N-CSR 1 a_diversifiedinctrust.htm PUTNAM DIVERSIFIED INCOME TRUST a_diversifiedinctrust.htm
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, 2008   
 
Date of reporting period: October 1, 2007— September 30, 2008 

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?

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 superior investment results over time.

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

With a focus on investment performance, below-average expenses, and in-depth information about our funds, we put the interests of investors first and seek to set the standard for integrity and service.

Industry-leading service

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


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.

Putnam
Diversified
Income Trust

9|30|08
Annual Report

Message from the Trustees  1 
About the fund  2 
Performance and portfolio snapshots  4 
Interview with your fund’s Portfolio Leader  5 
Performance in depth  8 
Expenses  10 
Portfolio turnover  12 
Risk  12 
Your fund’s management  13 
Terms and definitions  14 
Trustee approval of management contract  15 
Other information for shareholders  18 
Financial statements  19 
Federal tax information  61 
About the Trustees  62 
Officers  65 

Cover photograph: © Richard H. Johnson

Message from the Trustees

Dear Fellow Shareholder:

The financial markets have been experiencing the kind of upheaval not seen in decades. Investor confidence has been shaken by losses across a range of sectors and by the collapse of several financial industry companies. Coordinated responses by a full array of economic and financial authorities both in the United States and overseas should restore stability in due course, but investors should not expect a reduction in volatility in the near term. The likelihood of a U.S. recession, in particular, now makes the situation more challenging. History has shown that markets are extremely resilient over the long term, and we expect that, in time, they will recover from this crisis.

As a shareholder of this fund, you should feel confident about the financial standing of Putnam Investments. Our parent companies, Great-West Lifeco and Power Financial Corporation, are among the largest and most successful organizations in the financial services industry. All three companies are well capitalized with strong cash flows.

We are pleased to announce that Robert L. Reynolds, a well-known leader and visionary in the mutual fund industry, has joined the Putnam leadership team as President and Chief Executive Officer of Putnam Investments, effective July 1, 2008. Charles E. Haldeman, Jr., former President and CEO, has taken on the role of Chairman of Putnam Investment Management, LLC, the firm’s fund management company. He continues to serve as President of the Funds and as a Trustee.

Mr. Reynolds brings to Putnam Investments substantial industry experience and an outstanding record of success, including serving as Vice Chairman and Chief Operating Officer at Fidelity Investments from 2000 to 2007. We look forward to working with Mr. Reynolds as we continue our efforts to position Putnam Investments to exceed our shareholders’ expectations.

We would also like to take this opportunity to welcome new shareholders to the fund and to thank all of our investors for your continued confidence in Putnam during these challenging times.


About the fund

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 two decades since. New sectors like mortgage- and asset-backed securities now make up a sizable portion 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 investment perspective has been broadened to keep pace with the market expansion over time. To process the market’s increasing complexity, Putnam’s nearly 100-member fixed-income group aligns teams of specialists with 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 strategy seeks to 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. 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. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Unlike bonds, bond funds have ongoing fees and expenses. 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 may 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.

Optimizing the risk/return trade-off across multiple sectors


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Performance and portfolio snapshots

Average annual total return (%) comparison as of 9/30/08


Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will fluctuate, and you may have a gain or a loss when you sell your shares. Performance of class A shares assumes reinvestment of distributions and does not account for taxes. Fund returns in the bar chart do not reflect a sales charge of 4.00%; had they, returns would have been lower. See pages 5 and 8–9 for additional performance information. For a portion of the periods, this fund may have limited expenses, without which returns would have been lower. A 1% short-term trading fee may apply. To obtain the most recent month-end performance, visit www.putnam.com.

* Inception date of the JPMorgan Developed High Yield Index was 12/31/94, after the fund’s inception.

“The past 12 months for the financial markets
worldwide have been unprecedented.
During the first six months of the period,
investors indiscriminately fled even high-
quality mortgage and credit instruments for
government-backed U.S.Treasury bonds and
international government securities.”

D. William Kohli, Portfolio Leader, Putnam Diversified Income Trust

Credit qualities shown as a percentage of portfolio value as of 9/30/08. A bond rated Baa or higher (MIG3/VMIG3 or higher, for short-term debt) is considered investment grade. The chart reflects Moody’s ratings; percentages may include bonds not rated by Moody’s but considered by Putnam Management to be of comparable quality. Ratings will vary over time.

Credit quality overview


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Bill, thank you for taking the time today to talk about Putnam Diversified Income Trust’s most recent annual period. How did the fund perform?

The past 12 months for the financial markets worldwide have been unprecedented, with price volatility, collapses of large financial institutions, and government intervention in the markets on a scale not seen since the 1930s. During the first six months of the period, investors indiscriminately fled even high-quality mortgage and credit instruments for government-backed U.S. Treasury bonds and international government securities. The fund significantly underperformed its benchmarks as well as its peer group, Lipper Multi-Sector Income Funds.

Could you briefly cover the events of the past 12 months?

November 2007 as well as January and March of this year stand out as periods when securitized bond prices moved sharply lower based on broad-based housing market troubles and the oncoming credit squeeze. From late 2007 through early 2008, global credit markets grew increasingly illiquid, reaching the first of several subsequent low points thus far with the collapse of Bear Stearns in March. Other factors contributing to market volatility earlier in the period included spiking energy and commodity prices (though these prices have since receded somewhat). In July came the government’s financial rescue of the assets of Fannie Mae and Freddie Mac.

From a Wall Street perspective, September’s events were earthshaking, as financial pressure on major investment and commercial banks mushroomed and market liquidity dried up. Lehman Brothers made known that it was seeking a buyer or a government bailout but failed on both counts and was liquidated. In addition, Merrill Lynch was acquired by Bank of America, and the giant insurer AIG teetered on the brink of collapse before the government decided that the company was too critical to global financial market operations to be allowed to fail. Almost immediately afterward, Goldman Sachs and Morgan Stanley, the last two remaining U.S. investment banks, themselves under financial stress, decided to change to bank holding companies in order to gain access to Federal Reserve lending facilities, thereby subjecting themselves to tighter federal regulation. Thus came the end of the era of

Broad market index and fund performance

This comparison shows your fund’s performance in the context of broad market indexes for the 12 months ended 9/30/08. See the previous page and pages 8–9 for additional fund performance information. Index descriptions can be found on page 14.


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the stand-alone investment bank that funds its operations through open-market trading activity.

Meanwhile, short-term credit markets, including the commercial paper market, went from somewhat illiquid to frozen over this period. Banks, fearful of possible toxic assets on one another’s books, became reluctant to lend to other institutions. Credit became extremely tight to virtually unobtainable for businesses of all sizes across the country. Just before the end of the period, federal regulators seized the country’s largest savings and loan institution, Washington Mutual. In recent months, the stock market has exhibited volatility not seen since the Depression. And last, the near-collapse of several major banks in Europe and bankruptcy for Iceland were extremely problematic for global capital flows.

Bill, what has been the investment team’s approach in managing the fund during the global credit crunch?

Our investment approach has been to focus on credit quality. We also believe this to be the correct approach going forward. Accordingly, the portfolio is significantly underweight in corporate credit while favoring carefully selected securitized bonds, which we have purchased at what we feel are very attractive terms at several points over the past year, and which we believe should reward fund shareholders over time. We believe that these securities carry minimal fundamental credit risk. In addition, we remain neutral on government bonds. The fund is also underweight in emerging market bonds.

What is your outlook going forward for the economy, the credit markets, and the fund?

From short-term money markets and securitized instruments to corporate bonds and bank loans, all parts of the credit system had ceased to function normally by late September. The longer it takes for normal liquidity to be restored, the greater the negative impact on the real economy. In our judgment, there is now a high probability of a recession, and such a downturn could be severe. This would have major implications for corporate profits and default rates on corporate bonds and bank loans.

Our overall investment themes have not materially changed. We continue to emphasize top-rated securities among commercial mortgage-backed securities, mortgage pass-throughs, agencies, and collateralized mortgage obligations. We also continue to position the portfolio for yield-curve steepening, a situation in which yields on short-term instruments are lower and which helped performance over the past 12 months. This strategy is based on our view that the yield curve will continue to steepen as global central banks continue to cut short-term rates and longer-term rates trend higher on the liquidity

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 represented, as of 9/30/08. The fund’s holdings will change over time.

HOLDING (percentage of fund’s net assets)  COUPON (%) and MATURITY DATE 
Securitized sector   
Credit Suisse Mortgage Capital Certificates Ser. 07-C5, Class A3 (2.4%)  5.694%, 2040 
Green Tree Financial Corp. Ser. 99–5, Class A5 (1.2%)  7.86%, 2030 
Conseco Finance Securitizations Corp. Ser. 00–4, Class A6 (0.9%)  8.31%, 2032 
Credit sector   
VTB Capital SA 144A sec. notes (0.7%)  6.609%, 2012 
VTB Capital unsec. sub. notes FRN (0.5%)  6.315%, 2015 
Echostar DBS Corp. company guaranty (0.5%)  6.625%, 2014 
Government sector   
Japan (Government of) CPI Linked bonds Ser. 8 (4.1%)  1%, 2016 
Argentina (Republic of) sr. unsec. unsub. bonds FRB (0.9%)  3.127%, 2012 
Japan (Government of) CPI Linked bonds Ser. 12 (0.7%)  1.2%, 2017 

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squeeze and inflation concerns. We are also taking a neutral position on non-U.S. government bonds, as we believe that substantial new bond issuance by countries for financial bailouts should depress security prices and raise rates over the long term.

Thanks again, Bill, for sharing your insights with us.

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

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

In November 2007, your fund’s dividend was decreased from $0.045 to $0.042 per share. This decrease was due to a decrease in interest income. In April 2008, your fund’s dividend was increased from $0.042 to $0.057 per share. This increase was due to more high-yield and emerging market bonds and widening of spreads in the mortgage market.

I N  T H E  N E W S

On October 3, 2008, federal lawmakers approved the Emergency Economic Stabilization Act of 2008 (EESA), a $700 billion economic package designed to ease the nation’s worsening credit crisis. EESA creates a facility — the “Troubled Asset Relief Program (TARP)” — that authorizes the U.S. Treasury to purchase failed mortgages and mortgage-related securities that are at the heart of the crisis. EESA is designed to provide an infusion of capital so that financial institutions can increase lending and improve marketplace confidence. To increase TARP’s effectiveness, U.S. Treasury Secretary Henry Paulson and President Bush revised the program on October 14, allowing the government to take the unprecedented step of buying direct equity stakes in several major U.S. banks.

Comparison of sector weightings

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


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Your fund’s performance

This section shows your fund’s performance, price, and distribution information for periods ended September 30, 2008, the end of its most recent fiscal year. In accordance with regulatory requirements for mutual funds, we also include expense information taken from the fund’s current prospectus. 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. Performance information does not reflect any deduction for taxes a shareholder may owe on fund distributions or on the redemption of fund shares. For the most recent month-end performance, please visit the Individual Investors section of www.putnam.com or call Putnam at 1-800-225-1581. Class Y shares are generally only available to corporate and institutional clients and clients in other approved programs. 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 9/30/08

  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)  6.33%  6.12%  5.52%  5.52%  5.52%  5.52%  6.03%  5.85%  6.05%  6.48% 
10 years  46.09  40.20  35.49  35.49  35.05  35.05  42.33  37.72  42.10  49.27 
Annual average  3.86  3.44  3.08  3.08  3.05  3.05  3.59  3.25  3.58  4.09 
5 years  12.76  8.25  8.70  7.06  8.35  8.35  11.39  7.75  11.08  13.85 
Annual average  2.43  1.60  1.68  1.37  1.62  1.62  2.18  1.50  2.12  2.63 
3 years  –3.51  –7.41  –5.54  –7.93  –5.85  –5.85  –4.15  –7.27  –4.48  –3.03 
Annual average  –1.18  –2.53  –1.88  –2.72  –1.99  –1.99  –1.40  –2.48  –1.52  –1.02 
1 year  –12.80  –16.27  –13.40  –17.49  –13.57  –14.38  –12.95  –15.79  –13.29  –12.88 

Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. After sales charge returns (public offering price, or POP) for class A and M shares reflect a maximum 4.00% and 3.25% load, respectively, as of 1/2/08. 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 for 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.

For a portion of the periods, this fund may have limited expenses, without which returns would have been lower.

A 1% short-term trading fee may be applied to shares exchanged or sold within 7 days of purchase.

Change in the value of a $10,000 investment ($9,600 after sales charge)

Cumulative total return from 9/30/98 to 9/30/08

Past performance does not indicate future results. At the end of the same time period, a $10,000 investment in the fund’s class B and class C shares would have been valued at $13,549 and $13,505, respectively, and no contingent deferred sales charges would apply. A $10,000 investment in the fund’s class M shares ($9,675 after sales charge) would have been valued at $13,772 at public offering price. A $10,000 investment in the fund’s class R and class Y shares would have been valued at $14,210 and $14,927, respectively.

8

Comparative index returns For periods ended 9/30/08

    Citigroup Non-U.S.    Lipper Multi-Sector 
  Lehman Aggregate  World Govt.  JPMorgan Developed  Income Funds 
  Bond Index  Bond Index  High Yield Index  category average† 
Annual average (life of fund)  7.23%  7.17%  —*  7.10% 
10 years  65.95  66.65  60.17%  61.12 
Annual average  5.20  5.24  4.82  4.78 
5 years  20.40  31.05  25.93  21.53 
Annual average  3.78  5.56  4.72  3.95 
3 years  12.98  17.47  5.04  5.11 
Annual average  4.15  5.51  1.65  1.65 
1 year  3.65  5.16  –9.94  –6.00 

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

* Inception date of index was 12/31/94, after the fund’s inception.

† Over the 1-year, 3-year, 5-year, 10-year, and life-of-fund periods ended 9/30/08, there were 144, 117, 97, 67, and 5 funds, respectively, in this Lipper category.

Fund price and distribution information For the 12-month period ended 9/30/08

Distributions  Class A    Class B  Class C  Class M    Class R  Class Y 
Number  12    12  12  12    12  12 
Income  $0.597    $0.523  $0.526  $0.573    $0.570  $0.621 
Capital gains  —    —  —  —    —  — 
Total  $0.597    $0.523  $0.526  $0.573    $0.570  $0.621 
Share value  NAV  POP  NAV  NAV  NAV  POP  NAV  NAV 
9/30/07  $9.91  $10.32*  $9.83  $9.84  $9.81  $10.14  $9.89  $9.92 
9/30/08  8.10  8.44  8.04  8.03  8.02  8.29  8.06  8.08 
Current yield (end of period)  NAV  POP  NAV  NAV  NAV  POP  NAV  NAV 
Current dividend rate 1  8.44%  8.10%  7.61%  7.62%  8.23%  7.96%  8.19%  8.76% 
Current 30-day SEC yield 2  N/A  8.75  8.31  8.31  N/A  8.55  8.84  9.39 

The classification of distributions, if any, is an estimate. Final distribution information will appear on your year-end tax forms.

* Reflects an increase in sales charges that took effect on 1/2/08.

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 the maximum offering price for each share class, in accordance with SEC guidelines.

Fund’s annual operating expenses For the fiscal year ended 9/30/07

  Class A  Class B  Class C  Class M  Class R  Class Y 
Total annual fund operating expenses  0.98%  1.73%  1.73%  1.23%  1.23%  0.73% 

Expense information in this table is taken from the most recent prospectus, is subject to change, and may differ from that shown in the next section and in the financial highlights of this report. Expenses are shown as a percentage of average net assets.

9

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 following information, 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 representative.

Review your fund’s expenses

The following table shows the expenses you would have paid on a $1,000 investment in Putnam Diversified Income Trust from April 1, 2008, to September 30, 2008. 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*  $5.01  $8.58  $8.57  $6.21  $6.20  $3.82 
Ending value (after expenses)  $909.60  $907.40  $905.40  $909.60  $907.00  $908.60 

* 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 average net assets for the six months ended 9/30/08. The expense ratio may differ for each share class (see the last table in this section). 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.

Estimate the expenses you paid

To estimate the ongoing expenses you paid for the six months ended September 30, 2008, use the following calculation method. To find the value of your investment on April 1, 2008, call Putnam at 1-800-225-1581.


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 following table 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*  $5.30  $9.07  $9.07  $6.56  $6.56  $4.04 
Ending value (after expenses)  $1,019.75  $1,016.00  $1,016.00  $1,018.50  $1,018.50  $1,021.00 

* 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 average net assets for the six months ended 9/30/08. The expense ratio may differ for each share class (see the last table in this section). 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.

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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 indicates how much of your fund’s average 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*  1.05%  1.80%  1.80%  1.30%  1.30%  0.80% 
Average annualized expense ratio for Lipper peer group†  1.10%  1.85%  1.85%  1.35%  1.35%  0.85% 

* For the fund’s most recent fiscal half year; may differ from expense ratios based on one-year data in the financial highlights.

† Putnam keeps fund expenses below the Lipper peer group average expense ratio by limiting our fund expenses if they exceed the Lipper average. The Lipper average is a simple average of front-end load funds in the peer group that excludes 12b-1 fees as well as any expense offset and brokerage/service arrangements that may reduce fund expenses. To facilitate the comparison in this presentation, Putnam has adjusted the Lipper average to reflect 12b-1 fees. Investors should note that the other funds in the peer group may be significantly smaller or larger than the fund, and that an asset-weighted average would likely be lower than the simple average. Also, the fund and Lipper report expense data at different times; the fund’s expense ratio shown here is annualized data for the most recent six-month period, while the quarterly updated Lipper average is based on the most recent fiscal year-end data available for the peer group funds as of 9/30/08.

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Your fund’s portfolio turnover and Morningstar® Risk

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 average portfolio value within a given period. Funds with high turnover may be more likely to generate capital gains 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 following table 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

  2008  2007  2006  2005  2004 
Putnam Diversified Income Trust  157%*  74%*  71%*  126%*  99% 
Lipper Multi-Sector Income Funds category average  159%  119%  124%  127%  104% 

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 2008 is based on information available as of 9/30/08.

* Excludes dollar roll transactions.

Your fund’s Morningstar® 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 Morningstar Risk.


Your fund’s Morningstar Risk is shown alongside that of the average fund in its Morningstar category. The risk bar broadens the comparison by translating the fund’s Morningstar Risk into a percentile, which is based on the fund’s ranking among all funds rated by Morningstar as of September 30, 2008. A higher Morningstar Risk generally indicates that a fund’s monthly returns have varied more widely.

Morningstar determines a fund’s Morningstar Risk by assessing variations in the fund’s monthly returns — with an emphasis on downside variations — over a 3-year period, if available. Those measures are weighted and averaged to produce the fund’s Morningstar Risk. The information shown is provided for the fund’s class A shares only; information for other classes may vary. 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 Morningstar Risk does not mean that you cannot lose money on an investment in a fund. Copyright 2008 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.

12

Your fund’s management

Your fund is managed by the members of the Putnam Taxable Fixed-Income Team. D. William Kohli is the Portfolio Leader, and Michael Atkin, Rob Bloemker, Kevin Murphy, and Paul Scanlon are Portfolio Members of the fund. The Portfolio Leader and Portfolio Members coordinate the team’s management of the fund.

