-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H0AGMWeqmL0pCuU5Uxy/v/Xsso6PPfGMLBPdOJ3c2778Y93M6VFqd7YVvWSbdqOg ikSxE+ysY/OYTYDD4guIrg== 0000950134-07-022627.txt : 20071102 0000950134-07-022627.hdr.sgml : 20071102 20071102091619 ACCESSION NUMBER: 0000950134-07-022627 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20070831 FILED AS OF DATE: 20071102 DATE AS OF CHANGE: 20071102 EFFECTIVENESS DATE: 20071102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIVERSOURCE DIVERSIFIED INCOME SERIES INC CENTRAL INDEX KEY: 0000049697 IRS NUMBER: 411237361 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-02503 FILM NUMBER: 071208758 BUSINESS ADDRESS: STREET 1: 50606 AMERIPRISE FINANCIAL CENTER STREET 2: H27/5228 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 BUSINESS PHONE: 6126714321 MAIL ADDRESS: STREET 1: 50606 AMERIPRISE FINANCIAL CENTER STREET 2: H27/5228 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 FORMER COMPANY: FORMER CONFORMED NAME: RIVERSOURCE DIVERSIFIED INCOME SERIES, INC. DATE OF NAME CHANGE: 20060504 FORMER COMPANY: FORMER CONFORMED NAME: AXP FIXED INCOME SERIES INC DATE OF NAME CHANGE: 20021118 FORMER COMPANY: FORMER CONFORMED NAME: AXP BOND FUND INC DATE OF NAME CHANGE: 20000829 0000049697 S000003362 RiverSource Diversified Bond Fund C000009231 RiverSource Diversified Bond Fund Class I RDBIX C000009232 RiverSource Diversified Bond Fund Class A INBNX C000009233 RiverSource Diversified Bond Fund Class B ININX C000009234 RiverSource Diversified Bond Fund Class C AXBCX C000038360 RiverSource Diversified Bond Fund Class R2 C000038361 RiverSource Diversified Bond Fund Class R3 RSDBX C000038362 RiverSource Diversified Bond Fund Class R5 RSVBX C000038363 RiverSource Diversified Bond Fund Class W RVBWX C000039562 RiverSource Diversified Bond Fund Class R4 IDBYX N-CSR 1 c18783nvcsr.txt FORM N-CSR 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 RIVERSOURCE DIVERSIFIED INCOME SERIES, INC. (Exact name of registrant as specified in charter) 50606 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (Address of principal executive offices) (Zip code) Scott R. Plummer - 5228 Ameriprise Financial Center, Minneapolis, MN 55474 (Name and address of agent for service) Registrant's telephone number, including area code: (612) 671-1947 Date of fiscal year end: 8/31 Date of reporting period: 8/31 Annual Report and Prospectus (RIVERSOURCE INVESTMENTS LOGO) RIVERSOURCE(R) DIVERSIFIED BOND FUND ANNUAL REPORT FOR THE PERIOD ENDED AUGUST 31, 2007 (Prospectus also enclosed) 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. This annual report includes a prospectus that describes in detail the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money. TABLE OF CONTENTS Fund Snapshot....................... 3 Performance Summary................. 5 Questions & Answers with Portfolio Management........ 8 The Fund's Long-term Performance ... 12 Fund Expenses Example............... 14 Investments in Securities........... 17 Financial Statements................ 36 Notes to Financial Statements....... 42 Report of Independent Registered Public Accounting Firm........... 69 Federal Income Tax Information...... 70 Board Members and Officers.......... 75 Approval of Investment Management Services Agreement............... 79 Proxy Voting........................ 81 Change in Independent Registered Public Accounting Firm........... 82
(DALBAR LOGO) 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. - -------------------------------------------------------------------------------- 2 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT FUND SNAPSHOT AT AUG. 31, 2007 FUND OBJECTIVE 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. SECTOR BREAKDOWN Percentage of portfolio assets (PIE CHART) Mortgage-Backed 45.0% Corporate Bonds(1) 22.8% U.S. Government Obligations & Agencies 16.7% Commercial Mortgage-Backed 11.8% Asset-Backed 2.3% Cash & Cash Equivalents(2) 1.4%
(1) Includes Telecommunications 5.6%, Financials 4.9%, Utilities 3.4%, Consumer Discretionary 2.9%, Consumer Staples 2.4%, Health Care 1.3%, Energy 0.9%, Materials 0.9% and Industrials 0.5%. (2) Due to security lending activity. QUALITY BREAKDOWN Percentage of bond portfolio assets (PIE CHART) AAA Bonds 75.8% BBB Bonds 12.3% Non-Investment Grade Bonds 6.1% A Bonds 4.2% AA Bonds 1.6% Non-Rated Bonds 0.0%
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. Ratings for 0.2% of the bond portfolio assets were determined through internal analysis. 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. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 3 FUND SNAPSHOT AT AUG. 31, 2007 STYLE MATRIX
DURATION SHORT INT. LONG X HIGH X MEDIUM QUALITY LOW
Shading within the style matrix indicates areas in which the Fund generally invests. 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, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. PORTFOLIO MANAGERS
YEARS IN INDUSTRY Jamie Jackson, CFA 19 Scott Kirby 28 Tom Murphy, CFA 21 Nicholas Pifer, CFA 17 Jennifer Ponce de Leon 18
FUND FACTS
TICKER SYMBOL INCEPTION DATE Class A INBNX 10/03/74 Class B ININX 03/20/95 Class C AXBCX 06/26/00 Class I RDBIX 03/04/04 Class R2 -- 12/11/06 Class R3 RSDBX 12/11/06 Class R4(1) IDBYX 03/20/95 Class R5 RSVBX 12/11/06 Class W RVBWX 12/01/06 (1) Effective Dec. 11, 2006, Class Y was renamed Class R4. Total net assets $2.944 billion Number of holdings 492 Weighted average life(2) 7.72 years Effective duration(3) 4.43 years Weighted average bond rating(4) AA
(2) 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. (3) 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. (4) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. - -------------------------------------------------------------------------------- 4 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT PERFORMANCE SUMMARY PERFORMANCE COMPARISON For the year ended Aug. 31, 2007 (BAR CHART) RiverSource Diversified Bond fund Class A (excluding sales charges) +5.54 Lehman Brothers Aggregate Bond Index (unmanaged) +5.26 Lipper Intermediate Investment Grade Index +4.44
(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. ANNUAL OPERATING EXPENSE RATIO (AS OF THE CURRENT PROSPECTUS)
TOTAL NET EXPENSES(A) Class A 0.97% 0.89% Class B 1.73% 1.65% Class C 1.73% 1.65% Class I 0.56% 0.53% Class R2(b) 1.36% 1.33% Class R3(b) 1.11% 1.08% Class R4(c) 0.86% 0.77% Class R5(b) 0.61% 0.58% Class W(d) 1.01% 0.98%
(a) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Aug. 31, 2008, unless sooner terminated at the discretion of the Fund's Board. Any amounts waived will not be reimbursed by the Fund. Under this agreement, net fund expenses will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.53% for Class I, 1.33% for Class R2, 1.08% for Class R3, 0.77% for Class R4, 0.58% for Class R5 and 0.98% for Class W. (b) Inception date for Class R2, Class R3 and Class R5 was Dec. 11, 2006. (c) Effective Dec. 11, 2006, Class Y was renamed Class R4. (d) Inception date for Class W is Dec. 1, 2006. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 5 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS
AT AUG. 31, 2007 SINCE WITHOUT SALES CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION Class A (inception 10/3/74) +5.54% +3.84% +4.39% +4.81% +9.07% Class B (inception 3/20/95) +4.74% +2.99% +3.61% +4.02% +5.26% Class C (inception 6/26/00) +4.73% +2.98% +3.60% N/A +4.49% Class I (inception 3/4/04) +5.90% +4.20% N/A N/A +4.02% Class R2 (inception 12/11/06) N/A N/A N/A N/A +2.70%* Class R3 (inception 12/11/06) N/A N/A N/A N/A +2.90%* Class R4** (inception 3/20/95) +5.49% +3.87% +4.52% +4.94% +6.20% Class R5 (inception 12/11/06) N/A N/A N/A N/A +3.25%* Class W (inception 12/01/06) N/A N/A N/A N/A +2.71%* WITH SALES CHARGE Class A (inception 10/3/74) +0.52% +2.17% +3.38% +4.30% +8.91% Class B (inception 3/20/95) -0.26% +1.74% +3.26% +4.02% +5.26% Class C (inception 6/26/00) +3.73% +2.98% +3.60% N/A +4.49%
- -------------------------------------------------------------------------------- 6 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT PERFORMANCE SUMMARY
AT SEPT. 30, 2007 SINCE WITHOUT SALES CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION Class A (inception 10/3/74) +5.73% +4.00% +4.42% +4.74% +9.08% Class B (inception 3/20/95) +4.94% +3.22% +3.63% +3.95% +5.30% Class C (inception 6/26/00) +4.93% +3.14% +3.62% N/A +4.57% Class I (inception 3/4/04) +6.10% +4.43% N/A N/A +4.21% Class R2 (inception 12/11/06) N/A N/A N/A N/A +3.67%* Class R3 (inception 12/11/06) N/A N/A N/A N/A +3.90%* Class R4** (inception 3/20/95) +5.69% +4.10% +4.54% +4.87% +6.24% Class R5 (inception 12/11/06) N/A N/A N/A N/A +4.29%* Class W (inception 12/01/06) N/A N/A N/A N/A +3.71%* WITH SALES CHARGE Class A (inception 10/3/74) +0.71% +2.33% +3.40% +4.23% +8.92% Class B (inception 3/20/95) -0.06% +1.97% +3.28% +3.95% +5.30% Class C (inception 6/26/00) +3.93% +3.14% +3.62% N/A +4.57%
Class A share performance reflects the maximum sales charge of 4.75%. Class B share performance 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 if shares are sold within one year after purchase. Sales charges do not apply to Class I, Class R2, Class R3, Class R4, Class R5 and Class W shares. Class I, Class R2, Class R3, Class R4 and Class R5 are available to institutional investors only. Class W shares are offered through qualifying discretionary accounts. * Not annualized. ** Effective Dec. 11, 2006, Class Y was renamed Class R4. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 7 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, 2007. 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 5.54% for the 12 months ended Aug. 31, 2007. The Fund outperformed its benchmark, the unmanaged Lehman Brothers Aggregate Bond Index (Lehman Index), which gained 5.26%. The Fund also outperformed its peer group, as represented by the Lipper Intermediate Investment Grade Index, which returned 4.44% during the same period. Q: What factors most significantly affected the Fund's performance? A: The Fund outperformed its benchmark and peer group due primarily to effective issue selection within mortgage-backed securities, investment grade corporate bonds and U.S. agency securities. Strategic duration positioning also contributed positively to the Fund's results, especially in early 2007 when its shorter duration than the Lehman Index enabled the Fund to take advantage of rising interest rates. Duration is a measure of the Fund's sensitivity to interest rate changes. Fixed income market returns, in general, were bolstered by a decline in interest rates across the yield curve, or range of maturities, during the last three months of the period. The boost to the fixed income market was partially offset by the lagging performance of non-Treasury securities, as investors became increasingly risk averse given their concerns about subprime mortgage loan losses and signs of a less favorable economic environment for businesses. All told, the yield on the 10-year U.S. Treasury declined approximately 19 points (0.19%) over the 12 months. Shorter maturity Treasuries fell even more; longer maturity Treasuries fell slightly less. THE FUND OUTPERFORMED ITS BENCHMARK AND PEER GROUP DUE PRIMARILY TO EFFECTIVE ISSUE SELECTION WITHIN MORTGAGE-BACKED SECURITIES, INVESTMENT GRADE CORPORATE BONDS AND U.S. AGENCY SECURITIES. - -------------------------------------------------------------------------------- 8 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT QUESTIONS & ANSWERS Given investors' reduced appetite for risk as the period progressed, the Fund's significant allocations to mortgage-backed securities and commercial mortgage-backed securities (CMBS) hurt its performance, as these sectors -- regardless of the quality of the individual securities' underlying mortgage loans -- suffered from subprime mortgage fears and underperformed the broader fixed income market. Similarly, an exposure to high yield corporate bonds, including bank loans, detracted from the Fund's results. Having posted positive returns earlier in the fiscal year, this sector slipped significantly during the last three months of the period. Q: What changes did you make to the Fund's portfolio during the period? A: As indicated above, we strategically adjusted the Fund's duration positioning during the period, shifting between a neutral-to-the-Lehman Index and a shorter-than-the-Lehman Index stance as interest rates moved within a wide range during the 12 months. The Fund ended the period with a shorter duration than the Lehman Index. We increased the Fund's allocations to mortgage-backed securities, CMBS and agency securities during the fiscal year. We also added to the Fund's exposure to high yield corporate bonds, particularly bank loans. Although this exposure detracted from the Fund's results during the period, we expect such positioning to ultimately prove prudent as the markets calm and the strong underlying economic and credit fundamentals prevail over near-term uncertainties. The Fund's portfolio turnover rate for the annual period was 295%.* * A significant portion of the turnover was the result of "roll" transactions in the liquid derivatives and Treasury securities. In derivative transactions, positions in expiring contracts are liquidated and simultaneously replaced with positions in new contracts with equivalent characteristics. In 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. We expect this activity to enhance the returns of the Fund. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 9 QUESTIONS & ANSWERS WE ALSO BELIEVE INTEREST RATES ARE LIKELY TO RISE SOMEWHAT OVER THE NEXT SEVERAL QUARTERS, INCREASING TO LEVELS SEEN EARLIER IN 2007. Q: What is the Fund's tactical view and strategy for the months ahead? A: The lagging performance by non-Treasury sectors toward the end of the period has led, in our view, to compelling potential value in a number of these sectors, especially given our belief that recent concerns over liquidity and financial market stability may subside over the near term. We also believe interest rates are likely to rise somewhat over the next several quarters, increasing to levels seen earlier in 2007. Following this move, we expect that interest rates may re-settle during 2008, with the yield on the 10-year U.S. Treasury ranging between 4.75% and 5.25%. Given this view, we intend to maintain the Fund's comparatively shorter duration stance for the near term. We also intend to increase the Fund's exposure to non-Treasury sectors, as their spreads -- or the difference in yields between these sectors and equivalent-duration U.S. Treasuries -- have widened to offer more attractive yield compensation than U.S. Treasuries. We expect to increase the Fund's allocations to CMBS, mortgage-backed securities, agency securities, high yield corporate bonds and bank loans. As always, we will maintain a disciplined focus on individual security selection. Of course, given the volatility of the current fixed income market, we will continue to closely monitor Fed policy shifts, economic data releases, supply/demand factors and interest rate movements, and adjust the portfolio's holdings and duration stance if necessary. Any specific securities mentioned are for illustrative purposes only and are not a complete list of securities that have increased or decreased in value. The views expressed in this statement reflect those of the portfolio manager(s) only through the end of the period of the report as stated on the cover and do not necessarily represent the views of RiverSource Investments, LLC (RiverSource) or any subadviser to the Fund or any other person in the RiverSource or subadviser organizations. Any such views are subject to change at any time based upon market or other conditions and RiverSource disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a RiverSource Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any RiverSource Fund. - -------------------------------------------------------------------------------- 10 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT THIS PAGE LEFT BLANK INTENTIONALLY 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 9/1/97 to 8/31/07) 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 table below and the chart on the facing page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. 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
SINCE Results at Aug. 31, 2007 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION(3) RIVERSOURCE DIVERSIFIED BOND FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $10,052 $10,665 $11,808 $15,233 $165,915 Average annual total return +0.52% +2.17% +3.38% +4.30% +8.91% LEHMAN BROTHERS AGGREGATE BOND INDEX(1) Cumulative value of $10,000 $10,526 $11,152 $12,349 $17,982 N/A Average annual total return +5.26% +3.70% +4.31% +6.04% N/A LIPPER INTERMEDIATE INVESTMENT GRADE INDEX(2) Cumulative value of $10,000 $10,444 $11,078 $12,390 $17,267 N/A Average annual total return +4.44% +3.47% +4.38% +5.61% N/A
Results for other share classes can be found on page 6. - -------------------------------------------------------------------------------- 12 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT (VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE DIVERSIFIED BOND FUND LINE GRAPH)
RIVERSOURCE DIVERSIFIED BOND FUND CLASS A LEHMAN BROTHERS AGGREGATE LIPPER INTERMEDIATE (INCLUDES SALES CHARGE) BOND INDEX(1) INVESTMENT GRADE INDEX(2) ----------------------- ------------------------- ------------------------- '97 $ 9,525 $10,000 $10,000 '98 10,135 11,057 10,950 '99 10,303 11,145 10,998 '00 10,784 11,988 11,722 '01 11,914 13,469 13,165 '02 12,287 14,561 13,935 '03 12,890 15,196 14,685 '04 13,604 16,127 15,586 '05 14,200 16,797 16,269 '06 14,433 17,084 16,533 '07 15,233 17,982 17,267
