A
- -----------------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(a)
- -----------------------------------------------------------------------------------------------------------
Fiscal period ended Aug. 31, 2006 2005 2004 2003 2002
Net asset value, beginning of period $ 4.89 $ 4.87 $ 4.78 $ 4.75 $ 4.86
- -----------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .19 .18 .18 .20 .25
Net gains (losses) (both realized and unrealized) (.11) .03 .08 .03 (.10)
- -----------------------------------------------------------------------------------------------------------
Total from investment operations .08 .21 .26 .23 .15
- -----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.20) (.19) (.17) (.20) (.25)
Tax return of capital -- -- -- -- (.01)
- -----------------------------------------------------------------------------------------------------------
Total distributions (.20) (.19) (.17) (.20) (.26)
- -----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.77 $ 4.89 $ 4.87 $ 4.78 $ 4.75
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 2,013 $ 1,774 $ 1,933 $ 2,280 $ 2,438
- -----------------------------------------------------------------------------------------------------------
Ratio of expenses to average
daily net assets(b) .89%(c) .94%(c) .98%(c) .97% .95%
- -----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 4.09% 3.67% 3.55% 4.16% 5.17%
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 281% 300% 279% 256% 169%
- -----------------------------------------------------------------------------------------------------------
Total return(d) 1.64% 4.38% 5.54% 4.91% 3.13%
- -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest
cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings and bank fee credits on cash balances.
(c) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses
for Class A would have been 0.99%, 1.02% and 1.00% for the years ended
Aug. 31, 2006, 2005 and 2004, respectively.
(d) Total return does not reflect payment of a sales charge.
- ------------------------------------------------------------------------------
46 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
CLASS B
- -------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(a)
- -------------------------------------------------------------------------------------------------
Fiscal period ended Aug. 31, 2006 2005 2004 2003 2002
Net asset value, beginning of period $ 4.89 $ 4.88 $ 4.78 $ 4.75 $ 4.86
- -------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .16 .15 .14 .16 .21
Net gains (losses) (both realized and
unrealized) (.12) .01 .09 .03 (.10)
- -------------------------------------------------------------------------------------------------
Total from investment operations .04 .16 .23 .19 .11
- -------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.16) (.15) (.13) (.16) (.21)
Tax return of capital -- -- -- -- (.01)
- -------------------------------------------------------------------------------------------------
Total distributions (.16) (.15) (.13) (.16) (.22)
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.77 $ 4.89 $ 4.88 $ 4.78 $ 4.75
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 402 $ 484 $ 628 $ 902 $ 1,047
- -------------------------------------------------------------------------------------------------
Ratio of expenses to average
daily net assets(b) 1.65%(c) 1.70%(c) 1.73%(c) 1.73% 1.71%
- -------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 3.31% 2.92% 2.78% 3.40% 4.40%
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 281% 300% 279% 256% 169%
- -------------------------------------------------------------------------------------------------
Total return(d) .88% 3.39% 4.95% 4.12% 2.35%
- -------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest
cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings and bank fee credits on cash balances.
(c) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses
for Class B would have been 1.76%, 1.78% and 1.75% for the years ended
Aug. 31, 2006, 2005 and 2004, respectively.
(d) Total return does not reflect payment of a sales charge.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 47
CLASS C
- -------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(a)
- -------------------------------------------------------------------------------------------------
Fiscal period ended Aug. 31, 2006 2005 2004 2003 2002
Net asset value, beginning of period $ 4.90 $ 4.88 $ 4.78 $ 4.75 $ 4.86
- -------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .16 .15 .14 .16 .21
Net gains (losses) (both realized and
unrealized) (.13) .02 .09 .03 (.10)
- -------------------------------------------------------------------------------------------------
Total from investment operations .03 .17 .23 .19 .11
- -------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.16) (.15) (.13) (.16) (.21)
Tax return of capital -- -- -- -- (.01)
- -------------------------------------------------------------------------------------------------
Total distributions (.16) (.15) (.13) (.16) (.22)
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.77 $ 4.90 $ 4.88 $ 4.78 $ 4.75
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 17 $ 18 $ 21 $ 27 $ 24
- -------------------------------------------------------------------------------------------------
Ratio of expenses to average
daily net assets(b) 1.66%(c) 1.70%(c) 1.73%(c) 1.74% 1.72%
- -------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 3.31% 2.93% 2.79% 3.34% 4.33%
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 281% 300% 279% 256% 169%
- -------------------------------------------------------------------------------------------------
Total return(d) .66% 3.60% 4.95% 4.11% 2.35%
- -------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest
cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings and bank fee credits on cash balances.
