-----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, GNhRVzGYw0aPGsbUMo5XP6JCfdJ0QXMPXTMnLUhekm380TtrFKtSyGArX8phCB5Q /b+XkBD5O388FDvvTuemAg== 0000950137-08-013391.txt : 20081104 0000950137-08-013391.hdr.sgml : 20081104 20081104102041 ACCESSION NUMBER: 0000950137-08-013391 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20080831 FILED AS OF DATE: 20081104 DATE AS OF CHANGE: 20081104 EFFECTIVENESS DATE: 20081104 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: 081159451 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 c35639nvcsr.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 DIVERSIFIED BOND FUND ANNUAL REPORT FOR THE PERIOD ENDED AUGUST 31, 2008 (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. (SINGLE STRATEGY FUNDS ICON)
TABLE OF CONTENTS -------------------------------------------------------------- Your Fund at a Glance.............. 2 Manager Commentary................. 6 The Fund's Long-term Performance... 12 Fund Expenses Example.............. 14 Portfolio of Investments........... 17 Financial Statements............... 40 Notes to Financial Statements...... 46 Report of Independent Registered Public Accounting Firm........... 73 Federal Income Tax Information..... 75 Board Members and Officers......... 76 Approval of Investment Management Services Agreement............... 79 Proxy Voting....................... 81
(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. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 1 YOUR FUND AT A GLANCE ---------------------------------------------------------- FUND SUMMARY - -------------------------------------------------------------------------------- > RiverSource Diversified Bond Fund (the Fund) Class A shares increased 0.93% (excluding sales charge) for the 12 months ended Aug. 31, 2008. > The Fund underperformed its benchmark, the unmanaged Lehman Brothers Aggregate Bond Index, which gained 5.86%. > The Fund also underperformed its peer group, as represented by the Lipper Intermediate Investment Grade Index, which returned 1.78% during the same period. ANNUALIZED TOTAL RETURNS (for period ended Aug. 31, 2008) - --------------------------------------------------------------------------------
1 year 3 years 5 years 10 years - -------------------------------------------------------------------- RiverSource Diversified Bond Fund Class A (excluding sales charge) +0.93% +2.68% +3.59% +4.26% - -------------------------------------------------------------------- Lehman Brothers Aggregate Bond Index (unmanaged) +5.86% +4.26% +4.61% +5.58% - -------------------------------------------------------------------- Lipper Intermediate Investment Grade Index +1.78% +2.61% +3.66% +4.84% - --------------------------------------------------------------------
(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 table above. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. See the Average Annual Total Returns table for performance of other share classes of the Fund. 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. - -------------------------------------------------------------------------------- 2 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT - -------------------------------------------------------------------------------- STYLE MATRIX - --------------------------------------------------------------------------------
DURATION SHORT INT. LONG X HIGH X MEDIUM QUALITY LOW
Shading within the style matrix indicates areas in which the Fund is designed to generally invest. 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 may serve 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 STATISTICS - -------------------------------------------------------------------------------- Weighted average life(1) 7.52 years - -------------------------------------- Effective duration(2) 4.45 years - -------------------------------------- Weighted average bond rating(3) AA - --------------------------------------
ANNUAL OPERATING EXPENSE RATIO (as of the current prospectus) - --------------------------------------------------------------------------------
Total Net expenses(a) - ---------------------------------------- Class A 0.95% 0.83% - ---------------------------------------- Class B 1.71% 1.59% - ---------------------------------------- Class C 1.70% 1.58% - ---------------------------------------- Class I 0.55% 0.47% - ---------------------------------------- Class R2 1.34% 1.27% - ---------------------------------------- Class R3 1.08% 1.02% - ---------------------------------------- Class R4 0.85% 0.77% - ---------------------------------------- Class R5 0.59% 0.52% - ---------------------------------------- Class W 0.99% 0.92% - ----------------------------------------
(a) The Investment Manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Aug. 31, 2009, 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 (excluding fees and expenses of acquired funds) will not exceed 0.83% for Class A, 1.59% for Class B, 1.58% for Class C, 0.47% for Class I, 1.27% for Class R2, 1.02% for Class R3, 0.77% for Class R4, 0.52% for Class R5 and 0.92% for Class W. (1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) EFFECTIVE DURATION measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. There are risks associated with an investment in a bond fund, including credit risk, interest rate risk, and prepayment and extension risk. See the Fund's prospectus for information on these and other risks associated with the Fund. In general, bond prices rise when interest rates fall and vice versa. This effect is more pronounced for longer-term securities. Non-investment grade securities, commonly called "high-yield" or "junk" bonds, have more volatile prices and carry more risk to principal and income than investment grade securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 3 YOUR FUND AT A GLANCE (continued) ---------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS - --------------------------------------------------------------------------------
AT AUG. 31, 2008 SINCE Without sales charge 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION* Class A (inception 10/3/74) +0.93% +2.68% +3.59% +4.26% N/A - --------------------------------------------------------------------------- Class B (inception 3/20/95) +0.16% +1.91% +2.81% +3.47% N/A - --------------------------------------------------------------------------- Class C (inception 6/26/00) +0.16% +1.83% +2.80% N/A +3.95% - --------------------------------------------------------------------------- Class I (inception 3/4/04) +1.07% +3.03% N/A N/A +3.35% - --------------------------------------------------------------------------- Class R2 (inception 12/11/06) +0.84% N/A N/A N/A +2.05% - --------------------------------------------------------------------------- Class R3 (inception 12/11/06) +1.11% N/A N/A N/A +2.33% - --------------------------------------------------------------------------- Class R4 (inception 3/20/95) +1.03% +2.76% +3.70% +4.39% N/A - --------------------------------------------------------------------------- Class R5 (inception 12/11/06) +1.22% N/A N/A N/A +2.59% - --------------------------------------------------------------------------- Class W (inception 12/01/06) +0.82% N/A N/A N/A +2.02% - --------------------------------------------------------------------------- With sales charge Class A (inception 10/3/74) -3.87% +1.06% +2.58% +3.72% N/A - --------------------------------------------------------------------------- Class B (inception 3/20/95) -4.67% +0.67% +2.45% +3.47% N/A - --------------------------------------------------------------------------- Class C (inception 6/26/00) -0.81% +1.83% +2.80% N/A +3.95% - ---------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 4 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT - --------------------------------------------------------------------------------
AT SEPT. 30, 2008 SINCE Without sales charge 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION* Class A (inception 10/3/74) -1.59% +2.47% +2.78% +3.88% N/A - --------------------------------------------------------------------------- Class B (inception 3/20/95) -2.35% +1.70% +2.01% +3.10% N/A - --------------------------------------------------------------------------- Class C (inception 6/26/00) -2.35% +1.62% +1.96% N/A +3.71% - --------------------------------------------------------------------------- Class I (inception 3/4/04) -1.24% +2.90% N/A N/A +3.00% - --------------------------------------------------------------------------- Class R2 (inception 12/11/06) -1.66% N/A N/A N/A +1.08% - --------------------------------------------------------------------------- Class R3 (inception 12/11/06) -1.40% N/A N/A N/A +1.35% - --------------------------------------------------------------------------- Class R4 (inception 3/20/95) -1.50% +2.54% +2.90% +4.01% N/A - --------------------------------------------------------------------------- Class R5 (inception 12/11/06) -1.31% N/A N/A N/A +1.61% - --------------------------------------------------------------------------- Class W (inception 12/01/06) -1.69% N/A N/A N/A +1.06% - --------------------------------------------------------------------------- With sales charge Class A (inception 10/3/74) -6.24% +0.83% +1.80% +3.35% N/A - --------------------------------------------------------------------------- Class B (inception 3/20/95) -7.06% +0.46% +1.66% +3.10% N/A - --------------------------------------------------------------------------- Class C (inception 6/26/00) -3.29% +1.62% +1.96% N/A +3.71% - ---------------------------------------------------------------------------
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. * For classes with less than 10 years performance. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 5 MANAGER COMMENTARY ------------------------------------------------------------- Dear Shareholders, RiverSource Diversified Bond Fund (the Fund) Class A shares increased 0.93% (excluding sales charge) for the 12 months ended Aug. 31, 2008. The Fund underperformed its benchmark, the unmanaged Lehman Brothers Aggregate Bond Index (Lehman Index), which gained 5.86%. The Fund also underperformed its peer group, as represented by the Lipper Intermediate Investment Grade Index, which returned 1.78% during the same period. SIGNIFICANT PERFORMANCE FACTORS Impacting the Fund's performance most was the dominating sentiment of risk- aversion among fixed income investors during the annual period. The Fund's fiscal year began just following the advent of the credit crisis in 2007, which centered on the subprime mortgage market. As the market transitioned into 2008, ongoing declines in housing prices expanded concerns into higher quality loan segments, which eventually led to further restricted credit availability. Fixed income investors were simultaneously facing deterioration in underlying economic fundamentals SECTOR DIVERSIFICATION (at Aug. 31, 2008; % of portfolio assets) - ---------------------------------------------------------------------
Asset-Backed 1.5% - ------------------------------------------------ Commercial Mortgage-Backed 8.4% - ------------------------------------------------ Consumer Discretionary 1.6% - ------------------------------------------------ Consumer Staples 2.2% - ------------------------------------------------ Energy 2.7% - ------------------------------------------------ Financials 5.4% - ------------------------------------------------ Foreign Government 0.8% - ------------------------------------------------ Health Care 0.7% - ------------------------------------------------ Industrials 1.5% - ------------------------------------------------ Materials 0.4% - ------------------------------------------------ Mortgage-Backed 38.7% - ------------------------------------------------ Telecommunication 7.2% - ------------------------------------------------ U.S. Agency Debt 6.6% - ------------------------------------------------ U.S. Treasuries 9.9% - ------------------------------------------------ Utilities 4.3% - ------------------------------------------------ Other(1) 8.1% - ------------------------------------------------
(1) Cash & Cash Equivalents. Of the 8.1%, 0.8% is due to security lending activity and 7.3% is the Fund's cash equivalent position. - -------------------------------------------------------------------------------- 6 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT - -------------------------------------------------------------------------------- as well as the ongoing asset write-downs at commercial and investment banks. Investors sought the relative safety of Treasuries, driving Treasury prices up and yields down in dramatic fashion. Bond yields and prices move in opposite directions. Treasury Inflation-Protected Securities (TIPS) also performed well, given elevated inflation during the annual period. Agency securities fared comparatively well as higher quality assets outperformed lower quality assets during the 12 months. The performance of higher quality fixed income securities was supported by falling interest rates. During the 12-month period, the Federal Reserve (the Fed) lowered the targeted federal funds rate by a significant 325 basis points, or 3.25%, in an attempt to ease pressure in the short-term financing markets. At the end of the annual period, the targeted federal funds rate stood at 2.00%. In addition, the Fed attempted to restore confidence in the financial markets by implementing an unprecedented series of measures to provide liquidity to banks and brokers. The Fund's exposure to TIPS helped its performance, as interest rates fell while realized inflation was even higher than market expectations. This led to enhanced income being generated by the TIPS. Effective issue selection within the investment grade corporate bond sector also contributed positively to Fund results. The Fund was positioned rather defensively with only a modest weighting in financials-related corporate bonds, which continued to be pressured by mounting losses and write-downs. QUALITY BREAKDOWN (at Aug. 31, 2008; % of portfolio assets excluding cash equivalents and equities) - ------------------------------------------------------------------------
AAA bonds 67.6% - --------------------------------------------------- AA bonds 3.9% - --------------------------------------------------- A bonds 7.3% - --------------------------------------------------- BBB bonds 18.0% - --------------------------------------------------- Non-investment grade bonds 3.2% - ---------------------------------------------------
Bond ratings apply to the 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 0.1% of the bond portfolio assets were determined through internal analysis. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 7 MANAGER COMMENTARY (continued) ------------------------------------------------- Conversely, the Fund's significant exposure to non-Treasury sectors hurt performance, as Treasuries dramatically outperformed other bond sectors during the period. In particular, the Fund's exposure to commercial mortgage backed securities (CMBS), residential mortgage securities and investment-grade corporate bonds detracted from Fund performance, as these sectors lagged the Lehman Index for the 12 months. Indeed, many formerly AAA-rated structured assets were downgraded multiple notches during the period, experiencing severe downward pricing adjustments as assets tied to the housing market were reassessed by the rating agencies. The Fund's positions, though modest, in high yield corporate bonds and emerging market debt also detracted from results. Lower quality sectors overall lagged with investors' aversion to risk. CHANGES TO THE FUND'S PORTFOLIO We materially reduced the Fund's still-sizable position in CMBS. After initially being tainted by the poor performance of the residential mortgage market and price declines in associated residential mortgage-backed securities, CMBS rebounded somewhat toward the end of the period. We used that opportunity to reduce the Fund's exposure to CMBS and to redeploy the proceeds into what we viewed as attractive opportunities in investment grade corporate bonds and U.S. agency securities. We increased our allocation to agency securities, including subordinated debt, given recent developments in the government-sponsored enterprises (GSEs), such as mortgage lenders Fannie Mae and Freddie Mac. With the wide publicity these developments have received, we should note here that GSE debt represented approximately 10% of the Fund's assets at the end of the annual period, with the majority consisting of senior debt, or debt that takes priority over other debt securities sold by the issuer. In the event the issuer goes bankrupt, senior debt must be repaid before other creditors receive any payment. The Fund's portfolio turnover rate for the 12-month period, including mortgage dollar rolls, was 226%.* OUR FUTURE STRATEGY At the end of the annual period, prices of many securities in the non-Treasury sectors of the fixed income market were trading at distressed levels. However, during the 12-month period, both Congress and the Fed took meaningful policy actions that, in our view, will begin to improve economic prospects during the remainder of 2008. - -------------------------------------------------------------------------------- 8 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT - -------------------------------------------------------------------------------- The highest quality assets of the fixed income market, i.e. Treasuries, appeared overpriced at the end of August, as credit fears and the consequent flight to quality drove yields to very low levels. At the other end of the spectrum, low- quality high yield corporate bonds were much cheaper than they were a year prior, but were not exceedingly compelling considering the elevated credit risk for highly leveraged companies. We believe that the best opportunities for investment may be in the middle of the credit spectrum. Specifically, investment-grade corporate bonds and mortgage-backed securities appeared to offer notably attractive yields on a risk-adjusted basis at the end of the annual period. We intend to maintain the Fund's exposure to TIPS, which should perform well given current inflationary pressures. We expect to maintain the Fund's emphasis on non-Treasury sectors of the fixed income market over Treasuries. We intend to maintain the Fund's allocation to residential mortgage-backed securities and CMBS, as we believe prices of these high-quality mortgage assets at the end of the annual period represented significant value to the portfolio going forward. U.S. agency bonds also remained attractive, as recent federal actions signal strong support of the U.S. Treasury behind these institutions and their debt. We further intend to maintain the Fund's sizable position in investment grade corporate bonds overall, but with only modest exposure to the financial sector. We intend to maintain the Fund's defensive position in the lower-quality high yield sectors of the fixed income market in favor of opportunities in the investment grade market. Given current market conditions, our goal is to maintain an attractive yield profile, with an Investors sought the relative safety of Treasuries, driving Treasury prices up and yields down in dramatic fashion. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 9 MANAGER COMMENTARY (continued) ------------------------------------------------- emphasis on high-quality assets. As always, we will maintain a disciplined focus on individual security selection. As we expect volatility within the fixed income markets to continue through the remainder of 2008, 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. * A significant portion of the turnover was the result of "roll" transactions in the liquid derivatives and Treasury securities. In the derivative transactions, positions in expiring contracts are liquidated and simultaneously replaced with positions in new contracts with equivalent characteristics. In the Treasury transactions, existing holdings are sold to purchase newly issued securities with slightly longer maturity dates. Although these transactions affect the turnover rate of the portfolio, they do not change the risk exposure or result in material transactions costs. The remaining turnover resulted from strategic reallocations and relative value trading. After transaction costs, we expect this activity to enhance the returns on the overall Fund. - -------------------------------------------------------------------------------- 10 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT - -------------------------------------------------------------------------------- (PHOTO - JAMIE JACKSON) (PHOTO - SCOTT KIRBY) (PHOTO - TOM MURPHY) Jamie Jackson, CFA(R) Scott Kirby Tom Murphy, CFA(R) Portfolio Manager Portfolio Manager Portfolio Manager