(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. (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. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 13 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, which may include management fees; distribution and service (12b-1) fees; and other Fund fees and 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. In addition to the ongoing expenses which the Fund bears directly, the Fund's shareholders indirectly bear the expenses of the funds in which it invests (also referred to as "acquired funds"), including affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds). The Fund's indirect expense from investing in the acquired funds is based on the Fund's pro rata portion of the cumulative expenses charged by the acquired funds using the acquired funds expense ratio as of the most recent shareholder report. 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, 2007. 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. - -------------------------------------------------------------------------------- 14 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED MARCH 1, 2007 AUG. 31, 2007 THE PERIOD(A) EXPENSE RATIO Class A Actual(b) $1,000 $1,007.80 $4.50(c) .89% Hypothetical $1,000 $1,020.72 $4.53(c) .89% (5% return before expenses) Class B Actual(b) $1,000 $1,003.90 $8.33(c) 1.65% Hypothetical $1,000 $1,016.89 $8.39(c) 1.65% (5% return before expenses) Class C Actual(b) $1,000 $1,003.90 $8.28(c) 1.64% Hypothetical $1,000 $1,016.94 $8.34(c) 1.64% (5% return before expenses) Class I Actual(b) $1,000 $1,011.60 $2.74(c) .54% Hypothetical $1,000 $1,022.48 $2.75(c) .54% (5% return before expenses) Class R2 Actual(b) $1,000 $1,005.40 $6.67(c) 1.32% Hypothetical $1,000 $1,018.55 $6.72(c) 1.32% (5% return before expenses) Class R3 Actual(b) $1,000 $1,006.90 $5.36(c) 1.06% Hypothetical $1,000 $1,019.86 $5.40(c) 1.06% (5% return before expenses) Class R4* Actual(b) $1,000 $1,008.50 $3.70(c) .73% Hypothetical $1,000 $1,021.53 $3.72(c) .73% (5% return before expenses) Class R5 Actual(b) $1,000 $1,009.30 $2.89(c) .57% Hypothetical $1,000 $1,022.33 $2.91(c) .57% (5% return before expenses)
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 15
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED MARCH 1, 2007 AUG. 31, 2007 THE PERIOD(A) EXPENSE RATIO Class W Actual(b) $1,000 $1,007.00 $4.91(c) .97% Hypothetical $1,000 $1,020.32 $4.94(c) .97% (5% return before expenses)
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (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, 2007: +0.78% for Class A, +0.39% for Class B, +0.39% for Class C, +1.16% for Class I, +0.54% for Class R2, +0.69% for Class R3, +0.85% for Class R4, +0.93% for Class R5 and +0.70% for Class W. (c) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Aug. 31, 2008, unless sooner terminated at the discretion of the Fund's Board, such that net expenses (excluding fees and expenses of acquired funds), will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.53% for Class I, 1.33% for Class R2, 1.08% for Class R3, 0.77% for Class R4, 0.58% for Class R5 and 0.98% for Class W. Any amounts waived will not be reimbursed by the Fund. This change was effective Sept. 1, 2007. If this change had been in place for the entire six month period ended Aug. 31, 2007, the actual expenses paid would have been $8.33 for Class C, $2.69 for Class I, $3.90 for Class R4, $2.94 for Class R5 and $4.96 for Class W; the hypothetical expenses paid would have been $8.39 for Class C, $2.70 for Class I, $3.92 for Class R4, $2.96 for Class R5 and $4.99 for Class W. The actual and hypothetical expenses paid for Class A, Class B, Class R2 and Class R3 would have been the same as those expenses presented in the table above. - -------------------------------------------------------------------------------- 16 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT INVESTMENTS IN SECURITIES AUG. 31, 2007 (Percentages represent value of investments compared to net assets)
BONDS (105.1%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) U.S. GOVERNMENT OBLIGATIONS & AGENCIES (18.3%) Federal Farm Credit Bank 10-10-08 4.25% $13,285,000 $13,190,743 Federal Home Loan Bank 06-18-08 5.13 14,675,000 14,678,405 12-29-08 5.13 11,285,000 11,321,010 Federal Home Loan Mtge Corp 03-15-09 5.75 4,385,000 4,441,273 07-15-09 4.25 10,000,000 9,908,120 03-15-31 6.75 16,550,000 19,605,196 04-16-37 6.00 43,260,000 43,250,180 Federal Natl Mtge Assn 08-15-08 3.25 86,170,000 85,001,536 02-16-12 5.00 30,185,000 30,454,039 05-18-12 4.88 20,165,000 20,281,755 11-15-30 6.63 72,815,000 84,954,134 07-15-37 5.63 14,730,000 15,280,018 Overseas Private Investment U.S. Govt Guaranty Series 1996A 09-15-08 6.99 1,666,667 1,695,183 U.S. Treasury 06-30-09 4.88 57,550,000(q) 58,228,917 07-31-09 4.63 6,565,000(q) 6,618,853 05-15-10 4.50 1,185,000 1,195,184 07-31-12 4.63 14,715,000 14,950,675 08-15-17 4.75 24,035,000 24,429,318 02-15-26 6.00 19,083,000 21,672,620 U.S. Treasury Inflation-Indexed Bond 01-15-14 2.00 57,785,913(s) 56,416,999 --------------- Total 537,574,158 - ---------------------------------------------------------------------------------- ASSET-BACKED (2.5%) Capital Auto Receivables Asset Trust Series 2004-1 Cl CTFS 09-15-10 2.84 4,200,000 4,194,593 Capital Auto Receivables Asset Trust Series 2006-SN1A Cl D 04-20-11 6.15 2,500,000(d) 2,498,572
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) ASSET-BACKED (CONT.) College Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-1 Cl AIO 07-25-08 5.62% $14,700,000(g) $1,259,262 Countrywide Asset-backed Ctfs Series 2005-10 Cl AF6 02-25-36 4.92 1,865,000 1,744,449 Countrywide Asset-Backed Ctfs Series 2006-15 Cl A3 10-25-46 5.69 5,175,000 5,057,717 Countrywide Asset-backed Ctfs Series 2006-4 Cl 1A1M 07-25-36 5.77 2,268,423(i) 2,200,055 Countrywide Asset-backed Ctfs Series 2007-7 Cl 2A2 10-25-37 5.67 8,500,000(i) 8,371,174 Dunkin Securitization Series 2006-1 Cl A2 (AMBAC) 06-20-31 5.78 8,900,000(d,e) 8,957,591 Hertz Vehicle Financing LLC Series 2004-1A Cl A3 (MBIA) 05-25-09 2.85 2,600,000(d,e) 2,572,811 Keycorp Student Loan Trust Series 2003-A Cl 2A2 (MBIA) 10-25-25 5.67 967,830(e,i) 970,249 Master Asset Backed Securities Trust Series 2006-HE1 Cl A2 01-25-36 5.65 8,400,000(i) 8,352,750 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-2 Cl AIO 08-25-11 5.89 8,875,000(g) 1,803,941 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-3 Cl AIO 01-25-12 5.88 13,900,000(g) 3,616,224
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 17
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) ASSET-BACKED (CONT.) Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-4 Cl AIO 02-27-12 5.88% $11,700,000(g) $2,881,359 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-2 Cl AIO 07-25-12 5.90 6,250,000(g) 1,759,000 Popular ABS Mtge Pass-Through Trust Series 2005-A Cl AF2 06-25-35 4.49 117,301 116,823 Renaissance Home Equity Loan Trust Series 2005-4 Cl A3 02-25-36 5.57 4,670,000 4,613,540 Renaissance Home Equity Loan Trust Series 2007-2 Cl M4 06-25-37 6.31 1,380,000 1,026,902 Renaissance Home Equity Loan Trust Series 2007-2 Cl M5 06-25-37 6.66 900,000 674,645 Renaissance Home Equity Loan Trust Series 2007-2 Cl M6 06-25-37 7.01 1,320,000 967,365 Residential Asset Securities Series 2006-KS1 Cl A2 02-25-36 5.65 7,225,000(i) 7,148,234 SBA CMBS Trust Series 2006-1A Cl B 11-15-36 5.45 4,075,000(d) 4,094,103 WFS Financial Owner Trust Series 2004-1 Cl D 08-22-11 3.17 19,940 19,912 --------------- Total 74,901,271 - ---------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (13.0%)(f) Banc of America Commercial Mtge Series 2005-1 Cl A4 11-10-42 5.02 4,850,000 4,789,819 Banc of America Commercial Mtge Series 2007-1 Cl A3 01-15-49 5.45 5,825,000 5,694,820
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03-13-40 4.00% $1,983,533 $1,921,310 Bear Stearns Commercial Mtge Securities Series 2007-T26 Cl A4 01-12-45 5.47 5,950,000 5,794,765 CDC Commercial Mtge Trust Series 2002-FX1 Cl A2 11-15-30 5.68 11,775,000 11,863,109 Citigroup Commercial Mtge Trust Series 2005-EMG Cl A1 09-20-51 4.15 3,487,857(d) 3,443,896 Citigroup Commercial Mtge Trust Series 2006-C5 Cl A4 10-15-49 5.43 2,850,000 2,783,126 Citigroup Commercial Mtge Trust Series 2007-C6 Cl A4 12-10-49 5.89 11,550,000 11,549,555 Citigroup/Deutsche Bank Commercial Mtge Trust Series 2005-CD1 Cl ASB 07-15-44 5.40 3,050,000 3,011,088 Commercial Mtge Acceptance Series 1999-C1 Cl A2 06-15-31 7.03 8,567,660 8,723,709 Commercial Mtge Pass-Through Ctfs Series 2006-CN2A Cl BFL 02-05-19 5.64 2,550,000(d,i) 2,557,051 Commercial Mtge Pass-Through Ctfs Series 2007-C9 Cl A4 12-10-49 6.01 12,600,000 12,738,881 Commercial Mtge Pass-Through Ctfs Series 2007-FL14 Cl MKL1 06-15-22 6.30 9,850,000(d,i) 9,800,750 Credit Suisse Mtge Capital Ctfs Series 2006-C2 Cl A3 03-15-39 5.85 5,025,000 5,045,327 Credit Suisse Mtge Capital Ctfs Series 2007-C3 Cl A4 06-15-39 5.91 5,750,000 5,767,253 CS First Boston Mtge Securities Series 2001-CP4 Cl A4 12-15-35 6.18 7,400,000 7,541,743 CS First Boston Mtge Securities Series 2003-CPN1 Cl A2 03-15-35 4.60 3,525,000 3,371,172
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 18 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #385683 02-01-13 4.83% $6,116,277 $6,022,463 Federal Natl Mtge Assn #385815 01-01-13 4.77 7,011,956 6,856,249 Federal Natl Mtge Assn #555806 10-01-13 5.26 471,690 465,686 General Electric Capital Assurance Series 2003-1 Cl A3 05-12-35 4.77 10,350,000(d) 10,225,021 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05-15-33 6.30 8,000,000 8,067,490 Greenwich Capital Commercial Funding Series 2004-GG1 Cl A5 06-10-36 4.88 3,400,000 3,348,659 Greenwich Capital Commercial Funding Series 2007-GG9 Cl A4 03-10-39 5.44 16,350,000 16,027,140 GS Mtge Securities II Series 2004-GG2 Cl A4 08-10-38 4.96 5,900,000 5,828,205 GS Mtge Securities II Series 2007-EOP Cl J 03-06-20 6.18 8,400,000(d,i) 8,232,281 GS Mtge Securities II Series 2007-GG10 Cl A4 08-10-45 5.99 11,900,000 11,989,255 GS Mtge Securities II Series 2007-GG10 Cl F 08-10-45 5.99 4,425,000 4,377,653 JPMorgan Chase Commercial Mtge Securities Series 2003-LN1 Cl A1 10-15-37 4.13 3,751,021 3,635,332 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A1 03-12-39 3.97 3,562,855 3,475,363 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A2 03-12-39 4.77 6,894,000 6,639,747 JPMorgan Chase Commercial Mtge Securities Series 2004-CBX Cl A3 01-12-37 4.18 4,000,000 3,903,640 JPMorgan Chase Commercial Mtge Securities Series 2004-LN2 Cl A1 07-15-41 4.48 8,570,883 8,348,315
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) JPMorgan Chase Commercial Mtge Securities Series 2005-LDP5 Cl A4 12-15-44 5.34% $5,200,000 $5,056,740 JPMorgan Chase Commercial Mtge Securities Series 2006-LDP6 Cl A4 04-15-43 5.48 4,275,000 4,222,294 JPMorgan Chase Commercial Mtge Securities Series 2006-LDP6 Cl ASB 04-15-43 5.49 6,475,000 6,431,032 JPMorgan Chase Commercial Mtge Securities Series 2007-LDPX Cl A3 01-15-49 5.42 16,000,000 15,580,181 LB-UBS Commercial Mtge Trust Series 2002-C4 Cl A4 09-15-26 4.56 7,000,000 6,836,054 LB-UBS Commercial Mtge Trust Series 2002-C4 Cl A5 09-15-31 4.85 6,000,000 5,809,769 LB-UBS Commercial Mtge Trust Series 2004-C2 Cl A3 03-15-29 3.97 4,475,000 4,259,663 LB-UBS Commercial Mtge Trust Series 2005-C5 Cl AAB 09-15-30 4.93 7,325,000 7,193,077 LB-UBS Commercial Mtge Trust Series 2006-C4 Cl AAB 06-15-32 6.06 4,125,000 4,194,353 LB-UBS Commercial Mtge Trust Series 2006-C6 Cl A4 09-15-39 5.37 4,900,000 4,773,782 LB-UBS Commercial Mtge Trust Series 2007-C1 Cl A4 02-15-40 5.42 4,875,000 4,756,949 LB-UBS Commercial Mtge Trust Series 2007-C6 Cl A4 07-15-40 5.86 6,350,000 6,381,746 Morgan Stanley Capital I Series 2003-T11 Cl A2 06-13-41 4.34 4,575,000 4,509,425 Morgan Stanley Capital I Series 2004-HQ4 Cl A5 04-14-40 4.59 4,950,000 4,821,053 Morgan Stanley Capital I Series 2006-T23 Cl AAB 08-12-41 5.97 3,425,000 3,472,257
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 19
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) Morgan Stanley Capital I Series 2007-IQ15 Cl A4 06-11-49 6.08% $5,600,000 $5,663,840 TIAA Retail Commercial Trust Series 2007-C4 Cl A3 08-15-39 6.10 8,500,000(c) 8,535,241 Wachovia Bank Commercial Mtge Trust Series 2003-C7 Cl A2 10-15-35 5.08 14,550,000(d) 14,160,801 Wachovia Bank Commercial Mtge Trust Series 2005-C18 Cl A4 04-15-42 4.94 4,815,000 4,624,074 Wachovia Bank Commercial Mtge Trust Series 2005-C20 Cl A5 07-15-42 5.09 4,667,000 4,574,808 Wachovia Bank Commercial Mtge Trust Series 2006-C27 Cl A3 07-15-45 5.77 11,950,372 11,953,069 Wachovia Bank Commercial Mtge Trust Series 2006-C27 Cl APB 07-15-45 5.73 5,075,000 5,034,875 Wachovia Bank Commercial Mtge Trust Series 2006-C29 Cl A4 11-15-48 5.31 8,900,000 8,648,747 Wachovia Bank Commercial Mtge Trust Series 2007-C31 Cl A4 04-15-47 5.51 17,350,000 16,998,308 --------------- Total 382,332,011 - ---------------------------------------------------------------------------------- MORTGAGE-BACKED (49.5%)(f,n) Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-12 Cl 2A1 03-25-36 5.69 7,580,646(k) 7,581,474 Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2006-1 Cl 2A1 03-25-36 5.94 8,634,712(k) 8,623,832 Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2007-1 Cl 3A21 03-25-37 6.19 6,766,652(k) 6,840,918
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 1A1 01-25-34 6.00% $6,816,612 $6,691,868 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 4A1 01-25-19 4.75 3,729,443 3,583,764 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2004-3 Cl 1A1 04-25-34 6.00 8,654,252 8,589,345 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2006-9 Cl 1CB1 01-25-37 6.00 16,660,970 16,401,807 Banc of America Funding Collateralized Mtge Obligation Series 2006-2 Cl N1 11-25-46 7.25 632,069(d) 595,725 Banc of America Funding Collateralized Mtge Obligation Series 2006-A Cl 3A2 02-20-36 5.89 6,140,551(k) 6,139,507 Banc of America Mtge Securities Collateralized Mtge Obligation Series 2005-9 Cl 3A3 10-25-20 5.00 27,132,255 26,300,240 Bear Stearns Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-8 Cl A4 08-25-35 5.10 6,025,000(d,k) 5,756,163 Bear Stearns Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2007-5 Cl 3A1 08-25-47 6.00 13,600,000(k) 13,319,500 ChaseFlex Trust Collateralized Mtge Obligation Series 2005-2 Cl 2A2 06-25-35 6.50 2,001,690 2,023,585 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-8CB Cl A13 05-25-37 7.73 6,218,487(g) 1,050,738
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 20 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11T1 Cl A1 07-25-18 4.75% $3,818,061 $3,668,920 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-20CB Cl 1A1 10-25-33 5.50 14,928,280 14,371,375 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 2A3 11-25-35 5.50 5,813,231 5,842,996 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 3A7 11-25-35 5.50 5,890,080 5,920,217 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-64CB Cl 1A1 12-25-35 5.50 10,013,264 10,004,880 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-6CB Cl 1A1 04-25-35 7.50 5,308,276 5,502,702 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-85CB Cl 2A2 02-25-36 5.50 2,708,330 2,699,051 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-22R Cl 1A2 05-25-36 6.00 7,988,368 8,029,342 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-2CB Cl A11 03-25-36 6.00 8,310,985 8,132,753 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-31CB Cl A16 11-25-36 6.00 10,000,000 10,095,600 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-43CB Cl 1A4 02-25-37 6.00 12,356,857 12,389,479
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-25 Cl 1A1 10-25-37 6.50% $20,000,000(j) $19,646,875 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OH3 Cl A3 09-25-47 6.01 15,967,790(i) 14,637,770 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-27 Cl 2A1 12-25-35 5.50 13,361,552 12,862,689 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00 6,574,642(d) 6,909,833 Countrywide Home Loans Collateralized Mtge Obligation Series 2006-HYB1 Cl 1A1 03-20-36 5.36 3,756,789(k) 3,753,784 Countrywide Home Loans Collateralized Mtge Obligation Series 2007-17 Cl 2A1 10-25-37 6.50 18,000,000 17,907,188 Countrywide Home Loans Collateralized Mtge Obligation Series 2007-HY3 Cl 4A1 06-25-47 6.00 10,335,386(k) 10,121,814 CS First Boston Mtge Securities Collateralized Mtge Obligation Series 2003-29 Cl 8A1 11-25-18 6.00 2,027,217 2,029,162 Downey Savings & Loan Assn Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR5 Cl X1 08-19-45 9.55 42,924,289(g) 382,294 Federal Home Loan Mtge Corp 09-01-37 6.50 61,000,000(j) 61,914,999 Federal Home Loan Mtge Corp #170216 03-01-17 8.50 7,682 8,171 Federal Home Loan Mtge Corp #1J1445 01-01-37 5.90 13,124,315(k) 13,200,534 Federal Home Loan Mtge Corp #284190 01-01-17 8.00 341 358
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 21
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #290970 04-01-17 8.00% $9,885 $10,344 Federal Home Loan Mtge Corp #295114 06-01-17 8.50 3,693 3,929 Federal Home Loan Mtge Corp #540861 09-01-19 8.50 33,499 35,747 Federal Home Loan Mtge Corp #A00304 04-01-21 9.00 46,970 50,357 Federal Home Loan Mtge Corp #A62544 06-01-37 6.00 8,106,420 8,100,509 Federal Home Loan Mtge Corp #B11835 01-01-19 5.50 502,437 500,613 Federal Home Loan Mtge Corp #C00103 03-01-22 8.50 122,079 130,795 Federal Home Loan Mtge Corp #C00144 08-01-22 8.50 111,358 119,412 Federal Home Loan Mtge Corp #C00356 08-01-24 8.00 390,728 413,838 Federal Home Loan Mtge Corp #C00666 10-01-28 7.00 46,602 48,203 Federal Home Loan Mtge Corp #C02951 07-01-37 6.50 24,963,125 25,340,171 Federal Home Loan Mtge Corp #C53878 12-01-30 5.50 1,617,997 1,588,691 Federal Home Loan Mtge Corp #C62993 01-01-32 6.50 1,135,757 1,161,398 Federal Home Loan Mtge Corp #C63552 01-01-32 6.50 1,735,467 1,780,106 Federal Home Loan Mtge Corp #C64703 03-01-32 6.50 991,391 1,014,556 Federal Home Loan Mtge Corp #C67723 06-01-32 7.00 797,346 826,555 Federal Home Loan Mtge Corp #C78031 04-01-33 5.50 8,896,394 8,721,585 Federal Home Loan Mtge Corp #C79930 06-01-33 5.50 7,723,071 7,565,174 Federal Home Loan Mtge Corp #C90767 12-01-23 6.00 7,307,024 7,375,724 Federal Home Loan Mtge Corp #D96300 10-01-23 5.50 5,004,713 4,945,549 Federal Home Loan Mtge Corp #E01127 02-01-17 6.50 1,138,468 1,163,268 Federal Home Loan Mtge Corp #E01419 05-01-18 5.50 4,247,554 4,235,794
