-----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, NTspbO+FXp1hMfTZRNEVGda01CITvBsW/1CuVErTxpUqRtT+FEtXy6zJVMhqQ+Y3 0mv/eFKpA7chcujRQ/LDUg== 0001068800-06-001372.txt : 20061103 0001068800-06-001372.hdr.sgml : 20061103 20061103145112 ACCESSION NUMBER: 0001068800-06-001372 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060831 FILED AS OF DATE: 20061103 DATE AS OF CHANGE: 20061103 EFFECTIVENESS DATE: 20061103 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: 061186368 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 C000009235 RiverSource Diversified Bond Fund Class Y IDBYX N-CSR 1 diversified-inc_ncsr.txt RIVERSOURCE DIVERSIFIED INCOME SERIES, INC. 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) Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268 - -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (612) 330-9283 ----------------- Date of fiscal year end: 8/31 -------------- Date of reporting period: 8/31 -------------- Annual Report RIVERSOURCE [LOGO](SM) INVESTMENTS RIVERSOURCE(SM) DIVERSIFIED BOND FUND - ------------------------------------------------------------------------------ ANNUAL REPORT FOR THE PERIOD ENDED AUG. 31, 2006 > RIVERSOURCE DIVERSIFIED BOND FUND SEEKS TO PROVIDE SHAREHOLDERS WITH A HIGH LEVEL OF CURRENT INCOME WHILE CONSERVING THE VALUE OF THE INVESTMENT FOR THE LONGEST PERIOD OF TIME. - ------------------------------------------------------------------------------ TABLE OF CONTENTS Fund Snapshot ...................................3 Performance Summary .............................5 Questions & Answers with Portfolio Management ....................7 The Fund's Long-term Performance ...............10 Investments in Securities ......................12 Financial Statements ...........................29 Notes to Financial Statements ..................33 Report of Independent Registered Public Accounting Firm ......................51 Federal Income Tax Information .................52 Fund Expenses Example ..........................55 Board Members and Officers .....................57 Approval of Investment Management Services Agreement ..........................60 Proxy Voting ...................................60
[LOGO] DALBAR RATED 2006 FOR COMMUNICATION The RiverSource mutual fund shareholder reports have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. - ------------------------------------------------------------------------------ 2 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT FUND SNAPSHOT AT AUG. 31, 2006 - ------------------------------------------------------------------------------ FUND OVERVIEW - ------------------------------------------------------------------------------ RiverSource Diversified Bond Fund combines securities from all fixed income sectors including U.S. government, corporate, and mortgage-backed securities. Although the Fund emphasizes high and medium quality bonds, it opportunistically adds exposure to high yield and emerging markets. The Fund's intermediate-term portfolio is less volatile when interest rates fluctuate. The multisector structure of the Fund provides a one-stop investment opportunity for fixed income investors. - ------------------------------------------------------------------------------ SECTOR BREAKDOWN - ------------------------------------------------------------------------------ Percentage of portfolio assets Mortgage-Backed 40.2% U.S. Government Obligations & Agencies 22.2% Corporate Bonds* 16.0% Commercial Mortgage-Backed 12.7% [PIE CHART] Short-Term Securities** 6.3% Asset-Backed 2.4% Foreign Government 0.2% * Includes Telecommunication 5.2%, Utilities 3.4%, Consumer Discretionary 2.0%, Financials 1.7%, Health Care 1.2%, Consumer Staples 1.1%, Energy 0.8%, Industrials 0.5% and Materials 0.1%. ** Of the 6.3%, 1.3% is due to security lending activity and 5.0% is the Fund's cash equivalent position.
- ------------------------------------------------------------------------------ QUALITY BREAKDOWN - ------------------------------------------------------------------------------ Percentage of bond portfolio assets AAA bonds 81.6% AA bonds 0.6% A bonds 4.7% [PIE CHART] BBB bonds 11.1% Non-investment grade bonds 2.0%
Bond ratings apply to underlying holdings of the Fund and not the Fund itself. Whenever possible, the Standard and Poor's rating is used to determine the credit quality of a security. Standard and Poor's rates the creditworthiness of corporate bonds, with 15 categories, ranging from AAA (highest) to D (lowest). Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. If Standard and Poor's doesn't rate a security, then Moody's rating is used. RiverSource Investments, LLC, the Fund's investment manager, rates a security using an internal rating system when Moody's doesn't provide a rating. 0.2% of the portfolio rating above was determined through internal analysis. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 3 FUND SNAPSHOT AT AUG. 31, 2006 - ------------------------------------------------------------------------------ STYLE MATRIX - ------------------------------------------------------------------------------ [chart] Shading within the style matrix indicates areas in which the Fund generally invests. DURATION SHORT INT. LONG X HIGH X MEDIUM QUALITY LOW The style matrix can be a valuable tool for constructing and monitoring your portfolio. It provides a frame of reference for distinguishing the types of stocks or bonds owned by a mutual fund, and serves as a guideline for helping you build a portfolio. Investment products, including shares of mutual funds, involve investment risks including possible loss of principal and fluctuation in value. - ------------------------------------------------------------------------------ SEC YIELDS - ------------------------------------------------------------------------------
AT AUG. 31, 2006 AT SEPT. 29 2006* Class A 4.35% 4.26% Class B 3.81% 3.71% Class C 3.81% 3.70% Class I 4.92% 4.82% Class Y 4.73% 4.63% * The last business day of the period.
The Securities and Exchange Commission (SEC) yield is calculated by dividing anticipated net investment income during a 31-day period by the public offering price (POP) per share on the last day of the period, and converting the results to yearly figures. See Average Annual Total Returns on page 6 for additional performance information. - ------------------------------------------------------------------------------ PORTFOLIO MANAGERS - ------------------------------------------------------------------------------
YEARS IN INDUSTRY Jamie Jackson, CFA 18 Scott Kirby 27 Tom Murphy, CFA 20 Nicholas Pifer, CFA 16 Jennifer Ponce de Leon 17
- ------------------------------------------------------------------------------ FUND FACTS - ------------------------------------------------------------------------------
TICKER SYMBOL INCEPTION DATE Class A INBNX 10/3/74 Class B ININX 3/20/95 Class C AXBCX 6/26/00 Class I RDBIX 3/4/04 Class Y IDBYX 3/20/95 Total net assets $2.881 billion Number of holdings 450 Weighted average life(1) 6.2 years Effective duration(2) 4.4 years Weighted average bond rating(3) AA+ (1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) EFFECTIVE DURATION measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio.
There are risks associated with an investment in a bond fund, including credit risk, interest rate risk and prepayment and extension risk. See the Fund's prospectus for information on these and other risks associated with the Fund. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. Non-investment grade securities, commonly called "high-yield" or "junk" bonds, generally have more volatile prices and carry more risk to principal and income than investment grade securities. - ------------------------------------------------------------------------------ 4 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT PERFORMANCE SUMMARY PERFORMANCE COMPARISON For the year ended Aug. 31, 2006 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
RiverSource Diversified Bond Fund Lehman Brothers Class A (excluding Aggregate Bond Lipper Intermediate sales charge) Index (unmanaged) Investment Grade Index +1.64% +1.71% +1.62%
(see "The Fund's Long-term Performance" for Index descriptions) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial institution or visiting riversource.com/funds. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. It is not possible to invest directly in an index. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 5 - ------------------------------------------------------------------------------ AVERAGE ANNUAL TOTAL RETURNS - ------------------------------------------------------------------------------ AT AUG. 31, 2006
SINCE Without sales charge 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION - ------------------------------------------------------------------------------------- Class A (inception 10/3/74) +1.64% +3.84% +3.91% +5.44% +9.18% - ------------------------------------------------------------------------------------- Class B (inception 3/20/95) +0.88% +3.06% +3.13% +4.64% +5.31% - ------------------------------------------------------------------------------------- Class C (inception 6/26/00) +0.66% +3.05% +3.12% N/A +4.45% - ------------------------------------------------------------------------------------- Class I (inception 3/4/04) +2.19% N/A N/A N/A +3.27% - ------------------------------------------------------------------------------------- Class Y (inception 3/20/95) +1.81% +4.01% +4.08% +5.59% +6.26% - ------------------------------------------------------------------------------------- With sales charge - ------------------------------------------------------------------------------------- Class A (inception 10/3/74) -3.19% +2.17% +2.91% +4.93% +9.02% - ------------------------------------------------------------------------------------- Class B (inception 3/20/95) -4.00% +1.79% +2.78% +4.64% +5.31% - ------------------------------------------------------------------------------------- Class C (inception 6/26/00) -0.31% +3.05% +3.12% N/A +4.45% - -------------------------------------------------------------------------------------
AT SEPT. 30, 2006
SINCE Without sales charge 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION - ------------------------------------------------------------------------------------- Class A (inception 10/3/74) +3.41% +3.31% +4.16% +5.30% +9.18% - ------------------------------------------------------------------------------------- Class B (inception 3/20/95) +2.63% +2.53% +3.37% +4.51% +5.33% - ------------------------------------------------------------------------------------- Class C (inception 6/26/00) +2.41% +2.46% +3.32% N/A +4.52% - ------------------------------------------------------------------------------------- Class I (inception 3/4/04) +3.96% N/A N/A N/A +3.49% - ------------------------------------------------------------------------------------- Class Y (inception 3/20/95) +3.58% +3.47% +4.28% +5.45% +6.29% - ------------------------------------------------------------------------------------- With sales charges - ------------------------------------------------------------------------------------- Class A (inception 10/3/74) -1.50% +1.65% +3.15% +4.79% +9.02% - ------------------------------------------------------------------------------------- Class B (inception 3/20/95) -2.32% +1.27% +3.02% +4.51% +5.33% - ------------------------------------------------------------------------------------- Class C (inception 6/26/00) +1.42% +2.46% +3.32% N/A +4.52% - -------------------------------------------------------------------------------------
Class A share performance reflects the maximum sales charge of 4.75%. Class B reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second and third years 4%; fourth year 3%; fifth year 2%; sixth year 1%. No sales charge thereafter. Class C shares may be subject to a 1% CDSC. Sales charges do not apply to Class I and Class Y shares. These share classes are available to institutional investors only. - ------------------------------------------------------------------------------ 6 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT QUESTIONS & ANSWERS WITH PORTFOLIO MANAGEMENT Below, the portfolio management team for RiverSource Diversified Bond Fund discusses the Fund's results and positioning for the 12 months ended Aug. 31, 2006. On March 10, 2006, the assets of RiverSource Selective Fund were merged into RiverSource Diversified Bond Fund. This reorganization was completed after shareholders of RiverSource Selective Fund approved the merger plan on Feb. 15, 2006. Q: How did RiverSource Diversified Bond Fund perform for the annual period? A: RiverSource Diversified Bond Fund's Class A shares (excluding sales charge) returned 1.64% for the 12 months ended Aug. 31, 2006. The Fund underperformed its benchmark, the unmanaged Lehman Brothers Aggregate Bond Index (Lehman Index), which gained 1.71%. The Fund outperformed its peer group, as represented by the Lipper Intermediate Investment Grade Index, which returned 1.62% during the same period. Q: What factors most significantly affected the Fund's performance? A: Increases in short-term interest rates had the greatest impact on the Fund. Short-term interest rates were forced higher by the Federal Reserve Board (the Fed), which raised its target for the federal funds rate, an interest rate that affects short-term rates, to 5.25% from 3.50%. In early August, the Fed observed its first pause in its two-year tightening cycle, noting that economic growth appeared to be moderating somewhat and inflation pressures -- though elevated -- were expected to recede over the balance of the year and into 2007. As a result of this Fed pause, rates declined during August in a sharp reversal of what had been a steady rise in interest rates. Thus, most of the Fund's returns were achieved during this last month of the fiscal year. Given the rising interest rate environment throughout the majority of the fiscal year, we maintained a defensive posture on duration, which helped mitigate the Fund's interest rate risk. Duration is a measure of the Fund's sensitivity to interest rate changes. Also, while interest rates moved higher across the fixed income yield curve during most of the annual period, they did so significantly more so at the short-term end of the curve than at the long-term end. This resulted in a continued flattening of the yield curve. The Fund also benefited during much of the period from its moderate exposure to bonds with shorter maturities in favor of those with longer maturities, i.e., its yield curve flattening bias. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 7 QUESTIONS & ANSWERS Also helping the Fund's results was its issue selection within the mortgage-backed securities sector of the fixed income market. The Fund's defensive positioning in higher coupon mortgages, adjustable rate mortgages (ARMs) and collateralized mortgage obligations (CMOs) helped results, as these securities outperformed Treasuries during the 12 months ended Aug. 31, 2006. - ------------------------------------------------------------------------------ GIVEN THE RISING INTEREST RATE ENVIRONMENT THROUGHOUT THE MAJORITY OF THE FISCAL YEAR, WE MAINTAINED A DEFENSIVE POSTURE ON DURATION, WHICH HELPED MITIGATE THE FUND'S INTEREST RATE RISK. - ------------------------------------------------------------------------------ Also contributing positively to the Fund's performance during the annual period was its positioning in non-U.S. dollar bonds, or bonds denominated in foreign currencies. The U.S. dollar weakened vs. most major international currencies, including the euro and the British pound, during the fiscal year, increasing the value of the Fund's non-U.S. dollar bonds in U.S. dollar terms. Remember, a weakening U.S. dollar increases the value of the Fund's foreign currency denominated securities when expressed in U.S. dollar terms and vice versa. Finally, an allocation to high yield corporate bonds further boosted the Fund's returns, as high yield corporate bonds were among the best-performing fixed income sectors during the period. Conversely, detracting from the Fund's returns was its comparatively greater emphasis on higher quality investments than its benchmarks. While the portfolio's securities performed well, they did not keep pace with even stronger performance by the riskier segments of the market, and so the Fund's performance lagged relative to the Lehman Index. Q: What changes did you make to the Fund's portfolio during the period? A: We maintained a shorter duration position than the Lehman Index for most of the annual period. However, by May, once 10-year Treasury yields breached the 5% level and we began to anticipate the Fed nearing an end to its tightening cycle, we moved toward a neutral duration position relative to the Lehman Index. - ------------------------------------------------------------------------------ 8 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT QUESTIONS & ANSWERS We increased the Fund's already sizable allocation to mortgage-backed securities by reducing its exposure to agencies and investment-grade corporate bonds. In June, we initiated a yield curve steepening bias by selling longer-maturity bonds in favor of two-year Treasuries, in an effort to take advantage of our expectation that long-term rates will rise more than short-term rates over the coming months. The Fund's portfolio turnover rate for the annual period was 281%.* Q: How do you intend to manage the Fund in the coming months? A: U.S. interest rates across the range of maturities, or yield curve, have declined to levels that appear too low given our view that the economy may slow modestly. We would characterize the slowing economy as a "soft landing" and we think inflation may be nudged higher over the remainder of 2006. Thus, we believe the Fed is likely to pause with its targeted federal funds rate at its current 5.25% for an extended period of time. Based on this view, we intend to maintain the Fund's duration only modestly shorter than the Lehman Index for the near term and we continue to favor shorter maturity notes over longer maturity bonds. We intend to maintain the Fund's modest exposure to investment-grade corporate bonds and its more significant allocations to mortgage-backed securities, commercial mortgage-backed securities and asset-backed securities. Mortgages remain an attractive source of yield, given our views that interest rates will likely be rather range-bound during the next several months. However, the strong performance of mortgages toward the end of the annual period will likely lead us to moderately reduce the Fund's still significant allocation to the sector. As always, we will maintain a disciplined focus on individual security selection. * A significant portion of the turnover was the result of "roll" transactions in the liquid derivatives and Treasury securities. In the derivative transactions, positions in expiring contracts are liquidated and simultaneously replaced with positions in new contracts with equivalent characteristics. In the Treasury transactions, existing holdings are sold to purchase newly issued securities with slightly longer maturity dates. Although these transactions affect the turnover rate of the portfolio, they do not change the risk exposure or result in material transaction costs. The remaining turnover resulted from strategic reallocations and relative value trading. After transaction costs, we expect this activity to enhance the returns on the overall fund. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 9 THE FUND'S LONG-TERM PERFORMANCE The chart on the facing page illustrates the total value of an assumed $10,000 investment in RiverSource Diversified Bond Fund Class A shares (from 9/1/96 to 8/31/06) as compared to the performance of two widely cited performance indices, the Lehman Brothers Aggregate Bond Index and the Lipper Intermediate Investment Grade Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distribution paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial institution or visiting riversource.com/funds. Also see "Past Performance" in the Fund's current prospectus. COMPARATIVE RESULTS
Results at Aug. 31, 2006 SINCE 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION(3) RIVERSOURCE DIVERSIFIED BOND FUND (INCLUDES SALES CHARGE) - -------------------------------------------------------------------------------------------------------- Class A Cumulative value of $10,000 $ 9,681 $10,665 $11,542 $16,174 $157,328 - -------------------------------------------------------------------------------------------------------- Average annual total return -3.19% +2.17% +2.91% +4.93% +9.02% - -------------------------------------------------------------------------------------------------------- LEHMAN BROTHERS AGGREGATE BOND INDEX(1) - -------------------------------------------------------------------------------------------------------- Cumulative value of $10,000 $10,171 $11,242 $12,684 $18,792 N/A - -------------------------------------------------------------------------------------------------------- Average annual total return +1.71% +3.98% +4.87% +6.51% N/A - -------------------------------------------------------------------------------------------------------- LIPPER INTERMEDIATE INVESTMENT GRADE INDEX(2) - -------------------------------------------------------------------------------------------------------- Cumulative value of $10,000 $10,162 $11,258 $12,552 $18,118 N/A - -------------------------------------------------------------------------------------------------------- Average annual total return +1.62% +4.03% +4.65% +6.12% N/A - --------------------------------------------------------------------------------------------------------
Results for other share classes can be found on page 6. - ------------------------------------------------------------------------------ 10 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE DIVERSIFIED BOND FUND [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
RiverSource Diversified Lehman Brothers Lipper Intermediate Bond Fund Class A Aggregate Bond Investment Grade Year (includes sales charge) Index(1) Index(2) - ----------- ----------------------- --------------- ------------------- 1996 $ 9,525 $10,000 $10,000 1997 $10,674 $11,000 $10,959 1998 $11,357 $12,163 $12,000 1999 $11,545 $12,260 $12,053 2000 $12,085 $13,187 $12,846 2001 $13,351 $14,815 $14,427 2002 $13,769 $16,017 $15,271 2003 $14,445 $16,715 $16,093 2004 $15,245 $17,740 $17,081 2005 $15,913 $18,476 $17,829 2006 $16,174 $18,792 $18,118 (1) The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. (2) The Lipper Intermediate Investment Grade Index includes the 30 largest investment grade funds tracked by Lipper Inc. The index's returns include net reinvested dividends. (3) Fund data is from Oct. 3, 1974. The Fund began operating before the inception of the Lehman Brothers Aggregate Bond Index and Lipper peer group.
- ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 11 INVESTMENTS IN SECURITIES AUG. 31, 2006 (Percentages represent value of investments compared to net assets) - ------------------------------------------------------------------------------ BONDS (103.3%) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT SOVEREIGN (0.2%) United Mexican States 09-27-34 6.75% $ 5,310,000(c) $ 5,633,910 - ----------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATIONS & AGENCIES (24.6%) Federal Farm Credit Bank 10-10-08 4.25 13,285,000 13,077,807 Federal Home Loan Bank 01-18-08 4.63 32,935,000 32,713,347 02-08-08 4.63 16,900,000 16,784,945 02-13-08 5.25 29,685,000 29,738,760 Federal Home Loan Mtge Corp 08-17-07 4.00 11,155,000 11,022,746 06-15-08 3.88 67,935,000 66,534,180 10-15-08 5.13 25,085,000 25,119,667 03-15-09 5.75 9,385,000 9,543,775 07-15-09 4.25 10,000,000 9,791,350 07-12-10 4.13 27,222,000 26,362,683 Federal Natl Mtge Assn 09-15-07 4.25 24,930,000 24,682,694 01-15-08 4.63 15,565,000 15,463,055 08-15-08 3.25 86,170,000 83,311,741 10-15-08 4.50 19,250,000 19,032,706 Overseas Private Investment U.S. Govt Guaranty Series 1996A 09-15-08 6.99 2,777,778 2,833,528 U.S. Treasury 02-15-08 3.38 330,000 323,117 05-31-08 4.88 25,745,000 25,761,091 08-15-09 4.88 10,655,000 10,703,278 07-31-11 4.88 21,415,000(g) 21,573,942 08-31-11 4.75 46,000,000(e) 45,859,838 08-15-23 6.25 93,994,000(j) 107,777,374 02-15-26 6.00 71,171,000 80,384,299 U.S. Treasury Inflation-Indexed Bond 01-15-07 3.38 29,056,133(r) 29,045,454 --------------- Total 707,441,377 - -----------------------------------------------------------------------------
- ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT ASSET-BACKED (2.6%) Capital Auto Receivables Asset Trust Series 2004-1 Cl CTFS 09-15-10 2.84% $ 4,200,000 $ 4,104,191 Capital Auto Receivables Asset Trust Series 2006-SN1A Cl A4B 03-20-10 5.44 9,400,000(b,d) 9,400,000 Capital Auto Receivables Asset Trust Series 2006-SN1A Cl D 04-20-11 6.33 2,500,000(d) 2,504,883 College Loan Corporation Trust Collateralized Mtge Obligation Interest Only Series 2006-1 Cl AIO 07-25-08 5.62 14,700,000(l) 2,659,207 Countrywide Asset-backed Ctfs Series 2005-10 Cl AF6 02-25-36 4.92 1,865,000 1,803,813 Countrywide Asset-backed Ctfs Series 2006-4 Cl 1A1M 07-25-36 5.58 4,112,574(b) 4,116,809 Dunkin Securitization Series 2006-1 Cl A2 (AMBAC) 06-20-31 5.78 5,575,000(d,n) 5,639,631 Ford Credit Floorplan Master Owner Trust Series 2006-3 Cl A 06-15-11 5.51 22,200,000(b) 22,258,963 Hertz Vehicle Financing LLC Series 2004-1A Cl A3 (MBIA) 05-25-09 2.85 2,600,000(d,n) 2,511,299 Metris Master Trust Series 2004-2 Cl D 10-20-10 8.57 1,200,000(b,d) 1,203,264 Metris Master Trust Series 2005-1A Cl D 03-21-11 7.23 1,375,000(b,d) 1,376,570
See accompanying notes to investments in securities. - ------------------------------------------------------------------------------ 12 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT - ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT ASSET-BACKED (CONT.) Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-2 Cl AIO 08-25-11 5.89% $ 8,875,000(l) $ 2,249,005 Popular ABS Mtge Pass-Through Trust Series 2005-A Cl AF2 06-25-35 4.49 3,615,000 3,560,237 Renaissance Home Equity Loan Trust Series 2005-4 Cl A3 02-25-36 5.57 4,670,000 4,654,029 Residential Asset Securities Series 2006-KS1 Cl A2 02-25-36 5.46 7,225,000(b) 7,223,873 WFS Financial Owner Trust Series 2004-1 Cl D 08-22-11 3.17 592,004 583,625 --------------- Total 75,849,399 - ----------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (13.9%)(f) Banc of America Commercial Mtge Series 2005-1 Cl A4 11-10-42 5.04 4,850,000 4,792,085 Banc of America Commercial Mtge Series 2005-4 Cl A5A 07-10-45 4.93 10,450,000 10,053,214 Banc of America Commercial Mtge Series 2005-4 Cl ASB 07-10-45 4.87 4,050,000 3,937,796 Banc of America Commercial Mtge Series 2006-2 Cl AAB 05-10-45 5.91 5,200,000 5,313,012 Banc of America Commercial Mtge Series 2006-4 Cl AAB 07-10-15 5.60 5,375,000 5,402,165 Banc of America Large Loan Series 2006-LAQ Cl E 02-09-21 5.75 3,350,000(b,d) 3,364,298 Banc of America Large Loan Series 2006-LAQ Cl F 02-09-21 5.81 3,750,000(b,d) 3,763,016 Banc of America Large Loan Series 2006-LAQ Cl G 02-09-21 5.90 2,625,000(b,d) 2,629,945
- ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT COMMERCIAL MORTGAGE-BACKED (CONT.) Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03-13-40 4.00% $ 2,716,395 $ 2,618,034 Bear Stearns Commercial Mtge Securities Series 2005-PW10 Cl A4 12-11-40 5.41 6,450,000 6,422,925 Bear Stearns Commercial Mtge Securities Series 2005-T20 Cl E 10-12-42 5.30 3,200,000 3,081,760 CDC Commercial Mtge Trust Series 2002-FX1 Cl A2 11-15-30 5.68 11,750,000 11,945,295 Citigroup Commercial Mtge Trust Series 2005-EMG Cl A1 09-20-51 4.15 8,231,436(d) 8,065,960 Citigroup/Deutsche Bank Commercial Mtge Trust Series 2005-CD1 Cl ASB 07-15-44 5.40 3,050,000 3,031,568 Commercial Mtge Pass-Through Ctfs Series 2006-CN2A Cl BFL 02-05-19 5.72 2,550,000(b,d) 2,564,182 Credit Suisse Mtge Capital Ctfs Series 2006-C2 Cl A3 03-15-39 5.85 5,000,000 5,088,172 CS First Boston Mtge Securities Series 2005-C5 Cl A4 08-15-38 5.10 21,065,000 20,527,705 Federal Natl Mtge Assn #385683 02-01-13 4.83 6,221,674 6,081,824 Federal Natl Mtge Assn #385815 01-01-13 4.77 7,285,524 7,112,065 Federal Natl Mtge Assn #555806 10-01-13 5.11 529,737 523,922 Federal Natl Mtge Assn #745629 01-01-18 5.08 3,535,166 3,459,337 GE Capital Commercial Mtge Series 2004-C2 Cl A2 03-10-40 4.12 6,250,000 6,033,688 General Electric Capital Assurance Series 2003-1 Cl A3 05-12-35 4.77 10,350,000(d) 10,140,599
See accompanying notes to investments in securities. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 13 - ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT COMMERCIAL MORTGAGE-BACKED (CONT.) GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05-15-33 6.30% $ 8,000,000 $ 8,175,513 Greenwich Capital Commercial Funding Series 2004-GG1 Cl A5 06-10-36 4.88 3,400,000 3,344,768 Greenwich Capital Commercial Funding Series 2006-GG7 Cl A4 07-10-38 6.11 15,700,000 16,285,319 Greenwich Capital Commercial Funding Series 2006-GG7 Cl AAB 07-10-38 6.11 5,250,000 5,423,330 GS Mtge Securities II Series 2004-GG2 Cl A4 08-10-38 4.96 5,900,000 5,819,451 JPMorgan Chase Commercial Mtge Securities Series 2002-CIB5 Cl A1 10-12-37 4.37 6,525,232 6,397,393 JPMorgan Chase Commercial Mtge Securities Series 2003-CB6 Cl A2 07-12-37 5.26 11,000,000 10,920,710 JPMorgan Chase Commercial Mtge Securities Series 2003-LN1 Cl A1 10-15-37 4.13 3,986,677 3,843,624 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A1 03-12-39 3.97 3,945,402 3,819,004 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A2 03-12-39 4.77 6,869,000 6,646,765 JPMorgan Chase Commercial Mtge Securities Series 2004-CBX Cl A3 01-12-37 4.18 4,000,000 3,880,588 JPMorgan Chase Commercial Mtge Securities Series 2005-LDP2 Cl A1 07-15-42 4.33 6,648,477 6,527,474 JPMorgan Chase Commercial Mtge Securities Series 2005-LDP5 Cl A4 12-15-44 5.34 10,825,000 10,684,012 JPMorgan Chase Commercial Mtge Securities Series 2006-LDP6 Cl A4 04-15-43 5.48 4,250,000 4,245,243
- ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT COMMERCIAL MORTGAGE-BACKED (CONT.) JPMorgan Chase Commercial Mtge Securities Series 2006-LDP6 Cl ASB 04-15-43 5.49% $ 6,450,000 $ 6,461,517 LB-UBS Commercial Mtge Trust Series 2002-C2 Cl A3 06-15-26 5.39 10,150,000 10,199,162 LB-UBS Commercial Mtge Trust Series 2002-C4 Cl A4 09-15-26 4.56 7,000,000 6,826,282 LB-UBS Commercial Mtge Trust Series 2002-C4 Cl A5 09-15-31 4.85 6,000,000 5,859,690 LB-UBS Commercial Mtge Trust Series 2004-C2 Cl A3 03-15-29 3.97 4,475,000 4,195,492 LB-UBS Commercial Mtge Trust Series 2004-C8 Cl A2 12-15-29 4.20 8,100,000 7,851,654 LB-UBS Commercial Mtge Trust Series 2005-C5 Cl AAB 09-15-30 4.93 7,300,000 7,123,778 LB-UBS Commercial Mtge Trust Series 2006-C3 Cl AAB 03-15-39 5.64 5,950,000 6,022,947 LB-UBS Commercial Mtge Trust Series 2006-C4 Cl AAB 06-15-32 6.07 4,100,000 4,229,110 Merrill Lynch Mtge Trust Series 2006-C1 Cl A4 05-12-39 5.84 11,625,000 11,853,501 Morgan Stanley Capital I Series 2003-IQ4 Cl A1 05-15-40 3.27 4,656,731 4,459,442 Morgan Stanley Capital I Series 2003-T11 Cl A2 06-13-41 4.34 4,550,000 4,436,474 Morgan Stanley Capital I Series 2004-HQ4 Cl A5 04-14-40 4.59 4,950,000 4,773,681 Morgan Stanley Capital I Series 2005-IQ10 Cl A4A 09-15-42 5.23 6,125,000 6,018,666
See accompanying notes to investments in securities. - ------------------------------------------------------------------------------ 14 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT - ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT COMMERCIAL MORTGAGE-BACKED (CONT.) Morgan Stanley Capital I Series 2005-T19 Cl AAB 06-12-47 4.85% $ 9,125,000 $ 8,879,141 Morgan Stanley Capital I Series 2006-T23 Cl AAB 08-12-41 5.97 3,425,000 3,519,990 Morgan Stanley Capital I Series 2006-XLF Cl A2 07-15-19 5.53 6,500,000(b,d) 6,500,000 Morgan Stanley Dean Witter Capital I Series 2002-TOP7 Cl A2 01-15-39 5.98 19,810,000 20,396,007 Prudential Commercial Mtge Trust Series 2003-PWR1 Cl A1 02-11-36 3.67 5,523,712 5,291,069 Wachovia Bank Commercial Mtge Trust Series 2003-C4 Cl A2 04-15-35 4.57 14,000,000 13,588,151 Wachovia Bank Commercial Mtge Trust Series 2005-C20 Cl A5 07-15-42 5.09 4,642,000 4,591,735 Wachovia Bank Commercial Mtge Trust Series 2006-C24 Cl APB 03-15-45 5.58 4,350,000 4,393,043 Wachovia Bank Commercial Mtge Trust Series 2006-C25 Cl APB2 05-15-43 5.95 4,225,000 4,320,694 Wachovia Bank Commercial Mtge Trust Series 2006-C27 Cl A3 07-15-45 5.77 2,900,000 2,898,289 Wachovia Bank Commercial Mtge Trust Series 2006-C27 Cl APB 07-15-45 5.73 5,075,000 5,075,609 --------------- Total 401,730,885 - ----------------------------------------------------------------------------- MORTGAGE-BACKED (43.7%)(f,o) Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-12 Cl 2A1 03-25-36 5.73 9,435,847(m) 9,446,582 Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2006-1 Cl 2A1 03-25-36 5.98 10,761,056(m) 10,909,882
- ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MORTGAGE-BACKED (CONT.) American Home Mtge Assets Collateralized Mtge Obligation Series 2006-2 Cl 2A2 09-25-46 5.62% $ 18,664,464(m) $ 18,664,464 American Home Mtge Assets Collateralized Mtge Obligation Series 2006-3 Cl 3A2 10-25-46 5.58 11,794,669(m) 11,794,669 Banc of America Funding Collateralized Mtge Obligation Series 2006-A Cl 3A2 02-20-36 5.93 7,524,999(m) 7,593,401 Bank of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 1A1 01-25-34 6.00 7,878,421 7,814,369 Bank of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 4A1 01-25-19 4.75 4,331,157 4,170,094 Bank of America Alternative Loan Trust Collateralized Mtge Obligation Series 2004-3 Cl 1A1 04-25-34 6.00 9,810,100 9,754,918 ChaseFlex Trust Collateralized Mtge Obligation Series 2005-2 Cl 2A2 06-25-35 6.50 2,429,536 2,456,868 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11T1 Cl A1 07-25-18 4.75 4,769,371 4,592,013 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 2A3 11-25-35 5.50 6,777,538 6,764,332 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 3A7 11-25-35 5.50 6,868,820 6,855,459
See accompanying notes to investments in securities. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 15 - ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MORTGAGE-BACKED (CONT.) Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-64CB Cl 1A1 12-25-35 5.50% $ 11,860,574 $ 11,862,534 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-6CB Cl 1A1 04-25-35 7.50 6,530,499 6,771,737 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-85CB Cl 2A2 02-25-36 5.50 3,199,099 3,190,350 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-22R Cl 1A2 05-25-36 6.00 8,400,000 8,501,257 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-2CB Cl A11 03-25-36 6.00 10,033,217 10,002,676 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00 8,335,928(d) 8,588,136 Countrywide Home Loans Collateralized Mtge Obligation Series 2006-HYB1 Cl 1A1 03-20-36 5.40 4,709,853(m) 4,702,930 CS First Boston Mtge Securities Collateralized Mtge Obligation Series 2003-29 Cl 8A1 11-25-18 6.00 2,678,380 2,676,857 CS First Boston Mtge Securities Collateralized Mtge Obligation Series 2005-12 Cl 3A1 01-25-36 7.00 11,176,479 11,403,242 Downey Savings & Loan Assn Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR5 Cl X1 08-19-45 6.38 70,276,624(l) 922,381 Federal Home Loan Mtge Corp 09-01-36 6.50 32,350,000(e) 32,855,468
- ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #170216 03-01-17 8.50% $ 9,538 $ 10,149 Federal Home Loan Mtge Corp #275036 07-01-16 8.00 96 100 Federal Home Loan Mtge Corp #284190 01-01-17 8.00 675 707 Federal Home Loan Mtge Corp #290970 04-01-17 8.00 14,550 15,206 Federal Home Loan Mtge Corp #295114 06-01-17 8.50 3,914 4,165 Federal Home Loan Mtge Corp #540861 09-01-19 8.50 34,966 37,350 Federal Home Loan Mtge Corp #A00304 04-01-21 9.00 68,329 73,253 Federal Home Loan Mtge Corp #B11835 01-01-19 5.50 591,618 590,227 Federal Home Loan Mtge Corp #C00103 03-01-22 8.50 148,836 159,688 Federal Home Loan Mtge Corp #C00144 08-01-22 8.50 124,577 133,800 Federal Home Loan Mtge Corp #C00356 08-01-24 8.00 472,055 498,359 Federal Home Loan Mtge Corp #C00666 10-01-28 7.00 56,233 58,023 Federal Home Loan Mtge Corp #C53878 12-01-30 5.50 1,908,725 1,884,932 Federal Home Loan Mtge Corp #C62993 01-01-32 6.50 1,387,775 1,415,700 Federal Home Loan Mtge Corp #C63552 01-01-32 6.50 1,827,716 1,872,482 Federal Home Loan Mtge Corp #C64703 03-01-32 6.50 1,147,222 1,175,083 Federal Home Loan Mtge Corp #C67723 06-01-32 7.00 1,016,444 1,051,159 Federal Home Loan Mtge Corp #C78031 04-01-33 5.50 10,522,591 10,385,185 Federal Home Loan Mtge Corp #C79930 06-01-33 5.50 8,870,482 8,740,206 Federal Home Loan Mtge Corp #C90767 12-01-23 6.00 9,002,140 9,096,025 Federal Home Loan Mtge Corp #D96300 10-01-23 5.50 5,833,012 5,789,321