(PHOTO - NICOLAS PIFER) (PHOTO - JENNIFER PONCE de LEON) Nicolas Pifer, CFA(R) Jennifer Ponce de Leon Portfolio Manager Portfolio Manager
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. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 11 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 9/1/98 to 8/31/08) 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 - --------------------------------------------------------------------------------
Results at Aug. 31, 2008 1 YEAR 3 YEARS 5 YEARS 10 YEARS RIVERSOURCE DIVERSIFIED BOND FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $9,613 $10,321 $11,358 $14,450 - ------------------------------------------------------------------------------------------ Average annual total return -3.87% +1.06% +2.58% +3.72% - ------------------------------------------------------------------------------------------ LEHMAN BROTHERS AGGREGATE BOND INDEX(1) Cumulative value of $10,000 $10,586 $11,333 $12,528 $17,216 - ------------------------------------------------------------------------------------------ Average annual total return +5.86% +4.26% +4.61% +5.58% - ------------------------------------------------------------------------------------------ LIPPER INTERMEDIATE INVESTMENT GRADE INDEX(2) Cumulative value of $10,000 $10,178 $10,804 $11,969 $16,049 - ------------------------------------------------------------------------------------------ Average annual total return +1.78% +2.61% +3.66% +4.84% - ------------------------------------------------------------------------------------------
Results for other share classes can be found on page 4. - -------------------------------------------------------------------------------- 12 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT - -------------------------------------------------------------------------------- VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE DIVERSIFIED BOND FUND
RIVERSOURCE DIVERSIFIED BOND FUND CLASS A LEHMAN BROTHERS LIPPER INTERMEDIATE (INCLUDES SALES AGGREGATE BOND INVESTMENT GRADE CHARGE) ($14,450) INDEX(1) ($17,216) INDEX(2) ($16,049) ----------------------- ------------------ ------------------- '98 $ 9,525 $10,000 $10,000 '99 9,683 10,080 10,044 '00 10,135 10,842 10,705 '01 11,197 12,181 12,023 '02 11,548 13,169 12,726 '03 12,115 13,743 13,411 '04 12,786 14,586 14,234 '05 13,346 15,191 14,858 '06 13,565 15,451 15,098 '07 14,317 16,263 15,769 '08 14,450 17,216 16,049
(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. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 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 expense ratio of each of the acquired funds as of the acquired fund's 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, 2008. 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 -- 2008 ANNUAL REPORT - --------------------------------------------------------------------------------
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED MARCH 1, 2008 AUG. 31, 2008 THE PERIOD(A) EXPENSE RATIO - ------------------------------------------------------------------------------------------ Class A - ------------------------------------------------------------------------------------------ Actual(b) $1,000 $ 976.60 $4.39(c) .89% - ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.49 $4.48(c) .89% - ------------------------------------------------------------------------------------------ Class B - ------------------------------------------------------------------------------------------ Actual(b) $1,000 $ 972.90 $8.12(c) 1.65% - ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.70 $8.30(c) 1.65% - ------------------------------------------------------------------------------------------ Class C - ------------------------------------------------------------------------------------------ Actual(b) $1,000 $ 972.90 $8.07(c) 1.64% - ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.75 $8.25(c) 1.64% - ------------------------------------------------------------------------------------------ Class I - ------------------------------------------------------------------------------------------ Actual(b) $1,000 $ 976.30 $2.61(c) .53% - ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,022.29 $2.67(c) .53% - ------------------------------------------------------------------------------------------ Class R2 - ------------------------------------------------------------------------------------------ Actual(b) $1,000 $ 975.90 $6.60(c) 1.34% - ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,018.25 $6.74(c) 1.34% - ------------------------------------------------------------------------------------------ Class R3 - ------------------------------------------------------------------------------------------ Actual(b) $1,000 $ 977.10 $5.42(c) 1.10% - ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,019.45 $5.54(c) 1.10% - ------------------------------------------------------------------------------------------ Class R4 - ------------------------------------------------------------------------------------------ Actual(b) $1,000 $ 977.10 $3.80(c) .77% - ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,021.09 $3.88(c) .77% - ------------------------------------------------------------------------------------------ Class R5 - ------------------------------------------------------------------------------------------ Actual(b) $1,000 $ 978.10 $2.86(c) .58% - ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,022.04 $2.92(c) .58% - ------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 15 FUND EXPENSES EXAMPLE (continued) ----------------------------------------------
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED MARCH 1, 2008 AUG. 31, 2008 THE PERIOD(A) EXPENSE RATIO - ------------------------------------------------------------------------------------------ Class W - ------------------------------------------------------------------------------------------ Actual(b) $1,000 $ 976.10 $4.83(c) .98% - ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.04 $4.94(c) .98% - ------------------------------------------------------------------------------------------
(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 182/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended Aug. 31, 2008: -2.34% for Class A, -2.71% for Class B, -2.71% for Class C, -2.37% for Class I, -2.41% for Class R2, -2.29% for Class R3, -2.29% for Class R4, -2.19% for Class R5 and -2.39% 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, 2009, unless sooner terminated at the discretion of Fund's Board, such that net expenses (excluding interest and fee expenses related to the Fund's participation in certain inverse floater programs and fees and expenses of acquired funds), will not exceed 0.83% for Class A, 1.59% for Class B, 1.58% for Class C, 0.47% for Class I, 1.27% for Class R2, 1.02% for Class R3, 0.77% for Class R4, 0.52% for Class R5 and 0.92% for Class W. Any amounts waived will not be reimbursed by the Fund. This change was effective Sept. 1, 2008. Had this change been in place the entire six month period ended Aug. 31, 2008, the actual expenses paid would have been $4.09 for Class A, $7.82 for Class B, $7.77 for Class C, $2.32 for Class I, $6.26 for Class R2, $5.03 for Class R3, $2.56 for Class R5 and $4.53 for Class W; the hypothetical expenses paid would have been $4.18 for Class A, $8.00 for Class B, $7.95 for Class C, $2.37 for Class I, $6.39 for Class R2, $5.14 for Class R3, $2.62 for Class R5 and $4.63 for Class W. The actual and hypothetical expenses paid for Class R4 would have been the same as those expenses presented in the table above. - -------------------------------------------------------------------------------- 16 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT PORTFOLIO OF INVESTMENTS ------------------------------------------------------- AUG. 31, 2008 (Percentages represent value of investments compared to net assets) INVESTMENTS IN SECURITIES
BONDS (102.1%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) FOREIGN AGENCIES (0.2%)(C) Pemex Project Funding Master Trust 03-01-18 5.75% $1,790,000(d) $1,758,593 06-15-35 6.63 2,543,000 2,510,342 Petroleos de Venezuela 04-12-17 5.25 3,534,000 2,373,965 ------------ Total 6,642,900 - ------------------------------------------------------------------------------------- SOVEREIGN (0.7%)(C) Govt of Ukraine Sr Unsecured 11-14-17 6.75 1,670,000(d) 1,403,451 Republic of Argentina 09-12-13 7.00 2,762,000 2,078,405 Republic of Argentina Sr Unsecured 12-15-35 0.00 3,350,000(e) 328,300 Republic of Colombia 01-27-17 7.38 1,495,000 1,644,500 09-18-37 7.38 1,320,000 1,446,720 Republic of El Salvador 06-15-35 7.65 1,313,000(d) 1,352,390 Republic of Indonesia Sr Unsecured 01-17-18 6.88 742,000(d) 742,928 10-12-35 8.50 987,000(d) 1,058,558 01-17-38 7.75 850,000(d) 841,500 Republic of Philippines 01-15-16 8.00 425,000 468,563 01-14-31 7.75 1,979,000 2,167,004 Republic of Turkey 09-26-16 7.00 450,000 460,688 04-03-18 6.75 1,429,000 1,425,428 03-17-36 6.88 3,506,000 3,264,962 Republic of Uruguay 05-17-17 9.25 678,000 796,650 Republic of Venezuela 02-26-16 5.75 714,000 551,565 05-07-23 9.00 1,600,000 1,386,400 Republic of Venezuela Sr Unsecured 10-08-14 8.50 715,000 664,950 Republica Orient Uruguay Sr Unsecured 03-21-36 7.63 1,592,000 1,611,900 Russian Federation 03-31-30 7.50 973,180(d) 1,083,879 ------------ Total 24,778,741 - ------------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATIONS & AGENCIES (18.4%) Federal Farm Credit Bank 10-10-08 4.25 660,000 661,286 10-17-12 4.50 1,060,000 1,086,026 Federal Home Loan Bank 09-12-08 4.25 2,215,000 2,216,473 Federal Home Loan Mtge Corp 03-15-09 5.75 170,000 172,429 05-28-10 2.38 1,160,000 1,145,631 07-17-15 4.38 75,935,000 76,163,337 12-14-18 5.00 31,666,000 25,780,621 03-15-31 6.75 13,360,000 16,344,718 04-16-37 6.00 46,875,000 46,144,172 Federal Natl Mtge Assn 01-02-14 5.13 46,467,000 42,096,546 04-15-15 5.00 37,060,000 38,549,627 07-15-37 5.63 16,325,000 17,210,185 Overseas Private Investment Series 1996A (U.S. Govt Guaranty) 09-15-08 6.99 555,555 557,675 U.S. Treasury 06-30-10 2.88 6,195,000 6,260,339 07-31-10 2.75 10,395,000(p) 10,479,459 08-31-10 2.38 30,135,000(g) 30,139,701 07-31-13 3.38 38,800,000(p) 39,330,474 08-31-13 3.13 69,060,000(g) 69,151,712 08-15-18 4.00 41,010,000 41,634,746
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 17
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) U.S. GOVERNMENT OBLIGATIONS & AGENCIES (CONT.) 02-15-26 6.00% $10,300,000 $12,251,366 02-15-38 4.38 11,950,000 11,865,047 U.S. Treasury Inflation-Indexed Bond 01-15-14 2.00 65,880,367(m) 68,362,554 01-15-15 1.63 112,195,300(m) 113,880,016 ------------ Total 671,484,140 - ------------------------------------------------------------------------------------- ASSET-BACKED (1.7%) AmeriCredit Automobile Receivables Trust Series 2007-DF Cl A3A (FSA) 07-06-12 5.49 7,000,000(h) 6,857,816 Capital Auto Receivables Asset Trust Series 2006-SN1A Cl D 04-20-11 6.15 4,775,000(d) 4,434,940 Countrywide Asset-backed Ctfs Series 2005-10 Cl AF6 02-25-36 4.92 1,960,000 1,639,016 Countrywide Asset-backed Ctfs Series 2006-15 Cl A3 10-25-46 5.69 5,750,000 4,648,034 Countrywide Asset-backed Ctfs Series 2006-4 Cl 1A1M 07-25-36 2.73 1,701,109(i) 1,445,565 Countrywide Asset-backed Ctfs Series 2007-7 Cl 2A2 10-25-37 2.63 9,250,000(i) 7,155,744 CPS Auto Trust Series 2007-A Cl A3 (MBIA) 09-15-11 5.04 4,149,997(d,h) 3,972,525 Dunkin Securitization Series 2006-1 Cl A2 (AMBAC) 06-20-31 5.78 9,650,000(d,h) 8,445,004 Keycorp Student Loan Trust Series 2003-A Cl 2A2 (MBIA) 10-25-25 3.11 1,421,555(h,i) 1,388,238 MASTR Asset Backed Securities Trust Series 2006-HE1 Cl A2 01-25-36 2.61 1,425,467(i) 1,411,435 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-2 Cl AIO 08-25-11 6.00 9,525,000(k) 1,572,016 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-3 Cl AIO 01-25-12 5.88 15,000,000(k) 2,990,625 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-4 Cl AIO 02-27-12 6.35 11,700,000(k) 1,608,750 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-2 Cl AIO 07-25-12 29.69 6,800,000(k) 1,062,160 Renaissance Home Equity Loan Trust Series 2005-4 Cl A3 02-25-36 5.57 3,908,601 3,814,198 Renaissance Home Equity Loan Trust Series 2007-2 Cl M4 06-25-37 6.31 1,500,000 154,899 Renaissance Home Equity Loan Trust Series 2007-2 Cl M5 06-25-37 6.66 980,000 89,275 Renaissance Home Equity Loan Trust Series 2007-2 Cl M6 06-25-37 7.01 1,435,000 115,951 Residential Asset Securities Series 2006-KS1 Cl A2 02-25-36 2.61 226,514(i) 225,665 Residential Asset Securities Series 2007-KS3 Cl AI2 04-25-37 2.65 1,050,000(i) 907,034 SBA CMBS Trust Series 2006-1A Cl B 11-15-36 5.45 4,400,000(d) 4,360,127 Triad Auto Receivables Owner Trust Series 2007-B Cl A3A (FSA) 10-12-12 5.24 2,135,000(h) 2,118,915 ------------ Total 60,417,932 - ------------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (9.4%)(F) Banc of America Commercial Mtge Series 2007-1 Cl A3 01-15-49 5.45 13,425,000 12,498,974
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 18 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT
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% $1,830,278 $1,788,309 Bear Stearns Commercial Mtge Securities Series 2004-PWR5 Cl A3 07-11-42 4.57 325,000 316,484 Bear Stearns Commercial Mtge Securities Series 2007-PW16 Cl A1 06-11-40 5.59 13,408,696 13,201,506 Bear Stearns Commercial Mtge Securities Series 2007-T26 Cl A4 01-12-45 5.47 6,425,000 5,793,043 CDC Commercial Mtge Trust Series 2002-FX1 Cl A2 11-15-30 5.68 12,775,000 12,826,883 Citigroup Commercial Mtge Trust Series 2006-C5 Cl A4 10-15-49 5.43 3,150,000 2,876,949 Citigroup Commercial Mtge Trust Series 2007-C6 Cl A4 12-10-49 5.89 12,800,000 11,583,795 Citigroup/Deutsche Bank Commercial Mtge Trust Series 2005-CD1 Cl ASB 07-15-44 5.40 3,225,000 3,136,137 Commercial Mtge Acceptance Series 1999-C1 Cl A2 06-15-31 7.03 5,647,317 5,698,094 Commercial Mtge Pass-Through Ctfs Series 2006-CN2A Cl BFL 02-05-19 2.77 2,700,000(d,i) 2,608,717 Credit Suisse Mtge Capital Ctfs Series 2007-C3 Cl A4 06-15-39 5.91 6,400,000 5,831,624 CS First Boston Mtge Securities Series 2001-CP4 Cl A4 12-15-35 6.18 7,400,000 7,598,291 CS First Boston Mtge Securities Series 2003-CPN1 Cl A2 03-15-35 4.60 3,800,000 3,634,508 CS First Boston Mtge Securities Series 2004-C2 Cl A1 05-15-36 3.82 1,606,734 1,552,066 Federal Natl Mtge Assn #386558 10-01-10 4.85 466,887 469,912 Federal Natl Mtge Assn #555806 10-01-13 5.10 441,334 442,158 Federal Natl Mtge Assn #725217 02-01-14 4.78 1,010,110 998,293 Federal Natl Mtge Assn #735029 09-01-13 5.32 356,235 359,452 GE Capital Commercial Mtge Series 2005-C1 Cl A5 06-10-48 4.77 400,000 370,701 General Electric Capital Assurance Series 2003-1 Cl A3 05-12-35 4.77 2,994,395(d) 2,988,762 General Electric Capital Assurance Series 2003-1 Cl A4 05-12-35 5.25 3,100,000(d) 3,044,774 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05-15-33 6.30 8,000,000 8,023,968 Greenwich Capital Commercial Funding Series 2004-GG1 Cl A5 06-10-36 4.88 3,550,000 3,497,645 Greenwich Capital Commercial Funding Series 2007-GG9 Cl A4 03-10-39 5.44 16,350,000 14,638,560 Greenwich Capital Commercial Funding Series 2007-GG9 Cl AM 03-10-39 5.48 5,950,000 4,972,426 GS Mtge Securities II Series 2006-GG6 Cl A4 04-10-38 5.55 375,000 348,594 GS Mtge Securities II Series 2007-EOP Cl J 03-06-20 3.31 9,050,000(d,i) 8,296,660 GS Mtge Securities II Series 2007-GG10 Cl F 08-10-45 5.99 9,800,000 4,402,346 JPMorgan Chase Commercial Mtge Securities Series 2003-LN1 Cl A1 10-15-37 4.13 3,074,315 2,981,696 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A1 03-12-39 3.97 1,674,178 1,607,008 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A2 03-12-39 4.77 7,419,000 7,130,997 JPMorgan Chase Commercial Mtge Securities Series 2004-C2 Cl A2 05-15-41 5.25 425,000 419,008
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 19
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) COMMERCIAL MORTGAGE-BACKED (CONT.) JPMorgan Chase Commercial Mtge Securities Series 2004-CBX Cl A3 01-12-37 4.18% $4,150,000 $4,111,276 JPMorgan Chase Commercial Mtge Securities Series 2004-LN2 Cl A1 07-15-41 4.48 8,626,883 8,417,795 JPMorgan Chase Commercial Mtge Securities Series 2005-LDP4 Cl AM 10-15-42 5.00 14,900,000 13,301,109 JPMorgan Chase Commercial Mtge Securities Series 2006-LDP6 Cl A4 04-15-43 5.48 5,200,000 4,793,065 JPMorgan Chase Commercial Mtge Securities Series 2006-LDP6 Cl ASB 04-15-43 5.49 9,225,000 8,837,758 JPMorgan Chase Commercial Mtge Securities Series 2006-LDP8 Cl A4 05-15-45 5.40 50,000 45,624 JPMorgan Chase Commercial Mtge Securities Series 2007-CB20 Cl A4 02-12-51 5.79 6,000,000 5,449,132 JPMorgan Chase Commercial Mtge Securities Series 2007-CB20 Cl AM 02-12-51 6.11 11,225,000 9,670,134 JPMorgan Chase Commercial Mtge Securities Series 2007-CB20 Cl E 02-12-51 6.40 4,725,000(d) 2,409,300 LB-UBS Commercial Mtge Trust Series 2004-C2 Cl A3 03-15-29 3.97 4,700,000 4,514,021 LB-UBS Commercial Mtge Trust Series 2006-C4 Cl AAB 06-15-32 6.06 5,100,000 4,949,500 LB-UBS Commercial Mtge Trust Series 2006-C6 Cl A4 09-15-39 5.37 5,500,000 5,018,693 LB-UBS Commercial Mtge Trust Series 2007-C1 Cl A4 02-15-40 5.42 5,300,000 4,702,596 LB-UBS Commercial Mtge Trust Series 2007-C7 Cl A3 09-15-45 5.87 6,950,000 6,305,182 LB-UBS Commercial Mtge Trust Series 2008-C1 Cl A1 04-15-41 5.61 1,207,163 1,207,815 LB-UBS Commercial Mtge Trust Series 2008-C1 Cl A2 04-15-41 6.32 4,450,000 4,145,629 Merrill Lynch Mtge Trust Series 2005-CKI1 Cl A1 11-12-37 5.08 1,012,516 1,011,487 Merrill Lynch Mtge Trust Series 2008-C1 Cl A1 02-12-51 4.71 2,527,550 2,485,489 Morgan Stanley Capital I Series 2003-T11 Cl A2 06-13-41 4.34 2,444,282 2,427,599 Morgan Stanley Capital I Series 2004-HQ4 Cl A5 04-14-40 4.59 5,200,000 5,053,953 Morgan Stanley Capital I Series 2006-T23 Cl AAB 08-12-41 5.97 3,675,000 3,568,412 Morgan Stanley Capital I Series 2007-IQ15 Cl A4 06-11-49 6.08 6,200,000 5,768,424 TIAA Seasoned Commercial Mtge Trust Series 2007-C4 Cl A3 08-15-39 6.09 9,475,000 9,395,438 Wachovia Bank Commercial Mtge Trust Series 2003-C7 Cl A2 10-15-35 5.08 15,750,000(d) 15,217,560 Wachovia Bank Commercial Mtge Trust Series 2003-C8 Cl A2 11-15-35 3.89 870,000 867,847 Wachovia Bank Commercial Mtge Trust Series 2005-C20 Cl A5 07-15-42 5.09 5,017,000 4,914,957 Wachovia Bank Commercial Mtge Trust Series 2006-C24 Cl A3 03-15-45 5.56 29,675,000 27,571,981 Wachovia Bank Commercial Mtge Trust Series 2006-C24 Cl APB 03-15-45 5.58 3,200,000 3,063,492 Wachovia Bank Commercial Mtge Trust Series 2006-C27 Cl APB 07-15-45 5.73 5,475,000 5,251,792 Wachovia Bank Commercial Mtge Trust Series 2006-C29 Cl A4 11-15-48 5.31 1,575,000 1,421,539