For a complete listing of the members of the Putnam Taxable Fixed-Income Team, including those who are not Portfolio Leaders or Portfolio Members of your fund, please visit the Individual Investors section of www.putnam.com.

Trustee and Putnam employee fund ownership

As of September 30, 2008, 12 of the 13 Trustees of the Putnam funds owned fund shares. The table below shows the approximate value of investments in the fund and all Putnam funds as of that date by the Trustees and Putnam employees. These amounts include investments by the Trustees’ and employees’ immediate family members and investments through retirement and deferred compensation plans.

  Assets in  Total assets in 
  the fund  all Putnam funds 
Trustees  $783,000  $37,000,000 
Putnam employees  $14,089,000  $471,000,000 

Other Putnam funds managed by the Portfolio Leader and Portfolio Members

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

Michael Atkin is also a Portfolio Member of Putnam Global Income Trust, Putnam Premier Income Trust, and Putnam Master Intermediate Income Trust.

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

Kevin Murphy is also a Portfolio Member of Putnam Income Fund, Putnam Premier Income Trust, Putnam Master Intermediate Income Trust, and Putnam Utilities Growth and Income Fund.

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

D. William Kohli, Michael Atkin, Rob Bloemker, Kevin Murphy, and Paul Scanlon may also manage other accounts and variable trust funds advised by Putnam Management or an affiliate.

Investment team fund ownership

The following table shows how much the fund’s current Portfolio Leader and Portfolio Members have invested in the fund and in all Putnam mutual funds (in dollar ranges). Information shown is as of September 30, 2008, and September 30, 2007.


N/A indicates the individual was not a Portfolio Leader or Portfolio Member as of 9/30/07.

13

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 4.00% maximum sales charge for class A shares and 3.25% for class M shares.

Contingent deferred sales charge (CDSC) is generally 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.

Current yield is the annual rate of return earned from dividends or interest of an investment. Current yield is expressed as a percentage of the price of a security, fund share, or principal investment.

Share classes

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

Class B shares are not subject to an initial sales charge. They may be subject to a CDSC.

Class C shares are not subject to an initial sales charge and are subject to a CDSC 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 CDSC (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 generally only available to corporate and institutional clients and clients in other approved programs.

Comparative indexes

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

JPMorgan Developed High Yield Index is an unmanaged index of high-yield fixed-income securities issued in developed countries.

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

Merrill Lynch 91-Day Treasury Bill Index is an unmanaged index that seeks to measure the performance of U.S. Treasury bills available in the marketplace.

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 reflectperformance trends for funds within a category.

14

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 Investment Management (“Putnam Management”) and the sub-management contract, in respect of your fund, between Putnam Management’s affiliate, Putnam Investments Limited (“PIL”), and Putnam Management. 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 ending in June 2008, the Contract Committee met several 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. The Contract Committee recommended, and the Independent Trustees approved, the continuance of your fund’s management and sub-management contract, effective July 1, 2008. (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.)

The Independent Trustees’ approval was based on the following conclusions:

• That the fee schedule in effect for your fund represented 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 this fee schedule represented 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, were subject to the continued application of certain expense reductions and waivers and other considerations noted below, 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.

Management fee schedules and
categories; total expenses

The Trustees reviewed the management fee schedules in effect for all Putnam funds, including fee levels and breakpoints, and the assignment of funds to particular fee categories. In reviewing fees and expenses, the Trustees generally focused their attention on material changes in circumstances — for example, changes in a fund’s size or investment style, changes in Putnam Management’s operating costs or responsibilities, or changes in competitive practices in the mutual fund industry — that suggest that consideration of fee changes might be warranted. The Trustees concluded that the circumstances did not warrant changes to the management fee structure of your fund, which had been carefully developed over the years, re-examined on many occasions and adjusted where appropriate. In this regard, the Trustees also noted that shareholders of your fund voted in 2007 to approve new management contracts containing an identical fee structure. The Trustees focused on two areas of particular interest, as discussed further below:

• Competitiveness. The Trustees 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 43rd percentile in management fees and in the 19th percentile in total expenses (less any applicable 12b-1 fees) as of December 31, 2007 (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 information 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.

The Trustees noted that the expense ratio increases described above were currently being controlled by expense limitations initially implemented in January 2004. The Trustees have received a commitment from Putnam Management and its parent company to continue this program through at least June 30, 2009. These expense limitations give effect to a commitment by Putnam Management that the expense ratio of each open-end fund would be no higher than the average expense ratio of the competitive funds included in the fund’s relevant Lipper universe (exclusive of any applicable 12b-1 charges in each case). The Trustees observed that this commitment to limit fund expenses has served shareholders well since its inception.

15

In order to ensure that the expenses of the Putnam funds continue to meet evolving competitive standards, the Trustees requested, and Putnam Management agreed, to extend for the twelve months beginning July 1, 2008, an additional expense limitation for certain funds at an amount equal to the average expense ratio (exclusive of 12b-1 charges) of a custom peer group of competitive funds selected by Lipper to correspond to the size of the fund. This additional expense limitation will be applied to those open-end funds that had above-average expense ratios (exclusive of 12b-1 charges) based on the custom peer group data for the period ended December 31, 2007. This additional expense limitation will not be applied to your fund because it had a below-average expense ratio relative to its custom peer group.

In addition, the Trustees devoted particular attention to analyzing the Putnam funds’ fees and expenses relative to those of competitors in fund complexes of comparable size and with a comparable mix of asset categories. The Trustees concluded that this analysis did not reveal any matters requiring further attention at the current time.

• Economies of scale. 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 the fund (as a percentage of fund assets) declines as the fund grows in size and crosses specified asset thresholds. Conversely, if the fund shrinks in size — as has been the case for many Putnam funds in recent years — these breakpoints result in increasing fee levels. In recent years, the Trustees have examined the operation of the existing breakpoint structure during periods of both growth and decline in asset levels. The Trustees concluded that the fee schedule in effect for your fund represented an appropriate sharing of economies of scale at current asset levels.

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 Putnam funds’ investment process and performance by the work of the Investment Oversight Coordinating Committee of the Trustees and the Investment Oversight Committees of the Trustees, which had met 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 recognized 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 each fund’s performance with various benchmarks and with the performance of competitive funds.

While the Trustees noted the satisfactory investment performance of certain Putnam funds, they considered the disappointing investment performance of many funds in recent periods, particularly over periods in 2007 and 2008. They discussed 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 taken steps to strengthen its investment personnel and processes to address areas of underperformance, including recent efforts to further centralize Putnam Management’s equity research function. In this regard, the Trustees took into consideration efforts by Putnam Management to improve its ability to assess and mitigate investment risk in individual funds, across asset classes, and across the complex as a whole. The Trustees indicated their intention to continue to monitor performance trends to assess the effectiveness of these efforts and to evaluate whether additional changes to address areas of underperformance are warranted.

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-year, three-year and five-year periods ended December 31, 2007 (the first percentile being the best-performing funds and the 100th percentile being the worst-performing funds):

One-year period  76th 
Three-year period  58th 
Five-year period  45th 

(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-year, three-year, and five-year periods ended December 31, 2007, there were 124, 111, and 87 funds, respectively, in your fund’s Lipper peer group.* Past performance is no guarantee of future returns.

* 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-year, five-year and ten-year periods ended September 30, 2008 were 92%, 87%, and 81%, respectively. Over the one-year, five-year and ten-year periods ended September 30, 2008, your fund ranked 132 out of 144, 85 out of 97, and 55 out of 67 funds, respectively. Note that this more recent information was not available when the Trustees approved the continuance of your fund’s management contract.

16

The Trustees noted the disappointing performance for your fund for the one-year period ended December 31, 2007. In this regard, the Trustees considered that Putnam Management continues to have confidence in the investment process for your fund given its stronger longer-term record, recognizing the tendency for short-term variability over a market cycle.

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 noted 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 concluded that it is preferable to seek change within Putnam Management to address performance shortcomings. In the Trustees’ view, the alternative of engaging a new investment adviser 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 benefits related to brokerage and soft-dollar allocations, whereby a portion of the commissions paid by a fund for brokerage may be used to acquire research services that may be useful to Putnam Management in managing the assets of the fund and of other clients. The Trustees considered changes made in 2008, at Putnam Management’s request, to the Putnam funds’ brokerage allocation policy, which expanded the permitted categories of brokerage and research services payable with soft dollars and increased the permitted soft dollar allocation to third-party services over what had been authorized in previous years. The Trustees indicated their continued intent to monitor the potential benefits associated with the allocation of fund brokerage and trends in industry practice to ensure that the principle of seeking “best price and execution” remains paramount in the portfolio trading process.

The Trustees’ annual review of your fund’s management contract arrangements also included the review of its distributor’s contract and distribution plan with Putnam Retail Management Limited Partnership and the investor servicing agreement with Putnam Fiduciary Trust Company (“PFTC”), each of which provides benefits to affiliates of Putnam Management. In the case of the investor servicing agreement, the Trustees considered that certain shareholder servicing functions were shifted to a third-party service provider by PFTC in 2007.

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 comparisons 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 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 different asset classes are typically 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 did not rely on such comparisons to any significant extent in concluding that the management fees paid by your fund are reasonable.

17

Other information for shareholders

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 representatives. 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 representative, 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 8:00 p.m., or Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.

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, 2008, are available in the Individual Investors section of www.putnam.com, 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.

18

Financial statements

These sections of the report, as well as the accompanying Notes, preceded by the Report of Independent Registered Public Accounting Firm, 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 year.

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.

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 semi-annual report, the highlight table also includes the current reporting period.

19

Report of Independent Registered Public Accounting Firm

The Board of Trustees and Shareholders
Putnam Diversified Income Trust:

We have audited the accompanying statement of assets and liabilities of Putnam Diversified Income Trust, including the fund’s portfolio, as of September 30, 2008, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years or periods in the period then ended. These financial statements and financial highlights are the responsibility of the fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform our audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of September 30, 2008 by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Putnam Diversified Income Trust as of September 30, 2008, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years or periods in the period then ended, in conformity with U.S. generally accepted accounting principles.


Boston, Massachusetts
November 20, 2008

20

The fund’s portfolio 9/30/08

COLLATERALIZED MORTGAGE    Principal   
OBLIGATIONS (44.3%)*    amount  Value 
Asset Backed Funding Certificates       
144A FRB Ser. 06-OPT3, Class B,       
5.707s, 2036    $129,000  $4,438 
Banc of America Alternative Loan       
Trust Ser. 06-7, Class A2, 5.707s, 2036  19,993,000  12,595,590 
Banc of America Commercial Mortgage, Inc.     
FRB Ser. 07-3, Class A3, 5.838s, 2049  765,000  716,941 
Ser. 07-2, Class A2, 5.634s, 2049    2,590,000  2,429,938 
Ser. 05-6, Class A2, 5.165s, 2047    4,776,000  4,657,641 
Ser. 07-5, Class XW, Interest Only       
(IO), 0.607s, 2051    233,594,520  5,374,135 
Banc of America Commercial       
Mortgage, Inc. 144A       
Ser. 01-1, Class J, 6 1/8s, 2036    1,170,000  1,098,810 
Ser. 01-1, Class K, 6 1/8s, 2036    2,633,000  1,996,976 
Banc of America Funding Corp. FRB       
Ser. 06-D, Class 6A1, 5.992s, 2036    14,379,956  9,634,570 
Bayview Commercial Asset Trust 144A     
Ser. 07-5A, IO, 1.55s, 2037    6,184,652  759,475 
Ser. 07-1, Class S, IO, 1.211s, 2037    13,724,583  1,251,682 
Bear Stearns Alternate Trust       
FRB Ser. 06-5, Class 2A2, 6 1/4s, 2036  10,761,532  6,779,765 
FRB Ser. 06-6, Class 2A1, 5.899s, 2036  5,203,358  3,204,666 
FRB Ser. 05-7, Class 23A1, 5.649s, 2035  9,852,722  7,093,787 
Bear Stearns Commercial Mortgage       
Securities, Inc.       
FRB Ser. 00-WF2, Class F, 8.447s, 2032  1,174,000  1,049,808 
Ser. 07-PW17, Class A3, 5.736s, 2050  9,430,000  8,939,923 
Bear Stearns Commercial Mortgage       
Securities, Inc. 144A       
Ser. 07-PW18, Class X1, IO,       
0.062s, 2050    274,436,368  2,295,056 
Broadgate Financing PLC sec. FRB       
Ser. D, 6.713s, 2023       
(United Kingdom)  GBP  2,519,650  3,371,532 
Citigroup Mortgage Loan Trust, Inc.       
FRB Ser. 06-AR5, Class 2A5A,       
6.202s, 2036    $7,064,058  4,885,028 
FRB Ser. 06-AR7, Class 2A2A,       
5.654s, 2036    1,235,356  778,274 
IFB Ser. 07-6, Class 2A5, IO,       
3.443s, 2037    7,144,164  493,397 
Citigroup/Deutsche Bank Commercial       
Mortgage Trust Ser. 06-CD3,       
Class A4, 5.658s, 2048    483,000  457,317 
Citigroup/Deutsche Bank Commercial       
Mortgage Trust 144A Ser. 07-CD5,       
Class XS, IO, 0.067s, 2044    162,894,340  1,165,156 
Commercial Mortgage       
Acceptance Corp. Ser. 97-ML1, IO,       
1.217s, 2017    17,030,884  606,060 
Countrywide Alternative Loan Trust       
Ser. 06-45T1, Class 2A2, 6s, 2037    4,462,610  2,719,961 
Ser. 06-J8, Class A4, 6s, 2037    11,270,040  5,742,085 
Ser. 07-HY5R, Class 2A1A, 5.544s, 2047  8,766,966  7,179,324 
IFB Ser. 04-2CB, Class 1A5, IO,       
4.393s, 2034    8,297,940  433,697 
Countrywide Home Loans       
FRB Ser. 05-HYB7, Class 6A1,       
5.714s, 2035    16,834,153  11,952,249 
Ser. 05-2, Class 2X, IO, 1.16s, 2035  19,198,346  416,214 

COLLATERALIZED MORTGAGE    Principal   
OBLIGATIONS (44.3%)* cont.    amount  Value 
Countrywide Home Loans 144A       
Ser. 03-R4, Class 1A, Principal       
Only (PO), zero %, 2034    $34,805  $25,863 
Credit Suisse Mortgage       
Capital Certificates       
FRB Ser. 07-C4, Class A2, 6.004s, 2039    3,679,000  3,477,225 
Ser. 07-C5, Class A3, 5.694s, 2040    50,230,000  44,946,357 
CRESI Finance Limited       
Partnership 144A       
FRB Ser. 06-A, Class D, 4.007s, 2017    369,000  317,045 
FRB Ser. 06-A, Class C, 3.807s, 2017    1,093,000  981,951 
Criimi Mae Commercial Mortgage       
Trust 144A Ser. 98-C1, Class B, 7s, 2033    8,894,852  8,983,681 
CS First Boston Mortgage       
Securities Corp. 144A       
Ser. 98-C2, Class F, 6 3/4s, 2030    8,998,000  8,743,310 
Ser. 98-C1, Class F, 6s, 2040    7,396,000  6,133,606 
Ser. 02-CP5, Class M, 5 1/4s, 2035    2,599,000  519,800 
FRB Ser. 05-TFLA, Class L, 4.338s, 2020    4,911,000  4,076,130 
Deutsche Mortgage & Asset       
Receiving Corp. Ser. 98-C1,       
Class X, IO, 0.776s, 2031    30,345,740  751,461 
DLJ Commercial Mortgage Corp.       
Ser. 98-CF2, Class B4, 6.04s, 2031    2,235,111  1,913,926 
DLJ Commercial Mortgage Corp. 144A       
Ser. 98-CF2, Class B5, 5.95s, 2031    7,128,872  5,647,492 
European Loan Conduit 144A FRB       
Ser. 22A, Class D, 6.646s,       
2014 (Ireland)  GBP  2,461,000  3,417,336 
European Prime Real Estate PLC       
144A FRB Ser. 1-A, Class D,       
6.641s, 2014 (United Kingdom)  GBP  1,730,779  2,515,996 
Fannie Mae       
IFB Ser. 06-70, Class SM,       
27.567s, 2036    $706,229  907,300 
IFB Ser. 07-1, Class NR,       
23.128s, 2037    3,689,348  4,060,178 
IFB Ser. 06-76, Class QB,       
20.359s, 2036    4,618,754  5,606,899 
IFB Ser. 06-63, Class SP,       
20.059s, 2036    5,058,788  6,048,626 
IFB Ser. 07-W7, Class 1A4,       
19.939s, 2037    2,217,796  2,151,262 
IFB Ser. 06-104, Class GS,       
17.994s, 2036    1,633,119  1,912,180 
IFB Ser. 06-60, Class TK,       
15.772s, 2036    1,607,465  1,780,539 
IFB Ser. 05-25, Class PS,       
14.05s, 2035    2,909,499  3,102,316 
IFB Ser. 05-74, Class CP,       
12.991s, 2035    2,553,889  2,696,144 
IFB Ser. 05-115, Class NQ,       
12.912s, 2036    1,303,063  1,301,461 
IFB Ser. 06-27, Class SP,       
12.808s, 2036    3,419,480  3,709,739 
IFB Ser. 06-8, Class HP,       
12.808s, 2036    3,699,106  3,998,442 
IFB Ser. 06-8, Class WK,       
12.808s, 2036    5,860,900  6,267,371 
IFB Ser. 05-106, Class US,       
12.808s, 2035    5,924,456  6,482,172 
IFB Ser. 05-99, Class SA,       
12.808s, 2035    2,996,629  3,196,989 

