N-CSR 1 a_divinctst.htm PUTNAM DIVERSIFIED INCOME TRUST

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- 05635 )

Exact name of registrant as specified in charter: Putnam Diversified Income Trust

Address of principal executive offices: One Post Office Square, Boston, Massachusetts 02109

Name and address of agent for service:  Beth S. Mazor, Vice President 
  One Post Office Square 
  Boston, Massachusetts 02109 
 
Copy to:  John W. Gerstmayr, Esq. 
  Ropes & Gray LLP 
  One International Place 
  Boston, Massachusetts 02110 
 
Registrant’s telephone number, including area code:  (617) 292-1000 

Date of fiscal year end: September 30, 2006

Date of reporting period: October 1, 2005—March 31, 2006

 

Item 1. Report to Stockholders:

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


What makes Putnam different?


In 1830, Massachusetts Supreme Judicial Court Justice Samuel Putnam established The Prudent Man Rule, a legal foundation for responsible money management.

THE PRUDENT MAN RULE

All that can be required of a trustee to invest is that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.


A time-honored tradition in money management

Since 1937, our values have been rooted in a profound sense of responsibility for the money entrusted to us.

A prudent approach to investing

We use a research-driven team approach to seek consistent, dependable, superior investment results over time, although there is no guarantee a fund will meet its objectives.

Funds for every investment goal

We offer a broad range of mutual funds and other financial products so investors and their financial representatives can build diversified portfolios.

A commitment to doing what’s right for investors

We have below-average expenses and stringent investor protections, and provide a wealth of information about the Putnam funds.

Industry-leading service

We help investors, along with their financial representatives, make informed investment decisions with confidence.

Putnam
Diversified
Income Trust

3| 31| 06
Semiannual Report

Message from the Trustees  2 
About the fund  4 
Report from the fund managers  7 
Performance  13 
Expenses  16 
Portfolio turnover  18 
Risk  19 
Your fund’s management  20 
Terms and definitions  23 
Trustee approval of management contract  25 
Other information for shareholders  30 
Financial statements  32 

Cover photograph: © Richard H. Johnson

Message from the Trustees

Dear Fellow Shareholder

In the early months of 2006, we have seen a continuation of generally benign economic conditions in the United States. The expansion that began in late 2001 is continuing, fueled by gains in worker productivity. The stock market has advanced, driven largely by corporate profit levels that, by some measures, are near all-time highs. Inflation, which can cause problems for stock and bond markets, has remained fairly steady in recent months even as energy prices have resumed their ascent. Investors can be encouraged by these conditions, but should also be mindful of risks. Bond prices have fallen recently in response to stronger job creation. As mortgage rates have risen to higher levels, activity in the housing market has slowed. Our nation’s large trade deficit is also dampening prosperity and could cause the U.S. dollar to weaken, which might make it more difficult for U.S. stocks and bonds to attract investment from abroad.

We consider it fortunate that the Federal Reserve’s (the Fed’s) new Chairman, Ben Bernanke, like his predecessor, Alan Greenspan, regards the Fed’s role in pursuing both price stability and economic growth as essential to maintaining a healthy financial system. In its first months under the leadership of Mr. Bernanke, the Fed has continued Mr. Greenspan’s program of interest-rate increases, while offering some signals that the end of the current tightening cycle might not be far away.

The economy’s significant strengths and notable weaknesses remind us once again that a well-diversified financial program under the guidance of a professional financial representative can help many investors pursue their goals. And in our view, the professional research, diversification, and active management that mutual funds provide continue to make them an intelligent choice for investors.

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We want you to know that Putnam Investments, under the leadership of Chief Executive Officer Ed Haldeman, continues to focus on delivering consistent, dependable, superior investment performance over time. In the following pages, members of your fund’s management team discuss the fund’s performance and strategies, and their outlook for the months ahead. We thank you for your support of the Putnam funds.


Putnam Diversified Income Trust: seeking broad
diversification across global bond markets


When Putnam Diversified Income Trust was launched in 1988, its three-pronged focus on U.S. investment-grade bonds, high-yield corporate bonds, and non-U.S. bonds was considered innovative. Lower-rated, higher-yielding corporate bonds were relatively new, having just been established in the late 1970s. And, at the time of the fund’s launch, few investors were venturing outside the United States for fixed-income opportunities.

The bond investment landscape has undergone a transformation in the nearly two decades since. New sectors like mortgage- and asset-backed securities now make up over one third of the U.S. investment-grade market. The high-yield corporate bond sector has also grown significantly. Outside the United States, the popularity of the euro has resulted in a large market of European government bonds. There are also growing opportunities to invest in the government and corporate debt of emerging-market countries.

The fund’s original investment focus has been enhanced in an attempt to keep pace with this market expansion. To process the market’s increasing complexity, Putnam’s 100-member fixed-income group aligns teams of specialists with the varied investment opportunities. Each team identifies compelling strategies within its area of expertise. Your fund’s management team selects from among these strategies, striving to systematically build a diversified portfolio that carefully balances risk and return.

We believe the fund’s multi-strategy approach is well suited to the expanding opportunities of today’s global bond marketplace. As different factors drive the performance of the various fixed-income sectors, the fund’s diversified

Optimizing the risk/return trade-off across multiple sectors

Putnam believes that building a diversified portfolio with multiple income-generating strategies is the best way to pursue your fund’s objectives. The fund’s portfolio is composed of a broad spectrum of government, credit, and securitized debt instruments.


strategy can take advantage of changing market leadership in pursuit of high current income consistent with capital preservation.

International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Additional risks may be associated with emerging-market securities, including illiquidity and volatility. Lower-rated bonds may offer higher yields in return for more risk. Mutual funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Mutual funds that invest in bonds are subject to certain risks, including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. While diversification can help protect returns from excessive volatility, it cannot ensure protection against a market loss. The use of derivatives involves special risks and may result in losses.

Key drivers of
fixed-income returns

Government

Interest-rate levels are a primary driver of performance. Generally, bond prices decline when interest rates rise, and rise when interest rates fall. Interest rates — and bond yields — rise and fall according to investor expectations about the health of the economy. Differences in countries’ economic cycles and currency values create opportunities for global investors.

Credit

Corporate bond performance tends to track the health of the overall economy more closely than other bonds. These bonds are less sensitive to interest-rate movements and tend to perform well when the economy strengthens.

Securitized

Interest-rate cycles also affect mortgage- and asset-backed securities (MBSs/ABSs). Because MBSs are the securitized cash flows of mortgages, prepayment rates are another consideration. For ABSs, managers monitor the credit quality of the underlying assets, which comprise the securitized cash flow of anything from credit card debt to manufactured housing debt.

Weightings are shown as a percentage of total investment portfolio. Allocations and holdings in each sector will vary over time. For more information on current fund holdings, see pages 10 and 33.

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Putnam Diversified Income Trust seeks high current income consistent with preservation of capital by investing in investment-grade, high-yield, and non-U.S. fixed-income securities. Fund holdings and sector classifications reflect the diversification of the fixed-income market. The fund is designed for investors seeking high current income consistent with capital preservation, asset class diversification, or both.

Highlights
 
* For the six months ended March 31, 2006, Putnam Diversified Income Trust’s class A shares 
     posted a total return of 1.05% without sales charges. 

*		 The fund’s primary benchmark, the Lehman Aggregate Bond Index, returned –0.06%. 

*		 The average return for the fund’s Lipper category, Multi-Sector Income Funds, was 1.28%. 

*		 The fund increased its dividend in December 2005. See page 11 for details. 

*		 Additional fund performance, comparative performance, and Lipper data can be found in the 
performance section beginning on page 13. 

Performance
Total return for class A shares for periods ended 3/31/06
Since the fund's inception (10/3/88), average annual return is 7.55% at NAV and 7.32% at POP.

  Average annual return  Cumulative return 
  NAV  POP  NAV  POP 
 
10 years  5.80%  5.39%  75.67%  69.11% 
5 years  7.78  6.97  45.47  40.06 
3 years  8.93  7.56  29.25  24.45 
1 year  4.18  0.23  4.18  0.23 
6 months  —  —  1.05  -2.77 

Data is historical. Past performance does not guarantee future results. More recent returns may be less or more than those shown. Investment return and principal value will fluctuate, and you may have a gain or a loss when you sell your shares. Performance assumes reinvestment of distributions and does not account for taxes. Returns at NAV do not reflect a sales charge of 3.75% . For the most recent month-end performance, visit www.putnam.com. A short-term trading fee of up to 2% may apply.

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Report from the fund managers

The period in review

The six-month period ended March 31, 2006, was generally favorable for the fixed-income sectors of the market, especially those associated with higher credit risk, such as high-yield and emerging-market bonds. Strong investor demand for yield boosted prices in both of these sectors, especially during the first calendar quarter of 2006. Because your fund invests in a variety of fixed-income investments, its results at net asset value (NAV, or without sales charges) were well ahead of the return of its all-bond benchmark index. However, the fund’s results at NAV trailed the average for its Lipper category because the fund had less exposure than many of its peers to the strong-performing emerging-market and high-yield sectors. The fund continued to benefit from its holdings in securitized bonds, while its currency strategy had no significant effect on performance over the course of the semiannual period.

Market overview

During the six months ended March 31, 2006, the U.S. economy continued to grow at a solid, moderate pace with low inflation, continuing a four-year trend. Fixed-income securities generally remained in a relatively narrow trading range in the fourth quarter of 2005. During the first calendar quarter of 2006, however, strong demand for high-yield and emerging-market bonds drove their prices up and caused their yields to decline close to the level of comparable Treasuries.

While the bond market has benefited from a supportive environment for the past several years, we have detected growing cautionary signs. The U.S. economy has been posting a steady 3% to 4% growth rate since 2002, but during the past six months, we believe that spare or “excess” capacity to fuel economic growth (i.e., plant and equipment capacity) has all but disappeared. This is an important development, because excess capacity can help keep prices low as companies try to boost

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sales volume, and consequently, when present, it has a dampening effect on inflation. Furthermore, in what could be a significant development for the world’s financial markets, Japan is currently emerging from 15 years of economic diffi-culty. Japan’s previously stagnant economy and very low interest rates have long been key elements of an important mechanism for keeping long-term interest rates low in the United States. Because of the low interest rates available to them at home, Japanese investors (who have a very high savings rate) have purchased higher-yielding U.S. Treasury and corporate bonds in large volume. Recently, real estate prices in Japan have been rising, unemployment has declined, and the Japanese stock market has been strengthening. In addition, Japanese interest rates have risen across the board during the past six months. Japanese investors, noting the changing conditions, have begun to divert some of their capital out of the international markets and back to their domestic markets. We believe these developments could soon mean significantly higher long-term interest rates here, as credit issuers in the United States could be forced to raise interest rates to compete for Japanese capital. We continue to monitor unfolding events in Japan closely.

Strategy overview

As we have noted the beginnings of possible changes in the global economy over the past six months, amid signs that

Market sector performance   
These indexes provide an overview of performance in different market sectors for the   
six months ended 3/31/06.   
 
Bonds   
 
Lehman Aggregate Bond Index (broad bond market)  -0.06% 
JP Morgan Global Diversified Emerging Markets Bond Index (global emerging-market bonds)  3.30% 
Citigroup Non-U.S. World Government Bond Index (international government bonds)  -2.80% 
JP Morgan Global High Yield Index (global high-yield corporate bonds)  3.65% 

Equities  		 
 
S&P 500 Index (broad stock market)  6.38% 
Russell 2000 Growth Index (small-company growth stocks)  16.20% 
Russell 2000 Value Index (small-company value stocks)  14.26% 

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long-term interest rates could rise, our primary goal has been to keep the portfolio’s credit risk at a reduced level. (Credit risk is the risk that a bond issuer could default and fail to pay interest and repay principal in a timely manner.) During the six-month period, we deemphasized the emerging-market sector and increased the average credit quality of the fund’s high-yield holdings by selling lower-quality bonds and purchasing bonds with higher ratings. High-yield securities, which generally pose a higher risk of default than other securities such as Treasuries, are classed among several tiers of credit quality.

In addition, we sought to reduce the fund’s sensitivity to changes in interest rates by maintaining a shorter portfolio duration than in past years. Duration, which is the average length of all of the fund’s bonds and is measured in years, is the primary indicator of interest-rate sensitivity. The shorter a bond’s duration, the less sensitive its price will be to interest-rate changes. Since bond prices move in the opposite direction of interest rates, the fund’s lower interest-rate sensitivity helped performance over the six-month period.

We have also maintained the fund’s position in bank loans. These securities offer floating interest rates that, like an adjustable-rate home mortgage, move in tandem with market rates and can therefore help provide some protection from interest-rate risk.

Comparison of top sector weightings

This chart shows how the fund’s sector weightings have changed over the last six months. Weightings are shown as a percentage of total investment portfolio. Holdings will vary over time.


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Your fund’s holdings

The portfolio’s significant position in securitized bonds, or structured securities, performed well during the semiannual period as interest rates fluctuated within a narrow range. Structured securities currently offer higher income than corporate bonds of comparable credit quality. They also carry short maturities, providing us with the flexibility to shift assets to other fixed-income securities should interest rates rise. The most common types of structured securities are mortgage-backed securities (MBSs) issued by the Federal National Mortgage Association (Fannie Mae) and the Government National Mortgage Association (Ginnie Mae). Other types of structured securities include asset-backed securities (ABSs), which are typically backed by car loans and credit card payments, and commercial mortgage-backed securities (CMBSs), which are backed by loans on large commercial real estate projects, such as office parks or shopping malls.

European government bonds outperformed Treasury bonds and contributed to performance during the six-month period. European bonds benefited from the Fed’s continuing series of interest-rate increases and the fact that economic growth on the Continent has generally been slower than in the United States.

Top holdings

This table shows the fund's top holdings within each of the fund's three broad sectors, and the percentage of the fund's net assets that each comprised, as of 3/31/06. The fund's holdings will change over time.

Holding (percent of fund's net assets)  Coupon (%) and maturity date 
Securitized sector   
 
Freddie Mac Ser. 231, PO (0.9%)  zero %, 2035 
Green Tree Financial Corp. Ser. 99-5,   
Class A5 (0.8%)  7.86%, 2030 
Conseco Finance Securitizations Corp.   
Ser. 01-3, Class A4 (0.7%)  6.91%, 2033 
Credit sector   
 
Echostar DBS Corp. company guaranty (0.5%)  6.625%, 2014 
Pemex Project Funding Master Trust   
company guaranty (0.4%)  10%, 2027 
Bosphorus Financial Services, Ltd.   
144A sec. FRN (Cayman Islands) (0.3%)  6.549%, 2012 
Government sector   
 
U.S. Treasury bonds (3.0%)  6.25%, 2030 
U.S. Treasury bonds (2.8%)  6.25%, 2023 
Ireland (Republic of) bonds (2.1%)  5%, 2013 

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Although the fund’s benchmark includes bonds from Italy, we have avoided them, emphasizing bonds issued in Germany and France instead. In general, the fund has benefited from this strategy.

While the fund continues to de-emphasize emerging-market securities, we added some emerging-market bonds during the period, believing them to be more attractive than high-yield U.S. corporate bonds. Over the period, the fund benefited from positions in higher-yielding issues from the Philippines and Brazil. However, our emphasis on more defensive, lower-yielding bonds from countries such as Mexico and Russia detracted from performance.

In the high-yield corporate bond portion of the portfolio, we continued to emphasize bonds from the energy sector, which has benefited from higher energy prices. These included bonds issued by Dynegy, a Houston-based power company that sold assets and took excess cash flow along with new financing in order to retire outstanding bonds at a significant premium. One high-yield bond position that detracted from results was the fund’s holdings in MedQuest. This medical diagnostic imaging firm was negatively affected by changes in Medicare reimbursement in the first quarter of 2006, and prices of its securities declined accordingly.

Additionally, we maintained the fund’s allocation in senior-secured bank loans. These senior floating-rate bank loans are loans issued by banks to corporations. The interest these loans pay adjusts to reflect changes in short-term interest rates. When rates rise, these securities pay a higher yield. Also, their “senior-secured” status means that they are backed by the assets of each issuing company, such as buildings and equipment. Although the floating-rate feature of these securities does not eliminate interest-rate or inflation risk, floating-rate bank loans can help an income-oriented portfolio weather the ups and downs of a full interest-rate cycle.

Please note that the holdings discussed in this report may not have been held by the fund for the entire period. Portfolio composition is subject to review in accordance with the fund’s investment strategy and may vary in the future.

Of special interest

The fund’s monthly dividend was increased during the period. Dividends on class A shares rose from $0.042 per share to $0.045 per share effective with the December 2005 payment. The fund’s other share classes had similar increases.

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The outlook for your fund

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

We believe that the Fed — even with its recent change in leadership — will continue to raise short-term interest rates beyond the market’s current expectations. In the near term, we expect steady economic growth and contained inflation pressure. Valuations in the credit markets, particularly in high-yield bonds, look high but sustainable at present. However, we continue to believe there is increased risk that long-term interest rates could rise sharply at some point, in light of the disappearing excess capacity in the U.S. economy and if the rebound in the Japanese economy continues. Over the near term, we will maintain a cautious stance, reflected in a portfolio with higher credit quality and a duration that is shorter than that of the fund’s benchmark. In our view, there is not enough reward available in the form of higher interest rates to make it worthwhile for the fund to take on additional credit or interest-rate risk. Going forward, we will continue to remain vigilant regarding any possible disruptions to the global economy and fixed-income markets, seeking to keep the fund positioned defensively while remaining diversified in a broad range of fixed-income sectors and securities.

The views expressed in this report are exclusively those of Putnam Management. They are not meant as investment advice.

International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Additional risks may be associated with emerging-market securities, including illiquidity and volatility. Lower-rated bonds may offer higher yields in return for more risk. Mutual funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Mutual funds that invest in bonds are subject to certain risks, including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. The use of derivatives involves special risks and may result in losses.

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Your fund’s performance

This section shows your fund’s performance for periods ended March 31, 2006, the end of the first half of its current fiscal year. Performance should always be considered in light of a fund’s investment strategy. Data represents past performance. Past performance does not guarantee future results. More recent returns may be less or more than those shown. Investment return and principal value will fluctuate, and you may have a gain or a loss when you sell your shares. For the most recent month-end performance, please visit www.putnam.com or call Putnam at 1-800-225-1581. Class Y shares are generally only available to corporate and institutional clients. See the Terms and Definitions section in this report for definitions of the share classes offered by your fund.

Fund performance                 
Total return for periods ended 3/31/06               
 
  Class A    Class B    Class C    Class M    Class R  Class Y 
(inception dates)  (10/3/88)    (3/1/93)    (2/1/99)    (12/1/94)    (12/1/03)  (7/1/96) 
  NAV  POP  NAV  CDSC  NAV  CDSC  NAV  POP  NAV  NAV 
 
Annual average                     
(life of fund)  7.55%  7.32%  6.72%  6.72%  6.73%  6.73%  7.24%  7.03%  7.28%  7.70% 
10 years  75.67  69.11  62.82  62.82  62.52  62.52  70.98  65.36  71.31  79.87 
Annual average  5.80  5.39  5.00  5.00  4.98  4.98  5.51  5.16  5.53  6.05 
5 years  45.47  40.06  39.93  37.94  39.86  39.86  43.45  38.78  43.67  47.10 
Annual average  7.78  6.97  6.95  6.64  6.94  6.94  7.48  6.77  7.52  8.02 
3 years  29.25  24.45  26.28  23.28  26.19  26.19  28.17  24.03  28.33  30.18 
Annual average  8.93  7.56  8.09  7.23  8.06  8.06  8.62  7.44  8.67  9.19 
1 year  4.18  0.23  3.42  –1.42  3.31  2.34  3.87  0.47  3.85  4.43 
6 months  1.05  –2.77  0.67  –4.14  0.57  –0.40  0.94  –2.35  0.93  1.17 

Performance assumes reinvestment of distributions and does not account for taxes. Returns at public offering price (POP) for class A and M shares reflect a sales charge of 3.75% and 3.25%, respectively. Class B share returns reflect the applicable contingent deferred sales charge (CDSC), which is 5% in the first year, declining to 1% in the sixth year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the first year that is eliminated thereafter. Class R and Y shares have no initial sales charge or CDSC. Performance for class B, C, M, R, and Y shares before their inception is derived from the historical performance of class A shares, adjusted for the applicable sales charge (or CDSC) and, except for class Y shares, the higher operating expenses for such shares.

A 2% short-term trading fee may be applied to shares exchanged or sold within 5 days of purchase.

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Comparative index returns

For periods ended 3/31/06

                                                                                  Citigroup                                                                        Lipper                                         
  Lehman  Non-U.S.  JP Morgan  Multi-Sector 
  Aggregate Bond  World Govt.  Global High  Income Funds 
  Index                                                    Bond Index  Yield Index  category average† 
 
Annual average         
(life of fund)  7.55%  7.07%  —*  7.69% 
10 years  83.98  56.39  98.41%  87.75 
Annual average  6.29  4.57  7.09  6.44 
5 years  28.27  49.03  54.36  43.83 
Annual average  5.11  8.31  9.07  7.48 
3 years  9.02  16.11  41.37  25.87 
Annual average  2.92  5.10  12.23  7.93 
1 year  2.26  –6.48  7.18  4.36 
6 months  –0.06  –2.80  3.65  1.28 

Index and Lipper results should be compared to fund performance at net asset value.

* The index's inception date was 12/31/93.

† Over the 6-month and 1-, 3-, 5-, and 10-year periods ended 3/31/06, there were 119, 119, 93, 85, and 49 funds, respectively, in this Lipper category.

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Fund price and distribution information

For the six-month period ended 3/31/06

Distributions*  Class A    Class B  Class C  Class M    Class R  Class Y 
Number  6                                                     6  6  6    6  6 
Income  $0.482  $0.444  $0.444  $0.470  $0.470  $0.494 
Capital gains  —    —  —  —    —  — 
Total  $0.482  $0.444  $0.444  $0.470  $0.470  $0.494 
Share value:  NAV                           POP  NAV  NAV  NAV                       POP  NAV  NAV 
 
9/30/05  $10.20 $10.60  $10.12  $10.14  $10.11 $10.45                $10.18  $10.20 
3/31/06  9.82  10.20  9.74  9.75  9.73  10.06  9.80  9.82 
Current yield                 
(end of period)                 
Current                 
dividend rate1  5.50%  5.29%  4.80%  4.80%  5.30%  5.13%  5.27%  5.74% 
Current 30-day                 
SEC yield2  5.39  5.19  4.63  4.63  5.14  4.97  5.14  5.64 

* Dividend sources are estimated and may vary based on final tax calculations after the fund's fiscal year-end.

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

2 Based only on investment income, calculated using SEC guidelines.

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Your fund’s expenses

As a mutual fund investor, you pay ongoing expenses, such as management fees, distribution fees (12b-1 fees), and other expenses. In the most recent six-month period, your fund limited these expenses; had it not done so, expenses would have been higher. Using the information below, you can estimate how these expenses affect your investment and compare them with the expenses of other funds. You may also pay one-time transaction expenses, including sales charges (loads) and redemption fees, which are not shown in this section and would have resulted in higher total expenses. For more information, see your fund’s prospectus or talk to your financial advisor.

Review your fund’s expenses

The table below shows the expenses you would have paid on a $1,000 investment in Putnam Diversified Income Trust from October 1, 2005, to March 31, 2006. It also shows how much a $1,000 investment would be worth at the close of the period, assuming actual returns and expenses.

  Class A  Class B  Class C  Class M  Class R  Class Y 
Expenses paid per $1,000*  $ 4.76  $ 8.51  $ 8.50  $ 6.01  $ 6.01  $ 3.51 
Ending value (after expenses)  $1,010.50  $1,006.70  $1,005.70  $1,009.40  $1,009.30  $1,011.70 

* Expenses for each share class are calculated using the fund’s annualized expense ratio for each class, which represents the ongoing expenses as a percentage of net assets for the six months ended 3/31/06. The expense ratio may differ for each share class (see the table at the bottom of the next page). Expenses are calculated by multiplying the expense ratio by the average account value for the period; then multiplying the result by the number of days in the period; and then dividing that result by the number of days in the year. Does not reflect the effect of a non-recurring reimbursement by Putnam. If this amount had been reflected in the table above, the fund’s expenses would have been lower.

Estimate the expenses you paid

To estimate the ongoing expenses you paid for the six months ended March 31, 2006, use the calculation method below. To find the value of your investment on October 1, 2005, go to www.putnam.com and log on to your account. Click on the “Transaction History” tab in your Daily Statement and enter 10/01/2005 in both the “from” and “to” fields. Alternatively, call Putnam at 1-800-225-1581.


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Compare expenses using the SEC’s method

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

  Class A  Class B  Class C  Class M  Class R  Class Y 
Expenses paid per $1,000*  $ 4.78  $ 8.55  $ 8.55  $ 6.04  $ 6.04  $ 3.53 
Ending value (after expenses)  $1,020.19  $1,016.45  $1,016.45  $1,018.95  $1,018.95  $1,021.44 

* Expenses for each share class are calculated using the fund’s annualized expense ratio for each class, which represents the ongoing expenses as a percentage of net assets for the six months ended 3/31/06. The expense ratio may differ for each share class (see the table at the bottom of this page). Expenses are calculated by multiplying the expense ratio by the average account value for the period; then multiplying the result by the number of days in the period; and then dividing that result by the number of days in the year. Does not reflect the effect of a non-recurring reimbursement by Putnam. If this amount had been reflected in the table above, the fund’s expenses would have been lower.

Compare expenses using industry averages

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

  Class A  Class B  Class C  Class M  Class R  Class Y 
 
Your fund's annualized             
expense ratio*  0.95%  1.70%  1.70%  1.20%  1.20%  0.70% 
Average annualized expense             
ratio for Lipper peer group†  1.10%  1.85%  1.85%  1.35%  1.35%  0.85% 

* Does not reflect the effect of a non-recurring reimbursement by Putnam. If this amount had been reflected in the table above, the fund’s expense ratio would have been lower.

† Simple average of the expenses of all front-end load funds in the fund’s Lipper peer group, calculated in accordance with Lipper’s standard method for comparing fund expenses (excluding 12b-1 fees and without giving effect to any expense offset and brokerage service arrangements that may reduce fund expenses). This average reflects each fund’s expenses for its most recent fiscal year available to Lipper as of 3/31/06. To facilitate comparison, Putnam has adjusted this average to reflect the 12b-1 fees carried by each class of shares other than class Y shares, which do not incur 12b-1 fees. The peer group may include funds that are significantly smaller or larger than the fund, which may limit the comparability of the fund’s expenses to the simple average, which typically is higher than the asset-weighted average.