(c) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses
for Class C would have been 1.76%, 1.79% and 1.75% for the years ended
Aug. 31, 2006, 2005 and 2004, respectively.
(d) Total return does not reflect payment of a sales charge.
- ------------------------------------------------------------------------------
48 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
CLASS I
- -------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(a)
- -------------------------------------------------------------------------
Fiscal period ended Aug. 31, 2006 2005 2004(b)
Net asset value, beginning of period $ 4.89 $ 4.88 $ 4.91
- -------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .21 .20 .11
Net gains (losses) (both realized and
unrealized) (.11) .02 (.04)
- -------------------------------------------------------------------------
Total from investment operations .10 .22 .07
- -------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.21) (.21) (.10)
- -------------------------------------------------------------------------
Net asset value, end of period $ 4.78 $ 4.89 $ 4.88
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------
Net assets, end of period (in millions) $ 276 $ -- $ --
- -------------------------------------------------------------------------
Ratio of expenses to average
daily net assets(c) .54%(d) .60% .59%(e)
- -------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 4.59% 4.01% 3.13%(e)
- -------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 281% 300% 279%
- -------------------------------------------------------------------------
Total return(f) 2.19% 4.53% 1.43%(g)
- -------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest
cent.
(b) Inception date is March 4, 2004.
(c) Expense ratio is based on total expenses of the Fund before reduction of
earnings and bank fee credits on cash balances.
(d) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratio of expenses for
Class I would have been 0.55% for the year ended Aug. 31, 2006.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 49
CLASS Y
- -------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(a)
- -------------------------------------------------------------------------------------------------
Fiscal period ended Aug. 31, 2006 2005 2004 2003 2002
Net asset value, beginning of period $ 4.89 $ 4.88 $ 4.78 $ 4.75 $ 4.86
- -------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .20 .19 .18 .21 .25
Net gains (losses) (both realized and
unrealized) (.12) .02 .10 .03 (.10)
- -------------------------------------------------------------------------------------------------
Total from investment operations .08 .21 .28 .24 .15
- -------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.20) (.20) (.18) (.21) (.25)
Tax return of capital -- -- -- -- (.01)
- -------------------------------------------------------------------------------------------------
Total distributions (.20) (.20) (.18) (.21) (.26)
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.77 $ 4.89 $ 4.88 $ 4.78 $ 4.75
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 173 $ 202 $ 203 $ 268 $ 297
- -------------------------------------------------------------------------------------------------
Ratio of expenses to average
daily net assets(b) .73%(c) .78%(c) .81%(c) .81% .78%
- -------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average daily net assets 4.24% 3.85% 3.70% 4.34% 5.30%
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate
(excluding short-term securities) 281% 300% 279% 256% 169%
- -------------------------------------------------------------------------------------------------
Total return(d) 1.81% 4.34% 5.92% 5.08% 3.29%
- -------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest
cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings and bank fee credits on cash balances.
(c) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses
for Class Y would have been 0.82%, 0.86% and 0.83% for the years ended
Aug. 31, 2006, 2005 and 2004, respectively.
(d) Total return does not reflect payment of a sales charge.
- ------------------------------------------------------------------------------
50 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD AND SHAREHOLDERS
RIVERSOURCE DIVERSIFIED INCOME SERIES, INC.
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of RiverSource
Diversified Bond Fund (a series of RiverSource Diversified Income Series,
Inc.) as of August 31, 2006, the related statement of operations for the year
then ended, the statements of changes in net assets for each of the years in
the two-year period ended August 31, 2006, and the financial highlights for
each of the years in the five-year period ended August 31, 2006. These
financial statements and the financial highlights are the responsibility of
fund management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and the 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 August 31, 2006, by
correspondence with the custodian and brokers or by other appropriate auditing
procedures. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
RiverSource Diversified Bond Fund as of August 31, 2006, and the results of
its operations, changes in its net assets and the financial highlights for
each of the periods stated in the first paragraph above, in conformity with
U.S. generally accepted accounting principles.