21

COLLATERALIZED MORTGAGE  Principal   
OBLIGATIONS (44.3%)* cont.  amount  Value 
Fannie Mae     
IFB Ser. 06-60, Class CS,     
12.331s, 2036  $2,366,165  $2,341,682 
IFB Ser. 05-74, Class CS,     
11.201s, 2035  2,912,019  3,067,561 
IFB Ser. 04-79, Class S,     
10.981s, 2032  3,608,983  3,628,588 
IFB Ser. 05-114, Class SP,     
10.761s, 2036  1,628,626  1,629,022 
IFB Ser. 05-95, Class OP,     
10.45s, 2035  1,868,086  1,813,792 
IFB Ser. 05-95, Class CP,     
10.35s, 2035  401,475  409,282 
FRB Ser. 03-W6, Class PT1,     
9.998s, 2042  71,656  82,549 
IFB Ser. 05-83, Class QP, 9.056s, 2034  1,040,318  991,091 
Ser. 383, Class 90, IO, 8s, 2037  286,232  49,207 
Ser. 383, Class 91, IO, 8s, 2037  230,294  41,344 
Ser. 04-T2, Class 1A4, 7 1/2s, 2043  1,702,787  1,787,395 
Ser. 02-T19, Class A3, 7 1/2s, 2042  993,802  1,056,679 
Ser. 02-T12, Class A3, 7 1/2s, 2042  250,181  265,338 
Ser. 02-14, Class A2, 7 1/2s, 2042  11,167  11,800 
Ser. 01-T10, Class A2, 7 1/2s, 2041  1,078,482  1,117,125 
Ser. 02-T4, Class A3, 7 1/2s, 2041  293,537  312,728 
Ser. 01-T3, Class A1, 7 1/2s, 2040  736,218  774,831 
Ser. 01-T1, Class A1, 7 1/2s, 2040  2,273,063  2,402,746 
Ser. 99-T2, Class A1, 7 1/2s, 2039  841,769  893,356 
Ser. 386, Class 26, IO, 7 1/2s, 2038  585,343  109,602 
Ser. 386, Class 27, IO, 7 1/2s, 2037  340,835  68,761 
Ser. 386, Class 28, IO, 7 1/2s, 2037  335,111  65,811 
Ser. 383, Class 88, IO, 7 1/2s, 2037  618,795  115,049 
Ser. 383, Class 89, IO, 7 1/2s, 2037  483,398  95,078 
Ser. 383, Class 87, IO, 7 1/2s, 2037  772,514  149,160 
Ser. 00-T6, Class A1, 7 1/2s, 2030  406,604  426,793 
Ser. 01-T4, Class A1, 7 1/2s, 2028  5,590,272  5,951,246 
Ser. 01-T10, Class A1, 7s, 2041  4,837,608  5,026,580 
Ser. 386, Class 24, IO, 7s, 2038  496,347  119,808 
Ser. 386, Class 25, IO, 7s, 2038  528,242  129,973 
Ser. 386, Class 22, IO, 7s, 2038  679,805  159,977 
Ser. 386, Class 21, IO, 7s, 2037  769,149  185,012 
Ser. 386, Class 23, IO, 7s, 2037  755,114  180,547 
Ser. 383, Class 84, IO, 7s, 2037  705,191  171,048 
Ser. 383, Class 85, IO, 7s, 2037  449,810  111,676 
Ser. 383, Class 86, IO, 7s, 2037  353,924  86,410 
Ser. 383, Class 79, IO, 7s, 2037  714,932  152,186 
Ser. 383, Class 80, IO, 7s, 2037  1,559,825  288,568 
Ser. 383, Class 81, IO, 7s, 2037  856,330  187,731 
Ser. 383, Class 82, IO, 7s, 2037  856,470  199,230 
Ser. 383, Class 83, IO, 7s, 2037  716,681  170,636 
Ser. 386, Class 14, IO, 6 1/2s, 2038  6,204,099  1,077,962 
Ser. 386, Class 19, IO, 6 1/2s, 2038  732,294  157,901 
Ser. 386, Class 17, IO, 6 1/2s, 2037  1,123,190  192,346 
Ser. 386, Class 16, IO, 6 1/2s, 2037  771,123  175,868 
Ser. 383, Class 60, IO, 6 1/2s, 2037  3,558,888  702,880 
Ser. 383, Class 62, IO, 6 1/2s, 2037  993,248  218,090 
Ser. 383, Class 69, IO, 6 1/2s, 2037  563,179  133,678 
Ser. 383, Class 63, IO, 6 1/2s, 2037  776,641  172,679 
Ser. 383, Class 64, IO, 6 1/2s, 2037  1,432,537  291,879 
Ser. 383, Class 67, IO, 6 1/2s, 2037  756,565  164,532 
Ser. 383, Class 68, IO, 6 1/2s, 2037  365,210  81,789 
Ser. 383, Class 58, IO, 6 1/2s, 2037  1,660,367  323,772 
Ser. 383, Class 59, IO, 6 1/2s, 2037  1,044,585  226,066 
Ser. 383, Class 61, IO, 6 1/2s, 2037  832,459  179,592 
Ser. 383, Class 65, IO, 6 1/2s, 2037  989,992  227,344 
Ser. 383, Class 66, IO, 6 1/2s, 2037  1,008,956  231,265 
Ser. 383, Class 72, IO, 6 1/2s, 2037  3,981,356  771,388 

COLLATERALIZED MORTGAGE  Principal   
OBLIGATIONS (44.3%)* cont.  amount  Value 
Fannie Mae     
Ser. 383, Class 77, IO, 6 1/2s, 2037  $601,193  $134,502 
Ser. 383, Class 78, IO, 6 1/2s, 2037  615,071  114,878 
Ser. 383, Class 73, IO, 6 1/2s, 2037  1,359,330  254,874 
Ser. 383, Class 76, IO, 6 1/2s, 2037  819,427  185,472 
Ser. 383, Class 70, IO, 6 1/2s, 2037  2,104,848  402,552 
Ser. 383, Class 74, IO, 6 1/2s, 2037  1,121,091  208,803 
Ser. 383, Class 71, IO, 6 1/2s, 2036  892,192  189,901 
Ser. 383, Class 75, IO, 6 1/2s, 2036  715,897  157,664 
Ser. 98-T2, Class A4, IO, 6 1/2s, 2036  127,395  239 
Ser. 371, Class 2, IO, 6 1/2s, 2036  60,597,796  13,407,262 
Ser. 383, Class 101, IO, 6 1/2s, 2022  334,278  62,066 
Ser. 383, Class 102, IO, 6 1/2s, 2022  202,908  39,857 
Ser. 389, Class 6, IO, 6s, 2038  992,391  210,883 
Ser. 08-76, Class JI, IO, 6s, 2038  6,874,011  1,323,247 
Ser. 386, Class 10, IO, 6s, 2038  543,350  115,451 
Ser. 386, Class 11, IO, 6s, 2038  362,330  67,840 
Ser. 383, Class 41, IO, 6s, 2038  6,034,690  1,116,418 
Ser. 383, Class 42, IO, 6s, 2038  4,363,902  796,412 
Ser. 383, Class 43, IO, 6s, 2038  3,942,859  729,429 
Ser. 383, Class 44, IO, 6s, 2038  3,601,565  661,788 
Ser. 383, Class 45, IO, 6s, 2038  2,775,520  510,002 
Ser. 383, Class 46, IO, 6s, 2038  2,411,528  443,118 
Ser. 383, Class 47, IO, 6s, 2038  2,134,501  410,892 
Ser. 383, Class 48, IO, 6s, 2038  1,915,533  368,740 
Ser. 383, Class 52, IO, 6s, 2038  777,961  166,059 
Ser. 386, Class 9, IO, 6s, 2038  3,458,209  600,864 
Ser. 383, Class 28, IO, 6s, 2038  7,215,593  1,389,002 
Ser. 383, Class 29, IO, 6s, 2038  6,118,432  1,177,798 
Ser. 383, Class 30, IO, 6s, 2038  4,785,917  921,289 
Ser. 383, Class 31, IO, 6s, 2038  4,222,520  812,835 
Ser. 383, Class 32, IO, 6s, 2038  3,274,918  630,422 
Ser. 383, Class 33, IO, 6s, 2038  2,801,193  546,233 
Ser. 383, Class 37, IO, 6s, 2038  1,088,757  241,532 
Ser. 386, Class 7, IO, 6s, 2038  4,230,533  824,954 
Ser. 383, Class 34, IO, 6s, 2037  1,132,879  220,911 
Ser. 383, Class 35, IO, 6s, 2037  936,454  198,046 
Ser. 383, Class 36, IO, 6s, 2037  736,275  155,151 
Ser. 383, Class 38, IO, 6s, 2037  462,766  98,104 
Ser. 383, Class 50, IO, 6s, 2037  1,307,358  236,959 
Ser. 386, Class 6, IO, 6s, 2037  2,031,243  375,780 
Ser. 383, Class 39, IO, 6s, 2037  310,137  59,502 
Ser. 383, Class 49, IO, 6s, 2037  984,562  207,622 
Ser. 383, Class 51, IO, 6s, 2037  1,016,396  213,257 
Ser. 383, Class 53, IO, 6s, 2037  375,942  79,273 
Ser. 383, Class 54, IO, 6s, 2037  244,441  51,543 
Ser. 383, Class 55, IO, 6s, 2037  204,216  43,055 
Ser. 383, Class 56, IO, 6s, 2037  118,568  25,085 
Ser. 383, Class 57, IO, 6s, 2037  620,819  117,849 
Ser. 383, Class 100, IO, 6s, 2022  348,355  69,041 
Ser. 383, Class 98, IO, 6s, 2022  1,070,149  224,629 
Ser. 383, Class 99, IO, 6s, 2022  472,372  93,500 
Ser. 383, Class 18, IO, 5 1/2s, 2038  3,800,349  741,068 
Ser. 383, Class 19, IO, 5 1/2s, 2038  3,467,696  671,866 
Ser. 383, Class 25, IO, 5 1/2s, 2038  592,509  134,684 
Ser. 386, Class 4, IO, 5 1/2s, 2037  859,172  213,006 
Ser. 386, Class 5, IO, 5 1/2s, 2037  549,181  122,280 
Ser. 383, Class 15, IO, 5 1/2s, 2037  525,395  121,772 
Ser. 383, Class 16, IO, 5 1/2s, 2037  228,443  50,194 
Ser. 383, Class 4, IO, 5 1/2s, 2037  5,303,307  1,060,661 
Ser. 383, Class 5, IO, 5 1/2s, 2037  3,365,402  681,494 
Ser. 383, Class 6, IO, 5 1/2s, 2037  3,023,918  612,343 
Ser. 383, Class 7, IO, 5 1/2s, 2037  2,980,470  603,545 
Ser. 383, Class 8, IO, 5 1/2s, 2037  1,208,438  256,793 
Ser. 383, Class 9, IO, 5 1/2s, 2037  1,152,880  244,987 
Ser. 383, Class 20, IO, 5 1/2s, 2037  2,146,179  434,601 

22

COLLATERALIZED MORTGAGE  Principal   
OBLIGATIONS (44.3%)* cont.  amount  Value 
Fannie Mae     
Ser. 383, Class 21, IO, 5 1/2s, 2037  $2,029,180  $410,909 
Ser. 383, Class 22, IO, 5 1/2s, 2037  1,374,782  288,704 
Ser. 383, Class 23, IO, 5 1/2s, 2037  1,240,191  257,340 
Ser. 383, Class 24, IO, 5 1/2s, 2037  868,295  201,213 
Ser. 383, Class 26, IO, 5 1/2s, 2037  638,736  156,907 
Ser. 383, Class 27, IO, 5 1/2s, 2037  186,806  40,066 
Ser. 379, Class 2, IO, 5 1/2s, 2037  14,019,364  3,204,827 
Ser. 363, Class 2, IO, 5 1/2s, 2035  10,321,316  2,427,573 
Ser. 383, Class 95, IO, 5 1/2s, 2022  1,709,265  252,117 
Ser. 383, Class 97, IO, 5 1/2s, 2022  717,021  140,181 
Ser. 383, Class 94, IO, 5 1/2s, 2022  858,538  180,446 
Ser. 383, Class 96, IO, 5 1/2s, 2022  932,268  187,984 
Ser. 386, Class 1, IO, 5s, 2037  157,192  39,559 
Ser. 386, Class 2, IO, 5s, 2037  125,889  30,245 
Ser. 383, Class 2, IO, 5s, 2037  569,758  132,018 
Ser. 377, Class 2, IO, 5s, 2036  8,558,263  2,027,453 
Ser. 383, Class 92, IO, 5s, 2022  745,981  151,040 
Ser. 383, Class 93, IO, 5s, 2022  405,022  79,225 
IFB Ser. 07-W6, Class 6A2, IO,     
4.593s, 2037  4,115,247  344,652 
IFB Ser. 06-90, Class SE, IO,     
4.593s, 2036  8,605,565  1,037,900 
IFB Ser. 04-51, Class XP, IO,     
4.493s, 2034  8,636,056  883,172 
IFB Ser. 03-66, Class SA, IO,     
4.443s, 2033  5,288,538  541,414 
IFB Ser. 08-7, Class SA, IO,     
4.343s, 2038  21,128,796  2,503,783 
IFB Ser. 07-W6, Class 5A2, IO,     
4.083s, 2037  5,564,561  410,386 
IFB Ser. 07-W2, Class 3A2, IO,     
4.073s, 2037  5,849,719  442,385 
IFB Ser. 06-115, Class BI, IO,     
4.053s, 2036  5,557,190  383,518 
IFB Ser. 05-113, Class AI, IO,     
4.023s, 2036  2,726,142  235,412 
IFB Ser. 05-113, Class DI, IO,     
4.023s, 2036  157,860  13,767 
IFB Ser. 08-36, Class YI, IO,     
3.993s, 2036  9,418,414  882,741 
IFB Ser. 06-60, Class SI, IO,     
3.943s, 2036  6,091,630  563,476 
IFB Ser. 06-60, Class UI, IO,     
3.943s, 2036  2,473,047  210,328 
IFB Ser. 04-12, Class WS, IO,     
3.943s, 2033  2,816,452  283,831 
IFB Ser. 07-W7, Class 3A2, IO,     
3.923s, 2037  7,944,805  713,826 
IFB Ser. 06-60, Class DI, IO,     
3.863s, 2035  6,243,269  437,029 
IFB Ser. 03-130, Class BS, IO,     
3.843s, 2033  12,649,684  1,124,582 
IFB Ser. 03-34, Class WS, IO,     
3.793s, 2029  12,037,380  983,634 
IFB Ser. 08-10, Class LI, IO,     
3.773s, 2038  12,100,592  1,111,742 
IFB Ser. 05-42, Class SA, IO,     
3.593s, 2035  5,431,259  463,860 
IFB Ser. 07-39, Class LI, IO,     
3.563s, 2037  6,556,161  567,817 
IFB Ser. 07-23, Class SI, IO,     
3.563s, 2037  1,609,068  111,167 
IFB Ser. 07-54, Class CI, IO,     
3.553s, 2037  5,718,613  517,157 
IFB Ser. 07-39, Class PI, IO,     
3.553s, 2037  3,658,901  255,247 

COLLATERALIZED MORTGAGE  Principal   
OBLIGATIONS (44.3%)* cont.  amount  Value 
Fannie Mae     
IFB Ser. 07-30, Class WI, IO,     
3.553s, 2037  $19,931,901  $1,534,776 
IFB Ser. 07-28, Class SE, IO,     
3.543s, 2037  990,638  88,270 
IFB Ser. 07-22, Class S, IO,     
3.543s, 2037  16,460,731  1,368,298 
IFB Ser. 06-128, Class SH, IO,     
3.543s, 2037  4,121,913  275,686 
IFB Ser. 06-56, Class SM, IO,     
3.543s, 2036  4,488,397  361,437 
IFB Ser. 05-90, Class SP, IO,     
3.543s, 2035  2,705,783  239,176 
IFB Ser. 05-12, Class SC, IO,     
3.543s, 2035  3,356,799  281,721 
IFB Ser. 05-45, Class PL, IO,     
3.543s, 2034  5,491,084  464,540 
IFB Ser. 07-W5, Class 2A2, IO,     
3.533s, 2037  1,794,375  139,064 
IFB Ser. 07-30, Class IE, IO,     
3.533s, 2037  11,089,249  1,151,075 
IFB Ser. 06-123, Class CI, IO,     
3.533s, 2037  10,677,893  890,227 
IFB Ser. 06-123, Class UI, IO,     
3.533s, 2037  10,354,605  808,954 
IFB Ser. 07-15, Class BI, IO,     
3.493s, 2037  17,118,623  1,395,818 
IFB Ser. 06-126, Class CS, IO,     
3.493s, 2037  8,946,027  721,023 
IFB Ser. 06-16, Class SM, IO,     
3.493s, 2036  10,425,966  892,348 
IFB Ser. 05-95, Class CI, IO,     
3.493s, 2035  6,670,512  624,994 
IFB Ser. 05-84, Class SG, IO,     
3.493s, 2035  10,484,053  891,145 
IFB Ser. 05-57, Class NI, IO,     
3.493s, 2035  2,181,117  170,550 
IFB Ser. 05-29, Class SX, IO,     
3.493s, 2035  6,001,340  529,914 
IFB Ser. 05-7, Class SC, IO,     
3.493s, 2035  6,431,595  469,056 
IFB Ser. 04-92, Class S, IO,     
3.493s, 2034  15,997,651  1,119,836 
IFB Ser. 06-104, Class EI, IO,     
3.483s, 2036  6,187,674  586,837 
IFB Ser. 05-83, Class QI, IO,     
3.483s, 2035  1,820,489  149,079 
IFB Ser. 06-128, Class GS, IO,     
3.473s, 2037  6,428,066  561,157 
IFB Ser. 06-116, Class ES, IO,     
3.443s, 2036  806,372  62,824 
IFB Ser. 06-114, Class IS, IO,     
3.443s, 2036  4,528,070  366,665 
IFB Ser. 04-92, Class SQ, IO,     
3.443s, 2034  6,587,704  596,343 
IFB Ser. 06-115, Class IE, IO,     
3.433s, 2036  3,525,013  301,580 
IFB Ser. 06-117, Class SA, IO,     
3.433s, 2036  5,184,365  398,590 
IFB Ser. 06-121, Class SD, IO,     
3.433s, 2036  625,974  45,774 
IFB Ser. 06-109, Class SG, IO,     
3.423s, 2036  1,471,684  110,376 
IFB Ser. 06-104, Class SY, IO,     
3.413s, 2036  1,316,892  97,221 
IFB Ser. 06-109, Class SH, IO,     
3.413s, 2036  4,879,051  436,568 

23

COLLATERALIZED MORTGAGE  Principal   
OBLIGATIONS (44.3%)* cont.  amount  Value 
Fannie Mae     
IFB Ser. 06-111, Class SA, IO,     
3.413s, 2036  $30,996,226  $2,587,503 
IFB Ser. 07-W6, Class 4A2, IO,     
3.393s, 2037  24,600,789  1,845,059 
IFB Ser. 06-128, Class SC, IO,     
3.393s, 2037  5,459,621  401,703 
IFB Ser. 06-43, Class SI, IO,     
3.393s, 2036  12,035,425  962,028 
IFB Ser. 06-8, Class JH, IO,     
3.393s, 2036  17,125,425  1,440,762 
IFB Ser. 05-122, Class SG, IO,     
3.393s, 2035  5,219,883  452,937 
IFB Ser. 05-57, Class MS, IO,     
3.393s, 2035  4,739,505  368,664 
IFB Ser. 05-95, Class OI, IO,     
3.383s, 2035  1,034,458  85,534 
IFB Ser. 06-92, Class LI, IO,     
3.373s, 2036  5,168,235  412,777 
IFB Ser. 06-99, Class AS, IO,     
3.373s, 2036  1,555,431  121,518 
IFB Ser. 06-98, Class SQ, IO,     
3.363s, 2036  11,853,821  866,811 
IFB Ser. 06-85, Class TS, IO,     
3.353s, 2036  12,248,690  909,551 
IFB Ser. 07-75, Class PI, IO,     
3.333s, 2037  6,934,728  500,819 
IFB Ser. 07-88, Class MI, IO,     
3.313s, 2037  2,693,866  182,009 
IFB Ser. 07-103, Class AI, IO,     
3.293s, 2037  24,607,646  1,784,054 
IFB Ser. 07-15, Class NI, IO,     
3.293s, 2022  10,574,623  674,132 
IFB Ser. 07-106, Class SM, IO,     
3.253s, 2037  15,022,975  1,100,703 
IFB Ser. 08-3, Class SC, IO,     
3.243s, 2038  39,710,003  3,060,462 
IFB Ser. 07-109, Class XI, IO,     
3.243s, 2037  4,156,638  341,996 
IFB Ser. 07-109, Class YI, IO,     
3.243s, 2037  5,428,594  390,756 
IFB Ser. 07-W8, Class 2A2, IO,     
3.243s, 2037  10,395,665  659,449 
IFB Ser. 07-88, Class JI, IO,     
3.243s, 2037  8,384,340  643,984 
IFB Ser. 06-79, Class SH, IO,     
3.243s, 2036  8,951,443  747,172 
IFB Ser. 07-54, Class KI, IO,     
3.233s, 2037  2,771,362  160,709 
IFB Ser. 07-30, Class JS, IO,     
3.233s, 2037  9,987,644  724,104 
IFB Ser. 07-30, Class LI, IO,     
3.233s, 2037  9,102,142  748,324 
IFB Ser. 07-W2, Class 1A2, IO,     
3.223s, 2037  4,854,889  336,390 
IFB Ser. 07-106, Class SN, IO,     
3.203s, 2037  6,123,298  437,528 
IFB Ser. 07-54, Class IA, IO,     
3.203s, 2037  5,027,898  399,366 
IFB Ser. 07-54, Class IB, IO,     
3.203s, 2037  5,027,898  399,366 
IFB Ser. 07-54, Class IC, IO,     
3.203s, 2037  5,027,898  399,366 
IFB Ser. 07-54, Class ID, IO,     
3.203s, 2037  5,027,898  399,366 
IFB Ser. 07-54, Class IE, IO,     
3.203s, 2037  5,027,898  399,366 