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #E79810 11-01-14 7.50% $952,062 $990,711 Federal Home Loan Mtge Corp #E90216 05-01-17 6.00 1,320,121 1,336,218 Federal Home Loan Mtge Corp #E98725 08-01-18 5.00 9,615,590 9,429,100 Federal Home Loan Mtge Corp #E99684 10-01-18 5.00 9,634,698 9,446,483 Federal Home Loan Mtge Corp #G00286 02-01-25 8.00 153,612 162,698 Federal Home Loan Mtge Corp #G01108 04-01-30 7.00 2,957,443 3,059,353 Federal Home Loan Mtge Corp #G01441 07-01-32 7.00 2,685,445 2,769,253 Federal Home Loan Mtge Corp #G01535 04-01-33 6.00 10,192,550 10,259,085 Federal Home Loan Mtge Corp #G02757 06-01-36 5.00 26,392,109 25,135,440 Federal Home Loan Mtge Corp #G11302 07-01-17 7.00 3,189,876 3,296,532 Federal Home Loan Mtge Corp #G30225 02-01-23 6.00 10,088,513 10,195,293 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 237 Cl IO 05-15-36 8.64 4,230,664(g) 1,131,703 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2590 Cl BI 02-15-14 10.67 1,504,506(g) 39,767 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2718 Cl IA 10-15-22 20.00 3,332,378(g) 73,048 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2817 Cl SA 06-15-32 9.13 6,831,038(g) 381,443
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 22 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 1241 Cl K 03-15-22 7.00% $570,583 $568,998 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2576 Cl KJ 02-15-33 5.50 10,213,966 10,268,501 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2641 Cl KC 01-15-18 6.50 3,584,188 3,690,279 Federal Natl Mtge Assn 09-01-37 5.50 34,500,000(j) 33,691,388 09-01-37 6.00 41,500,000(j) 41,448,124 09-01-37 7.00 56,000,000(j) 57,557,471 10-01-37 6.00 48,000,000(j) 47,925,023 Federal Natl Mtge Assn #125479 04-01-27 7.50 236,065 247,416 Federal Natl Mtge Assn #190899 04-01-23 8.50 371,661 392,144 Federal Natl Mtge Assn #190944 05-01-24 6.00 5,759,455 5,786,298 Federal Natl Mtge Assn #190988 06-01-24 9.00 332,477 354,447 Federal Natl Mtge Assn #231309 09-01-23 6.50 151,085 154,501 Federal Natl Mtge Assn #231310 09-01-23 6.50 379,461 388,039 Federal Natl Mtge Assn #250330 09-01-25 8.00 246,521 260,661 Federal Natl Mtge Assn #250495 03-01-26 7.00 596,810 619,041 Federal Natl Mtge Assn #250765 12-01-26 8.00 230,929 244,296 Federal Natl Mtge Assn #251116 08-01-27 8.00 251,494 266,167 Federal Natl Mtge Assn #252498 06-01-29 7.00 5,772 5,990 Federal Natl Mtge Assn #253883 08-01-16 6.00 2,772,025 2,807,905 Federal Natl Mtge Assn #254236 03-01-17 6.50 1,649,152 1,683,180 Federal Natl Mtge Assn #254383 06-01-32 7.50 354,545 369,739
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #254802 07-01-18 4.50% $2,844,873 $2,737,441 Federal Natl Mtge Assn #254916 09-01-23 5.50 9,754,235 9,638,128 Federal Natl Mtge Assn #255788 06-01-15 5.50 2,870,981 2,900,432 Federal Natl Mtge Assn #268071 01-01-24 6.50 103,967 106,317 Federal Natl Mtge Assn #303226 02-01-25 8.00 114,443 120,939 Federal Natl Mtge Assn #313049 08-01-11 8.50 696,950 727,849 Federal Natl Mtge Assn #323933 09-01-29 7.00 3,824,956 3,969,786 Federal Natl Mtge Assn #408207 01-01-28 6.50 145,213 149,108 Federal Natl Mtge Assn #455791 01-01-29 6.50 532,019 544,838 Federal Natl Mtge Assn #489888 05-01-29 6.50 2,018,616 2,065,600 Federal Natl Mtge Assn #496029 01-01-29 6.50 2,369,919 2,431,209 Federal Natl Mtge Assn #50700 03-01-08 7.00 198,293 199,693 Federal Natl Mtge Assn #545008 06-01-31 7.00 2,408,108 2,504,103 Federal Natl Mtge Assn #545342 04-01-13 7.00 1,073,319 1,080,895 Federal Natl Mtge Assn #545684 05-01-32 7.50 303,366 317,198 Federal Natl Mtge Assn #545869 07-01-32 6.50 2,136,329 2,186,657 Federal Natl Mtge Assn #545885 08-01-32 6.50 3,774,242 3,916,909 Federal Natl Mtge Assn #545910 08-01-17 6.00 4,768,777 4,836,062 Federal Natl Mtge Assn #555343 08-01-17 6.00 4,632,714 4,690,762 Federal Natl Mtge Assn #555375 04-01-33 6.00 22,600,396 22,734,627 Federal Natl Mtge Assn #555458 05-01-33 5.50 20,422,396 20,014,152 Federal Natl Mtge Assn #555528 04-01-33 6.00 14,854,511 14,913,146
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 23
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #555734 07-01-23 5.00% $7,982,726 $7,720,003 Federal Natl Mtge Assn #555740 08-01-18 4.50 9,704,041 9,357,955 Federal Natl Mtge Assn #555794 09-01-28 7.50 776,184 813,807 Federal Natl Mtge Assn #567840 10-01-30 7.00 1,235,140 1,281,908 Federal Natl Mtge Assn #587859 12-01-16 5.50 4,352,732 4,344,096 Federal Natl Mtge Assn #597374 09-01-31 7.00 671,534 698,920 Federal Natl Mtge Assn #606882 10-01-31 7.00 931,403 966,140 Federal Natl Mtge Assn #634650 04-01-32 7.50 161,171 168,077 Federal Natl Mtge Assn #638969 03-01-32 5.50 1,461,588 1,436,014 Federal Natl Mtge Assn #643362 04-01-17 6.50 695,230 709,575 Federal Natl Mtge Assn #646147 06-01-32 7.00 2,326,228 2,419,678 Federal Natl Mtge Assn #646446 06-01-17 6.50 1,061,298 1,083,197 Federal Natl Mtge Assn #649068 06-01-17 6.50 1,808,865 1,851,210 Federal Natl Mtge Assn #649263 08-01-17 6.50 1,840,466 1,880,523 Federal Natl Mtge Assn #654208 10-01-32 6.50 1,911,644 1,952,926 Federal Natl Mtge Assn #654682 10-01-32 6.00 1,274,448 1,279,679 Federal Natl Mtge Assn #654689 11-01-32 6.00 1,355,865 1,360,673 Federal Natl Mtge Assn #656908 09-01-32 6.50 1,783,790 1,829,712 Federal Natl Mtge Assn #662061 09-01-32 6.50 1,609,997 1,644,765 Federal Natl Mtge Assn #667787 02-01-18 5.50 1,694,185 1,688,069 Federal Natl Mtge Assn #670382 09-01-32 6.00 10,674,149 10,716,283 Federal Natl Mtge Assn #670387 08-01-32 7.00 1,368,542 1,420,550
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #678028 09-01-17 6.00% $5,336,031 $5,402,891 Federal Natl Mtge Assn #678065 02-01-33 6.50 377,284 386,835 Federal Natl Mtge Assn #678937 01-01-18 5.50 2,673,148 2,667,448 Federal Natl Mtge Assn #678941 02-01-18 5.50 3,304,914 3,297,821 Federal Natl Mtge Assn #679095 04-01-18 5.00 5,180,011 5,074,530 Federal Natl Mtge Assn #680961 01-01-33 6.00 552,356 555,642 Federal Natl Mtge Assn #681400 03-01-18 5.50 4,852,612 4,840,650 Federal Natl Mtge Assn #682825 01-01-33 6.00 1,769,545 1,776,530 Federal Natl Mtge Assn #683274 02-01-18 5.50 2,210,392 2,204,700 Federal Natl Mtge Assn #684586 03-01-33 6.00 3,160,173 3,175,854 Federal Natl Mtge Assn #686172 02-01-33 6.00 2,763,574 2,774,482 Federal Natl Mtge Assn #686528 02-01-33 6.00 3,509,276 3,531,370 Federal Natl Mtge Assn #687051 01-01-33 6.00 10,563,262 10,543,456 Federal Natl Mtge Assn #689093 07-01-28 5.50 3,299,941 3,242,200 Federal Natl Mtge Assn #694628 04-01-33 5.50 6,514,264 6,388,136 Federal Natl Mtge Assn #694795 04-01-33 5.50 7,911,592 7,757,919 Federal Natl Mtge Assn #694988 03-01-33 5.50 11,017,160 10,799,582 Federal Natl Mtge Assn #695202 03-01-33 6.50 4,144,718 4,228,328 Federal Natl Mtge Assn #695909 05-01-18 5.50 2,185,816 2,179,956 Federal Natl Mtge Assn #699424 04-01-33 5.50 4,447,211 4,360,288 Federal Natl Mtge Assn #702427 04-01-33 5.50 4,235,697 4,153,614 Federal Natl Mtge Assn #704049 05-01-18 5.50 2,633,722 2,626,737
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 24 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #710823 05-01-33 5.50% $642,725 $630,299 Federal Natl Mtge Assn #720070 07-01-23 5.50 2,571,009 2,540,406 Federal Natl Mtge Assn #720378 06-01-18 4.50 5,987,721 5,761,605 Federal Natl Mtge Assn #723687 08-01-28 5.50 4,027,298 3,956,829 Federal Natl Mtge Assn #725232 03-01-34 5.00 17,912,257 17,086,761 Federal Natl Mtge Assn #725424 04-01-34 5.50 18,710,807 18,326,764 Federal Natl Mtge Assn #725425 04-01-34 5.50 24,235,824 23,742,274 Federal Natl Mtge Assn #725684 05-01-18 6.00 9,712,655 9,842,789 Federal Natl Mtge Assn #725719 07-01-33 4.85 6,851,569(k) 6,670,893 Federal Natl Mtge Assn #725813 12-01-33 6.50 10,195,718 10,401,393 Federal Natl Mtge Assn #730153 08-01-33 5.50 1,157,023 1,133,274 Federal Natl Mtge Assn #735212 12-01-34 5.00 19,847,099 18,913,399 Federal Natl Mtge Assn #735224 02-01-35 5.50 34,296,906 33,592,952 Federal Natl Mtge Assn #738921 11-01-32 6.50 788,277 807,330 Federal Natl Mtge Assn #743262 10-01-18 5.00 3,429,389 3,362,716 Federal Natl Mtge Assn #745355 03-01-36 5.00 14,145,539 13,467,154 Federal Natl Mtge Assn #747642 11-01-28 5.50 2,607,614 2,561,987 Federal Natl Mtge Assn #753074 12-01-28 5.50 7,004,277 6,881,718 Federal Natl Mtge Assn #753091 12-01-33 5.50 4,402,938 4,312,566 Federal Natl Mtge Assn #753919 12-01-33 4.95 5,758,451(k) 5,645,203 Federal Natl Mtge Assn #759342 01-01-34 6.50 1,629,744 1,663,809 Federal Natl Mtge Assn #765183 01-01-19 5.50 595,602 593,721
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #765759 12-01-18 5.00% $3,517,988 $3,446,351 Federal Natl Mtge Assn #766641 03-01-34 5.00 6,667,469 6,353,800 Federal Natl Mtge Assn #776962 04-01-29 5.00 16,977,928 16,227,156 Federal Natl Mtge Assn #804442 12-01-34 6.50 1,255,828 1,279,151 Federal Natl Mtge Assn #837258 09-01-35 4.93 2,710,141(k) 2,698,108 Federal Natl Mtge Assn #882063 06-01-36 6.50 3,842,858 3,913,141 Federal Natl Mtge Assn #886291 07-01-36 7.00 6,945,957 7,160,276 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-24 Cl PI 12-25-12 20.00 482,725(g) 2,965 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-63 Cl IP 07-25-33 12.86 14,982,101(g) 3,477,449 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12-25-31 10.85 2,878,962(g) 522,216 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2004-84 Cl GI 12-25-22 9.48 773,245(g) 111,624 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2005-92 CL SC 10-25-35 15.94 25,263,829(g) 964,573 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 367 Cl 2 01-01-36 8.59 14,407,307(g) 3,853,955
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 25
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn Collateralized Mtge Obligation Principal Only Series 43 Cl 1 09-01-18 5.77% $19,379(h) $15,804 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-133 Cl GB 12-25-26 8.00 3,411,789 3,619,474 Govt Natl Mtge Assn #345538 02-15-24 8.00 135,245 143,452 Govt Natl Mtge Assn #398831 08-15-26 8.00 129,921 137,949 Govt Natl Mtge Assn #423782 05-15-26 7.50 437,532 459,056 Govt Natl Mtge Assn #425004 10-15-33 5.50 3,678,115 3,620,417 Govt Natl Mtge Assn #426170 06-15-26 8.00 107,855 114,520 Govt Natl Mtge Assn #595256 12-15-32 6.00 6,182,445 6,227,680 Govt Natl Mtge Assn #604580 08-15-33 5.00 3,742,717 3,612,110 Govt Natl Mtge Assn #604708 10-15-33 5.50 9,923,822 9,768,150 Govt Natl Mtge Assn #606844 09-15-33 5.00 9,063,479 8,747,197 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-70 Cl IC 08-20-32 11.73 7,891,946(g) 1,556,411 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-80 Cl CI 01-20-32 12.47 1,364,184(g) 142,851 Harborview Nim Collateralized Mtge Obligation Series 2006-10 Cl N1 11-19-36 6.41 530,358(d) 527,707
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR8 Cl AX1 04-25-35 4.50% $102,422,089(g) $640,138 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Series 2005-AR25 Cl 1A21 12-25-35 5.85 6,148,290(k) 5,999,746 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Series 2007-AR5 Cl 1A1 05-25-37 6.36 11,899,514(k) 12,049,091 IndyMac Index Nim Collateralized Mtge Obligation Series 2006-AR6 Cl N1 06-25-46 6.65 594,989(d) 591,270 Lehman XS Net Interest Margin Nts Collateralized Mtge Obligation Series 2006-2N Cl A1 02-27-46 7.00 571,927(d) 571,838 Lehman XS Net Interest Margin Nts Collateralized Mtge Obligation Series 2006-GPM6 Cl A1 10-28-46 6.25 1,185,241(d) 1,166,722 Lehman XS Net Interest Margin Nts Series 2006-AR8 Cl A1 10-28-46 6.25 360,757(d) 359,711 Lehman XS Trust Collateralized Mtge Obligation Series 2007-5H Cl 1A1 05-25-37 6.50 19,549,641 19,761,004 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-2 Cl 4A1 02-25-19 5.00 5,827,888 5,653,069 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-4 Cl 2A1 05-25-34 6.00 3,341,527 3,303,567 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-7 Cl 8A1 08-25-19 5.00 4,678,416 4,601,784
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 26 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-8 Cl 7A1 09-25-19 5.00% $6,513,119 $6,268,551 Morgan Stanley Mtge Loan Trust Collateralized Mtge Obligation Series 2007-12 Cl 3A22 08-25-37 6.00 16,988,485 16,611,510 Rali NIM Collateralized Mtge Obligation Series 2006-QO4 Cl N1 04-25-46 6.05 553,910(d) 548,371 Residential Accredit Loans Collateralized Mtge Obligation Series 2006-QS3 Cl 1A10 03-25-36 6.00 6,008,788 6,100,265 Residential Funding Mtge Securities I Collateralized Mtge Obligation Series 2005-S6 Cl A8 08-25-35 5.25 19,499,904 18,524,852 Structured Asset Securities Collateralized Mtge Obligation Series 2003-33H Cl 1A1 10-25-33 5.50 13,088,921 12,600,309 Washington Mutual Alternative Mtge Loan Trust Pass-Through Ctfs Collateralized Mtge Obligation Interest Only Series 2005-AR1 Cl X2 12-25-35 7.10 38,521,818(g) 264,838 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2004-CB2 Cl 6A 07-25-19 4.50 4,495,809 4,260,049 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2005-AR14 Cl 2A1 12-25-35 5.29 5,256,421(k) 5,191,576 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2006-AR10 Cl 1A1 09-25-36 5.95 5,026,762(k) 5,012,621
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2006-AR3 Cl A1A 02-25-46 6.02% $7,800,707(k) $7,561,849 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-10 Cl A1 10-25-35 5.00 17,397,295 16,470,715 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-5 Cl 2A1 05-25-35 5.50 11,715,569 11,369,596 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-16 Cl 1A1 12-25-18 4.75 15,965,609 15,339,242 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR12 Cl 1A1 09-25-36 6.03 4,800,062(k) 4,782,671 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR6 Cl 5A1 03-25-36 5.11 11,035,958(k) 10,798,084 --------------- Total 1,453,480,309 - ---------------------------------------------------------------------------------- AEROSPACE & DEFENSE (0.2%) Communications & Power Inds 02-01-12 8.00 185,000 185,925 DRS Technologies 11-01-13 6.88 1,535,000 1,504,300 02-01-18 7.63 1,925,000 1,886,499 L-3 Communications 01-15-15 5.88 1,565,000 1,482,838 L-3 Communications Series B 10-15-15 6.38 1,675,000 1,620,563 TransDigm 07-15-14 7.75 195,000 195,975 --------------- Total 6,876,100 - ---------------------------------------------------------------------------------- BANKING (3.2%) Bank of America Sub Nts 03-15-17 5.30 20,295,000 19,552,162
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 27
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) BANKING (CONT.) Citigroup Sub Nts 02-15-17 5.50% $13,810,000 $13,476,047 JPMorgan Chase & Co Sub Nts 10-01-15 5.15 2,760,000 2,631,889 06-27-17 6.13 7,535,000 7,648,884 Manufacturers & Traders Trust Sub Nts 12-01-21 5.63 17,095,000 16,450,624 Popular North America Sr Nts 10-01-08 3.88 28,122,000 27,537,260 Regions Bank Sub Nts 06-26-37 6.45 7,245,000 7,325,057 --------------- Total 94,621,923 - ---------------------------------------------------------------------------------- BROKERAGE (1.3%) Discover Financial Services 06-12-17 6.45 3,985,000(d,o) 3,959,217 Lehman Brothers Holdings Sr Nts 07-19-12 6.00 22,700,000 22,673,032 Morgan Stanley Sr Unsecured 08-31-12 5.75 10,675,000 10,666,759 --------------- Total 37,299,008 - ---------------------------------------------------------------------------------- CHEMICALS (0.2%) NALCO Sr Unsecured 11-15-11 7.75 4,605,000 4,685,588 NewMarket 12-15-16 7.13 1,815,000 1,724,250 --------------- Total 6,409,838 - ---------------------------------------------------------------------------------- CONSUMER PRODUCTS (--%) Jarden 05-01-17 7.50 635,000 593,725 Visant 10-01-12 7.63 285,000 285,713 --------------- Total 879,438 - ----------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) DIVERSIFIED MANUFACTURING (0.1%) Baldor Electric 02-15-17 8.63% $2,985,000 $3,082,013 - ---------------------------------------------------------------------------------- ELECTRIC (2.5%) Consumers Energy 1st Mtge Series F 05-15-10 4.00 1,040,000 1,004,968 Consumers Energy 1st Mtge Series H 02-17-09 4.80 13,520,000 13,413,463 Edison Mission Energy Sr Nts 05-15-17 7.00 2,855,000(d) 2,712,250 Entergy Gulf States 1st Mtge 06-01-08 3.60 5,500,000 5,391,304 Exelon 06-15-10 4.45 13,085,000 12,732,228 Indiana Michigan Power Sr Nts 03-15-37 6.05 3,825,000 3,629,405 IPALCO Enterprises Secured 11-14-08 8.38 400,000 405,000 11-14-11 8.63 3,680,000 3,781,200 Metropolitan Edison Sr Nts 03-15-10 4.45 1,810,000(o) 1,777,485 Midwest Generation LLC Pass-Through Ctfs Series B 01-02-16 8.56 163,621 174,052 Northern States Power Sr Nts 08-01-09 6.88 5,730,000 5,909,641 NRG Energy 02-01-14 7.25 695,000 688,050 01-15-17 7.38 800,000 786,000 Oncor Electric Delivery Sr Unsecured 01-15-15 6.38 830,000 846,095 Portland General Electric 03-15-10 7.88 2,935,000(o) 3,121,889 Potomac Electric Power Secured 06-01-35 5.40 3,040,000(o) 2,687,102