KPMG LLP
Minneapolis, Minnesota
October 20, 2006
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 51
FEDERAL INCOME TAX INFORMATION
(UNAUDITED)
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its fiscal
year. The dividends listed below are reported to you on Form 1099-DIV, Dividends
and Distributions. Shareholders should consult a tax advisor on how to report
distributions for state and local tax purposes.
Fiscal year ended Aug. 31, 2006
CLASS A
INCOME DISTRIBUTIONS -- taxable as dividend income:
Qualified Dividend Income for individuals.............................0.00%
Dividends Received Deduction for corporations.........................0.00%
PAYABLE DATE PER SHARE
Sept. 29, 2005.......................................................$ 0.01496
Oct. 27, 2005..........................................................0.01500
Nov. 29, 2005..........................................................0.01500
Dec. 22, 2005..........................................................0.01700
Jan. 26, 2006..........................................................0.01586
Feb. 27, 2006..........................................................0.01822
March 27, 2006.........................................................0.01602
April 26, 2006.........................................................0.01600
May 25, 2006...........................................................0.01600
June 26, 2006..........................................................0.01600
July 26, 2006..........................................................0.01700
Aug. 28, 2006..........................................................0.01800
Total distributions..................................................$ 0.19506
- ------------------------------------------------------------------------------
52 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
CLASS B
INCOME DISTRIBUTIONS -- taxable as dividend income:
Qualified Dividend Income for individuals.............................0.00%
Dividends Received Deduction for corporations.........................0.00%
PAYABLE DATE PER SHARE
Sept. 29, 2005.......................................................$ 0.01186
Oct. 27, 2005..........................................................0.01230
Nov. 29, 2005..........................................................0.01172
Dec. 22, 2005..........................................................0.01472
Jan. 26, 2006..........................................................0.01235
Feb. 27, 2006..........................................................0.01503
March 27, 2006.........................................................0.01323
April 26, 2006.........................................................0.01305
May 25, 2006...........................................................0.01316
June 26, 2006..........................................................0.01287
July 26, 2006..........................................................0.01401
Aug. 28, 2006..........................................................0.01474
Total distributions..................................................$ 0.15904
CLASS C
INCOME DISTRIBUTIONS -- taxable as dividend income:
Qualified Dividend Income for individuals.............................0.00%
Dividends Received Deduction for corporations.........................0.00%
PAYABLE DATE PER SHARE
Sept. 29, 2005.......................................................$ 0.01188
Oct. 27, 2005..........................................................0.01227
Nov. 29, 2005..........................................................0.01169
Dec. 22, 2005..........................................................0.01471
Jan. 26, 2006..........................................................0.01231
Feb. 27, 2006..........................................................0.01501
March 27, 2006.........................................................0.01321
April 26, 2006.........................................................0.01301
May 25, 2006...........................................................0.01312
June 26, 2006..........................................................0.01283
July 26, 2006..........................................................0.01403
Aug. 28, 2006..........................................................0.01470
Total distributions..................................................$ 0.15877
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 53
CLASS I
INCOME DISTRIBUTIONS -- taxable as dividend income:
Qualified Dividend Income for individuals.............................0.00%
Dividends Received Deduction for corporations.........................0.00%
PAYABLE DATE PER SHARE
Sept. 29, 2005.......................................................$ 0.01637
Oct. 27, 2005..........................................................0.01609
Nov. 29, 2005..........................................................0.01634
Dec. 22, 2005..........................................................0.01805
Jan. 26, 2006..........................................................0.01674
Feb. 27, 2006..........................................................0.01947
March 27, 2006.........................................................0.01734
April 26, 2006.........................................................0.01737
May 25, 2006...........................................................0.01733
June 26, 2006..........................................................0.01747
July 26, 2006..........................................................0.01837
Aug. 28, 2006..........................................................0.01953
Total distributions..................................................$ 0.21047
CLASS Y
INCOME DISTRIBUTIONS -- taxable as dividend income:
Qualified Dividend Income for individuals.............................0.00%
Dividends Received Deduction for corporations.........................0.00%
PAYABLE DATE PER SHARE
Sept. 29, 2005.......................................................$ 0.01563
Oct. 27, 2005..........................................................0.01560
Nov. 29, 2005..........................................................0.01569
Dec. 22, 2005..........................................................0.01748
Jan. 26, 2006..........................................................0.01660
Feb. 27, 2006..........................................................0.01890
March 27, 2006.........................................................0.01661
April 26, 2006.........................................................0.01662
May 25, 2006...........................................................0.01660
June 26, 2006..........................................................0.01666
July 26, 2006..........................................................0.01761
Aug. 28, 2006..........................................................0.01868
Total distributions..................................................$ 0.20268
- ------------------------------------------------------------------------------
54 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
FUND EXPENSES EXAMPLE
(UNAUDITED)
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments; and (2) ongoing
costs, including management fees; distribution and service (12b-1) fees; and
other Fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in the Fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the six months ended Aug. 31, 2006.