COLLATERALIZED MORTGAGE  Principal   
OBLIGATIONS (44.3%)* cont.  amount  Value 
Fannie Mae     
IFB Ser. 07-54, Class IF, IO,     
3.203s, 2037  $7,963,736  $648,117 
IFB Ser. 07-54, Class NI, IO,     
3.203s, 2037  4,834,359  403,008 
IFB Ser. 07-54, Class UI, IO,     
3.203s, 2037  7,304,212  583,089 
IFB Ser. 07-91, Class AS, IO,     
3.193s, 2037  4,298,269  324,919 
IFB Ser. 07-91, Class HS, IO,     
3.193s, 2037  4,406,697  311,739 
IFB Ser. 07-15, Class CI, IO,     
3.173s, 2037  19,249,068  1,424,547 
IFB Ser. 06-123, Class BI, IO,     
3.173s, 2037  23,484,489  1,716,106 
IFB Ser. 06-115, Class JI, IO,     
3.173s, 2036  13,980,784  1,022,345 
IFB Ser. 07-109, Class PI, IO,     
3.143s, 2037  6,685,327  503,103 
IFB Ser. 06-123, Class LI, IO,     
3.113s, 2037  9,621,802  750,823 
IFB Ser. 08-1, Class NI, IO,     
3.043s, 2037  11,125,133  702,274 
IFB Ser. 08-10, Class GI, IO,     
3.023s, 2038  8,197,090  461,118 
IFB Ser. 08-13, Class SA, IO,     
3.013s, 2038  24,881,801  1,690,942 
IFB Ser. 07-39, Class AI, IO,     
2.913s, 2037  8,807,029  575,948 
IFB Ser. 07-32, Class SD, IO,     
2.903s, 2037  5,850,817  413,214 
IFB Ser. 07-30, Class UI, IO,     
2.893s, 2037  4,861,438  332,471 
IFB Ser. 07-32, Class SC, IO,     
2.893s, 2037  8,355,770  584,570 
IFB Ser. 07-1, Class CI, IO,     
2.893s, 2037  5,621,111  401,173 
IFB Ser. 05-74, Class SE, IO,     
2.893s, 2035  3,703,800  218,350 
IFB Ser. 05-92, Class US, IO,     
2.893s, 2025  14,351,046  735,491 
IFB Ser. 05-14, Class SE, IO,     
2.843s, 2035  5,410,271  319,530 
IFB Ser. 08-1, Class BI, IO,     
2.703s, 2038  21,705,681  1,061,755 
IFB Ser. 07-75, Class ID, IO,     
2.663s, 2037  7,283,750  472,890 
Ser. 03-W10, Class 3, IO,     
1.937s, 2043  967,056  63,346 
Ser. 03-W17, Class 12, IO,     
1.147s, 2033  17,156,071  660,433 
Ser. 01-T1, Class 1, IO,     
0.809s, 2040  919,937  11,680 
Ser. 00-T6, IO, 0.768s, 2030  15,289,789  223,307 
Ser. 03-W10, Class 3A, IO,     
0.703s, 2043  31,881,382  655,822 
Ser. 03-W10, Class 1A, IO,     
0.66s, 2043  25,974,777  429,924 
Ser. 02-T18, IO, 0.514s, 2042  46,160,950  563,117 
Ser. 02-W8, Class 1, IO,     
0.345s, 2042  23,423,512  237,158 
Ser. 06-117, Class OA, PO,     
zero %, 2036  282,630  229,475 
Ser. 06-56, Class XF, zero %, 2036  364,525  377,780 
Ser. 04-38, Class AO, PO,     
zero %, 2034  2,116,918  1,471,258 

24

COLLATERALIZED MORTGAGE  Principal   
OBLIGATIONS (44.3%)* cont.  amount  Value 
Fannie Mae     
Ser. 04-61, Class CO, PO, zero %, 2031  $2,640,261  $2,085,806 
Ser. 99-51, Class N, PO, zero %, 2029  330,255  277,415 
Ser. 07-15, Class IM, IO, zero %, 2009  4,796,248  349 
Ser. 07-16, Class TS, IO, zero %, 2009  19,862,434  1,394 
FRB Ser. 05-91, Class EF, zero %, 2035  411,980  402,347 
FRB Ser. 06-54, Class CF, zero %, 2035  385,299  368,263 
Federal Home Loan Mortgage Corp.     
Structured Pass-Through Securities     
Ser. T-58, Class 4A, 7 1/2s, 2043  35,033  37,102 
Ser. T-42, Class A5, 7 1/2s, 2042  439,385  454,442 
Ser. T-60, Class 1A2, 7s, 2044  8,358,632  8,871,501 
IFB Ser. T-56, Class 2ASI, IO,     
4.893s, 2043  3,064,390  334,325 
Ser. T-57, Class 1AX, IO, 0.451s, 2043  13,484,071  142,608 
FFCA Secured Lending Corp. 144A     
Ser. 00-1, Class X, IO, 1.322s, 2020 F  27,461,801  1,743,168 
First Chicago Lennar Trust 144A     
Ser. 97-CHL1, Class E, 8.026s, 2039  2,630,915  2,630,915 
First Union Commercial Mortgage     
Trust 144A Ser. 99-C1, Class G,     
5.35s, 2035  3,121,100  1,875,645 
First Union-Lehman Brothers     
Commercial Mortgage Trust II     
Ser. 97-C2, Class G, 7 1/2s, 2029  1,408,000  1,218,834 
Freddie Mac     
IFB Ser. 3153, Class JS, 20.663s, 2036  2,499,868  2,873,317 
IFB Ser. 3182, Class PS, 18.65s, 2032  3,044,446  3,512,624 
IFB Ser. 3182, Class SP, 18.65s, 2032  1,653,707  1,660,946 
IFB Ser. 3393, Class JS,     
18.059998s, 2032  2,450,990  2,492,705 
IFB Ser. 3081, Class DC, 17.966s, 2035  2,326,841  2,472,225 
IFB Ser. 3211, Class SI, IO,     
17.207s, 2036  1,882,382  912,307 
IFB Ser. 3114, Class GK, 16.45s, 2036  1,476,854  1,571,680 
IFB Ser. 2979, Class AS, 15.152s, 2034  1,090,381  1,132,081 
IFB Ser. 3149, Class SU, 12.822s, 2036  1,775,185  1,712,478 
IFB Ser. 3065, Class DC, 12.398s, 2035  3,904,714  3,774,296 
IFB Ser. 3012, Class FS, 10.656s, 2035  2,153,152  2,169,322 
IFB Ser. 246, Class S54, IO,     
6.113s, 2037  25,990,532  3,053,887 
IFB Ser. 248, IO, 5 1/2s, 2037  4,550,292  1,031,636 
IFB Ser. 2828, Class GI, IO, 5.013s, 2034  394,028  44,010 
IFB Ser. 3184, Class SP, IO, 4.863s, 2033  9,004,720  746,572 
IFB Ser. 2869, Class JS, IO, 4.763s, 2034  846,134  59,808 
IFB Ser. 2882, Class LS, IO, 4.713s, 2034  4,061,784  361,515 
IFB Ser. 3203, Class SH, IO, 4.653s, 2036  5,085,869  520,305 
IFB Ser. 2594, Class SE, IO, 4.563s, 2030  1,522,576  116,432 
IFB Ser. 2828, Class TI, IO, 4.563s, 2030  3,258,559  245,258 
IFB Ser. 3397, Class GS, IO, 4.513s, 2037  4,102,293  313,403 
IFB Ser. 3297, Class BI, IO, 4.273s, 2037  15,972,487  1,391,268 
IFB Ser. 3287, Class SD, IO, 4.263s, 2037  4,772,470  399,828 
IFB Ser. 3281, Class BI, IO, 4.263s, 2037  2,785,563  256,170 
IFB Ser. 3281, Class CI, IO, 4.263s, 2037  3,991,194  367,596 
IFB Ser. 3249, Class SI, IO, 4.263s, 2036  2,676,633  215,972 
IFB Ser. 3028, Class ES, IO, 4.263s, 2035  17,507,759  1,568,030 
IFB Ser. 3042, Class SP, IO, 4.263s, 2035  4,664,978  340,873 
IFB Ser. 2990, Class TS, IO, 4.263s, 2035  5,617,501  359,666 
IFB Ser. 3045, Class DI, IO, 4.243s, 2035  29,237,417  2,200,817 
IFB Ser. 3236, Class ES, IO, 4.213s, 2036  471,980  37,387 
IFB Ser. 3136, Class NS, IO, 4.213s, 2036  3,529,751  273,591 
IFB Ser. 3107, Class DC, IO, 4.213s, 2035  16,730,656  1,488,694 
IFB Ser. 2950, Class SM, IO, 4.213s, 2016  2,089,477  174,756 
IFB Ser. 3256, Class S, IO, 4.203s, 2036  9,915,387  830,414 
IFB Ser. 3031, Class BI, IO, 4.202s, 2035  3,828,633  305,235 
IFB Ser. 3370, Class TS, IO, 4.183s, 2037  16,354,731  1,213,189 

COLLATERALIZED MORTGAGE  Principal   
OBLIGATIONS (44.3%)* cont.  amount  Value 
Freddie Mac     
IFB Ser. 3244, Class SB, IO, 4.173s, 2036  $4,092,928  $288,296 
IFB Ser. 3244, Class SG, IO, 4.173s, 2036  4,749,224  395,311 
IFB Ser. 3236, Class IS, IO, 4.163s, 2036  8,289,980  606,205 
IFB Ser. 3033, Class SG, IO, 4.163s, 2035  3,751,608  271,277 
IFB Ser. 3114, Class TS, IO, 4.163s, 2030  22,746,074  1,793,619 
IFB Ser. 3128, Class JI, IO, 4.143s, 2036  1,599,912  130,993 
IFB Ser. 3240, Class S, IO, 4.133s, 2036  16,172,700  1,362,129 
IFB Ser. 3229, Class BI, IO, 4.133s, 2036  507,131  39,756 
IFB Ser. 3153, Class JI, IO, 4.133s, 2036  7,377,725  470,330 
IFB Ser. 3065, Class DI, IO, 4.133s, 2035  2,703,986  211,184 
IFB Ser. 3145, Class GI, IO, 4.113s, 2036  1,305,797  113,441 
IFB Ser. 3218, Class AS, IO, 4.093s, 2036  5,169,294  403,360 
IFB Ser. 3221, Class SI, IO, 4.093s, 2036  6,457,170  482,344 
IFB Ser. 3424, Class XI, IO, 4.083s, 2036  10,526,785  775,355 
IFB Ser. 3202, Class PI, IO, 4.053s, 2036  17,873,049  1,434,098 
IFB Ser. 3355, Class MI, IO, 4.013s, 2037  4,571,242  341,892 
IFB Ser. 3201, Class SG, IO, 4.013s, 2036  8,181,116  618,778 
IFB Ser. 3203, Class SE, IO, 4.013s, 2036  7,311,550  560,389 
IFB Ser. 3238, Class LI, IO, 4.003s, 2036  5,385,957  429,518 
IFB Ser. 3171, Class PS, IO, 3.998s, 2036  6,646,538  519,261 
IFB Ser. 3152, Class SY, IO, 3.993s, 2036  12,539,380  1,144,544 
IFB Ser. 3366, Class SA, IO, 3.963s, 2037  9,970,048  767,793 
IFB Ser. 3284, Class BI, IO, 3.963s, 2037  4,640,521  332,897 
IFB Ser. 3260, Class SA, IO, 3.963s, 2037  4,585,365  303,868 
IFB Ser. 3199, Class S, IO, 3.963s, 2036  10,589,656  888,134 
IFB Ser. 3284, Class LI, IO, 3.953s, 2037  12,503,081  948,446 
IFB Ser. 3281, Class AI, IO, 3.943s, 2037  19,584,245  1,611,456 
IFB Ser. 3311, Class EI, IO, 3.923s, 2037  5,485,110  449,906 
IFB Ser. 3311, Class IA, IO, 3.923s, 2037  7,593,576  646,875 
IFB Ser. 3311, Class IB, IO, 3.923s, 2037  7,593,576  646,875 
IFB Ser. 3311, Class IC, IO, 3.923s, 2037  7,593,576  646,875 
IFB Ser. 3311, Class ID, IO, 3.923s, 2037  7,593,576  646,875 
IFB Ser. 3311, Class IE, IO, 3.923s, 2037  11,957,710  1,018,643 
IFB Ser. 3311, Class PI, IO, 3.923s, 2037  7,092,261  586,863 
IFB Ser. 3382, Class SI, IO, 3.913s, 2037  15,771,189  1,085,594 
IFB Ser. 3375, Class MS, IO, 3.913s, 2037  26,702,670  1,915,196 
IFB Ser. 3240, Class GS, IO, 3.893s, 2036  10,064,233  796,301 
IFB Ser. 3416, Class BI, IO, 3.763s, 2038  21,003,104  1,527,766 
IFB Ser. 2967, Class SA, IO, 3.663s, 2035  6,178,211  335,131 
IFB Ser. 3339, Class TI, IO, 3.653s, 2037  11,226,639  759,244 
IFB Ser. 3284, Class CI, IO, 3.633s, 2037  20,931,550  1,434,020 
IFB Ser. 3016, Class SQ, IO, 3.623s, 2035  6,465,891  353,529 
IFB Ser. 3397, Class SQ, IO, 3.483s, 2037  15,369,981  920,354 
IFB Ser. 3226, Class YS, IO, 3.363s, 2036  16,136,194  537,013 
IFB Ser. 3424, Class UI, IO, 3.273s, 2037  7,358,532  430,641 
IFB Ser. 2852, Class VS, IO, 3.4.350s, 2034  355,309  36,230 
Ser. 246, PO, zero %, 2037  3,156,989  2,565,547 
Ser. 3292, Class DO, PO, zero %, 2037  520,626  382,393 
Ser. 3292, Class OA, PO, zero %, 2037  546,698  379,740 
Ser. 3300, PO, zero %, 2037  3,054,684  2,367,380 
Ser. 3139, Class CO, PO, zero %, 2036  897,196  722,731 
Ser. 2587, Class CO, PO, zero %, 2032  2,633,409  2,175,726 
Ser. 1208, Class F, PO, zero %, 2022  321,855  270,528 
FRB Ser. 3345, Class TY, zero %, 2037  842,806  823,922 
FRB Ser. 3326, Class XF, zero %, 2037  957,420  841,561 
FRB Ser. 3273, Class HF, zero %, 2037  163,461  172,237 
FRB Ser. 3235, Class TP, zero %, 2036  267,705  237,457 
FRB Ser. 3283, Class KF, zero %, 2036  327,218  262,203 
Ser. 3226, Class YI, IO, zero %, 2036  16,136,194  616,386 
FRB Ser. 3226, Class YW, zero %, 2036  1,435,103  1,254,194 
FRB Ser. 3332, Class UA, zero %, 2036  361,912  338,212 
FRB Ser. 3251, Class TC, zero %, 2036  3,824,369  3,876,417 
FRB Ser. 3130, Class JF, zero %, 2036  1,283,216  1,334,742 
FRB Ser. 3326, Class WF, zero %, 2035  923,583  771,636 
FRB Ser. 3030, Class EF, zero %, 2035  425,297  416,151 
FRB Ser. 3412, Class UF, zero %, 2035  2,172,875  1,831,478 

25

COLLATERALIZED MORTGAGE  Principal   
OBLIGATIONS (44.3%)* cont.  amount  Value 
Freddie Mac     
FRB Ser. 2980, Class TY, zero %, 2035  $188,711  $154,062 
FRB Ser. 3112, Class XM, zero %, 2034  144,799  147,851 
GE Capital Commercial Mortgage Corp. 144A     
FRB Ser. 00-1, Class F, 7.787s, 2033  1,354,000  1,322,976 
Ser. 00-1, Class G, 6.131s, 2033  4,588,975  2,891,054 
GMAC Commercial Mortgage     
Securities, Inc. 144A Ser. 99-C3,     
Class G, 6.974s, 2036  4,134,628  3,944,493 
Government National     
Mortgage Association     
FRB Ser. 07-41, Class SA, 21.075s, 2037  516,567  615,045 
FRB Ser. 07-40, Class GS, 20.955s, 2037  200,878  232,171 
FRB Ser. 07-45, Class SA, 20.715s, 2037  174,078  202,943 
FRB Ser. 07-45, Class SB, 20.475s, 2037  174,078  201,761 
IFB Ser. 07-51, Class SP, 20.355s, 2037  438,199  505,397 
IFB Ser. 05-66, Class SP, 12.54s, 2035  2,165,615  2,130,093 
Ser. 07-17, Class CI, IO, 7 1/2s, 2037  3,059,585  703,705 
IFB Ser. 08-42, Class AI, IO,     
5.202s, 2038  35,556,126  3,691,153 
IFB Ser. 04-59, Class SH, IO,     
4.762s, 2034  2,339,306  216,937 
IFB Ser. 04-59, Class SC, IO,     
4.712s, 2034  3,272,834  308,481 
IFB Ser. 04-26, Class IS, IO,     
4.712s, 2034  5,738,812  362,523 
IFB Ser. 07-47, Class SA, IO,     
4.612s, 2036  6,622,307  674,738 
IFB Ser. 08-29, Class SA, IO,     
4.593s, 2038  31,336,277  2,686,992 
IFB Ser. 07-35, Class NY, IO,     
4.412s, 2035  8,180,748  619,904 
IFB Ser. 07-26, Class SD, IO,     
4.312s, 2037  8,025,566  546,742 
IFB Ser. 04-17, Class QN, IO,     
4.212s, 2034  2,959,769  271,000 
IFB Ser. 07-2, Class SA, IO,     
4.193s, 2037  774,118  63,265 
IFB Ser. 06-69, Class SI, IO,     
4.193s, 2036  6,388,579  519,861 
IFB Ser. 06-61, Class SM, IO,     
4.193s, 2036  10,429,854  850,380 
IFB Ser. 06-62, Class SI, IO,     
4.193s, 2036  5,487,225  449,678 
IFB Ser. 07-1, Class SL, IO,     
4.173s, 2037  2,398,831  195,065 
IFB Ser. 07-1, Class SM, IO,     
4.163s, 2037  2,383,259  193,285 
IFB Ser. 07-48, Class SB, IO,     
4.162s, 2037  6,530,732  424,778 
IFB Ser. 06-62, Class SA, IO,     
4.153s, 2036  7,508,776  591,876 
IFB Ser. 06-64, Class SB, IO,     
4.153s, 2036  7,640,375  618,497 
IFB Ser. 05-68, Class PU, IO,     
4.113s, 2032  5,400,113  550,086 
IFB Ser. 07-74, Class SI, IO,     
4.082s, 2037  7,880,330  716,759 
IFB Ser. 07-17, Class AI, IO,     
4.062s, 2037  19,288,521  1,427,428 
IFB Ser. 07-78, Class SA, IO,     
4.042s, 2037  32,236,519  2,050,372 
IFB Ser. 08-2, Class SM, IO,     
4.012s, 2038  19,635,515  1,284,575 
IFB Ser. 07-9, Class AI, IO,     
4.012s, 2037  8,934,386  620,743 