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 20 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) COMMERCIAL MORTGAGE-BACKED (CONT.) Wachovia Bank Commercial Mtge Trust Series 2006-C29 Cl AM 11-15-48 5.34% $11,755,000 $10,103,131 ------------ Total 341,940,070 - ------------------------------------------------------------------------------------- MORTGAGE-BACKED (43.3%)(F,O) Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-12 Cl 2A1 03-25-36 5.68 7,225,443(j) 5,255,905 Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2006-1 Cl 2A1 03-25-36 5.91 8,041,424(j) 6,885,007 Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2007-1 Cl 3A21 03-25-37 6.18 6,133,351(j) 4,951,350 American Home Mtge Assets Collateralized Mtge Obligation Series 2007-2 Cl A2A 03-25-47 2.64 830,216(j) 322,415 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 1A1 01-25-34 6.00 6,249,047 5,216,253 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2004-3 Cl 1A1 04-25-34 6.00 7,998,107 6,475,972 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2006-9 Cl 1CB1 01-25-37 6.00 16,095,378 11,116,500 Banc of America Funding Collateralized Mtge Obligation Series 2006-2 Cl N1 11-25-46 7.25 329,513(d,n) 65,594 Banc of America Funding Collateralized Mtge Obligation Series 2006-A Cl 3A2 02-20-36 5.86 5,739,705(j) 4,484,579 Banc of America Funding Collateralized Mtge Obligation Series 2007-8 Cl 1A1 10-25-37 6.00 1,957,522 1,351,990 Banc of America Mtge Securities Collateralized Mtge Obligation Series 2005-9 Cl 3A3 10-25-20 5.00 26,354,564 24,852,560 Banc of America Mtge Securities Collateralized Mtge Obligation Series 2007-3 Cl 1A2 09-25-37 6.00 5,286,520 4,016,106 Barclays Capital LLC Trust Collateralized Mtge Obligation Series 2007-AA4 Cl 11A1 06-25-47 6.21 5,472,462(j) 4,057,126 Bear Stearns Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-8 Cl A4 08-25-35 5.10 6,475,000(d,j) 5,885,411 Bear Stearns Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2007-5 Cl 3A1 08-25-47 5.98 13,700,961(j) 11,551,167 ChaseFlex Trust Collateralized Mtge Obligation Series 2005-2 Cl 2A2 06-25-35 6.50 1,788,676 1,571,241 Citicorp Mtge Securities Collateralized Mtge Obligation Series 2005-5 Cl 3A1 08-25-35 5.00 7,320,888 6,177,285 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-8CB Cl A13 05-25-37 7.73 5,786,544(k) 862,773 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11T1 Cl A1 07-25-18 4.75 3,337,137 3,141,080 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-20CB Cl 1A1 10-25-33 5.50 15,169,510 12,428,332 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-50CB Cl 2A1 11-25-35 6.00 11,517,903 7,379,107
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 21
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 2A3 11-25-35 5.50% $5,296,534 $5,032,013 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 3A7 11-25-35 5.50 5,167,624 4,924,655 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-64CB Cl 1A1 12-25-35 5.50 8,683,943 7,718,531 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-6CB Cl 1A1 04-25-35 7.50 4,785,587 4,453,322 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-85CB Cl 2A2 02-25-36 5.50 2,407,638 2,055,056 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-22R Cl 1A2 05-25-36 6.00 6,965,812 6,389,492 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-2CB Cl A11 03-25-36 6.00 8,067,865 5,322,274 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-31CB Cl A16 11-25-36 6.00 9,660,000 8,168,385 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-43CB Cl 1A4 02-25-37 6.00 11,107,879 10,076,704 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-45T1 Cl 2A5 02-25-37 6.00 14,510,888 9,572,659 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-22 Cl 2A16 09-25-37 6.50 16,317,597 11,070,478 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-25 Cl 1A1 11-25-37 6.50 18,169,853 12,865,108 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OA9 Cl A2 06-25-47 2.82 920,990(i) 395,098 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OH3 Cl A3 09-25-47 2.97 16,016,234(i) 5,203,221 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-27 Cl 2A1 12-25-35 5.50 14,561,423 12,658,200 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-HYB8 Cl 4A1 12-20-35 5.61 1,302,977(j) 854,477 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00 5,967,831(d) 5,556,349 Countrywide Home Loans Collateralized Mtge Obligation Series 2006-HYB1 Cl 1A1 03-20-36 5.34 3,827,080(j) 2,545,847 Countrywide Home Loans Collateralized Mtge Obligation Series 2006-HYB1 Cl 2A1 03-20-36 5.33 6,356,221(j) 4,727,698 Countrywide Home Loans Collateralized Mtge Obligation Series 2007-17 Cl 2A1 10-25-37 6.50 17,817,334 15,644,455 Countrywide Home Loans Collateralized Mtge Obligation Series 2007-HY3 Cl 4A1 06-25-47 6.00 10,890,722(j) 9,495,871 CS First Boston Mtge Securities Collateralized Mtge Obligation Series 2003-29 Cl 8A1 11-25-18 6.00 1,677,373 1,463,508
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 22 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Deutsche Bank Alternate Mtge Loan Trust Collateralized Mtge Obligation Series 2007-AR3 Cl 2A1 06-25-37 2.58% $312,401(i) $296,439 Downey Savings & Loan Assn Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR5 Cl X1 08-19-45 15.32 28,071,048(k) 100,880 Federal Home Loan Mtge Corp 09-01-38 6.00 30,000,000(g) 30,243,750 09-01-38 6.50 56,000,000(g) 57,522,527 Federal Home Loan Mtge Corp #170216 03-01-17 8.50 6,391 6,950 Federal Home Loan Mtge Corp #1J1445 01-01-37 5.89 13,154,138(j) 13,403,751 Federal Home Loan Mtge Corp #284190 01-01-17 8.00 223 240 Federal Home Loan Mtge Corp #290970 04-01-17 8.00 8,364 8,954 Federal Home Loan Mtge Corp #295114 06-01-17 8.50 3,450 3,752 Federal Home Loan Mtge Corp #540861 09-01-19 8.50 31,870 34,843 Federal Home Loan Mtge Corp #A00304 04-01-21 9.00 38,637 42,395 Federal Home Loan Mtge Corp #A12692 10-01-32 6.00 69,153 70,433 Federal Home Loan Mtge Corp #A13854 09-01-33 6.00 119,650 121,679 Federal Home Loan Mtge Corp #B10254 10-01-18 5.50 357,460 363,508 Federal Home Loan Mtge Corp #B12280 02-01-19 5.50 200,846 204,244 Federal Home Loan Mtge Corp #C00103 03-01-22 8.50 96,020 105,593 Federal Home Loan Mtge Corp #C00144 08-01-22 8.50 81,489 89,682 Federal Home Loan Mtge Corp #C00356 08-01-24 8.00 318,281 344,630 Federal Home Loan Mtge Corp #C00666 10-01-28 7.00 40,403 42,604 Federal Home Loan Mtge Corp #C53878 12-01-30 5.50 1,444,617 1,435,183 Federal Home Loan Mtge Corp #C59161 10-01-31 6.00 114,946 116,710 Federal Home Loan Mtge Corp #C62993 01-01-32 6.50 855,411 886,471 Federal Home Loan Mtge Corp #C63552 01-01-32 6.50 1,489,778 1,552,099 Federal Home Loan Mtge Corp #C64703 03-01-32 6.50 828,376 863,078 Federal Home Loan Mtge Corp #C67723 06-01-32 7.00 672,674 711,178 Federal Home Loan Mtge Corp #C77372 03-01-33 6.00 231,132 235,097 Federal Home Loan Mtge Corp #C78031 04-01-33 5.50 8,051,783 7,997,992 Federal Home Loan Mtge Corp #C79930 06-01-33 5.50 6,716,636 6,660,181 Federal Home Loan Mtge Corp #C90767 12-01-23 6.00 6,238,226 6,368,786 Federal Home Loan Mtge Corp #D96300 10-01-23 5.50 4,604,618 4,609,999 Federal Home Loan Mtge Corp #E01127 02-01-17 6.50 906,795 946,899 Federal Home Loan Mtge Corp #E01419 05-01-18 5.50 3,420,444 3,480,548 Federal Home Loan Mtge Corp #E74288 12-01-13 6.00 99,845 102,245 Federal Home Loan Mtge Corp #E79810 11-01-14 7.50 736,046 773,115 Federal Home Loan Mtge Corp #E90216 05-01-17 6.00 1,110,595 1,137,380 Federal Home Loan Mtge Corp #E98725 08-01-18 5.00 8,020,426 8,025,732 Federal Home Loan Mtge Corp #E99684 10-01-18 5.00 8,340,405 8,352,522 Federal Home Loan Mtge Corp #G00286 02-01-25 8.00 132,383 143,342 Federal Home Loan Mtge Corp #G01108 04-01-30 7.00 2,468,995 2,598,391 Federal Home Loan Mtge Corp #G01410 04-01-32 7.00 262,085 275,372 Federal Home Loan Mtge Corp #G01441 07-01-32 7.00 2,332,139 2,450,368 Federal Home Loan Mtge Corp #G01535 04-01-33 6.00 9,004,806 9,162,377 Federal Home Loan Mtge Corp #G02757 06-01-36 5.00 26,313,253 25,365,636 Federal Home Loan Mtge Corp #G03419 07-01-37 6.00 9,110,161 9,193,016
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 23
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #G11302 07-01-17 7.00% $2,552,190 $2,675,732 Federal Home Loan Mtge Corp #G30225 02-01-23 6.00 8,606,539 8,794,701 Federal Home Loan Mtge Corp #H01724 09-01-37 6.00 1,659,558 1,665,197 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 237 Cl IO 05-15-36 6.60 4,053,993(k) 1,094,895 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2795 Cl IY 07-15-17 20.00 308,309(k) 25,447 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2817 Cl SA 06-15-32 45.20 6,354,332(k) 626,431 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 1241 Cl K 03-15-22 7.00 252,612 252,612 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2576 Cl KJ 02-15-33 5.50 8,434,992 8,581,319 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2641 Cl KC 01-15-18 6.50 3,112,941 3,255,520 Federal Natl Mtge Assn 09-01-23 4.50 9,000,000(g) 8,715,942 09-01-38 5.00 46,500,000(g) 44,698,124 09-01-38 5.50 134,000,000(g) 132,324,999 09-01-38 6.00 67,400,000(g) 68,052,970 09-01-38 6.50 30,500,000(g) 31,367,358 09-01-38 7.00 30,000,000(g) 31,378,139 Federal Natl Mtge Assn #125479 04-01-27 7.50 199,176 214,970 Federal Natl Mtge Assn #190899 04-01-23 8.50 289,289 310,684 Federal Natl Mtge Assn #190944 05-01-24 6.00 4,840,231 4,920,189 Federal Natl Mtge Assn #190988 06-01-24 9.00 239,146 259,338 Federal Natl Mtge Assn #231309 09-01-23 6.50 68,322 71,134 Federal Natl Mtge Assn #231310 09-01-23 6.50 359,234 374,018 Federal Natl Mtge Assn #250330 09-01-25 8.00 219,832 238,855 Federal Natl Mtge Assn #250495 03-01-26 7.00 487,682 516,305 Federal Natl Mtge Assn #250765 12-01-26 8.00 176,256 191,321 Federal Natl Mtge Assn #251116 08-01-27 8.00 221,974 241,001 Federal Natl Mtge Assn #252440 05-01-29 7.00 170,125 179,365 Federal Natl Mtge Assn #252498 06-01-29 7.00 4,951 5,220 Federal Natl Mtge Assn #253883 08-01-16 6.00 2,225,407 2,290,875 Federal Natl Mtge Assn #254236 03-01-17 6.50 1,307,539 1,360,094 Federal Natl Mtge Assn #254383 06-01-32 7.50 309,364 332,064 Federal Natl Mtge Assn #254587 12-01-22 5.50 487,513 489,016 Federal Natl Mtge Assn #254802 07-01-18 4.50 2,393,097 2,359,521 Federal Natl Mtge Assn #254916 09-01-23 5.50 8,928,742 8,953,354 Federal Natl Mtge Assn #255788 06-01-15 5.50 2,760,856 2,818,044 Federal Natl Mtge Assn #256135 02-01-36 5.50 3,478,954 3,404,052 Federal Natl Mtge Assn #257016 12-01-37 7.00 1,728,291 1,809,700 Federal Natl Mtge Assn #268071 01-01-24 6.50 99,740 103,844 Federal Natl Mtge Assn #303226 02-01-25 8.00 90,305 98,055 Federal Natl Mtge Assn #313049 08-01-11 8.50 349,200 364,056 Federal Natl Mtge Assn #323715 05-01-29 6.00 385,236 392,592 Federal Natl Mtge Assn #323933 09-01-29 7.00 3,425,402 3,611,447
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 24 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #408207 01-01-28 6.50% $117,023 $122,223 Federal Natl Mtge Assn #455791 01-01-29 6.50 408,167 424,041 Federal Natl Mtge Assn #489888 05-01-29 6.50 1,720,368 1,786,198 Federal Natl Mtge Assn #493945 04-01-29 6.50 75,944 78,974 Federal Natl Mtge Assn #496029 01-01-29 6.50 1,823,075 1,893,974 Federal Natl Mtge Assn #518159 09-01-14 7.00 306,337 321,307 Federal Natl Mtge Assn #545008 06-01-31 7.00 2,137,570 2,266,607 Federal Natl Mtge Assn #545216 03-01-09 5.89 84,321 84,122 Federal Natl Mtge Assn #545342 04-01-13 7.00 346,683 349,198 Federal Natl Mtge Assn #545684 05-01-32 7.50 259,194 279,000 Federal Natl Mtge Assn #545868 08-01-32 7.00 88,255 93,406 Federal Natl Mtge Assn #545869 07-01-32 6.50 1,833,132 1,908,598 Federal Natl Mtge Assn #545885 08-01-32 6.50 3,261,641 3,416,568 Federal Natl Mtge Assn #545910 08-01-17 6.00 3,770,004 3,883,931 Federal Natl Mtge Assn #555340 04-01-33 5.50 247,592 246,338 Federal Natl Mtge Assn #555343 08-01-17 6.00 3,633,709 3,739,470 Federal Natl Mtge Assn #555375 04-01-33 6.00 19,873,068 20,247,571 Federal Natl Mtge Assn #555458 05-01-33 5.50 18,213,354 18,008,453 Federal Natl Mtge Assn #555528 04-01-33 6.00 14,084,461 14,313,789 Federal Natl Mtge Assn #555734 07-01-23 5.00 7,252,550 7,107,824 Federal Natl Mtge Assn #555794 09-01-28 7.50 728,307 786,404 Federal Natl Mtge Assn #567840 10-01-30 7.00 1,109,525 1,169,788 Federal Natl Mtge Assn #582154 05-01-31 6.50 93,059 96,533 Federal Natl Mtge Assn #587859 12-01-16 5.50 3,407,989 3,474,166 Federal Natl Mtge Assn #597374 09-01-31 7.00 702,853 745,229 Federal Natl Mtge Assn #606882 10-01-31 7.00 822,492 866,906 Federal Natl Mtge Assn #611831 02-01-31 7.50 31,889 34,405 Federal Natl Mtge Assn #615135 11-01-16 6.00 230,505 237,286 Federal Natl Mtge Assn #634650 04-01-32 7.50 131,733 141,399 Federal Natl Mtge Assn #638969 03-01-32 5.50 1,416,263 1,409,670 Federal Natl Mtge Assn #643362 04-01-17 6.50 572,298 595,301 Federal Natl Mtge Assn #646147 06-01-32 7.00 2,701,496 2,864,236 Federal Natl Mtge Assn #646446 06-01-17 6.50 917,280 954,149 Federal Natl Mtge Assn #649068 06-01-17 6.50 1,564,646 1,640,137 Federal Natl Mtge Assn #649263 08-01-17 6.50 1,586,631 1,663,020 Federal Natl Mtge Assn #650009 09-01-31 7.50 79,187 85,434 Federal Natl Mtge Assn #654208 10-01-32 6.50 1,853,529 1,922,137 Federal Natl Mtge Assn #654682 10-01-32 6.00 1,159,594 1,182,628 Federal Natl Mtge Assn #654689 11-01-32 6.00 1,163,411 1,185,953 Federal Natl Mtge Assn #656908 09-01-32 6.50 1,506,693 1,570,693 Federal Natl Mtge Assn #661815 10-01-32 6.00 121,029 123,317 Federal Natl Mtge Assn #662061 09-01-32 6.50 2,377,736 2,465,748 Federal Natl Mtge Assn #667604 10-01-32 5.50 253,161 251,508 Federal Natl Mtge Assn #667787 02-01-18 5.50 1,343,533 1,367,103 Federal Natl Mtge Assn #670382 09-01-32 6.00 9,050,237 9,197,596 Federal Natl Mtge Assn #670387 08-01-32 7.00 1,136,925 1,198,280
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 25
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #677089 01-01-33 5.50% $542,305 $538,764 Federal Natl Mtge Assn #678028 09-01-17 6.00 4,506,465 4,637,629 Federal Natl Mtge Assn #678065 02-01-33 6.50 370,007 385,684 Federal Natl Mtge Assn #678937 01-01-18 5.50 2,180,741 2,222,299 Federal Natl Mtge Assn #678941 02-01-18 5.50 2,665,197 2,715,753 Federal Natl Mtge Assn #679095 04-01-18 5.00 4,443,271 4,456,629 Federal Natl Mtge Assn #680961 01-01-33 6.00 487,822 497,022 Federal Natl Mtge Assn #681080 02-01-18 5.00 858,032 860,612 Federal Natl Mtge Assn #681166 04-01-32 6.50 321,601 333,605 Federal Natl Mtge Assn #681400 03-01-18 5.50 4,143,275 4,218,021 Federal Natl Mtge Assn #682825 01-01-33 6.00 1,420,062 1,443,184 Federal Natl Mtge Assn #683100 02-01-18 5.50 148,229 151,002 Federal Natl Mtge Assn #683116 02-01-33 6.00 228,340 232,058 Federal Natl Mtge Assn #684586 03-01-33 6.00 2,896,308 2,950,999 Federal Natl Mtge Assn #686172 02-01-33 6.00 2,389,394 2,428,299 Federal Natl Mtge Assn #686528 02-01-33 6.00 2,924,254 2,979,481 Federal Natl Mtge Assn #687051 01-01-33 6.00 9,390,480 9,476,374 Federal Natl Mtge Assn #689026 05-01-33 5.50 1,088,845 1,083,340 Federal Natl Mtge Assn #689093 07-01-28 5.50 3,033,055 3,018,936 Federal Natl Mtge Assn #694628 04-01-33 5.50 5,947,981 5,918,141 Federal Natl Mtge Assn #694795 04-01-33 5.50 7,038,002 7,002,437 Federal Natl Mtge Assn #694988 03-01-33 5.50 9,577,308 9,529,223 Federal Natl Mtge Assn #695202 03-01-33 6.50 3,270,247 3,387,207 Federal Natl Mtge Assn #695909 05-01-18 5.50 1,799,013 1,832,315 Federal Natl Mtge Assn #699424 04-01-33 5.50 3,968,127 3,948,132 Federal Natl Mtge Assn #702427 04-01-33 5.50 3,661,890 3,642,324 Federal Natl Mtge Assn #704005 05-01-33 5.50 916,586 910,314 Federal Natl Mtge Assn #705655 05-01-33 5.00 441,125 427,031 Federal Natl Mtge Assn #709093 06-01-33 6.00 157,152 159,515 Federal Natl Mtge Assn #709901 06-01-18 5.00 432,827 433,714 Federal Natl Mtge Assn #710823 05-01-33 5.50 601,846 598,872 Federal Natl Mtge Assn #711503 06-01-33 5.50 105,410 105,112 Federal Natl Mtge Assn #720070 07-01-23 5.50 2,233,937 2,240,095 Federal Natl Mtge Assn #723687 08-01-28 5.50 3,719,220 3,701,907 Federal Natl Mtge Assn #725232 03-01-34 5.00 17,362,915 16,808,163 Federal Natl Mtge Assn #725424 04-01-34 5.50 1,633,164 1,621,989 Federal Natl Mtge Assn #725425 04-01-34 5.50 24,336,649 24,168,624 Federal Natl Mtge Assn #725431 08-01-15 5.50 110,191 112,297 Federal Natl Mtge Assn #725684 05-01-18 6.00 8,092,327 8,361,662 Federal Natl Mtge Assn #725813 12-01-33 6.50 8,583,326 8,890,309 Federal Natl Mtge Assn #726940 08-01-23 5.50 72,587 73,103 Federal Natl Mtge Assn #730153 08-01-33 5.50 1,049,262 1,042,082 Federal Natl Mtge Assn #735212 12-01-34 5.00 18,296,083 17,682,928 Federal Natl Mtge Assn #735224 02-01-35 5.50 30,441,454 30,233,154 Federal Natl Mtge Assn #735841 11-01-19 4.50 1,585,025 1,558,329 Federal Natl Mtge Assn #738921 11-01-32 6.50 773,619 805,414
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 26 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #743262 10-01-18 5.00% $2,874,627 $2,880,322 Federal Natl Mtge Assn #743347 10-01-33 6.00 85,496 87,042 Federal Natl Mtge Assn #743579 11-01-33 5.50 272,015 270,153 Federal Natl Mtge Assn #745355 03-01-36 5.00 17,375,832(u) 16,760,937 Federal Natl Mtge Assn #745563 08-01-34 5.50 1,340,274 1,331,103 Federal Natl Mtge Assn #747642 11-01-28 5.50 2,356,754 2,345,783 Federal Natl Mtge Assn #753074 12-01-28 5.50 6,939,183 6,906,880 Federal Natl Mtge Assn #753091 12-01-33 5.50 3,916,118 3,889,321 Federal Natl Mtge Assn #757581 01-01-19 5.50 841,591 856,356 Federal Natl Mtge Assn #759342 01-01-34 6.50 1,347,542 1,403,537 Federal Natl Mtge Assn #765759 12-01-18 5.00 2,829,647 2,838,155 Federal Natl Mtge Assn #766641 03-01-34 5.00 6,038,838 5,836,459 Federal Natl Mtge Assn #776962 04-01-29 5.00 15,746,589 15,275,956 Federal Natl Mtge Assn #779676 06-01-34 5.00 2,092,531 2,022,404 Federal Natl Mtge Assn #804442 12-01-34 6.50 1,130,024 1,167,615 Federal Natl Mtge Assn #831870 11-01-36 6.50 1,627,213 1,675,749 Federal Natl Mtge Assn #844445 12-01-35 5.50 14,168,329 14,038,173 Federal Natl Mtge Assn #845109 05-01-36 6.00 24,956,353 25,234,019 Federal Natl Mtge Assn #878661 02-01-36 5.50 1,617,499 1,586,968 Federal Natl Mtge Assn #881629 02-01-36 5.50 1,093,990 1,073,341 Federal Natl Mtge Assn #882063 06-01-36 6.50 3,172,516 3,287,808 Federal Natl Mtge Assn #886291 07-01-36 7.00 6,406,896 6,743,897 Federal Natl Mtge Assn #915770 03-01-37 6.50 2,848,783 2,933,150 Federal Natl Mtge Assn #928860 11-01-37 8.00 1,357,653 1,446,014 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-63 Cl IP 07-25-33 7.52 14,025,922(k) 3,887,934 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12-25-31 9.86 2,649,411(k) 481,207 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2004-84 Cl GI 12-25-22 10.56 757,372(k) 106,273 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 367 Cl 2 01-01-36 6.57 14,203,335(k) 3,793,430 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 379 Cl 2 05-01-37 6.52 22,174,034(k) 5,961,003 Federal Natl Mtge Assn Collateralized Mtge Obligation Principal Only Series 43 Cl 1 09-01-18 2.72 13,144(l) 11,598 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-133 Cl GB 12-25-26 8.00 2,893,173 3,093,138 Govt Natl Mtge Assn 09-01-38 5.50 19,000,000(g) 18,845,625 09-01-38 6.00 20,000,000(g) 20,293,760 Govt Natl Mtge Assn #345538 02-15-24 8.00 98,330 107,484 Govt Natl Mtge Assn #398831 08-15-26 8.00 121,323 132,734 Govt Natl Mtge Assn #423782 05-15-26 7.50 333,192 358,627