ACTUAL EXPENSES
The first line of the table provides information about actual account values
and actual expenses. You may use the information in this line, together with
the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading titled "Expenses paid during the period"
to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table provides information about hypothetical account
values and hypothetical expenses based on the Fund's actual expense ratio and
an assumed rate of return of 5% per year before expenses, which is not the
Fund's actual return. The hypothetical account values and expenses may not be
used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder
reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads). Therefore, the second line of the table is useful in
comparing ongoing costs only, and will not help you determine the relative
total costs of owning different funds. In addition, if these transactional
costs were included, your costs would have been higher.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 55
BEGINNING ENDING EXPENSES
ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED
MARCH 1, 2006 AUG. 31, 2006 THE PERIOD(a) EXPENSE RATIO
- ----------------------------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,017.20 $ 4.53 .89%
- ----------------------------------------------------------------------------------------------
Hypothetical $1,000 $1,020.72 $ 4.53 .89%
(5% return before expenses)
- ----------------------------------------------------------------------------------------------
Class B
- ----------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,013.30 $ 8.37 1.65%
- ----------------------------------------------------------------------------------------------
Hypothetical $1,000 $1,016.89 $ 8.39 1.65%
(5% return before expenses)
- ----------------------------------------------------------------------------------------------
Class C
- ----------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,011.10 $ 8.41 1.66%
- ----------------------------------------------------------------------------------------------
Hypothetical $1,000 $1,016.84 $ 8.44 1.66%
(5% return before expenses)
- ----------------------------------------------------------------------------------------------
Class I
- ----------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,019.00 $ 2.75 .54%
- ----------------------------------------------------------------------------------------------
Hypothetical $1,000 $1,022.48 $ 2.75 .54%
(5% return before expenses)
- ----------------------------------------------------------------------------------------------
Class Y
- ----------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,018.00 $ 3.71 .73%
- ----------------------------------------------------------------------------------------------
Hypothetical $1,000 $1,021.53 $ 3.72 .73%
(5% return before expenses)
- ----------------------------------------------------------------------------------------------
(a) Expenses are equal to the Fund's annualized expense ratio as indicated
above, multiplied by the average account value over the period,
multiplied by 184/365 (to reflect the one-half year period).
(b) Based on the actual return for the six months ended Aug. 31, 2006:
+1.72% for Class A, +1.33% for Class B, +1.11% for Class C, +1.90% for
Class I and +1.80% for Class Y.
- ------------------------------------------------------------------------------
56 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
BOARD MEMBERS AND OFFICERS
Shareholders elect a Board that oversees the Fund's operations. The Board
appoints officers who are responsible for day-to-day business decisions based
on policies set by the Board.
The following is a list of the Fund's Board members. Each member oversees 100
RiverSource funds. Board members serve until the next regular shareholders'
meeting or until he or she reaches the mandatory retirement age established by
the Board. Under the current Board policy, members may serve until the end of
the meeting following their 75th birthday, or the fifteenth anniversary of the
first Board meeting they attended as members of the Board, whichever occurs
first. This policy does not apply to Ms. Jones who may retire after her 75th
birthday.