COLLATERALIZED MORTGAGE  Principal   
OBLIGATIONS (44.3%)* cont.  amount  Value 
Government National Mortgage Association     
IFB Ser. 07-49, Class NY, IO,     
3.913s, 2035  $21,228,797  $1,611,393 
IFB Ser. 08-40, Class SA, IO,     
3.912s, 2038  58,807,763  4,134,656 
IFB Ser. 05-71, Class SA, IO,     
3.872s, 2035  14,239,804  1,035,291 
IFB Ser. 07-25, Class KS, IO,     
3.712s, 2037  9,119,005  617,329 
IFB Ser. 07-21, Class S, IO,     
3.712s, 2037  302,063  17,905 
IFB Ser. 07-31, Class AI, IO,     
3.692s, 2037  5,582,073  456,401 
IFB Ser. 07-26, Class SG, IO,     
3.663s, 2037  7,900,838  624,739 
IFB Ser. 07-62, Class S, IO,     
3.662s, 2037  9,110,348  546,872 
IFB Ser. 07-9, Class BI, IO,     
3.633s, 2037  14,767,319  1,002,530 
IFB Ser. 07-31, Class CI, IO,     
3.623s, 2037  4,510,841  310,042 
IFB Ser. 07-25, Class SA, IO,     
3.613s, 2037  5,647,074  391,805 
IFB Ser. 07-25, Class SB, IO,     
3.613s, 2037  11,087,798  762,398 
IFB Ser. 07-22, Class S, IO,     
3.613s, 2037  4,417,572  385,340 
IFB Ser. 07-11, Class SA, IO,     
3.613s, 2037  4,165,527  320,896 
IFB Ser. 07-14, Class SB, IO,     
3.613s, 2037  3,998,211  294,884 
IFB Ser. 06-69, Class SA, IO,     
3.613s, 2036  12,290,675  846,623 
IFB Ser. 05-84, Class AS, IO,     
3.613s, 2035  12,756,878  1,015,069 
IFB Ser. 07-43, Class SC, IO,     
3.612s, 2037  7,506,467  432,125 
IFB Ser. 07-40, Class SC, IO,     
3.563s, 2037  633,063  43,357 
IFB Ser. 07-40, Class SD, IO,     
3.563s, 2037  633,063  43,357 
IFB Ser. 07-40, Class SE, IO,     
3.563s, 2037  633,063  43,357 
IFB Ser. 07-42, Class SC, IO,     
3.563s, 2037  1,227,161  80,254 
IFB Ser. 07-40, Class SB, IO,     
3.563s, 2037  12,484,673  811,229 
IFB Ser. 07-42, Class SB, IO,     
3.563s, 2037  1,224,645  80,089 
IFB Ser. 07-51, Class SJ, IO,     
3.563s, 2037  5,248,042  427,187 
IFB Ser. 07-53, Class SY, IO,     
3.548s, 2037  11,412,842  1,001,956 
IFB Ser. 07-41, Class SM, IO,     
3.513s, 2037  1,785,823  111,614 
IFB Ser. 07-41, Class SN, IO,     
3.513s, 2037  1,821,738  113,859 
IFB Ser. 07-58, Class PS, IO,     
3.513s, 2037  3,463,000  269,747 
IFB Ser. 04-88, Class S, IO,     
3.513s, 2032  6,785,779  421,890 
IFB Ser. 07-40, Class SG, IO,     
3.493s, 2037  1,397,932  92,806 
IFB Ser. 07-59, Class PS, IO,     
3.483s, 2037  4,122,445  300,003 
IFB Ser. 07-59, Class SP, IO,     
3.483s, 2037  505,738  37,564 

26

COLLATERALIZED MORTGAGE  Principal   
OBLIGATIONS (44.3%)* cont.  amount  Value 
Government National Mortgage Association     
IFB Ser. 06-38, Class SG, IO,     
3.463s, 2033  $16,494,227  $1,017,451 
IFB Ser. 07-45, Class QA, IO,     
3.453s, 2037  1,228,172  80,599 
IFB Ser. 07-45, Class QB, IO,     
3.413s, 2037  1,228,172  73,690 
IFB Ser. 07-53, Class SG, IO,     
3.413s, 2037  3,062,613  194,793 
IFB Ser. 07-51, Class SG, IO,     
3.393s, 2037  25,755,738  1,622,529 
IFB Ser. 08-3, Class SA, IO,     
3.363s, 2038  9,803,017  599,859 
IFB Ser. 07-79, Class SY, IO,     
3.363s, 2037  19,963,443  1,147,898 
IFB Ser. 07-64, Class AI, IO,     
3.363s, 2037  2,021,632  122,394 
IFB Ser. 07-53, Class ES, IO,     
3.363s, 2037  4,507,601  250,555 
IFB Ser. 08-2, Class SB, IO,     
3.333s, 2038  25,147,585  1,428,207 
IFB Ser. 07-10, Class SB, IO,     
3.333s, 2037  34,371,877  2,399,136 
IFB Ser. 08-4, Class SA, IO,     
3.329s, 2038  60,755,208  3,734,805 
IFB Ser. 07-9, Class DI, IO,     
3.323s, 2037  7,459,299  448,380 
IFB Ser. 07-59, Class SC, IO,     
3.313s, 2037  1,697,831  110,862 
IFB Ser. 07-57, Class QA, IO,     
3.313s, 2037  11,551,393  726,316 
IFB Ser. 07-58, Class SA, IO,     
3.313s, 2037  5,472,017  320,688 
IFB Ser. 07-58, Class SC, IO,     
3.313s, 2037  8,518,636  466,942 
IFB Ser. 07-59, Class SA, IO,     
3.313s, 2037  31,410,665  1,991,775 
IFB Ser. 07-61, Class SA, IO,     
3.313s, 2037  5,882,782  356,874 
IFB Ser. 07-53, Class SC, IO,     
3.313s, 2037  4,881,180  261,416 
IFB Ser. 08-34, Class SH, IO,     
3.313s, 2037  10,534,700  714,684 
IFB Ser. 06-26, Class S, IO,     
3.313s, 2036  42,017,269  2,975,663 
IFB Ser. 08-15, Class CI, IO,     
3.303s, 2038  42,590,731  2,583,809 
IFB Ser. 07-58, Class SD, IO,     
3.303s, 2037  8,109,173  444,636 
IFB Ser. 08-9, Class SK, IO,     
3.293s, 2038  17,400,680  1,183,366 
IFB Ser. 08-6, Class SC, IO,     
3.288s, 2038  43,130,032  2,362,577 
IFB Ser. 07-59, Class SD, IO,     
3.283s, 2037  821,820  46,878 
IFB Ser. 06-49, Class SA, IO,     
3.273s, 2036  14,629,231  925,868 
IFB Ser. 05-92, Class S, IO,     
3.213s, 2032  28,650,816  1,560,126 
IFB Ser. 05-65, Class SI, IO,     
3.163s, 2035  7,921,989  493,247 
IFB Ser. 06-7, Class SB, IO,     
3.133s, 2036  1,469,089  87,628 
IFB Ser. 08-15, Class PI, IO,     
3.113s, 2035  3,689,763  253,860 
IFB Ser. 06-16, Class SX, IO,     
3.103s, 2036  14,918,750  996,192 

COLLATERALIZED MORTGAGE  Principal   
OBLIGATIONS (44.3%)* cont.  amount  Value 
Government National Mortgage Association     
IFB Ser. 07-17, Class IB, IO,     
3.063s, 2037  $4,107,607  $217,811 
IFB Ser. 06-10, Class SM, IO,     
3.063s, 2036  10,913,659  718,540 
IFB Ser. 06-14, Class S, IO,     
3.063s, 2036  6,332,244  399,881 
IFB Ser. 05-57, Class PS, IO,     
3.063s, 2035  8,455,587  504,059 
IFB Ser. 06-11, Class ST, IO,     
3.053s, 2036  3,963,300  234,436 
IFB Ser. 07-27, Class SD, IO,     
3.013s, 2037  3,938,959  229,093 
IFB Ser. 07-19, Class SJ, IO,     
3.013s, 2037  6,873,592  376,474 
IFB Ser. 07-23, Class ST, IO,     
3.013s, 2037  8,717,814  471,913 
IFB Ser. 07-9, Class CI, IO,     
3.013s, 2037  9,703,737  549,844 
IFB Ser. 07-7, Class EI, IO,     
3.013s, 2037  4,402,923  245,925 
IFB Ser. 07-7, Class JI, IO,     
3.013s, 2037  11,791,082  648,509 
IFB Ser. 07-1, Class S, IO,     
3.013s, 2037  9,079,927  499,160 
IFB Ser. 07-3, Class SA, IO,     
3.013s, 2037  8,667,891  484,977 
IFB Ser. 05-17, Class S, IO,     
2.993s, 2035  7,568,120  461,528 
IFB Ser. 05-3, Class SN, IO,     
2.913s, 2035  20,416,845  1,235,379 
IFB Ser. 07-73, Class MI, IO,     
2.813s, 2037  3,398,295  151,431 
IFB Ser. 04-41, Class SG, IO,     
2.813s, 2034  20,459,372  740,565 
Ser. 07-73, Class MO, PO,     
zero %, 2037  246,423  201,930 
Ser. 99-31, Class MP, PO,     
zero %, 2029  31,212  26,021 
FRB Ser. 07-71, Class TA,     
zero %, 2037  1,693,266  1,648,275 
FRB Ser. 07-71, Class UC,     
zero %, 2037  195,543  211,239 
Ser. 07-73, Class KI, IO,     
zero %, 2037  2,468,145  37,580 
FRB Ser. 07-73, Class KM,     
zero %, 2037  247,206  250,584 
FRB Ser. 07-61, Class YC,     
zero %, 2037  2,541,271  2,532,922 
FRB Ser. 98-2, Class EA, PO,     
zero %, 2028  286,003  243,470 
GS Mortgage Securities Corp. II     
FRB Ser. 07-GG10, Class A3,     
5.993s, 2045  1,506,000  1,417,203 
Ser. 06-GG6, Class A2, 5.506s, 2038  5,643,000  5,505,875 
GSMPS Mortgage Loan Trust 144A     
Ser. 01-2, IO, 0.205s, 2032  1,128,199  5,008 
HASCO NIM Trust 144A Ser. 05-OP1A,     
Class A, 6 1/4s, 2035 (Cayman Islands)  409,597  42,829 
HSI Asset Loan Obligation FRB     
Ser. 07-AR1, Class 2A1, 6.133s, 2037  17,490,169  12,592,922 
IMPAC Secured Assets Corp. FRB     
Ser. 07-2, Class 1A1A, 3.317s, 2037  1,620,895  1,334,832 

27

COLLATERALIZED MORTGAGE  Principal   
OBLIGATIONS (44.3%)* cont.  amount  Value 
IndyMac Index Mortgage Loan Trust     
FRB Ser. 06-AR25, Class 5A1,     
6.313s, 2036  $4,053,909  $2,502,332 
FRB Ser. 07-AR15, Class 1A1,     
6.225s, 2037  7,046,107  4,720,892 
FRB Ser. 07-AR9, Class 2A1,     
6.039s, 2037  7,223,939  4,840,039 
FRB Ser. 07-AR11, Class 1A1,     
5.64s, 2037  5,412,243  3,301,468 
FRB Ser. 05-AR31, Class 3A1,     
5.633s, 2036  14,060,276  9,560,988 
JPMorgan Alternative Loan Trust     
FRB Ser. 06-A1, Class 5A1,     
5.94s, 2036  5,041,811  3,529,267 
FRB Ser. 06-A6, Class 1A1,     
3.367s, 2036 F  6,397,885  3,819,194 
JPMorgan Chase Commercial Mortgage     
Securities Corp.     
FRB Ser. 07-LD12, Class AM,     
6.261s, 2051  2,318,000  1,904,028 
FRB Ser. 07-LD12, Class A3,     
6.189s, 2051  11,043,000  10,349,389 
FRB Ser. 07-LD11, Class A3,     
6.007s, 2049  1,878,000  1,678,369 
Ser. 07-CB20, Class A3, 5.863s, 2051  3,771,000  3,466,379 
Ser. 08-C2, Class X, IO, 0.647s, 2051  261,567,362  6,743,207 
JPMorgan Chase Commercial Mortgage     
Securities Corp. 144A     
Ser. 07-CB20, Class X1, IO,     
0.068s, 2051  280,271,310  2,847,557 
LB Commercial Conduit     
Mortgage Trust 144A     
Ser. 99-C1, Class G, 6.41s, 2031  1,960,723  1,536,030 
Ser. 98-C4, Class J, 5.6s, 2035  3,535,000  3,032,554 
LB-UBS Commercial     
Mortgage Trust     
Ser. 07-C6, Class A2, 5.845s, 2012  3,440,000  3,230,295 
Ser. 07-C7, Class XW, IO, 0.526s, 2045  273,300,230  5,875,873 
LB-UBS Commercial Mortgage Trust     
144A Ser. 07-C7, Class XCL, IO,     
0.086s, 2045  116,402,622  1,113,042 
Lehman Mortgage Trust     
IFB Ser. 07-5, Class 4A3, 20.839s, 2037  3,130,516  2,817,465 
IFB Ser. 07-5, Class 8A2, IO,     
4.513s, 2036  5,456,921  486,981 
IFB Ser. 07-4, Class 3A2, IO,     
3.993s, 2037  4,604,446  383,173 
IFB Ser. 06-5, Class 2A2, IO,     
3.943s, 2036  10,588,158  767,641 
IFB Ser. 07-2, Class 2A13, IO,     
3.483s, 2037  8,285,836  621,438 
IFB Ser. 06-9, Class 2A2, IO,     
3.413s, 2037  9,896,422  773,851 
IFB Ser. 06-7, Class 2A4, IO,     
3.343s, 2036  17,442,747  1,220,992 
IFB Ser. 06-7, Class 2A5, IO,     
3.343s, 2036  16,367,228  1,145,706 
IFB Ser. 06-6, Class 1A2, IO,     
3.293s, 2036  7,048,265  493,379 
IFB Ser. 06-6, Class 1A3, IO,     
3.293s, 2036  9,994,603  699,622 
Mach One Commercial Mortgage Trust 144A     
Ser. 04-1A, Class J, 5.45s, 2040 (Canada)  4,511,500  2,030,175 
Ser. 04-1A, Class K, 5.45s, 2040 (Canada)  1,653,000  661,200 
Ser. 04-1A, Class L, 5.45s, 2040 (Canada)  752,500  285,950 

COLLATERALIZED MORTGAGE    Principal   
OBLIGATIONS (44.3%)* cont.    amount  Value 
MASTR Adjustable Rate Mortgages       
Trust FRB Ser. 04-13, Class 3A6,       
3.788s, 2034    $579,000  $460,305 
MASTR Alternative Loans Trust       
Ser. 06-3, Class 1A1, 6 1/4s, 2036    4,497,098  3,372,823 
Merrill Lynch Capital       
Funding Corp. Ser. 06-4,       
Class XC, IO, 0.119s, 2049    201,110,022  2,453,956 
Merrill Lynch Mortgage Investors, Inc.     
FRB Ser. 05-A9, Class 3A1,       
5.278s, 2035    867,760  878,569 
Ser. 96-C2, Class JS, IO,       
2.261s, 2028    6,614,751  476,659 
Merrill Lynch Mortgage Trust       
FRB Ser. 07-C1, Class A3, 6.023s, 2050  1,006,000  959,212 
FRB Ser. 07-C1, Class A2, 5.919s, 2050  5,000,000  4,845,632 
Merrill Lynch/Countrywide       
Commercial Mortgage Trust FRB       
Ser. 07-8, Class A2, 6.119s, 2049    1,827,000  1,761,860 
Mezz Cap Commercial Mortgage Trust     
Ser. 07-C5, Class X, 4.867s, 2017    11,177,942  1,910,667 
Mezz Cap Commercial Mortgage Trust     
144A Ser. 04-C1, Class X, IO,       
8.007s, 2037    7,990,543  1,754,475 
Morgan Stanley Capital       
FRB Ser. 08-T29, Class A3, 6.458s, 2043  2,439,000  2,377,684 
FRB Ser. 07-IQ14, Class AM,       
5.877s, 2049    1,136,000  901,019 
Morgan Stanley Capital I 144A       
FRB Ser. 04-RR, Class F7, 6s, 2039    13,869,752  7,628,364 
Ser. 07-HQ13, Class X1, IO,       
0.822s, 2044    126,486,987  3,348,111 
Morgan Stanley Mortgage Loan Trust       
Ser. 05-5AR, Class 2A1, 4.852s, 2035  6,873,623  4,656,880 
Mortgage Capital Funding, Inc.       
FRB Ser. 98-MC2, Class E, 7.184s, 2030  2,378,284  2,380,077 
Ser. 97-MC2, Class X, IO, 1.988s, 2012  21,244  — 
Permanent Financing PLC 144A FRB       
Ser. 9A, Class 3A, 2.917s, 2033       
(United Kingdom)    6,371,000  5,767,087 
Permanent Master Issuer PLC FRB       
Ser. 07-1, Class 4A, 2.871s, 2033       
(United Kingdom)    7,758,000  7,399,193 
PNC Mortgage Acceptance Corp. 144A     
Ser. 00-C1, Class J, 6 5/8s, 2010    880,000  516,868 
Residential Asset Securitization Trust       
Ser. 07-A5, Class 2A3, 6s, 2037    14,105,595  9,873,916 
IFB Ser. 07-A3, Class 2A2, IO,       
3.483s, 2037    18,987,567  1,234,192 
Residential Mortgage Securities 144A       
FRB Ser. 20A, Class B1A, 6.509s, 2038     
(United Kingdom)  GBP  665,158  699,001 
SBA CMBS Trust 144A Ser. 05-1A,       
Class E, 6.706s, 2035    $1,580,000  1,332,145 
STRIPS 144A       
Ser. 03-1A, Class M, 5s, 2018       
(Cayman Islands)    1,339,000  923,910 
Ser. 03-1A, Class N, 5s, 2018       
(Cayman Islands)    1,590,000  1,033,500 
Ser. 04-1A, Class M, 5s, 2018       
(Cayman Islands)    1,438,000  920,320 
Ser. 04-1A, Class N, 5s, 2018       
(Cayman Islands)    1,371,000  795,180 