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 28 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) ELECTRIC (CONT.) Public Service Company of Colorado Sr Nts Series A 07-15-09 6.88% $2,005,000 $2,066,415 Sierra Pacific Power Series M 05-15-16 6.00 8,280,000 8,145,690 Sierra Pacific Power Series P 07-01-37 6.75 915,000 893,552 Xcel Energy Sr Nts 07-01-08 3.40 3,315,000 3,257,385 --------------- Total 73,423,174 - ---------------------------------------------------------------------------------- ENTERTAINMENT (0.2%) United Artists Theatre Circuit Pass-Through Ctfs 07-01-15 9.30 5,706,707(p) 5,934,975 - ---------------------------------------------------------------------------------- ENVIRONMENTAL (--%) Allied Waste North America 06-01-17 6.88 1,320,000 1,280,400 - ---------------------------------------------------------------------------------- FOOD AND BEVERAGE (1.7%) Cadbury Schweppes US Finance LLC 10-01-08 3.88 31,950,000(d) 31,465,703 Cott Beverages USA 12-15-11 8.00 1,740,000 1,722,600 Del Monte 02-15-15 6.75 220,000 209,000 HJ Heinz 12-01-08 6.43 5,920,000(d) 5,982,515 Molson Coors Capital Finance 09-22-10 4.85 12,180,000(c) 11,937,849 --------------- Total 51,317,667 - ---------------------------------------------------------------------------------- GAMING (--%) Mohegan Tribal Gaming Authority Sr Sub Nts 04-01-12 8.00 750,000 760,313 Wynn Las Vegas LLC/Capital 1st Mtge 12-01-14 6.63 690,000 667,575 --------------- Total 1,427,888 - ----------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) GAS DISTRIBUTORS (0.1%) Atmos Energy Sr Unsub 10-15-09 4.00% $4,005,000 $3,920,074 - ---------------------------------------------------------------------------------- GAS PIPELINES (1.1%) CenterPoint Energy Resources 02-15-11 7.75 3,685,000 3,910,920 Colorado Interstate Gas Sr Nts 11-15-15 6.80 10,510,000 10,845,720 Northern Natural Gas Sr Unsecured 02-15-37 5.80 1,535,000(d) 1,448,553 Northwest Pipeline Sr Unsecured 04-15-17 5.95 1,615,000 1,566,550 Southern Natural Gas 04-01-17 5.90 5,925,000(d) 5,759,171 Southern Star Central Sr Nts 03-01-16 6.75 1,460,000 1,401,600 Transcontinental Gas Pipe Line Series B 08-15-11 7.00 1,915,000 1,996,388 Transcontinental Gas Pipe Line Sr Unsecured 04-15-16 6.40 2,221,000 2,237,658 Williams Companies Sr Nts 07-15-19 7.63 2,079,000 2,208,938 --------------- Total 31,375,498 - ---------------------------------------------------------------------------------- HEALTH CARE (0.2%) Coventry Health Care Sr Unsecured 08-15-14 6.30 3,040,000 3,035,540 Omnicare 12-15-13 6.75 2,370,000 2,204,100 12-15-15 6.88 355,000 331,038 --------------- Total 5,570,678 - ---------------------------------------------------------------------------------- HEALTH CARE INSURANCE (0.5%) UnitedHealth Group 06-15-37 6.50 5,700,000(d) 5,924,522
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 29
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) HEALTH CARE INSURANCE (CONT.) WellPoint Sr Unsub 01-15-36 5.85% $5,920,000 $5,381,440 06-15-37 6.38 2,910,000 2,848,483 --------------- Total 14,154,445 - ---------------------------------------------------------------------------------- HOME CONSTRUCTION (0.2%) DR Horton Sr Unsub 04-15-16 6.50 6,875,000 6,035,205 - ---------------------------------------------------------------------------------- INDEPENDENT ENERGY (0.8%) Anadarko Petroleum Sr Unsecured 09-15-16 5.95 4,015,000 3,992,809 Canadian Natural Resources 03-15-38 6.25 6,845,000(c) 6,567,332 Chesapeake Energy 01-15-16 6.63 4,892,000 4,733,010 01-15-18 6.25 925,000 866,031 Denbury Resources 04-01-13 7.50 250,000 249,375 Denbury Resources Sr Sub Nts 12-15-15 7.50 180,000 179,100 EnCana Sr Unsecured 08-15-37 6.63 3,035,000(c) 3,085,008 Forest Oil Sr Nts 06-15-19 7.25 265,000(d) 255,063 Range Resources 03-15-15 6.38 425,000 408,000 05-15-16 7.50 180,000 181,800 XTO Energy Sr Unsecured 08-01-37 6.75 3,245,000 3,325,995 --------------- Total 23,843,523 - ---------------------------------------------------------------------------------- MEDIA CABLE (1.1%) Comcast 03-15-37 6.45 17,105,000 16,517,066 Comcast MO of Delaware LLC 09-01-08 9.00 9,500,000 9,799,060
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MEDIA CABLE (CONT.) CSC Holdings Sr Nts Series B 07-15-09 8.13% $3,200,000 $3,224,000 EchoStar DBS 10-01-13 7.00 225,000 222,188 10-01-14 6.63 363,000 351,203 02-01-16 7.13 940,000 918,850 Videotron Ltee 01-15-14 6.88 1,310,000(c) 1,247,775 --------------- Total 32,280,142 - ---------------------------------------------------------------------------------- MEDIA NON CABLE (1.4%) British Sky Broadcasting Group 02-23-09 6.88 6,270,000(c) 6,430,155 Dex Media West LLC/Finance Sr Unsecured Series B 08-15-10 8.50 560,000 567,000 Idearc 11-15-16 8.00 1,530,000 1,510,875 News America 12-15-35 6.40 13,160,000(o) 12,580,328 Rainbow Natl Services LLC Sr Nts 09-01-12 8.75 1,565,000(d) 1,602,169 RH Donnelley Sr Disc Nts Series A-1 01-15-13 6.88 680,000 640,900 RH Donnelley Sr Disc Nts Series A-2 01-15-13 6.88 1,800,000 1,696,500 RR Donnelley & Sons Sr Unsecured 01-15-17 6.13 15,800,000 15,704,252 Sinclair Broadcast Group 03-15-12 8.00 338,000 341,380 --------------- Total 41,073,559 - ---------------------------------------------------------------------------------- METALS (0.2%) Freeport-McMoRan Copper & Gold Sr Unsecured 04-01-15 8.25 3,600,000 3,816,000 04-01-17 8.38 535,000 569,775 Peabody Energy 11-01-16 7.38 1,885,000 1,899,138
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 30 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) METALS (CONT.) Peabody Energy Series B 03-15-13 6.88% $560,000 $558,600 --------------- Total 6,843,513 - ---------------------------------------------------------------------------------- NON CAPTIVE CONSUMER (0.1%) SLM 01-15-13 5.38 2,125,000(o) 1,881,853 10-01-13 5.00 2,460,000 2,148,564 --------------- Total 4,030,417 - ---------------------------------------------------------------------------------- OIL FIELD SERVICES (0.1%) OPTI Canada Secured 12-15-14 7.88 2,585,000(c,d) 2,597,925 - ---------------------------------------------------------------------------------- PACKAGING (0.2%) Ball 03-15-18 6.63 240,000 229,800 Crown Americas LLC/Capital 11-15-13 7.63 680,000 683,400 11-15-15 7.75 1,685,000(o) 1,701,850 Owens-Brockway Glass Container 05-15-13 8.25 3,345,000 3,428,625 --------------- Total 6,043,675 - ---------------------------------------------------------------------------------- PAPER (0.2%) Cascades Sr Nts 02-15-13 7.25 905,000(c) 864,275 NewPage 05-01-12 10.00 2,090,000 2,163,150 Smurfit-Stone Container Enterprises Sr Unsecured 03-15-17 8.00 1,900,000 1,812,125 --------------- Total 4,839,550 - ---------------------------------------------------------------------------------- PROPERTY & CASUALTY (0.2%) Travelers Companies Sr Unsecured 06-15-37 6.25 5,810,000 5,629,309 - ---------------------------------------------------------------------------------- RAILROADS (0.2%) Burlington Northern Santa Fe 05-01-37 6.15 6,205,000 6,015,232 - ----------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) REITS (0.4%) Brandywine Operating Partnership LP 05-01-17 5.70% $4,635,000 $4,407,143 ERP Operating LP 06-15-17 5.75 6,955,000 6,801,921 --------------- Total 11,209,064 - ---------------------------------------------------------------------------------- RETAILERS (1.0%) Home Depot Sr Unsecured 12-16-36 5.88 15,650,000 13,485,621 Macys Retail Holdings 07-15-09 4.80 16,219,000 15,992,501 Neiman Marcus Group 10-15-15 10.38 600,000 645,000 --------------- Total 30,123,122 - ---------------------------------------------------------------------------------- TRANSPORTATION SERVICES (0.1%) Hertz 01-01-14 8.88 1,925,000 1,992,375 - ---------------------------------------------------------------------------------- WIRELESS (--%) American Tower Sr Nts 10-15-12 7.13 220,000 220,000 - ---------------------------------------------------------------------------------- WIRELINES (4.3%) AT&T 03-15-11 6.25 11,786,000(o) 12,088,653 AT&T Sr Unsub 09-15-09 4.13 1,090,000 1,066,289 Citizens Communications Sr Unsecured 03-15-19 7.13 425,000 404,813 Telecom Italia Capital 11-15-13 5.25 11,405,000(c) 10,988,056 11-15-33 6.38 7,175,000(c) 6,846,385 Telefonica Europe 09-15-10 7.75 17,311,000(c) 18,452,885 TELUS 06-01-11 8.00 35,878,500(c) 38,917,624 Verizon New York Series A 04-01-12 6.88 22,863,000 24,089,463
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 31
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) WIRELINES (CONT.) Verizon Pennsylvania Series A 11-15-11 5.65% $8,000,000 $8,083,040 Windstream 08-01-16 8.63 4,915,000 5,136,175 03-15-19 7.00 420,000 395,850 --------------- Total 126,469,233 - ---------------------------------------------------------------------------------- TOTAL BONDS (Cost: $3,109,869,469) $3,095,106,712 - ----------------------------------------------------------------------------------
MUNICIPAL BONDS (0.4%) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE RATE AMOUNT VALUE(A) TOBACCO Tobacco Settlement Financing Corporation Revenue Bonds Series 2007A-1 06-01-46 6.71% $13,850,000 $12,539,236 - ---------------------------------------------------------------------------------- TOTAL MUNICIPAL BONDS (Cost: $13,848,615) $12,539,236 - ----------------------------------------------------------------------------------
SENIOR LOANS (2.5%)(l) COUPON PRINCIPAL BORROWER RATE AMOUNT VALUE(A) CHEMICALS (0.1%) Celanese Tranche B Term Loan 04-06-14 5.32-7.11% $2,939,125(c) $2,838,695 - ---------------------------------------------------------------------------------- CONSUMER PRODUCTS (0.2%) Jarden Tranche B3 Term Loan 01-24-12 2.50 5,940,000(j) 5,836,050 - ---------------------------------------------------------------------------------- FOOD AND BEVERAGE (0.2%) Aramark Letter of Credit 01-26-14 7.36 226,462 217,888 Aramark Tranche B Term Loan 01-20-14 7.36 3,218,915 3,097,047
SENIOR LOANS (CONTINUED) COUPON PRINCIPAL BORROWER RATE AMOUNT VALUE(A) FOOD AND BEVERAGE (CONT.) Pinnacle Foods Finance Term Loan 04-02-14 8.11% $2,560,000 $2,438,400 --------------- Total 5,753,335 - ---------------------------------------------------------------------------------- GAMING (0.1%) Fontainebleau Las Vegas Delayed Draw Term Loan 06-05-14 0.00 959,355(j,m) 889,802 Fontainebleau Las Vegas Term Loan 06-05-14 8.61 1,918,711 1,779,604 --------------- Total 2,669,406 - ---------------------------------------------------------------------------------- HEALTH CARE (0.7%) Community Health Delayed Draw Term Loan 06-28-14 0.00 447,641(j,m) 429,176 Community Health Term Loan 06-28-14 7.76 6,787,359 6,507,380 HCA Tranche B Term Loan 01-21-13 7.61 12,984,750 12,479,513 Vanguard Health Holding II Term Loan 09-23-11 7.61 2,970,000(j) 2,840,063 --------------- Total 22,256,132 - ---------------------------------------------------------------------------------- LIFE INSURANCE (0.1%) Asurion Term Loan 07-03-14 8.36 4,090,000(j) 3,844,600 - ---------------------------------------------------------------------------------- MEDIA CABLE (0.4%) Charter Communications Term Loan 03-06-14 7.36 6,130,000 5,792,850 Univision Communications Delayed Draw Term Loan 09-23-14 0.00 351,242(j,m) 324,681 Univision Communications Tranche B Term Loan 09-23-14 7.61 5,463,758 5,050,589 --------------- Total 11,168,120 - ----------------------------------------------------------------------------------
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 32 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
SENIOR LOANS (CONTINUED) COUPON PRINCIPAL BORROWER RATE AMOUNT VALUE(A) MEDIA NON CABLE (0.2%) Idearc Tranche B Term Loan 11-17-14 2.00% $1,485,000(j) $1,434,881 VNU Tranche B Term Loan 08-09-13 7.36 5,442,569(c) 5,184,047 --------------- Total 6,618,928 - ---------------------------------------------------------------------------------- OIL FIELD SERVICES (0.1%) Dresser 1st Lien Term Loan 05-04-14 8.01-8.04 2,059,000 1,973,201 - ---------------------------------------------------------------------------------- PAPER (0.1%) Domtar Tranche B Term Loan 03-07-14 6.93 1,539,000(c) 1,473,593 - ---------------------------------------------------------------------------------- RETAILERS (0.1%) Michaels Stores Term Loan 10-31-13 7.63-7.69 1,201,206 1,130,131 Neiman Marcus Group Tranche B Term Loan 04-27-13 7.09-7.11 1,677,574 1,624,444 --------------- Total 2,754,575 - ---------------------------------------------------------------------------------- TECHNOLOGY (0.1%) West Corp Tranche B Term Loan 10-24-13 7.74-7.88 2,687,952 2,585,138 - ----------------------------------------------------------------------------------
SENIOR LOANS (CONTINUED) COUPON PRINCIPAL BORROWER RATE AMOUNT VALUE(A) WIRELINES (0.1%) Level 3 Communications Tranche B Term Loan 03-13-14 7.61% $3,340,000 $3,178,578 - ---------------------------------------------------------------------------------- TOTAL SENIOR LOANS (Cost: $76,112,324) $72,950,351 - ----------------------------------------------------------------------------------
COMMON STOCKS (--%) ISSUER SHARES VALUE(A) PAPER & FOREST PRODUCTS (--%) Crown Paper Escrow 6,950,000(b) $7 - ---------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $--) $7 - ----------------------------------------------------------------------------------
MONEY MARKET FUND (1.6%)(r) SHARES VALUE(A) RiverSource Short-Term Cash Fund 45,885,729(t) $45,885,729 - ------------------------------------------------------------------------------------------------------ TOTAL MONEY MARKET FUND (Cost: $45,885,729) $45,885,729 - ------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN SECURITIES (Cost: $3,245,716,137)(u) $3,226,482,035 ======================================================================================================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by using procedures described in Note 1 to the financial statements. (b) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (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, 2007, the value of foreign securities represented 4.3% 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, 2007, the value of these securities amounted to $145,277,305 or 4.9% of net assets. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 33 NOTES TO INVESTMENTS IN SECURITIES (CONTINUED) (e) 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
(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) 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, 2007. (h) 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, 2007. (i) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2007. (j) At Aug. 31, 2007, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $277,561,571. (k) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Aug 31, 2007. (l) Senior loans have rates of interest that float periodically based primarily on the London Interbank Offered Rate ("LIBOR") and other short-term rates. Remaining maturities of senior loans may be less than the stated maturities shown as a result of contractual or optional prepayments by the borrower. Such prepayments cannot be predicted with certainty. (m) At Aug. 31, 2007, the Fund had unfunded senior loan commitments pursuant to the term of the loan agreement. The Fund receives a stated coupon rate until the borrower draws on the loan commitment, at which time the rate will become the stated rate in the loan agreement.
UNFUNDED BORROWER COMMITMENT - ----------------------------------------------------------------------------- Community Health $447,641 Fontainebleau Las Vegas 956,957 Univision Communications 351,242 - ----------------------------------------------------------------------------- Total $1,775,840 - -----------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 34 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT NOTES TO INVESTMENTS IN SECURITIES (CONTINUED) (n) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments at Aug. 31, 2007:
PRINCIPAL SETTLEMENT PROCEEDS SECURITY AMOUNT DATE RECEIVABLE VALUE - ------------------------------------------------------------------------------------- Federal Natl Mtge Assn 09-01-22 5.50% $10,000,000 09-18-07 $9,884,375 $9,940,620
(o) Partially pledged as initial margin deposit on the following open interest rate futures contracts (see Note 6 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT - ------------------------------------------------------------------------------- SALE CONTRACTS U.S. Long Bond, Dec. 2007, 20-year $27,500,000 U.S. Treasury Note, Dec. 2007, 2-year 22,400,000 U.S. Treasury Note, Dec. 2007, 5-year 81,100,000 U.S. Treasury Note, Dec. 2007, 10-year 47,100,000
(p) 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 procedures approved, in good faith, by the Fund's Board of Directors. Information concerning such security holdings at Aug. 31, 2007, is as follows:
ACQUISITION SECURITY DATES COST - ---------------------------------------------------------------------------------- United Artists Theatre Circuit 9.30% Pass-Through Ctfs 2015 02-23-96 thru 08-12-96 $5,520,575
(q) At Aug. 31, 2007, security was partially or fully on loan. See Note 5 to the financial statements. (r) Cash collateral received from security lending activity is invested in an affiliated money market fund. See Note 5 to the financial statements. (s) 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. (t) Affiliated Money Market Fund -- See Note 8 to the financial statements. (u) At Aug. 31, 2007, the cost of securities for federal income tax purposes was $3,254,248,273 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $18,710,761 Unrealized depreciation (46,476,999) - ------------------------------------------------------------------------------ Net unrealized depreciation $(27,766,238) - ------------------------------------------------------------------------------