See accompanying notes to investments in securities. - ------------------------------------------------------------------------------ 16 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT - ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #E01127 02-01-17 6.50% $ 1,481,472 $ 1,507,879 Federal Home Loan Mtge Corp #E01419 05-01-18 5.50 5,058,418 5,049,661 Federal Home Loan Mtge Corp #E79810 11-01-14 7.50 1,251,303 1,307,872 Federal Home Loan Mtge Corp #E90216 05-01-17 6.00 1,639,531 1,657,674 Federal Home Loan Mtge Corp #E98725 08-01-18 5.00 11,342,450 11,135,907 Federal Home Loan Mtge Corp #E99684 10-01-18 5.00 11,422,611 11,211,867 Federal Home Loan Mtge Corp #G00286 02-01-25 8.00 185,986 196,350 Federal Home Loan Mtge Corp #G01108 04-01-30 7.00 3,720,599 3,836,219 Federal Home Loan Mtge Corp #G01441 07-01-32 7.00 3,486,575 3,588,649 Federal Home Loan Mtge Corp #G01535 04-01-33 6.00 11,738,584 11,827,738 Federal Home Loan Mtge Corp #G11302 07-01-17 7.00 3,999,155 4,106,710 Federal Home Loan Mtge Corp #G12101 11-01-18 5.00 3,779,846 3,709,654 Federal Home Loan Mtge Corp #G30225 02-01-23 6.00 12,058,781 12,192,150 Federal Home Loan Mtge Corp Collateralized Mtge Obligation 03-15-22 7.00 1,009,867 1,006,899 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2590 Cl Bl 02-15-14 17.16 3,134,265(l) 156,095 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2718 Cl IA 10-15-22 14.56 7,015,991(l) 319,004 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2576 Cl KJ 02-15-33 5.50 11,421,369 11,464,135
- ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2641 Cl KC 01-15-18 6.50% $ 4,324,513 $ 4,449,854 Federal Natl Mtge Assn 09-01-21 5.50 500,000(e) 498,125 09-01-21 6.00 12,550,000(e) 12,687,272 09-01-36 5.50 78,900,000(e) 77,420,624 09-01-36 6.00 20,000,000(e) 20,018,760 09-01-36 6.50 73,000,000(e) 74,094,999 Federal Natl Mtge Assn #125479 04-01-27 7.50 288,679 299,731 Federal Natl Mtge Assn #190899 04-01-23 8.50 517,844 545,803 Federal Natl Mtge Assn #190944 05-01-24 6.00 6,617,082 6,654,930 Federal Natl Mtge Assn #190988 06-01-24 9.00 439,692 468,241 Federal Natl Mtge Assn #231309 09-01-23 6.50 159,457 162,502 Federal Natl Mtge Assn #231310 09-01-23 6.50 397,589 405,182 Federal Natl Mtge Assn #250330 09-01-25 8.00 317,048 336,044 Federal Natl Mtge Assn #250495 03-01-26 7.00 720,837 743,694 Federal Natl Mtge Assn #250765 12-01-26 8.00 264,866 280,908 Federal Natl Mtge Assn #251116 08-01-27 8.00 310,212 329,182 Federal Natl Mtge Assn #252498 06-01-29 7.00 6,776 6,983 Federal Natl Mtge Assn #252982 01-01-30 8.00 216,402 229,849 Federal Natl Mtge Assn #253883 08-01-16 6.00 3,569,187 3,612,548 Federal Natl Mtge Assn #254236 03-01-17 6.50 2,129,551 2,167,758 Federal Natl Mtge Assn #254383 06-01-32 7.50 469,536 485,163 Federal Natl Mtge Assn #254802 07-01-18 4.50 3,346,672 3,223,849
See accompanying notes to investments in securities. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 17 - ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #254916 09-01-23 5.50% $ 11,575,018 $ 11,479,159 Federal Natl Mtge Assn #255788 06-01-15 5.50 3,685,733 3,684,059 Federal Natl Mtge Assn #268071 01-01-24 6.50 108,149 110,215 Federal Natl Mtge Assn #303226 02-01-25 8.00 147,746 156,489 Federal Natl Mtge Assn #313049 08-01-11 8.50 1,124,252 1,149,085 Federal Natl Mtge Assn #323933 09-01-29 7.00 4,509,195 4,646,798 Federal Natl Mtge Assn #408207 01-01-28 6.50 167,218 171,380 Federal Natl Mtge Assn #455791 01-01-29 6.50 542,310 553,698 Federal Natl Mtge Assn #489888 05-01-29 6.50 2,530,816 2,583,770 Federal Natl Mtge Assn #496029 01-01-29 6.50 3,403,518 3,474,063 Federal Natl Mtge Assn #50700 03-01-08 7.00 739,731 744,343 Federal Natl Mtge Assn #545008 06-01-31 7.00 2,862,158 2,961,185 Federal Natl Mtge Assn #545342 04-01-13 7.00 2,532,142 2,547,931 Federal Natl Mtge Assn #545684 05-01-32 7.50 388,757 402,427 Federal Natl Mtge Assn #545869 07-01-32 6.50 2,550,405 2,601,398 Federal Natl Mtge Assn #545885 08-01-32 6.50 4,510,149 4,601,750 Federal Natl Mtge Assn #545910 08-01-17 6.00 5,807,711 5,883,177 Federal Natl Mtge Assn #555343 08-01-17 6.00 5,652,882 5,719,687 Federal Natl Mtge Assn #555375 04-01-33 6.00 26,983,901 27,165,147 Federal Natl Mtge Assn #555458 05-01-33 5.50 23,707,583 23,344,619 Federal Natl Mtge Assn #555734 07-01-23 5.00 8,899,170 8,638,063
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ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #555740 08-01-18 4.50% $ 11,482,252 $ 11,079,027 Federal Natl Mtge Assn #555794 09-01-28 7.50 1,012,494 1,051,647 Federal Natl Mtge Assn #567840 10-01-30 7.00 1,553,028 1,600,420 Federal Natl Mtge Assn #587859 12-01-16 5.50 5,553,220 5,550,656 Federal Natl Mtge Assn #597374 09-01-31 7.00 841,465 870,446 Federal Natl Mtge Assn #606882 10-01-31 7.00 1,102,580 1,134,445 Federal Natl Mtge Assn #634650 04-01-32 7.50 263,079 271,835 Federal Natl Mtge Assn #638969 03-01-32 5.50 1,576,260 1,555,522 Federal Natl Mtge Assn #643362 04-01-17 6.50 890,099 906,068 Federal Natl Mtge Assn #646147 06-01-32 7.00 2,728,641 2,820,308 Federal Natl Mtge Assn #646446 06-01-17 6.50 1,312,495 1,336,043 Federal Natl Mtge Assn #649068 06-01-17 6.50 2,241,017 2,287,559 Federal Natl Mtge Assn #649263 08-01-17 6.50 2,214,618 2,259,061 Federal Natl Mtge Assn #654208 10-01-32 6.50 2,310,479 2,352,869 Federal Natl Mtge Assn #654682 10-01-32 6.00 1,370,585 1,376,547 Federal Natl Mtge Assn #654689 11-01-32 6.00 1,725,764 1,732,728 Federal Natl Mtge Assn #656908 09-01-32 6.50 2,265,222 2,318,116 Federal Natl Mtge Assn #662061 09-01-32 6.50 1,818,736 1,852,103 Federal Natl Mtge Assn #667787 02-01-18 5.50 2,141,148 2,137,575 Federal Natl Mtge Assn #670382 09-01-32 6.00 12,432,828 12,485,598 Federal Natl Mtge Assn #670387 08-01-32 7.00 1,673,145 1,723,100
See accompanying notes to investments in securities. - ------------------------------------------------------------------------------ 18 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT - ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #678028 09-01-17 6.00% $ 6,117,358 $ 6,189,651 Federal Natl Mtge Assn #678065 02-01-33 6.50 520,327 532,246 Federal Natl Mtge Assn #678937 01-01-18 5.50 3,351,258 3,349,151 Federal Natl Mtge Assn #678941 02-01-18 5.50 4,050,252 4,047,309 Federal Natl Mtge Assn #678944 01-01-18 5.50 1,956,310 1,955,138 Federal Natl Mtge Assn #679095 04-01-18 5.00 6,050,261 5,941,252 Federal Natl Mtge Assn #680961 01-01-33 6.00 718,907 723,259 Federal Natl Mtge Assn #681400 03-01-18 5.50 5,834,395 5,828,628 Federal Natl Mtge Assn #682825 01-01-33 6.00 2,256,268 2,265,844 Federal Natl Mtge Assn #683274 02-01-18 5.50 2,769,956 2,767,161 Federal Natl Mtge Assn #684586 03-01-33 6.00 3,808,665 3,827,801 Federal Natl Mtge Assn #686172 02-01-33 6.00 2,990,410 3,003,103 Federal Natl Mtge Assn #686528 02-01-33 6.00 3,905,937 3,931,287 Federal Natl Mtge Assn #687051 01-01-33 6.00 11,692,142 11,694,943 Federal Natl Mtge Assn #689093 07-01-28 5.50 3,828,981 3,778,605 Federal Natl Mtge Assn #694628 04-01-33 5.50 7,468,703 7,366,599 Federal Natl Mtge Assn #694795 04-01-33 5.50 8,992,855 8,868,895 Federal Natl Mtge Assn #694988 03-01-33 5.50 12,817,971 12,629,131 Federal Natl Mtge Assn #695202 03-01-33 6.50 4,836,741 4,921,163 Federal Natl Mtge Assn #695220 04-01-33 5.50 1,938,118 1,908,157 Federal Natl Mtge Assn #695385 03-01-18 5.50 7,217,727 7,210,342
- ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #695909 05-01-18 5.50% $ 2,663,253 $ 2,660,344 Federal Natl Mtge Assn #697843 04-01-18 5.00 2,513,927 2,469,801 Federal Natl Mtge Assn #699424 04-01-33 5.50 5,129,653 5,059,297 Federal Natl Mtge Assn #702427 04-01-33 5.50 4,830,617 4,764,433 Federal Natl Mtge Assn #704049 05-01-18 5.50 3,181,262 3,177,817 Federal Natl Mtge Assn #709901 06-01-18 5.00 6,436,207 6,322,873 Federal Natl Mtge Assn #710823 05-01-33 5.50 749,566 739,359 Federal Natl Mtge Assn #712057 07-01-18 4.50 4,124,421 3,973,055 Federal Natl Mtge Assn #720006 07-01-33 5.50 10,217,575 10,059,624 Federal Natl Mtge Assn #720070 07-01-23 5.50 2,922,081 2,897,882 Federal Natl Mtge Assn #720378 06-01-18 4.50 6,861,491 6,609,674 Federal Natl Mtge Assn #723687 08-01-28 5.50 4,421,269 4,363,100 Federal Natl Mtge Assn #725232 03-01-34 5.00 25,258,889 24,292,249 Federal Natl Mtge Assn #725425 04-01-34 5.50 27,912,809 27,484,689 Federal Natl Mtge Assn #725684 05-01-18 6.00 11,930,655 12,088,176 Federal Natl Mtge Assn #725719 07-01-33 4.84 7,615,449(m) 7,390,184 Federal Natl Mtge Assn #725737 08-01-34 4.53 5,612,194(m) 5,562,975 Federal Natl Mtge Assn #725813 12-01-33 6.50 12,395,396 12,611,750 Federal Natl Mtge Assn #730153 08-01-33 5.50 1,421,677 1,399,700 Federal Natl Mtge Assn #735057 01-01-19 4.50 11,901,082 11,464,311 Federal Natl Mtge Assn #738921 11-01-32 6.50 978,905 998,992
See accompanying notes to investments in securities. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 19 - ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #743262 10-01-18 5.00% $ 4,005,493 $ 3,933,862 Federal Natl Mtge Assn #747642 11-01-28 5.50 2,856,023 2,818,448 Federal Natl Mtge Assn #747784 10-01-18 4.50 2,547,773 2,454,269 Federal Natl Mtge Assn #753074 12-01-28 5.50 8,320,855 8,211,380 Federal Natl Mtge Assn #753091 12-01-33 5.50 4,976,313 4,899,385 Federal Natl Mtge Assn #753919 12-01-33 4.94 6,720,790(m) 6,579,260 Federal Natl Mtge Assn #759342 01-01-34 6.50 2,002,256 2,045,170 Federal Natl Mtge Assn #765183 01-01-19 5.50 722,004 720,981 Federal Natl Mtge Assn #765759 12-01-18 5.00 4,675,147 4,590,914 Federal Natl Mtge Assn #765761 02-01-19 5.00 2,092,793 2,055,086 Federal Natl Mtge Assn #766641 03-01-34 5.00 7,430,266 7,136,241 Federal Natl Mtge Assn #776962 04-01-29 5.00 18,601,782 17,869,560 Federal Natl Mtge Assn #779327 06-01-34 4.56 4,668,825(m) 4,559,358 Federal Natl Mtge Assn #804442 12-01-34 6.50 1,866,068 1,896,196 Federal Natl Mtge Assn #837258 09-01-35 4.92 3,080,389(m) 3,060,521 Federal Natl Mtge Assn #845070 12-01-35 5.10 7,445,556(m) 7,393,009 Federal Natl Mtge Assn #882063 06-01-36 6.50 4,088,324 4,150,756 Federal Natl Mtge Assn #886291 07-01-36 7.00 8,080,751 8,296,490 Federal Natl Mtge Assn #886461 08-01-36 6.20 7,963,774(m) 8,045,881 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-24 Cl PI 12-25-12 13.29 2,097,186(l) 65,005
- ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12-25-31 10.63% $ 3,471,840(l) $ 645,966 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2004-84 Cl GI 12-25-22 9.25 921,859(l) 139,076 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 367 Cl 2 01-25-36 9.07 16,109,477(l) 4,070,541 Federal Natl Mtge Assn Collateralized Mtge Obligation Principal Only 09-01-18 5.63 23,035(q) 19,424 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-133 Cl GB 12-25-26 8.00 4,084,256 4,338,661 Govt Natl Mtge Assn #345538 02-15-24 8.00 167,578 177,631 Govt Natl Mtge Assn #398831 08-15-26 8.00 199,649 211,896 Govt Natl Mtge Assn #423782 05-15-26 7.50 486,792 507,979 Govt Natl Mtge Assn #425004 10-15-33 5.50 4,087,588 4,053,076 Govt Natl Mtge Assn #426170 06-15-26 8.00 110,534 117,314 Govt Natl Mtge Assn #595256 12-15-32 6.00 7,559,018 7,640,989 Govt Natl Mtge Assn #604580 08-15-33 5.00 4,400,765 4,266,435 Govt Natl Mtge Assn #604708 10-15-33 5.50 11,436,257 11,339,700 Govt Natl Mtge Assn #606844 09-15-33 5.00 10,933,055 10,599,332
See accompanying notes to investments in securities. - ------------------------------------------------------------------------------ 20 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT - ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MORTGAGE-BACKED (CONT.) Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-70 Cl IC 08-20-32 11.80% $ 9,990,511(l) $ 1,880,462 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-80 Cl CI 01-20-32 16.24 1,993,664(l) 222,337 Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2006-3 Cl B1 06-19-36 6.49 4,261,019(m) 4,290,979 Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2006-5 Cl 2A1B 07-19-46 5.56 5,320,369(m) 5,319,421 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR8 Cl AX1 04-25-35 4.50 163,908,862(l) 1,664,699 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Series 2005-AR25 Cl 1A21 12-25-35 5.88 7,430,047(m) 7,425,984 IndyMac Index Nim Collateralized Mtge Obligation Series 2006-AR6 Cl N1 06-25-46 6.65 3,350,754(d) 3,350,754 Lehman XS Net Interest Margin Nts Collateralized Mtge Obligation Series 2006-2N Cl A1 02-27-46 7.00 1,668,925(d) 1,669,968 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-2 Cl 4A1 02-25-19 5.00 6,847,515 6,654,949 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-4 Cl 2A1 05-25-34 6.00 4,049,987 4,000,658
- ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MORTGAGE-BACKED (CONT.) Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-7 Cl 8A1 08-25-19 5.00% $ 5,548,451 $ 5,370,956 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-8 Cl 7A1 09-25-19 5.00 7,514,803 7,279,214 Rali NIM Collateralized Mtge Obligation Series 2006-QO4 Cl N1 04-25-46 6.05 2,402,755(d) 2,401,254 Residential Accredit Loans Collateralized Mtge Obligation Series 2006-QO6 Cl A2 06-25-46 5.55 6,127,919(b) 6,129,744 Residential Accredit Loans Collateralized Mtge Obligation Series 2006-QS3 Cl 1A10 03-25-36 6.00 7,061,408 7,131,563 Structured Asset Securities Collateralized Mtge Obligation Series 2003-33H Cl 1A1 10-25-33 5.50 15,413,299 15,014,058 TBW Mtge Backed Pass Through Ctfs Collateralized Mtge Obligation Series 2006-2 Cl 6A1 07-25-36 7.00 11,355,892 11,657,782 Washington Mutual Alternative Mtge Loan Trust Pass-Through Ctfs Collateralized Mtge Obligation Interest Only Series 2005-AR1 Cl X2 12-25-35 7.10 57,810,087(l) 584,876 Washington Mutual Collateralized Mtge Obligation Series 2003-AR10 Cl A7 10-25-33 4.06 9,025,000(m) 8,839,101 Washington Mutual Collateralized Mtge Obligation Series 2004-CB2 Cl 6A 07-25-19 4.50 5,120,185 4,854,447
See accompanying notes to investments in securities. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 21 - ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MORTGAGE-BACKED (CONT.) Washington Mutual Collateralized Mtge Obligation Series 2005-AR14 Cl 2A1 12-25-35 5.30% $ 5,850,788(m) $ 5,791,601 Washington Mutual Collateralized Mtge Obligation Series 2005-AR17 Cl A1C1 12-25-45 5.51 4,608,505(m) 4,610,527 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-10 Cl A1 10-25-35 5.00 19,150,680 18,065,794 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-5 Cl 2A1 05-25-35 5.50 13,197,111 12,867,184 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR6 Cl 5A1 03-25-36 5.11 12,186,437(e,m) 12,021,229 --------------- Total 1,277,141,602 - ----------------------------------------------------------------------------- AEROSPACE & DEFENSE (0.1%) DRS Technologies 02-01-16 6.63 825,000 802,313 L-3 Communications 06-15-12 7.63 670,000 683,400 L-3 Communications Sr Sub Nts Series B 10-15-15 6.38 890,000 856,625 --------------- Total 2,342,338 - ----------------------------------------------------------------------------- AUTOMOTIVE (--%) GMAC LLC 09-15-11 6.88 575,000 566,305 - ----------------------------------------------------------------------------- BANKING (1.6%) Banknorth Group Sr Nts 05-01-08 3.75 7,330,000 7,146,603 Landsbanki Islands 08-25-11 6.10 9,400,000(c,d) 9,418,471
- ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT BANKING (CONT.) Popular North America Sr Nts 10-01-08 3.88% $ 21,427,000 $ 20,743,179 Wells Fargo Bank Sub Nts 08-26-36 5.95 8,280,000 8,337,877 --------------- Total 45,646,130 - ----------------------------------------------------------------------------- BROKERAGE (--%) LaBranche & Co Sr Nts 05-15-12 11.00 935,000 1,002,788 - ----------------------------------------------------------------------------- CHEMICALS (0.1%) Airgas 10-01-11 9.13 1,500,000 1,565,625 Georgia Gulf Sr Nts 12-15-13 7.13 160,000 151,200 --------------- Total 1,716,825 - ----------------------------------------------------------------------------- ELECTRIC (3.2%) Aquila Canada Finance 06-15-11 7.75 960,000(c) 1,005,600 Arizona Public Service 05-15-15 4.65 13,370,000 12,142,446 CMS Energy Sr Nts 01-15-09 7.50 1,275,000 1,310,063 Commonwealth Edison 1st Mtge 04-15-15 4.70 1,845,000 1,707,581 08-15-16 5.95 2,420,000 2,432,330 Consumers Energy 1st Mtge 02-15-12 5.00 1,950,000 1,890,991 02-15-17 5.15 2,520,000 2,380,946 Consumers Energy 1st Mtge Series H 02-17-09 4.80 7,750,000 7,625,729 Dynegy Holdings 05-15-18 7.13 80,000 70,600
See accompanying notes to investments in securities. - ------------------------------------------------------------------------------ 22 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT - ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT ELECTRIC (CONT.) Dynegy Holdings Sr Unsecured 05-01-16 8.38% $ 315,000(d) $ 310,275 Edison Mission Energy Sr Nts 06-15-13 7.50 720,000(d) 720,000 Exelon 06-15-10 4.45 10,725,000 10,336,862 Florida Power 1st Mtge 07-15-11 6.65 2,250,000 2,365,355 IPALCO Enterprises Secured 11-14-08 8.38 400,000 413,000 11-14-11 8.63 3,680,000 3,946,800 Midwest Generation LLC Series B 01-02-16 8.56 163,621 173,847 Northern States Power Sr Nts 08-01-09 6.88 5,730,000 5,937,088 NRG Energy 02-01-14 7.25 695,000 686,313 Ohio Edison 06-15-09 5.65 8,670,000(d) 8,676,503 Ohio Edison Sr Nts 05-01-15 5.45 1,195,000 1,164,304 PacifiCorp 1st Mtge 06-15-35 5.25 2,940,000 2,666,074 PSI Energy 10-15-35 6.12 10,035,000 9,849,714 Sierra Pacific Power 05-15-16 6.00 3,525,000(d) 3,498,862 Southern California Edison 1st Mtge 04-01-35 5.75 2,060,000 2,001,418 Virginia Electric & Power Sr Nts Series A 03-01-13 4.75 6,650,000 6,331,791 Xcel Energy Sr Nts 07-01-08 3.40 2,725,000 2,628,017 ------------- Total 92,272,509 - -----------------------------------------------------------------------------
- ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT ENTERTAINMENT (0.2%) United Artists Theatre Circuit 07-01-15 9.30% $ 6,734,516(i) $ 7,003,897 - ----------------------------------------------------------------------------- FOOD AND BEVERAGE (1.2%) Cadbury Schweppes US Finance LLC 10-01-08 3.88 6,910,000(d) 6,696,916 10-01-13 5.13 5,900,000(d) 5,686,774 Cott Beverages USA 12-15-11 8.00 1,740,000 1,761,750 Kraft Foods 06-01-12 6.25 5,201,000 5,387,549 Kraft Foods Sr Unsecured 11-01-11 5.63 15,230,000 15,320,315 --------------- Total 34,853,304 - ----------------------------------------------------------------------------- GAMING (0.1%) MGM MIRAGE 10-01-09 6.00 670,000 652,413 MGM MIRAGE Sr Nts 02-27-14 5.88 720,000 655,200 Mohegan Tribal Gaming Authority 02-15-15 6.88 365,000 348,575 Mohegan Tribal Gaming Authority Sr Nts 02-15-13 6.13 540,000 515,025 Mohegan Tribal Gaming Authority Sr Sub Nts 04-01-12 8.00 750,000 773,437 Pokagon Gaming Authority Sr Nts 06-15-14 10.38 235,000(d) 248,513 --------------- Total 3,193,163 - ----------------------------------------------------------------------------- GAS PIPELINES (0.5%) ANR Pipeline 03-15-10 8.88 875,000 917,916 Colorado Interstate Gas Sr Nts 03-15-15 5.95 470,000 442,119 11-15-15 6.80 830,000 822,585 Southern Natural Gas 03-15-10 8.88 875,000 917,916
See accompanying notes to investments in securities. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 23 - ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT GAS PIPELINES (CONT.) Southern Star Central 03-01-16 6.75% $ 1,175,000(d) $ 1,152,969 Southern Star Central Gas Pipeline 06-01-16 6.00 5,610,000(d) 5,617,012 Transcontinental Gas Pipe Line Series B 08-15-11 7.00 1,915,000 1,955,694 Transcontinental Gas Pipe Line Sr Nts 04-15-16 6.40 656,000(d) 638,780 Williams Companies Sr Nts 07-15-19 7.63 2,079,000 2,110,185 --------------- Total 14,575,176 - ----------------------------------------------------------------------------- HEALTH CARE (0.6%) Cardinal Health 07-15-08 6.25 1,595,000 1,615,081 06-15-15 4.00 10,809,000 9,518,946 12-15-17 5.85 2,535,000 2,518,228 Omnicare Sr Sub Nts 12-15-13 6.75 1,105,000 1,060,800 12-15-15 6.88 700,000 669,375 Triad Hospitals Sr Nts 05-15-12 7.00 720,000 707,400 Triad Hospitals Sr Sub Nts 11-15-13 7.00 860,000 821,300 --------------- Total 16,911,130 - ----------------------------------------------------------------------------- HEALTH CARE INSURANCE (0.7%) UnitedHealth Group Sr Unsecured 03-15-11 5.25 19,725,000 19,615,033 - ----------------------------------------------------------------------------- INDEPENDENT ENERGY (0.9%) Devon Financing 09-30-11 6.88 9,160,000 9,714,061 Encore Acquisition Sr Sub Nts 04-15-14 6.25 240,000 225,600
- ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT INDEPENDENT ENERGY (CONT.) EXCO Resources 01-15-11 7.25% $ 1,420,000 $ 1,380,950 Pioneer Natural Resources 05-01-18 6.88 2,675,000 2,641,295 Pioneer Natural Resources Sr Nts 07-15-16 5.88 1,150,000 1,072,726 Range Resources 03-15-15 6.38 425,000 405,875 Stone Energy Sr Nts 07-15-10 8.24 855,000(b,d) 846,450 XTO Energy 01-31-15 5.00 2,795,000 2,647,810 XTO Energy Sr Unsecured 06-30-15 5.30 6,930,000 6,692,848 --------------- Total 25,627,615 - ----------------------------------------------------------------------------- INTEGRATED ENERGY (--%) Denbury Resources Sr Sub Nts 12-15-15 7.50 100,000 101,000 - ----------------------------------------------------------------------------- LIFE INSURANCE (0.2%) Prudential Financial 09-20-14 5.10 6,400,000 6,185,837 - ----------------------------------------------------------------------------- LODGING (--%) ITT 11-15-15 7.38 715,000 761,475 - ----------------------------------------------------------------------------- MEDIA CABLE (0.4%) Comcast 06-15-16 4.95 9,535,000 8,794,454 DIRECTV Holdings LLC/Financing Sr Nts 03-15-13 8.38 406,000 426,300 Videotron Ltee 01-15-14 6.88 1,310,000(c) 1,285,438 --------------- Total 10,506,192 - -----------------------------------------------------------------------------
See accompanying notes to investments in securities. - ------------------------------------------------------------------------------ 24 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT - ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT MEDIA NON CABLE (0.4%) Dex Media West LLC/Finance Sr Nts Series B 08-15-10 8.50% $ 560,000 $ 574,000 Lamar Media 01-01-13 7.25 242,000 240,185 08-15-15 6.63 788,000 738,750 News America 12-15-35 6.40 9,355,000 8,964,457 Radio One Series B 07-01-11 8.88 1,000,000 1,015,000 Sun Media 02-15-13 7.63 745,000(c) 756,175 --------------- Total 12,288,567 - ----------------------------------------------------------------------------- OIL FIELD SERVICES (--%) Pride Intl Sr Nts 07-15-14 7.38 845,000 859,788 - ----------------------------------------------------------------------------- PAPER (--%) Boise Cascade LLC 10-15-14 7.13 50,000 46,500 Georgia-Pacific 06-15-15 7.70 395,000 391,544 --------------- Total 438,044 - ----------------------------------------------------------------------------- PROPERTY & CASUALTY (0.1%) Willis North America 07-15-15 5.63 1,560,000 1,476,045 - ----------------------------------------------------------------------------- RETAILERS (1.5%) CVS 09-15-09 4.00 10,170,000 9,781,699 09-15-14 4.88 6,225,000 5,878,660 CVS Sr Unsecured 08-15-11 5.75 5,525,000 5,574,338 May Department Stores 07-15-09 4.80 14,064,000 13,823,942 07-15-34 6.70 2,620,000 2,622,997 United Auto Group 03-15-12 9.63 715,000 752,538
- ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT RETAILERS (CONT.) Wal-Mart Stores Series C 06-29-11 8.88% $ 3,500,000 $ 3,521,140 --------------- Total 41,955,314 - ----------------------------------------------------------------------------- TRANSPORTATION SERVICES (0.5%) Avis Budget Car Rental LLC/Finance Sr Nts 05-15-14 7.63 160,000(d) 152,000 Erac USA Finance 11-15-15 5.90 375,000(d) 373,511 11-01-16 6.20 5,860,000(d) 5,954,205 FedEx 08-15-09 5.50 8,165,000 8,206,919 --------------- Total 14,686,635 - ----------------------------------------------------------------------------- WIRELESS (1.3%) American Tower Sr Nts 10-15-12 7.13 220,000 222,750 Nextel Communications Sr Nts Series F 03-15-14 5.95 35,195,000 34,217,106 Rogers Wireless Secured 03-01-14 6.38 795,000(c) 779,100 Windstream Sr Nts 08-01-16 8.63 1,065,000(d) 1,126,238 --------------- Total 36,345,194 - ----------------------------------------------------------------------------- WIRELINES (4.0%) BellSouth Sr Unsecured 11-15-12 4.75 6,680,000 6,327,911 Qwest 03-15-12 8.88 1,095,000 1,185,338 Qwest Sr Nts 10-01-14 7.50 950,000(d) 967,813 Sprint Capital 03-15-32 8.75 3,980,000 4,826,021 Telecom Italia Capital 10-01-15 5.25 25,440,000(c) 23,779,582
See accompanying notes to investments in securities. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 25 - ------------------------------------------------------------------------------ BONDS (CONTINUED) - ------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a) RATE AMOUNT WIRELINES (CONT.) TELUS 06-01-11 8.00% $ 31,344,000(c) $ 34,468,369 Valor Telecommunications Enterprises LLC/Finance 02-15-15 7.75 230,000 242,650 Verizon Pennsylvania Series A 11-15-11 5.65 44,690,000 44,517,496 --------------- Total 116,315,180 - ----------------------------------------------------------------------------- TOTAL BONDS (Cost: $3,001,044,742) $ 2,975,042,657 - -----------------------------------------------------------------------------
- ------------------------------------------------------------------------------ OTHER (--%) - ------------------------------------------------------------------------------
ISSUER SHARES VALUE(a) Wayland Investment LLC 6,000,000(i,p) $ 401,620 - ----------------------------------------------------------------------------- TOTAL OTHER (Cost: $2,150,783) $ 401,620 - -----------------------------------------------------------------------------
- ------------------------------------------------------------------------------ SHORT-TERM SECURITIES (6.9%)(h) - ------------------------------------------------------------------------------
ISSUER EFFECTIVE AMOUNT VALUE(a) YIELD PAYABLE AT MATURITY COMMERCIAL PAPER Bear Stearns Companies 09-12-06 5.27% $ 50,000,000 $ 49,912,332 Deer Valley Funding LLC 09-15-06 5.29 20,000,000 19,956,001 Ebury Finance LLC 09-01-06 5.30 9,600,000 9,598,587 09-13-06 5.29 50,000,000 49,904,668 09-14-06 5.31 20,000,000 19,958,777 Fairway Finance 09-13-06 5.27 30,000,000(k) 29,943,016 Park Sienna LLC 09-20-06 5.33 20,000,000(k) 19,941,000 - ----------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $199,243,644) $ 199,214,381 - ----------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $3,202,439,169)(s) $ 3,174,658,658 =============================================================================
- ------------------------------------------------------------------------------ NOTES TO INVESTMENTS IN SECURITIES - ------------------------------------------------------------------------------ (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2006. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in U.S. dollar currency unless otherwise noted. At Aug. 31, 2006, the value of foreign securities represented 2.7% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At Aug. 31, 2006, the value of these securities amounted to $127,759,051 or 4.4% of net assets. (e) At Aug. 31, 2006, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $274,555,239. (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) At Aug. 31, 2006, security was partially or fully on loan. See Note 5 to the financial statements. - ------------------------------------------------------------------------------ 26 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT - ------------------------------------------------------------------------------ NOTES TO INVESTMENTS IN SECURITIES (CONTINUED) - ------------------------------------------------------------------------------ (h) Cash collateral received from security lending activity is invested in short-term securities and represents 1.4% of net assets. See Note 5 to the financial statements. 5.5% of net assets is the Fund's cash equivalent position. (i) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). These securities may be valued at fair value according to methods selected in good faith by the Fund's Board of Directors. Information concerning such security holdings at Aug. 31, 2006, is as follows:
ACQUISITION SECURITY DATES COST ------------------------------------------------------------------------ United Artists Theatre Circuit 9.30% 2015 02-23-96 thru 08-12-96 $ 6,530,267 Wayland Investment LLC 05-19-00 2,150,783
(j) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 6 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT ------------------------------------------------------------------------ PURCHASE CONTRACTS U.S. Long Bond, Dec. 2006, 20-year $ 36,900,000 U.S. Treasury Note, Dec. 2006, 5-year 26,700,000 U.S. Treasury Note, Dec. 2006, 10-year 136,500,000 SALE CONTRACTS U.S. Treasury Note, Dec. 2006, 2-year 66,600,000
(k) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At Aug. 31, 2006, the value of these securities amounted to $49,884,016 or 1.7% of net assets. (l) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at Aug. 31, 2006. (m) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2006. (n) The following abbreviations are used in the portfolio security descriptions to identify the insurer of the issue: AMBAC -- Ambac Assurance Corporation MBIA -- MBIA Insurance Corporation (o) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments at Aug. 31, 2006:
PRINCIPAL SETTLEMENT PROCEEDS SECURITY AMOUNT DATE RECEIVABLE VALUE ----------------------------------------------------------------------------- Federal Natl Mtge Assn 09-01-21 5.00% $15,650,000 09-18-06 $15,190,281 $15,322,320 09-01-36 5.00 28,000,000 09-13-06 26,565,000 26,818,736
- ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 27 - ------------------------------------------------------------------------------ NOTES TO INVESTMENTS IN SECURITIES (CONTINUED) - ------------------------------------------------------------------------------ (p) The share amount for Limited Liability Companies (LLC) or Limited Partnerships (LP) represents capital contributions. (q) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows at Aug. 31, 2006. (r) Inflation-indexed bonds are securities in which the principal amount is adjusted for inflation and the semiannual interest payments equal a fixed percentage of the inflation-adjusted principal amount. (s) At Aug. 31, 2006, the cost of securities for federal income tax purposes was $3,213,698,280 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 12,629,719 Unrealized depreciation (51,669,341) ------------------------------------------------------------------------- Net unrealized depreciation $(39,039,622) -------------------------------------------------------------------------
HOW TO FIND INFORMATION ABOUT THE FUND'S PORTFOLIO HOLDINGS (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as disclosed in its annual and semiannual shareholder reports and in its filings on Form N-Q, can be found at riversource.com/funds. - ------------------------------------------------------------------------------ 28 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES AUG. 31, 2006 ASSETS Investments in securities, at value (Note 1)* (identified cost $3,202,439,169) $ 3,174,658,658 Cash in bank on demand deposit 314,785 Foreign currency holdings (identified cost $2,064,039) (Note 1) 2,087,460 Capital shares receivable 374,162 Accrued interest receivable 20,327,149 Receivable for investment securities sold 169,876,994 Unrealized appreciation on swap transactions, at value (Note 7) 317,799 - -------------------------------------------------------------------------------------------------------------- Total assets 3,367,957,007 - -------------------------------------------------------------------------------------------------------------- LIABILITIES Dividends payable to shareholders 1,116,326 Capital shares payable 350,195 Payable for investment securities purchased 127,938,454 Payable for securities purchased on a forward-commitment basis (Note 1) 274,555,239 Payable upon return of securities loaned (Note 5) 39,957,500 Accrued investment management services fee 35,972 Accrued distribution fee 575,801 Accrued service fee 473 Accrued transfer agency fee 11,882 Accrued administrative services fee 4,938 Other accrued expenses 501,489 Forward sale commitments, at value (proceeds receivable $41,755,281) (Note1) 42,141,056 - -------------------------------------------------------------------------------------------------------------- Total liabilities 487,189,325 - -------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $ 2,880,767,682 ==============================================================================================================
- ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 29 REPRESENTED BY Capital stock -- $.01 par value (Note 1) $ 6,038,385 Additional paid-in capital 3,088,318,125 Undistributed net investment income 4,503,837 Accumulated net realized gain (loss) (Note 10) (190,801,857) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Note 6) (27,290,808) - -------------------------------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $ 2,880,767,682 ============================================================================================================== Net assets applicable to outstanding shares: Class A $ 2,013,110,199 Class B $ 401,897,200 Class C $ 17,292,094 Class I $ 275,800,310 Class Y $ 172,667,879 Net asset value per share of outstanding capital stock: Class A shares 422,021,713 $ 4.77 Class B shares 84,250,141 $ 4.77 Class C shares 3,624,635 $ 4.77 Class I shares 57,740,014 $ 4.78 Class Y shares 36,202,020 $ 4.77 - -------------------------------------------------------------------------------------------------------------- *Including securities on loan, at value (Note 5) $ 39,336,180 - --------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. - ------------------------------------------------------------------------------ 30 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT STATEMENT OF OPERATIONS
YEAR ENDED AUG. 31, 2006 INVESTMENT INCOME Income: Interest $ 128,996,423 Fee income from securities lending (Note 5) 220,256 - -------------------------------------------------------------------------------------------------------------- Total income 129,216,679 - -------------------------------------------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 12,388,294 Distribution fee Class A 4,646,930 Class B 4,653,803 Class C 176,643 Transfer agency fee 3,835,450 Incremental transfer agency fee Class A 247,680 Class B 129,070 Class C 5,550 Service fee -- Class Y 157,691 Administrative services fees and expenses 1,698,244 Compensation of board members 22,580 Custodian fees 199,790 Printing and postage 348,350 Registration fees 137,695 Audit fees 45,000 Other 57,864 - -------------------------------------------------------------------------------------------------------------- Total expenses 28,750,634 Expenses waived/reimbursed by the Investment Manager and its affiliates (Note 2) (2,443,090) - -------------------------------------------------------------------------------------------------------------- 26,307,544 Earnings and bank fee credits on cash balances (Note 2) (238,238) - -------------------------------------------------------------------------------------------------------------- Total net expenses 26,069,306 - -------------------------------------------------------------------------------------------------------------- Investment income (loss) -- net 103,147,373 - -------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (Note 3) (43,573,476) Foreign currency transactions (286,744) Futures contracts 4,479,668 Payment from affiliate (Note 2) 425,963 Swap transactions (196,530) - -------------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments (39,151,119) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (17,503,759) - -------------------------------------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies (56,654,878) - -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 46,492,495 ==============================================================================================================
See accompanying notes to financial statements. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 31 STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED AUG. 31, 2006 2005 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 103,147,373 $ 91,755,329 Net realized gain (loss) on investments (39,151,119) 28,923,177 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (17,503,759) (14,927,428) - ----------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 46,492,495 105,751,078 - ----------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (76,604,597) (70,478,732) Class B (15,585,869) (17,993,962) Class C (591,217) (605,297) Class I (4,560,444) (421) Class Y (6,737,531) (8,081,878) - ----------------------------------------------------------------------------------------------------- Total distributions (104,079,658) (97,160,290) - ----------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales Class A shares (Note 2) 316,729,749 259,770,664 Class B shares 79,990,744 84,427,800 Class C shares 3,579,299 4,052,182 Class I shares 109,101,564 -- Class Y shares 19,247,047 41,037,278 Fund merger (Note 9) Class A shares 482,178,674 N/A Class B shares 84,180,791 N/A Class C shares 3,014,375 N/A Class I shares 161,023,234 N/A Class Y shares 43,644,789 N/A Reinvestment of distributions at net asset value Class A shares 60,868,805 56,221,455 Class B shares 13,634,050 15,935,666 Class C shares 518,063 543,915 Class I shares 4,443,417 -- Class Y shares 6,613,878 6,719,948 Payments for redemptions Class A shares (578,402,371) (480,335,355) Class B shares (Note 2) (247,147,060) (245,851,411) Class C shares (Note 2) (7,432,273) (7,443,384) Class I shares (1,248,255) -- Class Y shares (95,308,639) (49,568,951) - ----------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions 459,229,881 (314,490,193) - ----------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 401,642,718 (305,899,405) Net assets at beginning of year 2,479,124,964 2,785,024,369 - ----------------------------------------------------------------------------------------------------- Net assets at end of year $ 2,880,767,682 $ 2,479,124,964 ===================================================================================================== Undistributed net investment income $ 4,503,837 $ 5,270,078 - -----------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. - ------------------------------------------------------------------------------ 32 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of RiverSource Diversified Income Series, Inc. (formerly RiverSource Fixed Income Series, Inc.) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. RiverSource Diversified Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the Board. The Fund invests primarily in bonds and other debt securities including securities issued by the U.S. government, corporate bonds and mortgage- and asset-backed securities. The Fund offers Class A, Class B, Class C and Class Y shares. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth year of ownership. o Class C shares may be subject to a CDSC. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. The Fund offers an additional class of shares, Class I, exclusively to certain institutional investors. Class I shares have no sales charge and are made available through a separate prospectus supplement provided to investors eligible to purchase the shares. At Aug. 31, 2006, Ameriprise Financial, Inc. (Ameriprise Financial) and the affiliated funds-of-funds owned 100% of Class I shares, which represents 9.57% of the Fund's net assets. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, transfer agency fees and service fee (class specific expenses) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. The Fund's significant accounting policies are summarized below: USE OF ESTIMATES Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 33 VALUATION OF SECURITIES All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the Board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. ILLIQUID SECURITIES At Aug. 31, 2006, investments in securities included issues that are illiquid which the Fund currently limits to 10% of net assets, at market value, at the time of purchase. The aggregate value of such securities at Aug. 31, 2006 was $7,405,517 representing 0.26% of net assets. These securities are valued at fair value according to methods selected in good faith by the Board. According to board guidelines, certain unregistered securities are determined to be liquid and are not included within the 10% limitation specified above. Assets are liquid if they can be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the asset is valued by the Fund. SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS Delivery and payment for securities that have been purchased by the Fund on a forward-commitment basis, including when-issued securities and other forward-commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Fund's net assets the same as owned securities. The Fund designates cash or liquid securities at least equal to the amount of its forward-commitments. At Aug. 31, 2006, the Fund has entered into outstanding when-issued securities of $262,504,597 and other forward-commitments of $12,050,642. The Fund also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Fund to "roll over" its purchase commitments, the Fund receives negotiated amounts in the form of reductions of the purchase price of the commitment. OPTION TRANSACTIONS To produce incremental earnings, protect gains, and facilitate buying and selling of securities for investments, the Fund may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where completing the obligation depends upon the credit standing of the other party. The Fund also may buy and sell put and call options and write covered call options on portfolio - ------------------------------------------------------------------------------ 34 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT securities as well as write cash-secured put options. The risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Fund pays a premium whether or not the option is exercised. The Fund also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Fund will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Fund will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. FUTURES TRANSACTIONS To gain exposure to or protect itself from market changes, the Fund may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Fund also may buy and write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Fund each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Fund recognizes a realized gain or loss when the contract is closed or expires. FOREIGN CURRENCY TRANSLATIONS AND FOREIGN CURRENCY CONTRACTS Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions, if any, may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement date on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. At Aug. 31, 2006, foreign currency holdings consisted of European monetary units and British pounds. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 35 The Fund may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Fund and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Fund is subject to the credit risk that the other party will not complete its contract obligations. FORWARD SALE COMMITMENTS The Fund may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to-market" daily and the change in market value is recorded by the Fund as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss. If the Fund delivers securities under the commitment, the Fund realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the "Notes to investments in securities." CMBS TOTAL RETURN SWAP TRANSACTIONS The Fund may enter into swap agreements to earn the total return on a specified security or index of fixed income securities. CMBS total return swaps are bilateral financial contracts designed to replicate synthetically the total returns of collateralized mortgage-backed securities. Under the terms of the swaps, the Fund either receives or pays the total return on a reference security or index applied to a notional principal amount. In return, the Fund agrees to pay or receive from the counterparty a floating rate, which is reset periodically based on short-term interest rates, applied to the same notional amount. The notional amounts of swap contracts are not recorded in the financial statements. Swaps are valued daily, and the change in value is recorded as unrealized appreciation (depreciation) until the termination of the swap, at which time realized gain (loss) is recorded. Payments received or made are recorded as realized gains (losses). - ------------------------------------------------------------------------------ 36 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT Swap agreements may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. It may not be possible for the Fund to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses. Total return swaps are subject to the risk that the counterparty will default on its obligation to pay net amounts due to the Funds. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. FEDERAL TAXES The Fund's policy is to comply with Subchapter M of the Internal Revenue Code that applies to regulated investment companies and to distribute substantially all of its taxable income to shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of the deferred losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been increased by $189,392 and accumulated net realized loss has been increased by $96,262 resulting in a net reclassification adjustment to decrease paid-in capital by $93,130. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 37 The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED AUG. 31, 2006 2005 - ------------------------------------------------------------------------------ CLASS A Distributions paid from: Ordinary income ................................$76,604,597 $ 70,478,732 Long-term capital gain ..................................-- -- CLASS B Distributions paid from: Ordinary income .................................15,585,869 17,993,962 Long-term capital gain ..................................-- -- CLASS C Distributions paid from: Ordinary income ....................................591,217 605,297 Long-term capital gain ..................................-- -- CLASS I Distributions paid from: Ordinary income ..................................4,560,444 421 Long-term capital gain ..................................-- -- CLASS Y Distributions paid from: Ordinary income ..................................6,737,531 8,081,878 Long-term capital gain ..................................-- --
At Aug. 31, 2006, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income ...................................$ 4,695,807 Accumulated long-term gain (loss) ...............................$(175,789,584) Unrealized appreciation (depreciation) ..........................$ (41,378,725)
RECENT ACCOUNTING PRONOUNCEMENTS In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 48 (FIN 48), "Accounting for Uncertainty in Income Taxes." FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement 109, "Accounting for Income Taxes." FIN 48 prescribes a two-step process to recognize and measure a tax position taken or expected to be taken in a tax return. The first step is to determine whether a tax position has met the more-likely-than-not recognition threshold and the second step is to measure a tax position that meets the threshold to determine the amount of benefit to recognize. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after Dec. 15, 2006. Tax positions of the Fund are being evaluated to determine the impact, if any, that will result from the adoption of FIN 48. - ------------------------------------------------------------------------------ 38 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT DIVIDENDS TO SHAREHOLDERS Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. OTHER Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date or upon receipt of ex-dividend notification in the case of certain foreign securities. Interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. 2. EXPENSES AND SALES CHARGES Under an Investment Management Services Agreement, RiverSource Investments, LLC (the Investment Manager) determines which securities will be purchased, held or sold. Prior to Oct. 1, 2005, investment management services were provided by Ameriprise Financial. The management fee is a percentage of the Fund's average daily net assets that declines from 0.48% to 0.29% annually as the Fund's assets increase. Prior to March 1, 2006, the fee percentage of the Fund's average daily net assets declined from 0.52% to 0.395% annually as the Fund's assets increased. Under the current Administrative Services Agreement, the Fund pays Ameriprise Financial a fee for administration and accounting services at a percentage of the Fund's average daily net assets that declines from 0.07% to 0.04% annually as the Fund's assets increase. Prior to Oct. 1, 2005, the fee percentage of the Fund's average daily net assets declined from 0.05% to 0.025% annually as the Fund's assets increased. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the Board. Under a Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other RiverSource funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 39 Under a separate Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains shareholder accounts and records. The Fund pays the Transfer Agent an annual fee per shareholder account for this service as follows: o Class A $20.50 o Class B $21.50 o Class C $21.00 o Class Y $18.50 The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. Class I pays a transfer agency fee at an annual rate per shareholder account of $1. This amount is included in the transfer agency fee on the statement of operations. The Transfer Agent charges an annual closed account fee of $5 per inactive account, charged on a pro rata basis for 12 months from the date the account becomes inactive. These fees are included in the transfer agency fees on the statement of operations. The Fund has agreements with Ameriprise Financial Services, Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by the Distributor and other servicing agents with respect to those shares. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by the Distributor for distributing Fund shares were $2,083,362 for Class A, $670,839 for Class B and $3,787 for Class C for the year ended Aug. 31, 2006. For the year ended Aug. 31, 2006, the Investment Manager and its affiliates waived certain fees and expenses to 0.89% for Class A, 1.65% for Class B, 1.66% for Class C, 0.54% for Class I and 0.73% for Class Y. Of these waived fees and expenses, the transfer agency fees waived for Class A, Class B, Class C and Class Y were $1,609,229, $435,882, $15,500 and $111,791, respectively and the management fees waived at the Fund level were $270,688. Under this agreement, which was effective until Feb. 28, 2006, net expenses would not exceed 0.89% for Class A, 1.65% for Class B, 1.66% for Class C, 0.59% for Class I and 0.73% for Class Y of the Fund's average daily net assets. Effective as of March 1, 2006, the Investment Manager and its affiliates have agreed to waive certain fees and expenses until Aug. 31, 2007, unless sooner terminated at the discretion of the Board, such that net expenses will not exceed 0.89% for Class A, 1.65% for Class B, 1.66% for Class C, 0.54% for Class I and 0.73% for Class Y of the Fund's average daily net assets. - ------------------------------------------------------------------------------ 40 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT During the year ended Aug. 31, 2006, the Fund's custodian and transfer agency fees were reduced by $238,238 as a result of earnings and bank fee credits from overnight cash balances. In addition, the Fund received a one time payment of $425,963 by Ameriprise Financial for additional earnings from overnight cash balances determined to be owed for prior years. This amount was insignificant to the Fund's net assets value and total return. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $7,958,085,517 (including $810,371,102 from RiverSource Selective Fund that was acquired in the fund merger as described in Note 9) and $7,255,564,966, respectively, for the year ended Aug. 31, 2006. Realized gains and losses are determined on an identified cost basis. 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
YEAR ENDED AUG. 31, 2006 CLASS A CLASS B CLASS C CLASS I CLASS Y - --------------------------------------------------------------------------------------------------------- Sold 66,603,100 16,761,356 749,835 23,207,815 4,039,333 Fund merger 101,470,543 17,711,859 633,369 33,851,639 9,182,696 Issued for reinvested distributions 12,810,045 2,867,046 108,893 941,851 1,392,410 Redeemed (121,661,365) (52,093,450) (1,561,227) (263,328) (19,763,678) - --------------------------------------------------------------------------------------------------------- Net increase (decrease) 59,222,323 (14,753,189) (69,130) 57,737,977 (5,149,239) - ---------------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, 2005 CLASS A CLASS B CLASS C CLASS I CLASS Y - --------------------------------------------------------------------------------------------------------- Sold 53,307,133 17,309,061 829,459 -- 8,423,475 Issued for reinvested distributions 11,524,807 3,264,247 111,266 -- 1,376,611 Redeemed (98,492,883) (50,438,583) (1,524,135) -- (10,161,026) - --------------------------------------------------------------------------------------------------------- Net increase (decrease) (33,660,943) (29,865,275) (583,410) -- (360,940) - ---------------------------------------------------------------------------------------------------------
5. LENDING OF PORTFOLIO SECURITIES At Aug. 31, 2006, securities valued at $39,336,180 were on loan to brokers. For collateral, the Fund received $39,957,500 in cash. Cash collateral received is invested in short-term securities, which are included in the short-term section of the "Investments in securities." Income from securities lending amounted to $220,256 for the year ended Aug. 31, 2006. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 41 6. INTEREST RATE FUTURES CONTRACTS At Aug. 31, 2006, investments in securities included securities valued at $1,605,297 that were pledged as collateral to cover initial margin deposits on 2,001 open purchase contracts and 333 open sale contracts. The notional market value of the open purchase contracts at Aug. 31, 2006 was $215,613,142 with a net unrealized gain of $665,336. The notional market value of the open sale contracts at Aug. 31, 2006 was $68,046,469 with a net unrealized loss of $131,079. See "Summary of significant accounting policies" and "Notes to investments in securities." 7. SWAP CONTRACTS At Aug. 31, 2006, the Fund had the following open CBMS total return swap contracts:
UNREALIZED TERMINATION NOTIONAL APPRECIATION DATE AMOUNT (DEPRECIATION) - -------------------------------------------------------------------------------- Receive total return on Lehman Brothers Aaa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR less 0.33%. Counterparty: Citigroup Sept. 1, 2006 $18,175,000 $317,799 - --------------------------------------------------------------------------------
8. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by JPMorgan Chase Bank, N.A. (JPMCB), whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The agreement went into effect Sept. 20, 2005. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other RiverSource funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the higher of the Federal Funds Effective Rate plus 0.40% or the JPMCB Prime Commercial Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.07% per annum. Prior to this agreement, the Fund had a revolving credit agreement that permitted borrowings up to $500 million with The Bank of New York. The Fund had no borrowings outstanding during the year ended Aug. 31, 2006. - ------------------------------------------------------------------------------ 42 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 9. FUND MERGER At the close of business on March 10, 2006, RiverSource Diversified Bond Fund acquired the assets and assumed the identified liabilities of RiverSource Selective Fund. The reorganization was completed after shareholders approved the plan on Feb. 15, 2006. The aggregate net assets of RiverSource Diversified Bond Fund immediately before the acquisition were $2,230,540,317 and the combined net assets immediately after the acquisition were $3,004,582,180. The merger was accomplished by a tax-free exchange of 91,783,512 shares of RiverSource Selective Fund valued at $774,041,863. In exchange for the RiverSource Selective Fund shares and net assets, RiverSource Diversified Bond Fund issued the following number of shares:
SHARES - -------------------------------------------------------------------------------- Class A 101,470,543 - -------------------------------------------------------------------------------- Class B 17,711,859 - -------------------------------------------------------------------------------- Class C 633,369 - -------------------------------------------------------------------------------- Class I 33,851,639 - -------------------------------------------------------------------------------- Class Y 9,182,696 - --------------------------------------------------------------------------------
RiverSource Selective Fund's net assets after adjustments for any permanent book-to-tax differences at the merger date were as follows, which include the following amounts of capital stock, unrealized depreciation, accumulated net realized loss and undistributed net income.