28

COLLATERALIZED MORTGAGE    Principal   
OBLIGATIONS (44.3%)* cont.    amount  Value 
Structured Adjustable Rate       
Mortgage Loan Trust FRB       
Ser. 06-9, Class 1A1, 5.715s, 2036    $4,744,751  $3,086,833 
Structured Asset       
Securities Corp.       
IFB Ser. 07-4, Class 1A3, IO,       
2.541s, 2037    19,834,068  1,227,107 
Ser. 07-4, Class 1A4, IO, 1s, 2037    21,010,500  493,058 
Structured Asset Securities Corp.       
144A Ser. 07-RF1, Class 1A, IO,       
3.317s, 2037    21,263,464  930,277 
Titan Europe PLC 144A       
FRB Ser. 05-CT2A, Class E, 6.845s,       
2014 (Ireland)  GBP  1,094,530  1,749,718 
FRB Ser. 05-CT1A, Class D, 7.095s,       
2014 (Ireland)  GBP  2,491,896  3,585,638 
URSUS EPC 144A       
FRB Ser. 1-A, Class D, 6.938s,       
2012 (Ireland)  GBP  1,477,037  2,308,214 
Ser. 1-A, Class X1, IO, 4.925s,       
2012 (Ireland)  GBP  5,000  102,316 
Wachovia Bank Commercial       
Mortgage Trust       
Ser. 07-C30, Class A3, 5.246s, 2043    $11,512,000  10,631,038 
Ser. 07-C34, IO, 0.521s, 2046    76,089,865  1,610,822 
Wachovia Bank Commercial Mortgage       
Trust 144A FRB Ser. 05-WL5A,       
Class L, 5.788s, 2018    3,292,000  2,962,800 
Wells Fargo Mortgage Backed       
Securities Trust Ser. 05-AR13,       
Class 1A4, IO, 0.742s, 2035    59,061,323  398,664 
 
Total collateralized mortgage obligations       
(cost $876,903,126)      $844,806,218 
 
U.S. GOVERNMENT AND AGENCY    Principal   
MORTGAGE OBLIGATIONS (31.7%)*    amount  Value 
U.S. Government Guaranteed Mortgage Obligations (0.2%)   
Government National Mortgage Association     
Pass-Through Certificates       
6 1/2s, with due dates from       
August 20, 2037 to November 20, 2037    $3,994,789  $4,095,441 
      4,095,441 
 
U.S. Government Agency Mortgage Obligations (31.5%)   
Federal Home Loan Mortgage Corporation     
Pass-Through Certificates       
6s, September 1, 2021    63,395  64,584 
5 1/2s, May 1, 2020    312,459  315,535 
Federal National Mortgage Association       
Pass-Through Certificates       
6 1/2s, with due dates from       
October 1, 2036 to August 1, 2037    4,078,158  4,185,688 
6s, April 1, 2021    3,244,452  3,310,862 
6s, TBA, October 1, 2034    78,000,000  78,938,434 
5 1/2s, with due dates from       
March 1, 2037 to January 1, 2038    11,445,117  11,412,482 
5 1/2s, with due dates from       
January 1, 2009 to February 1, 2021    3,753,451  3,801,600 
5 1/2s, TBA, October 1, 2034    11,000,000  10,955,313 
5s, TBA, October 1, 2034    411,000,000  400,018,573 
5s, TBA, November 1, 2038    78,000,000  75,800,158 

U.S. GOVERNMENT AND AGENCY  Principal   
MORTGAGE OBLIGATIONS (31.7%)* cont.  amount  Value 
U.S. Government Agency Mortgage Obligations cont.   
Federal National Mortgage Association     
Pass-Through Certificates       
4 1/2s, with due dates from       
August 1, 2033 to October 1, 2035  $12,090,079  $11,441,066 
4s, with due dates from       
May 1, 2019 to September 1, 2020  725,801  693,114 
      600,937,409 
 
Total U.S. government and agency mortgage obligations   
(cost $604,581,328)      $605,032,850 
 
CORPORATE BONDS    Principal   
AND NOTES (24.8%)*    amount  Value 
Basic Materials (1.5%)       
Bayer AG jr. unsec. sub. bond FRB       
5s, 2105 (Germany)  EUR  819,000  $895,221 
Builders FirstSource, Inc. company       
guaranty sr. sec. notes FRN       
7.054s, 2012    $1,195,000  770,775 
Clondalkin Acquisition BV 144A       
company guaranty sr. sec.       
notes FRN 4.819s, 2013 (Netherlands)  885,000  726,806 
Compass Minerals       
International, Inc. sr. disc.       
notes Ser. B, 12s, 2013    856,000  885,960 
Domtar Corp. company       
guaranty Ser. *, 7 7/8s, 2011 (Canada)  640,000  636,800 
Freeport-McMoRan Copper &       
Gold, Inc. sr. unsec. notes       
8 3/8s, 2017    3,442,000  3,373,160 
Freeport-McMoRan Copper &       
Gold, Inc. sr. unsec.       
notes 8 1/4s, 2015 S    1,722,000  1,683,255 
Freeport-McMoRan Copper &       
Gold, Inc. sr. unsec. notes FRN       
5.883s, 2015    605,000  575,503 
Georgia-Pacific Corp.       
debs. 9 1/2s, 2011    239,000  236,610 
Georgia-Pacific Corp.       
notes 8 1/8s, 2011    230,000  227,700 
Gerdau Ameristeel Corp.       
sr. notes 10 3/8s, 2011 (Canada)    2,431,000  2,510,008 
Hexion U.S. Finance Corp./Hexion       
Nova Scotia Finance, ULC company       
guaranty 9 3/4s, 2014    339,000  267,810 
Huntsman International, LLC       
company guaranty sr. unsec.       
sub. notes 7 7/8s, 2014    3,981,000  3,423,660 
Momentive Performance       
Materials, Inc. company guaranty       
sr. unsec. notes 9 3/4s, 2014    1,114,000  880,060 
Mosaic Co. (The) 144A sr. unsec.       
unsub. notes 7 5/8s, 2016    951,000  971,661 
Mosaic Co. (The) 144A sr. unsec.       
unsub. notes 7 3/8s, 2014    574,000  594,244 
NewPage Corp. company       
guaranty 10s, 2012    1,691,000  1,513,445 
NewPage Holding Corp.       
sr. notes FRN 9.986s, 2013 ‡‡    366,175  324,065 
Norske Skog Canada, Ltd. company       
guaranty Ser. D, 8 5/8s, 2011 (Canada)  82,000  64,780 

29

CORPORATE BONDS    Principal   
AND NOTES (24.8%)* cont.    amount  Value 
Basic Materials cont.       
Novelis, Inc. company       
guaranty 7 1/4s, 2015    $701,000  $609,870 
Rhodia SA sr. unsec. FRN 7.713s,       
2013 (France)  EUR  1,835,000  2,370,695 
Rockwood Specialties Group, Inc.       
company guaranty 7 5/8s, 2014  EUR  1,400,000  1,765,335 
Steel Dynamics, Inc. company       
guaranty sr. unsec.       
unsub. notes 6 3/4s, 2015    $3,667,000  3,153,620 
Steel Dynamics, Inc. 144A       
sr. notes 7 3/4s, 2016 S    706,000  628,340 
      29,089,383 
Capital Goods (1.3%)       
Alliant Techsystems, Inc.       
sr. sub. notes 6 3/4s, 2016    394,000  368,390 
Berry Plastics Corp. company       
guaranty sr. sec. notes FRN       
7.541s, 2015    3,425,000  3,048,250 
Bombardier, Inc. 144A sr. unsec.       
notes FRN 8.09s, 2013 (Canada)  EUR  865,000  1,205,826 
Bombardier, Inc. 144A unsec.       
notes 6 3/4s, 2012 (Canada)    $7,295,000  7,003,200 
Crown Americas, LLC/Crown Americas       
Capital Corp. sr. notes 7 5/8s, 2013    2,057,000  2,026,145 
General Cable Corp. company guaranty       
sr. unsec. notes FRN 5.166s, 2015    850,000  714,000 
Hawker Beechcraft Acquisition Co., LLC       
sr. sub. notes 9 3/4s, 2017    1,066,000  954,070 
Hexcel Corp.       
sr. sub. notes 6 3/4s, 2015    305,000  292,800 
L-3 Communications Corp. company       
guaranty sr. unsec. sub. notes 6 1/8s, 2014  3,102,000  2,869,350 
L-3 Communications Corp.       
sr. sub. notes 5 7/8s, 2015    2,084,000  1,886,020 
Legrand SA unsec.       
unsub. debs. 8 1/2s, 2025 (France)    2,734,000  2,743,607 
Owens-Illinois, Inc. debs. 7 1/2s, 2010    453,000  448,470 
Ryerson Tull, Inc. 144A sec.       
notes 12s, 2015    2,012,000  1,710,200 
      25,270,328 
Communication Services (1.6%)       
American Tower Corp. 144A       
sr. notes 7s, 2017 S    1,730,000  1,652,150 
Cincinnati Bell, Inc. company       
guaranty 7s, 2015    1,294,000  1,086,960 
Cricket Communications, Inc.       
company guaranty sr. unsec.       
notes Ser. *, 9 3/8s, 2014    1,765,000  1,641,450 
Cricket Communications, Inc. 144A       
company guaranty sr. notes 10s, 2015    2,065,000  1,972,075 
Digicel Group, Ltd. 144A       
sr. unsec. notes 8 7/8s, 2015 (Jamaica)    1,095,000  919,800 
Digicel, Ltd. 144A sr. unsec.       
unsub. notes 9 1/4s, 2012 (Jamaica)    1,050,000  1,039,500 
Inmarsat Finance PLC company guaranty       
stepped-coupon zero % (10 3/8s,       
11/15/08), 2012 (United Kingdom) ††    4,551,000  4,482,735 
iPCS, Inc. company guaranty sr.       
sec. notes FRN 4.926s, 2013 S    575,000  468,625 

CORPORATE BONDS    Principal   
AND NOTES (24.8%)* cont.    amount  Value 
Communication Services cont.       
MetroPCS Wireless, Inc. company       
guaranty sr. unsec. notes 9 1/4s, 2014    $370,000  $345,950 
Qwest Communications       
International, Inc. company       
guaranty 7 1/2s, 2014    2,985,000  2,582,025 
Qwest Corp. sr. unsec.       
notes 7 1/2s, 2014 S    610,000  527,650 
Qwest Corp. sr. unsec.       
unsub. notes 8 7/8s, 2012    4,691,000  4,597,180 
Qwest Corp. sr. unsec.       
unsub. notes 7 1/4s, 2025    1,375,000  1,024,375 
West Corp. company       
guaranty 9 1/2s, 2014    528,000  403,920 
Wind Aquisition Finance SA       
notes 9 3/4s, 2015 (Netherlands)  EUR  5,355,000  6,903,214 
      29,647,609 
Consumer Cyclicals (3.4%)       
Allison Transmission 144A company       
guaranty 11s, 2015    $350,000  304,500 
Bon-Ton Stores, Inc. (The) company       
guaranty 10 1/4s, 2014    720,000  216,000 
Boyd Gaming Corp.       
sr. sub. notes 6 3/4s, 2014    1,325,000  950,688 
CanWest Media, Inc. company       
guaranty 8s, 2012 (Canada)    1,453,443  1,213,625 
Cenveo Corp. 144A company       
guaranty sr. unsec.       
notes 10 1/2s, 2016    1,145,000  1,059,125 
D.R. Horton, Inc. company       
guaranty 8s, 2009    908,000  893,245 
D.R. Horton, Inc. company       
guaranty sr. unsub. notes 5s, 2009    1,252,000  1,220,700 
D.R. Horton, Inc.       
sr. notes 7 7/8s, 2011    3,460,000  3,114,000 
FelCor Lodging LP company       
guaranty 8 1/2s, 2011 R    3,792,000  3,280,080 
Ford Motor Credit Co., LLC       
sr. notes 9 7/8s, 2011    3,013,000  2,012,347 
Ford Motor Credit Co., LLC       
sr. unsec. notes 9 3/4s, 2010    1,539,000  1,154,969 
Ford Motor Credit Co., LLC unsec.       
notes 7 3/8s, 2009    883,000  709,902 
Hanesbrands, Inc. company       
guaranty sr. unsec. notes FRN       
Ser. B, 6.508s, 2014    1,280,000  1,062,400 
Host Marriott LP sr. notes Ser. M,       
7s, 2012 R    4,015,000  3,583,388 
Jostens IH Corp. company       
guaranty 7 5/8s, 2012    4,138,000  3,796,615 
K. Hovnanian Enterprises, Inc.       
company guaranty sr. sec.       
notes 11 1/2s, 2013    906,000  887,880 
Lamar Media Corp. sr. unsec.       
sub. notes Ser. C, 6 5/8s, 2015    735,000  608,213 
Levi Strauss & Co. sr. unsec.       
notes 8 7/8s, 2016    1,320,000  1,056,000 
Levi Strauss & Co. sr. unsec.       
unsub. notes 9 3/4s, 2015    3,326,000  2,777,210 
Mashantucket Western Pequot Tribe       
144A bonds 8 1/2s, 2015    1,765,000  1,147,250 

30

CORPORATE BONDS  Principal   
AND NOTES (24.8%)* cont.  amount  Value 
Consumer Cyclicals cont.     
Meritage Homes Corp. company     
guaranty 6 1/4s, 2015  $292,000  $217,540 
Meritage Homes Corp. sr. notes 7s, 2014  332,000  255,640 
MGM Mirage, Inc. company     
guaranty 8 1/2s, 2010  2,757,000  2,536,440 
MGM Mirage, Inc. company     
guaranty 6s, 2009  7,904,000  7,390,240 
NTK Holdings, Inc. sr. disc.     
notes zero %, 2014  794,000  341,420 
Oxford Industries, Inc.     
sr. notes 8 7/8s, 2011  2,940,000  2,657,025 
Pinnacle Entertainment, Inc.     
company guaranty sr. unsec.     
sub. notes 7 1/2s, 2015  1,295,000  958,300 
Pinnacle Entertainment, Inc.     
sr. sub. notes 8 1/4s, 2012  1,386,000  1,339,223 
Pulte Homes, Inc. company     
guaranty 7 7/8s, 2011  3,293,000  3,144,815 
Quebecor Media, Inc. sr. unsec.     
notes Ser. *, 7 3/4s, 2016 (Canada)  320,000  280,000 
Realogy Corp. company     
guaranty sr. notes 11s, 2014 ‡‡ R  492,000  188,190 
Realogy Corp. company     
guaranty sr. unsec. notes 10 1/2s, 2014 R  789,000  347,160 
Sealy Mattress Co.     
sr. sub. notes 8 1/4s, 2014  525,000  412,125 
Station Casinos, Inc.     
sr. notes 6s, 2012 S  2,191,000  1,226,960 
Tenneco Automotive, Inc. company     
guaranty 8 5/8s, 2014 S  1,109,000  881,655 
Tenneco, Inc. sr. unsec.     
notes company guaranty 8 1/8s, 2015  1,530,000  1,308,150 
Texas Industries, Inc. sr. unsec.     
notes 7 1/4s, 2013  1,480,000  1,287,600 
Texas Industries, Inc. 144A company     
guaranty sr. unsec. notes 7 1/4s, 2013  1,338,000  1,164,060 
THL Buildco, Inc. (Nortek Holdings, Inc.)     
sr. sub. notes 8 1/2s, 2014  1,976,000  1,126,320 
THL Buildco, Inc. (Nortek Holdings, Inc.)     
144A sr. sec. notes 10s, 2013  567,000  498,960 
Toll Brothers, Inc. company guaranty sr.     
unsec. sub. notes 8 1/4s, 2011  3,075,000  2,967,375 
Trump Entertainment Resorts, Inc.     
sec. notes 8 1/2s, 2015  517,000  211,970 
Wynn Las Vegas, LLC/Wynn Las Vegas     
Capital Corp. 1st mtge. 6 5/8s, 2014 S  2,605,000  2,220,763 
    64,010,068 
Consumer Staples (2.8%)     
Affinity Group, Inc.     
sr. sub. notes 9s, 2012  4,155,000  3,074,700 
AMC Entertainment, Inc. company     
guaranty 11s, 2016  1,152,000  1,134,720 
AMC Entertainment, Inc.     
sr. sub. notes 8s, 2014  948,000  815,280 
Archibald Candy Corp. company     
guaranty 10s, 2008 (In default) F †  574,508  80 
Avis Budget Car Rental, LLC     
company guaranty 7 3/4s, 2016  1,280,000  800,000 

CORPORATE BONDS  Principal   
AND NOTES (24.8%)* cont.  amount  Value 
Consumer Staples cont.     
Cablevision Systems Corp.     
sr. notes Ser. B, 8s, 2012  $774,000  $727,560 
CCH I Holdings, LLC company     
guaranty 12 1/8s, 2015  246,000  87,330 
CCH I, LLC sec. notes 11s, 2015  1,580,000  1,042,800 
CCH II, LLC sr. unsec.     
notes 10 1/4s, 2010  1,230,000  1,107,000 
CCH II, LLC sr. unsec.     
notes Ser. B, 10 1/4s, 2010  5,326,000  4,766,770 
Church & Dwight Co., Inc. company     
guaranty 6s, 2012  3,512,000  3,318,840 
Cinemark, Inc. sr. disc.     
notes stepped-coupon zero %     
(9 3/4s, 3/15/09), 2014 ††  1,995,000  1,917,694 
Clear Channel Communications, Inc.     
sr. unsec. notes 7.65s, 2010  2,714,000  2,442,600 
Clear Channel Communications, Inc.     
sr. unsec. notes 5 1/2s, 2014  263,000  81,530 
CSC Holdings, Inc.     
sr. notes 6 3/4s, 2012  2,150,000  1,969,938 
Dean Foods Co. company     
guaranty 7s, 2016  611,000  531,570 
Del Monte Corp.     
sr. sub. notes 8 5/8s, 2012  3,605,000  3,568,950 
DirecTV Holdings, LLC company     
guaranty 6 3/8s, 2015 S  4,223,000  3,716,240 
DirecTV Holdings, LLC 144A     
sr. notes 7 5/8s, 2016  588,000  532,140 
Echostar DBS Corp. company     
guaranty 6 5/8s, 2014  11,907,000  9,555,368 
Grupo Televisa SA sr. unsec.     
notes 6s, 2018 (Mexico)  810,000  764,455 
Liberty Media, LLC sr. notes 5.7s, 2013  613,000  509,843 
Liberty Media, LLC sr. unsec.     
notes 7 7/8s, 2009  758,000  760,354 
Nielsen Finance LLC/Nielsen     
Finance Co. company guaranty 10s, 2014  750,000  712,500 
Nielsen Finance LLC/Nielsen Finance Co.     
company guaranty stepped-coupon zero %     
(12 1/2s, 8/1/11), 2016 ††  1,752,000  1,138,800 
Prestige Brands, Inc.     
sr. sub. notes 9 1/4s, 2012  2,384,000  2,264,800 
R.H. Donnelley Corp. sr. unsec.     
notes 6 7/8s, 2013  5,000  1,950 
R.H. Donnelley, Inc. 144A company     
guaranty sr. unsec. notes 11 3/4s, 2015  387,000  236,070 
Rainbow National Services, LLC     
144A sr. notes 8 3/4s, 2012  1,852,000  1,852,000 
Rite Aid Corp. company     
guaranty 9 3/8s, 2015  1,114,000  584,850 
Rite Aid Corp. sec. notes 7 1/2s, 2017  1,275,000  969,000 
Sara Lee Corp. sr. unsec.     
unsub. notes 6 1/4s, 2011  1,340,000  1,351,216 
United Rentals NA, Inc. company     
guaranty 6 1/2s, 2012  1,753,000  1,463,755 
Young Broadcasting, Inc. company     
guaranty 10s, 2011  966,000  140,070 
Young Broadcasting, Inc.     
sr. sub. notes 8 3/4s, 2014  331,000  49,650 
    53,990,423 