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. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 35 FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES AUG. 31, 2007 ASSETS Investments in securities, at value (Note 1) Unaffiliated issuers* (identified cost $3,199,830,408) $3,180,596,306 Affiliated money market fund (identified cost $45,885,729) (Note 8) 45,885,729 - ------------------------------------------------------------------------------ Total investments in securities (identified cost $3,245,716,137) 3,226,482,035 Cash in bank on demand deposit 27,052 Foreign currency holdings (identified cost $1,022) (Note 1) 1,035 Capital shares receivable 11,081,420 Accrued interest receivable 25,647,494 Receivable for investment securities sold 163,119,499 Unrealized appreciation on swap transactions, at value (Note 7) 526,101 Variation margin receivable 712,678 - ------------------------------------------------------------------------------ Total assets 3,427,597,314 - ------------------------------------------------------------------------------ LIABILITIES Dividends payable to shareholders 2,614,030 Capital shares payable 2,846,093 Payable for investment securities purchased 132,764,420 Payable for securities purchased on a forward-commitment basis (Note 1) 277,561,571 Payable upon return of securities loaned (Note 5) 54,427,500 Unrealized depreciation on swap transactions, at value (Note 7) 2,248,872 Accrued investment management services fee 36,751 Accrued distribution fee 542,794 Accrued transfer agency fee 8,066 Accrued administrative services fee 5,047 Accrued plan administration services fee 16,925 Other accrued expenses 283,602 Forward sale commitments, at value (proceeds receivable $9,884,375) (Note 1) 9,940,620 - ------------------------------------------------------------------------------ Total liabilities 483,296,291 - ------------------------------------------------------------------------------ Net assets applicable to outstanding capital stock $2,944,301,023 ==============================================================================
- -------------------------------------------------------------------------------- 36 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) AUG. 31, 2007 REPRESENTED BY Capital stock -- $.01 par value (Note 1) $ 6,119,286 Additional paid-in capital 3,125,529,521 Excess of distributions over net investment income (1,432,632) Accumulated net realized gain (loss) (Note 11) (164,897,645) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Notes 6 and 7) (21,017,507) - ------------------------------------------------------------------------------ Total -- representing net assets applicable to outstanding capital stock $2,944,301,023 ==============================================================================
Net assets applicable to outstanding shares: Class A $1,936,988,090 Class B $ 303,507,236 Class C $ 16,840,412 Class I $ 386,010,354 Class R2 $ 4,993 Class R3 $ 4,993 Class R4 $ 77,835,688 Class R5 $ 4,993 Class W $ 223,104,264 Net asset value per share of outstanding Class A capital stock: shares(1) 402,638,195 $ 4.81 Class B shares 63,093,643 $ 4.81 Class C shares 3,499,861 $ 4.81 Class I shares 80,134,097 $ 4.82 Class R2 shares 1,040 $ 4.80 Class R3 shares 1,040 $ 4.80 Class R4 shares 16,200,659 $ 4.80 Class R5 shares 1,040 $ 4.80 Class W shares 46,359,028 $ 4.81 - ------------------------------------------------------------------------------------------- * Including securities on loan, at value (Note 5) $ 53,596,150 - -------------------------------------------------------------------------------------------
(1) The maximum offering price per share for Class A is $5.05. The offering price is calculated by dividing the net asset value by 1.0 minus the maximum sales charge of 4.75%. See accompanying notes to financial statements. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 37 STATEMENT OF OPERATIONS YEAR ENDED AUG. 31, 2007 INVESTMENT INCOME Income: Interest $142,326,750 Income distributions from affiliated money market fund (Note 8) 5,748,763 Fee income from securities lending (Note 5) 395,879 - ---------------------------------------------------------------------------- Total income 148,471,392 - ---------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 12,770,016 Distribution fee Class A 4,860,209 Class B 3,704,597 Class C 168,420 Class R2 18 Class R3 8 Class W 128,130 Transfer agency fee Class A 3,090,229 Class B 631,378 Class C 28,318 Class R2 2 Class R3 2 Class R4 79,526 Class R5 2 Class W 102,504 Service fee -- Class R4 36,188 Administrative services fee 1,752,212 Plan administration services fee Class R2 8 Class R3 8 Class R4 148,364 Compensation of board members 52,475 Custodian fees 249,190 Printing and postage 483,505 Registration fees 166,240 Professional fees 65,771 Other 87,435 - ---------------------------------------------------------------------------- Total expenses 28,604,755 Expenses waived/reimbursed by the Investment Manager and its affiliates (Note 2) (2,004,697) - ---------------------------------------------------------------------------- 26,600,058 Earnings and bank fee credits on cash balances (Note 2) (229,404) - ---------------------------------------------------------------------------- Total net expenses 26,370,654 - ---------------------------------------------------------------------------- Investment income (loss) -- net 122,100,738 - ----------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 38 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT STATEMENT OF OPERATIONS (CONTINUED) YEAR ENDED AUG. 31, 2007 REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (Note 3) 26,879,708 Foreign currency transactions 145,184 Futures contracts (2,400,100) Swap transactions (3,756,544) - ---------------------------------------------------------------------------- Net realized gain (loss) on investments 20,868,248 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 6,273,301 - ---------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies 27,141,549 - ---------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $149,242,287 ============================================================================
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 39 STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED AUG. 31, 2007 2006 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 122,100,738 $ 103,147,373 Net realized gain (loss) on investments 20,868,248 (39,151,119) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 6,273,301 (17,503,759) - --------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 149,242,287 46,492,495 - --------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (86,827,158) (76,604,597) Class B (13,755,846) (15,585,869) Class C (626,596) (591,217) Class I (15,257,999) (4,560,444) Class R2 (141) N/A Class R3 (151) N/A Class R4 (4,383,933) (6,737,531) Class R5 (167) N/A Class W (2,150,062) N/A Tax return of capital Class A (1,969,457) -- Class B (312,017) -- Class C (14,213) -- Class I (346,089) -- Class R2 (3) N/A Class R3 (3) N/A Class R4 (99,439) -- Class R5 (4) N/A Class W (48,769) N/A - --------------------------------------------------------------------------------------- Total distributions (125,792,047) (104,079,658) - ---------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 40 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
YEAR ENDED AUG. 31, 2007 2006 CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales Class A shares (Note 2) 341,978,156 316,729,749 Class B shares 73,778,423 79,990,744 Class C shares 4,309,754 3,579,299 Class I shares 162,095,736 109,101,564 Class R2 shares 5,000 N/A Class R3 shares 5,000 N/A Class R4 shares 29,755,649 19,247,047 Class R5 shares 5,000 N/A Class W shares 267,590,689 N/A Fund Merger (Note 10) Class A shares N/A 482,178,674 Class B shares N/A 84,180,791 Class C shares N/A 3,014,375 Class I shares N/A 161,023,234 Class R4 shares N/A 43,644,789 Reinvestment of distributions at net asset value Class A shares 71,340,780 60,868,805 Class B shares 12,481,391 13,634,050 Class C shares 558,059 518,063 Class I shares 15,346,042 4,443,417 Class R4 shares 4,481,258 6,613,878 Class W shares 2,006,618 N/A Payments for redemptions Class A shares (507,058,109) (578,402,371) Class B shares (Note 2) (187,649,959) (247,147,060) Class C shares (Note 2) (5,462,345) (7,432,273) Class I shares (69,529,553) (1,248,255) Class R4 shares (129,682,278) (95,308,639) Class W shares (46,272,210) N/A - --------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions 40,083,101 459,229,881 - --------------------------------------------------------------------------------------- Total increase (decrease) in net assets 63,533,341 401,642,718 Net assets at beginning of year 2,880,767,682 2,479,124,964 - --------------------------------------------------------------------------------------- Net assets at end of year $2,944,301,023 $2,880,767,682 ======================================================================================= Undistributed (excess of distributions over) net investment income $ (1,432,632) $ 4,503,837 - ---------------------------------------------------------------------------------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 41 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of RiverSource Diversified 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, Class I and Class R4 shares. - - Class A shares are sold with a front-end sales charge. - - 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. - - Class C shares may be subject to a CDSC. - - Class I and Class R4 shares have no sales charge and are offered only to qualifying institutional investors. Effective Dec. 11, 2006, the Board approved renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from account-based to asset-based, and adopting a plan administration services agreement. At Aug. 31, 2007, Ameriprise Financial, Inc. (Ameriprise Financial), the parent company of RiverSource Investments, LLC (the Investment Manager) and the affiliated funds-of-funds owned 100% of Class I shares. Effective Dec. 11, 2006, the Fund offers additional classes of shares, Class R2, Class R3 and Class R5, to certain institutional investors. These shares are sold without a front-end sales charge or CDSC. At Aug. 31, 2007, Ameriprise Financial owned 100% of Class R2, Class R3 and Class R5 shares. Effective Dec. 1, 2006, the Fund offers an additional class of shares, Class W, through qualifying discretionary accounts. Class W shares are sold without a front-end sales charge or CDSC. At Aug. 31, 2007, Ameriprise Financial owned 100% of Class W shares. All classes of shares have identical voting, dividend and liquidation rights. Class specific expenses (e.g., distribution and service fees, transfer agency fees, plan administration fees) 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. - -------------------------------------------------------------------------------- 42 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 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. 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. Foreign securities are valued based on quotations from the principal market in which such securities are normally traded. The procedures adopted by the Board of Directors of the funds generally contemplate the use of fair valuation in the event that price quotations or valuations are not readily available, price quotations or valuations from other sources are not reflective of market value and thus deemed unreliable, or a significant event has occurred in relation to a security or class of securities (such as foreign equities) that is not reflected in price quotations or valuations from other sources. A fair value price is a good faith estimate of the value of a security at a given point in time. Many securities markets and exchanges outside the U.S. close prior to the close of the New York Stock Exchange and therefore the closing prices for securities in such markets or on such exchanges may not fully reflect events that occur after such close but before the close of the New York Stock Exchange, including significant movements in the U.S. market after foreign exchanges have closed. Accordingly, in those situations, Ameriprise Financial will fair value foreign equity securities pursuant to procedures adopted by the Board of Directors of the funds, including utilizing a third party pricing service to determine these fair values. These procedures take into account multiple factors, including movements in the U.S. securities markets, to determine a good faith estimate that reasonably reflects the current market conditions as of the close of the New York Stock Exchange. Swap transactions are valued through an authorized pricing service, broker, or an internal model. 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, 2007, investments in securities included issues that are illiquid which the Fund currently limits to 15% of net assets, at market value, at the time of purchase. Prior to July 12, 2007, the Fund limited the percent held in securities and other instruments that were illiquid to 10% of the Fund's net assets. The aggregate value of such securities at Aug. 31, 2007 was $5,934,975 representing 0.20% of net assets. These securities may be valued at fair value according to procedures approved, in good faith, by the Board. According to board guidelines, - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 43 certain unregistered securities are determined to be liquid and are not included within the 15% 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 AND UNFUNDED LOAN COMMITMENTS 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, 2007, the Fund has entered into outstanding when-issued securities of $277,561,571. The fund may enter into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these loan commitments at the borrower's discretion. These commitments are disclosed in the accompanying "Investments in securities." At Aug. 31, 2007, the Fund has entered into unfunded loan commitments of $1,755,840. 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. The amounts received, in the form of reductions of the purchase price, are recorded as an adjustment to interest income on the Statement of Operations. Losses may arise due to changes in the value of the securities or if the counterparty does not perform under the terms of the agreement. If the counterparty files for bankruptcy or becomes insolvent, a fund's right to repurchase or sell securities may be limited. 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. Cash collateral may be collected by the Fund to secure certain over-the-counter options trades. Cash collateral held by the Fund for such option trades must be returned to the counterparty upon closure, exercise or expiration of the contract. The Fund also may buy and sell put and call options and write covered call options on portfolio 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 - -------------------------------------------------------------------------------- 44 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 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. At Aug. 31, 2007, the fund had no outstanding option contracts. 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. Futures are valued daily based upon the last sale price at the close of market on the principal exchange on which they are traded. 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 FORWARD 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, 2007, foreign currency holdings consisted of European monetary units and British pounds. 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 - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 45 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. At Aug. 31, 2007 the Fund had no outstanding forward foreign currency contracts. 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." CREDIT DEFAULT SWAP TRANSACTIONS The Fund may enter into credit default swap contracts to increase or decrease its credit exposure to an issuer, obligation, portfolio, or index of issuers or obligations, to hedge its exposure on an obligation that it owns or in lieu of selling such obligations. As the purchaser of a credit default swap contract, the Fund purchases protection by paying a periodic interest rate on the notional amount to the counterparty. The interest amount is accrued daily as a component of unrealized appreciation (depreciation) and is recorded as a realized gain (loss) upon payment. If the credit event specified in the contract occurs, the Fund will be required to deliver either the referenced obligation or an equivalent cash amount to the protection seller and in exchange the Fund will receive the notional amount from the seller. The difference between the value of the obligation delivered and the notional amount received will be recorded as a realized gain (loss). As the seller of a credit default swap contract, the Fund sells protection to a buyer and will generally receive a periodic interest rate on the notional amount. The interest amount is accrued daily as a component of unrealized appreciation (depreciation) and is recorded as a realized gain (loss) upon receipt of the payment. If the credit event specified in the contract occurs, the Fund will receive the referenced obligation or an equivalent cash amount in exchange for the payment of the notional amount to the protection buyer. The difference between the value of the - -------------------------------------------------------------------------------- 46 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT obligation received and the notional amount paid will be recorded as a realized gain (loss). As a protection seller, the maximum amount of the payment made by the Fund may equal the notional amount, at par, of the underlying index or security as a result of the related credit event. The notional amounts of credit default swap contracts are not recorded in the financial statements; however any up front payment paid or received by the Fund is recorded as an asset or liability and amortized daily as a component of realized gain (loss) on the statement of operations. At Aug. 31, 2007, there were no credit default swap contracts outstanding which had up front payments paid or received by the Fund. Credit default swap contracts are valued daily, and the change in value is recorded as unrealized appreciation (depreciation) until the termination of the swap, at which time a realized gain (loss) is recorded. Credit default swap contracts can involve greater risks than if a fund had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to counterparty credit risk, leverage risk, hedging risk, correlation risk and liquidity risk. The Fund will enter into credit default swap agreements only with counterparties that meet certain standards of creditworthiness. 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). 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 - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 47 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 decreased by $5,035,154 and accumulated net realized loss has been decreased by $5,035,964 resulting in a net reclassification adjustment to decrease paid-in capital by $810. The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED AUG. 31, 2007 2006 - ---------------------------------------------------------------------------- CLASS A Distributions paid from: Ordinary income......................... $86,827,158 $76,604,597 Long-term capital gain.................. -- -- Tax return of capital................... 1,969,457 -- CLASS B Distributions paid from: Ordinary income......................... 13,755,846 15,585,869 Long-term capital gain.................. -- -- Tax return of capital................... 312,017 -- CLASS C Distributions paid from: Ordinary income......................... 626,596 591,217 Long-term capital gain.................. -- -- Tax return of capital................... 14,213 --