INDEPENDENT BOARD MEMBERS
NAME, POSITION HELD
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS
- -----------------------------------------------------------------------------------------------
Kathleen Blatz Board member Chief Justice, Minnesota
901 S. Marquette Ave. since 2006 Supreme Court, 1998-2005
Minneapolis, MN 55402
Age 52
- -----------------------------------------------------------------------------------------------
Arne H. Carlson Board member Chair, Board Services
901 S. Marquette Ave. since 1999 Corporation (provides
Minneapolis, MN 55402 administrative services
Age 71 to boards); former Governor
of Minnesota
- -----------------------------------------------------------------------------------------------
Patricia M. Flynn Board member Trustee Professor of
901 S. Marquette Ave. since 2004 Economics and Management,
Minneapolis, MN 55402 Bentley College; former
Age 55 Dean, McCallum Graduate
School of Business, Bentley
College
- -----------------------------------------------------------------------------------------------
Anne P. Jones Board member Attorney and Consultant
901 S. Marquette Ave. since 1985
Minneapolis, MN 55402
Age 71
- -----------------------------------------------------------------------------------------------
Jeffrey Laikind Board member Former Managing Director, American Progressive
901 S. Marquette Ave. since 2005 Shikiar Asset Management Insurance
Minneapolis, MN 55402
Age 71
- -----------------------------------------------------------------------------------------------
Stephen R. Lewis, Jr. Board member President Emeritus and Valmont Industries,
901 S. Marquette Ave. since 2002 Professor of Economics, Inc. (manufactures
Minneapolis, MN 55402 Carleton College irrigation systems)
Age 67
- -----------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 57
INDEPENDENT BOARD MEMBERS (CONTINUED)
NAME, POSITION HELD
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS
- -----------------------------------------------------------------------------------------------
Catherine James Paglia Board member Director, Enterprise Asset Strategic
901 S. Marquette Ave. since 2004 Management, Inc. (private Distribution,Inc.
Minneapolis, MN 55402 real estate and asset (transportation,
Age 54 management company) distribution and
logistics
consultants)
- -----------------------------------------------------------------------------------------------
Vikki L. Pryor Board member President and Chief
901 S. Marquette Ave. since 2006 Executive Officer, SBLI
Minneapolis, MN 55402 USA Mutual Life Insurance
Age 53 Company, Inc. since 1999
- -----------------------------------------------------------------------------------------------
Alison Taunton-Rigby Board member Chief Executive Officer, Hybridon, Inc.
901 S. Marquette Ave. since 2002 RiboNovix, Inc. since 2003 (biotechnology);
Minneapolis, MN 55402 (biotechnology); former American Healthways,
Age 62 President, Forester Inc. (health
Biotech management programs)
- -----------------------------------------------------------------------------------------------
BOARD MEMBER AFFILIATED WITH RIVERSOURCE INVESTMENTS*
NAME, POSITION HELD
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS
- ----------------------------------------------------------------------------------------------
William F. Truscott** Board member President, Ameriprise
53600 Ameriprise since 2001, Certificate Company since
Financial Center Vice President 2006; President - U.S.
Minneapolis, MN 55474 since 2002, Asset Management and Chief
Age 46 Acting President Investment Officer,
since 2006 Ameriprise Financial,
Inc. and President,
Chairman of the Board and
Chief Investment Officer,
RiverSource Investments,
LLC since 2005; Senior
Vice President - Chief
Investment Officer,
Ameriprise Financial, Inc.
and Chairman of the Board
and Chief Investment
Officer, RiverSource
Investments, LLC, 2001-2005
- ----------------------------------------------------------------------------------------------
* Interested person by reason of being an officer, director, security
holder and/or employee of RiverSource Investments.
** Paula R. Meyer resigned her position as President for the RiverSource
funds. Mr. Truscott has been appointed Acting President and will be
assuming the responsibilities of President until a permanent replacement
for Ms. Meyer is found.