31

CORPORATE BONDS    Principal   
AND NOTES (24.8%)* cont.    amount  Value 
Energy (4.0%)       
Arch Western Finance, LLC       
sr. notes 6 3/4s, 2013    $5,575,000  $5,240,500 
Chaparral Energy, Inc. company       
guaranty sr. unsec. notes 8 7/8s, 2017    1,310,000  1,034,900 
Chesapeake Energy Corp.       
sr. notes 7 1/2s, 2013    5,575,000  5,393,813 
Complete Production Services, Inc.       
company guaranty 8s, 2016    2,195,000  2,085,250 
Comstock Resources, Inc.       
sr. notes 6 7/8s, 2012    3,895,000  3,524,975 
Connacher Oil and Gas, Ltd. 144A       
sec. notes 10 1/4s, 2015 (Canada)    945,000  907,200 
Denbury Resources, Inc.       
sr. sub. notes 7 1/2s, 2015    1,295,000  1,191,400 
Dong Energy A/S jr. unsec.       
sub. notes FRN 5 1/2s, 2035 (Denmark)  EUR  819,000  1,064,320 
El Paso Natural Gas Co.       
debs. 8 5/8s, 2022    $1,315,000  1,313,371 
Forest Oil Corp. sr. notes 8s, 2011    3,730,000  3,730,000 
Gaz Capital for Gazprom 144A       
sr. unsec. notes 7.288s,       
2037 (Luxembourg)    1,280,000  908,800 
Gaz Capital SA sr. unsec.       
notes 7.288s, 2037 (Luxembourg)    1,810,000  1,285,100 
Gaz Capital SA 144A company       
guaranty sr. unsec. bond 8.146s,       
2018 (Luxembourg)    740,000  657,349 
Gaz Capital SA 144A company       
guaranty sr. unsec. bond 7.343s,       
2013 (Luxembourg)    800,000  738,792 
Gaz Capital SA 144A sr. unsec.       
6.51s, 2022 (Luxembourg)    1,090,000  784,800 
Harvest Operations Corp.       
sr. notes 7 7/8s, 2011 (Canada)    4,610,000  3,734,100 
Helix Energy Solutions Group, Inc.       
144A sr. unsec. notes 9 1/2s, 2016    1,745,000  1,631,575 
Hornbeck Offshore Services, Inc.       
sr. notes Ser. B, 6 1/8s, 2014    4,355,000  3,973,938 
Key Energy Services, Inc. 144A       
sr. notes 8 3/8s, 2014    825,000  792,000 
Lukoil International Finance 144A       
company guaranty 6.656s,       
2022 (Netherlands)    2,380,000  1,594,600 
Lukoil International Finance 144A       
company guaranty 6.356s,       
2017 (Netherlands)    1,150,000  874,000 
Newfield Exploration Co.       
sr. sub. notes 6 5/8s, 2014    2,650,000  2,385,000 
Offshore Logistics, Inc. company       
guaranty 6 1/8s, 2013    1,327,000  1,187,665 
Oslo Seismic Services, Inc. 1st       
mtge. 8.28s, 2011    2,175,458  2,254,490 
Pacific Energy Partners/Pacific       
Energy Finance Corp.       
sr. notes 7 1/8s, 2014    2,625,000  2,579,981 
Peabody Energy Corp. company       
guaranty 7 3/8s, 2016 S    5,820,000  5,587,200 
Pemex Finance, Ltd. bonds 9.69s,       
2009 (Cayman Islands)    1,409,000  1,437,077 

CORPORATE BONDS    Principal   
AND NOTES (24.8%)* cont.    amount  Value 
Energy cont.       
Pemex Project Funding Master Trust       
144A company guaranty 6 5/8s, 2035    $1,140,000  $1,044,001 
Pemex Project Funding Master Trust       
144A company guaranty 5 3/4s, 2018    1,425,000  1,348,478 
Pemex Project Funding Master Trust       
144A notes 6 5/8s, 2038    1,500,000  1,359,450 
PetroHawk Energy Corp. company       
guaranty 9 1/8s, 2013    742,000  697,480 
PetroHawk Energy Corp. 144A       
sr. unsec. unsub. notes 7 7/8s, 2015    610,000  530,700 
Petroleum Co. of Trinidad & Tobago       
Ltd. 144A sr. unsec. notes 6s,       
2022 (Trinidad)    3,595,000  3,437,287 
Petroleum Development Corp. company       
guaranty sr. unsec. notes 12s, 2018    1,070,000  1,027,200 
Petroplus Finance, Ltd. company       
guaranty 6 3/4s, 2014 (Bermuda)    1,440,000  1,216,800 
Plains Exploration &       
Production Co. company       
guaranty 7 3/4s, 2015    535,000  492,200 
Plains Exploration & Production Co.       
company guaranty 7s, 2017    580,000  504,600 
Pride International, Inc.       
sr. unsec. notes 7 3/8s, 2014    2,215,000  2,115,325 
SandRidge Energy, Inc.       
sr. notes 8s, 2018    1,530,000  1,315,800 
Williams Cos., Inc. (The)       
sr. unsec. notes 7 5/8s, 2019    2,449,000  2,412,265 
      75,393,782 
Financial (5.1%)       
Banco Do Brasil 144A sr. unsec.       
5.862s, 2017 (Cayman Islands)  BRL  2,155,000  899,640 
Banco Nacional de       
Desenvolvimento Economico e       
Social 144A sr. unsec.       
notes 6.369s, 2018 (Brazil)    $540,000  475,200 
Bear Stearns Cos., Inc. (The)       
notes Ser. MTN, 6.95s, 2012    4,785,000  4,833,443 
Bosphorus Financial Services, Ltd.       
144A sec. sr. notes FRN 4.604s,       
2012 (Cayman Islands)    9,011,625  8,699,057 
GMAC, LLC sr. unsec.       
unsub. notes 7 3/4s, 2010    418,000  250,284 
GMAC, LLC sr. unsec.       
unsub. notes 7s, 2012    335,000  144,050 
GMAC, LLC sr. unsec.       
unsub. notes 6 7/8s, 2012    2,179,000  866,105 
GMAC, LLC sr. unsec.       
unsub. notes 6 7/8s, 2011    375,000  167,320 
GMAC, LLC sr. unsec.       
unsub. notes 6 3/4s, 2014    3,155,000  1,210,933 
GMAC, LLC sr. unsec.       
unsub. notes 6 5/8s, 2012 S    2,060,000  865,200 
GMAC, LLC sr. unsec.       
unsub. notes FRN 5.011s, 2014    275,000  124,745 
Goldman Sachs Group, Inc. (The)       
sub. notes 6 3/4s, 2037    1,260,000  882,000 
HSBC Capital Funding LP/ Jersey       
Channel Islands company       
guaranty sub. FRB 5.13s, 2049 (Jersey)  EUR  1,092,000  1,203,761 

32

CORPORATE BONDS    Principal   
AND NOTES (24.8%)* cont.    amount  Value 
Financial cont.       
HUB International Holdings, Inc.       
144A sr. sub. notes 10 1/4s, 2015    $375,000  $296,250 
HUB International Holdings, Inc.       
144A sr. unsec. unsub. notes 9s, 2014    270,000  240,300 
iStar Financial, Inc. sr. unsec.       
notes Ser. B, 4 7/8s, 2009 R    425,000  255,000 
JPMorgan Chase & Co. 144A       
sr. unsec. FRN 6.46s, 2017    2,500,000  2,232,250 
JPMorgan Chase & Co. 144A       
sr. unsec. notes FRN 9.34s, 2011  RUB  150,000,000  5,844,000 
JPMorgan Chase & Co. 144A unsec.       
unsub. notes 0.18s, 2012  INR  76,000,000  1,709,029 
Lender Processing Services, Inc.       
144A sr. unsec. notes 8 1/8s, 2016    $3,942,000  3,843,450 
Leucadia National Corp. sr. unsec.       
notes 8 1/8s, 2015    530,000  515,425 
Leucadia National Corp. sr. unsec.       
notes 7 1/8s, 2017    1,024,000  931,840 
Liberty Mutual Insurance 144A       
notes 7.697s, 2097    2,900,000  2,325,107 
Merrill Lynch & Co., Inc.       
notes 5.45s, 2013    3,285,000  2,880,457 
Merrill Lynch & Co., Inc.       
notes FRN Ser. MTN, 3s, 2011    1,500,000  1,296,095 
MetLife Capital Trust X 144A       
collateral trust FRB 9 1/4s, 2068    3,500,000  3,401,597 
Morgan Stanley sr. unsec.       
bonds 6.066s, 2017  BRL  7,331,000  2,205,041 
Nuveen Investments, Inc. 144A       
sr. notes 10 1/2s, 2015    $879,000  676,830 
RSHB Capital SA for OJSC Russian       
Agricultural Bank notes 6.299s,       
2017 (Luxembourg)    2,740,000  1,956,086 
RSHB Capital SA for OJSC Russian       
Agricultural Bank sub. bonds FRB       
6.97s, 2016 (Luxembourg)    1,000,000  839,960 
Russian Agricultural Bank 144A       
notes 7 3/4s, 2018 (Luxembourg)    1,890,000  1,434,888 
Russian Agricultural Bank 144A       
notes 7 1/8s, 2014 (Luxembourg)    1,800,000  1,489,500 
UBS Luxembourg SA for Sberbank       
unsec. sub. notes stepped-coupon       
6.23s (7.429s, 2/11/10), 2015       
(Luxembourg) ††    2,850,000  2,564,915 
USI Holdings Corp. 144A sr. unsec.       
notes FRN 6.679s, 2014    245,000  186,200 
VTB Capital unsec. sub. notes FRN       
6.315s, 2015 (Luxembourg)    10,275,000  10,024,290 
VTB Capital SA bonds 6 1/4s, 2035       
(Luxembourg)    7,596,000  5,317,200 
VTB Capital SA sr. notes 6 1/4s,       
2035 (Luxembourg)    3,035,000  2,124,500 
VTB Capital SA 144A notes 7 1/2s,       
2011 (Luxembourg)    7,265,000  6,306,529 
VTB Capital SA 144A notes 6 7/8s,       
2018 (Luxembourg)    3,261,000  2,506,894 
VTB Capital SA 144A sec.       
notes 6.609s, 2012 (Luxembourg)    15,750,000  13,073,918 
      97,099,289 

CORPORATE BONDS  Principal   
AND NOTES (24.8%)* cont.  amount  Value 
Health Care (2.1%)     
Community Health Systems, Inc.     
company guaranty 8 7/8s, 2015  $2,650,000  $2,517,500 
DaVita, Inc. company     
guaranty 6 5/8s, 2013 S  1,134,000  1,077,300 
Elan Finance PLC/Elan     
Finance Corp. company     
guaranty 7 3/4s, 2011 (Ireland)  920,000  849,850 
HCA, Inc. company     
guaranty sr. sec. notes 9 5/8s, 2016 ‡‡  1,136,000  1,079,200 
HCA, Inc. sr. sec. notes 9 1/4s, 2016  2,730,000  2,654,925 
HCA, Inc. sr. sec. notes 9 1/8s, 2014  1,204,000  1,170,890 
HCA, Inc. sr. unsec. notes 6 3/8s, 2015  1,766,000  1,390,725 
HCA, Inc. sr. unsec. notes 5 3/4s, 2014  1,985,000  1,548,300 
Omnicare, Inc. company guaranty     
6 3/4s, 2013  1,210,000  1,098,075 
Omnicare, Inc. sr. sub. notes     
6 1/8s, 2013  3,350,000  3,006,625 
Select Medical Corp. company     
guaranty 7 5/8s, 2015  2,678,000  2,169,180 
Service Corporation International     
debs. 7 7/8s, 2013  465,000  465,000 
Stewart Enterprises, Inc.     
sr. notes 6 1/4s, 2013  3,922,000  3,686,680 
Surgical Care Affiliates, Inc.     
144A sr. sub. notes 10s, 2017  1,210,000  907,500 
Surgical Care Affiliates, Inc.     
144A sr. unsec. notes 8 7/8s, 2015 ‡‡  760,000  661,200 
Tenet Healthcare Corp.notes 7 3/8s, 2013  2,140,000  1,947,400 
Tenet Healthcare Corp. sr. unsec.     
unsub. notes 6 3/8s, 2011  2,158,000  1,990,755 
US Oncology, Inc. company     
guaranty 9s, 2012  3,430,000  3,430,000 
Vanguard Health Holding Co.     
II, LLC sr. sub. notes 9s, 2014  2,101,000  2,027,465 
Ventas Realty LP/Capital Corp.     
company guaranty 9s, 2012 R  2,840,000  2,960,700 
Ventas Realty LP/Capital Corp.     
company guaranty 6 3/4s, 2010 R  1,339,000  1,332,305 
Ventas Realty LP/Capital Corp.     
sr. notes 6 5/8s, 2014 R  1,350,000  1,296,000 
    39,267,575 
Technology (1.1%)     
Advanced Micro Devices, Inc.     
sr. notes 7 3/4s, 2012  2,334,000  1,797,180 
Ceridian Corp. 144A sr. unsec.     
notes 11 1/4s, 2015  1,248,000  1,029,600 
Compucom Systems, Inc.     
sr. sub. notes 12 1/2s, 2015  685,000  609,650 
Freescale Semiconductor, Inc.     
company guaranty sr. unsec.     
notes 8 7/8s, 2014  2,266,000  1,563,540 
Freescale Semiconductor, Inc.     
company guaranty sr. unsec.     
sub. notes 10 1/8s, 2016 S  1,614,000  1,032,960 
Freescale Semiconductor, Inc.     
company guaranty sr. unsec.     
sub. notes 9 1/8s, 2014 ‡‡  1,613,000  1,016,190 
Iron Mountain, Inc. company     
guaranty 8 5/8s, 2013  4,018,000  3,977,820 

33

CORPORATE BONDS  Principal   
AND NOTES (24.8%)* cont.  amount  Value 
Technology cont.     
Iron Mountain, Inc. company guaranty     
sr. unsec. sub. notes 8s, 2020 S  $2,300,000  $2,236,750 
New ASAT Finance, Ltd. company     
guaranty 9 1/4s, 2011 (Cayman Islands)  81,000  48,701 
Nortel Networks, Ltd. company     
guaranty sr. unsec.     
notes 10 3/4s, 2016 (Canada)  965,000  591,063 
Nortel Networks, Ltd. company     
guaranty sr. unsec. notes FRN     
7.041s, 2011 (Canada)  1,040,000  694,200 
Nortel Networks, Ltd. 144A     
sr. unsecd. notes company     
guaranty 10 3/4s, 2016 (Canada)  2,247,000  1,376,288 
Sanmina Corp. company guaranty     
sr. unsec. sub. notes 6 3/4s, 2013 S  1,032,000  903,000 
Sanmina Corp. sr. unsec.     
sub. notes 8 1/8s, 2016  1,605,000  1,364,250 
SunGard Data Systems, Inc. company     
guaranty 9 1/8s, 2013  1,906,000  1,715,400 
Travelport LLC company     
guaranty 9 7/8s, 2014  763,000  621,845 
Unisys Corp. sr. unsec.     
unsub. notes 12 1/2s, 2016  1,070,000  1,016,500 
    21,594,937 
Utilities & Power (2.0%)     
AES Corp. (The) sr. unsec.     
unsub. notes 8s, 2017  565,000  509,913 
AES Corp. (The) 144A sec.     
notes 8 3/4s, 2013  1,657,000  1,673,570 
CMS Energy Corp. sr. notes 7 3/4s, 2010  1,225,000  1,263,957 
Colorado Interstate Gas Co.     
debs. 6.85s, 2037  2,495,000  2,010,508 
Edison Mission Energy sr. unsec.     
notes 7 3/4s, 2016 S  654,000  614,760 
Edison Mission Energy sr. unsec.     
notes 7 1/2s, 2013  760,000  729,600 
Edison Mission Energy sr. unsec.     
notes 7.2s, 2019  1,125,000  990,000 
Edison Mission Energy sr. unsec.     
notes 7s, 2017 S  785,000  706,500 
Ferrellgas LP/Finance     
sr. notes 6 3/4s, 2014  3,632,000  2,960,080 
Florida Power Corp. 1st mtge. sec.     
bonds 5.65s, 2018  325,000  310,827 
Ipalco Enterprises, Inc. 144A     
sr. sec. notes 7 1/4s, 2016  490,000  467,950 
Kinder Morgan, Inc.     
sr. notes 6 1/2s, 2012  6,397,000  6,157,113 
NRG Energy, Inc. sr. notes 7 3/8s, 2016  1,015,000  913,500 
Orion Power Holdings, Inc.     
sr. unsec. notes 12s, 2010  5,195,000  5,039,150 
PNM Resources, Inc. unsec.     
unsub. notes 9 1/4s, 2015  1,107,000  1,090,395 
Teco Finance, Inc. company     
guaranty sr. unsec.     
unsub. notes 7.2s, 2011  1,165,000  1,187,183 
Teco Finance, Inc. company guaranty     
sr. unsec. unsub. notes 7s, 2012  1,500,000  1,524,636 

CORPORATE BONDS    Principal   
AND NOTES (24.8%)* cont.    amount  Value 
Utilities & Power cont.       
Teco Finance, Inc. company guaranty sr.       
unsec. unsub. notes 6 3/4s, 2015    $221,000  $211,672 
Tennessee Gas Pipeline Co.       
sr. unsec. unsub. debs. 7 1/2s, 2017    1,052,000  1,024,729 
Tennessee Gas Pipeline Co.       
sr. unsec. unsub. debs. 7s, 2028    520,000  445,615 
Transcontinental Gas       
Pipeline Corp. sr. unsec.       
debs. 7 1/4s, 2026    3,235,000  3,109,246 
Utilicorp United, Inc. sr. unsec.       
notes 7.95s, 2011    61,000  63,161 
Vattenfall Treasury AB company       
guaranty unsec. unsub. FRB       
5 1/4s, 2049 (Sweden)  EUR  819,000  1,021,535 
Veolia Environnement       
sr. unsub. notes Ser. EMTN,       
5 3/8s, 2018 (France)  EUR  3,125,000  4,225,620 
Williams Partners LP/ Williams       
Partners Finance Corp. sr. unsec.       
notes 7 1/4s, 2017    $605,000  562,650 
      38,813,870 
 