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Your fund’s
portfolio turnover

Putnam funds are actively managed by teams of experts who buy and sell securities based on intensive analysis of companies, industries, economies, and markets. Portfolio turnover is a measure of how often a fund’s managers buy and sell securities for your fund. A portfolio turnover of 100%, for example, means that the managers sold and replaced securities valued at 100% of a fund’s assets within a one-year period. Funds with high turnover may be more likely to generate capital gains and dividends that must be distributed to shareholders as taxable income. High turnover may also cause a fund to pay more brokerage commissions and other transaction costs, which may detract from performance.

Funds that invest in bonds or other fixed-income instruments may have higher turnover than funds that invest only in stocks. Short-term bond funds tend to have higher turnover than longer-term bond funds, because shorter-term bonds will mature or be sold more frequently than longer-term bonds. You can use the table below to compare your fund’s turnover with the average turnover for funds in its Lipper category.

Turnover comparisons
Percentage of holdings that change every year

  2005  2004  2003  2002  2001 
 
Putnam Diversified Income Trust  126%*  99%  146%†  209%†‡  150%† 
Lipper Multi-Sector Income Funds           
category average  127%  104%  145%  118%  123% 

Turnover data for the fund is calculated based on the fund's fiscal-year period, which ends on September 30. Turnover data for the fund's Lipper category is calculated based on the average of the turnover of each fund in the category for its fiscal year ended during the indicated year. Fiscal years vary across funds in the Lipper category, which may limit the comparability of the fund's portfolio turnover rate to the Lipper average. Comparative data for 2005 is based on information available as of 12/31/05.

* Excludes dollar roll transactions.

† Excludes certain Treasury note transactions executed in connection with a short-term trading strategy.

‡ Excludes the impact of assets received from the acquisition of Putnam Strategic Income Fund.

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Your fund’s risk

This risk comparison is designed to help you understand how your fund compares with other funds. The comparison utilizes a risk measure developed by Morningstar, an independent fund-rating agency. This risk measure is referred to as the fund’s Overall Morningstar Risk.

Your fund’s Overall Morningstar Risk


Your fund’s Overall Morningstar Risk is shown alongside that of the average fund in its broad asset class, as determined by Morningstar. The risk bar broadens the comparison by translating the fund’s Overall Morningstar Risk into a percentile, which is based on the fund’s ranking among all funds rated by Morningstar as of March 31, 2006. A higher Overall Morningstar Risk generally indicates that a fund’s monthly returns have varied more widely.

Morningstar determines a fund’s Overall Morningstar Risk by assessing variations in the fund’s monthly returns — with an emphasis on downside variations — over 3-, 5-, and 10-year periods, if available. Those measures are weighted and averaged to produce the fund’s Overall Morningstar Risk. The information shown is provided for the fund’s class A shares only; information for other classes may vary. Overall Morningstar Risk is based on historical data and does not indicate future results. Morningstar does not purport to measure the risk associated with a current investment in a fund, either on an absolute basis or on a relative basis. Low Overall Morningstar Risk does not mean that you cannot lose money on an investment in a fund. Copyright 2006 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

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Your fund’s management

Your fund is managed by the members of the Putnam Core Fixed-Income and Core Fixed-Income High-Yield teams. D. William Kohli is the Portfolio Leader. Rob Bloemker, Jeffrey Kaufman, Paul Scanlon, and David Waldman are Portfolio Members of the fund. The Portfolio Leader and Portfolio Members coordinate the teams’ management of the fund.

For a complete listing of the members of the Putnam Core Fixed-Income and Core Fixed-Income High-Yield teams, including those who are not Portfolio Leaders or Portfolio Members of your fund, visit Putnam’s Individual Investor Web site at www.putnam.com.

Fund ownership by the Portfolio Leader and Portfolio Members

The table below shows how much the fund’s current Portfolio Leader and Portfolio Members have invested in the fund (in dollar ranges). Information shown is as of March 31, 2006, and March 31, 2005.

      $1 –  $10,001 –  $50,001 –  $100,001 –  $500,001 –  $1,000,001 
  Year   $0                      $10,000  $50,000  $100,000  $500,000  $1,000,000  and over 
 
D. William Kohli  2006          *    
Portfolio Leader  2005            *  
Rob Bloemker  2006          *    
Portfolio Member  2005        *      
Jeffrey Kaufman  2006  *            
Portfolio Member  2005  *            
Paul Scanlon  2006  *            
Portfolio Member  2005  *            
David Waldman  2006  *            
Portfolio Member  2005  *            

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Fund manager compensation

The total 2005 fund manager compensation that is attributable to your fund is approximately $4,200,000. This amount includes a portion of 2005 compensation paid by Putnam Management to the fund managers listed in this section for their portfolio management responsibilities, calculated based on the fund assets they manage taken as a percentage of the total assets they manage. The compensation amount also includes a portion of the 2005 compensation paid to the Chief Investment Officer of the team and the Group Chief Investment Officer of the fund’s broader investment category for their oversight responsibilities, calculated based on the fund assets they oversee taken as a percentage of the total assets they oversee. This amount does not include compensation of other personnel involved in research, trading, administration, systems, compliance, or fund operations; nor does it include non-compensation costs. These percentages are determined as of the fund’s fiscal period-end. For personnel who joined Putnam Management during or after 2005, the calculation reflects annualized 2005 compensation or an estimate of 2006 compensation, as applicable.

Other Putnam funds managed by the Portfolio Leader and Portfolio Members

D. William Kohli is also a Portfolio Leader of Putnam Master Intermediate Income Trust and Putnam Premier Income Trust, and a Portfolio Member of Putnam Global Income Trust.

Rob Bloemker is also a Portfolio Member of Putnam American Government Income Fund, Putnam Income Fund, Putnam Limited Duration Government Income Fund, Putnam Master Intermediate Income Trust, Putnam Premier Income Trust, and Putnam U.S. Government Income Trust.

Jeffrey Kaufman is also a Portfolio Member of Putnam Master Intermediate Income Trust and Putnam Premier Income Trust.

Paul Scanlon is also a Portfolio Leader of Putnam Floating Rate Income Fund, Putnam High Yield Advantage Fund, Putnam High Yield Trust, and Putnam Managed High Yield Trust. He is also a Portfolio Member of Putnam Master Intermediate Income Trust and Putnam Premier Income Trust.

David Waldman is also a Portfolio Member of Putnam Master Intermediate Income Trust and Putnam Premier Income Trust.

D. William Kohli, Rob Bloemker, Jeffrey Kaufman, Paul Scanlon, and David Waldman may also manage other accounts and variable trust funds advised by Putnam Management or an affiliate.

Changes in your fund’s Portfolio Leader and Portfolio Members

Your fund’s Portfolio Leader and Portfolio Members did not change during the year ended March 31, 2006.

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Fund ownership by Putnam’s Executive Board

The table below shows how much the members of Putnam’s Executive Board have invested in the fund (in dollar ranges). Information shown is as of March 31, 2006, and March 31, 2005.

      $1 –  $10,001 –  $50,001–  $100,001 
  Year  $0  $10,000  $50,000  $100,000  and over 
 
Philippe Bibi  2006  *        
Chief Technology Officer  2005  *        
Joshua Brooks  2006  *        
Deputy Head of Investments  2005  *        
William Connolly  2006  *        
Head of Retail Management  N/A           
Kevin Cronin  2006        *  
Head of Investments  2005  *        
Charles Haldeman, Jr.  2006          *
President and CEO  2005          *
Amrit Kanwal  2006  *        
Chief Financial Officer  2005  *        
Steven Krichmar  2006  *        
Chief of Operations  2005  *        
Francis McNamara, III  2006  *        
General Counsel  2005  *        
Richard Robie, III  2006  *        
Chief Administrative Officer  2005  *        
Edward Shadek  2006  *        
Deputy Head of Investments  2005  *        
Sandra Whiston  2006  *        
Head of Institutional Management  N/A           

N/A indicates the individual was not a member of Putnam's Executive Board as of 3/31/05.

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Terms and definitions

Important terms

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

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

Public offering price (POP) is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. POP performance figures shown here assume the 3.75% maximum sales charge for class A shares and 3.25% for class M shares.

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

Share classes

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

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

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

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

Class R shares are not subject to an initial sales charge or CDSC and are available only to certain defined contribution plans.

Class Y shares are not subject to an initial sales charge or CDSC, and carry no 12b-1 fee. They are only available to eligible purchasers, including eligible defined contribution plans or corporate IRAs.

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Comparative indexes

Citigroup Non-U.S. World Government Bond Index is an unmanaged index of international investment-grade fixed-income securities.

JP Morgan Global Diversified Emerging Markets Bond Index is an unmanaged index of global emerging-market fixed-income securities.

JP Morgan Global High Yield Index is an unmanaged index of global high-yield fixed-income securities.

Lehman Aggregate Bond Index is an unmanaged index of U.S. investment-grade fixed-income securities.

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

Russell 2000 Value Index is an unmanaged index of those companies in the small-cap Russell 2000 Index chosen for their value orientation.

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

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

Lipper is a third-party industry-ranking entity that ranks mutual funds. Its rankings do not reflect sales charges. Lipper rankings are based on total return at net asset value relative to other funds that have similar current investment styles or objectives as determined by Lipper. Lipper may change a fund’s category assignment at its discretion. Lipper category averages reflect performance trends for funds within a category.

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Trustee approval of
management contract

General conclusions

The Board of Trustees of the Putnam funds oversees the management of each fund and, as required by law, determines annually whether to approve the continuance of your fund’s management contract with Putnam Management and its sub-management contract with Putnam Management’s affiliate, Putnam Investment Limited (“PIL”). In this regard, the Board of Trustees, with the assistance of its Contract Committee consisting solely of Trustees who are not “interested persons” (as such term is defined in the Investment Company Act of 1940, as amended) of the Putnam funds (the “Independent Trustees”), requests and evaluates all information it deems reasonably necessary under the circumstances. Over the course of several months beginning in March and ending in June 2005, the Contract Committee met five times to consider the information provided by Putnam Management and other information developed with the assistance of the Board’s independent counsel and independent staff. The Contract Committee reviewed and discussed key aspects of this information with all of the Independent Trustees. Upon completion of this review, the Contract Committee recommended and the Independent Trustees approved the continuance of your fund’s management contract and sub-management contract, effective July 1, 2005. Because PIL is an affiliate of Putnam Management and Putnam Management remains fully responsible for all services provided by PIL, the Trustees have not evaluated PIL as a separate entity and all subsequent references to Putnam Management below should be deemed to include reference to PIL as necessary or appropriate in the context.

This approval was based on the following conclusions:

*   That the fee schedule currently in effect for your fund represents reasonable compensation in 
light of the nature and quality of the services being provided to the fund, the fees paid by 
competitive funds and the costs incurred by Putnam Management in providing such services, and 

*		 That such fee schedule represents an appropriate sharing between fund shareholders and 
Putnam Management of such economies of scale as may exist in the management of the fund 
at current asset levels. 

These conclusions were based on a comprehensive consideration of all information provided to the Trustees and were not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations and how the Trustees considered these factors are described below, although individual Trustees may have evaluated the information presented differently, giving different weights to various factors. It is also important to recognize that the fee arrangements for your fund and the other Putnam funds are the result of many years of review and discussion between the Independent Trustees and Putnam Management, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements in prior years.

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Model fee schedules and categories; total expenses

The Trustees’ review of the management fees and total expenses of the Putnam funds focused on three major themes:

* Consistency. The Trustees, working in cooperation with Putnam Management, have developed and implemented a series of model fee schedules for the Putnam funds designed to ensure that each fund’s management fee is consistent with the fees for similar funds in the Putnam family of funds and compares favorably with fees paid by competitive funds sponsored by other investment advisors. Under this approach, each Putnam fund is assigned to one of several fee categories based on a combination of factors, including competitive fees and perceived difficulty of management, and a common fee schedule is implemented for all funds in a given fee category. The Trustees reviewed the model fee schedule then in effect for your fund, including fee levels and breakpoints, and the assignment of the fund to a particular fee category under this structure. (“Breakpoints” refer to reductions in fee rates that apply to additional assets once specified asset levels are reached.) The Trustees concluded that no changes should be made in the fund’s current fee schedule at this time.

*  Competitiveness. The Trustees also reviewed comparative fee and expense information for competitive funds, which indicated that, in a custom peer group of competitive funds selected by Lipper Inc., your fund ranked in the 31st percentile in management fees and in the 19th percentile in total expenses (less any applicable 12b-1 fees) as of December 31, 2004 (the first percentile being the least expensive funds and the 100th percentile being the most expensive funds). (Because the fund’s custom peer group is smaller than the fund’s broad Lipper Inc. peer group, this expense comparison may differ from the Lipper peer expense information found elsewhere in this report.) The Trustees noted that expense ratios for a number of Putnam funds, which show the percentage of fund assets used to pay for management and administrative services, distribution (12b-1) fees and other expenses, had been increasing recently as a result of declining net assets and the natural operation of fee breakpoints. They noted that such expense ratio increases were currently being controlled by expense limitations implemented in January 2004 and which Putnam Management, in consultation with the Contract Committee, has committed to maintain at least through 2006. The Trustees expressed their intention to monitor this information closely to ensure that fees and expenses of the Putnam funds continue to meet evolving competitive standards.

*  Economies of scale. The Trustees concluded that the fee schedule currently in effect for your fund represents an appropriate sharing of economies of scale at current asset levels. Your fund currently has the benefit of breakpoints in its management fee that provide shareholders with significant economies of scale, which means that the effective management fee rate of a fund (as a percentage of fund assets) declines as a fund grows in size and crosses specified asset thresholds. The Trustees examined the existing breakpoint structure of the Putnam funds’ management fees in light of competitive industry practices. The Trustees considered various possible modifications to the Putnam funds’ current breakpoint structure, but ultimately

26

concluded that the current breakpoint structure continues to serve the interests of fund shareholders. Accordingly, the Trustees continue to believe that the fee schedules currently in effect for the funds represent an appropriate sharing of economies of scale at current asset levels. The Trustees noted that significant redemptions in many Putnam funds, together with signifi-cant changes in the cost structure of Putnam Management, have altered the economics of Putnam Management’s business in significant ways. In view of these changes, the Trustees intend to consider whether a greater sharing of the economies of scale by fund shareholders would be appropriate if and when aggregate assets in the Putnam funds begin to experience meaningful growth.

In connection with their review of the management fees and total expenses of the Putnam funds, the Trustees also reviewed the costs of the services to be provided and profits to be realized by Putnam Management and its affiliates from the relationship with the funds. This information included trends in revenues, expenses and profitability of Putnam Management and its affiliates relating to the investment management and distribution services provided to the funds. In this regard, the Trustees also reviewed an analysis of Putnam Management’s revenues, expenses and profitability with respect to the funds’ management contracts, allocated on a fund-by-fund basis.

Investment performance

The quality of the investment process provided by Putnam Management represented a major factor in the Trustees’ evaluation of the quality of services provided by Putnam Management under your fund’s management contract. The Trustees were assisted in their review of the funds’ investment process and performance by the work of the Investment Oversight Committees of the Trustees, which meet on a regular monthly basis with the funds’ portfolio teams throughout the year. The Trustees concluded that Putnam Management generally provides a high-quality investment process – as measured by the experience and skills of the individuals assigned to the management of fund portfolios, the resources made available to such personnel, and in general the ability of Putnam Management to attract and retain high-quality personnel – but also recognize that this does not guarantee favorable investment results for every fund in every time period. The Trustees considered the investment performance of each fund over multiple time periods and considered information comparing the fund’s performance with various benchmarks and with the performance of competitive funds. The Trustees noted the satisfactory investment performance of many Putnam funds. They also noted the disappointing investment performance of certain funds in recent years and continued to discuss with senior management of Putnam Management the factors contributing to such underperformance and actions being taken to improve performance. The Trustees recognized that, in recent years, Putnam Management has made significant changes in its investment personnel and processes and in the fund product line to address areas of underperformance. The Trustees indicated their intention to continue to monitor performance trends to assess the effectiveness of these changes and to evaluate whether additional remedial changes are warranted.

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In the case of your fund, the Trustees considered that your fund’s class A share cumulative total return performance at net asset value was in the following percentiles of its Lipper Inc. peer group (Lipper Multi-Sector Income Funds) for the one-, three- and five-year periods ended December 31, 2004 (the first percentile being the best-performing funds and the 100th percentile being the worst-performing funds):

One-year period  Three-year period  Five-year period 
34th  32nd  39th 

(Because of the passage of time, these performance results may differ from the performance results for more recent periods shown elsewhere in this report. Over the one-, three-, and five-year periods ended December 31, 2004, there were 112, 96, and 91 funds, respectively, in your fund’s Lipper peer group.* Past performance is no guarantee of future performance.)

As a general matter, the Trustees believe that cooperative efforts between the Trustees and Putnam Management represent the most effective way to address investment performance problems. The Trustees believe that investors in the Putnam funds have, in effect, placed their trust in the Putnam organization, under the oversight of the funds’ Trustees, to make appropriate decisions regarding the management of the funds. Based on the responsiveness of Putnam Management in the recent past to Trustee concerns about investment performance, the Trustees believe that it is preferable to seek change within Putnam Management to address performance shortcomings. In the Trustees’ view, the alternative of terminating a management contract and engaging a new investment advisor for an underperforming fund would entail significant disruptions and would not provide any greater assurance of improved investment performance.

Brokerage and soft-dollar allocations; other benefits

The Trustees considered various potential benefits that Putnam Management may receive in connection with the services it provides under the management contract with your fund. These include principally benefits related to brokerage and soft-dollar allocations, whereby a portion of the commissions paid by a fund for brokerage is earmarked to pay for research services that may be utilized by a fund’s investment advisor, subject to the obligation to seek best execution. The Trustees believe that soft-dollar credits and other potential benefits associated with the allocation of fund brokerage, which pertains mainly to funds investing in equity securities, represent assets of the funds that should be used for the benefit of fund shareholders. This area has been marked by significant change in recent years. In July 2003, acting upon the Contract Committee’s recommendation, the Trustees directed that allocations of brokerage to reward

* The percentile rankings for your fund’s class A share annualized total return performance in the Lipper Multi-Sector Income Funds category for the one-, five-, and ten-year periods ended March 31, 2006, were 60%, 41%, 70%, respectively. Over the one-, five-, and ten-year periods ended March 31, 2006, the fund ranked 71st out of 119, 35th out of 85, and 35th out of 49 funds, respectively. Note that this more recent information was not available when the Trustees approved the continuance of your fund’s management contract.

28

firms that sell fund shares be discontinued no later than December 31, 2003. In addition, commencing in 2004, the allocation of brokerage commissions by Putnam Management to acquire research services from third-party service providers has been significantly reduced, and continues at a modest level only to acquire research that is customarily not available for cash. The Trustees will continue to monitor the allocation of the funds’ brokerage to ensure that the principle of “best price and execution” remains paramount in the portfolio trading process.

The Trustees’ annual review of your fund’s management contract also included the review of its distributor’s contract and distribution plan with Putnam Retail Management Limited Partnership and the custodian agreement and investor servicing agreement with Putnam Fiduciary Trust Company, all of which provide benefits to affiliates of Putnam Management.

Comparison of retail and institutional fee schedules

The information examined by the Trustees as part of their annual contract review has included for many years information regarding fees charged by Putnam Management and its affiliates to institutional clients such as defined benefit pension plans, college endowments, etc. This information included comparison of such fees with fees charged to the funds, as well as a detailed assessment of the differences in the services provided to these two types of clients. The Trustees observed, in this regard, that the differences in fee rates between institutional clients and the mutual funds are by no means uniform when examined by individual asset sectors, suggesting that differences in the pricing of investment management services to these types of clients reflect to a substantial degree historical competitive forces operating in separate market places. The Trustees considered the fact that fee rates across all asset sectors are higher on average for mutual funds than for institutional clients, as well as the differences between the services that Putnam Management provides to the Putnam funds and those that it provides to institutional clients of the firm, but have not relied on such comparisons to any significant extent in concluding that the management fees paid by your fund are reasonable.

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Other information
for shareholders

Important notice regarding delivery of shareholder documents

In accordance with SEC regulations, Putnam sends a single copy of annual and semiannual shareholder reports, prospectuses, and proxy statements to Putnam shareholders who share the same address. If you prefer to receive your own copy of these documents, please call Putnam at 1-800-225-1581, and Putnam will begin sending individual copies within 30 days.

Proxy voting

Putnam is committed to managing our mutual funds in the best interests of our shareholders. The Putnam funds’ proxy voting guidelines and procedures, as well as information regarding how your fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2005, are available on the Putnam Individual Investor Web site, www.putnam.com/individual, and on the SEC’s Web site, www.sec.gov. If you have questions about finding forms on the SEC’s Web site, you may call the SEC at 1-800-SEC-0330. You may also obtain the Putnam funds’ proxy voting guidelines and procedures at no charge by calling Putnam’s Shareholder Services at 1-800-225-1581.

Fund portfolio holdings

The fund will file a complete schedule of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Shareholders may obtain the fund’s Forms N-Q on the SEC’s Web site at www.sec.gov. In addition, the fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for information about the SEC’s Web site or the operation of the Public Reference Room.

30

Putnam’s policy on confidentiality

In order to conduct business with our shareholders, we must obtain certain personal information such as account holders’ addresses, telephone numbers, Social Security numbers, and the names of their financial advisors. We use this information to assign an account number and to help us maintain accurate records of transactions and account balances. It is our policy to protect the confidentiality of your information, whether or not you currently own shares of our funds, and in particular, not to sell information about you or your accounts to outside marketing firms. We have safeguards in place designed to prevent unauthorized access to our computer systems and procedures to protect personal information from unauthorized use. Under certain circumstances, we share this information with outside vendors who provide services to us, such as mailing and proxy solicitation. In those cases, the service providers enter into confidentiality agreements with us, and we provide only the information necessary to process transactions and perform other services related to your account. We may also share this information with our Putnam affiliates to service your account or provide you with information about other Putnam products or services. It is also our policy to share account information with your financial advisor, if you’ve listed one on your Putnam account. If you would like clarification about our confidentiality policies or have any questions or concerns, please don’t hesitate to contact us at 1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.

31

Financial statements

A guide to financial statements

These sections of the report, as well as the accompanying Notes, constitute the fund’s financial statements.

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

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

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

Statement of changes in net assets shows how the fund’s net assets were affected by the fund’s net investment gain or loss, by distributions to shareholders, and by changes in the number of the fund’s shares. It lists distributions and their sources (net investment income or realized capital gains) over the current reporting period and the most recent fiscal year-end. The distributions listed here may not match the sources listed in the Statement of operations because the distributions are determined on a tax basis and may be paid in a different period from the one in which they were earned. Dividend sources are estimated at the time of declaration. Actual results may vary. Any non-taxable return of capital cannot be determined until final tax calculations are completed after the end of the fund’s fiscal year.

Financial highlights provide an overview of the fund’s investment results, per-share distributions, expense ratios, net investment income ratios, and portfolio turnover in one summary table, reflecting the five most recent reporting periods. In a semiannual report, the highlight table also includes the current reporting period.