- ------------------------------------------------------------------------------
58 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
The Board has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. The officers serve at the
pleasure of the Board. In addition to Mr. Truscott, who is Vice President and
Acting President, the Fund's other officers are:
FUND OFFICERS
NAME, POSITION HELD
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------
Jeffrey P. Fox Treasurer Vice President - Investment Accounting,
105 Ameriprise since 2002 Ameriprise Financial, Inc.,
Financial Center since 2002; Vice President - Finance,
Minneapolis, MN 55474 American Express Company, 2000-2002
Age 51
- --------------------------------------------------------------------------------------
Michelle M. Keeley Vice President Executive Vice President - Equity and Fixed
172 Ameriprise since 2004 Income, Ameriprise Financial, Inc.
Financial Center and RiverSource Investments, LLC
Minneapolis, MN 55474 since 2006; Vice President - Investments,
Age 42 Ameriprise Certificate Company since 2003;
Senior Vice President - Fixed Income,
Ameriprise Financial, Inc., 2002-2006 and
RiverSource Investments, LLC, 2004-2006;
Managing Director, Zurich Global Assets,
2001-2002
- --------------------------------------------------------------------------------------
Leslie L. Ogg Vice President, President of Board Services Corporation
901 S. Marquette Ave. General Counsel,
Minneapolis, MN 55402 and Secretary
Age 68 since 1978
- --------------------------------------------------------------------------------------
Edward S. Dryden* Acting Chief Chief Compliance Officer, Ameriprise
1875 Ameriprise Compliance Certificate Company since 2006; Vice
Financial Center Officer President - Asset Management Compliance,
Minneapolis, MN 55474 since 2006 RiverSource Investments, LLC since 2006;
Age 41 Chief Compliance Officer - Mason Street
Advisors, LLC, 2002-2006
- --------------------------------------------------------------------------------------
Neysa M. Alecu Anti-Money Compliance Director and Anti-Money
2934 Ameriprise Laundering Laundering Officer, Ameriprise Financial,
Financial Center Officer Inc. since 2004; Manager Anti-Money
Minneapolis, MN 55474 since 2004 Laundering, Ameriprise Financial, Inc.,
Age 42 2003-2004; Compliance Director and
Bank Secrecy Act Officer, American Express
Centurion Bank, 2000-2003
- --------------------------------------------------------------------------------------
* Beth E. Weimer resigned her position as Chief Compliance Officer for the
RiverSource funds. Mr. Dryden has been appointed Acting Chief Compliance
Officer and will be assuming the responsibilities of Chief Compliance
Officer until a permanent replacement for Ms. Weimer is found.
The SAI has additional information about the Fund's directors and is
available, without charge, upon request by calling RiverSource Funds at (888)
791-3380; contacting your financial institution; or visiting
riversource.com/funds.
- ------------------------------------------------------------------------------
RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 59
APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT
During the period covered by this report, RiverSource Investments, LLC
("RiverSource Investments" or the "investment manager"), a wholly-owned
subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), served as
the investment manager to RiverSource funds under an Investment Management
Services Agreement ("IMS Agreement").
The Board of Directors/Trustees (the "Board") annually determines whether to
continue the IMS Agreement and subadvisory agreements, as applicable, by
evaluating the quality and level of services received and the costs associated
with those services. The Board did not make the specific determination this
year as each fund's IMS Agreement was approved by the vote of a majority of
the outstanding voting securities of the funds at a shareholder meeting held
on Feb. 15, 2006.
PROXY VOTING
The policy of the Board is to vote all proxies of the companies in which the
Fund holds investments. The procedures are stated in the Statement of
Additional Information (SAI). You may obtain a copy of the SAI without charge
by calling RiverSource Funds at (888) 791-3380; contacting your financial
institution; visiting riversource.com/funds; or searching the website of the
Securities and Exchange Commission (SEC) at http://www.sec.gov. Information
regarding how the Fund voted proxies relating to portfolio securities during
the 12-month period ended June 30, 2006 is available without charge by
visiting riversource.com/funds; or searching the website of the SEC at
www.sec.gov.
- ------------------------------------------------------------------------------
60 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT
RIVERSOURCE(SM) DIVERSIFIED BOND FUND
734 Ameriprise Financial Center
Minneapolis, MN 55474
riversource.com/funds
RIVERSOURCE [LOGO](SM) This report must be accompanied or preceded by the
INVESTMENTS Fund's current prospectus. RiverSource(SM) mutual funds
are distributed by RiverSource Distributors, Inc. and
Ameriprise Financial Services, Inc., Members NASD, and
managed by RiverSource Investments, LLC. These
companies are part of Ameriprise Financial, Inc.