- -------------------------------------------------------------------------------- 48 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
YEAR ENDED AUG. 31, 2007 2006 - ---------------------------------------------------------------------------- CLASS I Distributions paid from: Ordinary income......................... 15,257,999 4,560,444 Long-term capital gain.................. -- -- Tax return of capital................... 346,089 -- CLASS R2(A) Distributions paid from: Ordinary income......................... 141 N/A Long-term capital gain.................. -- N/A Tax return of capital................... 3 N/A CLASS R3(A) Distributions paid from: Ordinary income......................... 151 N/A Long-term capital gain.................. -- N/A Tax return of capital................... 3 N/A CLASS R4(B) Distributions paid from: Ordinary income......................... 4,383,933 6,737,531 Long-term capital gain.................. -- -- Tax return of capital................... 99,439 -- CLASS R5(A) Distributions paid from: Ordinary income......................... 167 N/A Long-term capital gain.................. -- N/A Tax return of capital................... 4 N/A CLASS W(C) Distributions paid from: Ordinary income......................... 2,150,062 N/A Long-term capital gain.................. -- N/A Tax return of capital................... 48,769 N/A
(a) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (b) Effective Dec. 11, 2006, Class Y was renamed R4. (c) For the period from Dec. 1, 2006 (inception date) to Aug. 31, 2007. At Aug. 31, 2007, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income............................ $ -- Undistributed accumulated long-term gain................. $ -- Accumulated realized loss................................ $(154,484,363) Unrealized appreciation (depreciation)................... $ (30,249,391)
RECENT ACCOUNTING PRONOUNCEMENTS On Sept. 20, 2006, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards No. 157 "Fair Value Measurements" - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 49 (SFAS 157). SFAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The application of SFAS 157 is required for fiscal years beginning after Nov. 15, 2007 and interim periods within those fiscal years. The impact of SFAS 157 on the Fund's financial statements is being evaluated. In June 2006, the 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. As a result, the Fund will incorporate FIN 48 in their semiannual report on Feb 29, 2008. Tax positions of the Fund are being evaluated to determine the impact, if any, to the Fund. The adoption of FIN 48 is not anticipated to have a material impact on the Fund. 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, if any, 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, the Investment Manager determines which securities will be purchased, held or sold. 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. The management fee for the year ended Aug. 31, 2007, was 0.46% of the Fund's average daily net assets. Under an 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 - -------------------------------------------------------------------------------- 50 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT assets increase. The fee for the year ended Aug. 30, 2007, was 0.06% of the Fund's average daily net assets. Other expenses in the amount of $22,780 are for, among other things, certain expenses of the Fund or the Board including: Fund boardroom and office expense, employee compensation, employee health and retirement benefits, and certain other expenses. Payment of these Fund and Board expenses is facilitated by a company providing limited administrative services to the Fund and the Board. Compensation of Board members includes, for a former Board Chair, compensation as well as retirement benefits. Certain other aspects of a former Board Chair's compensation, including health benefits and payment of certain other expenses, are included under other expenses. 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. Professional fees include fees paid by the Fund for legal services and independent registered public accounting firm services. Under a 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: - - Class A $20.50 - - Class B $21.50 - - Class C $21.00 Effective Dec. 11, 2006, as part of the Board's approval to rename Class Y as Class R4, the fee structure under the Transfer Agency Agreement was revised from an account-based fee for Class Y to an asset-based fee for Class R4. The Fund pays the Transfer Agent an annual asset-based fee at a rate of 0.05% of the Fund's average daily net assets attributable to Class R4 shares. Prior to Dec. 11, 2006, the Fund paid the Transfer Agent an annual account-based fee of $18.50 per shareholder account. In addition, the Fund pays the Transfer Agent an annual asset-based fee at a rate of 0.05% of the Fund's average daily net assets attributable to Class R2, Class R3 and Class R5 shares and an annual asset-based fee at a rate of 0.20% of the Fund's average daily net assets attributable to Class W shares. Prior to Dec. 11, 2006, Class I paid a transfer agency fee at an annual rate per shareholder account of $1. Effective Dec. 11, 2006, this fee was eliminated. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 51 The Transfer Agent charges an annual 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. and RiverSource Distributors, Inc. (collectively, the Distributor) for distribution and shareholder services. As of Oct. 1, 2007, RiverSource Distributors serves as the sole principal and distributor to the Funds. Under a Plan and Agreement of Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A, Class R3 and Class W shares, a fee at an annual rate of up to 0.50% of the Fund's average daily net assets attributable to Class R2 shares and a fee at an annual rate of up to 1.00% of the Fund's average daily net assets attributable to Class B and Class C shares. Effective Dec. 11, 2006, a Plan Administration Services Agreement, a fee for the provision of various administrative, recordkeeping, communication and educational services, was adopted for the restructured Class R4 and the introduction of Class R2 and Class R3. The fee is calculated at a rate of 0.25% of the Fund's average daily net assets attributable to Class R2, Class R3 and Class R4 shares. Prior to Dec. 11, 2006, under a Shareholder Service Agreement, the Fund paid the Distributor a fee for service provided to shareholders by the Distributor and other servicing agents with respect to Class Y shares. The fee was calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Effective Dec. 11, 2006, this agreement was terminated. Sales charges received by the Distributor for distributing Fund shares were $2,007,768 for Class A, $329,350 for Class B and $3,133 for Class C for the year ended Aug. 31, 2007. In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the funds in which it invests (also referred to as "acquired funds"), including affiliated and non- affiliated pooled investment vehicles (including mutual funds and exchange traded funds). Because the acquired funds have varied expense and fee levels and the Fund may own different proportions of acquired funds at different times, the amount of fees and expenses incurred indirectly by the Fund will vary. For the year ended Aug. 31, 2007, the Investment Manager and its affiliates waived certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds) were 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.54% for Class I, 1.32% for Class R2, 1.06% for Class R3, 0.73% for Class R4, 0.57% for Class R5 and 0.97% for Class W. Of these waived fees and expenses, the transfer agency fees waived for Class A, Class B, Class C and Class W were $1,146,146, $223,872, $9,929 and $6,612, respectively, and the - -------------------------------------------------------------------------------- 52 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT transfer agency and plan administration service fees waived for Class R4 were $82,565 and the management fees waived at the Fund level were $535,573. Under an agreement, which was effective until Aug. 31, 2007, the Investment Manager and its affiliates contractually agreed to waive certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds) would not exceed 0.89% for Class A, 1.65% for Class B, 1.66% for Class C, 0.54% for Class I, 1.32% for Class R2, 1.07% for Class R3, 0.73% for Class R4, 0.57% for Class R5 and 0.97% for Class W of the Fund's average daily net assets. Effective Sept. 1, 2007, the Investment Manager and its affiliates have contractually agreed to waive certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds) will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.53% for Class I, 1.33% for Class R2, 1.08% for Class R3, 0.77% for Class R4, 0.58% for Class R5 and 0.98% for Class W of the Fund's average daily net assets, until Aug. 31, 2008, unless sooner terminated at the discretion of the Board. During the year ended Aug. 31, 2007, the Fund's custodian and transfer agency fees were reduced by $229,404 as a result of earnings and bank fee credits from overnight cash balances. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $8,543,779,920 and $8,345,887,467, respectively, for the year ended Aug. 31, 2007. 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, 2007 ISSUED FOR REINVESTED NET SOLD DISTRIBUTIONS REDEEMED INCREASE (DECREASE) - ------------------------------------------------------------------------------------------- Class A 71,107,119 14,806,791 (105,297,428) (19,383,518) Class B 15,312,266 2,590,288 (39,059,052) (21,156,498) Class C 893,514 115,836 (1,134,124) (124,774) Class I 33,643,276 3,181,732 (14,430,925) 22,394,083 Class R2(a) 1,040 -- -- 1,040 Class R3(a) 1,040 -- -- 1,040 Class R4(b) 6,169,567 931,416 (27,102,344) (20,001,361) Class R5(a) 1,040 -- -- 1,040 Class W(c) 55,562,189 417,986 (9,621,147) 46,359,028 - -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 53
YEAR ENDED AUG. 31, 2006 ISSUED FOR FUND REINVESTED NET SOLD MERGER DISTRIBUTIONS REDEEMED INCREASE (DECREASE) - ---------------------------------------------------------------------------------------------------------- Class A 66,603,100 101,470,543 12,810,045 (121,661,365) 59,222,323 Class B 16,761,356 17,711,859 2,867,046 (52,093,450) (14,753,189) Class C 749,835 633,369 108,893 (1,561,227) (69,130) Class I 23,207,815 33,851,639 941,851 (263,328) 57,737,977 Class R4(b) 4,039,333 9,182,696 1,392,410 (19,763,678) (5,149,239) - ----------------------------------------------------------------------------------------------------------
(a) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (b) Effective Dec. 11, 2006, Class Y was renamed Class R4. (c) For the period from Dec. 1, 2006 (inception date) to Aug. 31, 2007. 5. LENDING OF PORTFOLIO SECURITIES In order to generate additional income, the Fund may lend securities representing up to one-third of the value of its total assets (which includes collateral for securities on loan) to broker-dealers, banks, or other institutional borrowers of securities. The Fund receives collateral in the form of cash and U.S. government securities, equal to at least 100% of the value of securities loaned, which is marked to the market value of the loaned securities daily until the securities are returned, e.g., if the value of the securities on loan increases, additional cash collateral is provided by the borrower. The Investment Manager serves as securities lending agent for the Fund under the Investment Management Services Agreement pursuant to which the Fund has agreed to reimburse the Investment Manager for expenses incurred by it in connection with the lending program, and pursuant to guidelines adopted by and under the oversight of the Board. At Aug. 31, 2007, securities valued at $53,596,150 were on loan to brokers. For collateral, the Fund received $54,427,500 in cash. Cash collateral received is invested in an affiliated money market fund and short-term securities, including U.S. government securities or other high-grade debt obligations, which are included in the "Investments in securities." From Aug. 31, 2007 to Sept. 4, 2007, the Fund temporarily held less cash in short term investments than the amount of collateral received from securities on loan. Income from securities lending amounted to $395,879 for the year ended Aug. 31, 2007. Expenses paid to the Investment Manager were $12,365 for the year ended Aug. 31, 2007, which are included in other expenses on the statement of operations. 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. 6. INTEREST RATE FUTURES CONTRACTS At Aug. 31, 2007, investments in securities included securities valued at $1,893,987 that were pledged as collateral to cover initial margin deposits on 1,669 open sale contracts. The notional market value of the open sale contracts at Aug. 31, 2007 was $191,666,506 with a net unrealized loss of $4,402. See "Summary of significant accounting policies" and "Notes to investments in securities." - -------------------------------------------------------------------------------- 54 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 7. SWAP CONTRACTS At Aug. 31, 2007, the Fund had the following open CBMS total return swap contracts:
TERMINATION NOTIONAL UNREALIZED UNREALIZED DATE AMOUNT APPRECIATION 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 plus 0.25%. Counterparty: Wachovia Oct. 1, 2007 $37,500,000 $508,013 $ -- Receive total return on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR plus 1.20%. Counterparty: Citibank NA Nov. 1, 2007 7,500,000 -- 501,510 Receive total return on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR plus 1.05%. Counterparty: Wachovia Dec. 1, 2007 6,725,000 -- 449,758 Receive total return on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR plus 1.10%. Counterparty: Citibank NA Dec. 1, 2007 7,525,000 -- 503,830 Receive total return on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR plus 1.10%. Counterparty: Wachovia Jan. 1, 2008 7,500,000 -- 501,277 Receive total return on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR plus 1.00%. Counterparty: Citibank NA Jan. 1, 2008 2,400,000 -- 223,243 - --------------------------------------------------------------------------------------- Total $508,013 $2,179,618 - ---------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 55 At Aug. 31, 2007, the Fund had the following open credit default swap contracts:
REFERENCED BUY/SELL NOTIONAL FIXED TERMINATION UNREALIZED UNREALIZED COUNTERPARTY ENTITY PROTECTION AMOUNT RATE DATE APPRECIATION DEPRECIATION - ------------------------------------------------------------------------------------------------------------------------ Goldman Lehman Brothers Sell $10,675,000 1.22% Sept. 20, 2012 $ -- $69,254 Sachs Holdings Inc. Goldman Morgan Stanley Buy 10,675,000 0.72% Sept. 20, 2012 18,088 -- Sachs - ------------------------------------------------------------------------------------------------------------------------ Total $18,088 $69,254 - ------------------------------------------------------------------------------------------------------------------------
8. AFFILIATED MONEY MARKET FUND The Fund may invest its daily cash balance in RiverSource Short-Term Cash Fund, a money market fund established for the exclusive use of the RiverSource funds and other institutional clients of RiverSource Investments. Cost of purchases and proceeds from sales of securities aggregated $1,655,721,359 and $1,609,835,630, respectively, for the year ended Aug. 31, 2007. 9. 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. 19, 2006. 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 0.06% per annum. Prior to this agreement, the Fund paid a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.07% per annum. The Fund had no borrowings under the facility during the year ended Aug. 31, 2007. 10. 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. - -------------------------------------------------------------------------------- 56 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 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 temporary book-to-tax differences.