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 27
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Govt Natl Mtge Assn #425004 10-15-33 5.50% $3,304,374 $3,313,386 Govt Natl Mtge Assn #426170 06-15-26 8.00 104,876 114,740 Govt Natl Mtge Assn #567717 06-15-32 7.50 15,284 16,399 Govt Natl Mtge Assn #595256 12-15-32 6.00 5,357,233 5,460,573 Govt Natl Mtge Assn #604580 08-15-33 5.00 3,328,296 3,263,385 Govt Natl Mtge Assn #604708 10-15-33 5.50 8,733,946 8,757,766 Govt Natl Mtge Assn #606844 09-15-33 5.00 8,000,403 7,844,373 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-70 Cl IC 08-20-32 15.22 6,427,361(k) 1,172,639 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-80 Cl CI 01-20-32 40.88 948,415(k) 71,642 Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2005-16 Cl 3A1B 01-19-36 2.81 271,624(j) 122,029 Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2006-8 Cl 2A1B 08-21-36 2.72 952,478(j) 430,265 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR8 Cl AX1 04-25-35 20.00 68,154,511(k) 74,544 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-AR25 Cl 3A3 09-25-36 0.00 30,542,818(k) 312,062 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Series 2005-AR25 Cl 1A21 12-25-35 5.83 5,828,062(j) 3,750,450 Lehman Mortgage Trust Collateralized Mtge Obligation Series 2008-2 Cl 1A2 03-25-38 6.00 7,442,853 5,289,368 Lehman XS Trust Collateralized Mtge Obligation Series 2007-5H Cl 1A1 05-25-37 6.50 19,187,317 13,017,405 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-2 Cl 4A1 02-25-19 5.00 5,203,266 4,793,508 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-4 Cl 2A1 05-25-34 6.00 3,124,874 2,871,417 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-7 Cl 8A1 08-25-19 5.00 4,197,350 3,784,789 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-8 Cl 7A1 09-25-19 5.00 5,806,220 5,330,730 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2005-3 Cl 1A2 04-25-35 5.50 950,000 788,776 Merrill Lynch Alternative Note Asset Collateralized Mtge Obligation Series 2007-OAR2 Cl A1 04-25-37 2.65 955,568(i) 589,643 Morgan Stanley Mtge Loan Trust Collateralized Mtge Obligation Series 2007-12 Cl 3A22 08-25-37 6.00 17,595,299 14,352,406 Residential Accredit Loans Collateralized Mtge Obligation Series 2006-QS3 Cl 1A10 03-25-36 6.00 5,348,114 4,864,748 Residential Funding Mtge Securities I Collateralized Mtge Obligation Series 2005-S6 Cl A8 08-25-35 5.25 20,380,247 17,456,558
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 28 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Structured Adjustable Rate Mtge Loan Trust Collateralized Mtge Obligation Series 2006-5 Cl 4A1 06-25-36 5.93% $657,198(j) $476,736 Structured Asset Securities Collateralized Mtge Obligation Series 2003-33H Cl 1A1 10-25-33 5.50 12,370,053 10,876,949 Washington Mutual Alternative Mtge Loan Trust Pass-Through Ctfs Collateralized Mtge Obligation Interest Only Series 2005-AR1 Cl X2 12-25-35 20.00 25,617,770(k) 40,028 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2005-AR14 Cl 2A1 12-25-35 5.29 5,200,019(j) 4,739,187 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2006-AR10 Cl 1A1 09-25-36 5.93 4,932,195(j) 4,397,328 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2006-AR3 Cl A1A 02-25-46 4.08 6,509,645(j) 4,096,286 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-10 Cl A1 10-25-35 5.00 25,846,145 23,034,718 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-14 Cl 2A1 12-25-35 5.50 1,912,908 1,720,272 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-5 Cl 2A1 05-25-35 5.50 10,561,525 9,373,353 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR12 Cl 1A1 09-25-36 6.02 4,758,801(j) 4,198,550 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR6 Cl 5A1 03-25-36 5.11 10,919,669(j) 10,105,511 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2007-11 Cl A68 08-25-37 6.00 16,788,485 15,820,132 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2007-14 Cl 1A2 10-25-37 6.00 7,147,965 5,079,802 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2007-15 Cl A1 11-25-37 6.00 14,653,816 12,612,014 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2007-AR9 Cl A2 12-28-37 6.39 9,503,436(j) 5,073,725 ------------ Total 1,576,187,074 - ------------------------------------------------------------------------------------- AEROSPACE & DEFENSE (--%) DRS Technologies 11-01-13 6.88 462,000 467,775 Moog Sr Sub Nts 06-15-18 7.25 915,000(d) 896,700 ------------ Total 1,364,475 - ------------------------------------------------------------------------------------- BANKING (3.6%) Banco Nacional de Desenvolvimento Economico e Social Sr Unsecured 06-16-18 6.37 975,000(c,d) 982,313 Bank of America Sr Unsecured 05-01-18 5.65 30,150,000 27,868,418 Citigroup Sr Unsecured 02-14-11 5.13 4,235,000 4,182,270 04-11-13 5.50 8,475,000 8,173,104 05-15-18 6.13 17,065,000 15,954,956 Credit Suisse New York Sub Nts 02-15-18 6.00 4,800,000 4,591,057 JPMorgan Chase & Co Sr Nts 01-15-18 6.00 16,555,000 16,062,237
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 29
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BANKING (CONT.) JPMorgan Chase Bank Sub Nts 10-01-17 6.00% $8,595,000 $8,319,926 Manufacturers & Traders Trust Sub Nts 12-01-21 5.63 15,595,000 11,952,139 Popular North America 10-01-08 3.88 32,427,000 32,407,648 ------------ Total 130,494,068 - ------------------------------------------------------------------------------------- BROKERAGE (1.2%) Lehman Brothers Holdings Sr Unsecured 05-02-18 6.88 13,460,000(w) 12,531,597 Merrill Lynch & Co 02-05-13 5.45 4,315,000 4,004,769 04-25-18 6.88 10,665,000 9,897,009 Morgan Stanley Sr Unsecured 04-01-18 6.63 18,215,000 16,923,975 ------------ Total 43,357,350 - ------------------------------------------------------------------------------------- CHEMICALS (0.2%) Airgas 10-01-18 7.13 2,695,000(d) 2,698,369 INVISTA Sr Unsecured 05-01-12 9.25 4,096,000(d) 4,070,399 NALCO 11-15-11 7.75 1,415,000 1,432,688 ------------ Total 8,201,456 - ------------------------------------------------------------------------------------- CONSUMER PRODUCTS (0.5%) Clorox Sr Unsecured 10-15-12 5.45 3,280,000 3,305,657 03-01-13 5.00 15,125,000 14,895,618 ------------ Total 18,201,275 - ------------------------------------------------------------------------------------- DIVERSIFIED MANUFACTURING (0.3%) Tyco Electronics Group 10-01-12 6.00 1,720,000(c) 1,706,947 01-15-14 5.95 7,850,000(c) 7,854,825 ------------ Total 9,561,772 - ------------------------------------------------------------------------------------- ELECTRIC (3.2%) Consumers Energy 1st Mtge Series H 02-17-09 4.80 14,685,000 14,732,578 Duke Energy Carolinas LLC Sr Unsecured Series D 03-01-10 7.38 9,880,000 10,356,404 Duke Energy Indiana 1st Mtge 08-15-38 6.35 3,925,000 3,922,581 Exelon Sr Unsecured 06-15-10 4.45 11,905,000 11,871,642 FirstEnergy Sr Unsecured Series B 11-15-11 6.45 5,945,000 6,101,881 Florida Power 1st Mtge 06-15-38 6.40 4,900,000 4,986,176 Indiana Michigan Power Sr Unsecured 03-15-37 6.05 10,870,000 9,519,859 Majapahit Holding 10-17-16 7.75 480,000(c,d) 458,400 Midwest Generation LLC Pass-Through Ctfs Series B 01-02-16 8.56 163,621 168,939 Nevada Power 08-01-18 6.50 7,145,000 7,260,867 Nevada Power Series M 03-15-16 5.95 3,460,000 3,395,468 NiSource Finance 03-01-13 6.15 3,890,000 3,863,715 Northern States Power Sr Unsecured 08-01-09 6.88 6,245,000 6,408,251 PacifiCorp 1st Mtge 09-15-13 5.45 5,095,000 5,202,127 07-15-38 6.35 5,395,000 5,376,963 Portland General Electric 03-15-10 7.88 3,165,000 3,318,351 Potomac Electric Power Sr Secured 06-01-35 5.40 3,160,000 2,697,515
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 30 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ELECTRIC (CONT.) Progress Energy Carolinas 1st Mtge 04-01-38 6.30% $1,735,000 $1,745,448 Sierra Pacific Power Series M 05-15-16 6.00 13,555,000 13,337,578 ------------ Total 114,724,743 - ------------------------------------------------------------------------------------- ENTERTAINMENT (0.1%) United Artists Theatre Circuit Pass-Through Ctfs 07-01-15 9.30 5,209,587(n) 5,157,491 - ------------------------------------------------------------------------------------- ENVIRONMENTAL (0.1%) Allied Waste North America Sr Secured 02-15-14 6.13 875,000 850,938 06-01-17 6.88 1,525,000 1,498,312 ------------ Total 2,349,250 - ------------------------------------------------------------------------------------- FOOD AND BEVERAGE (1.5%) Cadbury Schweppes US Finance LLC 10-01-08 3.88 2,935,000(d) 2,934,251 ConAgra Foods Sr Unsecured 09-15-11 6.75 3,895,000 4,037,752 Cott Beverages USA 12-15-11 8.00 2,650,000 2,226,000 Dr Pepper Snapple Group Sr Nts 05-01-18 6.82 7,760,000(d) 7,901,736 Kraft Foods Sr Unsecured 01-26-39 6.88 7,620,000 7,467,687 Molson Coors Capital Finance 09-22-10 4.85 13,415,000(c) 13,562,726 SABMiller 01-15-14 5.70 14,775,000(c,d) 14,770,901 ------------ Total 52,901,053 - ------------------------------------------------------------------------------------- GAMING (--%) Mohegan Tribal Gaming Authority Sr Sub Nts 04-01-12 8.00 750,000 637,500 - ------------------------------------------------------------------------------------- GAS PIPELINES (1.6%) CenterPoint Energy Resources Sr Unsecured 02-15-11 7.75 5,775,000 6,025,277 Colorado Interstate Gas Sr Unsecured 11-15-15 6.80 13,003,000 13,138,024 Kinder Morgan Energy Partners LP Sr Unsecured 03-15-11 6.75 2,345,000 2,432,264 Northern Natural Gas Sr Unsecured 02-15-37 5.80 1,700,000(d) 1,563,369 Northwest Pipeline Sr Unsecured 04-15-17 5.95 7,625,000 7,411,298 Southern Natural Gas Sr Unsecured 04-01-17 5.90 7,011,000(d) 6,643,049 Southern Star Central Sr Nts 03-01-16 6.75 1,460,000 1,361,450 Transcontinental Gas Pipe Line Sr Unsecured 04-15-16 6.40 11,329,000 11,420,187 Transcontinental Gas Pipe Line Sr Unsecured Series B 08-15-11 7.00 7,965,000 8,302,788 ------------ Total 58,297,706 - ------------------------------------------------------------------------------------- HEALTH CARE (0.2%) Cardinal Health Sr Unsecured 06-15-12 5.65 3,860,000 3,855,153 Omnicare 12-15-13 6.75 2,370,000 2,221,875 12-15-15 6.88 355,000 333,700 ------------ Total 6,410,728 - ------------------------------------------------------------------------------------- HEALTH CARE INSURANCE (0.3%) Coventry Health Care Sr Unsecured 08-15-14 6.30 3,370,000 3,173,263 03-15-17 5.95 1,685,000 1,480,935
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 31
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) HEALTH CARE INSURANCE (CONT.) UnitedHealth Group Sr Unsecured 11-15-37 6.63% $4,425,000 $3,935,059 02-15-38 6.88 1,025,000 940,072 ------------ Total 9,529,329 - ------------------------------------------------------------------------------------- INDEPENDENT ENERGY (2.3%) Anadarko Petroleum Sr Unsecured 09-15-09 3.18 2,175,000(i) 2,156,784 09-15-16 5.95 13,215,000 12,878,004 Canadian Natural Resources Sr Unsecured 02-01-39 6.75 4,270,000(c) 4,147,766 EnCana Holdings Finance 05-01-14 5.80 1,790,000(c) 1,782,688 EnCana Sr Nts 10-15-13 4.75 1,410,000(c) 1,361,842 EnCana Sr Unsecured 11-01-11 6.30 17,330,000(c) 17,886,345 Nexen 11-20-13 5.05 3,275,000(c) 3,185,519 Quicksilver Resources 08-01-15 8.25 3,830,000 3,705,525 SandRidge Energy Sr Nts 06-01-18 8.00 770,000(d) 723,800 XTO Energy Sr Unsecured 02-01-14 4.90 21,995,000 21,059,860 01-31-15 5.00 6,965,000 6,581,249 06-30-15 5.30 7,115,000 6,840,126 ------------ Total 82,309,508 - ------------------------------------------------------------------------------------- INTEGRATED ENERGY (0.7%) Marathon Oil Sr Unsecured 03-15-18 5.90 11,760,000 11,242,801 Petro-Canada Sr Unsecured 05-15-38 6.80 11,560,000(c) 10,997,421 Suncor Energy Sr Unsecured 06-01-39 6.85 3,320,000(c) 3,320,681 TNK-BP Finance 03-13-18 7.88 545,000(c,d) 504,806 ------------ Total 26,065,709 - ------------------------------------------------------------------------------------- LIFE INSURANCE (1.1%) MetLife Sr Unsecured Series A 08-15-18 6.82 7,800,000 7,794,217 Metropolitan Life Global Funding I Sr Secured 04-10-13 5.13 12,760,000(d) 12,549,626 Pricoa Global Funding I Secured 10-18-12 5.40 11,265,000(d) 11,127,602 Principal Life Income Funding Trusts Sr Secured 12-14-12 5.30 8,140,000 8,103,924 ------------ Total 39,575,369 - ------------------------------------------------------------------------------------- MEDIA CABLE (0.9%) Comcast 03-15-11 5.50 12,280,000 12,409,354 03-15-37 6.45 14,400,000 13,281,048 05-15-38 6.40 3,980,000 3,661,863 CSC Holdings Sr Unsecured Series B 07-15-09 8.13 1,970,000 1,997,088 ------------ Total 31,349,353 - ------------------------------------------------------------------------------------- MEDIA NON CABLE (2.7%) British Sky Broadcasting Group 02-23-09 6.88 16,285,000(c) 16,476,365 02-15-18 6.10 7,940,000(c,d) 7,683,284 DIRECTV Holdings LLC/Financing 05-15-16 7.63 3,505,000(d) 3,491,856 EchoStar DBS 10-01-13 7.00 225,000 213,750 10-01-14 6.63 363,000 333,960 02-01-16 7.13 940,000 864,800 News America 12-15-35 6.40 9,565,000 8,850,734 11-15-37 6.65 2,370,000 2,284,765 Reed Elsevier Capital 08-01-11 6.75 7,680,000 7,987,658
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 32 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MEDIA NON CABLE (CONT.) RR Donnelley & Sons Sr Unsecured 01-15-17 6.13% $16,305,000 $14,966,653 Thomson Reuters 08-15-09 4.25 6,430,000(c) 6,405,579 10-01-14 5.70 16,650,000(c) 16,586,747 07-15-18 6.50 10,170,000(c) 10,298,864 ------------ Total 96,445,015 - ------------------------------------------------------------------------------------- NON CAPTIVE CONSUMER (--%) American Express Sr Unsecured 03-19-38 8.15 975,000 985,379 - ------------------------------------------------------------------------------------- OIL FIELD SERVICES (0.1%) Gaz Capital Sr Unsecured 11-22-16 6.21 1,255,000(c,d) 1,126,362 KazMunaiGaz Finance 07-02-18 9.13 720,000(c,d) 740,907 ------------ Total 1,867,269 - ------------------------------------------------------------------------------------- PACKAGING (0.2%) Owens-Brockway Glass Container 05-15-13 8.25 4,320,000 4,449,600 Vitro 02-01-17 9.13 1,640,000(c) 1,271,000 ------------ Total 5,720,600 - ------------------------------------------------------------------------------------- PAPER (--%) Smurfit-Stone Container Enterprises Sr Unsecured 03-15-17 8.00 890,000 712,000 - ------------------------------------------------------------------------------------- RAILROADS (0.7%) CSX Sr Unsecured 03-15-12 6.30 4,400,000 4,424,930 03-15-13 5.75 10,785,000 10,545,779 04-01-15 6.25 9,760,000 9,563,121 ------------ Total 24,533,830 - ------------------------------------------------------------------------------------- REITS (0.2%) Brandywine Operating Partnership LP 05-01-17 5.70 1,905,000 1,614,632 ERP Operating LP Sr Unsecured 06-15-17 5.75 4,285,000 3,786,841 Simon Property Group LP Sr Unsecured 12-01-16 5.25 915,000 821,723 ------------ Total 6,223,196 - ------------------------------------------------------------------------------------- RETAILERS (0.6%) Home Depot Sr Unsecured 03-01-11 5.20 2,060,000 2,056,156 Kohl's Sr Unsecured 12-15-17 6.25 3,785,000 3,590,644 Macys Retail Holdings 07-15-09 4.80 17,954,000 17,709,736 ------------ Total 23,356,536 - ------------------------------------------------------------------------------------- SUPERMARKETS (0.1%) Kroger 04-15-12 6.75 3,790,000 3,960,147 - ------------------------------------------------------------------------------------- TECHNOLOGY (--%) Communications & Power Inds 02-01-12 8.00 110,000 106,150 - ------------------------------------------------------------------------------------- TOBACCO (0.2%) Philip Morris Intl Sr Unsecured 05-16-18 5.65 7,910,000 7,781,905 - ------------------------------------------------------------------------------------- TRANSPORTATION SERVICES (0.5%) Erac USA Finance 10-15-17 6.38 23,290,000(d) 19,957,936 - ------------------------------------------------------------------------------------- TREASURY (--%) Govt of Indonesia (Indonesian Rupiah) 07-15-22 10.25 15,000,000,000(c) 1,414,462 - ------------------------------------------------------------------------------------- WIRELESS (0.2%) Nextel Communications Series D 08-01-15 7.38 4,480,000 3,640,000 Nextel Communications Series E 10-31-13 6.88 310,000 254,975
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 33
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) WIRELESS (CONT.) Rogers Communications 08-15-18 6.80% $4,900,000(c) $4,998,000 ------------ Total 8,892,975 - ------------------------------------------------------------------------------------- WIRELINES (5.1%) AT&T Sr Unsecured 03-15-11 6.25 14,811,000 15,380,364 01-15-38 6.30 10,435,000 9,869,661 05-15-38 6.40 10,815,000 10,338,213 Frontier Communications Sr Unsecured 01-15-13 6.25 1,770,000 1,690,350 Telecom Italia Capital 11-15-13 5.25 31,965,000(c) 29,886,284 Telefonica Europe 09-15-10 7.75 19,171,000(c) 20,209,857 TELUS Sr Unsecured 06-01-11 8.00 42,581,000(c) 45,583,515 Verizon Communications 04-15-38 6.90 9,795,000 9,702,933 Verizon New York Sr Unsecured Series A 04-01-12 6.88 30,213,000 31,323,116 Verizon Pennsylvania Sr Unsecured Series A 11-15-11 5.65 7,725,000 7,829,042 Windstream 08-01-16 8.63 1,535,000 1,519,650 03-15-19 7.00 235,000 205,625 ------------ Total 183,538,610 - ------------------------------------------------------------------------------------- TOTAL BONDS (Cost: $3,867,551,404) $3,707,435,002 - ------------------------------------------------------------------------------------- MUNICIPAL BONDS (0.2%) 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% $9,445,000 $7,553,450 - ------------------------------------------------------------------------------------- TOTAL MUNICIPAL BONDS (Cost: $9,431,628) $7,553,450 - ------------------------------------------------------------------------------------- SENIOR LOANS (0.7%)(r) COUPON PRINCIPAL BORROWER RATE AMOUNT VALUE(a) CONSTRUCTION MACHINERY (--%) Manitowoc Tranche B Term Loan TBD TBD $1,630,000(g,t) $1,625,420 - ------------------------------------------------------------------------------------- CONSUMER CYCLICAL SERVICES (0.1%) West Corp Tranche B2 Term Loan 10-24-13 4.84-5.17% 2,674,360 2,335,385 - ------------------------------------------------------------------------------------- FOOD AND BEVERAGE (--%) Wrigley Tranche B Term Loan TBD TBD 820,000(g,t) 823,698 - ------------------------------------------------------------------------------------- HEALTH CARE (0.4%) Community Health Systems Delayed Draw Term Loan TBD TBD 253,243(g,s,t) 239,315 Community Health Systems Term Loan 07-25-14 4.72-5.06 4,951,634 4,679,294 HCA Tranche B Term Loan 11-17-13 5.05 7,228,560 6,772,293 ------------ Total 11,690,902 - ------------------------------------------------------------------------------------- MEDIA CABLE (0.1%) Charter Communications Term Loan 09-06-14 4.67-4.80 4,237,705 3,701,635 - -------------------------------------------------------------------------------------