ACCUMULATED TEMPORARY TOTAL NET CAPITAL UNREALIZED NET REALIZED BOOK-TO-TAX ASSETS STOCK DEPRECIATION LOSS DIFFERENCES - ------------------------------------------------------------------------------------------------- RiverSource Selective Fund $774,041,863 $826,804,340 $(18,618,938) $(34,129,421) $(14,118)
10. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund had a capital loss carry-over of $175,789,584 at Aug. 31, 2006, that if not offset by capital gains will expire as follows:
2009 2010 2012 2014 2015 - -------------------------------------------------------------------------------- $78,698,873 $49,658,521 $5,227,159 $12,836,807 $29,368,224 - --------------------------------------------------------------------------------
RiverSource Diversified Bond Fund acquired $31,763,053 of capital loss carry-overs in connection with the RiverSource Selective Fund merger (Note 9). In addition to the acquired capital loss carry-overs, the Fund also acquired unrealized capital gains as a result of the mergers. The yearly utilization of the acquired capital losses as well as the utilization of the acquired unrealized losses is limited by the Internal Revenue Code. It is unlikely the Board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 43 11. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), the parent company of RiverSource Investments, LLC (RiverSource Investments), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. In connection with these matters, the SEC and MDOC issued orders (the Orders) alleging that AEFC violated certain provisions of the federal and Minnesota securities laws by failing to adequately disclose market timing activities by allowing certain identified market timers to continue to market time contrary to disclosures in mutual fund and variable annuity product prospectuses. The Orders also alleged that AEFC failed to implement procedures to detect and prevent market timing in 401(k) plans for employees of AEFC and related companies and failed to adequately disclose that there were no such procedures. Pursuant to the MDOC Order, the MDOC also alleged that AEFC allowed inappropriate market timing to occur by failing to have written policies and procedures and failing to properly supervise its employees. As a result of the Orders, AEFC was censured and ordered to cease and desist from committing or causing any violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. Pursuant to the terms of the Orders, AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to make presentations at least annually to its board of directors and the relevant mutual funds' board that include an overview of policies and procedures to prevent market timing, material changes to these policies and procedures and whether disclosures related to market timing are consistent with the SEC order and federal securities laws. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. In addition, AEFC agreed to complete and submit to the MDOC a compliance review of its procedures regarding market timing within one year of the MDOC Order, including a summary of actions taken to ensure compliance with applicable laws and regulations and certification by a senior officer regarding compliance and supervisory procedures. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the RiverSource Funds' Boards of Directors/Trustees. - ------------------------------------------------------------------------------ 44 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal, arbitration and regulatory proceedings, including routine litigation, class actions, and governmental actions, concerning matters arising in connection with the conduct of their business activities. Ameriprise Financial believes that the Funds are not currently the subject of, and that neither Ameriprise Financial nor any of its affiliates are the subject of, any pending legal, arbitration or regulatory proceedings that are likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds. Ameriprise Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the Securities and Exchange Commission on legal and regulatory matters that relate to Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing the SEC website at www.sec.gov. There can be no assurance that these matters, or the adverse publicity associated with them, will not result in increased fund redemptions, reduced sale of fund shares or other adverse consequences to the Funds. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 45 12. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results. CLASS A
- ----------------------------------------------------------------------------------------------------------- PER SHARE INCOME AND CAPITAL CHANGES(a) - ----------------------------------------------------------------------------------------------------------- Fiscal period ended Aug. 31, 2006 2005 2004 2003 2002 Net asset value, beginning of period $ 4.89 $ 4.87 $ 4.78 $ 4.75 $ 4.86 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .19 .18 .18 .20 .25 Net gains (losses) (both realized and unrealized) (.11) .03 .08 .03 (.10) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .08 .21 .26 .23 .15 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.20) (.19) (.17) (.20) (.25) Tax return of capital -- -- -- -- (.01) - ----------------------------------------------------------------------------------------------------------- Total distributions (.20) (.19) (.17) (.20) (.26) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 4.77 $ 4.89 $ 4.87 $ 4.78 $ 4.75 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA - ----------------------------------------------------------------------------------------------------------- Net assets, end of period (in millions) $ 2,013 $ 1,774 $ 1,933 $ 2,280 $ 2,438 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .89%(c) .94%(c) .98%(c) .97% .95% - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.09% 3.67% 3.55% 4.16% 5.17% - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 281% 300% 279% 256% 169% - ----------------------------------------------------------------------------------------------------------- Total return(d) 1.64% 4.38% 5.54% 4.91% 3.13% - ----------------------------------------------------------------------------------------------------------- (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 0.99%, 1.02% and 1.00% for the years ended Aug. 31, 2006, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge.
- ------------------------------------------------------------------------------ 46 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT CLASS B
- ------------------------------------------------------------------------------------------------- PER SHARE INCOME AND CAPITAL CHANGES(a) - ------------------------------------------------------------------------------------------------- Fiscal period ended Aug. 31, 2006 2005 2004 2003 2002 Net asset value, beginning of period $ 4.89 $ 4.88 $ 4.78 $ 4.75 $ 4.86 - ------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .16 .15 .14 .16 .21 Net gains (losses) (both realized and unrealized) (.12) .01 .09 .03 (.10) - ------------------------------------------------------------------------------------------------- Total from investment operations .04 .16 .23 .19 .11 - ------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) (.15) (.13) (.16) (.21) Tax return of capital -- -- -- -- (.01) - ------------------------------------------------------------------------------------------------- Total distributions (.16) (.15) (.13) (.16) (.22) - ------------------------------------------------------------------------------------------------- Net asset value, end of period $ 4.77 $ 4.89 $ 4.88 $ 4.78 $ 4.75 - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA - ------------------------------------------------------------------------------------------------- Net assets, end of period (in millions) $ 402 $ 484 $ 628 $ 902 $ 1,047 - ------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) 1.65%(c) 1.70%(c) 1.73%(c) 1.73% 1.71% - ------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.31% 2.92% 2.78% 3.40% 4.40% - ------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 281% 300% 279% 256% 169% - ------------------------------------------------------------------------------------------------- Total return(d) .88% 3.39% 4.95% 4.12% 2.35% - ------------------------------------------------------------------------------------------------- (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class B would have been 1.76%, 1.78% and 1.75% for the years ended Aug. 31, 2006, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge.
- ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 47 CLASS C
- ------------------------------------------------------------------------------------------------- PER SHARE INCOME AND CAPITAL CHANGES(a) - ------------------------------------------------------------------------------------------------- Fiscal period ended Aug. 31, 2006 2005 2004 2003 2002 Net asset value, beginning of period $ 4.90 $ 4.88 $ 4.78 $ 4.75 $ 4.86 - ------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .16 .15 .14 .16 .21 Net gains (losses) (both realized and unrealized) (.13) .02 .09 .03 (.10) - ------------------------------------------------------------------------------------------------- Total from investment operations .03 .17 .23 .19 .11 - ------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) (.15) (.13) (.16) (.21) Tax return of capital -- -- -- -- (.01) - ------------------------------------------------------------------------------------------------- Total distributions (.16) (.15) (.13) (.16) (.22) - ------------------------------------------------------------------------------------------------- Net asset value, end of period $ 4.77 $ 4.90 $ 4.88 $ 4.78 $ 4.75 - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA - ------------------------------------------------------------------------------------------------- Net assets, end of period (in millions) $ 17 $ 18 $ 21 $ 27 $ 24 - ------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) 1.66%(c) 1.70%(c) 1.73%(c) 1.74% 1.72% - ------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.31% 2.93% 2.79% 3.34% 4.33% - ------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 281% 300% 279% 256% 169% - ------------------------------------------------------------------------------------------------- Total return(d) .66% 3.60% 4.95% 4.11% 2.35% - ------------------------------------------------------------------------------------------------- (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class C would have been 1.76%, 1.79% and 1.75% for the years ended Aug. 31, 2006, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge.
- ------------------------------------------------------------------------------ 48 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT CLASS I
- ------------------------------------------------------------------------- PER SHARE INCOME AND CAPITAL CHANGES(a) - ------------------------------------------------------------------------- Fiscal period ended Aug. 31, 2006 2005 2004(b) Net asset value, beginning of period $ 4.89 $ 4.88 $ 4.91 - ------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .21 .20 .11 Net gains (losses) (both realized and unrealized) (.11) .02 (.04) - ------------------------------------------------------------------------- Total from investment operations .10 .22 .07 - ------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.21) (.10) - ------------------------------------------------------------------------- Net asset value, end of period $ 4.78 $ 4.89 $ 4.88 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA - ------------------------------------------------------------------------- Net assets, end of period (in millions) $ 276 $ -- $ -- - ------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c) .54%(d) .60% .59%(e) - ------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.59% 4.01% 3.13%(e) - ------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 281% 300% 279% - ------------------------------------------------------------------------- Total return(f) 2.19% 4.53% 1.43%(g) - ------------------------------------------------------------------------- (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date is March 4, 2004. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (d) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class I would have been 0.55% for the year ended Aug. 31, 2006. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized.
- ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 49 CLASS Y
- ------------------------------------------------------------------------------------------------- PER SHARE INCOME AND CAPITAL CHANGES(a) - ------------------------------------------------------------------------------------------------- Fiscal period ended Aug. 31, 2006 2005 2004 2003 2002 Net asset value, beginning of period $ 4.89 $ 4.88 $ 4.78 $ 4.75 $ 4.86 - ------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .20 .19 .18 .21 .25 Net gains (losses) (both realized and unrealized) (.12) .02 .10 .03 (.10) - ------------------------------------------------------------------------------------------------- Total from investment operations .08 .21 .28 .24 .15 - ------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.20) (.20) (.18) (.21) (.25) Tax return of capital -- -- -- -- (.01) - ------------------------------------------------------------------------------------------------- Total distributions (.20) (.20) (.18) (.21) (.26) - ------------------------------------------------------------------------------------------------- Net asset value, end of period $ 4.77 $ 4.89 $ 4.88 $ 4.78 $ 4.75 - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA - ------------------------------------------------------------------------------------------------- Net assets, end of period (in millions) $ 173 $ 202 $ 203 $ 268 $ 297 - ------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .73%(c) .78%(c) .81%(c) .81% .78% - ------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.24% 3.85% 3.70% 4.34% 5.30% - ------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 281% 300% 279% 256% 169% - ------------------------------------------------------------------------------------------------- Total return(d) 1.81% 4.34% 5.92% 5.08% 3.29% - ------------------------------------------------------------------------------------------------- (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class Y would have been 0.82%, 0.86% and 0.83% for the years ended Aug. 31, 2006, 2005 and 2004, respectively. (d) Total return does not reflect payment of a sales charge.
- ------------------------------------------------------------------------------ 50 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE BOARD AND SHAREHOLDERS RIVERSOURCE DIVERSIFIED INCOME SERIES, INC. We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of RiverSource Diversified Bond Fund (a series of RiverSource Diversified Income Series, Inc.) as of August 31, 2006, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended August 31, 2006, and the financial highlights for each of the years in the five-year period ended August 31, 2006. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2006, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of RiverSource Diversified Bond Fund as of August 31, 2006, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with U.S. generally accepted accounting principles. KPMG LLP Minneapolis, Minnesota October 20, 2006 - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 51 FEDERAL INCOME TAX INFORMATION (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. Fiscal year ended Aug. 31, 2006 CLASS A INCOME DISTRIBUTIONS -- taxable as dividend income: Qualified Dividend Income for individuals.............................0.00% Dividends Received Deduction for corporations.........................0.00%
PAYABLE DATE PER SHARE Sept. 29, 2005.......................................................$ 0.01496 Oct. 27, 2005..........................................................0.01500 Nov. 29, 2005..........................................................0.01500 Dec. 22, 2005..........................................................0.01700 Jan. 26, 2006..........................................................0.01586 Feb. 27, 2006..........................................................0.01822 March 27, 2006.........................................................0.01602 April 26, 2006.........................................................0.01600 May 25, 2006...........................................................0.01600 June 26, 2006..........................................................0.01600 July 26, 2006..........................................................0.01700 Aug. 28, 2006..........................................................0.01800 Total distributions..................................................$ 0.19506
- ------------------------------------------------------------------------------ 52 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT CLASS B INCOME DISTRIBUTIONS -- taxable as dividend income: Qualified Dividend Income for individuals.............................0.00% Dividends Received Deduction for corporations.........................0.00%
PAYABLE DATE PER SHARE Sept. 29, 2005.......................................................$ 0.01186 Oct. 27, 2005..........................................................0.01230 Nov. 29, 2005..........................................................0.01172 Dec. 22, 2005..........................................................0.01472 Jan. 26, 2006..........................................................0.01235 Feb. 27, 2006..........................................................0.01503 March 27, 2006.........................................................0.01323 April 26, 2006.........................................................0.01305 May 25, 2006...........................................................0.01316 June 26, 2006..........................................................0.01287 July 26, 2006..........................................................0.01401 Aug. 28, 2006..........................................................0.01474 Total distributions..................................................$ 0.15904
CLASS C INCOME DISTRIBUTIONS -- taxable as dividend income: Qualified Dividend Income for individuals.............................0.00% Dividends Received Deduction for corporations.........................0.00%
PAYABLE DATE PER SHARE Sept. 29, 2005.......................................................$ 0.01188 Oct. 27, 2005..........................................................0.01227 Nov. 29, 2005..........................................................0.01169 Dec. 22, 2005..........................................................0.01471 Jan. 26, 2006..........................................................0.01231 Feb. 27, 2006..........................................................0.01501 March 27, 2006.........................................................0.01321 April 26, 2006.........................................................0.01301 May 25, 2006...........................................................0.01312 June 26, 2006..........................................................0.01283 July 26, 2006..........................................................0.01403 Aug. 28, 2006..........................................................0.01470 Total distributions..................................................$ 0.15877
- ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 53 CLASS I INCOME DISTRIBUTIONS -- taxable as dividend income: Qualified Dividend Income for individuals.............................0.00% Dividends Received Deduction for corporations.........................0.00%
PAYABLE DATE PER SHARE Sept. 29, 2005.......................................................$ 0.01637 Oct. 27, 2005..........................................................0.01609 Nov. 29, 2005..........................................................0.01634 Dec. 22, 2005..........................................................0.01805 Jan. 26, 2006..........................................................0.01674 Feb. 27, 2006..........................................................0.01947 March 27, 2006.........................................................0.01734 April 26, 2006.........................................................0.01737 May 25, 2006...........................................................0.01733 June 26, 2006..........................................................0.01747 July 26, 2006..........................................................0.01837 Aug. 28, 2006..........................................................0.01953 Total distributions..................................................$ 0.21047
CLASS Y INCOME DISTRIBUTIONS -- taxable as dividend income: Qualified Dividend Income for individuals.............................0.00% Dividends Received Deduction for corporations.........................0.00%
PAYABLE DATE PER SHARE Sept. 29, 2005.......................................................$ 0.01563 Oct. 27, 2005..........................................................0.01560 Nov. 29, 2005..........................................................0.01569 Dec. 22, 2005..........................................................0.01748 Jan. 26, 2006..........................................................0.01660 Feb. 27, 2006..........................................................0.01890 March 27, 2006.........................................................0.01661 April 26, 2006.........................................................0.01662 May 25, 2006...........................................................0.01660 June 26, 2006..........................................................0.01666 July 26, 2006..........................................................0.01761 Aug. 28, 2006..........................................................0.01868 Total distributions..................................................$ 0.20268
- ------------------------------------------------------------------------------ 54 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT FUND EXPENSES EXAMPLE (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended Aug. 31, 2006. ACTUAL EXPENSES The first line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading titled "Expenses paid during the period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 55
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED MARCH 1, 2006 AUG. 31, 2006 THE PERIOD(a) EXPENSE RATIO - ---------------------------------------------------------------------------------------------- Class A - ---------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,017.20 $ 4.53 .89% - ---------------------------------------------------------------------------------------------- Hypothetical $1,000 $1,020.72 $ 4.53 .89% (5% return before expenses) - ---------------------------------------------------------------------------------------------- Class B - ---------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,013.30 $ 8.37 1.65% - ---------------------------------------------------------------------------------------------- Hypothetical $1,000 $1,016.89 $ 8.39 1.65% (5% return before expenses) - ---------------------------------------------------------------------------------------------- Class C - ---------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,011.10 $ 8.41 1.66% - ---------------------------------------------------------------------------------------------- Hypothetical $1,000 $1,016.84 $ 8.44 1.66% (5% return before expenses) - ---------------------------------------------------------------------------------------------- Class I - ---------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,019.00 $ 2.75 .54% - ---------------------------------------------------------------------------------------------- Hypothetical $1,000 $1,022.48 $ 2.75 .54% (5% return before expenses) - ---------------------------------------------------------------------------------------------- Class Y - ---------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,018.00 $ 3.71 .73% - ---------------------------------------------------------------------------------------------- Hypothetical $1,000 $1,021.53 $ 3.72 .73% (5% return before expenses) - ---------------------------------------------------------------------------------------------- (a) Expenses are equal to the Fund's annualized expense ratio as indicated above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended Aug. 31, 2006: +1.72% for Class A, +1.33% for Class B, +1.11% for Class C, +1.90% for Class I and +1.80% for Class Y.