TEMPORARY TOTAL CAPITAL UNREALIZED ACCUMULATED BOOK-TO-TAX NET ASSETS STOCK DEPRECIATION NET REALIZED LOSS DIFFERENCES - ----------------------------------------------------------------------------------------------------- RiverSource Selective Fund $774,041,863 $826,804,340 $(18,618,938) $(34,129,421) $(14,118) - -----------------------------------------------------------------------------------------------------
11. CAPITAL LOSS CARRY-OVER AND POST-OCTOBER LOSS For federal income tax purposes, the Fund had a capital loss carry-over of $143,554,285 at Aug. 31, 2007, that if not offset by capital gains will expire as follows:
2009 2010 2012 2014 $75,831,798 $49,658,521 $5,227,159 $12,836,807
The Fund also had a post-October loss of $10,930,078 at Aug. 31, 2007. Because the measurement periods for a regulated investment company's income are different for excise tax purposes versus income tax purposes special rules are in place to protect the amount of earnings and profits needed to support excise tax distributions. As a result, the Funds are permitted to treat net capital losses realized between November 1 and its fiscal year end ("post-October loss") as occurring on the first day of the following tax year. At Aug. 31, 2007, the Fund had a post-October loss of $10,930,078 that is treated as occurring on Sept. 1, 2007. RiverSource Diversified Bond Fund acquired $31,763,053 of capital loss carry-overs in connection with the RiverSource Selective Fund merger (Note 10). 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 -- 2007 ANNUAL REPORT 57 12. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS In June 2004, an action captioned John E. Gallus et al. v. American Express Financial Corp. and American Express Financial Advisors Inc., was filed in the United States District Court for the District of Arizona. The plaintiffs allege that they are investors in several American Express Company mutual funds and they purport to bring the action derivatively on behalf of those funds under the Investment Company Act of 1940. The plaintiffs allege that fees allegedly paid to the defendants by the funds for investment advisory and administrative services are excessive. The plaintiffs seek remedies including restitution and rescission of investment advisory and distribution agreements. The plaintiffs voluntarily agreed to transfer this case to the United States District Court for the District of Minnesota. In response to defendants' motion to dismiss the complaint, the Court dismissed one of plaintiffs' four claims and granted plaintiffs limited discovery. Defendants moved for summary judgment in April 2007. Summary judgment was granted in the defendants' favor on July 9, 2007. The plaintiffs filed a notice of appeal with the Eighth Circuit Court of Appeals on August 8, 2007. 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 - -------------------------------------------------------------------------------- 58 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 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. 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. Further, although we believe proceedings are not 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, these proceedings are subject to uncertainties and, as such, we are unable to estimate the possible loss or range of loss that may result. An adverse outcome in one or more of these proceedings could result in adverse judgments, settlements, fines, penalties or other relief that could have a material adverse effect on the consolidated financial condition or results of operations of Ameriprise Financial. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 59 13. 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, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.89 $4.87 $4.78 $4.75 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .21(b) .19 .18 .18 .20 Net gains (losses) (both realized and unrealized) .05 (.11) .03 .08 .03 - ----------------------------------------------------------------------------------------------------------- Total from investment operations .26 .08 .21 .26 .23 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.20) (.19) (.17) (.20) Tax return of capital (.01) -- -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.22) (.20) (.19) (.17) (.20) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 $4.77 $4.89 $4.87 $4.78 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $1,937 $2,013 $1,774 $1,933 $2,280 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .89%(e) .89%(e) .94%(e) .98%(e) .97% - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.43% 4.09% 3.67% 3.55% 4.16% - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - ----------------------------------------------------------------------------------------------------------- Total return(f) 5.54% 1.64% 4.38% 5.54% 4.91% - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) 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 0.97%, 0.99%, 1.02% and 1.00% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 60 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT CLASS B
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.89 $4.88 $4.78 $4.75 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18(b) .16 .15 .14 .16 Net gains (losses) (both realized and unrealized) .04 (.12) .01 .09 .03 - ----------------------------------------------------------------------------------------------------------- Total from investment operations .22 .04 .16 .23 .19 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.16) (.15) (.13) (.16) Tax return of capital (.00) -- -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.18) (.16) (.15) (.13) (.16) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 $4.77 $4.89 $4.88 $4.78 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $304 $402 $484 $628 $902 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.65%(e) 1.65%(e) 1.70%(e) 1.73%(e) 1.73% - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.66% 3.31% 2.92% 2.78% 3.40% - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - ----------------------------------------------------------------------------------------------------------- Total return(f) 4.74% .88% 3.39% 4.95% 4.12% - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) 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 1.73%, 1.76%, 1.78% and 1.75% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 61 CLASS C
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.90 $4.88 $4.78 $4.75 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18(b) .16 .15 .14 .16 Net gains (losses) (both realized and unrealized) .04 (.13) .02 .09 .03 - ----------------------------------------------------------------------------------------------------------- Total from investment operations .22 .03 .17 .23 .19 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.16) (.15) (.13) (.16) Tax return of capital (.00) -- -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.18) (.16) (.15) (.13) (.16) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 $4.77 $4.90 $4.88 $4.78 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $17 $17 $18 $21 $27 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.65%(e) 1.66%(e) 1.70%(e) 1.73%(e) 1.74% - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.67% 3.31% 2.93% 2.79% 3.34% - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - ----------------------------------------------------------------------------------------------------------- Total return(f) 4.73% .66% 3.60% 4.95% 4.11% - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) 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 1.73%, 1.76%, 1.79% and 1.75% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 62 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004(B) Net asset value, beginning of period $4.78 $4.89 $4.88 $4.91 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .23(c) .21 .20 .11 Net gains (losses) (both realized and unrealized) .04 (.11) .02 (.04) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .27 .10 .22 .07 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.21) (.21) (.10) Tax return of capital (.01) -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.23) (.21) (.21) (.10) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.82 $4.78 $4.89 $4.88 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $386 $276 $-- $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e) .54%(f) .54%(f) .60% .59%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.80% 4.59% 4.01% 3.13%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% - ----------------------------------------------------------------------------------------------------------- Total return(h) 5.90% 2.19% 4.53% 1.43%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from March 4, 2004 (inception date) to Aug. 31, 2004. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (e) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (f) 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 I would have been 0.56% and 0.55% for the years ended Aug. 31, 2007 and 2006, respectively. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 63 CLASS R2
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.81 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .14(c) Net gains (losses) (both realized and unrealized) (.02) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .12 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.13) Tax return of capital (.00) - ----------------------------------------------------------------------------------------------------------- Total distributions (.13) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e) 1.32%(f) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.06%(f) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - ----------------------------------------------------------------------------------------------------------- Total return(g) 2.70%(h) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (e) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. - -------------------------------------------------------------------------------- 64 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT CLASS R3
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.81 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15(c) Net gains (losses) (both realized and unrealized) (.02) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .13 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.14) Tax return of capital (.00) - ----------------------------------------------------------------------------------------------------------- Total distributions (.14) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e) 1.06%(f) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.33%(f) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - ----------------------------------------------------------------------------------------------------------- Total return(g) 2.90%(h) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (e) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 65 CLASS R4*
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.89 $4.88 $4.78 $4.75 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .22(b) .20 .19 .18 .21 Net gains (losses) (both realized and unrealized) .04 (.12) .02 .10 .03 - ----------------------------------------------------------------------------------------------------------- Total from investment operations .26 .08 .21 .28 .24 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.20) (.20) (.18) (.21) Tax return of capital (.01) -- -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.23) (.20) (.20) (.18) (.21) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 $4.77 $4.89 $4.88 $4.78 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $78 $173 $202 $203 $268 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .73%(e) .73%(e) .78%(e) .81%(e) .81% - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.53% 4.24% 3.85% 3.70% 4.34% - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - ----------------------------------------------------------------------------------------------------------- Total return(f) 5.49% 1.81% 4.34% 5.92% 5.08% - -----------------------------------------------------------------------------------------------------------
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) 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 R4 would have been 0.83%, 0.82%, 0.86% and 0.83% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 66 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT CLASS R5
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.81 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .17(c) Net gains (losses) (both realized and unrealized) (.02) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .15 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) Tax return of capital (.00) - ----------------------------------------------------------------------------------------------------------- Total distributions (.16) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .57%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.81%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - ----------------------------------------------------------------------------------------------------------- Total return(h) 3.25%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (e) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (f) 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 R5 would have been 0.59% for the period ended Aug. 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 67 CLASS W
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.82 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15(c) - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) Tax return of capital (.00) - ----------------------------------------------------------------------------------------------------------- Total distributions (.16) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $223 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .97%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.32%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - ----------------------------------------------------------------------------------------------------------- Total return(h) 2.71%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 1, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (e) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (f) 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 W would have been 0.98% for the period ended Aug. 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- 68 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RIVERSOURCE DIVERSIFIED BOND FUND: We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of RiverSource Diversified Bond Fund (the Fund), one of the portfolios constituting the RiverSource Diversified Income Series, Inc, as of August 31, 2007, and the related statements of operations, changes in net assets, and financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The financial statements and financial highlights of the Fund for the periods presented through August 31, 2006, were audited by other auditors whose report dated October 20, 2006, expressed an unqualified opinion on those financial statements and financial highlights. We conducted our audit 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 financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of August 31, 2007, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2007 financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of RiverSource Diversified Bond Fund of the RiverSource Diversified Income Series, Inc. at August 31, 2007, the results of its operations, changes in its net assets and the financial highlights for the year then ended, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota October 18, 2007 - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 69 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, 2007 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. 25, 2006.............................................. $0.01750 Oct. 26, 2006............................................... 0.01750 Nov. 27, 2006............................................... 0.01800 Dec. 18, 2006............................................... 0.02100 Jan. 23, 2007............................................... 0.02100 Feb. 23, 2007............................................... 0.01700 March 26, 2007.............................................. 0.01700 April 25, 2007.............................................. 0.01700 May 25, 2007................................................ 0.01700 June 25, 2007............................................... 0.01700 July 25, 2007............................................... 0.01870 Aug. 24, 2007............................................... 0.01870 Total distributions(a)...................................... $0.21740
- -------------------------------------------------------------------------------- 70 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 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. 25, 2006.............................................. $0.01472 Oct. 26, 2006............................................... 0.01441 Nov. 27, 2006............................................... 0.01480 Dec. 18, 2006............................................... 0.01889 Jan. 23, 2007............................................... 0.01737 Feb. 23, 2007............................................... 0.01388 March 26, 2007.............................................. 0.01385 April 25, 2007.............................................. 0.01396 May 25, 2007................................................ 0.01397 June 25, 2007............................................... 0.01390 July 25, 2007............................................... 0.01563 Aug. 24, 2007............................................... 0.01571 Total distributions(b)...................................... $0.18109
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. 25, 2006.............................................. $0.01468 Oct. 26, 2006............................................... 0.01438 Nov. 27, 2006............................................... 0.01476 Dec. 18, 2006............................................... 0.01886 Jan. 23, 2007............................................... 0.01730 Feb. 23, 2007............................................... 0.01393 March 26, 2007.............................................. 0.01387 April 25, 2007.............................................. 0.01393 May 25, 2007................................................ 0.01399 June 25, 2007............................................... 0.01396 July 25, 2007............................................... 0.01573 Aug. 24, 2007............................................... 0.01573 Total distributions(b)...................................... $0.18112
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 71 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. 25, 2006.............................................. $0.01881 Oct. 26, 2006............................................... 0.01895 Nov. 27, 2006............................................... 0.01950 Dec. 18, 2006............................................... 0.02200 Jan. 23, 2007............................................... 0.02270 Feb. 23, 2007............................................... 0.01846 March 26, 2007.............................................. 0.01847 April 25, 2007.............................................. 0.01842 May 25, 2007................................................ 0.01842 June 25, 2007............................................... 0.01845 July 25, 2007............................................... 0.02010 Aug. 24, 2007............................................... 0.02010 Total distributions(a)...................................... $0.23438
CLASS R2
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Dec. 18, 2006............................................... $0.00587 Jan. 23, 2007............................................... 0.01889 Feb. 23, 2007............................................... 0.01516 March 26, 2007.............................................. 0.01523 April 25, 2007.............................................. 0.01521 May 25, 2007................................................ 0.01523 June 25, 2007............................................... 0.01522 July 25, 2007............................................... 0.01685 Aug. 24, 2007............................................... 0.01684 Total distributions(c)...................................... $0.13450
- -------------------------------------------------------------------------------- 72 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT CLASS R3
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Dec. 18, 2006............................................... $0.00608 Jan. 23, 2007............................................... 0.02018 Feb. 23, 2007............................................... 0.01631 March 26, 2007.............................................. 0.01631 April 25, 2007.............................................. 0.01635 May 25, 2007................................................ 0.01637 June 25, 2007............................................... 0.01629 July 25, 2007............................................... 0.01789 Aug. 24, 2007............................................... 0.01789 Total distributions(c)...................................... $0.14367
CLASS R4*
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. 25, 2006.............................................. $0.01808 Oct. 26, 2006............................................... 0.01807 Nov. 27, 2006............................................... 0.01866 Dec. 18, 2006............................................... 0.02167 Jan. 23, 2007............................................... 0.02185 Feb. 23, 2007............................................... 0.01763 March 26, 2007.............................................. 0.01764 April 25, 2007.............................................. 0.01762 May 25, 2007................................................ 0.01762 June 25, 2007............................................... 0.01763 July 25, 2007............................................... 0.01928 Aug. 24, 2007............................................... 0.01932 Total distributions(a)...................................... $0.22507
* Effective Dec. 11, 2006, Class Y was reamed Class R4. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 73 CLASS R5
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Dec. 18, 2006............................................... $0.00627 Jan. 23, 2007............................................... 0.02240 Feb. 23, 2007............................................... 0.01826 March 26, 2007.............................................. 0.01846 April 25, 2007.............................................. 0.01820 May 25, 2007................................................ 0.01818 June 25, 2007............................................... 0.01821 July 25, 2007............................................... 0.01980 Aug. 24, 2007............................................... 0.01979 Total distributions(b)...................................... $0.15957
CLASS W
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Dec. 18, 2006............................................... $0.01734 Jan. 23, 2007............................................... 0.01952 Feb. 23, 2007............................................... 0.01663 March 26, 2007.............................................. 0.01543 April 25, 2007.............................................. 0.01637 May 25, 2007................................................ 0.01649 June 25, 2007............................................... 0.01654 July 25, 2007............................................... 0.01835 Aug. 24, 2007............................................... 0.01835 Total distributions(c)...................................... $0.15502