S-6495 Z (10/06)
Item 2. (a) The Registrant has adopted a code of ethics that applies to the
Registrant's principal executive officer and principal financial
officer. A copy of the code of ethics is filed as an exhibit to this
form N-CSR.
(b) During the period covered by this report, there were not any
amendments to the provisions of the code of ethics adopted in 2(a)
above.
(c) During the period covered by this report, there were not any
implicit or explicit waivers to the provisions of the code of ethics
adopted in 2(a).
Item 3. The Registrant's board of directors has determined that independent
directors Jeffrey Laikind and Anne P. Jones, each qualify as audit
committee financial experts.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fund - Related Fees*
(a) Audit Fees. The fees paid for the years ended Aug. 31, to KPMG LLP
for professional services rendered for the audits of the annual
financial statements for RiverSource Diversified Income Series, Inc.
were as follows:
2006 - $33,700; 2005 - $43,500
(b) Audit - Related Fees. The fees paid for the years ended Aug. 31, to
KPMG LLP for additional professional services rendered in connection
with the registrant's security count pursuant to Rule 17f-2 for
RiverSource Diversified Income Series, Inc. were as follows:
2006 - $718; 2005 - $589
(c) Tax Fees. The fees paid for the years ended Aug. 31, to KPMG LLP for
tax compliance related services for RiverSource Diversified Income
Series, Inc. were as follows:
2006 - $7,279; 2005 - $2,575
(d) All Other Fees. The fees paid for the years ended Aug. 31, to KPMG
LLP for additional professional services rendered in connection to
proxy filing for RiverSource Diversified Income Series, Inc. were as
follows:
2006 - $2,870; 2005 - $776
(e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley
pre-approval requirements, all services to be performed by KPMG LLP
for the registrant and to the registrant's investment adviser and any
entity controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
must be pre-approved by the audit committee.
(e) (2) 100% of the services performed for items (b) through (d) above
during 2006 and 2005 were pre-approved by the audit committee.
(f) Not applicable.
(g) Non-Audit Fees. The fees paid for the years ended Aug. 31, by the
registrant for non-audit services to KPMG LLP were as follows:
2006 - $39,649; 2005 - $90,351
The fees paid for the years ended Aug. 31, to KPMG LLP by the
registrant's investment adviser, and any entity controlling,
controlled by, or under common control with the adviser that provides
ongoing services to the registrant were as follows:
2006 - $29,500; 2005 - $87,000
(h) 100% of the services performed in item (g) above during 2006 and 2005
were pre-approved by the audit committee.
*2005 represents bills paid 9/1/04 - 8/31/05
2006 represents bills paid 9/1/05 - 8/31/06
Item 5. Audit Committee of Listed Registrants. Not applicable.
Item 6. The complete schedule of investments is included in Item 1 of this
Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchase of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. Not applicable.
Item 10. Submission of matters to a vote of security holders. Not applicable.
Item 11. Controls and Procedures.
(a) Based upon their evaluation of the registrant's disclosure
controls and procedures as conducted within 90 days of the filing
date of this Form N-CSR, the registrant's Principal Financial
Officer and Principal Executive Officer have concluded that those
disclosure controls and procedures provide reasonable assurance
that the material information required to be disclosed by the
registrant on this report is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal controls over
financial reporting that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over
financial reporting.
Item 12. Exhibits.
(a)(1) Code of ethics as applies to the Registrant's principal
executive officer and principal financial officer, as required to be
disclosed under Item 2 of Form N-CSR, is attached as Ex. 99.CODE ETH.
(a)(2) Separate certification for the Registrant's principal
executive officer and principal financial officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a)
under the Investment Company Act of 1940, are attached as
EX.99.CERT.
(a)(3) Not applicable.
(b) A certification by the Registrant's principal executive officer
and principal financial officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment
Company Act of 1940, is attached as EX.99.906 CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) RiverSource Diversified Income Series, Inc.
By /s/ William F. Truscott
-----------------------
William F. Truscott
President and Principal Executive Officer
Date November 3, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By /s/ William F. Truscott
-----------------------
William F. Truscott
President and Principal Executive Officer
Date November 3, 2006
By /s/ Jeffrey P. Fox
-----------------------
Jeffrey P. Fox
Treasurer and Principal Financial Officer
Date November 3, 2006