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- 34 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT
SENIOR LOANS (CONTINUED) COUPON PRINCIPAL BORROWER RATE AMOUNT VALUE(a) MEDIA NON CABLE (0.1%) Idearc Tranche B Term Loan 11-17-14 4.47-4.80% $2,618,056 $1,836,200 Nielsen Finance Term Loan 08-09-13 4.80 2,943,197(c) 2,719,249 ------------ Total 4,555,449 - ------------------------------------------------------------------------------------- PAPER (--%) Georgia-Pacific Tranche B Term Loan 12-20-12 4.45-4.55 7,209 6,806 - ------------------------------------------------------------------------------------- TECHNOLOGY (--%) Flextronics Intl Term Loan 10-01-14 5.04 3,033 2,782 - ------------------------------------------------------------------------------------- TOTAL SENIOR LOANS (Cost: $27,304,282) $24,742,077 - -------------------------------------------------------------------------------------
COMMON STOCKS (--%) ISSUER SHARES VALUE(a) PAPER & FOREST PRODUCTS Crown Paper Escrow 6,950,000(b,n) $7 - ------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $--) $7 - ------------------------------------------------------------------------------------- MONEY MARKET FUND (9.1%)(q) SHARES VALUE(a) RiverSource Short-Term Cash Fund, 2.57% 329,852,708(v) $329,852,708 - ------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $329,852,708) $329,852,708 - ------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $4,234,140,022)(x) $4,069,583,244 =====================================================================================
INVESTMENTS IN DERIVATIVES FUTURES CONTRACTS OUTSTANDING AT AUG. 31, 2008
NUMBER OF UNREALIZED CONTRACTS NOTIONAL EXPIRATION APPRECIATION CONTRACT DESCRIPTION LONG (SHORT) MARKET VALUE DATE (DEPRECIATION) - ---------------------------------------------------------------------------------------- U.S. Long Bond, 20-year 919 $107,810,188 Dec. 2008 $446,156 U.S. Treasury Note, 2-year 484 102,744,125 Jan. 2009 82,338 U.S. Treasury Note, 5-year (579) (65,110,362) Oct. 2008 (749,016) U.S. Treasury Note, 5-year (2,112) (236,412,000) Jan. 2009 (273,561) U.S. Treasury Note, 10-year (733) (85,531,938) Sept. 2008 (1,990,951) U.S. Treasury Note, 10-year (1,775) (205,012,500) Dec. 2008 293,665 - ---------------------------------------------------------------------------------------- Total $(2,191,369) - ----------------------------------------------------------------------------------------
See accompanying Notes to Portfolio of Investments. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 35 CREDIT DEFAULT SWAP CONTRACTS OUTSTANDING AT AUG. 31, 2008
REFERENCED BUY/SELL PAY/RECEIVE EXPIRATION NOTIONAL UNREALIZED UNREALIZED COUNTERPARTY ENTITY PROTECTION FIXED RATE DATE AMOUNT APPRECIATION DEPRECIATION - ------------------------------------------------------------------------------------------------------------------------- Goldman Sachs Home Depot Buy .50% March 20, 2011 $1,920,000 $41,547 $-- - ------------------------------------------------------------------------------------------------------------------------- Lehman Brothers Kinder Morgan Buy .41 March 20, 2011 2,345,000 23,737 -- Special Financing Energy Partners - ------------------------------------------------------------------------------------------------------------------------- Citibank Reed Elsevier Buy .26 Sept. 20, 2011 1,915,000 9,783 -- Capital - ------------------------------------------------------------------------------------------------------------------------- Goldman Sachs ConAgra Foods Buy .18 Sept. 20, 2011 3,895,000 23,354 -- - ------------------------------------------------------------------------------------------------------------------------- Goldman Sachs FirstEnergy Buy .60 Dec. 20, 2011 1,750,000 -- (5,701) - ------------------------------------------------------------------------------------------------------------------------- JP Morgan Chase Bank Kroger Buy .36 March 20, 2012 3,790,000 22,599 -- - ------------------------------------------------------------------------------------------------------------------------- JP Morgan Chase Bank Cardinal Health Buy .225 June 20, 2012 3,860,000 45,912 -- - ------------------------------------------------------------------------------------------------------------------------- Citibank Clorox Buy .31 Dec. 20, 2012 3,110,000 59,561 -- - ------------------------------------------------------------------------------------------------------------------------- JP Morgan Chase Bank NiSource Finance Buy .55 Dec. 20, 2012 3,890,000 140,249 -- - ------------------------------------------------------------------------------------------------------------------------- Total $366,742 $(5,701) - -------------------------------------------------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT AUG. 31, 2008
CURRENCY TO CURRENCY TO UNREALIZED UNREALIZED EXCHANGE DATE BE DELIVERED BE RECEIVED APPRECIATION DEPRECIATION - ---------------------------------------------------------------------------------------------- Oct. 1, 2008 19,022,000 18,151,491 $245,847 $-- Canadian Dollar U.S. Dollar - ---------------------------------------------------------------------------------------------- Oct. 1, 2008 797,373,000 7,286,204 -- (53,333) Japanese Yen U.S. Dollar - ---------------------------------------------------------------------------------------------- Oct. 1, 2008 11,937,000 10,900,116 55,396 -- Swiss Fanc U.S. Dollar - ---------------------------------------------------------------------------------------------- Oct. 1, 2008 10,872,720 5,880,000 -- (176,180) U.S. Dollar British Pound - ---------------------------------------------------------------------------------------------- Oct. 1, 2008 7,220,928 10,257,000 -- (72,824) U.S. Dollar New Zealand Dollar - ---------------------------------------------------------------------------------------------- Oct. 1, 2008 18,098,503 97,398,000 -- (184,754) U.S. Dollar Norwegian Krone - ---------------------------------------------------------------------------------------------- Total $301,243 $(487,091) - ----------------------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS (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, 2008, the value of foreign securities represented 7.7% of net assets. - -------------------------------------------------------------------------------- 36 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security may be 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, 2008, the value of these securities amounted to $176,352,688 or 4.9% of net assets. (e) This is a variable rate security that entitles holders to receive only interest payments. Interest is paid annually. The interest payment is based on the Gross Domestic Product (GDP) level of the previous year for the respective country. To the extent that the previous year's GDP exceeds the 'base case GDP', an interest payment is made equal to 0.012225 of the difference. (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) At Aug. 31, 2008, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $540,119,805. See Note 1 to the financial statements. (h) The following abbreviations are used in the portfolio security descriptions to identify the insurer of the issue: AMBAC -- Ambac Assurance Corporation FSA -- Financial Security Assurance MBIA -- MBIA Insurance Corporation
(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, 2008. (j) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2008. (k) 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, 2008. (l) 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, 2008. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 37 NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (m) 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. (n) 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, 2008, is as follows:
ACQUISITION SECURITY DATES COST ---------------------------------------------------------------------- Banc of America Funding* Collateralized Mtge Obligation Series 2006-2 Cl N1 7.25% 2046 11-14-06 thru 07-22-08 $326,739 Crown Paper Escrow Common 04-16-07 -- United Artists Theatre Circuit Pass-Through Ctfs 9.30% 2015 02-23-96 thru 08-12-96 5,041,037
* Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. (o) Represents comparable securities held to satisfy future delivery requirements of the following open forward sale commitments at Aug. 31, 2008:
PRINCIPAL SETTLEMENT PROCEEDS SECURITY AMOUNT DATE RECEIVABLE VALUE -------------------------------------------------------------------------- Federal Natl Mtge Assn 09-01-23 5.00% $8,725,000 09-16-08 $8,515,055 $8,643,203 09-01-23 5.50 14,700,000 09-16-08 14,668,418 14,819,438
(p) At Aug. 31, 2008, security was partially or fully on loan. See Note 5 to the financial statements. (q) Cash collateral received from security lending activity is invested in an affiliated money market fund and represents 0.8% of net assets. See Note 5 to the financial statements. The Fund's cash equivalent position is 8.3% of net assets. (r) 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. (s) At Aug. 31, 2008, the Fund had unfunded senior loan commitments pursuant to the terms 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 Systems $253,243
- -------------------------------------------------------------------------------- 38 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (t) Represents a senior loan purchased on a when-issued or delayed-delivery basis. Certain details associated with this purchase are not known prior to the settlement date of the transaction. In addition, senior loans typically trade without accrued interest and therefore a weighted average coupon rate is not available prior to settlement. At settlement, if still unknown, the borrower or counterparty will provide the Fund with the final weighted average coupon rate and maturity date. (u) At Aug. 31, 2008, investments in securities included securities valued at $9,260,276 that were partially pledged as collateral to cover initial margin deposits on open interest rate futures contracts. (v) Affiliated Money Market Fund -- See Note 6 to the financial statements. The rate shown is the seven-day current annualized yield at Aug. 31, 2008. (w) Subsequent to Aug. 31, 2008, Lehman Brothers Holdings filed a Chapter 11 bankruptcy petition. As a result, this security has been determined to be non-income producing. (x) At Aug. 31, 2008, the cost of securities for federal income tax purposes was $4,261,588,854 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $26,069,097 Unrealized depreciation (218,074,707) ------------------------------------------------------------ Net unrealized depreciation $(192,005,610) ------------------------------------------------------------
The industries identified above are based on the Global Industry Classification Standard (GICS), which was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor's, a division of The McGraw-Hill Companies, Inc. 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 -- 2008 ANNUAL REPORT 39 FINANCIAL STATEMENTS ----------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES AUG. 31, 2008
ASSETS Investments in securities, at value Unaffiliated issuers* (identified cost $3,904,287,314) $3,739,730,536 Affiliated money market fund (identified cost $329,852,708) 329,852,708 - ----------------------------------------------------------------------------- Total investments in securities (identified cost $4,234,140,022) 4,069,583,244 Cash 98,772 Foreign currency holdings (identified cost $1,022) 962 Capital shares receivable 6,048,489 Dividends and accrued interest receivable 32,749,564 Receivable for investment securities sold 149,853,061 Unrealized appreciation on forward foreign currency contracts 301,243 Unrealized appreciation on swap contracts 366,742 - ----------------------------------------------------------------------------- Total assets 4,259,002,077 - ----------------------------------------------------------------------------- LIABILITIES Forward sale commitments, at value (proceeds receivable $23,183,473) 23,462,641 Dividends payable to shareholders 915,186 Capital shares payable 7,832,782 Payable for investment securities purchased 23,994,040 Payable for securities purchased on a forward-commitment basis 540,119,805 Payable upon return of securities loaned 30,850,000 Variation margin payable 119,068 Unrealized depreciation on forward foreign currency contracts 487,091 Unrealized depreciation on swap contracts 5,701 Accrued investment management services fees 44,397 Accrued distribution fees 595,331 Accrued transfer agency fees 7,771 Accrued administrative services fees 6,000 Accrued plan administration services fees 15,547 Other accrued expenses 358,062 - ----------------------------------------------------------------------------- Total liabilities 628,813,422 - ----------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $3,630,188,655 - ----------------------------------------------------------------------------- REPRESENTED BY Capital stock -- $.01 par value $ 7,809,294 Additional paid-in capital 3,940,889,083 Undistributed net investment income 1,974,902 Accumulated net realized gain (loss) (153,632,424) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (166,852,200) - ----------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $3,630,188,655 - ----------------------------------------------------------------------------- *Including securities on loan, at value $ 30,354,600 - -----------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 40 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) AUG. 31, 2008
NET ASSET VALUE PER SHARE NET ASSETS SHARES OUTSTANDING NET ASSET VALUE PER SHARE Class A $1,920,027,558 413,143,778 $4.65(1) Class B $ 254,464,345 54,765,337 $4.65 Class C $ 31,688,522 6,817,452 $4.65 Class I $ 693,189,044 148,965,143 $4.65 Class R2 $ 9,610 2,067 $4.65 Class R3 $ 9,610 2,067 $4.65 Class R4 $ 75,478,505 16,261,328 $4.64 Class R5 $ 9,588 2,067 $4.64 Class W $ 655,311,873 140,970,151 $4.65 - -------------------------------------------------------------------------------------------
(1) The maximum offering price per share for Class A is $4.88. The offering price is calculated by dividing the net asset value by 1.0 minus the maximum sales charge of 4.75%. The accompanying Notes to Financial Statements are an integral part of this statement. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 41 STATEMENT OF OPERATIONS YEAR ENDED AUG. 31, 2008
INVESTMENT INCOME Income: Interest $ 177,627,137 Income distributions from affiliated money market fund 4,708,945 Fee income from securities lending 41,168 Less foreign taxes withheld (16,715) - ---------------------------------------------------------------------------- Total income 182,360,535 - ---------------------------------------------------------------------------- Expenses: Investment management services fees 14,772,880 Distribution fees Class A 4,896,633 Class B 3,027,276 Class C 237,190 Class R2 36 Class R3 18 Class W 1,101,584 Transfer agency fees Class A 2,887,276 Class B 475,869 Class C 35,998 Class R2 4 Class R3 4 Class R4 39,140 Class R5 4 Class W 881,267 Administrative services fees 2,012,548 Plan administration services fees Class R2 18 Class R3 18 Class R4 195,702 Compensation of board members 65,833 Custodian fees 268,176 Printing and postage 457,290 Registration fees 193,994 Professional fees 84,542 Other 116,505 - ---------------------------------------------------------------------------- Total expenses 31,749,805 Expenses waived/reimbursed by the Investment Manager and its affiliates (1,540,535) Earnings and bank fee credits on cash balances (107,103) - ---------------------------------------------------------------------------- Total net expenses 30,102,167 - ---------------------------------------------------------------------------- Investment income (loss) -- net 152,258,368 - ----------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 42 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT STATEMENT OF OPERATIONS (CONTINUED) YEAR ENDED AUG. 31, 2008
REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions $ 22,750,963 Foreign currency transactions (2,006,493) Futures contracts (10,131,132) Swap transactions (6,552,933) - ---------------------------------------------------------------------------- Net realized gain (loss) on investments 4,060,405 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (142,483,859) - ---------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies (138,423,454) - ---------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 13,834,914 - ----------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of this statement. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 43 STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED AUG. 31 2008 2007 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 152,258,368 $ 122,100,738 Net realized gain (loss) on investments 4,060,405 20,868,248 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (142,483,859) 6,273,301 - -------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 13,834,914 149,242,287 - -------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (84,539,939) (86,827,158) Class B (10,768,502) (13,755,846) Class C (828,277) (626,596) Class I (22,019,428) (15,257,999) Class R2 (290) (141) Class R3 (308) (151) Class R4 (3,476,394) (4,383,933) Class R5 (328) (167) Class W (18,133,130) (2,150,062) Tax return of capital Class A -- (1,969,457) Class B -- (312,017) Class C -- (14,213) Class I -- (346,089) Class R2 -- (3) Class R3 -- (3) Class R4 -- (99,439) Class R5 -- (4) Class W -- (48,769) - -------------------------------------------------------------------------------------------- Total distributions (139,766,596) (125,792,047) - --------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 44 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