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The fund’s portfolio 3/31/06 (Unaudited)         
 
 
 
CORPORATE BONDS AND NOTES (25.4%)*         
    Principal amount    Value 
 
Basic Materials (2.0%)         
Chaparral Steel Co. company guaranty 10s, 2013  $  3,133,000  $  3,493,295 
Cognis Holding GmbH & Co. 144A         
sr. notes 9 1/2s, 2014 (Germany)  EUR  1,845,000    2,534,904 
Compass Minerals International, Inc. sr. disc.         
notes stepped-coupon Ser. B, zero % (12s, 6/1/08), 2013 ††  $  1,715,000    1,534,925 
Compass Minerals International, Inc.         
sr. notes stepped-coupon zero % (12 3/4s, 12/15/07), 2012 ††    5,065,000    4,685,125 
Crystal US Holdings, LLC sr. disc.         
notes stepped-coupon Ser. A, zero % (10s, 10/1/09), 2014 ††    2,665,000    2,078,700 
Equistar Chemicals LP/Equistar Funding Corp. company         
guaranty 10 1/8s, 2008    4,059,000    4,312,688 
Gerdau Ameristeel Corp. sr. notes 10 3/8s, 2011 (Canada)    4,625,000    5,075,938 
Huntsman, LLC company guaranty 11 5/8s, 2010    2,259,000    2,558,318 
Innophos, Inc. company guaranty 8 7/8s, 2014    1,720,000    1,788,800 
International Steel Group, Inc. sr. notes 6 1/2s, 2014    930,000    925,350 
Jefferson Smurfit Corp. company guaranty 7 1/2s, 2013    1,765,000    1,659,100 
JSG Holding PLC 144A sr. notes 11 1/2s,         
2015 (Ireland) ‡‡  EUR  1,047,364    1,316,736 
Lyondell Chemical Co. company guaranty 10 1/2s, 2013  $  715,000    791,863 
MDP Acquisitions PLC sr. notes 9 5/8s, 2012 (Ireland)    1,640,000    1,734,300 
MDP Acquisitions PLC sr. notes Ser. EUR,         
10 1/8s, 2012 (Ireland)  EUR  3,045,000    4,102,635 
Nalco Co. sr. sub. notes 9s, 2013  EUR  505,000    659,323 
Nalco Co. sr. sub. notes 8 7/8s, 2013  $  2,213,000    2,301,520 
Novelis, Inc. 144A sr. notes 7 3/4s, 2015    4,915,000    4,718,400 
PQ Corp. 144A company guaranty 7 1/2s, 2013    895,000    859,200 
Rockwood Specialties Group, Inc. company         
guaranty 7 5/8s, 2014  EUR  2,750,000    3,442,299 
Steel Dynamics, Inc. company guaranty 9 1/2s, 2009  $  4,955,000    5,153,200 
Sterling Chemicals, Inc. sec. notes 10s, 2007 ‡‡    862,593    821,620 
Stone Container Corp. sr. notes 9 3/4s, 2011    865,000    890,950 
Stone Container Corp. sr. notes 8 3/8s, 2012    60,000    59,100 
Stone Container Finance company guaranty 7 3/8s,         
2014 (Canada)    1,080,000    1,004,400 
United States Steel Corp. sr. notes 9 3/4s, 2010    943,000    1,018,440 
United States Steel, LLC sr. notes 10 3/4s, 2008    682,000    750,200 
        60,271,329 
 
Capital Goods (1.2%)         
Allied Waste North America, Inc. company         
guaranty Ser. B, 8 1/2s, 2008    5,158,000    5,390,110 
BE Aerospace, Inc. sr. notes 8 1/2s, 2010    439,000    466,438 
Blount, Inc. sr. sub. notes 8 7/8s, 2012    3,190,000    3,317,600 
Browning-Ferris Industries, Inc. debs. 7.4s, 2035    440,000    408,100 
Browning-Ferris Industries, Inc. sr. notes 6 3/8s, 2008    2,115,000    2,115,000 
Crown Cork & Seal Co. Inc. debs. 8s, 2023    614,000    590,975 

33

CORPORATE BONDS AND NOTES (25.4%)* continued         
    Principal amount    Value 
 
Capital Goods continued         
Decrane Aircraft Holdings Co. company         
guaranty zero %, 2008 (acquired 7/23/04, cost $1,281,482) ‡  $  4,945,000  $  3,263,700 
L-3 Communications Corp. sr. sub. notes 5 7/8s, 2015    3,094,000    2,947,035 
Legrand SA debs. 8 1/2s, 2025 (France)    4,999,000    6,123,775 
Manitowoc Co., Inc. (The) company guaranty 10 1/2s, 2012    256,000    280,320 
Manitowoc Co., Inc. (The) company guaranty 10 3/8s, 2011  EUR  1,120,000    1,437,190 
Manitowoc Co., Inc. (The) sr. notes 7 1/8s, 2013  $  1,510,000    1,540,200 
Mueller Group, Inc. sr. sub. notes 10s, 2012    1,885,000    2,064,075 
Owens-Brockway Glass sr. sec. notes 8 3/4s, 2012    2,368,000    2,533,760 
Owens-Illinois, Inc. debs. 7.8s, 2018    460,000    456,550 
Siebe PLC 144A sr. unsub. 6 1/2s, 2010 (United Kingdom)    2,710,000    2,527,075 
Terex Corp. company guaranty 9 1/4s, 2011    1,310,000    1,393,513 
        36,855,416 
 
Communication Services (1.8%)         
Alamosa Delaware, Inc. company guaranty 12s, 2009    1,719,000    1,852,223 
Alamosa Delaware, Inc. company guaranty 11s, 2010    1,799,000    1,996,387 
American Cellular Corp. company guaranty 9 1/2s, 2009    1,350,000    1,397,250 
Cincinnati Bell Telephone company guaranty 6.3s, 2028    1,105,000    1,019,363 
Cincinnati Bell, Inc. company guaranty 7s, 2015    3,374,000    3,340,260 
Cincinnati Bell, Inc. unsub. notes 7 1/4s, 2023    2,845,000    2,802,325 
Citizens Communications Co. sr. notes 6 1/4s, 2013    6,819,000    6,631,478 
Inmarsat Finance PLC company guaranty 7 5/8s, 2012         
(United Kingdom)    2,340,000    2,398,500 
Inmarsat Finance PLC company guaranty stepped-coupon         
zero % (10 3/8s, 10/15/08), 2012 (United Kingdom) ††    6,035,000    5,129,750 
iPCS, Inc. sr. notes 11 1/2s, 2012    2,160,000    2,462,400 
IWO Holdings, Inc. sec. FRN 8.8s, 2012    680,000    708,050 
Qwest Communications International, Inc. company         
guaranty 7 1/2s, 2014    3,595,000    3,702,850 
Qwest Corp. notes 8 7/8s, 2012    8,725,000    9,750,188 
Rogers Cantel, Inc. debs. 9 3/4s, 2016 (Canada)    1,265,000    1,543,300 
Rural Cellular Corp. sr. sub. notes 9 3/4s, 2010    5,671,000    5,756,065 
SBA Communications Corp. sr. notes 8 1/2s, 2012    1,233,000    1,368,630 
SBA Telecommunications, Inc./SBA Communications Corp.         
sr. disc. notes stepped-coupon zero % (9 3/4s,         
12/15/07), 2011 ††    1,567,000    1,496,485 
U.S. West, Inc. debs. 7 1/4s, 2025    1,375,000    1,409,375 
        54,764,879 
 
Consumer Cyclicals (4.9%)         
Autonation, Inc. company guaranty 9s, 2008    5,230,000    5,648,400 
Boyd Gaming Corp. sr. sub. notes 8 3/4s, 2012    2,415,000    2,565,938 
Boyd Gaming Corp. sr. sub. notes 7 3/4s, 2012    1,175,000    1,230,813 
Boyd Gaming Corp. sr. sub. notes 6 3/4s, 2014    1,325,000    1,321,688 
CanWest Media, Inc. company guaranty 8s, 2012 (Canada)    2,106,443    2,159,104 
Dex Media West, LLC/Dex Media Finance Co.         
sr. notes Ser. B, 8 1/2s, 2010    217,000    229,478 

34

CORPORATE BONDS AND NOTES (25.4%)* continued         
    Principal amount    Value 
Consumer Cyclicals continued         
Dex Media, Inc. notes 8s, 2013  $  913,000  $  940,390 
FelCor Lodging LP company guaranty 9s, 2008 (R)    3,792,000    4,152,240 
General Motors Acceptance Corp. FRN 5.55s, 2007    2,320,000    2,252,813 
General Motors Acceptance Corp. FRN Ser. MTN, 5.62s, 2007    4,665,000    4,569,736 
General Motors Acceptance Corp. notes 7 3/4s, 2010    418,000    407,555 
General Motors Acceptance Corp. notes 6 7/8s, 2012    418,000    385,610 
General Motors Acceptance Corp. notes 6 3/4s, 2014    1,668,000    1,501,542 
Goodyear Tire & Rubber Co. (The) notes 7.857s, 2011    2,060,000    2,013,650 
Harrah’s Operating Co., Inc. company guaranty 8s, 2011    155,000    168,199 
HMH Properties, Inc. company guaranty Ser. B, 7 7/8s,         
2008 (R)    1,151,000    1,159,633 
Host Marriott LP company guaranty Ser. G, 9 1/4s,         
2007 (R)    1,020,000    1,065,900 
Host Marriott LP sr. notes Ser. M, 7s, 2012 (R)    5,515,000    5,632,194 
Jostens IH Corp. company guaranty 7 5/8s, 2012    4,956,000    4,894,050 
Levi Strauss & Co. sr. notes 9 3/4s, 2015    3,326,000    3,500,615 
Levi Strauss & Co. 144A sr. notes 8 7/8s, 2016    1,320,000    1,323,300 
MeriStar Hospitality Corp. company guaranty 9 1/8s,         
2011 (R)    3,429,000    3,969,068 
Meritor Automotive, Inc. notes 6.8s, 2009    491,000    491,000 
MGM Mirage, Inc. company guaranty 8 1/2s, 2010    2,757,000    2,949,990 
MGM Mirage, Inc. company guaranty 6s, 2009    7,904,000    7,785,440 
Mirage Resorts, Inc. debs. 7 1/4s, 2017    1,395,000    1,417,669 
Movie Gallery, Inc. sr. unsecd. notes 11s, 2012    1,319,000    652,905 
Owens Corning notes 7 1/2s, 2005 (In default) † ****    3,686,000    2,948,800 
Oxford Industries, Inc. sr. notes 8 7/8s, 2011    2,940,000    3,028,200 
Park Place Entertainment Corp. sr. notes 7s, 2013    3,265,000    3,400,674 
Park Place Entertainment Corp. sr. sub. notes 7 7/8s, 2010    2,300,000    2,443,750 
Pinnacle Entertainment, Inc. sr. sub. notes 8 1/4s, 2012    1,956,000    2,048,910 
PRIMEDIA, Inc. sr. notes 8s, 2013    4,752,000    4,348,080 
R.H. Donnelley Corp. sr. notes 6 7/8s, 2013    2,222,000    2,077,570 
R.H. Donnelley Corp. 144A sr. disc. notes Ser. A-2,         
6 7/8s, 2013    553,000    517,055 
Reader’s Digest Association, Inc. (The)         
sr. notes 6 1/2s, 2011    2,795,000    2,788,013 
Resorts International Hotel and Casino, Inc. company         
guaranty 11 1/2s, 2009    3,175,000    3,484,563 
Russell Corp. company guaranty 9 1/4s, 2010    2,470,000    2,568,800 
Scientific Games Corp. company guaranty 6 1/4s, 2012    4,989,000    4,882,984 
Sealy Mattress Co. sr. sub. notes 8 1/4s, 2014    5,165,000    5,397,425 
Standard Pacific Corp. sr. notes 7 3/4s, 2013    3,035,000    2,962,919 
Starwood Hotels & Resorts Worldwide, Inc. company         
guaranty 7 7/8s, 2012    4,880,000    5,307,000 
Starwood Hotels & Resorts Worldwide, Inc.         
debs. 7 3/8s, 2015    3,920,000    4,233,600 
Station Casinos, Inc. sr. notes 6s, 2012    3,250,000    3,205,313 
Station Casinos, Inc. sr. sub. notes 6 7/8s, 2016    2,910,000    2,924,550 
Tenneco Automotive, Inc. company guaranty 8 5/8s, 2014    3,370,000    3,370,000 
Tenneco Automotive, Inc. sec. notes Ser. B, 10 1/4s, 2013    2,601,000    2,887,110 

35

CORPORATE BONDS AND NOTES (25.4%)* continued         
    Principal amount    Value 
 
Consumer Cyclicals continued         
THL Buildco, Inc. (Nortek Holdings, Inc.)         
sr. sub. notes 8 1/2s, 2014  $  4,655,000  $  4,736,463 
Trump Entertainment Resorts, Inc. sec. notes 8 1/2s, 2015    677,000    658,383 
United Auto Group, Inc. company guaranty 9 5/8s, 2012    4,100,000    4,340,875 
Vertis, Inc. company guaranty Ser. B, 10 7/8s, 2009    5,840,000    5,737,800 
Vertis, Inc. 144A sub. notes 13 1/2s, 2009    5,055,000    4,056,638 
Wynn Las Vegas, LLC/Wynn Las Vegas Capital Corp.         
1st mtge. 6 5/8s, 2014    2,605,000    2,530,106 
        151,274,501 
 
Consumer Staples (3.5%)         
Affinity Group, Inc. sr. sub. notes 9s, 2012    4,155,000    4,175,775 
AMC Entertainment, Inc. sr. sub. notes 8s, 2014    4,360,000    3,891,300 
Archibald Candy Corp. company guaranty 10s,         
2007 (In default) (F) †    574,508    30,019 
Brand Services, Inc. company guaranty 12s, 2012    4,700,000    5,040,750 
Cablevision Systems Corp. sr. notes Ser. B, 8s, 2012    1,352,000    1,318,200 
CCH I Holdings, LLC company guaranty stepped-coupon         
zero % (12 1/8s, 1/15/07), 2015 ††    1,493,000    656,920 
CCH I, LLC secd. notes 11s, 2015    8,838,000    7,346,588 
Charter Communications Holdings II,144A         
sr. notes 10 1/4s, 2010    1,671,000    1,637,580 
Charter Communications Holdings, LLC/Capital Corp.         
sr. notes 10 1/4s, 2010    556,000    546,270 
Church & Dwight Co., Inc. company guaranty 6s, 2012    3,512,000    3,454,930 
Cinemark USA, Inc. sr. sub. notes 9s, 2013    1,450,000    1,540,625 
Cinemark, Inc. sr. disc. notes stepped-coupon zero %         
(9 3/4s, 3/15/07), 2014 ††    4,560,000    3,488,400 
Constellation Brands, Inc. sr. sub. notes Ser. B,         
8 1/8s, 2012    2,520,000    2,649,150 
CSC Holdings, Inc. debs. 7 5/8s, 2018    2,753,000    2,722,029 
CSC Holdings, Inc. sr. notes Ser. B, 7 5/8s, 2011    1,998,000    2,007,990 
CSC Holdings, Inc. 144A sr. notes 7 1/4s, 2012    5,005,000    4,892,388 
Dean Foods Co. sr. notes 6 5/8s, 2009    3,920,000    3,959,200 
Del Monte Corp. company guaranty 6 3/4s, 2015    1,780,000    1,735,500 
Del Monte Corp. sr. sub. notes 8 5/8s, 2012    3,605,000    3,807,781 
Echostar DBS Corp. company guaranty 6 5/8s, 2014    15,810,000    15,276,413 
Jean Coutu Group, Inc. sr. notes 7 5/8s, 2012 (Canada)    3,863,000    3,756,768 
Jean Coutu Group, Inc. sr. sub. notes 8 1/2s, 2014 (Canada)    1,907,000    1,749,673 
Pinnacle Foods Holding Corp. sr. sub. notes 8 1/4s, 2013    4,175,000    4,133,250 
Playtex Products, Inc. company guaranty 9 3/8s, 2011    1,869,000    1,953,105 
Playtex Products, Inc. sec. notes 8s, 2011    2,893,000    3,059,348 
Prestige Brands, Inc. sr. sub. notes 9 1/4s, 2012    3,465,000    3,499,650 
Rainbow National Services, LLC 144A sr. notes 8 3/4s, 2012    3,366,000    3,584,790 
Remington Arms Co., Inc. company guaranty 10 1/2s, 2011    2,810,000    2,318,250 
Sbarro, Inc. company guaranty 11s, 2009    5,071,000    5,159,743 
Scotts Co. (The) sr. sub. notes 6 5/8s, 2013    1,760,000    1,768,800 
Six Flags, Inc. sr. notes 9 5/8s, 2014    2,043,000    2,058,323 

36

CORPORATE BONDS AND NOTES (25.4%)* continued         
    Principal amount    Value 
 
Consumer Staples continued         
Young Broadcasting, Inc. company guaranty 10s, 2011  $  2,774,000  $  2,559,015 
Young Broadcasting, Inc. sr. sub. notes 8 3/4s, 2014    2,745,000    2,346,975 
        108,125,498 
 
Energy (4.6%)         
Arch Western Finance, LLC sr. notes 6 3/4s, 2013    9,515,000    9,443,638 
Bluewater Finance, Ltd. company guaranty 10 1/4s,         
2012 (Cayman Islands)    3,265,000    3,428,250 
CHC Helicopter Corp. sr. sub. notes 7 3/8s, 2014         
(Canada)    5,729,000    5,843,580 
Chesapeake Energy Corp. sr. notes 7 1/2s, 2013    5,575,000    5,825,875 
Comstock Resources, Inc. sr. notes 6 7/8s, 2012    3,895,000    3,836,575 
Dresser, Inc. company guaranty 9 3/8s, 2011    5,260,000    5,509,850 
EXCO Resources, Inc. company guaranty 7 1/4s, 2011    5,425,000    5,397,875 
Forest Oil Corp. sr. notes 8s, 2011    3,730,000    4,009,750 
Forest Oil Corp. sr. notes 8s, 2008    1,065,000    1,106,269 
Gazprom OAO 144A notes 9 5/8s, 2013 (Germany)    2,210,000    2,613,325 
Harvest Operations Corp. sr. notes 7 7/8s, 2011         
(Canada)    4,610,000    4,517,800 
Hornbeck Offshore Services, Inc. sr. notes Ser. B,         
6 1/8s, 2014    4,355,000    4,180,800 
Massey Energy Co. sr. notes 6 5/8s, 2010    5,565,000    5,662,388 
Newfield Exploration Co. sr. notes 7 5/8s, 2011    3,940,000    4,186,250 
Newfield Exploration Co. sr. sub. notes 6 5/8s, 2014    2,650,000    2,656,625 
Offshore Logistics, Inc. company guaranty 6 1/8s, 2013    3,232,000    3,038,080 
Oslo Seismic Services, Inc. 1st mtge. 8.28s, 2011    3,398,863    3,451,175 
Pacific Energy Partners/Pacific Energy Finance Corp.         
sr. notes 7 1/8s, 2014    2,625,000    2,670,938 
Peabody Energy Corp. sr. notes 5 7/8s, 2016    5,820,000    5,587,200 
Pemex Finance, Ltd. bonds 9.69s, 2009         
(Cayman Islands)    4,931,500    5,291,549 
Pemex Project Funding Master Trust company         
guaranty 10s, 2027    9,008,000    11,440,160 
Pemex Project Funding Master Trust company         
guaranty 8 5/8s, 2022    4,295,000    5,057,363 
Pemex Project Funding Master Trust company         
guaranty 5 3/4s, 2015    7,695,000    7,367,963 
Pemex Project Funding Master Trust 144A company         
guaranty 5 3/4s, 2015    8,432,000    8,073,640 
Plains Exploration & Production Co. sr. notes 7 1/8s, 2014    4,670,000    4,798,425 
Plains Exploration & Production Co.         
sr. sub. notes 8 3/4s, 2012    4,424,000    4,722,620 
Pogo Producing Co. sr. sub. notes Ser. B, 8 1/4s, 2011    4,365,000    4,545,056 
Pride International, Inc. sr. notes 7 3/8s, 2014    3,145,000    3,302,250 
Seabulk International, Inc. company guaranty 9 1/2s, 2013    4,065,000    4,512,150 
Star Gas Partners LP/Star Gas Finance Co.         
sr. notes 10 1/4s, 2013    708,000    732,780 
        142,810,199 

37

CORPORATE BONDS AND NOTES (25.4%)* continued         
    Principal amount    Value 
 
Financial (1.5%)         
Bosphorus Financial Services, Ltd. 144A sec. FRN         
6.549s, 2012 (Cayman Islands)  $  10,299,000  $  10,375,336 
Crescent Real Estate Equities LP notes 7 1/2s, 2007 (R)    2,440,000    2,473,550 
Liberty Mutual Insurance 144A notes 7.697s, 2097    10,000,000    10,261,980 
UBS Luxembourg SA for Sberbank sub. notes 6.23s, 2015         
(Luxembourg)    2,850,000    2,828,625 
VTB Capital SA bonds 6 1/4s, 2035 (Luxembourg)    7,596,000    7,548,525 
VTB Capital SA sr. notes 6 1/4s, 2035 (Luxembourg)    3,035,000    3,016,031 
VTB Capital SA 144A notes 7 1/2s, 2011 (Luxembourg)    7,265,000    7,682,738 
Western Financial Bank sub. debs. 9 5/8s, 2012    1,460,000    1,631,550 
        45,818,335 
 
Health Care (2.2%)         
Community Health Systems, Inc. sr. sub. notes 6 1/2s, 2012    1,203,000    1,165,406 
Coventry Health Care, Inc. sr. notes 5 7/8s, 2012    2,760,000    2,732,400 
DaVita, Inc. company guaranty 7 1/4s, 2015    2,460,000    2,472,300 
DaVita, Inc. company guaranty 6 5/8s, 2013    1,230,000    1,226,925 
HCA, Inc. debs. 7.19s, 2015    1,554,000    1,584,901 
HCA, Inc. notes 8.36s, 2024    1,930,000    2,023,634 
HCA, Inc. notes 6 3/8s, 2015    1,766,000    1,718,804 
HCA, Inc. notes 6 1/4s, 2013    4,639,000    4,499,960 
HCA, Inc. notes 5 3/4s, 2014    1,985,000    1,857,200 
MedQuest, Inc. company guaranty Ser. B, 11 7/8s, 2012    3,295,000    2,520,675 
MQ Associates, Inc. sr. disc. notes stepped-coupon         
zero % (12 1/4s, 8/15/08), 2012 ††    4,291,000    1,201,480 
Omnicare, Inc. sr. sub. notes 6 1/8s, 2013    4,560,000    4,377,600 
Service Corporation International debs. 7 7/8s, 2013    465,000    491,156 
Service Corporation International notes Ser. *, 7.7s, 2009    1,725,000    1,781,063 
Service Corporation International 144A         
sr. notes 6 3/4s, 2016    3,737,000    3,699,630 
Stewart Enterprises, Inc. 144A sr. notes 7 1/4s, 2013    3,922,000    3,765,120 
Tenet Healthcare Corp. notes 7 3/8s, 2013    2,680,000    2,445,500 
Tenet Healthcare Corp. sr. notes 9 7/8s, 2014    4,435,000    4,490,438 
Triad Hospitals, Inc. sr. notes 7s, 2012    5,810,000    5,810,000 
Triad Hospitals, Inc. sr. sub. notes 7s, 2013    1,456,000    1,434,160 
Universal Hospital Services, Inc. sr. notes 10 1/8s,         
2011 (Canada)    3,685,000    3,823,188 
US Oncology, Inc. company guaranty 9s, 2012    3,170,000    3,280,950 
Vanguard Health Holding Co. II, LLC         
sr. sub. notes 9s, 2014    4,221,000    4,315,973 
Ventas Realty LP/Capital Corp. company guaranty 9s, 2012 (R)    2,840,000    3,187,900 
Ventas Realty LP/Capital Corp. company         
guaranty 6 3/4s, 2010 (R)    1,339,000    1,352,390 
Ventas Realty LP/Capital Corp. sr. notes 6 5/8s, 2014 (R)    1,350,000    1,350,000 
        68,608,753 

38

CORPORATE BONDS AND NOTES (25.4%)* continued         
    Principal amount    Value 
 
Technology (0.5%)         
Advanced Micro Devices, Inc. sr. notes 7 3/4s, 2012  $  2,334,000  $  2,441,948 
Freescale Semiconductor, Inc. sr. notes Ser. B,         
7 1/8s, 2014    3,312,000    3,436,200 
Iron Mountain, Inc. company guaranty 8 5/8s, 2013    4,833,000    5,044,444 
New ASAT Finance, Ltd. company guaranty 9 1/4s, 2011         
(Cayman Islands)    81,000    69,053 
SunGard Data Systems, Inc. 144A sr. unsecd.         
notes 9 1/8s, 2013    1,906,000    2,015,595 
Xerox Corp. sr. notes 7 5/8s, 2013    4,077,000    4,291,043 
        17,298,283 
 
Transportation (0.2%)         
Calair, LLC/Calair Capital Corp. company         
guaranty 8 1/8s, 2008    5,235,000    4,933,988 
 
Utilities & Power (3.0%)         
AES Corp. (The) sr. notes 8 7/8s, 2011    361,000    389,880 
AES Corp. (The) sr. notes 8 3/4s, 2008    196,000    204,330 
AES Corp. (The) 144A sec. notes 9s, 2015    4,036,000    4,368,970 
AES Corp. (The) 144A sec. notes 8 3/4s, 2013    3,250,000    3,489,688 
ANR Pipeline Co. debs. 9 5/8s, 2021    1,572,000    1,924,977 
Centrais Electricas Brasileirass SA 144A         
sr. notes 7 3/4s, 2015 (Brazil)    2,743,000    2,887,008 
CMS Energy Corp. sr. notes 8.9s, 2008    1,200,000    1,275,000 
CMS Energy Corp. sr. notes 7 3/4s, 2010    1,225,000    1,283,188 
Colorado Interstate Gas Co. debs. 6.85s, 2037    2,495,000    2,523,523 
Colorado Interstate Gas Co. sr. notes 5.95s, 2015    700,000    671,782 
DPL, Inc. sr. notes 6 7/8s, 2011    3,075,000    3,206,628 
Dynegy Holdings, Inc. 144A sec. notes 10 1/8s, 2013    4,948,000    5,668,924 
El Paso Natural Gas Co. debs. 8 5/8s, 2022    1,315,000    1,496,218 
El Paso Production Holding Co. company         
guaranty 7 3/4s, 2013    5,263,000    5,453,784 
Ferrellgas LP/Finance sr. notes 6 3/4s, 2014    3,632,000    3,495,800 
Midwest Generation, LLC sec. sr. notes 8 3/4s, 2034    5,601,000    6,063,083 
Mission Energy Holding Co. sec. notes 13 1/2s, 2008    4,402,000    5,051,295 
Monongahela Power Co. 1st mtge. 6.7s, 2014    2,885,000    3,041,884 
National Power Corp. FRN 9.024s, 2011 (Philippines)    640,000    705,984 
National Power Corp. 144A foreign government         
guaranty FRN 9.024s, 2011 (Philippines)    405,000    446,756 
Northwestern Corp. sec. notes 5 7/8s, 2014    2,525,000    2,487,039 
Orion Power Holdings, Inc. sr. notes 12s, 2010    5,195,000    5,857,363 
SEMCO Energy, Inc. sr. notes 7 3/4s, 2013    3,346,000    3,467,835 
Teco Energy, Inc. notes 7.2s, 2011    1,165,000    1,214,513 
Teco Energy, Inc. notes 7s, 2012    1,500,000    1,550,625 
Teco Energy, Inc. sr. notes 6 3/4s, 2015    221,000    227,078 
Tennessee Gas Pipeline Co. debs. 7s, 2028    520,000    514,065 
Tennessee Gas Pipeline Co. unsecd. notes 7 1/2s, 2017    1,052,000    1,120,758 
Transcontinental Gas Pipeline Corp. debs. 7 1/4s, 2026    3,235,000    3,376,531 
Utilicorp Canada Finance Corp. company         
guaranty 7 3/4s, 2011 (Canada)    4,309,000    4,449,043 

39

CORPORATE BONDS AND NOTES (25.4%)* continued         
 
    Principal amount    Value 
 
Utilities & Power continued         
Utilicorp United, Inc. sr. notes 9.95s, 2011  $  1,215,000  $  1,345,613 
Veolia Environnement sr. unsub. notes         
Ser. EMTN, 5 3/8s, 2018 (France)  EUR  3,125,000    4,002,453 
Williams Cos., Inc. (The) notes 8 3/4s, 2032  $  3,790,000    4,434,300 
Williams Cos., Inc. (The) notes 7 5/8s, 2019    3,475,000    3,700,875 
Williams Cos., Inc. (The) 144A notes 6 3/8s, 2010    949,000    939,510 
York Power Funding 144A notes 12s, 2007         
(Cayman Islands) (In default) (F) †    1,327,347    110,701 
        92,447,004 
 