- ------------------------------------------------------------------------------ 56 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT BOARD MEMBERS AND OFFICERS Shareholders elect a Board that oversees the Fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of the Fund's Board members. Each member oversees 100 RiverSource funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the Board. Under the current Board policy, members may serve until the end of the meeting following their 75th birthday, or the fifteenth anniversary of the first Board meeting they attended as members of the Board, whichever occurs first. This policy does not apply to Ms. Jones who may retire after her 75th birthday. INDEPENDENT BOARD MEMBERS
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS - ----------------------------------------------------------------------------------------------- Kathleen Blatz Board member Chief Justice, Minnesota 901 S. Marquette Ave. since 2006 Supreme Court, 1998-2005 Minneapolis, MN 55402 Age 52 - ----------------------------------------------------------------------------------------------- Arne H. Carlson Board member Chair, Board Services 901 S. Marquette Ave. since 1999 Corporation (provides Minneapolis, MN 55402 administrative services Age 71 to boards); former Governor of Minnesota - ----------------------------------------------------------------------------------------------- Patricia M. Flynn Board member Trustee Professor of 901 S. Marquette Ave. since 2004 Economics and Management, Minneapolis, MN 55402 Bentley College; former Age 55 Dean, McCallum Graduate School of Business, Bentley College - ----------------------------------------------------------------------------------------------- Anne P. Jones Board member Attorney and Consultant 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 71 - ----------------------------------------------------------------------------------------------- Jeffrey Laikind Board member Former Managing Director, American Progressive 901 S. Marquette Ave. since 2005 Shikiar Asset Management Insurance Minneapolis, MN 55402 Age 71 - ----------------------------------------------------------------------------------------------- Stephen R. Lewis, Jr. Board member President Emeritus and Valmont Industries, 901 S. Marquette Ave. since 2002 Professor of Economics, Inc. (manufactures Minneapolis, MN 55402 Carleton College irrigation systems) Age 67 - -----------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 57 INDEPENDENT BOARD MEMBERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS - ----------------------------------------------------------------------------------------------- Catherine James Paglia Board member Director, Enterprise Asset Strategic 901 S. Marquette Ave. since 2004 Management, Inc. (private Distribution,Inc. Minneapolis, MN 55402 real estate and asset (transportation, Age 54 management company) distribution and logistics consultants) - ----------------------------------------------------------------------------------------------- Vikki L. Pryor Board member President and Chief 901 S. Marquette Ave. since 2006 Executive Officer, SBLI Minneapolis, MN 55402 USA Mutual Life Insurance Age 53 Company, Inc. since 1999 - ----------------------------------------------------------------------------------------------- Alison Taunton-Rigby Board member Chief Executive Officer, Hybridon, Inc. 901 S. Marquette Ave. since 2002 RiboNovix, Inc. since 2003 (biotechnology); Minneapolis, MN 55402 (biotechnology); former American Healthways, Age 62 President, Forester Inc. (health Biotech management programs) - -----------------------------------------------------------------------------------------------
BOARD MEMBER AFFILIATED WITH RIVERSOURCE INVESTMENTS*
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS - ---------------------------------------------------------------------------------------------- William F. Truscott** Board member President, Ameriprise 53600 Ameriprise since 2001, Certificate Company since Financial Center Vice President 2006; President - U.S. Minneapolis, MN 55474 since 2002, Asset Management and Chief Age 46 Acting President Investment Officer, since 2006 Ameriprise Financial, Inc. and President, Chairman of the Board and Chief Investment Officer, RiverSource Investments, LLC since 2005; Senior Vice President - Chief Investment Officer, Ameriprise Financial, Inc. and Chairman of the Board and Chief Investment Officer, RiverSource Investments, LLC, 2001-2005 - ---------------------------------------------------------------------------------------------- * Interested person by reason of being an officer, director, security holder and/or employee of RiverSource Investments. ** Paula R. Meyer resigned her position as President for the RiverSource funds. Mr. Truscott has been appointed Acting President and will be assuming the responsibilities of President until a permanent replacement for Ms. Meyer is found.
- ------------------------------------------------------------------------------ 58 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT The Board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Truscott, who is Vice President and Acting President, the Fund's other officers are: FUND OFFICERS
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------------- Jeffrey P. Fox Treasurer Vice President - Investment Accounting, 105 Ameriprise since 2002 Ameriprise Financial, Inc., Financial Center since 2002; Vice President - Finance, Minneapolis, MN 55474 American Express Company, 2000-2002 Age 51 - -------------------------------------------------------------------------------------- Michelle M. Keeley Vice President Executive Vice President - Equity and Fixed 172 Ameriprise since 2004 Income, Ameriprise Financial, Inc. Financial Center and RiverSource Investments, LLC Minneapolis, MN 55474 since 2006; Vice President - Investments, Age 42 Ameriprise Certificate Company since 2003; Senior Vice President - Fixed Income, Ameriprise Financial, Inc., 2002-2006 and RiverSource Investments, LLC, 2004-2006; Managing Director, Zurich Global Assets, 2001-2002 - -------------------------------------------------------------------------------------- Leslie L. Ogg Vice President, President of Board Services Corporation 901 S. Marquette Ave. General Counsel, Minneapolis, MN 55402 and Secretary Age 68 since 1978 - -------------------------------------------------------------------------------------- Edward S. Dryden* Acting Chief Chief Compliance Officer, Ameriprise 1875 Ameriprise Compliance Certificate Company since 2006; Vice Financial Center Officer President - Asset Management Compliance, Minneapolis, MN 55474 since 2006 RiverSource Investments, LLC since 2006; Age 41 Chief Compliance Officer - Mason Street Advisors, LLC, 2002-2006 - -------------------------------------------------------------------------------------- Neysa M. Alecu Anti-Money Compliance Director and Anti-Money 2934 Ameriprise Laundering Laundering Officer, Ameriprise Financial, Financial Center Officer Inc. since 2004; Manager Anti-Money Minneapolis, MN 55474 since 2004 Laundering, Ameriprise Financial, Inc., Age 42 2003-2004; Compliance Director and Bank Secrecy Act Officer, American Express Centurion Bank, 2000-2003 - -------------------------------------------------------------------------------------- * Beth E. Weimer resigned her position as Chief Compliance Officer for the RiverSource funds. Mr. Dryden has been appointed Acting Chief Compliance Officer and will be assuming the responsibilities of Chief Compliance Officer until a permanent replacement for Ms. Weimer is found.
The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling RiverSource Funds at (888) 791-3380; contacting your financial institution; or visiting riversource.com/funds. - ------------------------------------------------------------------------------ RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT 59 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT During the period covered by this report, RiverSource Investments, LLC ("RiverSource Investments" or the "investment manager"), a wholly-owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), served as the investment manager to RiverSource funds under an Investment Management Services Agreement ("IMS Agreement"). The Board of Directors/Trustees (the "Board") annually determines whether to continue the IMS Agreement and subadvisory agreements, as applicable, by evaluating the quality and level of services received and the costs associated with those services. The Board did not make the specific determination this year as each fund's IMS Agreement was approved by the vote of a majority of the outstanding voting securities of the funds at a shareholder meeting held on Feb. 15, 2006. PROXY VOTING The policy of the Board is to vote all proxies of the companies in which the Fund holds investments. The procedures are stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling RiverSource Funds at (888) 791-3380; contacting your financial institution; visiting riversource.com/funds; or searching the website of the Securities and Exchange Commission (SEC) at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2006 is available without charge by visiting riversource.com/funds; or searching the website of the SEC at www.sec.gov. - ------------------------------------------------------------------------------ 60 RIVERSOURCE DIVERSIFIED BOND FUND - 2006 ANNUAL REPORT RIVERSOURCE(SM) DIVERSIFIED BOND FUND 734 Ameriprise Financial Center Minneapolis, MN 55474 riversource.com/funds RIVERSOURCE [LOGO](SM) This report must be accompanied or preceded by the INVESTMENTS Fund's current prospectus. RiverSource(SM) mutual funds are distributed by RiverSource Distributors, Inc. and Ameriprise Financial Services, Inc., Members NASD, and managed by RiverSource Investments, LLC. These companies are part of Ameriprise Financial, Inc. S-6495 Z (10/06) Item 2. (a) The Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer and principal financial officer. A copy of the code of ethics is filed as an exhibit to this form N-CSR. (b) During the period covered by this report, there were not any amendments to the provisions of the code of ethics adopted in 2(a) above. (c) During the period covered by this report, there were not any implicit or explicit waivers to the provisions of the code of ethics adopted in 2(a). Item 3. The Registrant's board of directors has determined that independent directors Jeffrey Laikind and Anne P. Jones, each qualify as audit committee financial experts. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES Fund - Related Fees* (a) Audit Fees. The fees paid for the years ended Aug. 31, to KPMG LLP for professional services rendered for the audits of the annual financial statements for RiverSource Diversified Income Series, Inc. were as follows: 2006 - $33,700; 2005 - $43,500 (b) Audit - Related Fees. The fees paid for the years ended Aug. 31, to KPMG LLP for additional professional services rendered in connection with the registrant's security count pursuant to Rule 17f-2 for RiverSource Diversified Income Series, Inc. were as follows: 2006 - $718; 2005 - $589 (c) Tax Fees. The fees paid for the years ended Aug. 31, to KPMG LLP for tax compliance related services for RiverSource Diversified Income Series, Inc. were as follows: 2006 - $7,279; 2005 - $2,575 (d) All Other Fees. The fees paid for the years ended Aug. 31, to KPMG LLP for additional professional services rendered in connection to proxy filing for RiverSource Diversified Income Series, Inc. were as follows: 2006 - $2,870; 2005 - $776 (e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley pre-approval requirements, all services to be performed by KPMG LLP for the registrant and to the registrant's investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant must be pre-approved by the audit committee. (e) (2) 100% of the services performed for items (b) through (d) above during 2006 and 2005 were pre-approved by the audit committee. (f) Not applicable. (g) Non-Audit Fees. The fees paid for the years ended Aug. 31, by the registrant for non-audit services to KPMG LLP were as follows: 2006 - $39,649; 2005 - $90,351 The fees paid for the years ended Aug. 31, to KPMG LLP by the registrant's investment adviser, and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant were as follows: 2006 - $29,500; 2005 - $87,000 (h) 100% of the services performed in item (g) above during 2006 and 2005 were pre-approved by the audit committee. *2005 represents bills paid 9/1/04 - 8/31/05 2006 represents bills paid 9/1/05 - 8/31/06 Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. The complete schedule of investments is included in Item 1 of this Form N-CSR. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not applicable. Item 9. Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 10. Submission of matters to a vote of security holders. Not applicable. Item 11. Controls and Procedures. (a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's Principal Financial Officer and Principal Executive Officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal controls over financial reporting that occurred during the registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) Code of ethics as applies to the Registrant's principal executive officer and principal financial officer, as required to be disclosed under Item 2 of Form N-CSR, is attached as Ex. 99.CODE ETH. (a)(2) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. (a)(3) Not applicable. (b) A certification by the Registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as EX.99.906 CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) RiverSource Diversified Income Series, Inc. By /s/ William F. Truscott ----------------------- William F. Truscott President and Principal Executive Officer Date November 3, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By /s/ William F. Truscott ----------------------- William F. Truscott President and Principal Executive Officer Date November 3, 2006 By /s/ Jeffrey P. Fox ----------------------- Jeffrey P. Fox Treasurer and Principal Financial Officer Date November 3, 2006 EX-99.CERT 2 ex99cert.txt CERTIFICATION PURSUANT TO 270.30A-2 OF THE INVESTMENT COMPANY ACT OF 1940 Certification Pursuant to 270.30a-2 of the Investment Company Act of 1940 I, William Truscott, 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 25, 2006 /s/ William F. Truscott -------------------------------- Name: William F. Truscott Title: President and Principal Executive Officer Certification Pursuant to 270.30a-2 of the Investment Company Act of 1940 I, Jeffrey 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 25, 2006 /s/ Jeffrey P. Fox ------------------------------ Name: Jeffrey P. Fox Title: Treasurer and Chief Financial Officer EX-99.906 CERT 3 ex99-906cert.txt CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY 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 25, 2006 /s/ William F. Truscott ----------------------- William F. Truscott President and Principal Executive Officer Date: October 25, 2006 /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Chief 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. EX-99.CODE ETH 4 code-of_ethicsaug29.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: o honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o 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; o compliance with laws and governmental rules and regulations applicable to the conduct of the Funds' business and their financial reporting; o the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o 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: o 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; o 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 o 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 o should familiarize himself or herself with the disclosure requirements generally applicable to the Funds; o 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; o 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: o 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; o annually thereafter affirm to the Boards that he or she has complied with the requirements of the Code; o not retaliate against any other Covered Officer or any employee of Ameriprise for reports of potential violations that are made in good faith; and o 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 -2- 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 o 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; o will take all appropriate action to investigate such reported violations; o shall make a determination after the investigation and o if the Funds' General Counsel believes that no violation has occurred, the Boards will be so notified and no further action is required; o 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; o 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; o 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 o 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 Paula R. Meyer* President William F. Truscott Acting President Jeffrey P. Fox Treasurer * Until August 5, 2006. -3- -----END PRIVACY-ENHANCED MESSAGE-----