YEAR ENDED AUG. 31 2008 2007 CAPITAL SHARE TRANSACTIONS Proceeds from sales Class A shares $ 386,502,419 $ 341,978,156 Class B shares 80,268,108 73,778,423 Class C shares 20,510,381 4,309,754 Class I shares 193,548,806 162,095,736 Class R2 shares -- 5,000 Class R3 shares -- 5,000 Class R4 shares 31,152,017 29,755,649 Class R5 shares -- 5,000 Class W shares 529,049,476 267,590,689 Fund merger (Note 8) Class A shares 52,349,504 N/A Class B shares 13,151,218 N/A Class C shares 1,247,150 N/A Class I shares 250,084,366 N/A Class R2 shares 4,925 N/A Class R3 shares 4,925 N/A Class R4 shares 11,052 N/A Class R5 shares 4,913 N/A Class W shares 4,890 N/A Reinvestment of distributions at net asset value Class A shares 71,053,046 71,340,780 Class B shares 9,967,093 12,481,391 Class C shares 747,742 558,059 Class I shares 22,202,710 15,346,042 Class R4 shares 3,527,696 4,481,258 Class W shares 18,163,448 2,006,618 Payments for redemptions Class A shares (458,212,241) (507,058,109) Class B shares (142,424,544) (187,649,959) Class C shares (6,555,566) (5,462,345) Class I shares (137,684,266) (69,529,553) Class R4 shares (34,245,276) (129,682,278) Class W shares (92,614,678) (46,272,210) - -------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions 811,819,314 40,083,101 - -------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 685,887,632 63,533,341 Net assets at beginning of year 2,944,301,023 2,880,767,682 - -------------------------------------------------------------------------------------------- Net assets at end of year $3,630,188,655 $2,944,301,023 - -------------------------------------------------------------------------------------------- Undistributed (excess of distributions over) net investment income $ 1,974,902 $ (1,432,632) - --------------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of this statement. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 45 NOTES TO FINANCIAL STATEMENTS -------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RiverSource Diversified Bond Fund (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 of Directors (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, Class R2, Class R3, Class R4, Class R5 and Class W 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, Class R2, Class R3, Class R4 and Class R5 shares are sold without a front-end sales charge or CDSC and are offered to qualifying institutional investors. - - Class W shares are sold without a front-end sales charge or CDSC and are offered through qualifying discretionary accounts. At Aug. 31, 2008, RiverSource Investments, LLC (RiverSource Investments or the Investment Manager) and the RiverSource affiliated funds-of-funds owned 100% of Class I shares and the Investment Manager owned 100% of Class R2, Class R3 and Class R5 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 services 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. 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. - -------------------------------------------------------------------------------- 46 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 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. When market quotes are not readily available, the pricing service, in determining fair values of debt securities, takes into consideration such factors as current quotations by broker/dealers, coupon, maturity, quality, type of issue, trading characteristics, and other yield and risk factors it deems relevant in determining valuations. Foreign securities are valued based on quotations from the principal market in which such securities are normally traded. The procedures adopted by the Board 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 securities) 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, Inc. (Ameriprise Financial), parent company of the Investment Manager, as administrator to the Fund, will fair value foreign securities pursuant to procedures adopted by the Board, 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, 2008, 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. The aggregate value of such securities at Aug. 31, 2008 was $5,223,092 representing 0.14% of net assets. These securities may be valued at fair value according to procedures approved, in good faith, by the Board. According to Board - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 47 guidelines, 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, 2008, the Fund has outstanding when-issued securities of $540,119,805. 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 Portfolio of Investments. At Aug. 31, 2008, the Fund has entered into unfunded loan commitments of $253,243. 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 Fund records the incremental difference between the forward purchase and sale of each forward roll as realized gain or loss. Losses may arise due to changes in the value of the securities or if a counterparty does not perform under the terms of the agreement. If a counterparty files for bankruptcy or becomes insolvent, the 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. - -------------------------------------------------------------------------------- 48 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT The risk in buying an option is that the Fund pays a premium whether or not the option is exercised. The Fund also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Fund will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Fund will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost or a security for a purchased put or call option is adjusted by the amount or premium received or paid. At Aug. 31, 2008, and for the year then ended, 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, 2008, foreign currency holdings consisted of European monetary units and British pounds. The Fund may enter into forward foreign currency contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 49 U.S. dollar value of foreign currency underlying all contractual commitments held by the Fund and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Fund is subject to the credit risk that the other party will not complete its contract obligations. FORWARD SALE COMMITMENTS The Fund may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to- market" daily and the change in market value is recorded by the Fund as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss. If the Fund delivers securities under the commitment, the Fund realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the Notes to Portfolio of Investments. 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 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 upon receipt of the payment. If the credit event specified in the contract occurs, the Fund will receive the - -------------------------------------------------------------------------------- 50 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 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 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. Any premium paid or received by the Fund upon entering into a credit default swap contract 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, 2008, there were no credit default swap contracts outstanding which had a premium 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 commercial 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 - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 51 Fund. At Aug. 31, 2008, the Fund had no outstanding CMBS total return swap contracts. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of the 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. Financial Accounting Standards Board (FASB) Interpretation 48 (FIN 48), "Accounting for Uncertainty in Income Taxes," 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. Management of the Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Generally, the tax authorities can examine all the tax returns filed for the last three years. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of futures and options contracts, foreign currency transactions, recognition of unrealized appreciation (depreciation) for certain derivative investments, post-October losses, market discount and losses deferred due to wash sales. 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 $9,648,830 and accumulated net realized loss has been decreased by $9,541,299 - -------------------------------------------------------------------------------- 52 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT resulting in a net reclassification adjustment to increase paid-in capital by $107,531. The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED AUG. 31, 2008 2007* - ----------------------------------------------------------------- CLASS A Distributions paid from: Ordinary income.................... $84,539,939 $86,827,158 Long-term capital gain............. -- -- Tax return of capital.............. -- 1,969,457 CLASS B Distributions paid from: Ordinary income.................... 10,768,502 13,755,846 Long-term capital gain............. -- -- Tax return of capital.............. -- 312,017 CLASS C Distributions paid from: Ordinary income.................... 828,277 626,596 Long-term capital gain............. -- -- Tax return of capital.............. -- 14,213 CLASS I Distributions paid from: Ordinary income.................... 22,019,428 15,257,999 Long-term capital gain............. -- -- Tax return of capital.............. -- 346,089 CLASS R2 Distributions paid from: Ordinary income.................... 290 141 Long-term capital gain............. -- -- Tax return of capital.............. -- 3 CLASS R3 Distributions paid from: Ordinary income.................... 308 151 Long-term capital gain............. -- -- Tax return of capital.............. -- 3 CLASS R4 Distributions paid from: Ordinary income.................... 3,476,394 4,383,933 Long-term capital gain............. -- -- Tax return of capital.............. -- 99,439 CLASS R5 Distributions paid from: Ordinary income.................... 328 167 Long-term capital gain............. -- -- Tax return of capital.............. -- 4
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 53
YEAR ENDED AUG. 31, 2008 2007* - ----------------------------------------------------------------- CLASS W Distributions paid from: Ordinary income.................... $18,133,130 $ 2,150,062 Long-term capital gain............. -- -- Tax return of capital.............. -- 48,769
* Class R2, Class R3, and Class R5 are for the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. Class W is for the period from Dec. 1, 2006 (inception date) to Aug. 31, 2007. At Aug. 31, 2008, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income................. $ 4,412,056 Undistributed accumulated long-term gain...... $ -- Accumulated realized loss..................... $(125,823,517) Unrealized appreciation (depreciation)........ $(196,183,075)
RECENT ACCOUNTING PRONOUNCEMENTS In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (SFAS 161), "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133," which requires enhanced disclosures about a fund's derivative and hedging activities. Funds are required to provide enhanced disclosures about (a) how and why a fund uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect a fund's financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after Nov. 15, 2008. As of Aug. 31, 2008, management does not believe the adoption of SFAS 161 will impact the financial statement amounts; however, additional footnote disclosures may be required about the use of derivative instruments and hedging items. On Sept. 20, 2006, the FASB released Statement of Financial Accounting Standards No. 157 "Fair Value Measurements" (SFAS 157). SFAS 157 establishes an authoritative definition of fair value, sets out a hierarchy for measuring fair value, and requires additional disclosures about the inputs used to develop the measurements of fair value and the effect of certain measurements reported in the Statement of Operations for a fiscal period. The application of SFAS 157 will be effective for the Fund's fiscal year beginning Sept. 1, 2008. The adoption of SFAS 157 is not anticipated to have a material impact on the Fund's financial statements; however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain measurements reported in the Statement of Operations for a fiscal period. - -------------------------------------------------------------------------------- 54 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT DIVIDENDS TO SHAREHOLDERS Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. OTHER Security transactions are accounted for on the date securities are purchased or sold. Dividend income, 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 INVESTMENT MANAGEMENT SERVICES FEES 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, 2008 was 0.45% of the Fund's average daily net assets. ADMINISTRATIVE SERVICES FEES 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 assets increase. The fee for the year ended Aug. 31, 2008 was 0.06% of the Fund's average daily net assets. OTHER FEES Other expenses 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. For the year ended Aug. 31, 2008, other expenses paid to this company were $4,110. COMPENSATION OF BOARD MEMBERS 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 DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 55 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. TRANSFER AGENCY FEES Under a Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains shareholder accounts and records. The Fund pays the Transfer Agent an annual account-based fee at a rate equal to $20.50 for Class A, $21.50 for Class B and $21.00 for Class C for this service. The Fund also 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, Class R4 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. 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. PLAN ADMINISTRATION SERVICES FEES Under a Plan Administration Services Agreement with the Transfer Agent, the Fund pays an annual fee at a rate of 0.25% of the Fund's average daily net assets attributable to Class R2, Class R3 and Class R4 shares for the provision of various administrative, recordkeeping, communication and educational services. DISTRIBUTION FEES The Fund has an agreement with RiverSource Distributors, Inc. (the Distributor) for distribution and shareholder services. Prior to Oct. 1, 2007, Ameriprise Financial Services, Inc. also served as a principal underwriter and distributor to the Fund. 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. For Class B and Class C shares, up to 0.75% of the fee is reimbursed for distribution expenses. The amount of distribution expenses incurred by the Distributor and not yet reimbursed ("unreimbursed expense") was approximately $7,263,000 and $231,000 for Class B and Class C shares, respectively. These amounts are based on the most recent information available as of July 31, 2008, and may be recovered from future payments under the distribution plan or CDSC. To the extent the unreimbursed expense has been fully recovered, the distribution fee is reduced. - -------------------------------------------------------------------------------- 56 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT SALES CHARGES Sales charges received by the Distributor for distributing Fund shares were $1,805,400 for Class A, $182,205 for Class B and $4,617 for Class C for the year ended Aug. 31, 2008. EXPENSES WAIVED/REIMBURSED BY THE INVESTMENT MANAGER AND ITS AFFILIATES For the year ended Aug. 31, 2008, the Investment Manager and its affiliates waived/reimbursed certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds*) were as follows: Class A............................................. 0.89% Class B............................................. 1.65 Class C............................................. 1.65 Class I............................................. 0.53 Class R2............................................ 1.08 Class R3............................................ 0.83 Class R4............................................ 0.76 Class R5............................................ 0.58 Class W............................................. 0.98
The waived/reimbursed fees and expenses for the transfer agency fees at the class level were as follows: Class A.......................................... $740,715 Class B.......................................... 116,929 Class C.......................................... 8,946 Class R4......................................... 39,140 Class W.......................................... 1,237
The waived/reimbursed fees and expenses for the plan administration services fees at the class level were as follows: Class R2.......................................... $18 Class R3.......................................... 18 Class R4.......................................... 12,771
The management fees waived/reimbursed at the Fund level were $620,761. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 57 Under an agreement which was effective until Aug. 31, 2008, 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 the following percentage of the Fund's average daily net assets: Class A............................................. 0.89% Class B............................................. 1.65 Class C............................................. 1.65 Class I............................................. 0.53 Class R2............................................ 1.33 Class R3............................................ 1.08 Class R4............................................ 0.77 Class R5............................................ 0.58 Class W............................................. 0.98
Effective Sept. 1, 2008, the Investment Manager and its affiliates have contractually agreed to waive certain fees and expenses until Aug. 31, 2009, unless sooner terminated at the discretion of the Board, such that net expenses (excluding fees and expenses of acquired funds*), will not exceed the following percentage of the Fund's average daily net assets: Class A............................................. 0.83% Class B............................................. 1.59 Class C............................................. 1.58 Class I............................................. 0.47 Class R2............................................ 1.27 Class R3............................................ 1.02 Class R4............................................ 0.77 Class R5............................................ 0.52 Class W............................................. 0.92
* 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. EARNINGS AND BANK FEE CREDITS During the year ended Aug. 31, 2008, the Fund's custodian and transfer agency fees were reduced by $107,103 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, but including mortgage dollar rolls) aggregated $8,313,095,004 (including $290,967,914 from RiverSource Core Bond Fund that was acquired in the fund merger as described in Note 8) and $7,648,960,216, respectively, for the - -------------------------------------------------------------------------------- 58 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT year ended Aug. 31, 2008. 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, 2008 ISSUED FOR REINVESTED NET SOLD FUND MERGER DISTRIBUTIONS REDEEMED INCREASE (DECREASE) - ------------------------------------------------------------------------------------------ Class A 80,328,319 10,921,606 14,809,220 (95,553,562) 10,505,583 Class B 16,633,194 2,743,904 2,076,386 (29,781,790) (8,328,306) Class C 4,270,266 260,158 156,349 (1,369,182) 3,317,591 Class I 40,548,778 52,110,117 4,637,299 (28,465,148) 68,831,046 Class R2 -- 1,027 -- -- 1,027 Class R3 -- 1,027 -- -- 1,027 Class R4 6,464,647 2,309 736,110 (7,142,397) 60,669 Class R5 -- 1,027 -- -- 1,027 Class W 110,115,534 1,020 3,800,802 (19,306,233) 94,611,123 - ------------------------------------------------------------------------------------------ YEAR ENDED AUG. 31, 2007 ISSUED FOR REINVESTED NET SOLD FUND MERGER DISTRIBUTIONS REDEEMED INCREASE (DECREASE) - ------------------------------------------------------------------------------------------ Class A 71,107,119 N/A 14,806,791 (105,297,428) (19,383,518) Class B 15,312,266 N/A 2,590,288 (39,059,052) (21,156,498) Class C 893,514 N/A 115,836 (1,134,124) (124,774) Class I 33,643,276 N/A 3,181,732 (14,430,925) 22,394,083 Class R2* 1,040 N/A -- -- 1,040 Class R3* 1,040 N/A -- -- 1,040 Class R4 6,169,567 N/A 931,416 (27,102,344) (20,001,361) Class R5* 1,040 N/A -- -- 1,040 Class W** 55,562,189 N/A 417,986 (9,621,147) 46,359,028 - ------------------------------------------------------------------------------------------