Total corporate bonds and notes (cost $778,254,529)      $  783,208,185 
 
 
COLLATERALIZED MORTGAGE OBLIGATIONS (16.2%)*         
 
    Principal amount    Value 
 
Amresco Commercial Mortgage Funding I Ser. 97-C1,         
Class G, 7s, 2029  $  1,758,000  $  1,771,982 
Banc of America Commercial Mortgage, Inc. 144A         
Ser. 01-1, Class J, 6 1/8s, 2036    1,170,000    1,152,542 
Ser. 01-1, Class K, 6 1/8s, 2036    2,633,000    1,968,635 
Banc of America Large Loan 144A         
FRB Ser. 02-FL2A, Class L1, 7.67s, 2014    1,090,000    1,088,471 
FRB Ser. 02-FL2A, Class K1, 7.17s, 2014    399,575    399,500 
FRB Ser. 05-BOCA, Class M, 6.849s, 2016    2,249,000    2,254,397 
FRB Ser. 05-ESHA, Class K, 6.54s, 2020    4,239,000    4,238,975 
FRB Ser. 06-LAQ, Class M, 6.471s, 2021    1,587,000    1,587,000 
FRB Ser. 05-BOCA, Class L, 6.449s, 2016    1,052,000    1,053,804 
FRB Ser. 06-LAQ, Class L, 6.371s, 2021    1,556,000    1,556,000 
FRB Ser. 05-BOCA, Class K, 6.099s, 2016    1,235,000    1,237,121 
FRB Ser. 05-BOCA, Class J, 5.849s, 2016    212,000    212,291 
FRB Ser. 05-BOCA, Class H, 5.699s, 2016    504,000    504,763 
Ser. 03-BBA2, Class X1A, Interest Only (IO), 0.44s, 2015    4,021,349    7,102 
Bear Stearns Commercial Mortgage Securities, Inc.         
144A FRB Ser. 05-LXR1, Class J, 6.399s, 2018    2,480,000    2,480,000 
Bear Stearns Commercial Mortgage Securitization Corp.         
Ser. 00-WF2, Class F, 8.199s, 2032    1,174,000    1,309,522 
Broadgate Financing PLC sec. FRB Ser. D,         
5.429s, 2023 (United Kingdom)  GBP  3,067,400    5,309,152 
Commercial Mortgage Acceptance Corp. Ser. 97-ML1, IO,         
0.72s, 2017  $  114,223,687    1,633,042 
Commercial Mortgage Pass-Through Certificates 144A         
FRB Ser. 01-FL5A, Class G, 5.348s, 2013    5,781,000    5,752,095 
Criimi Mae Commercial Mortgage Trust 144A Ser. 98-C1,         
Class B, 7s, 2033    14,703,000    15,011,763 
CS First Boston Mortgage Securities Corp. 144A         
FRB Ser. 05-TFLA, Class L, 6.599s, 2020    4,911,000    4,910,966 
FRB Ser. 05-TFLA, Class K, 6.049s, 2020    2,413,000    2,412,986 
Ser. 98-C2, Class F, 6 3/4s, 2030    8,998,000    9,338,765 

40

COLLATERALIZED MORTGAGE OBLIGATIONS (16.2%)* continued         
                    Principal amount    Value 
 
CS First Boston Mortgage Securities Corp. 144A           
Ser. 98-C1, Class F, 6s, 2040    $  7,396,000  $  6,444,675 
Ser. 02-CP5, Class M, 5 1/4s, 2035      2,599,000    2,001,282 
Deutsche Mortgage & Asset Receiving Corp. Ser. 98-C1,           
Class X, IO, 0.656s, 2031      185,433,764    3,194,467 
DLJ Commercial Mortgage Corp.           
Ser. 98-CF2, Class B4, 6.04s, 2031      2,235,111    2,214,347 
Ser. 98-CF2, Class B5, 5.95s, 2031      7,128,872    6,219,299 
DLJ Mortgage Acceptance Corp. 144A           
Ser. 97-CF1, Class B2, 8.16s, 2030      1,974,000    1,381,800 
Ser. 97-CF1, Class B1, 7.91s, 2030      1,948,000    1,983,142 
European Loan Conduit FRB Ser. 6X, Class E,           
6.34s, 2010 (United Kingdom)  GBP    2,618,301    4,548,639 
European Loan Conduit 144A           
FRB Ser. 6A, Class F, 6.84s, 2010           
(United Kingdom)  GBP    975,203    1,694,170 
FRB Ser. 22A, Class D, 5.44s, 2014           
(Ireland)  GBP    2,461,000    4,268,112 
European Prime Real Estate PLC 144A FRB           
Ser. 1-A, Class D, 5.445s, 2014           
(United Kingdom)  GBP    2,261,115    3,921,451 
Fannie Mae           
FRB Ser. 05-117, Class GF, zero %, 2036    $  1,710,228    1,597,729 
IFB Ser. 06-27, Class SP, 7.443s, 2036      3,685,000    3,642,788 
IFB Ser. 05-74, Class CP, 7.084s, 2035      3,506,567    3,490,475 
IFB Ser. 05-76, Class SA, 7.084s, 2034      4,962,271    4,873,819 
IFB Ser. 06-8, Class HP, 6.9s, 2036      4,833,101    4,740,726 
IFB Ser. 06-8, Class WK, 6.9s, 2036      7,184,447    7,012,172 
IFB Ser. 05-106, Class US, 6.9s, 2035      8,218,314    8,174,393 
IFB Ser. 05-99, Class SA, 6.9s, 2035      4,144,297    4,061,259 
IFB Ser. 05-74, Class CS, 6.77s, 2035      3,998,290    3,943,982 
IFB Ser. 05-114, Class SP, 6.33s, 2036      2,146,024    2,029,334 
IFB Ser. 05-95, Class CP, 5.576s, 2035      617,581    597,734 
IFB Ser. 05-95, Class OP, 5.473s, 2035      2,011,000    1,807,324 
IFB Ser. 05-83, Class QP, 4.867s, 2034      1,318,184    1,195,871 
IFB Ser. 05-56, Class TP, 3.696s, 2033      1,345,407    1,182,829 
IFB Ser. 02-36, Class QH, IO, 3.232s, 2029      1,962,581    34,209 
IFB Ser. 03-66, Class SA, IO, 2.832s, 2033      8,917,067    620,004 
IFB Ser. 03-48, Class S, IO, 2.732s, 2033      3,499,746    242,812 
IFB Ser. 05-113, Class DI, IO, 2.412s, 2036      287,671    16,979 
IFB Ser. 04-51, Class S0, IO, 2.232s, 2034      2,203,385    110,169 
IFB Ser. 06-20, Class BI, IO, 2.01s, 2036      69,613,000    3,163,210 
IFB Ser. 06-20, Class PI, IO, 1.93s, 2030      23,420,000    905,453 
IFB Ser. 05-105, Class S, IO, 1.882s, 2035      5,738,904    283,358 
IFB Ser. 05-95, Class CI, IO, 1.882s, 2035      8,903,306    487,686 
IFB Ser. 05-84, Class SG, IO, 1.882s, 2035      15,022,312    917,181 
IFB Ser. 05-87, Class SG, IO, 1.882s, 2035      20,001,571    1,006,329 
IFB Ser. 05-69, Class AS, IO, 1.882s, 2035      3,957,463    209,622 
IFB Ser. 05-104, Class NI, IO, 1.882s, 2035      2,512,227    162,309 
IFB Ser. 04-92, Class S, IO, 1.882s, 2034      12,164,043    629,124 

41

COLLATERALIZED MORTGAGE OBLIGATIONS (16.2%)* continued         
    Principal amount    Value 
 
Fannie Mae         
IFB Ser. 05-104, Class SI, IO, 1.882s, 2033  $           19,125,194  $  1,105,578 
IFB Ser. 05-83, Class QI, IO, 1.872s, 2035    2,187,802    142,767 
IFB Ser. 05-92, Class SC, IO, 1.862s, 2035    20,977,634    1,147,267 
IFB Ser. 05-83, Class SL, IO, 1.852s, 2035    43,808,310    2,218,927 
IFB Ser. 06-8, Class NS, IO, 1.812s, 2036    22,183,289    1,216,184 
IFB Ser. 05-95, Class OI, IO, 1.772s, 2035    1,236,521    79,773 
IFB Ser. 03-112, Class SA, IO, 1.682s, 2028    7,608,464    243,874 
IFB Ser. 05-67, Class BS, IO, 1.332s, 2035    11,309,059    443,527 
IFB Ser. 05-74, Class SE, IO, 1.282s, 2035    6,023,970    186,799 
IFB Ser. 05-87, Class SE, IO, 1.232s, 2035    84,357,901    2,794,355 
IFB Ser. 04-54, Class SW, IO, 1.182s, 2033    4,625,995    118,685 
Ser. 03-W6, Class PT1, 9.574s, 2042    127,442    135,437 
Ser. 06-20, Class IP, IO, 8s, 2030    2,830,000    580,822 
Ser. 04-W8, Class 3A, 7 1/2s, 2044    3,289,312    3,435,204 
Ser. 04-W2, Class 5A, 7 1/2s, 2044    10,173,372    10,622,472 
Ser. 04-T2, Class 1A4, 7 1/2s, 2043    2,787,577    2,908,750 
Ser. 03-W4, Class 4A, 7 1/2s, 2042    877,722    911,830 
Ser. 03-W3, Class 1A3, 7 1/2s, 2042    1,716,281    1,787,141 
Ser. 02-T19, Class A3, 7 1/2s, 2042    1,605,613    1,671,648 
Ser. 03-W2, Class 1A3, 7 1/2s, 2042    323,515    336,914 
Ser. 02-W6, Class 2A, 7 1/2s, 2042    415,895    432,348 
Ser. 02-T12, Class A3, 7 1/2s, 2042    427,185    443,889 
Ser. 02-W1, Class 2A, 7 1/2s, 2042    1,440,728    1,492,814 
Ser. 02-14, Class A2, 7 1/2s, 2042    19,726    20,505 
Ser. 01-T10, Class A2, 7 1/2s, 2041    1,850,222    1,920,149 
Ser. 02-T4, Class A3, 7 1/2s, 2041    523,124    543,027 
Ser. 01-T8, Class A1, 7 1/2s, 2041    30,610    31,721 
Ser. 01-T7, Class A1, 7 1/2s, 2041    7,851,167    8,130,769 
Ser. 01-T3, Class A1, 7 1/2s, 2040    1,150,148    1,191,931 
Ser. 01-T1, Class A1, 7 1/2s, 2040    3,649,751    3,787,783 
Ser. 99-T2, Class A1, 7 1/2s, 2039    1,404,610    1,464,454 
Ser. 00-T6, Class A1, 7 1/2s, 2030    688,455    712,973 
Ser. 02-W7, Class A5, 7 1/2s, 2029    1,485,380    1,545,811 
Ser. 01-T4, Class A1, 7 1/2s, 2028    9,082,539    9,492,629 
Ser. 02-W3, Class A5, 7 1/2s, 2028    9,568    9,945 
Ser. 01-T10, Class A1, 7s, 2041    8,087,930    8,302,745 
Ser. 98-T2, Class A4, IO, 6 1/2s, 2036    243,863    5,944 
Ser. 04-78, Class HI, IO, 6s, 2034    1,128,069    197,060 
Ser. 350, Class 2, IO, 5 1/2s, 2034    4,872,100    1,184,298 
Ser. 03-86, Class IB, IO, 5 1/2s, 2028    1,634,892    66,417 
Ser. 03-W10, Class 3, IO, 1.929s, 2043    1,649,357    76,998 
Ser. 03-W10, Class 1A, IO, 1.195s, 2043    45,150,768    679,700 
Ser. 03-W10, Class 3A, IO, 1.178s, 2043    55,773,375    927,209 
Ser. 03-W17, Class 12, IO, 1.151s, 2033    27,956,649    820,599 
Ser. 01-T1, Class 1, IO, 0.834s, 2040    1,460,632    20,084 
Ser. 00-T6, IO, 0.753s, 2030    25,929,932    372,743 
Ser. 02-T18, IO, 0.525s, 2042    75,560,314    896,915 
Ser. 02-W8, Class 1, IO, 0.37s, 2042    39,395,601    299,171 
Ser. 363, Class 1, Principal Only (PO), zero %, 2035    27,362,773    19,450,801 

42

COLLATERALIZED MORTGAGE OBLIGATIONS (16.2%)* continued       
    Principal amount    Value 
 
Fannie Mae         
Ser. 361, Class 1, PO, zero %, 2035  $  14,689,751  $  11,238,017 
Ser. 04-38, Class AO, PO, zero %, 2034    2,844,865    2,013,187 
Ser. 342, Class 1, PO, zero %, 2033    1,824,616    1,391,384 
Ser. 02-82, Class TO, PO, zero %, 2032    1,354,636    1,031,000 
Ser. 04-61, Class CO, PO, zero %, 2031    2,993,000    2,241,944 
Ser. 99-51, Class N, PO, zero %, 2029    552,855    447,033 
Federal Home Loan Mortgage Corp. Structured         
Pass-Through Securities         
Ser. T-59, Class 1A3, 7 1/2s, 2043    3,287,450    3,436,080 
Ser. T-58, Class 4A, 7 1/2s, 2043    60,227    62,642 
Ser. T-42, Class A5, 7 1/2s, 2042    760,033    789,651 
Ser. T-41, Class 3A, 7 1/2s, 2032    4,078,321    4,232,989 
Ser. T-60, Class 1A2, 7s, 2044    14,566,316    15,010,738 
Ser. T-57, Class 1AX, IO, 0.454s, 2043    22,464,241    214,983 
FFCA Secured Lending Corp. Ser. 00-1, Class X, IO,         
1.42s, 2020    39,056,735    2,228,261 
First Union Commercial Mortgage Trust 144A         
Ser. 99-C1, Class G, 5.35s, 2035    3,121,100    1,944,348 
First Union-Lehman Brothers Commercial Mortgage Trust         
II Ser. 97-C2, Class G, 7 1/2s, 2029    1,408,000    1,543,754 
Freddie Mac         
FRB Ser. 3022, Class TC, zero %, 2035    1,039,308    1,218,589 
FRB Ser. 2986, Class XT, zero %, 2035    613,448    676,135 
FRB Ser. 3046, Class WF, zero %, 2035    1,431,860    1,416,023 
FRB Ser. 3054, Class XF, zero %, 2034    585,148    607,454 
IFB Ser. 2771, Class SV, 9.88s, 2034    406,707    423,937 
IFB Ser. 2963, Class SV, 9.605s, 2034    1,666,000    1,707,455 
IFB Ser. 2763, Class SC, 9.605s, 2032    6,885,402    7,058,651 
IFB Ser. 3081, Class DC, 7.791s, 2035    3,116,193    3,015,289 
IFB Ser. 3114, Class GK, 7.405s, 2036    1,866,356    1,813,621 
IFB Ser. 2979, Class AS, 6.861s, 2034    1,478,330    1,427,051 
IFB Ser. 2996, Class SA, 6.741s, 2035    2,740,706    2,542,005 
IFB Ser. 3072, Class SA, 6.715s, 2035    1,216,985    1,124,950 
IFB Ser. 3072, Class SM, 6.385s, 2035    1,938,889    1,765,752 
IFB Ser. 3072, Class SB, 6.238s, 2035    1,831,282    1,657,811 
IFB Ser. 3065, Class DC, 5.614s, 2035    4,842,144    4,373,854 
IFB Ser. 3050, Class SA, 5.003s, 2034    3,201,274    2,844,868 
IFB Ser. 2828, Class GI, IO, 2.751s, 2034    558,263    52,046 
IFB Ser. 2869, Class JS, IO, 2.501s, 2034    1,394,568    83,171 
IFB Ser. 2882, Class SL, IO, 2.451s, 2034    292,779    20,647 
IFB Ser. 2828, Class TI, IO, 2.301s, 2030    4,728,687    305,887 
IFB Ser. 3033, Class SF, IO, 2.051s, 2035    7,822,313    325,115 
IFB Ser. 3028, Class ES, IO, 2.001s, 2035    23,042,192    1,569,735 
IFB Ser. 3042, Class SP, IO, 2.001s, 2035    4,765,024    311,156 
IFB Ser. 3045, Class DI, IO, 1.981s, 2035    49,216,212    2,249,193 
IFB Ser. 3054, Class CS, IO, 1.951s, 2035    5,110,616    236,366 
IFB Ser. 3107, Class DC, IO, 1.951s, 2035    20,977,611    1,530,710 
IFB Ser. 3066, Class SI, IO, 1.951s, 2035    15,580,758    1,039,659 
IFB Ser. 3031, Class BI, IO, 1.941s, 2035    4,984,814    316,048 

43

COLLATERALIZED MORTGAGE OBLIGATIONS (16.2%)* continued       
    Principal amount    Value 
 
Freddie Mac         
IFB Ser. 3067, Class SI, IO, 1.901s, 2035  $  18,016,096  $  1,236,995 
IFB Ser. 3114, Class TS, IO, 1.901s, 2030    37,082,979    1,531,734 
IFB Ser. 3114, Class BI, IO, 1.901s, 2030    16,341,370    630,135 
IFB Ser. 3065, Class DI, IO, 1.871s, 2035    3,520,236    208,676 
IFB Ser. 3081, Class DI, IO, 1.731s, 2035    4,029,073    225,357 
IFB Ser. 3016, Class SP, IO, 1.361s, 2035    4,585,189    139,711 
IFB Ser. 3016, Class SQ, IO, 1.361s, 2035    9,915,891    306,798 
IFB Ser. 2937, Class SY, IO, 1.351s, 2035    5,094,275    136,272 
IFB Ser. 2815, Class S, IO, 1.251s, 2032    10,369,802    297,988 
Ser. 3114, Class BL, IO, 7 1/2s, 2030    1,169,382    223,039 
Ser. 2852, Class WI, IO, 5s, 2019    282,903    58,083 
Ser. 2852, Class VS, IO, 2.07s, 2034    1,105,096    30,581 
Ser. 236, PO, zero %, 2036    4,642,000    3,485,966 
Ser. 3045, Class DO, PO, zero %, 2035    3,747,662    2,844,358 
Ser. 231, PO, zero %, 2035    39,200,419    28,305,655 
Ser. 228, PO, zero %, 2035    20,749,762    15,689,542 
Ser. 215, PO, zero %, 2031    670,892    570,709 
Ser. 2235, PO, zero %, 2030    1,598,745    1,243,520 
Ser. 2191, Class MO, PO, zero %, 2027    217,310    209,294 
Ser. 1208, Class F, PO, zero %, 2022    567,241    440,691 
GE Capital Commercial Mortgage Corp. 144A         
Ser. 00-1, Class F, 7.52s, 2033    1,354,000    1,425,519 
Ser. 00-1, Class G, 6.131s, 2033    4,588,975    4,210,385 
GMAC Commercial Mortgage Securities, Inc. 144A         
Ser. 99-C3, Class G, 6.974s, 2036    4,134,628    3,976,421 
Government National Mortgage Association         
IFB Ser. 05-66, Class SP, 4.997s, 2035    2,707,762    2,409,523 
IFB Ser. 04-86, Class SW, IO, 1.974s, 2034    754,983    36,767 
IFB Ser. 06-10, Class SM, IO, 1.62s, 2036    23,778,000    943,689 
IFB Ser. 05-65, Class SI, IO, 1.574s, 2035    12,620,293    501,310 
IFB Ser. 06-14, Class S, IO, 1.56s, 2036    10,190,857    358,272 
IFB Ser. 05-68, Class SI, IO, 1.524s, 2035    43,301,107    1,909,212 
IFB Ser. 05-51, Class SJ, IO, 1.424s, 2035    12,999,346    487,475 
IFB Ser. 05-68, Class S, IO, 1.424s, 2035    25,694,501    1,023,960 
Ser. 99-31, Class MP, PO, zero %, 2029    61,146    51,022 
Ser. 98-2, Class EA, PO, zero %, 2028    486,854    385,527 
GS Mortgage Securities Corp. II 144A FRB         
Ser. 03-FL6A, Class L, 7.999s, 2015    1,843,461    1,845,765 
LB Commercial Conduit Mortgage Trust 144A         
Ser. 99-C1, Class G, 6.41s, 2031    1,960,723    1,813,636 
Ser. 98-C4, Class J, 5.6s, 2035    3,535,000    3,134,092 
Lehman Brothers Floating Rate Commercial Mortgage         
Trust 144A FRB Ser. 03-LLFA, Class L, 8.49s, 2014    4,196,208    4,188,495 
Mach One Commercial Mortgage Trust 144A         
Ser. 04-1A, Class J, 5.45s, 2040    4,511,500    3,643,740 
Ser. 04-1A, Class K, 5.45s, 2040    1,653,000    1,299,800 
Ser. 04-1A, Class L, 5.45s, 2040    752,500    539,977 
Merrill Lynch Mortgage Investors, Inc. Ser. 96-C2,         
Class JS, IO, 2.14s, 2028    28,160,775    1,197,931 

44

COLLATERALIZED MORTGAGE OBLIGATIONS (16.2%)* continued       
    Principal amount    Value 
 
Mezz Cap Commercial Mortgage Trust 144A Ser. 04-C1,         
Class X, IO, 7.444s, 2037  $  8,352,605  $  3,228,804 
Morgan Stanley Capital I 144A Ser. 04-RR, Class F7,         
6s, 2039    13,869,752    9,569,863 
Mortgage Capital Funding, Inc.         
FRB Ser. 98-MC2, Class E, 7.099s, 2030    2,378,284    2,447,756 
Ser. 97-MC2, Class X, IO, 0.741s, 2012    18,902,437    213,390 
Permanent Financing PLC FRB Ser. 8, Class 2C, 5.28s,         
2042 (United Kingdom)    973,000    972,744 
PNC Mortgage Acceptance Corp. 144A Ser. 00-C1,         
Class J, 6 5/8s, 2010    880,000    819,007 
QFA Royalties, LLC 144A Ser. 05-1, 7.3s, 2025    4,567,471    4,481,874 
Quick Star PLC FRB Class 1-D, 5.501s, 2011         
(United Kingdom)  GBP  3,170,094    5,497,893 
Salomon Brothers Mortgage Securities VII 144A         
Ser. 03-CDCA, Class X3CD, IO, 1.43s, 2015  $  9,347,925    70,474 
SBA CMBS Trust 144A Ser. 05-1A, Class E, 6.706s, 2035    1,580,000    1,564,635 
STRIPS 144A         
Ser. 03-1A, Class M, 5s, 2018 (Cayman Islands)    1,339,000    1,103,108 
Ser. 03-1A, Class N, 5s, 2018 (Cayman Islands)    1,590,000    1,195,982 
Ser. 04-1A, Class M, 5s, 2018 (Cayman Islands)    1,438,000    1,180,842 
Ser. 04-1A, Class N, 5s, 2018 (Cayman Islands)    1,371,000    1,031,403 
Titan Europe PLC 144A         
FRB Ser. 05-CT2A, Class E, 5.64s, 2014         
(Ireland)                                                                                                                                                           GBP  1,661,000    2,880,672 
FRB Ser. 05-CT1A, Class D, 5.64s, 2014         
(Ireland)  GBP                   3,522,168                          6,108,495 
FRB Ser. 04-2A, Class D, 3.408s, 2014         
(Ireland)  EUR  2,506,662    3,033,060 
FRB Ser. 04-2A, Class C, 3.008s, 2014         
(Ireland)  EUR  3,150,502    3,812,107 
URSUS EPC 144A         
FRB Ser. 1-A, Class D, 5.489s, 2012         
(Ireland)  GBP  2,579,680    4,473,938 
Ser. 1-A, Class X1, IO, 3s, 2012 (Ireland)  GBP  5,000    1,371,332 
Wachovia Bank Commercial Mortgage Trust 144A FRB         
Ser. 05-WL5A, Class L, 8.049s, 2018  $  3,292,000    3,277,910 
Total collateralized mortgage obligations (cost $514,455,151)      $  499,882,624 
 
 
ASSET-BACKED SECURITIES (15.3%)*         
    Principal amount    Value 
 
ABSC NIMS Trust 144A Ser. 03-HE5, Class A, 7s, 2033  $  389,624  $  385,727 
Aegis Asset Backed Securities Trust 144A Ser. 04-2N,         
Class N1, 4 1/2s, 2034    104,573    104,230 
Americredit Automobile Receivables Trust 144A         
Ser. 05-1, Class E, 5.82s, 2012    4,035,779    4,022,865 
Ameriquest Finance NIM Trust 144A Ser. 04-RN9,         
Class N2, 10s, 2034 (Cayman Islands)    1,770,000    1,646,100 

45

ASSET-BACKED SECURITIES (15.3%)* continued         
    Principal amount    Value 
 
Arcap REIT, Inc. 144A         
Ser. 03-1A, Class E, 7.11s, 2038  $  2,906,000  $  2,921,733 
Ser. 04-1A, Class E, 6.42s, 2039    1,768,000    1,729,584 
Asset Backed Funding Corp. NIM Trust 144A         
Ser. 04-0PT5, Class N1, 4.45s, 2034 (Cayman Islands)    176,286    175,825 
Ser. 04-FF1, Class N1, 5s, 2034 (Cayman Islands)    66,155    66,058 
Aviation Capital Group Trust 144A FRB Ser. 03-2A,         
Class G1, 5.476s, 2033    2,147,005    2,150,191 
Bank One Issuance Trust FRB Ser. 03-C4, Class C4,         
5.779s, 2011    3,310,000    3,372,450 
Bayview Financial Acquisition Trust Ser. 03-F,         
Class A, IO, 4s, 2006    436,364    2,263 
Bayview Financial Asset Trust 144A Ser. 03-X,         
Class A, IO, 0.61s, 2006    24,567,054    84,450 
Bear Stearns Asset Backed Securities NIM         
Trust 144A         
Ser. 04-FR1, Class A1, 5s, 2034 (Cayman Islands)    10,130    10,110 
Ser. 04-HE10, Class A1, 4 1/4s, 2034 (Cayman Islands)    368,713    366,179 
Ser. 04-HE6, Class A1, 5 1/4s, 2034 (Cayman Islands)    102,677    102,533 
Ser. 04-HE7N, Class A1, 5 1/4s, 2034    229,697    229,374 
Bear Stearns Asset Backed Securities, Inc.         
Ser. 04-FR3, Class M6, 8.068s, 2034    1,703,000    1,707,258 
FRB Ser. 06-PC1, Class M9, 6.568s, 2035    885,000    711,319 
Bombardier Capital Mortgage         
Securitization Corp.         
Ser. 00-A, Class A2, 7.575s, 2030    1,135,279    761,826 
Ser. 00-A, Class A4, 8.29s, 2030    5,270,279    3,794,601 
Ser. 99-B, Class A3, 7.18s, 2015    8,271,471    5,335,099 
Ser. 99-B, Class A4, 7.3s, 2016    5,584,074    3,821,835 
Broadhollow Funding, LLC 144A FRB Ser. 04-A,         
Class Sub, 6.57s, 2009    2,733,000    2,764,703 
Capital Auto Receivables Asset Trust 144A Ser. 06-1,         
Class D, 7.39s, 2013    1,000,000    991,406 
CARSS Finance Limited Partnership 144A FRB Ser. 04-A,         
Class B2, 5.699s, 2011 (Cayman Islands)    476,724    477,822 
CARSSX Finance, Ltd. 144A         
FRB Ser. 04-AA, Class B3, 8.099s, 2011         
(Cayman Islands)    232,306    238,289 
FRB Ser. 04-AA, Class B4, 10.249s, 2011         
(Cayman Islands)    313,094    329,061 
Chase Credit Card Master Trust FRB Ser. 03-3,         
Class C, 5.829s, 2010    3,730,000    3,790,804 
CHEC NIM Ltd., 144A         
Ser. 04-2, Class N1, 4.45s, 2034 (Cayman Islands)    59,868    59,774 
Ser. 04-2, Class N2, 8s, 2034 (Cayman Islands)    687,000    680,837 
Ser. 04-2, Class N3, 8s, 2034 (Cayman Islands)    422,000    384,311 
Citigroup Mortgage Loan Trust, Inc.         
FRB Ser. 05-HE4, Class M11, 7.318s, 2035    1,384,000    1,133,799 
FRB Ser. 05-HE4, Class M12, 6.868s, 2035    1,931,000    1,514,628 
FRB Ser. 06-WMC1, Class M10, 8.318s, 2035    424,000    375,654 