(a) $0.005 per share represents a tax return of capital. (b) $0.004 per share represents a tax return of capital. (c) $0.003 per share represents a tax return of capital. - -------------------------------------------------------------------------------- 74 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 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 104 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 Supreme 901 S. Marquette Ave. since 2006 Court, 1998-2005 Minneapolis, MN 55402 Age 53 - ----------------------------------------------------------------------------------------------------- Arne H. Carlson Board member Chair, RiverSource Funds, 901 S. Marquette Ave. since 1999 1999-2006; former Governor of Minneapolis, MN 55402 Minnesota Age 73 - ----------------------------------------------------------------------------------------------------- Pamela G. Carlton Board member President, Springboard -- Partners 901 S. Marquette Ave. since 2007 in Cross Cultural Leadership Minneapolis, MN 55402 (consulting company) Age 52 - ----------------------------------------------------------------------------------------------------- Patricia M. Flynn Board member Trustee Professor of Economics and 901 S. Marquette Ave. since 2004 Management, Bentley College; former Minneapolis, MN 55402 Dean, McCallum Graduate School of Age 56 Business, Bentley College - ----------------------------------------------------------------------------------------------------- Anne P. Jones Board member Attorney and Consultant 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 72 - ----------------------------------------------------------------------------------------------------- Jeffrey Laikind, CFA Board member Former Managing Director, Shikiar American Progressive 901 S. Marquette Ave. since 2005 Asset Management Insurance Minneapolis, MN 55402 Age 72 - ----------------------------------------------------------------------------------------------------- Stephen R. Lewis, Jr. Board member President Emeritus and Professor of Valmont Industries, 901 S. Marquette Ave. since 2002 and Economics, Carleton College Inc. (manufactures Minneapolis, MN 55402 Chair of the irrigation systems) Age 68 Board since 2007 - -----------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 75 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 real Distribution, Inc. Minneapolis, MN 55402 estate and asset management (transportation, Age 55 company) distribution and logistics consultants) - ----------------------------------------------------------------------------------------------------- Alison Taunton-Rigby Board member Chief Executive Officer, RiboNovix, Hybridon, Inc. 901 S. Marquette Ave. since 2002 Inc. since 2003 (biotechnology); (biotechnology); Minneapolis, MN 55402 former President, Forester Biotech American Healthways, Age 63 Inc. (health 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 -- U.S. Asset Management 53600 Ameriprise since 2001, and Chief Investment Officer, Financial Center Vice President Ameriprise Financial, Inc. and Minneapolis, MN 55474 since 2002 President, Chairman of the Board Age 47 and Chief Investment Officer, RiverSource Investments, LLC since 2005; President, Ameriprise Certificate Company since 2006; 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. The SAI has additional information about the Fund's Board members and is available, without charge, upon request by calling RiverSource Funds at (888) 791-3380; contacting your financial institution; or visiting riversource.com/funds. - -------------------------------------------------------------------------------- 76 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 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, 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 - ------------------------------------------------------------------------------------------ Patrick T. Bannigan President since Senior Vice President -- Asset Management, 172 Ameriprise 2006 RiverSource Investments, LLC since 2006; Financial Center Managing Director and Global Head of Product, Minneapolis, MN 55474 Morgan Stanley Investment Management, Age 41 2004-2006; President, Touchstone Investments, 2002-2004; Director of Strategic Planning, Evergreen Investments, 1995-2002 - ------------------------------------------------------------------------------------------ Michelle M. Keeley Vice President Executive Vice President -- Equity and Fixed 172 Ameriprise since 2004 Income, Ameriprise Financial, Inc. and Financial Center RiverSource Investments, LLC since 2006; Vice Minneapolis, MN 55474 President -- Investments, Ameriprise Age 43 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 - ------------------------------------------------------------------------------------------ Amy K. Johnson Vice President Vice President -- Asset Management and Trust 5228 Ameriprise since 2006 Company Services, RiverSource Investments, LLC Financial Center since 2006; Vice President -- Operations and Minneapolis, MN 55474 Compliance, RiverSource Investments, LLC, Age 42 2004-2006; Director of Product Development -- Mutual Funds, Ameriprise Financial, Inc., 2001-2004 - ------------------------------------------------------------------------------------------ Jeffrey P. Fox Treasurer since Vice President -- Investment Accounting, 105 Ameriprise 2002 Ameriprise Financial, Inc. since 2002; Vice Financial Center President -- Finance, American Express Minneapolis, MN 55474 Company, 2000-2002 Age 52 - ------------------------------------------------------------------------------------------ Scott R. Plummer Vice President, Vice President and Chief Counsel -- Asset 5228 Ameriprise General Counsel Management, Ameriprise Financial, Inc. since Financial Center and Secretary 2005; Vice President, General Counsel and Minneapolis, MN 55474 since 2006 Secretary, Ameriprise Certificate Company Age 48 since 2005; Vice President -- Asset Management Compliance, Ameriprise Financial, Inc., 2004-2005; Senior Vice President and Chief Compliance Officer, U.S. Bancorp Asset Management, 2002-2004; Second Vice President and Assistant General Counsel, Hartford Life, 2001-2002 - ------------------------------------------------------------------------------------------ Jennifer D. Lammers Chief Compliance U.S. Asset Management Chief Compliance 172 Ameriprise Officer since Officer, RiverSource Investments, LLC since Financial Center 2006 2006; Director -- Mutual Funds, Voyageur Asset Minneapolis, MN 55474 Management, 2003-2006; Director of Finance, Age 46 Voyageur Asset Management, 2000-2003 - ------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 77 FUND OFFICERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------ Neysa M. Alecu Money Laundering Compliance Director and Anti-Money Laundering 2934 Ameriprise Prevention Officer, Ameriprise Financial, Inc. since Financial Center Officer since 2004; Manager Anti-Money Laundering, Minneapolis, MN 55474 2004 Ameriprise Financial, Inc., 2003-2004; Age 43 Compliance Director and Bank Secrecy Act Officer, American Express Centurion Bank, 2000-2003 - ------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 78 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT RiverSource Investments, LLC ("RiverSource"), a wholly-owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), serves as the investment manager to the Fund. Under an investment management services agreement (the "IMS Agreement") RiverSource provides investment advice and other services to the Fund and all RiverSource funds (collectively, the "Funds"). The Fund's Board of Directors (the "Board") and the Board's Investment Review and Contracts Committees monitor these services throughout the year. On an annual basis, the Board, including the independent Board members (the "Independent Directors"), considers renewal of the IMS Agreement. RiverSource prepares detailed reports for the Board and its Contracts Committee in March and April, including reports based on data provided by independent organizations to assist the Board in making this determination. In addition, throughout the year, the Board (or its committees) reviews information prepared by RiverSource addressing the services RiverSource provides and Fund performance. The Board accords particular weight to the work, deliberations and conclusions of the Contracts and Investment Review Committees in determining whether to continue the IMS Agreement. At the April 11-12, 2007 in-person Board meeting, independent legal counsel to the Independent Directors reviewed with the Independent Directors various factors relevant to the Board's consideration of advisory agreements and the Board's legal responsibilities related to such consideration. Following an analysis and discussion of the factors identified below, the Board, including all of the Independent Directors, approved renewal of the IMS Agreement. Nature, Extent and Quality of Services Provided by RiverSource: The Board analyzed various reports and presentations it had received detailing the services performed by RiverSource, as well as its expertise, resources and capabilities. The Board specifically considered many developments during the past year concerning the services provided by RiverSource, including, in particular, the growing strength and capabilities of many RiverSource offices and the increased investment and resources dedicated to the Fund's operations, particularly in the areas of trading systems, legal and compliance. Further, in connection with the Board's evaluation of the overall package of services provided by RiverSource, the Board considered the quality of the administrative, custody and transfer agency services provided by RiverSource affiliates to the Fund. The Board also reviewed the financial condition of RiverSource and the entity's ability to carry out its responsibilities under the IMS Agreement. The Board also discussed the acceptability of the terms of the IMS Agreement (including the relatively broad scope of services required to be performed by RiverSource). The Board concluded that the services being performed under the IMS Agreement were of a reasonably high quality. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 79 Based on the foregoing, and based on other information received (both oral and written, including the information on investment performance referenced below) and other considerations, the Board determined that RiverSource was in a position to continue to provide a high quality and level of services to the Fund. Investment Performance: For purposes of evaluating the nature, extent and quality of services provided under the IMS Agreement, the Board carefully reviewed the investment performance of the Fund. In this regard, the Board considered: (i) detailed reports containing data prepared by an independent organization showing, for various periods, the performance of the Fund, the performance of a benchmark index, the percentage ranking of the Fund among its comparison group and the net assets of the Fund; and (ii) a report detailing the Fund's performance over various periods (including since inception), recent Fund inflows (and outflows) and a comparison of the Fund's net assets from December 2006 to December 2005. The Board observed that the Fund's investment performance met expectations. Comparative Fees, Costs of Services Provided and the Profits Realized By RiverSource and its Affiliates from their Relationships with the Fund: The Board reviewed comparative fees and the costs of services to be provided under the IMS Agreement. The Board members considered detailed comparative information set forth in an annual report on fees and expenses, including, among other things, data (prepared by an independent organization) showing a comparison of the Fund's expenses with median expenses paid by funds in its peer group, as well as data showing the Fund's contribution to RiverSource's profitability. The Board accorded particular weight to the notion that the level of fees should reflect a rational pricing model applied consistently across the various product lines in the Funds' family, while assuring that the overall fees for each fund are generally in line with the "pricing philosophy" (i.e., that the total expense ratio of each fund, with few exceptions, is at or below the median expense ratio of funds in the same comparison group). The Board took into account that the Fund's total expense ratio (after considering proposed expense caps/waivers) was below the peer group's median expense ratio shown in the reports. Based on its review, the Board concluded that the Fund's management fee was fair and reasonable in light of the extent and quality of services that the Fund receives. The Board also considered the expected profitability of RiverSource and its affiliates in connection with RiverSource providing investment management services to the Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to RiverSource and Ameriprise Financial from managing and operating the Fund, including data showing comparative profitability. The Board also considered the services acquired by the investment manager through the use of commission dollars paid by the Funds on portfolio transactions. The Board noted that the fees paid by the Fund should permit the investment manager to offer competitive compensation to its personnel, make - -------------------------------------------------------------------------------- 80 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT necessary investments in its business and earn an appropriate profit. The Board concluded that profitability levels were reasonable. Economies of Scale to be Realized: The Board also considered the economies of scale that might be realized by RiverSource as the Fund grows and took note of the extent to which Fund shareholders might also benefit from such growth. The Board considered that the IMS Agreement provides for lower fees as assets increase at pre-established breakpoints and concluded that the IMS Agreement satisfactorily provided for sharing these economies of scale. Based on the foregoing, the Board, including all of the Independent Directors, concluded that the investment management service fees were fair and reasonable in light of the extent and quality of services provided. In reaching this conclusion, no single factor was determinative. On April 12, 2007, the Board, including all of the Independent Directors, approved the renewal of the IMS Agreement. PROXY VOTING The policy of the Board is to vote the proxies of the companies in which the Fund holds investments consistent with the procedures as 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 is filed with the SEC by August 31 for the most recent 12-month period ending June 30 of that year, and is available without charge by visiting riversource.com/funds; or searching the website of the SEC at www.sec.gov. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 81 CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM On April 12, 2007, Ernst & Young LLP was selected as the Fund's independent registered public accounting firm for the 2007 fiscal year. A majority of the Fund's Board of Directors, including a majority of the Independent Directors, approved the appointment of Ernst & Young LLP. The predecessor independent registered public accounting firm's reports on the Fund's financial statements for the year ended Aug. 31, 2006 and the year ended Aug. 31, 2005 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During such fiscal periods and through April 12, 2007 there were no disagreements between the Fund and the predecessor independent registered public accounting firm on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which such disagreements, if not resolved to the satisfaction of the predecessor independent registered public accounting firm, would have caused them to make reference to the subject matter of the disagreement in connection with their reports on the financial statements for such fiscal periods. - -------------------------------------------------------------------------------- 82 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT RIVERSOURCE(R) DIVERSIFIED BOND FUND 734 Ameriprise Financial Center Minneapolis, MN 55474 RIVERSOURCE.COM/FUNDS This report must be accompanied or preceded by the Fund's current prospectus. RiverSource(R) mutual funds are distributed by RiverSource Distributors, Inc., Member FINRA, and managed by RiverSource Investments, LLC. These companies are part of Ameriprise Financial, (RIVERSOURCE INVESTMENTS LOGO) Inc. (C)2007 RiverSource Distributors, Inc. S-6495 AA (10/07)
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 Pamela G. Carlton, 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 for the year ended Aug. 31, to Ernst & Young LLP for professional services rendered for the audit of the annual financial statements for RiverSource Diversified Income Series, Inc. were as follows: 2007 - $24,650 (b) Audit - Related Fees. The fees for the year ended Aug. 31, to Ernst & Young LLP for additional professional services rendered in connection with the registrant's semiannual financial statement review for RiverSource Diversified Income Series, Inc. were as follows: 2007 - $350 (c) Tax Fees. The fees for the year ended Aug. 31, to Ernst & Young LLP for tax compliance related services for RiverSource Diversified Income Series, Inc. were as follows: 2007 - $3,300 (d) All Other Fees. The fees for the year ended Aug. 31, to Ernst & Young LLP for additional professional services rendered for RiverSource Diversified Income Series, Inc. were as follows: 2007 - $0 (e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley pre-approval requirements, all services to be performed by Ernst & Young 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 2007 were pre-approved by the audit committee. (f) Not applicable. (g) Non-Audit Fees. The fees for the year ended Aug. 31, to Ernst & Young LLP by the registrant for non-audit fees and 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: 2007 - $511,730 (h) 100% of the services performed in item (g) above during 2007 were pre-approved by the Ameriprise Financial Audit Committee and/or the RiverSource Mutual Funds Audit Committee. 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/ Patrick T. Bannigan ---------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date November 2, 2007 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/ Patrick T. Bannigan ---------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date November 2, 2007 By /s/ Jeffrey P. Fox ---------------------------------- Jeffrey P. Fox Treasurer and Principal Financial Officer Date November 2, 2007 EX-99.CODE ETH 2 c18783exv99wcodeeth.txt CODE OF ETHICS Exhibit (a)(1) Ex. 99.CODE ETH. RIVERSOURCE FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS PURPOSE OF THE CODE; COVERED OFFICERS This code of ethics ("Code") for the RiverSource Funds (collectively, "Funds," and each, "Fund") applies to the Funds' Principal Executive Officer and Principal Financial Officer (the "Covered Officers," each of whom is identified in Exhibit A) for the purpose of promoting, in connection with his or her duties: - honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; - full, fair, accurate, timely, and understandable disclosure in reports and documents that a Fund files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Funds; - compliance with laws and governmental rules and regulations applicable to the conduct of the Funds' business and their financial reporting; - the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and - accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his or her family, receives improper personal benefits as a result of his or her position with the Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions, such as the purchase or sale of securities or other property, with the Funds because of their status as "affiliated persons" of the Funds. The compliance programs and procedures of the Funds and of Ameriprise Financial, Inc. and its affiliates ("Ameriprise") are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the Funds and Ameriprise, of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties, whether formally for the Funds or for Ameriprise, or for both, be involved in establishing policies and implementing decisions that will have different effects on Ameriprise and the Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Funds and Ameriprise and is consistent with the performance by the Covered Officers of their duties as officers of the Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Funds. Each Covered Officer must: - not use his or her personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Funds whereby the Covered Officer would benefit personally to the detriment of the Funds; - not cause the Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Funds; and - not use material non-public knowledge of portfolio transactions made or contemplated for the Fund to trade personally or cause others to trade personally in contemplation of the market effect of such transactions. DISCLOSURE AND COMPLIANCE Each Covered Officer - should familiarize himself or herself with the disclosure requirements generally applicable to the Funds; - should not knowingly misrepresent, or cause others to misrepresent, facts about the Funds to others, whether within or outside the Funds, including any member of the Board of Directors or Board of Trustees of any Fund ("Boards"), auditors, governmental regulators, and representatives of self-regulatory organizations; - should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Funds and Ameriprise with the goal of promoting full, fair, accurate, timely, and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules, and regulations. REPORTING AND ACCOUNTABILITY Each Covered Officer must: - upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Boards that he or she has received, read, and understands the Code; - annually thereafter affirm to the Boards that he or she has complied with the requirements of the Code; - not retaliate against any other Covered Officer or any employee of Ameriprise for reports of potential violations that are made in good faith; and - notify the Funds' General Counsel promptly if he or she knows of any violation of this Code. Failure to do so is itself a violation of this Code. APPLYING THE CODE The Funds' General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. Any approvals or waivers sought by a Covered Officers will be considered by each Board or appropriate committee of the Board. The Funds' General Counsel - shall notify the Boards whenever any evidence of a material violation has been reported, it being understood that the Funds' General Counsel may determine whether to provide such notice immediately or at the next meetings of the Boards based on the nature of the violation; - will take all appropriate action to investigate such reported violations; - shall make a determination after the investigation and - if the Funds' General Counsel believes that no violation has occurred, the Boards will be so notified and no further action is required; - if the Funds' General Counsel believes a violation has occurred, the matter shall be reported to the Boards or the committees of the Funds affected by the potential violation for further determination; - if the Boards or the committees determine that a violation has occurred the Boards will consider appropriate action, which may include: a review of applicable policies and procedures; the appropriate modifications to such policies and procedures; the notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; - will cause to be made such disclosures as are required by SEC rules if any changes to or waivers of this Code is made by the Boards; and - shall maintain a record of each reported evidence of material violation, the response thereto, and all related correspondence for a period of not less than 10 years. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds or Ameriprise govern or purport to govern the activities of the Covered Officers, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. Ameriprise's code of ethics under Rule 17j-1 under the Investment Company Act is a separate requirement applying to the Covered Officers and others, and is not part of this Code. AMENDMENTS Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of each Fund's Board, including a majority of its independent directors. Adopted: July 9, 2003; Amended: April 12, 2006 EXHIBIT A Persons Covered by this Code of Ethics: Patrick T. Bannigan President Jeffrey P. Fox Treasurer Paula R. Meyer* William F. Truscott** * Until August 5, 2006. ** Until November 9, 2006. EX-99.CERT 3 c18783exv99wcert.txt CERTIFICATION PURSUANT TO SECTION 302 Certification Pursuant to 270.30a-2 of the Investment Company Act of 1940 I, Patrick T. Bannigan, certify that: 1. I have reviewed this report on Form N-CSR of RiverSource Diversified Income Series, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation; d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 24, 2007 /s/ Patrick T. Bannigan - ------------------------------------- Name: Patrick T. Bannigan Title: President and Principal Executive Officer Certification Pursuant to 270.30a-2 of the Investment Company Act of 1940 I, Jeffrey P. Fox, certify that: 1. I have reviewed this report on Form N-CSR of RiverSource Diversified Income Series, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation; d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 24, 2007 /s/ Jeffrey P. Fox - ------------------------------------- Name: Jeffrey P. Fox Title: Treasurer and Principal Financial Officer EX-99.906 CERT 4 c18783exv99w906cert.txt CERTIFICATION PURSUANT TO SECTION 906 CERTIFICATION RIVERSOURCE DIVERSIFIED INCOME SERIES, INC. (the Registrant) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Each of the undersigned below certifies that 1. This report on Form N-CSR of the Registrant (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: October 24, 2007 /s/ Patrick T. Bannigan ---------------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date: October 24, 2007 /s/ Jeffrey P. Fox ---------------------------------------- Jeffrey P. Fox Treasurer and Principal Financial Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO THE REGISTRANT AND WILL BE RETAINED BY THE REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Form N-CSR filed with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----