* For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. ** 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 - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 59 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, 2008, securities valued at $30,354,600 were on loan to brokers. For collateral, the Fund received $30,850,000 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 Portfolio of Investments. Income from securities lending amounted to $41,168 for the year ended Aug. 31, 2008. Expenses paid to the Investment Manager as securities lending agent were $5,455 for the year ended Aug. 31, 2008, 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. 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. The cost of the Fund's purchases and proceeds from sales of shares of the RiverSource Short-Term Cash Fund aggregated $1,538,322,151 and $1,254,355,172, respectively, for the year ended Aug. 31, 2008. The income distributions received with respect to the Fund's investment in RiverSource Short-Term Cash Fund can be found on the Statement of Operations and the Fund's invested balance in RiverSource Short- Term Cash Fund at Aug. 31, 2008, can be found in the Portfolio of Investments. 7. BANK BORROWINGS The Fund has entered into a revolving credit facility 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 credit facility became effective on Oct. 18, 2007, replacing a prior credit facility. The credit facility agreement, which is a collective agreement between the Fund and certain other RiverSource funds, severally and not jointly, permits collective borrowings up to $500 million. Interest is charged to each Fund based on its borrowings at a rate equal to the federal funds rate plus 0.30%. Each borrowing under the credit facility matures no later than 60 days after the date of borrowing. 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. Under the prior credit facility, a Fund paid interest on its outstanding 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. The Fund had no borrowings during the year ended Aug. 31, 2008. - -------------------------------------------------------------------------------- 60 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 8. FUND MERGER At the close of business on March 14, 2008, RiverSource Diversified Bond Fund acquired the assets and assumed the identified liabilities of RiverSource Core Bond Fund. The reorganization was completed after shareholders approved the plan on Jan. 29, 2008. The aggregate net assets of RiverSource Diversified Bond Fund immediately before the acquisition were $3,162,732,908 and the combined net assets immediately after the acquisition were $3,479,595,851. The merger was accomplished by a tax-free exchange of 33,460,754 shares of RiverSource Core Bond Fund valued at $316,862,943. In exchange for the RiverSource Core Bond Fund shares and net assets, RiverSource Diversified Bond Fund issued the following number of shares:
SHARES - ------------------------------------------------------------ Class A......................................... 10,921,606 Class B......................................... 2,743,904 Class C......................................... 260,158 Class I......................................... 52,110,117 Class R2........................................ 1,027 Class R3........................................ 1,027 Class R4........................................ 2,309 Class R5........................................ 1,027 Class W......................................... 1,020
RiverSource Core Bond Fund's net assets after adjustments for any permanent book-to-tax differences at the merger date were as follows, which include the following amounts of capital stock, unrealized depreciation, accumulated net realized loss and undistributed net income.
ACCUMULATED UNDISTRIBUTED TOTAL CAPITAL UNREALIZED NET NET NET ASSETS STOCK DEPRECIATION REALIZED LOSS INVESTMENT INCOME - -------------------------------------------------------------------------------------------- RiverSource Core Bond Fund $316,862,943 $322,093,199 $(3,350,834) $(1,764,611) $(114,811)
9. CAPITAL LOSS CARRY-OVER AND POST-OCTOBER LOSS For federal income tax purposes, the Fund had a capital loss carry-over of $123,970,058 at Aug. 31, 2008, that if not offset by capital gains will expire as follows:
2009 2010 2012 2013 2014 $56,247,571 $49,658,521 $5,227,159 $2,996,287 $9,840,520
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 61 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 Fund is permitted to treat net capital losses realized between Nov. 1 2007 and its fiscal year end ("post-October loss") as occurring on the first day of the following tax year. At Aug. 31, 2008, the Fund had a post-October loss of $1,853,459 that is treated for income tax purposes as occurring on Sept. 1, 2008. 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. 10. 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)), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. As a result, 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. AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. 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. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal - -------------------------------------------------------------------------------- 62 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 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 -- 2008 ANNUAL REPORT 63 11. 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, 2008 2007 2006 2005 2004 Net asset value, beginning of period $4.81 $4.77 $4.89 $4.87 $4.78 - -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .22(b) .21(b) .19 .18 .18 Net gains (losses) (both realized and unrealized) (.17) .05 (.11) .03 .08 - -------------------------------------------------------------------------------------------------------------- Total from investment operations .05 .26 .08 .21 .26 - -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.21) (.20) (.19) (.17) Tax return of capital -- (.01) -- -- -- - -------------------------------------------------------------------------------------------------------------- Total distributions (.21) (.22) (.20) (.19) (.17) - -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.65 $4.81 $4.77 $4.89 $4.87 - -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $1,920 $1,937 $2,013 $1,774 $1,933 - -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) .95% .97% .99% 1.02% 1.00% - -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) .89% .89% .89% .94% .98% - -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.68% 4.43% 4.09% 3.67% 3.55% - -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(g) 226% 295% 281% 300% 279% - -------------------------------------------------------------------------------------------------------------- Total return(h) .93% 5.54% 1.64% 4.38% 5.54% - --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for 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 have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended Aug. 31, 2008 were less than 0.01% of average net assets. (g) Includes mortgage dollar rolls. If mortgage dollar rolls transactions were excluded, the portfolio turnover would have been 122% for the year ended Aug. 31, 2008. (h) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 64 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT CLASS B
PER SHARE INCOME AND CAPITAL CHANGES(A) Fiscal period ended Aug. 31, 2008 2007 2006 2005 2004 Net asset value, beginning of period $4.81 $4.77 $4.89 $4.88 $4.78 - -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .19(b) .18(b) .16 .15 .14 Net gains (losses) (both realized and unrealized) (.18) .04 (.12) .01 .09 - -------------------------------------------------------------------------------------------------------------- Total from investment operations .01 .22 .04 .16 .23 - -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.17) (.18) (.16) (.15) (.13) Tax return of capital -- (.00)(c) -- -- -- - -------------------------------------------------------------------------------------------------------------- Total distributions (.17) (.18) (.16) (.15) (.13) - -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.65 $4.81 $4.77 $4.89 $4.88 - -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $254 $304 $402 $484 $628 - -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(d),(e) 1.71% 1.73% 1.76% 1.78% 1.75% - -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(e),(f),(g) 1.65% 1.65% 1.65% 1.70% 1.73% - -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.91% 3.66% 3.31% 2.92% 2.78% - -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(h) 226% 295% 281% 300% 279% - -------------------------------------------------------------------------------------------------------------- Total return(i) .16% 4.74% .88% 3.39% 4.95% - --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Rounds to zero. (d) Expense ratio is before reduction for 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 have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (g) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended Aug. 31, 2008 were less than 0.01% of average net assets. (h) Includes mortgage dollar rolls. If mortgage dollar rolls transactions were excluded, the portfolio turnover would have been 122% for the year ended Aug. 31, 2008. (i) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 65 CLASS C
PER SHARE INCOME AND CAPITAL CHANGES(A) Fiscal period ended Aug. 31, 2008 2007 2006 2005 2004 Net asset value, beginning of period $4.81 $4.77 $4.90 $4.88 $4.78 - -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .19(b) .18(b) .16 .15 .14 Net gains (losses) (both realized and unrealized) (.18) .04 (.13) .02 .09 - -------------------------------------------------------------------------------------------------------------- Total from investment operations .01 .22 .03 .17 .23 - -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.17) (.18) (.16) (.15) (.13) Tax return of capital -- (.00)(c) -- -- -- - -------------------------------------------------------------------------------------------------------------- Total distributions (.17) (.18) (.16) (.15) (.13) - -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.65 $4.81 $4.77 $4.90 $4.88 - -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $32 $17 $17 $18 $21 - -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(d),(e) 1.70% 1.73% 1.76% 1.79% 1.75% - -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(e),(f),(g) 1.65% 1.65% 1.66% 1.70% 1.73% - -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.93% 3.67% 3.31% 2.93% 2.79% - -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(h) 226% 295% 281% 300% 279% - -------------------------------------------------------------------------------------------------------------- Total return(i) .16% 4.73% .66% 3.60% 4.95% - --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Rounds to zero. (d) Expense ratio is before reduction for 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 have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (g) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended Aug. 31, 2008 were less than 0.01% of average net assets. (h) Includes mortgage dollar rolls. If mortgage dollar rolls transactions were excluded, the portfolio turnover would have been 122% for the year ended Aug. 31, 2008. (i) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 66 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(A) Fiscal period ended Aug. 31, 2008 2007 2006 2005 2004(b) Net asset value, beginning of period $4.82 $4.78 $4.89 $4.88 $4.91 - -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .24(c) .23(c) .21 .20 .11 Net gains (losses) (both realized and unrealized) (.18) .04 (.11) .02 (.04) - -------------------------------------------------------------------------------------------------------------- Total from investment operations .06 .27 .10 .22 .07 - -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.23) (.22) (.21) (.21) (.10) Tax return of capital -- (.01) -- -- -- - -------------------------------------------------------------------------------------------------------------- Total distributions (.23) (.23) (.21) (.21) (.10) - -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.65 $4.82 $4.78 $4.89 $4.88 - -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $693 $386 $276 $-- $-- - -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(d),(e) .55% .56% .55% .60% .59%(f) - -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(e),(g),(h) .53% .54% .54% .60% .59%(f) - -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 5.09% 4.80% 4.59% 4.01% 3.13%(f) - -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(i) 226% 295% 281% 300% 279% - -------------------------------------------------------------------------------------------------------------- Total return 1.07% 5.90% 2.19% 4.53% 1.43%(j) - --------------------------------------------------------------------------------------------------------------
(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 amounts have been calculated using the average shares outstanding method. (d) Expense ratio is before reduction for 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) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (h) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended Aug. 31, 2008 were less than 0.01% of average net assets. (i) Includes mortgage dollar rolls. If mortgage dollar rolls transactions were excluded, the portfolio turnover would have been 122% for the year ended Aug. 31, 2008. (j) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 67 CLASS R2
PER SHARE INCOME AND CAPITAL CHANGES(A) Fiscal period ended Aug. 31, 2008 2007(b) Net asset value, beginning of period $4.80 $4.81 - -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)(c) .21 .14 Net gains (losses) (both realized and unrealized) (.16) (.02) - -------------------------------------------------------------------------------------------------------------- Total from investment operations .05 .12 - -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.20) (.13) Total return of capital -- (.00)(d) - -------------------------------------------------------------------------------------------------------------- Total distributions (.20) (.13) - -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.65 $4.80 - -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- - -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(e),(f) 1.34% 1.32%(g) - -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(f),(h),(i) 1.08% 1.32%(g) - -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.53% 4.06%(g) - -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(j) 226% 295% - -------------------------------------------------------------------------------------------------------------- Total return .84% 2.70%(k) - --------------------------------------------------------------------------------------------------------------
(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 amounts have been calculated using the average shares outstanding method. (d) Rounds to zero. (e) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (f) 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. (g) Adjusted to an annual basis. (h) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (i) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended Aug. 31, 2008 were less than 0.01% of average net assets. (j) Includes mortgage dollar rolls. If mortgage dollar rolls transactions were excluded, the portfolio turnover would have been 122% for the year ended Aug. 31, 2008. (k) Not annualized. - -------------------------------------------------------------------------------- 68 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT CLASS R3
PER SHARE INCOME AND CAPITAL CHANGES(A) Fiscal period ended Aug. 31, 2008 2007(b) Net asset value, beginning of period $4.80 $4.81 - -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)(c) .23 .15 Net gains (losses) (both realized and unrealized) (.17) (.02) - -------------------------------------------------------------------------------------------------------------- Total from investment operations .06 .13 - -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.14) Total return of capital -- (.00)(d) - -------------------------------------------------------------------------------------------------------------- Total distributions (.21) (.14) - -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.65 $4.80 - -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- - -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(e),(f) 1.08% 1.06%(g) - -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(f),(h),(i) .83% 1.06%(g) - -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.79% 4.33%(g) - -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(j) 226% 295% - -------------------------------------------------------------------------------------------------------------- Total return 1.11% 2.90%(k) - --------------------------------------------------------------------------------------------------------------
(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 amounts have been calculated using the average shares outstanding method. (d) Rounds to zero. (e) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (f) 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. (g) Adjusted to an annual basis. (h) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (i) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended Aug. 31, 2008 were less than 0.01% of average net assets. (j) Includes mortgage dollar rolls. If mortgage dollar rolls transactions were excluded, the portfolio turnover would have been 122% for the year ended Aug. 31, 2008. (k) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 69 CLASS R4
PER SHARE INCOME AND CAPITAL CHANGES(A) Fiscal period ended Aug. 31, 2008 2007 2006 2005 2004 Net asset value, beginning of period $4.80 $4.77 $4.89 $4.88 $4.78 - -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .23(b) .22(b) .20 .19 .18 Net gains (losses) (both realized and unrealized) (.17) .04 (.12) .02 .10 - -------------------------------------------------------------------------------------------------------------- Total from investment operations .06 .26 .08 .21 .28 - -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.22) (.20) (.20) (.18) Tax return of capital -- (.01) -- -- -- - -------------------------------------------------------------------------------------------------------------- Total distributions (.22) (.23) (.20) (.20) (.18) - -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.64 $4.80 $4.77 $4.89 $4.88 - -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $75 $78 $173 $202 $203 - -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) .85% .83% .82% .86% .83% - -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) .76% .73% .73% .78% .81% - -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.81% 4.53% 4.24% 3.85% 3.70% - -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(g) 226% 295% 281% 300% 279% - -------------------------------------------------------------------------------------------------------------- Total return 1.03% 5.49% 1.81% 4.34% 5.92% - --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for 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 have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended Aug. 31, 2008 were less than 0.01% of average net assets. (g) Includes mortgage dollar rolls. If mortgage dollar rolls transactions were excluded, the portfolio turnover would have been 122% for the year ended Aug. 31, 2008. - -------------------------------------------------------------------------------- 70 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT CLASS R5