46

ASSET-BACKED SECURITIES (15.3%)* continued         
    Principal amount    Value 
 
Conseco Finance Securitizations Corp.         
FRB Ser. 01-4, Class M1, 6.38s, 2033  $  2,391,000  $  908,580 
Ser. 00-1, Class A5, 8.06s, 2031    4,206,000    3,655,943 
Ser. 00-2, Class A4, 8.48s, 2030    824,713    819,791 
Ser. 00-4, Class A4, 7.73s, 2031    5,892,250    5,583,292 
Ser. 00-4, Class A5, 7.97s, 2032    1,762,000    1,425,895 
Ser. 00-4, Class A6, 8.31s, 2032    26,321,000    21,988,462 
Ser. 00-6, Class A5, 7.27s, 2032    722,000    659,746 
Ser. 00-6, Class M2, 8.2s, 2032    539,771    21,591 
Ser. 01-1, Class A5, 6.99s, 2032    15,259,000    13,885,726 
Ser. 01-3, Class A3, 5.79s, 2033    58,220    58,171 
Ser. 01-3, Class A4, 6.91s, 2033    23,474,000    22,202,930 
Ser. 01-3, Class M2, 7.44s, 2033    1,193,180    149,147 
Ser. 01-4, Class A4, 7.36s, 2033    2,000,000    1,944,006 
Ser. 01-4, Class B1, 9.4s, 2033    1,082,520    89,308 
Ser. 02-1, Class A, 6.681s, 2033    9,687,123    9,769,197 
Consumer Credit Reference IDX Securities 144A FRB         
Ser. 02-1A, Class A, 6.935s, 2007    4,668,000    4,738,020 
Countrywide Asset Backed Certificates 144A         
Ser. 04-6N, Class N1, 6 1/4s, 2035    1,713,462    1,701,476 
Ser. 04-BC1N, Class Note, 5 1/2s, 2035    245,830    242,635 
Countrywide Home Loans         
Ser. 05-2, Class 2X, IO, 1.428s, 2035    56,369,137    1,224,270 
Ser. 06-0A5, Class X, IO, zero %, 2046    23,729,000    1,186,450 
Countrywide Home Loans 144A Ser. 03-R4, Class 1A, PO,         
zero %, 2034    76,474    60,447 
Crest, Ltd. 144A Ser. 03-2A, Class E2, 8s, 2038         
(Cayman Islands)    3,427,000    3,281,764 
First Chicago Lennar Trust 144A Ser. 97-CHL1,         
Class E, 7.73s, 2039    13,100,002    13,294,455 
First Franklin Mortgage Loan NIM Trust 144A         
Ser. 04-FF10, Class N1, 4.45s, 2034 (Cayman Islands)    200,229    199,732 
Fort Point CDO, Ltd. FRB Ser. 03-2A, Class A2,         
5.873s, 2038 (Cayman Islands)    1,229,000    1,242,150 
Fremont NIM Trust 144A         
Ser. 04-3, Class A, 4 1/2s, 2034    390,514    387,614 
Ser. 04-3, Class B, 7 1/2s, 2034    335,621    309,031 
G-Force CDO, Ltd. 144A Ser. 03-1A, Class E, 6.58s,         
2038 (Cayman Islands)    1,471,000    1,464,223 
G-Star, Ltd. 144A FRB Ser. 02-2A, Class BFL, 6.661s,         
2037 (Cayman Islands)    614,000    638,689 
Gears Auto Owner Trust Ser. 05-AA, Class E1, 8.22s, 2012    3,514,000    3,472,407 
Granite Mortgages PLC         
FRB Ser. 02-1, Class 1C, 5.901s, 2042         
(United Kingdom)    3,300,000    3,320,992 
FRB Ser. 02-2, Class 1C, 5.851s, 2043         
(United Kingdom)    370,000    373,692 

47

ASSET-BACKED SECURITIES (15.3%)* continued         
    Principal amount    Value 
 
Granite Mortgages PLC         
FRB Ser. 03-2, Class 2C1, 5.2s, 2043         
(United Kingdom)  EUR  10,080,000  $  12,805,420 
FRB Ser. 03-2, Class 3C, 6.138s, 2043         
(United Kingdom)  GBP  7,560,000    13,509,892 
Green Tree Financial Corp.         
Ser. 93-1, Class B, 8.45s, 2018  $  4,253,849    4,103,620 
Ser. 94-4, Class B2, 8.6s, 2019    2,813,202    2,135,176 
Ser. 94-6, Class B2, 9s, 2020    6,495,625    5,612,038 
Ser. 95-4, Class B1, 7.3s, 2025    2,737,142    2,697,796 
Ser. 95-8, Class B1, 7.3s, 2026    2,796,090    2,167,468 
Ser. 95-F, Class B2, 7.1s, 2021    869,950    871,581 
Ser. 96-8, Class M1, 7.85s, 2027    2,979,000    2,504,159 
Ser. 99-3, Class A5, 6.16s, 2031    342,566    344,707 
Ser. 99-3, Class A7, 6.74s, 2031    3,957,000    3,767,527 
Ser. 99-5, Class A5, 7.86s, 2030    30,084,000    26,203,002 
Green Tree Home Improvement Loan Trust Ser. 95-D,         
Class B2, 7.45s, 2025    649,654    616,320 
Greenpoint Manufactured Housing         
Ser. 00-3, Class IA, 8.45s, 2031    15,265,680    14,118,251 
Ser. 99-5, Class A4, 7.59s, 2028    498,979    506,704 
GS Auto Loan Trust 144A Ser. 04-1, Class D, 5s, 2011    3,387,239    3,361,428 
GSAMP Trust 144A         
Ser. 04-NIM1, Class N1, 5 1/2s, 2034    776,592    776,437 
Ser. 04-NIM1, Class N2, zero %, 2034    3,884,000    2,860,566 
Ser. 04-NIM2, Class N, 4 7/8s, 2034    2,146,180    2,136,952 
GSMPS Mortgage Loan Trust 144A Ser. 01-2, IO, 0.188s, 2032    1,747,108    8,596 
Guggenheim Structured Real Estate Funding, Ltd. FRB         
Ser. 05-1A, Class E, 6.618s, 2030 (Cayman Islands)    2,377,000    2,367,611 
Guggenheim Structured Real Estate Funding, Ltd. 144A         
FRB Ser. 05-2A, Class E, 6.818s, 2030         
(Cayman Islands)    2,453,000    2,454,962 
HASCO NIM Trust 144A Ser. 05-OP1A, Class A, 6 1/4s, 2035    1,893,300    1,828,848 
Holmes Financing PLC         
FRB Ser. 4, Class 3C, 5.9s, 2040 (United Kingdom)    2,320,000    2,324,844 
FRB Ser. 8, Class 2C, 5.32s, 2040 (United Kingdom)    1,938,000    1,942,457 
LNR CDO, Ltd. 144A         
FRB Ser. 02-1A, Class FFL, 7.559s, 2037         
(Cayman Islands)    7,500,000    7,545,450 
FRB Ser. 03-1A, Class EFL, 7.8s, 2036         
(Cayman Islands)    11,120,000    11,845,024 
Long Beach Asset Holdings Corp. NIM Trust 144A         
Ser. 04-5, Class Note, 5s, 2034    147,317    147,085 
Long Beach Mortgage Loan Trust         
FRB Ser. 06-2, Class M10, 7.17s, 2036    1,478,000    1,231,544 
Ser. 04-3, Class S1, IO, 4 1/2s, 2006    10,186,149    283,684 
Ser. 04-3, Class S2, IO, 4 1/2s, 2006    4,555,852    126,880 
Long Beach Mortgage Loan Trust 144A FRB Ser. 06-2,         
Class B, 7.17s, 2036    1,478,000    1,150,254 
Lothian Mortgages PLC 144A FRB Ser. 3A,         
Class D, 5.388s, 2039 (United Kingdom)  GBP  6,500,000    11,387,934 

48

ASSET-BACKED SECURITIES (15.3%)* continued         
    Principal amount    Value 
 
Madison Avenue Manufactured Housing Contract FRB         
Ser. 02-A, Class B1, 8.068s, 2032  $  6,357,565  $  3,178,783 
MASTR Asset Backed Securities NIM Trust 144A         
Ser. 04-CI5, Class N2, 9s, 2034 (Cayman Islands)    831,336    836,158 
Ser. 04-HE1A, Class Note, 5.191s, 2034         
(Cayman Islands)    150,287    149,987 
MBNA Credit Card Master Note Trust FRB Ser. 03-C5,         
Class C5, 5.929s, 2010    3,730,000    3,802,987 
Merrill Lynch Mortgage Investors, Inc. Ser. 03-WM3N,         
Class N1, 8s, 2034    34,798    34,374 
Merrill Lynch Mortgage Investors, Inc. 144A         
Ser. 04-FM1N, Class N1, 5s, 2035 (Cayman Islands)    102,874    101,845 
Ser. 04-HE1N, Class N1, 5s, 2006    71,580    70,976 
Ser. 04-WM2N, Class N1, 4 1/2s, 2034    8,750    8,682 
Ser. 04-WM3N, Class N1, 4 1/2s, 2035    10,020    9,870 
Mid-State Trust Ser. 11, Class B, 8.221s, 2038    1,265,413    1,235,088 
Morgan Stanley ABS Capital I FRB Ser. 04-HE8,         
Class B3, 8.018s, 2034    1,597,000    1,616,916 
Morgan Stanley Auto Loan Trust 144A         
Ser. 04-HB1, Class D, 5 1/2s, 2011    107,484    106,822 
Ser. 04-HB2, Class E, 5s, 2012    1,297,000    1,269,418 
Morgan Stanley Dean Witter Capital I         
FRB Ser. 01-NC3, Class B1, 8.493s, 2031    744,540    744,540 
FRB Ser. 01-NC4, Class B1, 7.318s, 2032    65,676    65,739 
Morgan Stanley Mortgage Loan Trust Ser. 05-5AR,         
Class 2A1, 5.433s, 2035    12,638,514    12,556,566 
N-Star Real Estate CDO, Ltd. 144A FRB Ser. 1A,         
Class C1A, 7.81s, 2038 (Cayman Islands)    2,000,000    2,047,600 
Navistar Financial Corp. Owner Trust         
Ser. 04-B, Class C, 3.93s, 2012    1,089,102    1,055,749 
Ser. 05-A, Class C, 4.84s, 2014    1,182,607    1,162,225 
Neon Capital, Ltd. 144A         
limited recourse sec. notes Ser. 97, 1.105s, 2013         
(Cayman Islands) (F) (g)    2,649,208    3,352,514 
limited recourse sec. notes Ser. 95, 2.319s, 2013         
(Cayman Islands) (F) (g)    2,028,770    756,305 
limited recourse sec. notes Ser. 94, 1.686s, 2013         
(Cayman Islands) (F) (g)    4,330,907    4,523,160 
limited recourse sec. notes Ser. 96, 1.458s, 2013         
(Cayman Islands) (F) (g)    20,169,472    4,200,797 
Oakwood Mortgage Investors, Inc.         
Ser. 01-C, Class A1, 5.16s, 2012    876,843    435,986 
Ser. 01-C, Class A2, 5.92s, 2017    9,786,201    5,270,006 
Ser. 01-D, Class A4, 6.93s, 2031    193,594    138,597 
Ser. 01-E, Class A2, 5.05s, 2019    7,924,244    6,070,751 
Ser. 02-A, Class A2, 5.01s, 2020    665,478    514,437 
Ser. 02-B, Class A4, 7.09s, 2032    3,244,000    2,851,684 
Ser. 02-C, Class A1, 5.41s, 2032    13,661,358    11,606,540 
Ser. 99-B, Class A4, 6.99s, 2026    9,702,164    8,458,501 
Ser. 99-D, Class A1, 7.84s, 2029    8,659,776    7,626,301 

49

ASSET-BACKED SECURITIES (15.3%)* continued         
    Principal amount    Value 
 
Oakwood Mortgage Investors, Inc. 144A Ser. 01-B,         
Class A4, 7.21s, 2030  $  927,481  $  824,333 
Ocean Star PLC 144A         
FRB Ser. 04-A, Class E, 11.24s, 2018 (Ireland)    5,793,000    6,134,787 
FRB Ser. 05-A, Class E, 9.34s, 2012 (Ireland)    1,317,000    1,316,605 
Option One Mortgage Loan Trust FRB Ser. 05-4,         
Class M11, 7.318s, 2035    1,809,000    1,572,770 
Park Place Securities, Inc. 144A         
FRB Ser. 04-MHQ1, Class M10, 7.318s, 2034    863,000    784,420 
FRB Ser. 05-WCW2, Class M11, 7.318s, 2035    1,424,000    1,057,320 
People’s Choice Net Interest Margin Note 144A         
Ser. 04-2, Class B, 5s, 2034    774,000    752,221 
Permanent Financing PLC         
FRB Ser. 3, Class 3C, 6.03s, 2042 (United Kingdom)    3,300,000    3,343,418 
FRB Ser. 6, Class 3C, 5.26s, 2042         
(United Kingdom)  GBP  6,492,000    11,259,076 
Providian Gateway Master Trust FRB Ser. 04-EA,         
Class E, 7.57s, 2011  $  6,550,000    6,672,813 
Providian Gateway Master Trust 144A FRB Ser. 04-BA,         
Class D, 6.149s, 2010    220,000    220,653 
Residential Asset Securities Corp. 144A         
FRB Ser. 05-KS10, Class B, 7.331s, 2035    1,523,000    1,332,351 
Ser. 04-N10B, Class A1, 5s, 2034    799,372    795,875 
Residential Mortgage Securities 144A FRB         
Ser. 20A, Class B1A, 5.317s, 2038         
(United Kingdom)  GBP  950,000    1,638,029 
Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026  $  776,350    779,262 
SAIL Net Interest Margin Notes 144A         
Ser. 03-10A, Class A, 7 1/2s, 2033 (Cayman Islands)    441,483    357,645 
Ser. 03-3, Class A, 7 3/4s, 2033 (Cayman Islands)    123,233    108,491 
Ser. 03-5, Class A, 7.35s, 2033 (Cayman Islands)    122,424    102,650 
Ser. 03-6A, Class A, 7s, 2033 (Cayman Islands)    61,537    45,355 
Ser. 03-7A, Class A, 7s, 2033 (Cayman Islands)    154,151    126,021 
Ser. 03-8A, Class A, 7s, 2033 (Cayman Islands)    55,757    15,612 
Ser. 03-9A, Class A, 7s, 2033 (Cayman Islands)    89,413    12,518 
Ser. 03-BC2A, Class A, 7 3/4s, 2033 (Cayman Islands)    491,904    203,082 
Ser. 04-10A, Class A, 5s, 2034 (Cayman Islands)    936,785    931,534 
Ser. 04-4A, Class A, 5s, 2034 (Cayman Islands)    16,544    16,532 
Ser. 04-4A, Class B, 7 1/2s, 2034 (Cayman Islands)    120,000    98,163 
Ser. 04-7A, Class A, 4 3/4s, 2034 (Cayman Islands)    41,675    41,598 
Ser. 04-8A, Class A, 5s, 2034 (Cayman Islands)    201,076    200,688 
Ser. 04-AA, Class A, 4 1/2s, 2034 (Cayman Islands)    313,213    311,443 
Sasco Net Interest Margin Trust 144A         
Ser. 03-BC1, Class B, zero %, 2033 (Cayman Islands)    1,883,265    376,653 
Ser. 05-WF1A, Class A, 4 3/4s, 2035 (Cayman Islands)    1,278,369    1,267,610 
Sharps SP I, LLC Net Interest Margin Trust 144A         
Ser. 04-HE2N, Class NA, 5.43s, 2034    138,697    136,616 
Soundview Home Equity Loan Trust 144A FRB Ser. 05-4,         
Class M10, 7.318s, 2036    1,086,000    940,748 

50

ASSET-BACKED SECURITIES (15.3%)* continued         
    Principal amount    Value 
 
South Coast Funding 144A FRB Ser. 3A, Class A2,         
5.92s, 2038 (Cayman Islands)  $  2,070,000  $  2,080,350 
Structured Asset Investment Loan Trust 144A FRB         
Ser. 05-HE3, Class M11, 7.318s, 2035    2,060,000    1,648,919 
Structured Asset Receivables Trust 144A FRB         
Ser. 05-1, 5.114s, 2015    11,096,219    11,092,757 
Structured Asset Securities Corp. 144A Ser. 98-RF3,         
Class A, IO, 6.1s, 2028    425,728    52,152 
TIAA Real Estate CDO, Ltd. Ser. 03-1A, Class E, 8s,         
2038 (Cayman Islands)    3,688,000    3,639,291 
TIAA Real Estate CDO, Ltd. 144A Ser. 02-1A, Class IV,         
6.84s, 2037 (Cayman Islands)    2,403,000    2,370,387 
Wells Fargo Home Equity Trust 144A         
Ser. 04-2, Class N1, 4.45s, 2034 (Cayman Islands)    406,198    405,401 
Ser. 04-2, Class N2, 8s, 2034 (Cayman Islands)    1,608,000    1,608,624 
Wells Fargo Mortgage Backed Securities Trust         
Ser. 05-AR13, Class 1A4, IO, 0.742s, 2035    95,670,791    717,531 
Whinstone Capital Management, Ltd. 144A FRB Ser. 1A,         
Class B3, 5.523s, 2044 (United Kingdom)    3,645,000    3,644,089 
Whole Auto Loan Trust 144A         
Ser. 03-1, Class D, 6s, 2010    413,682    413,496 
Ser. 04-1, Class D, 5.6s, 2011    1,762,160    1,747,478 
Total asset-backed securities (cost $484,667,867)      $  471,344,018 
 
 
FOREIGN GOVERNMENT BONDS AND NOTES (14.5%)*         
    Principal amount    Value 
  
Argentina (Republic of ) FRB 4.889s, 2012  $  32,235,000  $  29,908,579 
Barbados (Government of ) 144A bonds 6 5/8s, 2035    2,651,000    2,574,916 
Brazil (Federal Republic of ) bonds 10 1/2s, 2014    1,775,000    2,209,875 
Brazil (Federal Republic of ) bonds 8 7/8s, 2019    8,000,000    9,240,000 
Brazil (Federal Republic of ) notes 11s, 2012    12,685,000    15,507,413 
Brazil (Federal Republic of ) notes 8 3/4s, 2025    9,026,000    10,334,770 
Canada (Government of ) bonds 5 1/2s, 2010  CAD  9,650,000    8,694,432 
Canada (Government of ) bonds Ser. WB60,         
7 1/4s, 2007  CAD  8,915,000    7,921,302 
Canada (Government of ) bonds Ser. WL43,         
5 3/4s, 2029  CAD  1,550,000    1,608,210 
Colombia (Republic of ) notes 10s, 2012  $  6,794,000    8,016,920 
Dominican Republic 144A bonds 8 5/8s, 2027    3,000,000    3,082,500 
El Salvador (Republic of ) 144A bonds 7 3/4s, 2023    2,925,000    3,246,750 
France (Government of ) bonds 5 3/4s, 2032  EUR  17,480,000    26,967,270 
France (Government of ) bonds 5 1/2s, 2010  EUR  22,675,000    29,659,127 
France (Government of ) bonds 4s, 2013  EUR  32,000,000    39,436,320 
France (Government of ) bonds 4s, 2009  6,430,000    7,916,455 
France (Government of ) bonds Ser. OATe, 3s, 2012  EUR  24,351,525    32,202,676 
Germany (Federal Republic of ) bonds Ser. 2, 5s, 2012  EUR  9,780,000    12,644,415 
Indonesia (Republic of ) 144A notes 7 1/4s, 2015  $  315,000    322,560 
Ireland (Republic of ) bonds 5s, 2013  EUR  49,300,000    64,472,962 

51

FOREIGN GOVERNMENT BONDS AND NOTES (14.5%)* continued       
    Principal amount    Value 
 
Japan (Government of ) 10 yr bonds Ser. 244,         
1s, 2012  JPY  23,000,000  $  188,276 
Peru (Republic of ) bonds 7.35s, 2025  $  2,870,000    2,812,600 
Philippines (Republic of ) bonds 9 1/2s, 2024    13,673,000    15,983,737 
Russia (Federation of ) unsub. stepped-coupon 5s         
(7 1/2s, 3/31/07), 2030 ††    19,484,975    21,316,563 
Russia (Ministry of Finance) debs. Ser. V, 3s, 2008    7,605,000    7,196,612 
South Africa (Republic of ) notes 7 3/8s, 2012 (S)    5,995,000    6,483,593 
South Africa (Republic of ) notes 6 1/2s, 2014    8,050,000    8,412,250 
Spain (Kingdom of ) bonds 5s, 2012  EUR  15,000,000    19,474,950 
Sweden (Government of ) debs. Ser. 1041,         
6 3/4s, 2014  SEK  215,045,000    33,616,737 
United Mexican States bonds Ser. MTN, 8.3s, 2031  $  7,775,000    9,388,313 
Venezuela (Republic of ) notes 10 3/4s, 2013    5,710,000    7,117,515 
Total foreign government bonds and notes (cost $433,235,689)    $  447,958,598 
 
 
U.S. GOVERNMENT AGENCY MORTGAGE OBLIGATIONS (2.0%)*       
    Principal amount    Value 
Federal Home Loan Mortgage Corporation Pass-Through         
Certificates 5 1/2s, May 1, 2020  $  487,189  $  484,506 
Federal National Mortgage Association         
Pass-Through Certificates         
8s, April 1, 2027    3,209    3,426 
7s, with due dates from July 1, 2031 to April 1, 2034    48,333    49,886 
6 1/2s, with due dates from October 1, 2034         
to February 1, 2035    24,204    24,725 
6 1/2s, November 1, 2017    33,709    34,268 
5 1/2s, with due dates from January 1, 2009         
to February 1, 2021    21,436,213    21,323,611 
5 1/2s, TBA, May 1, 2036    4,700,000    4,582,500 
5 1/2s, TBA, April 1, 2036    19,278,000    18,814,123 
5s, with due dates from January 1, 2019 to         
February 1, 2020    641,889    626,744 
4 1/2s, with due dates from August 1, 2033 to         
June 1, 2034    13,701,149    12,700,017 
4 1/2s, TBA, April 1, 2036    900,000    829,969 
4s, with due dates from May 1, 2019 to         
September 1, 2020    1,000,277    937,174 
Total U.S. government agency mortgage obligations (cost $60,913,387)  $  60,410,949 

52

U.S. TREASURY OBLIGATIONS (8.6%)*         
    Principal amount    Value 
 
U.S. Treasury Bonds         
7 1/2s, November 15, 2016  $  37,950,000  $  45,854,272 
6 1/4s, May 15, 2030    79,772,000    93,233,525 
6 1/4s, August 15, 2023    77,090,000    87,436,927 
U.S. Treasury Strip zero %, November 15, 2024    98,235,000    38,319,136 
Total U.S. treasury obligations (cost $254,871,150)      $  264,843,860 
 
 
SENIOR LOANS (8.5%)* (c)         
    Principal amount    Value 
 
Basic Materials (0.7%)         
Georgia-Pacific Corp. bank term loan FRN Ser. B,         
6.743s, 2013  $  3,900,000  $  3,925,900 
Hercules, Inc. bank term loan FRN Ser. B, 6.058s, 2010    3,464,816    3,488,637 
Innophos, Inc. bank term loan FRN 7.003s, 2010    1,884,812    1,909,158 
Nalco Co. bank term loan FRN Ser. B, 6.534s, 2010    1,915,592    1,934,748 
Novelis, Inc. bank term loan FRN Ser. B, 6.44s, 2012    313,036    316,313 
Novelis, Inc. bank term loan FRN Ser. B, 6.44s, 2012    180,233    182,120 
Rockwood Specialties Group, Inc. bank term loan FRN         
Ser. E, 6.918s, 2012    4,950,000    5,012,647 
Smurfit-Stone Container Corp. bank term loan FRN         
4.29s, 2010    271,070    274,560 
Smurfit-Stone Container Corp. bank term loan FRN         
Ser. B, 7.103s, 2011    2,354,798    2,385,116 
Smurfit-Stone Container Corp. bank term loan FRN         
Ser. C, 7.064s, 2011    798,850    809,136 
St. Mary’s Cement Corp. bank term loan FRN Ser. B,         
6.527s, 2009    977,500    989,719 
        21,228,054 
 
Capital Goods (1.0%)         
AGCO Corp. bank term loan FRN 6.277s, 2008    1,358,500    1,371,236 
Allied Waste Industries, Inc. bank term loan FRN         
Ser. A, 4.385s, 2012    524,769    526,737 
Allied Waste Industries, Inc. bank term loan FRN         
Ser. B, 6.796s, 2012    1,351,643    1,356,993 
Amsted Industries, Inc. bank term loan FRN 7.126s, 2010    754,269    764,012 
Communications & Power, Inc. bank term loan FRN         
7.01s, 2010    2,341,696    2,359,258 
Enersys Capital, Inc. bank term loan FRN 6.823s, 2011    1,486,795    1,503,521 
Graham Packaging Co., Inc. bank term loan FRN Ser. B,         
6.967s, 2011    992,481    1,004,887 
Hexcel Corp. bank term loan FRN Ser. B, 6 3/8s, 2012    4,892,222    4,937,069 
Invensys, PLC bank term loan FRN Ser. B-1, 7.791s,         
2009 (United Kingdom)    454,930    458,910 
Mueller Group, Inc. bank term loan FRN Ser. B, 6.88s, 2012    4,179,000    4,231,238 
Owens-Illinois, Inc. bank term loan FRN Ser. B,         
6.56s, 2008    394,214    395,200 

53

SENIOR LOANS (8.5%)* (c) continued         
    Principal amount    Value 
 
Capital Goods continued         
Roper Industries, Inc. bank term loan FRN Ser. A,         
5.89s, 2009  $  2,648,430  $  2,651,740 
Terex Corp. bank term loan FRN 6.839s, 2009    1,237,359    1,249,733 
Terex Corp. bank term loan FRN Ser. C, 7.339s, 2009    3,137,858    3,169,236 
Transdigm, Inc. bank term loan FRN Ser. C, 6.99s, 2010    3,323,938    3,364,450 
        29,344,220 
 