PER SHARE INCOME AND CAPITAL CHANGES(A) Fiscal period ended Aug. 31, 2008 2007(b) Net asset value, beginning of period $4.80 $4.81 - -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)(c) .24 .17 Net gains (losses) (both realized and unrealized) (.18) (.02) - -------------------------------------------------------------------------------------------------------------- Total from investment operations .06 .15 - -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.16) Total return of capital -- (.00)(d) - -------------------------------------------------------------------------------------------------------------- Total distributions (.22) (.16) - -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.64 $4.80 - -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- - -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(e),(f) .59% .59%(g) - -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(f),(h),(i) .58% .57%(g) - -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 5.02% 4.81%(g) - -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(j) 226% 295% - -------------------------------------------------------------------------------------------------------------- Total return 1.22% 3.25%(k) - --------------------------------------------------------------------------------------------------------------
(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 amounts have been calculated using the average shares outstanding method. (d) Rounds to zero. (e) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (f) 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. (g) Adjusted to an annual basis. (h) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (i) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended Aug. 31, 2008 were less than 0.01% of average net assets. (j) Includes mortgage dollar rolls. If mortgage dollar rolls transactions were excluded, the portfolio turnover would have been 122% for the year ended Aug. 31, 2008. (k) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 71 CLASS W
PER SHARE INCOME AND CAPITAL CHANGES(A) Fiscal period ended Aug. 31, 2008 2007(b) Net asset value, beginning of period $4.81 $4.82 - -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)(c) .22 .15 Net gains (losses) (both realized and unrealized) (.17) -- - -------------------------------------------------------------------------------------------------------------- Total from investment operations .05 .15 - -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.16) Total return of capital -- (.00)(d) - -------------------------------------------------------------------------------------------------------------- Total distributions (.21) (.16) - -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.65 $4.81 - -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $655 $223 - -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(e),(f) .99% .98%(g) - -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(f),(h),(i) .98% .97%(g) - -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.56% 4.32%(g) - -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(j) 226% 295% - -------------------------------------------------------------------------------------------------------------- Total return .82% 2.71%(k) - --------------------------------------------------------------------------------------------------------------
(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 amounts have been calculated using the average shares outstanding method. (d) Rounds to zero. (e) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (f) 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. (g) Adjusted to an annual basis. (h) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (i) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended Aug. 31, 2008 were less than 0.01% of average net assets. (j) Includes mortgage dollar rolls. If mortgage dollar rolls transactions were excluded, the portfolio turnover would have been 122% for the year ended Aug. 31, 2008. (k) Not annualized. - -------------------------------------------------------------------------------- 72 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 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 portfolio of investments, of RiverSource Diversified Bond Fund (the Fund), of the RiverSource Diversified Income Series, Inc. as of August 31, 2008, and the related statement of operations for the year then ended, and the statements of changes in net assets and the financial highlights for each of the two years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The 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 highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 audits 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, 2008, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 73 In our opinion, the financial statements and financial highlights audited by us as 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, 2008, the results of its operations for the year then ended, and changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota October 21, 2008 - -------------------------------------------------------------------------------- 74 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 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, 2008
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals.................... 0.00% Dividends Received Deduction for corporations................ 0.00% U.S. Government Obligations.................................. 15.89%
The Fund also designates as distributions of long-term gains, to the extent necessary to fully distribute such capital gains, earnings and profits distributed to shareholders on the redemption of shares. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 75 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 since Chief Justice, Minnesota Supreme Court, 1998-2006; None 901 S. Marquette Ave. 2006 Attorney Minneapolis, MN 55402 Age 54 - ------------------------------------------------------------------------------------------------------------------------------ Arne H. Carlson Board member since Chair, RiverSource Funds, 1999-2006; former Governor of None 901 S. Marquette Ave. 1999 Minnesota Minneapolis, MN 55402 Age 73 - ------------------------------------------------------------------------------------------------------------------------------ Pamela G. Carlton Board member since President, Springboard -- Partners in Cross Cultural None 901 S. Marquette Ave. 2007 Leadership (consulting company) Minneapolis, MN 55402 Age 53 - ------------------------------------------------------------------------------------------------------------------------------ Patricia M. Flynn Board member since Trustee Professor of Economics and Management, Bentley None 901 S. Marquette Ave. 2004 College; former Dean, McCallum Graduate School of Minneapolis, MN 55402 Business, Bentley College Age 57 - ------------------------------------------------------------------------------------------------------------------------------ Anne P. Jones Board member since Attorney and Consultant None 901 S. Marquette Ave. 1985 Minneapolis, MN 55402 Age 73 - ------------------------------------------------------------------------------------------------------------------------------ Jeffrey Laikind, CFA Board member since Former Managing Director, Shikiar Asset Management American Progressive 901 S. Marquette Ave. 2005 Insurance Minneapolis, MN 55402 Age 72 - ------------------------------------------------------------------------------------------------------------------------------ Stephen R. Lewis, Jr. Board member since President Emeritus and Professor of Economics, Carleton Valmont Industries, 901 S. Marquette Ave. 2002 and Chair of College Inc. (manufactures Minneapolis, MN 55402 the Board since 2007 irrigation systems) Age 69 - ------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 76 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 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 since Director, Enterprise Asset Management, Inc. (private None 901 S. Marquette Ave. 2004 real estate and asset management company) Minneapolis, MN 55402 Age 55 - ------------------------------------------------------------------------------------------------------------------------------ Alison Taunton-Rigby Board member since Chief Executive Officer and Director, RiboNovix, Inc. Idera 901 S. Marquette Ave. 2002 since 2003 (biotechnology); former President, Forester Pharmaceutical, Inc. Minneapolis, MN 55402 Biotech (biotechnology); Age 64 Healthways, 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 since President -- U.S. Asset Management and Chief Investment None 53600 Ameriprise 2001, Officer, Ameriprise Financial, Inc. and President, Financial Center Vice President since Chairman of the Board and Chief Investment Officer, Minneapolis, MN 55474 2002 RiverSource Investments, LLC since 2005; Director, Age 47 President and Chief Executive Officer, Ameriprise Certificate Company since 2006; Chairman of the Board, Chief Executive Officer and President, RiverSource Distributors, Inc. 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. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 77 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 2006 Director and Senior Vice President -- Asset Management, 172 Ameriprise Financial Products and Marketing, RiverSource Investments, LLC Center since 2006; Director and Vice President -- Asset Minneapolis, MN 55474 Management, Products and Marketing, RiverSource Age 42 Distributors, Inc. since 2006; Managing Director and Global Head of Product, Morgan Stanley Investment Management, 2004-2006; President, Touchstone Investments, 2002-2004 - -------------------------------------------------------------------------------------------------------- Michelle M. Keeley Vice President since Executive Vice President -- Equity and Fixed Income, 172 Ameriprise Financial 2004 Ameriprise Financial, Inc. and RiverSource Investments, Center LLC since 2006; Vice President -- Investments, Minneapolis, MN 55474 Ameriprise Certificate Company since 2003; Senior Vice Age 44 President -- Fixed Income, Ameriprise Financial, Inc., 2002-2006 and RiverSource Investments, LLC, 2004-2006 - -------------------------------------------------------------------------------------------------------- Amy K. Johnson Vice President since Vice President -- Asset Management and Trust Company 5228 Ameriprise Financial 2006 Services, RiverSource Investments, LLC since 2006; Vice Center Minneapolis, MN President -- Operations and Compliance, RiverSource 55474 Investments, LLC, 2004-2006; Director of Product Age 42 Development -- Mutual Funds, Ameriprise Financial, Inc., 2001-2004 - -------------------------------------------------------------------------------------------------------- Jeffrey P. Fox Treasurer since 2002 Vice President -- Investment Accounting, Ameriprise 105 Ameriprise Financial Financial, Inc. since 2002; Chief Financial Officer, Center RiverSource Distributors, Inc. since 2006 Minneapolis, MN 55474 Age 53 - -------------------------------------------------------------------------------------------------------- Scott R. Plummer Vice President, Vice President and Chief Counsel -- Asset Management, 5228 Ameriprise Financial General Counsel and Ameriprise Financial, Inc. since 2005; Chief Counsel, Center Secretary since 2006 RiverSource Distributors, Inc. since 2006; Vice Minneapolis, MN 55474 President, General Counsel and Secretary, Ameriprise Age 49 Certificate Company since 2005; Vice President -- Asset Management Compliance, Ameriprise Financial, Inc., 2004-2005; Senior Vice President and Chief Compliance Officer, USBancorp Asset Management, 2002-2004 - -------------------------------------------------------------------------------------------------------- Jennifer D. Lammers Chief Compliance U.S. Asset Management Chief Compliance Officer, 172 Ameriprise Financial Officer since 2006 RiverSource Investments, LLC since 2006; Center Director -- Mutual Funds, Voyageur Asset Management, Minneapolis, MN 55474 2003-2006; Director of Finance, Voyageur Asset Age 47 Management, 2000-2003 - -------------------------------------------------------------------------------------------------------- Neysa M. Alecu Money Laundering Compliance Director and Anti-Money Laundering Officer, 2934 Ameriprise Financial Prevention Officer Ameriprise Financial, Inc. since 2004; Manager Anti- Center since 2004 Money Laundering, Ameriprise Financial, Inc., 2003- Minneapolis, MN 55474 2004; Compliance Director and Bank Secrecy Act Officer, Age 44 American Express Centurion Bank, 2000-2003 - --------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 78 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT ---------------------------------------------------------------------- RiverSource Investments, LLC ("RiverSource Investments" or the "investment manager"), 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 Investments provides investment advice and other services to the Fund and all RiverSource funds (collectively, the "Funds"). On an annual basis, the Fund's Board of Directors (the "Board"), including the independent Board members (the "Independent Directors"), considers renewal of the IMS Agreement. RiverSource Investments prepared detailed reports for the Board and its Contracts Committee in March and April 2008, 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 Investments addressing the services RiverSource Investments provides and Fund performance. The Board accords particular weight to the work, deliberations and conclusions of the Contracts, Investment Review and Compliance Committees in determining whether to continue the IMS Agreement. At the April 9-10, 2008 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 Investments: The Board analyzed various reports and presentations it had received detailing the services performed by RiverSource Investments, as well as its expertise, resources and capabilities. The Board specifically considered many developments during the past year concerning the services provided by RiverSource Investments, including, in particular, the continued investment in, and resources dedicated to, the Fund's operations, particularly in the areas of trading systems, new product initiatives, legal and compliance. Further, in connection with the Board's evaluation of the overall package of services provided by RiverSource Investments, the Board considered the quality of the administrative and transfer agency services provided by RiverSource Investments' affiliates to the Fund. The Board also reviewed the financial condition of RiverSource Investments (and its affiliates) and each 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 Investments). The Board concluded that the services - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT 79 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT (continued) ---------------------------------------------------------- being performed under the IMS Agreement were of a reasonably high quality, particularly in light of recent market conditions. 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 concluded that RiverSource Investments and its affiliates were 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 2007. The Board observed that the Fund's investment performance was appropriate in light of the particular management style and market conditions involved. Comparative Fees, Costs of Services Provided and the Profits Realized By RiverSource Investments 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 Investments' 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 observed that the Fund's expense ratio (after considering proposed expense caps/waivers) approximated the peer group's median expense ratio. Based on its review, the Board concluded that - -------------------------------------------------------------------------------- 80 RIVERSOURCE DIVERSIFIED BOND FUND -- 2008 ANNUAL REPORT - -------------------------------------------------------------------------------- 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 Investments and its affiliates in connection with RiverSource Investments providing investment management services to the Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to RiverSource Investments and Ameriprise Financial from managing and operating the Fund, including data showing comparative profitability over the past two years. 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 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 Investments 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 10, 2008, 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 -- 2008 ANNUAL REPORT 81 RIVERSOURCE 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, Inc. (RIVERSOURCE INVESTMENTS LOGO) (C) 2008 RiverSource Distributors, Inc. S-6495 AC (10/08)
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: 2008 - $26,125 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: 2008 - $375 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: 2008 - $3,498 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: 2008 - $0 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 2008 and 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: 2008 - $617,073 2007 - $511,730 (h) 100% of the services performed in item (g) above during 2008 and 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 4, 2008 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 4, 2008 By /s/ Jeffrey P. Fox ---------------------------------- Jeffrey P. Fox Treasurer and Principal Financial Officer Date November 4, 2008 EX-99.CODEETH 2 c35639exv99wcodeeth.txt CODE OF ETHICS 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: i. 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; ii. annually thereafter affirm to the Boards that he or she has complied with the requirements of the Code; iii. 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 iv. 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; v. will take all appropriate action to investigate such reported violations; vi. 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 EX-99.CERT 3 c35639exv99wcert.txt CERTIFICATION 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 21, 2008 /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 21, 2008 /s/ Jeffrey P. Fox - ------------------------------------- Name: Jeffrey P. Fox Title: Treasurer and Principal Financial Officer EX-99.906CERT 4 c35639exv99w906cert.txt 906 CERTIFICATION 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 21, 2008 /s/ Patrick T. Bannigan ----------------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date: October 21, 2008 /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-----