Communication Services (0.6%)         
Consolidated Communications Holdings bank term loan         
FRN Ser. D, 6.342s, 2011    3,742,644    3,775,392 
Fairpoint Communications, Inc. bank term loan FRN         
Ser. B, 6.313s, 2012    2,500,000    2,518,125 
Hawaiian Telecom Communications bank term loan FRN         
Ser. B, 6.78s, 2012    1,000,000    1,008,750 
Intelsat Bermuda, Ltd. bank term loan FRN Ser. B,         
6.313s, 2011 (Bermuda)    3,853,247    3,883,352 
Qwest Communications International, Inc. bank term         
loan FRN Ser. A, 9.503s, 2007    552,500    565,760 
Syniverse Holdings, Inc. bank term loan FRN Ser. B,         
6.28s, 2012    2,529,904    2,561,528 
Valor Telecommunications         
Enterprises LLC/Finance Corp. bank term loan FRN         
Ser. B, 6.325s, 2012    4,543,333    4,549,721 
        18,862,628 
 
Consumer Cyclicals (1.7%)         
Adams Outdoor Advertising, LP bank term loan FRN         
6.62s, 2012    723,884    733,535 
Affinion Group, Inc. bank term loan FRN Ser. B,         
7.501s, 2013    4,313,400    4,325,533 
Boise Cascade Corp. bank term loan FRN Ser. D, 6.29s, 2011    1,325,054    1,341,467 
Coinmach Service Corp. bank term loan FRN Ser. B-1,         
7.257s, 2012    1,248,739    1,266,949 
Goodyear Tire & Rubber Co. (The) bank term loan FRN         
7.06s, 2010    1,295,000    1,312,537 
Hayes Lemmerz International, Inc. bank term loan FRN         
7.781s, 2009    941,656    945,692 
Infor Global Solutions bank term loan FRN Ser. B,         
7.286s, 2011    334,091    334,091 
Infor Global Solutions bank term loan FRN Ser. DD,         
7.286s, 2011    50,909    50,909 
Jostens IH Corp. bank term loan FRN Ser. C, 7.318s, 2010    3,595,348    3,641,789 
Landsource, Inc. bank term loan FRN Ser. B, 7 1/4s, 2010    2,900,000    2,910,875 
Maguire Properties, Inc. bank term loan FRN Ser. B,         
6.441s, 2010 (R)    2,620,722    2,635,136 
NCI Building Systems, Inc. bank term loan FRN Ser. B,         
6.134s, 2010    851,414    854,075 
Neiman Marcus Group, Inc. bank term loan FRN Ser. B,         
7.34s, 2013    2,136,076    2,165,257 

54

SENIOR LOANS (8.5%)* (c) continued         
    Principal amount    Value 
 
Consumer Cyclicals continued         
Nortek Holdings, Inc. bank term loan FRN Ser. B,         
6.945s, 2011  $  2,969,849  $  2,995,835 
Penn National Gaming, Inc. bank term loan FRN Ser. B,         
6 3/8s, 2012    1,094,500    1,108,181 
PRIMEDIA, Inc. bank term loan FRN Ser. B, 6.92s, 2013    900,000    889,688 
R.H. Donnelley Finance Corp. bank term loan FRN         
Ser. A-3, 6.28s, 2009    857,156    859,201 
R.H. Donnelley Finance Corp. bank term loan FRN         
Ser. D, 6.466s, 2011    2,837,411    2,858,147 
Raycom Media, Inc. bank term loan FRN Ser. B, 6.188s, 013    1,843,769    1,850,683 
Sealy Mattress Co. bank term loan FRN Ser. D, 6.525s, 2012    1,275,529    1,290,676 
Sun Media Corp. bank term loan FRN Ser. B, 6.668s,         
2009 (Canada)    382,534    387,315 
Trump Hotel & Casino Resort, Inc. bank term loan FRN         
Ser. B-1, 7.17s, 2012    1,119,375    1,128,470 
Trump Hotel & Casino Resort, Inc. bank term loan FRN         
Ser. DD, 5.62s, 2012 (U)    1,119,375    1,128,470 
TRW Automotive, Inc. bank term loan FRN Ser. B,         
6 1/4s, 2010    3,848,316    3,856,867 
TRW Automotive, Inc. bank term loan FRN Ser. B2,         
6 1/8s, 2010    610,000    610,763 
TRW Automotive, Inc. bank term loan FRN Ser. E, 6s, 2010    1,485,000    1,492,054 
Venetian Casino Resort, LLC bank term loan FRN         
Ser. B, 6.28s, 2011    6,571,282    6,636,995 
Venetian Casino Resort, LLC bank term loan FRN         
Ser. DD, 6.28s, 2011    1,354,904    1,368,453 
Veterinary Centers of America, Inc. bank term loan         
FRN Ser. B, 6 1/8s, 2011    749,489    755,110 
William Carter Holdings Co. (The) bank term loan FRN         
Ser. B, 6.489s, 2012    673,651    681,230 
        52,415,983 
 
Consumer Staples (2.1%)         
AMC Entertainment, Inc. bank term loan FRN Ser. B,         
6.943s, 2013    850,000    859,430 
Ashtead Group PLC bank term loan FRN Ser. B, 6 1/2s,         
2009 (United Kingdom)    2,376,000    2,399,760 
Burger King Corp. bank term loan FRN Ser. B1, 6 1/8s, 2013    1,811,308    1,821,497 
Cablevision Systems Corp. bank term loan FRN 6.286s, 2013    4,950,000    4,987,744 
Century Cable Holdings bank term loan FRN 9 3/4s, 2009    6,280,000    6,125,619 
Charter Communications bank term loan FRN Ser. B,         
7.92s, 2011    4,867,994    4,907,727 
Cinemark, Inc. bank term loan FRN Ser. C, 6.536s, 2011    2,806,065    2,840,439 
DirecTV Holdings, LLC bank term loan FRN Ser. B,         
6.276s, 2013    3,733,333    3,773,000 
Dole Food Co., Inc. bank term loan FRN Ser. B,         
6.318s, 2012    1,666,159    1,669,135 
Emmis Communications Corp. bank term loan FRN Ser. B,         
6.577s, 2010    345,959    347,743 

55

SENIOR LOANS (8.5%)* (c) continued         
    Principal amount    Value 
 
Consumer Staples continued         
Frontier Vision bank term loan FRN Ser. B, 9.275s, 2006  $  150,000  $  150,141 
Gray Television, Inc. bank term loan FRN Ser. B,         
6.03s, 2012    992,500    998,455 
Insight Midwest LP/Insight Capital, Inc. bank term         
loan FRN 6.563s, 2009    1,651,975    1,674,315 
Jean Coutu Group, Inc. bank term loan FRN Ser. B,         
6.938s, 2011 (Canada)    4,354,322    4,396,654 
Mediacom Communications Corp. bank term loan FRN         
Ser. B, 6.931s, 2012    2,221,875    2,250,691 
MGM Studios, Inc. bank term loan FRN Ser. B, 6.78s, 2011    4,400,000    4,452,250 
Olympus Cable Holdings, LLC bank term loan FRN         
Ser. B, 9 3/4s, 2010    4,085,000    4,000,383 
PanAmSat Corp. bank term loan FRN Ser. B1, 6.9s, 2010    2,254,362    2,282,542 
Pinnacle Foods Holding Corp. bank term loan FRN         
7.823s, 2010    2,018,837    2,048,615 
Prestige Brands, Inc. bank term loan FRN Ser. B,         
7.239s, 2011    1,979,849    2,002,122 
Regal Cinemas, Inc. bank term loan FRN Ser. B,         
6.527s, 2010    2,058,553    2,076,565 
Six Flags, Inc. bank term loan FRN Ser. B, 7.111s, 2009    2,996,150    3,028,452 
Universal City Development bank term loan FRN Ser. B,         
6.671s, 2011    4,044,038    4,092,902 
Warner Music Group bank term loan FRN Ser. B, 6.669s, 2011    1,917,226    1,940,593 
        65,126,774 
 
Energy (0.1%)         
Dresser, Inc. bank term loan FRN 7.99s, 2010    1,230,000    1,257,675 
Dresser, Inc. bank term loan FRN Ser. C, 7.11s, 2009    152,705    154,995 
Dresser-Rand Group, Inc. bank term loan FRN Ser. B,         
6.764s, 2011    667,233    677,867 
Petroleum Geo-Services ASA bank term loan FRN Ser. B,         
7s, 2012 (Norway)    548,625    554,797 
Universal Compression, Inc. bank term loan FRN         
Ser. B, 6.03s, 2012    1,470,512    1,483,379 
        4,128,713 
 
Financial (0.6%)         
Ameritrade, Inc. bank term loan FRN Ser. B, 6.32s, 2013    4,700,000    4,725,559 
Capital Automotive bank term loan FRN 6.34s, 2010 (R)    5,650,000    5,705,489 
Fidelity National Information Solutions bank term         
loan FRN Ser. B, 6.47s, 2013    4,180,000    4,211,350 
Hilb, Rogal & Hamilton Co. bank term loan FRN Ser. B,         
6.813s, 2011    2,029,888    2,042,574 
NASDAQ, Inc. bank term loan FRN Ser. B, 6.287s, 2011    1,700,000    1,711,334 
        18,396,306 

56

SENIOR LOANS (8.5%)* (c) continued         
    Principal amount    Value 
 
Health Care (0.8%)         
Alderwoods Group, Inc. bank term loan FRN 6.738s, 2009  $  520,524  $  525,078 
Community Health Systems, Inc. bank term loan FRN         
Ser. B, 6.559s, 2011    2,360,308    2,389,811 
DaVita, Inc. bank term loan FRN Ser. B, 6.542s, 2012    3,250,800    3,290,759 
Hanger Orthopedic Group, Inc. bank term loan FRN         
8.271s, 2009    782,000    791,775 
Healthsouth Corp. bank term loan FRN 7.07s, 2010    2,723,813    2,743,675 
Healthsouth Corp. bank term loan FRN Ser. B, 7.786s, 2013    5,550,000    5,590,471 
IASIS Healthcare Corp. bank term loan FRN Ser. B,         
6.786s, 2011    1,187,909    1,203,254 
Kinetic Concepts, Inc. bank term loan FRN Ser. B,         
6.28s, 2011    1,120,107    1,131,775 
LifePoint, Inc. bank term loan FRN Ser. B, 6.185s, 2012    4,294,865    4,317,533 
Stewart Enterprises, Inc. bank term loan FRN Ser. B,         
6.657s, 2011    565,582    570,531 
Vanguard Health Systems bank term loan FRN 6.95s, 2011    992,506    1,003,983 
VWR International, Inc. bank term loan FRN Ser. B,         
7.12s, 2011    1,812,519    1,835,743 
        25,394,388 
 
Technology (0.4%)         
AMI Semiconductor, Inc. bank term loan FRN 6.105s, 2012    3,960,026    3,978,175 
Avago Technologies Finance bank term loan FRN Ser. B,         
7.13s, 2012 (Singapore)    187,029    187,403 
Avago Technologies Finance bank term loan FRN         
Ser. DD, 7.318s, 2012 (Singapore)    778,050    781,940 
Extensity, Inc. bank term loan FRN Ser. B, 7 1/4s, 2011    150,000    150,938 
ON Semiconductor Corp. bank term loan FRN Ser. BH,         
6.54s, 2011    1,984,962    2,004,812 
UGS Corp. bank term loan FRN Ser. C, 6.61s, 2012    3,779,141    3,821,656 
        10,924,924 
 
Transportation (0.1%)         
Kansas City Southern Railway Co. bank term loan FRN         
Ser. B, 6.227s, 2008    2,962,500    2,972,374 
United Airlines bank term loan FRN Ser. B, 8.286s, 2012    1,312,500    1,333,828 
United Airlines bank term loan FRN Ser. DD, 8.286s, 012    187,500    190,547 
        4,496,749 
 
Utilities & Power (0.4%)         
El Paso Corp. bank term loan FRN 4.29s, 2009    1,725,000    1,743,927 
El Paso Corp. bank term loan FRN Ser. B, 7.313s, 2009    6,056,400    6,130,421 
NRG Energy, Inc. bank term loan FRN Ser. B, 6.82s, 013    3,179,000    3,217,412 
Williams Cos., Inc. (The) bank term loan FRN Ser. C,         
7.015s, 2007    1,806,671    1,828,125 
        12,919,885 
 
Total senior loans (cost $262,238,740)      $  263,238,624 

57

CONVERTIBLE BONDS AND NOTES (0.1%)* (cost $2,217,472)       
    Principal amount    Value 
 
WCI Communities, Inc. cv. sr. sub. notes 4s, 2023  $  1,950,000  $  2,218,125 
 
 
SHORT-TERM INVESTMENTS (8.7%)*         
  Principal amount/shares    Value 
Interest in $564,000,000 joint tri-party repurchase         
agreement dated March 31, 2006 with Bank of America         
Securities, LLC due April 3, 2006 with respect         
to various U.S. Government obligations — maturity         
value of $18,671,497 for an effective yield of 4.82%         
(collateralized by Fannie Mae securities with a yield         
of 5.00% and a due date of March 1, 2035, valued         
at $575,280,000)  $  18,664,000  $  18,664,000 

Putnam Prime Money Market Fund (e)  		  226,849,201    226,849,201 

Short-term investments held as collateral for loaned  		       
securities with yields ranging from 4.78% to 5.03%         
and due dates ranging from April 3, 2006 to May 16,         
2006 (d)  $  5,723,485    5,711,400 

Thunder Bay Funding, Inc. for an effective yield  		       
of 4.17%, April 10, 2006    11,300,000    11,288,220 
U.S. Treasury Bills for an effective yield of 4.297%,         
April 13, 2006 #    3,100,000    3,095,570 
U.S. Treasury Bills for an effective yield of 4.275%,         
April 13, 2006 #    2,499,000    2,495,429 
 
Total short-term investments (cost $268,103,820)      $  268,103,820 
 
TOTAL INVESTMENTS         

Total investments (cost $3,058,957,805)  		    $  3,061,208,803 

* Percentages indicated are based on net assets of $3,085,877,867.

**** Security is in default of principal and interest.

† Non-income-producing security.

(S) Securities on loan, in part or in entirety, at March 31, 2006.

†† The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the fund will begin accruing interest at this rate.

‡ Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at March 31, 2006 was $3,263,700 or 0.1% of net assets.

‡‡ Income may be received in cash or additional securities at the discretion of the issuer.

# These securities were pledged and segregated with the custodian to cover margin requirements for futures contracts at March 31, 2006.

(R) Real Estate Investment Trust.

(c) Senior loans are exempt from registration under the Security Act of 1933, as amended, but contain certain restrictions on resale and cannot be sold publicly. These loans pay interest at rates which adjust periodically. The interest rate shown for senior loans are the current interest rates at March 31, 2006. Senior loans are also subject to mandatory and/or optional prepayment which cannot be predicted. As a result, the remaining maturity may be substantially less than the stated maturity shown (Notes 1 and 6).

58

(d) See Note 1 to the financial statements.

(e) See Note 5 to the financial statements regarding investments in Putnam Prime Money Market Fund.

(F) Security is valued at fair value following procedures approved by the Trustees.

(g) The notes are secured by debt and equity securities and equity participation agreements held by Neon Capital, Ltd.

(U) A portion of the position represents unfunded loan commitments (Note 7).

At March 31, 2006, liquid assets totaling $820,245,954 have been designated as collateral for open forward commitments, swap contracts and forward contracts.

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

TBA after the name of a security represents to be announced securities (Note 1).

The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates at March 31, 2006.

Inverse Floating Rate Bonds (IFB) are securities that pay interest rates that vary inversely to changes in the market interest rates. As interest rates rise, inverse floaters produce less current income. The interest rates shown are the current interest rates at March 31, 2006.

DIVERSIFICATION BY COUNTRY

Distribution of investments by country of issue at March 31, 2006: (as a percentage of Portfolio Value)

Argentina                                                                                                               1.0% 
Brazil  1.3 
Canada  1.9 
Cayman Islands  2.9 
France  4.8 
Germany  0.6 
Ireland  3.4 
Luxembourg  0.7 
Philippines  0.6 
Russia  0.9 
South Africa  0.5 
Spain  0.6 
Sweden  1.1 
United Kingdom  3.3 
United States  75.0 
Other  1.4 
Total  100.0% 

FORWARD CURRENCY CONTRACTS TO BUY at 3/31/06 (aggregate face value $329,743,284) (Unaudited) 
        Unrealized 
    Aggregate  Delivery  appreciation/ 
  Value  face value  date  (depreciation) 
 
Australian Dollar  $24,430,909  $24,674,945  4/19/06  $(244,036) 
British Pound  39,432,546  39,705,886  6/21/06  (273,340) 
Canadian Dollar  36,046,199  36,459,181  4/19/06  (412,982) 
Danish Krone  6,354,668  6,315,830  6/21/06  38,838 
Euro  86,860,670  86,576,269  6/21/06  284,401 
Japanese Yen  81,159,830  81,740,568  5/17/06  (580,738) 
Korean Won  9,428,492  9,427,989  5/17/06  503 
Norwegian Krone  33,041,518  32,653,821  6/21/06  387,697 
Polish Zloty  4,170,880  4,260,622  6/21/06  (89,742) 
Swedish Krona  8,040,579  7,928,173  6/21/06  112,406 
Total        $(776,993) 

59

FORWARD CURRENCY CONTRACTS TO SELL at 3/31/06 (aggregate face value $495,575,155) (Unaudited)

        Unrealized 
    Aggregate  Delivery  appreciation/ 
  Value  face value  date  (depreciation) 
Australian Dollar  $ 29,011,891  $ 29,862,388  4/19/06  $ 850,497 
British Pound  23,236,247  23,381,519  6/21/06  145,272 
Canadian Dollar  40,222,510  40,440,033  4/19/06  217,523 
Euro  218,165,640  215,638,085  6/21/06  (2,527,555) 
Japanese Yen  34,933,711  35,156,764  5/17/06  223,053 
New Zealand Dollar  7,610,568  7,661,445  4/19/06  50,877 
Singapore Dollar  7,812,381  7,788,367  5/17/06  (24,014) 
Swedish Krona  104,003,370  103,191,352  6/21/06  (812,018) 
Swiss Franc  32,334,859  32,455,202  6/21/06  120,343 
Total        $(1,756,022) 
 
 
FUTURES CONTRACTS OUTSTANDING at 3/31/06 (Unaudited)     
        Unrealized 
  Number of    Expiration  appreciation/ 
  contracts  Value  date  (depreciation) 
Euro 90 day (Short)  6,999  $1,658,675,513  Mar-07  $ 6,336,937 
Euro 90 day (Long)  6,999  1,657,625,663  Sep-06  (3,506,038) 
Euro 90 day (Long)  68  16,115,150  Jun-06  (159,143) 
Euro-Bobl 5 yr (Long)  410  54,605,746  Jun-06  (318,725) 
Euro-Bund 10 yr (Short)  427  60,538,244  Jun-06  768,527 
Euro-Euribor Interest Rate 90 day (Long)  28  8,175,670  Dec-06  (28,858) 
Euro-Schatz 2 yr (Long)  110  13,903,631  Jun-06  (30,275) 
Japanese Government Bond 10 yr (Long)  113  127,837,416  Jun-06  (871,798) 
U.K. Gilt 10 yr (Long)  212  41,050,499  Jun-06  (702,931) 
U.S. Treasury Bond 20 yr (Long)  444  48,465,375  Jun-06  (1,709,669) 
U.S. Treasury Note 10 yr (Short)  422  44,896,844  Jun-06  632,532 
U.S. Treasury Note 5 yr (Short)  1,187  123,967,313  Jun-06  525,386 
U.S. Treasury Note 2 yr (Short)  2,705  551,439,609  Jun-06  772,602 
Total        $ 1,708,547 

WRITTEN OPTIONS OUTSTANDING at 3/31/06 (premiums received $2,178,225) (Unaudited)

    Contract  Expiration date/   
    amount  strike price  Value 
Option on an interest rate swap with       
Citibank for the obligation to pay a         
fixed rate of 0.60% versus the six         
month JPY-LIBOR-BBA maturing on       
January 31, 2008.  JPY  73,373,200,000  Jan-07/$0.60  $3,541,469 
Option on an interest rate swap with       
Citibank for the right to receive a fixed       
rate of 1.165% versus the one year         
JPY-LIBOR-BBA maturing on         
April 3, 2008.  JPY  59,657,639,000  Mar-07/$1.165  960,833 
Total        $4,502,302 

60

TBA SALE COMMITMENTS OUTSTANDING at 3/31/06 (proceeds receivable $14,643,422) (Unaudited) 
  Principal  Settlement                                                           
  amount  date  Value 
FNMA, 5 1/2s, April 1, 2036  $14,900,000  4/12/06  $14,541,469 

INTEREST RATE SWAP CONTRACTS OUTSTANDING at 3/31/06 (Unaudited)   
      Fixed payments  Fixed payments  Unrealized 
Swap counterparty /  Termination  made by  received by  appreciation/ 
Notional amount  date  fund per annum  fund per annum  (depreciation) 
 
Bank of America, N.A.         
$  42,000,000  1/27/14  4.35%  3 month USD-LIBOR-BBA  $ 2,702,093 
  5,000,000  9/1/15  3 month USD-LIBOR-BBA  4.53%  (314,878) 
Citibank, N.A.         
JPY  6,200,000,000  2/10/16  6 month JPY-LIBOR-BBA  1.755%  (1,098,481) 
NOK  115,000,000  7/22/10  6 month NOK-NIBOR-NIBR  3.52%  (52,555) 
EUR  14,140,000  7/22/10  2.825%  6 month EUR-EURIBOR-Telerate 357,462 
NOK  284,790,000  7/14/10  6 month NOK-NIBOR-NIBR  3.40%  (347,453) 
JPY 11,000,000,000  3/14/13  1.54375%  6 month JPY-LIBOR-BBA  1,365,542 
JPY 25,000,000,000  3/14/09  6 month JPY-LIBOR-BBA  0.84%  (1,629,980) 
JPY 24,459,632,000  4/3/08  1 year JPY-LIBOR-BBA  1.165%  (285,297) 
EUR  36,276,000  7/14/10  2.7515%  6 month EUR-EURIBOR-Telerate 1,048,433 
EUR  66,000,000  12/16/15  6 month EUR-EURIBOR-Telerate  3.485%  (2,942,188) 
EUR  390,000,000  12/17/07  2.973%  6 month EUR-EURIBOR-Telerate 3,228,751 
Credit Suisse First Boston International       
$  37,886,000  7/9/06  3 month USD-LIBOR-BBA  2.931%  (363,240) 
  42,918,600  7/9/14  4.945%  3 month USD-LIBOR-BBA  1,156,239 
Deutsche Bank AG         
  24,344,349  8/2/32  5.86%  3 month USD-LIBOR-BBA  (1,278,903) 
  21,693,259  8/2/22  3 month USD-LIBOR-BBA  5.7756%  755,697 
Goldman Sachs Capital Markets, L.P.       
  48,888,992  8/1/32  5.919%  3 month USD-LIBOR-BBA  (2,974,650) 
  43,565,000  8/1/22  3 month USD-LIBOR-BBA  5.845%  1,848,971 
  24,344,349  8/12/32  5.689%  3 month USD-LIBOR-BBA  (686,681) 
  21,693,259  8/12/22  3 month USD-LIBOR-BBA  5.601%  335,153 
HSBC Bank USA         
CAD  58,644,000  2/16/16  4.5875%  3 month CAD-BA-CDOR  158,101 
CAD  245,413,000  2/16/08  3 month CAD-BA-CDOR  4.20%  (248,606) 
JPMorgan Chase Bank, N.A.       
$  210,000,000  5/10/07  4.062%  3 month USD-LIBOR-BBA  746,772 
  113,000,000  5/10/15  3 month USD-LIBOR-BBA  4.687%  (4,241,810) 
  49,000,000  5/10/35  5.062%  3 month USD-LIBOR-BBA  2,403,420 
JPMorgan Securities, Inc.         
GBP  148,195,000  2/23/08  4.635%  6 month GBP-LIBOR-BBA  704,937 
Lehman Brothers Special Financing, Inc.       
$  35,000,000  7/23/12  3 month USD-LIBOR-BBA  5.114%  (364,178) 
  21,082,941  8/2/12  5.152%  3 month USD-LIBOR-BBA  181,660 
  21,693,259  8/2/22  3 month USD-LIBOR-BBA  5.7756%  755,697 
GBP  6,285,000  3/15/36  15,214,937.50 GBP at maturity  6 month GBP-LIBOR-BBA  169,500 
$  68,727,000  12/11/13  3 month USD-LIBOR-BBA  4.641%  (2,282,349) 
  42,000,000  1/26/14  4.3375%  3 month USD-LIBOR-BBA  2,736,221 
JPY 12,649,000,000  10/21/15  1.61%  6 month JPY-LIBOR-BBA  2,896,699 

61

INTEREST RATE SWAP CONTRACTS OUTSTANDING at 3/31/06 (Unaudited) continued     
      Fixed payments  Fixed payments    Unrealized 
Swap counterparty /  Termination  made by  received by  appreciation/ 
Notional amount  date  fund per annum  fund per annum  (depreciation) 
 
Merrill Lynch Capital Services, Inc.         
$  42,339,343  8/1/12  5.204%  3 month USD-LIBOR-BBA  $  243,311 
  43,565,000  8/1/22  3 month USD-LIBOR-BBA  5.845%    1,848,971 
  21,693,259  8/12/22  3 month USD-LIBOR-BBA  5.601%    335,153 
  21,082,941  8/13/12  4.94%  3 month USD-LIBOR-BBA    431,814 
EUR  337,100,000  2/19/07  2.5645%  6 month    2,212,877 
NOK  174,700,000  7/26/10  6 month NOK-NIBOR-NIBR  3.54%    (38,987) 
EUR  22,000,000  7/26/10  2.801%  6 month EUR-EURIBOR-Telerate  581,874 
Morgan Stanley Capital Services, Inc.         
$  2,000,000  10/2/10  6.94%  3 month USD-LIBOR-BBA    (177,070) 
  15,000,000  5/17/12  3 month USD-LIBOR-BBA  5.7775%    589,824 
Total          $10,467,866 

TOTAL RETURN SWAP CONTRACTS OUTSTANDING at 3/31/06 (Unaudited)   
      Fixed payments  Total return  Unrealized 
Swap counterparty /  Termination  received (paid) by  received by  appreciation/ 
Notional amount  date  fund per annum  or paid by fund  (depreciation) 
 
Goldman Sachs         
  $ 6,497,000  9/15/11  (678 bp 1 month  Ford Credit Auto Owner  $ (20,584) 
      USD-LIBOR)  Trust Series 2005-B Class D 
 
Lehman Brothers Special Financing, Inc.         
GBP  6,285,000  3/15/36  3.12%  GBP Non-revised Retail  80,680 
        Index   
 
  $11,813,383  5/1/06  (6 month USD-LIBOR-BBA  Lehman Brothers U.S. High 291,827 
      plus 5 bp)  Yield Index   
Total          $351,923 

62

CREDIT DEFAULT CONTRACTS OUTSTANDING at 3/31/06 (Unaudited)     
  Upfront      Fixed payments  Unrealized 
Swap counterparty /  premium  Notional  Termination  received (paid) by  appreciation/ 
Referenced Debt*  received (paid)**  amount  date  fund per annum  (depreciation) 
 
Bank of America, N.A.           
DJ CDX NA HY Series 4           
Index  $ (16,553)  $ 5,881,920  6/20/10  (360 bp)  $ (227,963) 
 
DJ CDX NA HY Series 4           
Index  (66,575)  14,976,000  6/20/10  (360 bp)  (604,850) 
DJ CDX NA HY Series 4           
Index  (99,806)  29,952,000  6/20/10  (360 bp)  (1,176,356) 
DJ CDX NA HY Series 3           
Index  129,315  6,240,000  6/20/10  360 bp  353,596 
DJ CDX NA HY Series 4           
Index  271,706  12,480,000  6/20/10  360 bp  720,268 
DJ CDX NA IG HVOL           
Series 4 Index  (152,984)  20,306,000  6/20/10  (90 bp)  (61,201) 
Citigroup Financial Products, Inc.         
DJ CDX NA HY Series 4           
Index  (262,203)  15,322,560  6/20/10  (360 bp)  (812,935) 
DJ CDX NA IG Series 4           
Index 3-7% tranche  —  15,961,000  6/20/10  (677.5 bp)  344,092 
Goldman Sachs Capital Markets, L.P.         
DJ CDX NA HY Series 5           
Index  (1,218,698)  75,175,000  12/20/10  (395 bp)  (4,138,513) 
DJ CDX NA HY Series 4           
Index  81,315  14,976,000  6/20/10  (360 bp)  (456,959) 
DJ CDX NA HY Series 3           
Index  84,055  6,240,000  6/20/10  (360 bp)  308,336 
DJ CDX NA IG Series 4           
Index 10-15% tranche  —  7,845,000  6/20/15  57.60 bp  27,521 
DJ CDX NA IG Series 4           
Index  (38,898)  7,845,000  6/20/15  (65 bp)  (19,652) 
DJ CDX NA IG Series 4           
Index  (163,652)  15,246,000  6/20/10  (90 bp)  (94,740) 
DJ CDX NA IG HVOL           
Series 5 Index  (76,025)  8,998,000  12/20/10  (85 bp)  (97,201) 
DJ CDX NA IG Series 5           
Index 3-7% tranche  —  4,499,000  12/20/10  (113 bp)  (73,949) 
DJ CDX NA IG HVOL           
Series 5 Index  (57,455)  8,998,000  12/20/10  (85 bp)  (78,630) 
DJ CDX NA IG Series 5           
Index 3-7% tranche  —  3,578,000  12/20/10  (115 bp)  (61,840) 
DJ CDX NA IG Series 4           
Index 3-7% tranche  —  9,527,400  6/20/15  656 bp  74,091 
DJ CDX NA IG Series 4           
Index 3-7% tranche  —  15,535,000  6/20/15  600 bp  (142,190) 
Goldman Sachs International           
one of the underlying           
securities in the           
basket of BB CMBS           
securities  —  28,743,000  (a)  2.461%  1,600,482 
JPMorgan Chase Bank, N.A.           
DJ CDX NA HY Series 4           
Index  (213,641)  15,255,360  6/20/10  (360 bp)  (761,957) 

63

CREDIT DEFAULT CONTRACTS OUTSTANDING at 3/31/06 (Unaudited) continued   
  Upfront        Fixed payments  Unrealized 
Swap counterparty /  premium    Notional  Termination  received (paid) by  appreciation/ 
Referenced Debt*  received (paid)**    amount  date  fund per annum  (depreciation) 
 
Lehman Brothers Special Financing, Inc.           
DJ CDX NA IG Series 4             
Index  $ (33,297)    $ 6,606,000  6/20/15  (65 bp)  $ (17,090) 
DJ CDX NA IG Series 4             
Index 10-15% tranche  —    6,606,000  6/20/15  59 bp  73,040 
DJ CDX NA IG Series 4             
Index  (2)    6,580,000  12/20/15  (70 bp)  (31,740) 
DJ CDX NA IG Series 5             
Index 10-15% tranche  —    6,580,000  12/20/15  57.5 bp  65,219 
DJ CDX NA IG Series 4             
Index 3-7% tranche  —    12,735,000  6/20/10  (124.5 bp)  (239,864) 
DJ CDX NA IG HVOL             
Series 4 Index  (30,020)    2,653,000  6/20/10  (90 bp)  (18,639) 
DJ CDX NA IG Series 4             
Index 3-7% tranche  —    2,653,000  6/20/12  309 bp  83,039 
DJ CDX NA IG HVOL             
Series 5 Index  (19,168)    3,578,000  12/20/10  (85 bp)  (27,588) 
DJ CDX NA HY Series 4             
Index  (50,363)    14,913,600  6/20/10  (360 bp)  (586,395) 
DJ CDX NA HY Series 4             
Index  (164,514)    15,322,560  6/20/10  (360 bp)  (715,245) 
DJ CDX NA HY Series 3             
Index  142,322    6,240,000  6/20/10  (360 bp)  366,603 
DJ CDX NA HY Series 4             
Index  (108,177)    9,174,720  6/20/10  (360 bp)  (437,939) 
DJ CDX NA HY Series 4             
Index  137,923    29,952,000  6/20/10  (360 bp)  (938,627) 
DJ iTraxx Europe             
Series 4 Version 1  —  EUR  10,800,000  12/20/15  616.375 bp  787,048 
DJ iTraxx Europe             
Series 4 Version 1  —  EUR  19,440,000  12/20/12  (230 bp)  (824,157) 
DJ iTraxx Index 6-9%             
tranche  —  EUR  13,927,000  6/20/12  46.375 bp  44,177 
DJ iTraxx Index  13  EUR  13,927,000  6/20/12  (45 bp)  (52,893) 
Merrill Lynch International             
DJ CDX NA HY Series 4             
Index  168,664    $ 7,872,000  6/20/10  360 bp  451,603 
Merrill Lynch International & Co. C.V.           
DJ CDX NA IG Series 5             
Index 3-7% tranche  —    3,578,000  12/20/12  246 bp  47,587 
Morgan Stanley Capital Services, Inc.           
DJ CDX NA IG Series 4             
Index 10-15% tranche  —    6,782,000  6/20/15  70.5 bp  86,301 
DJ CDX NA IG Series 4             
Index  (43,989)    6,782,000  6/20/15  (65 bp)  (27,350) 
DJ CDX NA IG Series 5             
Index 3-7% tranche  —    8,998,000  12/20/12  305 bp  417,297 
DJ CDX NA IG Series 4             
Index 3-7% tranche  —    2,653,000  6/20/10  (110.5 bp)  (36,235) 
DJ CDX NA IG Series 4             
Index 3-7% tranche  —    15,778,000  6/20/10  (114 bp)  (236,670) 

64

CREDIT DEFAULT CONTRACTS OUTSTANDING at 3/31/06 (Unaudited) continued   
    Upfront      Fixed payments  Unrealized 
Swap counterparty /    premium  Notional  Termination  received (paid) by  appreciation/ 
Referenced Debt*  received (paid)**              amount  date  fund per annum  (depreciation) 
 
Morgan Stanley Capital Services, Inc.           
DJ CDX NA IG Series 4             
Index 3-7% tranche  $  —  $15,317,000  6/20/12  285 bp  $ 286,581 
DJ CDX NA IG Series 4             
Index 3-7% tranche    —  10,153,000  6/20/12  275 bp  136,626 
DJ CDX NA IG Series 4             
Index    (28,163)  13,213,000  6/20/12  (55 bp)  (27,150) 
DJ CDX NA IG Series 4             
Index 7-10% tranche    —  13,213,000  6/20/12  48 bp  92,887 
DJ CDX NA IG Series 5             
Index    (48,211)  3,465,810  12/20/10  (395 bp)  (182,824) 
DJ CDX NA IG Series 5             
Index 3-7% tranche    —  3,578,000  12/20/10  (115 bp)  (61,840) 
DJ CDX NA IG HVOL             
Series 5 Index    (20,099)  3,578,000  12/20/10  (85 bp)  (28,519) 
DJ CDX NA IG Series 5             
Index 3-7% tranche    —  3,578,000  12/20/12  248 bp  51,619 
DJ CDX NA HY Series 5             
Index    (106,859)  5,767,620  12/20/10  (395 bp)  (330,874) 
DJ CDX NA HY Series 5             
Index 25-35% tranche    —  11,892,000  12/20/10  145 bp  507,353 
DJ CDX NA HY Series 5             
Index 25-35% tranche    —  7,146,000  12/20/10  127 bp  257,923 
DJ iTraxx EUR Series 3             
Index 3-6% tranche    —  EUR 6,127,000  6/20/15  479 bp  (150,688) 
Total            $(6,597,974) 

* Payments related to the reference debt are made upon a credit default event.

** Upfront premium is based on the difference between the original spread on issue and the market spread on day of execution.

(a) Terminating on the date on which the notional amount is reduced to zero or the date on which the assets securing the reference entity are liquidated.

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

65

Statement of assets and liabilities 3/31/06 (Unaudited)   
 
ASSETS   
 
Investment in securities, at value, including $5,581,239 of securities on loan (Note 1):   
Unaffiliated issuers (identified cost $2,832,108,604)  $2,834,359,602 
Affiliated issuers (identified cost $226,849,201) (Note 5)  226,849,201 
Cash  11,397,387 
Foreign currency (cost $18,336,740) (Note 1)  18,445,102 
Interest and other receivables  43,047,181 
Receivable for shares of the fund sold  1,616,872 
Receivable for securities sold  21,861,246 
Receivable for sales of delayed delivery securities (Note 1)  14,668,462 
Receivable for open forward currency contracts (Note 1)  2,535,846 
Receivable for closed forward currency contracts (Note 1)  1,267,041 
Unrealized appreciation on swap contracts (Note 1)  37,350,968 
Receivable for closed swap contracts (Note 1)  896,169 
Premiums paid on swap contracts (Note 1)  2,004,040 
Total assets  3,216,299,117 
 
LIABILITIES   
 
Payable for variation margin (Note 1)  636,942 
Payable for securities purchased  24,127,266 
Payable for purchases of delayed delivery securities (Note 1)  24,419,623 
Payable for shares of the fund repurchased  8,024,790 
Payable for compensation of Manager (Notes 2 and 5)  4,354,899 
Payable for investor servicing and custodian fees (Note 2)  214,599 
Payable for Trustee compensation and expenses (Note 2)  360,009 
Payable for administrative services (Note 2)  4,300 
Payable for distribution fees (Note 2)  1,791,376 
Payable for open forward currency contracts (Note 1)  5,068,861 
Payable for closed forward currency contracts (Note 1)  3,177,940 
TBA sale commitments, at value (proceeds receivable $14,643,422) (Note 1)  14,541,469 
Written options outstanding, at value (premiums received $2,178,225) (Note 1)  4,502,302 
Unrealized depreciation on swap contracts (Note 1)  33,129,153 
Collateral on securities loaned, at value (Note 1)  5,711,400 
Other accrued expenses  356,321 
Total liabilities  130,421,250 
Net assets  $3,085,877,867 
 
(Continued on next page)   

66

Statement of assets and liabilities (Continued)

REPRESENTED BY   
 
Paid-in capital (Unlimited shares authorized) (Notes 1 and 4)  $3,930,755,437 
Undistributed net investment income (Note 1)  16,290,833 
Accumulated net realized loss on investments and foreign   
currency transactions (Note 1)  (864,898,403) 
Net unrealized appreciation of investments and assets and   
liabilities in foreign currencies  3,730,000 
Total — Representing net assets applicable to capital shares outstanding  $3,085,877,867 
 
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE   
 
Net asset value and redemption price per class A share   
($1,301,696,158 divided by 132,614,797 shares)  $9.82 
Offering price per class A share   
(100/96.25 of $9.82)*  $10.20 
Net asset value and offering price per class B share   
($325,869,385 divided by 33,467,307 shares)**  $9.74 
Net asset value and offering price per class C share   
($162,021,616 divided by 16,609,852 shares)**  $9.75 
Net asset value and redemption price per class M share   
($1,279,486,778 divided by 131,522,055 shares)  $9.73 
Offering price per class M share   
(100/96.75 of $9.73)***  $10.06 
Net asset value, offering price and redemption price per class R share   
($642,057 divided by 65,521 shares)  $9.80 
Net asset value, offering price and redemption price per class Y share   
($16,161,873 divided by 1,645,695 shares)  $9.82 

* On single retail sales of less than $100,000. On sales of $100,000 or more and on group sales, the offering price is reduced.

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

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

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

67

Statement of operations Six months ended 3/31/06 (Unaudited)   
 
INVESTMENT INCOME   
 
Interest (including interest income of $2,686,504 from investments   
in affiliated issuers) (Note 5)  $106,186,292 
Securities lending  10,764 
Total investment income  106,197,056 
 
EXPENSES   
 
Compensation of Manager (Note 2)  9,369,214 
Investor servicing fees (Note 2)  1,724,950 
Custodian fees (Note 2)  323,104 
Trustee compensation and expenses (Note 2)  63,669 
Administrative services (Note 2)  35,828 
Distribution fees — Class A (Note 2)  1,650,627 
Distribution fees — Class B (Note 2)  1,795,500 
Distribution fees — Class C (Note 2)  950,458 
Distribution fees — Class M (Note 2)  3,768,991 
Distribution fees — Class R (Note 2)  1,503 
Other  373,558 
Non-recurring costs (Notes 2 and 8)  17,013 
Costs assumed by Manager (Notes 2 and 8)  (17,013) 
Fees waived and reimbursed by Manager or affiliate (Notes 5 and 8)  (298,910) 
Total expenses  19,758,492 
Expense reduction (Note 2)  (611,633) 
Net expenses  19,146,859 
Net investment income  87,050,197 
Net realized loss on investments (Notes 1 and 3)  (7,738,786) 
Net realized loss on swap contracts (Note 1)  (1,786,254) 
Net realized gain on futures contracts (Note 1)  5,373,911 
Net realized loss on foreign currency transactions (Note 1)  (2,777,077) 
Net unrealized depreciation of assets and liabilities   
in foreign currencies during the period  (5,437,360) 
Net unrealized depreciation of investments, futures contracts,   
swap contracts, written options, and TBA sale commitments during the period  (46,631,960) 
Net loss on investments  (58,997,526) 
Net increase in net assets resulting from operations  $ 28,052,671 

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

68

Statement of changes in net assets   
 
DECREASE IN NET ASSETS     
  Six months ended  Year ended 
  3/31/06*  9/30/05 
Operations:     
Net investment income  $ 87,050,197  $ 230,466,692 
Net realized gain (loss) on investments     
and foreign currency transactions  (6,928,206)  173,242,773 
Net unrealized depreciation of investments     
and assets and liabilities in foreign currencies  (52,069,320)  (97,732,675) 
Net increase in net assets resulting from operations  28,052,671  305,976,790 
Distributions to shareholders: (Note 1)     
From net investment income     
Class A  (63,625,359)  (72,352,278) 
Class B  (16,223,847)  (21,100,795) 
Class C  (8,590,126)  (10,950,053) 
Class M  (72,316,545)  (144,919,817) 
Class R  (28,001)  (18,536) 
Class Y  (1,058,842)  (1,593,689) 
Redemption fees (Note 1)  2,019  4,507 
Decrease from capital share transactions (Note 4)  (693,301,659)  (1,466,401,168) 
Total decrease in net assets  (827,089,689)  (1,411,355,039) 
 
NET ASSETS     
 
Beginning of period  3,912,967,556  5,324,322,595 
End of period (including undistributed net investment     
income of $16,290,833 and $91,083,356, respectively)  $3,085,877,867  $ 3,912,967,556 

* Unaudited.  		   

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

69

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

INVESTMENT OPERATIONS:        LESS DISTRIBUTIONS:          RATIOS AND SUPPLEMENTAL DATA:   
      Net              Total     Ratio of net   
     Net asset    realized and  Total  From        Net asset  return  Net  Ratio of  investment   
  value,  Net  unrealized  from  net  From      value,  at net  assets, expenses to     income (loss)  Portfolio 
  beginning  investment  gain (loss) on  investment  investment  return of  Total  Redemption  end  asset  end of period average net    to average  turnover 
Period ended  of period  income (loss)(a)  investments  operations  income  capital  distributions  fees  of period  value (%)(b)   (in thousands)  assets (%)(c)   net assets (%)  (%) 
 
CLASS A                             
March 31, 2006**  $10.20  .27(d,e)  (.17)  .10  (.48)  —  (.48)  —(f )  $9.82  1.05*  $1,301,696  .46*(d,e)  2.66*(d,e)  44.17*(g) 
September 30, 2005  10.10  .51(d)  .13  .64  (.54)  —  (.54)  —(f)   10.20  6.50  1,364,862  .91(d)  4.97(d)  125.82(g) 
September 30, 2004  9.85  .54(d)  .39  .93  (.68)  —  (.68)  —(f )  10.10  9.73  1,340,885  .95(d)  5.44(d)  99.17 
September 30, 2003  8.89  .68  1.00  1.68  (.72)  —  (.72)  —  9.85  19.65  1,478,254  .96  7.22  146.21(h) 
September 30, 2002  9.26  .73  (.31)  .42  (.74)  (.05)  (.79)  —  8.89  4.61  1,296,859  .94  7.96  209.42(h,i) 
September 30, 2001  10.13  .84  (.81)  .03  (.68)  (.22)  (.90)  —  9.26  .22  1,378,591  .95  8.75  150.11(h) 
 
CLASS B                             
March 31, 2006**  $10.12  .23(d,e)  (.17)  .06  (.44)  —  (.44)  —(f )  $9.74  .67*  $325,869  .84*(d,e)  2.29*(d,e)  44.17*(g) 
September 30, 2005  10.02  .43(d)  .14  .57  (.47)  —  (.47)  —(f)  10.12  5.72  391,133  1.66(d)  4.23(d)  125.82(g) 
September 30, 2004  9.78  .47(d)  .37  .84  (.60)  —  (.60)  —(f)   10.02  8.85  516,726  1.70(d)  4.73(d)  99.17 
September 30, 2003  8.84  .61  .98  1.59  (.65)  —  (.65)  —  9.78  18.67  742,979  1.71  6.49  146.21(h) 
September 30, 2002  9.22  .66  (.32)  .34  (.68)  (.04)  (.72)  —  8.84  3.70  696,733  1.69  7.20  209.42(h,i) 
September 30, 2001  10.09  .79  (.83)  (.04)  (.63)  (.20)  (.83)  —  9.22  (.53)  738,611  1.70  8.01  150.11(h) 
 
CLASS C                             
March 31, 2006**  $10.14  .23(d,e)  (.18)  .05  (.44)  —  (.44)  —(f )   $9.75  .57*  $162,022  .84*(d,e)  2.30*(d,e)  44.17*(g) 
September 30, 2005  10.04  .43(d)  .14  .57  (.47)  —  (.47)  —(f)   10.14  5.71  226,005  1.66(d)  4.23(d)  125.82 
September 30, 2004  9.80  .47(d)  .37  .84  (.60)  —  (.60)  —(f )  10.04  8.87  265,151  1.70(d)  4.67(d)  99.17 
September 30, 2003  8.86  .57  1.03  1.60  (.66)  —  (.66)  —  9.80  18.70  237,437  1.71  6.10  146.21(h) 
September 30, 2002  9.24  .65  (.31)  .34  (.68)  (.04)  (.72)  —  8.86  3.72  26,673  1.69  7.17  209.42(h,i) 
September 30, 2001  10.11  .77  (.81)  (.04)  (.63)  (.20)  (.83)  —  9.24  (.50)  18,589  1.70  7.96  150.11(h) 
 
CLASS M                             
March 31, 2006**  $10.11  .25(d,e)  (.16)  .09  (.47)  —  (.47)  —(f )   $9.73  94*  $1,279,487  .59*(d,e)  2.55*(d,e)  44.17*(g) 
September 30, 2005  10.02  .48(d)  .13  .61  (.52)  —  (.52)  —(f)   10.11  6.19  1,898,276  1.16(d)  4.73(d)  125.82(g) 
September 30, 2004  9.78  .51(d)  .38  .89  (.65)  —  (.65)  —(f)   10.02  9.43  3,174,449  1.20(d)  5.17(d)  99.17 
September 30, 2003  8.83  .65  1.00  1.65  (.70)  —  (.70)  —  9.78  19.37  3,004,689  1.21  6.96  146.21(h) 
September 30, 2002  9.22  .70  (.32)  .38  (.72)  (.05)  (.77)  —  8.83  4.13  2,258,273  1.19  7.68  209.42(h,i) 
September 30, 2001  10.09  .81  (.80)  .01  (.67)  (.21)  (.88)  —  9.22  (.02)  1,368,935  1.20  8.47  150.11(h) 
 
CLASS R                             
March 31, 2006**  $10.18  .25(d,e)  (.16)  .09  (.47)  —  (.47)  —(f)   $9.80  93*  $642  .59*(d,e)  2.53*(d,e)  44.17*(g) 
September 30, 2005  10.09  .48(d)  .14  .62  (.53)  —  (.53)  —(f)   10.18  6.20  563  1.16(d)  4.66(d)  125.82(g) 
September 30, 2004†  9.93  .46(d)  .24  .70  (.54)  —  (.54)  —(f)   10.09  7.30*  94  1.00*(d)  4.32*(d)  99.17 
 
CLASS Y                             
March 31, 2006**  $10.20  .28(d,e)  (.17)  .11  (.49)  —  (.49)  —(f)   $9.82  1.17*  $16,162  .34*(d,e)  2.80*(d,e)  44.17*(g) 
September 30, 2005  10.10  .53(d)  .14  .67  (.57)  —  (.57)  —(f)   10.20  6.74  32,129  .66(d)  5.22(d)  125.82(g) 
September 30, 2004  9.85  .56(d)  .39  .95  (.70)  —  (.70)  —(f)   10.10  9.99  27,017  .70(d)  5.68(d)  99.17 
September 30, 2003  8.89  .70  1.00  1.70  (.74)  —  (.74)  —  9.85  19.96  25,427  .71  7.45  146.21(h) 
September 30, 2002  9.28  .77  (.34)  .43  (.77)  (.05)  (.82)  —  8.89  4.65  17,109  .69  8.20  209.42(h,i) 
September 30, 2001  10.15  .85  (.80)  .05  (.70)  (.22)  (.92)  —  9.28  .48  24,014  .70  8.98  150.11(h) 

See notes to financial highlights at the end of this section.

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

70  71 

Financial highlights (Continued)

* Not annualized.

** Unaudited.

† For the period December 1, 2003 (commencement of operations) to September 30, 2004.

(a) Per share net investment income (loss) has been determined on the basis of the weighted average number of shares outstanding during the period.

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

(c) Includes amounts paid through expense offset arrangements (Note 2).

(d) Reflects waivers of certain fund expenses in connection with investments in Putnam Prime Market Fund during the period. As a result of such waivers, the expenses of each class, as a percentage of its net assets, reflect a reduction of the following amounts (Note 5):

  3/31/06  9/30/05  9/30/04 
Class A  <0.01%  0.01%  <0.01% 
Class B  <0.01  0.01  <0.01 
Class C  <0.01  0.01  <0.01 
Class M  <0.01  0.01  <0.01 
Class R  <0.01  0.01  <0.01 
Class Y  <0.01  0.01  <0.01 

(e) Reflects a non-recurring accrual related to a reimbursement to the fund from Putnam Investments relating to the calculation of certain amounts paid by the fund to Putnam in previous years for transfer agent services, in the following amounts (Note 8):

    Percentage of 
  Per share  net assets 
Class A  <$0.01  0.01% 
Class B  <0.01  0.01 
Class C  <0.01  0.01 
Class M  <0.01  0.01 
Class R  <0.01  0.01 
Class Y  <0.01  0.01 

(f) Amount represents less than $0.01 per share.

(g) Portfolio turnover excludes dollar roll transactions.

(h) Portfolio turnover excludes certain treasury note transactions executed in connection with a short-term trading strategy.

(i) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam Strategic Income Fund.

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

72

Notes to financial statements 3/31/06 (Unaudited)

Note 1: Significant accounting policies

Putnam Diversified Income Trust (the “fund”), a Massachusetts business trust, is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The fund seeks as high a level of current income as Putnam Investment Management, LLC (“Putnam Management”), the fund’s manager, an indirect wholly-owned subsidiary of Putnam, LLC, believes is consistent with preservation of capital by allocating its investments among the U.S. government and investment-grade corporate, the high-yield corporate and the international sectors of the fixed-income securities market. The fund invests in higher yielding, lower rated bonds that may have a higher rate of default.

The fund offers class A, class B, class C, class M, class R and class Y shares. Class A and class M shares are sold with a maximum front-end sales charge of 3.75% and 3.25%, respectively, and generally do not pay a contingent deferred sales charge. Class B shares, which convert to class A shares after approximately eight years, do not pay a front-end sales charge and are subject to a contingent deferred sales charge, if those shares are redeemed within six years of purchase. Class C shares have a one-year 1.00% contingent deferred sales charge and do not convert to class A shares. Class R shares, which are offered to qualified employee-benefit plans are sold without a front-end sales charge or a contingent deferred sales charge. The expenses for class A, class B, class C, class M and class R shares may differ based on the distribution fee of each class, which is identified in Note 2. Class Y shares, which are sold at net asset value, are generally subject to the same expenses as class A, class B, class C, class M and class R shares, but do not bear a distribution fee. Class Y shares are sold to certain eligible purchasers including certain defined contribution plans (including corporate IRAs), bank trust departments and trust companies.

A 2.00% redemption fee may apply to any shares that are redeemed (either by selling or exchanging into another fund) within 5 days of purchase. The redemption fee is accounted for as an addition to paid-in-capital.

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

In the normal course of business, the fund enters into contracts that may include agreements to indemnify another party under given circumstances. The fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be, but have not yet been, made against the fund. However, the fund expects the risk of material loss to be remote.

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

A) Security valuation Market quotations are not considered to be readily available for certain debt obligations; such investments are valued on the basis of valuations furnished by an independent pricing service approved by the Trustees or dealers selected by Putnam Management. Such services or dealers determine valuations for normal institutional-size trading units of such

73

securities using methods based on market transactions for comparable securities and various relationships, generally recognized by institutional traders, between securities. Securities quoted in foreign currencies, if any, are translated into U.S. dollars at the current exchange rate. Other investments, including certain restricted securities, are valued at fair value following procedures approved by the Trustees. Such valuations and procedures are reviewed periodically by the Trustees.

B) Joint trading account Pursuant to an exemptive order from the Securities and Exchange Commission, the fund may transfer uninvested cash balances, including cash collateral received under security lending arrangements, into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Management. These balances may be invested in issues of high-grade short-term investments having maturities of up to 397 days for collateral received under security lending arrangements and up to 90 days for other cash investments.

C) Repurchase agreements The fund, or any joint trading account, through its custodian, receives delivery of the underlying securities, the market value of which at the time of purchase is required to be in an amount at least equal to the resale price, including accrued interest. Collateral for certain tri-party repurchase agreements is held at the counterparty’s custodian in a segregated account for the benefit of the fund and the coun-terparty. Putnam Management is responsible for determining that the value of these underlying securities is at all times at least equal to the resale price, including accrued interest.

D) Security transactions and related investment income Security transactions are recorded on the trade date (the date the order to buy or sell is executed). Gains or losses on securities sold are determined on the identified cost basis.

Interest income is recorded on the accrual basis. All premiums/discounts are amortized/accreted on a yield-to-maturity basis.

Securities purchased or sold on a delayed delivery basis may be settled a month or more after the trade date; interest income is accrued based on the terms of the securities. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract.

The fund earned certain fees in connection with its senior loan purchasing activities. These fees are treated as market discount and are recorded as income in the statement of operations.

E) Stripped mortgage-backed securities The fund may invest in stripped mortgage-backed securities which represent a participation in mortgage loans and may be structured in classes with rights to receive different portions of the interest and principal. Interest-only securities receive all of the interest and principal-only securities receive all of the principal. If the interest-only securities experience greater than anticipated prepayments of principal, the fund may fail to recoup fully its initial investment in these securities. Conversely, principal-only securities increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. The market value of these securities is highly sensitive to changes in interest rates.

F) Foreign currency translation The accounting records of the fund are maintained in U.S. dollars. The market value of foreign securities, currency holdings, and other assets and liabilities are recorded in the books and records of the fund after translation to U.S. dollars based on the exchange rates on that day. The cost of each security is determined using historical exchange rates. Income and withholding taxes are translated at prevailing exchange rates when earned or incurred. The fund does not isolate that portion of realized or unrealized gains or losses resulting from changes in the foreign exchange rate on investments from fluctua-tions arising from changes in the market prices of the securities. Such gains and losses are included with the net realized and unrealized gain or loss on investments. Net realized gains and losses on

74

foreign currency transactions represent net realized exchange gains or losses on closed forward currency contracts, disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the fund’s books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized appreciation and depreciation of assets and liabilities in foreign currencies arise from changes in the value of open forward currency contracts and assets and liabilities other than investments at the period end, resulting from changes in the exchange rate. Investments in foreign securities involve certain risks, including those related to economic instability, unfavorable political developments, and currency fluctuations, not present with domestic investments.

G) Forward currency contracts The fund may buy and sell forward currency contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date. These contracts are used to protect against a decline in value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of a currency in which securities a fund intends to buy are denominated, when a fund holds cash reserves and short term investments), or for other investment purposes. The U.S. dollar value of forward currency contracts is determined using current forward currency exchange rates supplied by a quotation service. The market value of the contract will fluctuate with changes in currency exchange rates. The contract is marked to market daily and the change in market value is recorded as an unrealized gain or loss. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The fund could be exposed to risk if the value of the currency changes unfavorably, if the counterparties to the contracts are unable to meet the terms of their contracts or if the fund is unable to enter into a closing position. Risks may exceed amounts recognized on the statement of assets and liabilities. Forward currency contracts outstanding at period end, if any, are listed after the fund’s portfolio.

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

The potential risk to the fund is that the change in value of futures and options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty to the contract is unable to perform. Risks may exceed amounts recognized on the statement of assets and liabilities. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction to the cost of investments.

Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. The fund and the broker agree to exchange an amount of cash equal to the daily fluctuation in the value of the futures contract. Such receipts or payments are known as “variation margin.” Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied

75

by dealers. Futures and written option contracts outstanding at period end, if any, are listed after the fund’s portfolio.

I) Total return swap contracts The fund may enter into total return swap contracts, which are arrangements to exchange a market linked return for a periodic payment, both based on a notional principal amount. To the extent that the total return of the security, index or other financial measure underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the fund will receive a payment from or make a payment to the counterparty. Total return swap contracts are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss. Payments received or made are recorded as realized gains or loss. The fund could be exposed to credit or market risk due to unfavorable changes in the fluctuation of interest rates or in the price of the underlying security or index, the possibility that there is no liquid market for these agreements or that the counterparty may default on its obligation to perform. Risk of loss may exceed amounts recognized on the statement of assets and liabilities. Total return swap contracts outstanding at period end, if any, are listed after the fund’s portfolio.

J) Interest rate swap contracts The fund may enter into interest rate swap contracts, which are arrangements between two parties to exchange cash flows based on a notional principal amount, to manage the fund’s exposure to interest rates. Interest rate swap contracts are marked to market daily based upon quotations from an independent pricing service or market makers and the change, if any, is recorded as unrealized gain or loss. Payments received or made are recorded as realized gains or loss. The fund could be exposed to credit or market risk due to unfavorable changes in the fluctuation of interest rates or if the counterparty defaults on its obligation to perform. Risk of loss may exceed amounts recognized on the statement of assets and liabilities. Interest rate swap contracts outstanding at period end, if any, are listed after the fund’s portfolio.

K) Credit default contracts The fund may enter into credit default contracts where one party, the protection buyer, makes an upfront or periodic payment to a counter party, the protection seller, in exchange for the right to receive a contingent payment. The maximum amount of the payment may equal the notional amount, at par, of the underlying index or security as a result of a related credit event. An upfront payment received by the fund, as the protection seller, is recorded as a liability on the fund’s books. An upfront payment made by the fund, as the protection buyer, is recorded as an asset on the fund’s books. Periodic payments received or paid by the fund are recorded as realized gains or losses. The credit default contracts are marked to market daily based upon quotations from an independent pricing service or market makers and the change, if any, is recorded as unrealized gain or loss. Payments received or made as a result of a credit event or termination of the contract are recognized, net of a proportional amount of the upfront payment, as realized gains or losses. In addition to bearing the risk that the credit event will occur, the fund could be exposed to market risk due to unfavorable changes in interest rates or in the price of the underlying security or index, the possibility that the fund may be unable to close out its position at the same time or at the same price as if it had purchased comparable publicly traded securities or that the counterparty may default on its obligation to perform. Risks of loss may exceed amounts recognized on the statement of assets and liabilities. Credit default contracts outstanding at period end, if any, are listed after the fund’s portfolio.

L) TBA purchase commitments The fund may enter into “TBA” (to be announced) commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the

76

amount of the commitments will not significantly differ from the principal amount. The fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the fund’s other assets. Unsettled TBA purchase commitments are valued at fair value of the underlying securities, according to the procedures described under “Security valuation” above. The contract is “marked-to-market” daily and the change in market value is recorded by the fund as an unrealized gain or loss.

Although the fund will generally enter into TBA purchase commitments with the intention of acquiring securities for its portfolio or for delivery pursuant to options contracts it has entered into, the fund may dispose of a commitment prior to settlement if Putnam Management deems it appropriate to do so.

M) TBA sale commitments The fund may enter into TBA sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as “cover” for the transaction.

Unsettled TBA sale commitments are valued at fair value of the underlying securities, generally according to the procedures described under “Security valuation” above. The contract is “marked-to-market” daily and the change in market value is recorded by the fund as an unrealized gain or loss. If the TBA 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 unit price established at the date the commitment was entered into. TBA sale commitments outstanding at period end, if any, are listed after the fund’s portfolio.

N) Dollar rolls To enhance returns, the fund may enter into dollar rolls (principally using TBAs) in which the fund sells securities for delivery in the current month and simultaneously contracts to purchase similar securities on a specified future date. During the period between the sale and subsequent purchase, the fund will not be entitled to receive income and principal payments on the securities sold. The fund will, however, retain the difference between the initial sales price and the forward price for the future purchase. The fund will also be able to earn interest on the cash proceeds that are received from the initial sale. The fund may be exposed to market or credit risk if the price of the security changes unfavorably or the counterparty fails to perform under the terms of the agreement.

O) Security lending The fund may lend securities, through its agents, to qualified borrowers in order to earn additional income. The loans are collateralized by cash and/or securities in an amount at least equal to the market value of the securities loaned. The market value of securities loaned is determined daily and any additional required collateral is allocated to the fund on the next business day. The risk of borrower default will be borne by the fund’s agents; the fund will bear the risk of loss with respect to the investment of the cash collateral. Income from securities lending is included in investment income on the statement of operations. At March 31, 2006, the value of securities loaned amounted to $5,581,239. The fund received cash collateral of $5,711,400 which is pooled with collateral of other Putnam funds into 29 issues of high grade short-term investments.

P) Federal taxes It is the policy of the fund to distribute all of its taxable income within the

77

prescribed time and otherwise comply with the provisions of the Internal Revenue Code of 1986 (the “Code”) applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Code, as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains.

At September 30, 2005, the fund had a capital loss carryover of $856,047,835 available to the extent allowed by the Code to offset future net capital gain, if any. The amount of the carryover and the expiration dates are:

Loss Carryover  Expiration 
 
$ 34,614,725  September 30, 2007 
230,732,644  September 30, 2008 
110,840,621  September 30, 2009 
164,353,970  September 30, 2010 
311,230,234  September 30, 2011 
4,275,641  September 30, 2012 

The aggregate identified cost on a tax basis is $3,061,582,916, resulting in gross unrealized appreciation and depreciation of $75,491,038 and $75,865,151, respectively, or net unrealized depreciation of $374,113.

Q) Distributions to shareholders Distributions to shareholders from net investment income are recorded by the fund on the ex-dividend date. Distributions from capital gains, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. Dividend sources are estimated at the time of declaration. Actual results may vary. Any non-taxable return of capital cannot be determined until final tax calculations are completed after the end of the fund’s fiscal year. Reclassifications are made to the fund’s capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations.

Note 2: Management fee, administrative services and other transactions

Putnam Management is paid for management and investment advisory services quarterly based on the average net assets of the fund. Such fee is based on the following annual rates: 0.70% of the first $500 million of average net assets, 0.60% of the next $500 million, 0.55% of the next $500 million, 0.50% of the next $5 billion, 0.475% of the next $5 billion, 0.455% of the next $5 billion, 0.44% of the next $5 billion and 0.43% thereafter.

Putnam Management has agreed to waive fees and reimburse expenses of the fund through September 30, 2006 to the extent necessary to ensure that the fund’s expenses do not exceed the simple average of the expenses of all front-end load funds viewed by Lipper Inc. as having the same investment classification or objective as the fund. The expense reimbursement is based on a comparison of the fund’s expenses with the average annualized operating expenses of the funds in its Lipper peer group for each calendar quarter during the fund’s last fiscal year, excluding 12b-1 fees and without giving effect to any expense offset and brokerage service arrangements that may reduce fund expenses.

For the period ended March 31, 2006, Putnam Management did not waive any of its management fee from the fund. For the period ended March 31, 2006, Putnam Management has assumed $17,013 of legal, shareholder servicing and communication, audit and Trustee fees incurred by the fund in connection with certain legal and regulatory matters (including those described in Note 8).

Putnam Investments Limited (“PIL”), an affiliate of Putnam Management, is authorized by the Trustees to manage a separate portion of the assets of the fund as determined by Putnam Management from time to time. Putnam Management pays a quarterly sub-management fee to PIL for its services at an annual rate of

78

0.40% of the average net assets of the portion of the fund managed by PIL.

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

Custodial functions for the fund’s assets are provided by Putnam Fiduciary Trust Company (“PFTC”), a subsidiary of Putnam, LLC. PFTC receives fees for custody services based on the fund’s asset level, the number of its security holdings and transaction volumes. Putnam Investor Services, a division of PFTC, provides investor servicing agent functions to the fund. Putnam Investor Services receives fees for investor servicing based on the number of shareholder accounts in the fund and the level of defined contribution plan assets in the fund. During the period ended March 31, 2006, the fund incurred $2,048,054 for these services.

The fund has entered into an arrangement with PFTC whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the fund’s expenses. For the six months ended March 31, 2006, the fund’s expenses were reduced by $611,633 under these arrangements.

Each independent Trustee of the fund receives an annual Trustee fee, of which $861, as a quarterly retainer, has been allocated to the fund, and an additional fee for each Trustees meeting attended. Trustees receive additional fees for attendance at certain committee meetings, industry seminars and for certain compliance-related matters. Trustees also are reimbursed for expenses they incur relating to their services as Trustees. George Putnam, III, who is not an independent Trustee, also receives the foregoing fees for his services as Trustee.

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

The fund has adopted an unfunded noncontributory defined benefit pension plan (the “Pension Plan”) covering all Trustees of the fund who have served as a Trustee for at least five years and were first elected prior to 2004. Benefits under the Pension Plan are equal to 50% of the Trustee’s average annual attendance and retainer fees for the three years ended December 31, 2005. Pension expense for the fund is included in Trustee compensation and expenses in the statement of operations. Accrued pension liability is included in Payable for Trustee compensation and expenses in the statement of assets and liabilities. The Trustees have terminated the Pension Plan with respect to any Trustee first elected after 2003.

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

For the six months ended March 31, 2006, Putnam Retail Management, acting as underwriter, received net commissions of $49,833 and $614 from the sale of class A and class M shares, respectively, and received $211,247 and $2,970 in contingent deferred sales charges from redemptions of class B and class C shares, respectively.

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A deferred sales charge of up to 1.00% and 0.40% is assessed on certain redemptions of class A and class M shares, respectively. For the six months ended March 31, 2006, Putnam Retail Management, acting as underwriter, received $511 and no monies on class A and class M redemptions, respectively.

Note 3: Purchases and sales of securities

During the six months ended March 31, 2006, cost of purchases and proceeds from sales of investment securities other than U.S. government securities and short-term investments aggregated $1,417,685,090 and $2,193,655,175 respectively. Purchases and sales of U.S. government securities aggregated no monies and $146,128,718, respectively.

Written option transactions during the period
ended March 31, 2006 are summarized as follows:

    Contract    Premiums 
    Amounts    Received 
 
Written options       
outstanding at       
beginning of period  —  $               — 
Options         
opened                                                                      JPY 133,030,839,000  2,178,225 
Options exercised  —    — 
Options expired  —    — 
Options closed  —    — 
Written options       
outstanding       
at end end       
of period    JPY  133,030,839,000 $2,178,225 

Note 4: Capital shares

At March 31, 2006, there was an unlimited number
of shares of beneficial interest authorized.
Transactions in capital shares were as follows:

CLASS A  Shares    Amount 
 
Six months ended 3/31/06:     
Shares sold  11,174,002  $ 111,230,524 
Shares issued       
in connection       
with reinvestment       
of distributions  4,789,448    47,318,197 
  15,963,450    158,548,721 
Shares       
repurchased  (17,186,548)  (171,330,991) 
Net decrease  (1,223,098)  $  (12,782,270) 
 
Year ended 9/30/05:       
Shares sold  27,673,623  $ 283,462,115 
Shares issued       
in connection       
with reinvestment       
of distributions  5,161,530    52,768,581 
  32,835,153    336,230,696 
Shares       
repurchased  (31,761,405)  (325,159,459) 
Net increase  1,073,748  $  11,071,237 
 
CLASS B  Shares    Amount 
 
Six months ended 3/31/06:     
Shares sold  2,162,634  $  21,398,984 
Shares issued       
in connection       
with reinvestment       
of distributions  1,180,714    11,569,138 
  3,343,348    32,968,122 
Shares       
repurchased  (8,529,299)    (84,299,625) 
Net decrease  (5,185,951)  $  (51,331,503) 
 
Year ended 9/30/05:       
Shares sold  5,816,447  $  59,103,683 
Shares issued       
in connection       
with reinvestment       
of distributions  1,472,692    14,949,019 
  7,289,139    74,052,702 
Shares       
repurchased  (20,190,532)  (205,189,960) 
Net decrease  (12,901,393)  $ (131,137,258) 

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CLASS C  Shares    Amount 
 
Six months ended 3/31/06:     
Shares sold  622,265  $ 6,159,489 
Shares issued       
in connection       
with reinvestment       
of distributions  130,680    1,282,801 
  752,945    7,442,290 
Shares       
repurchased  (6,439,285)    (63,931,823) 
Net decrease  (5,686,340)  $ (56,489,533) 
 
Year ended 9/30/05:     
Shares sold  8,751,604    $ 89,125,080 
Shares issued       
in connection       
with reinvestment       
of distributions  137,020    1,393,634 
  8,888,624    90,518,714 
Shares       
repurchased  (13,003,377)    (132,347,064) 
Net decrease  (4,114,753)  $ (41,828,350) 
 
CLASS M  Shares    Amount 
 
Six months ended 3/31/06:     
Shares sold  108,248  $  1,066,800 
Shares issued       
in connection       
with reinvestment       
of distributions  87,906    860,700 
  196,154    1,927,500 
Shares       
repurchased  (56,411,410)    (559,629,023) 
Net decrease  (56,215,256)  $  (557,701,523) 
 
Year ended 9/30/05:     
Shares sold  25,877,581  $  263,301,936 
Shares issued       
in connection       
with reinvestment       
of distributions  106,838    1,083,559 
  25,984,419    264,385,495 
Shares       
repurchased  (155,063,889)  (1,574,239,288) 
Net decrease  (129,079,470)  $  (1,309,853,793)

CLASS R                                                                             Shares                                                                            Amount 
 
Six months ended 3/31/06:   
Shares sold  15,110  $ 150,931 
Shares issued     
in connection     
with reinvestment     
of distributions  2,840  28,001 
  17,950  178,932 
Shares     
repurchased  (7,700)  (77,068) 
Net increase  10,250  $ 101,864 
 
Year ended 9/30/05:     
Shares sold  48,096  $ 493,168 
Shares issued     
in connection     
with reinvestment     
of distributions  1,814  18,536 
  49,910  511,704 
Shares     
repurchased  (3,933)  (40,237) 
Net increase  45,977  $ 471,467 
 
CLASS Y  Shares  Amount 
 
Six months ended 3/31/06:   
Shares sold  248,308  $ 2,467,628 
Shares issued     
in connection     
with reinvestment     
of distributions  106,468  1,053,948 
  354,776  3,521,576 
Shares     
repurchased  (1,858,315)  (18,620,270) 
Net decrease  (1,503,539)  $ (15,098,694) 
 
Year ended 9/30/05:     
Shares sold  1,175,655  $ 12,052,175 
Shares issued     
in connection     
with reinvestment     
of distributions  155,859  1,593,689 
  1,331,514  13,645,864 
Shares     
repurchased  (856,667)  (8,770,335) 
Net increase  474,847  $ 4,875,529 

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Note 5: Investment in Putnam Prime Money Market Fund

Pursuant to an exemptive order from the Securities and Exchange Commission, the fund invests in Putnam Prime Money Market Fund, an open-end management investment company managed by Putnam Management. Management fees paid by the fund are reduced by an amount equal to the management and administrative services fees paid by Putnam Prime Money Market Fund with respect to assets invested by the fund in Putnam Prime Money Market Fund. For the period ended March 31, 2006, management fees paid were reduced by $73,693 relating to the fund’s investment in Putnam Prime Money Market Fund. Income distributions earned by the fund are recorded as income in the statement of operations and totaled $2,686,504 for the period ended March 31, 2006. During the period ended March 31, 2006, cost of purchases and cost of sales of investments in Putnam Prime Money Market Fund aggregated $466,446,724 and $364,938,950, respectively.

Note 6: Senior loan commitments

Senior loans are purchased or sold on a when-issued or delayed delivery basis and may be settled a month or more after the trade date, which from time to time can delay the actual investment of available cash balances; interest income is accrued based on the terms of the securities. Senior loans can be acquired through an agent, by assignment from another holder of the loan, or as a participation interest in another holder’s portion of the loan. When the fund invests in a loan or participation, the fund is subject to the risk that an intermediate participant between the fund and the borrower will fail to meet its obligations to the fund, in addition to the risk that the borrower under the loan may default on its obligations.

Note 7: Unfunded loan commitments

As of March 31, 2006, the fund had unfunded loan commitments of $1,119,375, which could be extended at the option of the borrower, pursuant to the following loan agreement with the following borrower:

Borrower  Unfunded Commitments 
 
Trump Hotel &   
Casino Resort, Inc.  $1,119,375 

Note 8: Regulatory matters and litigation

Putnam Management has entered into agreements with the Securities and Exchange Commission and the Massachusetts Securities Division settling charges connected with excessive short-term trading by Putnam employees and, in the case of the charges brought by the Massachusetts Securities Division, by participants in some Putnam-administered 401(k) plans. Pursuant to these settlement agreements, Putnam Management will pay a total of $193.5 million in penalties and restitution, with $153.5 million being paid to certain open-end funds and their shareholders. The amount will be allocated to shareholders and funds pursuant to a plan developed by an independent consultant, and will be paid following approval of the plan by the SEC and the Massachusetts Securities Division.

The Securities and Exchange Commission’s and Massachusetts Securities Division’s allegations and related matters also serve as the general basis for numerous lawsuits, including purported class action lawsuits filed against Putnam Management and certain related parties, including certain Putnam funds. Putnam Management will bear any costs incurred by Putnam funds in connection with these lawsuits. Putnam Management believes that the likelihood that the pending private lawsuits and purported class action lawsuits will have a material adverse financial impact on the fund is remote, and the pending actions are not likely to materially affect its ability to provide

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investment management services to its clients, including the Putnam funds.

In March 2006, the fund received $225,217 from Putnam to address issues relating to the calculation of certain amounts paid by the Putnam mutual funds to Putnam for transfer agent services. This amount is included in Fees waived and reimbursed by Manager or affiliate on the Statement of operations. Review of this matter is ongoing and the amount received by the fund may be adjusted in the future. Such adjustment is not expected to be material.

Putnam Management and Putnam Retail Management are named as defendants in a civil suit in which the plaintiffs allege that the management and distribution fees paid by certain Putnam funds were excessive and seek recovery under the Investment Company Act of 1940. Putnam Management and Putnam Retail Management have contested the plaintiffs’ claims and the matter is currently pending in the U.S. District Court for the District of Massachusetts. Based on currently available information, Putnam Management believes that this action is without merit and that it is unlikely to have a material effect on Putnam Management’s and Putnam Retail Management’s ability to provide services to their clients, including the fund.

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Fund information

Founded over 65 years ago, Putnam Investments was built around the concept that a balance between risk and reward is the hallmark of a well-rounded financial program. We manage over 100 mutual funds in growth, value, blend, fixed income, and international.

Investment Manager  Elizabeth T. Kennan  Beth S. Mazor 
Putnam Investment  John H. Mullin, III  Vice President 
Management, LLC  Robert E. Patterson 
One Post Office Square  George Putnam, III  James P. Pappas 
Boston, MA 02109  W. Thomas Stephens  Vice President 
Richard B. Worley   
Investment Sub-Manager  Richard S. Robie, III 
Putnam Investments Limited  Officers  Vice President 
57-59 St. James Street  George Putnam, III 
London, England SW1A 1LD  President  Francis J. McNamara, III 
Vice President and 
Marketing Services  Charles E. Porter  Chief Legal Officer 
Putnam Retail Management  Executive Vice President, 
One Post Office Square  Associate Treasurer and  Charles A. Ruys de Perez 
Boston, MA 02109  Principal Executive Officer  Vice President and 
Chief Compliance Officer 
Custodian  Jonathan S. Horwitz 
Putnam Fiduciary  Senior Vice President  Mark C. Trenchard 
Trust Company  and Treasurer  Vice President and 
BSA Compliance Officer 
Legal Counsel  Steven D. Krichmar 
Ropes & Gray LLP  Vice President and  Judith Cohen 
Principal Financial Officer  Vice President, Clerk and 
Trustees  Assistant Treasurer 
John A. Hill, Chairman  Michael T. Healy 
Jameson Adkins Baxter,  Assistant Treasurer and  Wanda M. McManus 
Vice Chairman  Principal Accounting Officer  Vice President, Senior Associate 
Charles B. Curtis  Treasurer and Assistant Clerk 
Myra R. Drucker  Daniel T. Gallagher 
Charles E. Haldeman, Jr.  Senior Vice President,  Nancy E. Florek 
Paul L. Joskow  Staff Counsel and  Vice President, Assistant Clerk, 
Compliance Liaison  Assistant Treasurer and 
Proxy Manager 

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

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Item 2. Code of Ethics:

Not applicable

Item 3. Audit Committee Financial Expert:

Not applicable

Item 4. Principal Accountant Fees and Services:

Not applicable

Item 5. Audit Committee of Listed Registrants

Not applicable

Item 6. Schedule of Investments:

The registrant’s schedule of investments in unaffiliated issuers is included in the report to shareholders in Item 1 above.

Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End Management Investment Companies:

Not applicable

Item 8. Portfolio Managers of Closed-End Investment Companies

Not Applicable

Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers:

Not applicable

Item 10. Submission of Matters to a Vote of Security Holders:

Not applicable

Item 11. Controls and Procedures:

(a) The registrant's principal executive officer and principal financial officer have concluded, based on their evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report, that the design and operation of such procedures are generally effective to provide reasonable assurance that information required to be disclosed by the registrant in this report is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.

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

Item 12. Exhibits:

(a)(1) Not applicable

(a)(2) Separate certifications for the principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940, as amended, are filed herewith.

(b) The certifications required by Rule 30a-2(b) under the Investment Company Act of 1940, as amended, are filed herewith.

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.

Putnam Diversified Income Trust

By (Signature and Title):

/s/Michael T. Healy
Michael T. Healy
Principal Accounting Officer

Date: May 26, 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 (Signature and Title):

/s/Charles E. Porter
Charles E. Porter
Principal Executive Officer

Date: May 26, 2006

By (Signature and Title):

/s/Steven D. Krichmar
Steven D. Krichmar
Principal Financial Officer

Date: May 26, 2006