Total corporate bonds and notes (cost $542,966,336)  $474,177,264 
 
ASSET-BACKED    Principal   
SECURITIES (13.5%)*    amount  Value 
Accredited Mortgage Loan Trust       
FRB Ser. 05-1, Class M2,       
3.897s, 2035    $879,000  $309,600 
FRB Ser. 05-4, Class A2C,       
3.417s, 2035    151,000  138,920 
Ace Securities Corp.       
FRB Ser. 06-OP2, Class A2C,       
3.357s, 2036    478,000  265,290 
FRB Ser. 06-HE3, Class A2C,       
3.357s, 2036    429,000  253,796 
Ameriquest Mortgage       
Securities, Inc. FRB Ser. 03-8,       
Class M2, 4.957s, 2033    976,078  195,216 
Arcap REIT, Inc. 144A       
Ser. 03-1A, Class E, 7.11s, 2038    2,906,000  2,192,336 
Ser. 04-1A, Class E, 6.42s, 2039    1,768,000  1,135,355 
Argent Securities, Inc.       
FRB Ser. 03-W3, Class M3,       
5.477s, 2033    109,276  13,113 
FRB Ser. 06-W4, Class A2C,       
3.367s, 2036    761,000  460,405 
Asset Backed Funding Certificates       
FRB Ser. 04-OPT2, Class M2,       
4.207s, 2033    1,019,195  468,830 
Asset Backed       
Securities Corp. Home       
Equity Loan Trust       
FRB Ser. 06-HE2, Class A3,       
3.397s, 2036    148,651  109,987 
FRB Ser. 06-HE4, Class A5,       
3.367s, 2036    540,000  437,400 
Aviation Capital Group Trust 144A       
FRB Ser. 03-2A, Class G1,       
3.888s, 2033    1,850,700  925,350 

34

ASSET-BACKED  Principal   
SECURITIES (13.5%)* cont.  amount  Value 
Bear Stearns Asset Backed     
Securities, Inc.     
FRB Ser. 04-FR3, Class M6,     
6.457s, 2034  $1,703,000  $1,009,119 
FRB Ser. 06-PC1, Class M9,     
4.957s, 2035  885,000  8,850 
FRB Ser. 05-HE1, Class M3,     
4.137s, 2035  1,007,000  292,030 
Bear Stearns Asset Backed     
Securities, Inc. 144A FRB     
Ser. 06-HE2, Class M10, 5.457s, 2036  1,582,000  45,305 
Bombardier Capital Mortgage     
Securitization Corp.     
Ser. 00-A, Class A4, 8.29s, 2030  4,386,903  2,813,615 
Ser. 00-A, Class A2, 7.575s, 2030  944,990  515,801 
Ser. 99-B, Class A4, 7.3s, 2016  4,758,375  2,909,223 
Ser. 99-B, Class A3, 7.18s, 2015  7,048,395  4,270,876 
Capital Auto Receivables Asset     
Trust 144A Ser. 06-1, Class D,     
7.16s, 2013  1,000,000  951,836 
Citigroup Mortgage Loan Trust, Inc.     
FRB Ser. 05-HE4, Class M11,     
5.707s, 2035  1,384,000  138,400 
FRB Ser. 05-HE4, Class M12,     
5.257s, 2035  227,492  11,375 
FRB Ser. 05-OPT1, Class M1,     
3.627s, 2035  212,735  133,045 
Conseco Finance Securitizations Corp.     
Ser. 00-4, Class A6, 8.31s, 2032  23,521,735  17,477,096 
Ser. 00-5, Class A7, 8.2s, 2032  492,000  354,142 
Ser. 00-1, Class A5, 8.06s, 2031  3,333,052  2,307,472 
Ser. 00-4, Class A5, 7.97s, 2032  1,365,287  983,416 
Ser. 01-3, Class M2, 7.44s, 2033  376,373  54,774 
Ser. 01-4, Class A4, 7.36s, 2033  1,485,672  1,285,005 
Ser. 00-6, Class A5, 7.27s, 2031  524,576  450,873 
Ser. 01-1, Class A5, 6.99s, 2032  12,203,871  11,186,095 
Ser. 01-3, Class A4, 6.91s, 2033  19,179,098  16,549,778 
Ser. 02-1, Class A, 6.681s, 2033  5,113,937  4,903,744 
FRB Ser. 01-4, Class M1, 5.47s, 2033  2,391,000  795,406 
Countrywide Asset     
Backed Certificates     
FRB Ser. 05-BC3, Class M1,     
3.727s, 2035  226,000  135,600 
FRB Ser. 05-14, Class 3A2,     
3.447s, 2036  121,639  109,475 
Crest, Ltd. 144A Ser. 03-2A,     
Class E2, 8s, 2038 (Cayman Islands)  3,427,000  2,124,740 
DB Master Finance, LLC 144A     
Ser. 06-1, Class M1, 8.285s, 2031  610,000  456,969 
Equifirst Mortgage Loan Trust FRB     
Ser. 05-1, Class M5, 3.877s, 2035  410,000  94,300 
First Franklin Mortgage Loan Asset     
Backed Certificates FRB     
Ser. 06-FF7, Class 2A3, 3.357s, 2036  790,000  483,796 
Fort Point CDO, Ltd. FRB     
Ser. 03-2A, Class A2, 3.86s, 2038     
(Cayman Islands)  1,229,000  86,030 
Fremont Home Loan Trust     
FRB Ser. 05-E, Class 2A4, 3.537s, 2036  1,107,000  797,040 
FRB Ser. 06-2, Class 2A3, 3.377s, 2036  1,320,000  963,600 
G-Star, Ltd. 144A FRB Ser. 02-2A,     
Class BFL, 5.207s, 2037 (Cayman Islands)  614,000  503,480 
Gears Auto Owner Trust 144A     
Ser. 05-AA, Class E1, 8.22s, 2012  3,514,000  3,327,430 

ASSET-BACKED    Principal   
SECURITIES (13.5%)* cont.    amount  Value 
Granite Mortgages PLC       
FRB Ser. 03-2, Class 3C, 7.349s,       
2043 (United Kingdom)  GBP  5,178,640  $8,610,095 
FRB Ser. 03-2, Class 2C1, 5.2s,       
2043 (United Kingdom)  EUR  10,080,000  13,461,256 
Green Tree       
Financial Corp.       
Ser. 94-6, Class B2, 9s, 2020    $6,428,633  6,062,844 
Ser. 94-4, Class B2, 8.6s, 2019    2,771,122  1,692,601 
Ser. 93-1, Class B, 8.45s, 2018    1,957,307  1,747,249 
Ser. 99-5, Class A5, 7.86s, 2030    25,792,551  21,966,487 
Ser. 96-8, Class M1, 7.85s, 2027    2,979,000  2,633,036 
Ser. 95-8, Class B1, 7.3s, 2026    2,796,090  2,347,280 
Ser. 95-4, Class B1, 7.3s, 2025    2,737,142  2,467,076 
Ser. 95-F, Class B2, 7.1s, 2021    337,505  250,429 
Ser. 99-3, Class A7, 6.74s, 2031    3,957,000  3,709,664 
Green Tree Home Improvement Loan       
Trust Ser. 95-D, Class B2, 7.45s, 2025    265,723  216,351 
Greenpoint Manufactured Housing       
Ser. 00-3, Class IA, 8.45s, 2031    12,536,893  10,753,181 
Ser. 99-5, Class M1A, 8.3s, 2026    343,000  312,971 
Ser. 99-5, Class A4, 7.59s, 2028    241,126  236,303 
GS Auto Loan Trust 144A Ser. 04-1,       
Class D, 5s, 2011    3,004,645  2,809,343 
GSAMP Trust FRB Ser. 06-HE5,       
Class A2C, 3.357s, 2036    1,965,000  1,203,956 
Guggenheim Structured Real Estate       
Funding, Ltd. 144A       
FRB Ser. 05-2A, Class E, 5.207s,       
2030 (Cayman Islands)    2,453,000  1,071,470 
FRB Ser. 05-1A, Class E, 5.007s,       
2030 (Cayman Islands)    537,087  359,848 
High Income Trust Securities 144A       
FRB Ser. 03-1A, Class A, 3.303s,       
2036 (Cayman Islands)    310,800  139,860 
Home Equity Asset Trust FRB       
Ser. 06-1, Class 2A4, 3.537s, 2036    551,000  338,865 
JPMorgan Mortgage       
Acquisition Corp.       
FRB Ser. 05-OPT2, Class M11,       
5.457s, 2035    690,000  34,500 
FRB Ser. 06-FRE1, Class A4,       
3.497s, 2035    470,000  287,875 
Lehman XS Trust FRB Ser. 07-6,       
Class 2A1, 3.417s, 2037    5,467,785  3,536,627 
LNR CDO, Ltd. 144A       
FRB Ser. 03-1A, Class EFL, 6.19s,       
2036 (Cayman Islands)    11,120,000  3,336,000 
FRB Ser. 02-1A, Class FFL, 5.926s,       
2037 (Cayman Islands)    7,500,000  3,375,000 
Local Insight Media Finance, LLC       
Ser. 07-1W, Class A1, 5.53s, 2012 F    7,541,137  6,014,285 
Long Beach Mortgage       
Loan Trust       
FRB Ser. 05-2, Class M4, 3.827s, 2035    1,150,000  356,500 
FRB Ser. 06-4, Class 2A4, 3.467s, 2036    532,000  256,584 
FRB Ser. 06-1, Class 2A3, 3.397s, 2036    602,000  451,500 
Lothian Mortgages PLC 144A FRB       
Ser. 3A, Class D, 6.597s,       
2039 (United Kingdom)  GBP  6,500,000  10,676,980 
Madison Avenue Manufactured       
Housing Contract FRB Ser. 02-A,       
Class B1, 6.457s, 2032    $6,357,565  4,502,815 

35

ASSET-BACKED  Principal   
SECURITIES (13.5%)* cont.  amount  Value 
MASTR Asset Backed Securities     
Trust FRB Ser. 06-FRE2, Class A4,     
3.357s, 2036  $278,000  $184,703 
Mid-State Trust Ser. 11, Class B,     
8.221s, 2038  990,305  750,453 
Morgan Stanley ABS Capital I     
FRB Ser. 04-HE8, Class B3,     
6.407s, 2034  521,150  104,230 
FRB Ser. 05-HE2, Class M5,     
3.887s, 2035  720,000  129,600 
FRB Ser. 05-HE1, Class M3,     
3.727s, 2034  720,000  259,200 
FRB Ser. 06-NC4, Class M2,     
3.507s, 2036  1,007,000  80,560 
N-Star Real Estate CDO, Ltd. 144A     
FRB Ser. 1A, Class C1A, 5.809s,     
2038 (Cayman Islands)  2,000,000  1,513,000 
Navistar Financial Corp. Owner Trust     
Ser. 05-A, Class C, 4.84s, 2014  314,896  282,262 
Ser. 04-B, Class C, 3.93s, 2012  409,278  361,036 
Neon Capital, Ltd. 144A     
limited recourse sec. notes Ser. 95,     
2.319s, 2013 (Cayman Islands) F g  2,028,770  515,600 
limited recourse sec.     
notes Ser. 97, 1.105s, 2013     
(Cayman Islands) F g  2,649,208  349,968 
New Century Home Equity Loan Trust     
FRB Ser. 03-4, Class M3, 5.257s, 2033  58,628  2,345 
Novastar Home Equity Loan     
FRB Ser. 06-1, Class A2C, 3.367s, 2036  663,000  546,975 
FRB Ser. 06-2, Class A2C, 3.357s, 2036  663,000  462,111 
Oakwood Mortgage     
Investors, Inc.     
Ser. 96-C, Class B1, 7.96s, 2027  1,183,907  664,341 
Ser. 99-D, Class A1, 7.84s, 2029  6,464,085  5,235,908 
Ser. 02-B, Class A4, 7.09s, 2032  2,708,845  2,359,676 
Ser. 99-B, Class A4, 6.99s, 2026  7,085,090  5,626,816 
Ser. 01-D, Class A4, 6.93s, 2031  161,596  109,740 
Ser. 01-C, Class A2, 5.92s, 2017  8,311,302  4,228,177 
Ser. 02-C, Class A1, 5.41s, 2032  9,615,802  7,642,640 
Ser. 01-C, Class A1, 5.16s, 2012  744,692  347,630 
Ser. 01-E, Class A2, 5.05s, 2019  5,876,226  3,663,686 
Ser. 02-A, Class A2, 5.01s, 2020  420,672  341,585 
Oakwood Mortgage     
Investors, Inc. 144A     
Ser. 01-B, Class A4, 7.21s, 2030  637,903  519,564 
FRB Ser. 01-B, Class A2, 2.863s, 2018  271,549  206,815 
Ocean Star PLC 144A FRB Ser. 05-A,     
Class E, 7.404s, 2012 (Ireland)  1,317,000  995,915 
Option One Mortgage Loan Trust FRB     
Ser. 05-4, Class M11, 5.707s, 2035  1,809,000  49,748 
Park Place Securities, Inc. FRB     
Ser. 05-WCH1, Class M4, 4.037s, 2036  465,000  46,500 
Park Place Securities, Inc. 144A     
FRB Ser. 04-MHQ1, Class M10,     
5.707s, 2034 F  422,562  16,355 
People’s Financial Realty Mortgage     
Securities Trust FRB Ser. 06-1,     
Class 1A2, 3.337s, 2036  1,065,000  596,400 
Residential Asset Mortgage     
Products, Inc.     
FRB Ser. 06-NC3, Class A2, 3.397s, 2036  581,106  475,810 
FRB Ser. 07-RZ1, Class A2, 3.367s, 2037  657,000  504,248 

ASSET-BACKED    Principal   
SECURITIES (13.5%)* cont.    amount  Value 
Residential Asset Securities Corp.       
FRB Ser. 05-EMX1, Class M2,       
3.937s, 2035    $1,635,000  $588,600 
Residential Asset Securities Corp.       
144A FRB Ser. 05-KS10, Class B,       
5.957s, 2035    1,486,915  14,869 
SAIL Net Interest Margin Notes       
144A Ser. 04-4A, Class B, 7 1/2s, 2034       
(Cayman Islands) (In default) †    73,702  — 
Securitized Asset Backed Receivables, LLC     
FRB Ser. 05-HE1, Class M2, 3.857s, 2035  720,000  165,600 
FRB Ser. 07-NC2, Class A2B,       
3.347s, 2037    616,000  360,360 
SG Mortgage Securities Trust       
FRB Ser. 06-OPT2, Class A3D, PO,       
3.417s, 2036    1,124,000  483,320 
FRB Ser. 06-FRE1, Class A2B,       
3.387s, 2036    542,000  346,880 
Soundview Home Equity Loan Trust       
FRB Ser. 06-OPT3, Class 2A3,       
3.377s, 2036    532,000  424,187 
FRB Ser. 06-3, Class A3, 3.367s, 2036    1,974,000  1,581,766 
Soundview Home Equity Loan Trust       
144A FRB Ser. 05-4, Class M10,       
5.707s, 2036    1,086,000  27,150 
South Coast Funding 144A FRB       
Ser. 3A, Class A2, 4.003s, 2038       
(Cayman Islands)    2,070,000  10,350 
Structured Asset Investment Loan       
Trust FRB Ser. 06-BNC2, Class A6,       
3.467s, 2036    532,000  103,762 
Structured Asset Investment Loan       
Trust 144A FRB Ser. 05-HE3,       
Class M11, 5.707s, 2035    148,801  715 
Structured Asset Receivables Trust       
144A FRB Ser. 05-1, 3.286s, 2015 F    10,844,893  9,684,124 
Structured Asset Securities Corp.       
144A Ser. 98-RF3, Class A, IO,       
6.1s, 2028    258,814  23,131 
TIAA Real Estate CDO, Ltd.       
Ser. 03-1A, Class E, 8s, 2038    3,688,000  1,532,696 
TIAA Real Estate CDO, Ltd. 144A       
Ser. 02-1A, Class IV, 6.84s, 2037    2,403,000  1,515,620 
Wells Fargo Home Equity Trust FRB       
Ser. 07-1, Class A3, 3.527s, 2037    235,000  116,772 
Whinstone Capital Management, Ltd.       
144A FRB Ser. 1A, Class B3, 3.7s,       
2044 (United Kingdom)    1,277,534  1,016,547 
 
Total asset-backed securities (cost $325,112,407)  $257,824,211 
 
FOREIGN GOVERNMENT  Units/Principal   
BONDS AND NOTES (11.3%)*    amount  Value 
Argentina (Republic of) bonds 7s, 2013    $1,585,000  $1,092,065 
Argentina (Republic of)       
bonds Ser. $V, 10 1/2s, 2012  ARS  6,340,000  1,260,075 
Argentina (Republic of) bonds FRB       
zero %, 2013    $6,903,000  3,002,805 
Argentina (Republic of)       
notes Ser. $dis, 8.28s, 2033    4,834,020  2,707,051 
Argentina (Republic of) sr. unsec.       
unsub. bonds 7s, 2015    3,230,000  1,800,725 

36

FOREIGN GOVERNMENT  Units/Principal   
BONDS AND NOTES (11.3%)*    amount  Value 
Argentina (Republic of) sr. unsec.       
unsub. bonds FRB 3.127s, 2012    $45,127,000  $16,358,538 
Brazil (Federal Republic of)       
bonds 6s, 2017    4,050,000  3,928,500 
Brazil (Federal Republic of)       
notes zero %, 2017  BRL  15,160  6,606,405 
Brazil (Federal Republic of)       
notes zero %, 2012  BRL  3,243  1,550,896 
Canada (Government of)       
bonds Ser. WL43, 5 3/4s, 2029  CAD  1,550,000  1,752,520 
Colombia (Republic of) notes       
10s, 2012 S    $8,869,000  9,844,590 
Colombia (Republic of) unsec.       
unsub. bonds 7 3/8s, 2037    1,960,000  2,013,900 
Colombia (Republic of) unsec.       
unsub. bonds 7 3/8s, 2017    1,315,000  1,374,175 
Ecuador (Republic of)       
bonds Ser. REGS, 12s, 2012    9,135,936  8,359,381 
Ecuador (Republic of) regs       
notes 9 3/8s, 2015    500,000  425,000 
Ghana (Republic of) bonds       
8 1/2s, 2017    1,255,000  1,126,363 
Indonesia (Republic of) 144A       
bonds 6 5/8s, 2037    3,255,000  2,547,038 
Indonesia (Republic of) 144A sr. unsec.       
unsub. bonds 7 3/4s, 2038    1,875,000  1,687,500 
Indonesia (Republic of) 144A       
sr. unsec. bonds 6 3/4s, 2014    1,310,000  1,251,050 
Japan (Government of) 10 yr       
bonds Ser. 244, 1s, 2012  JPY  23,000,000  216,332 
Japan (Government of) 30 yr       
bonds Ser. 23, 2 1/2s, 2036  JPY  599,500,000  5,866,157 
Japan (Government of) CPI Linked       
bonds Ser. 12, 1.2s, 2017  JPY 1,520,742,400  13,602,585 
Japan (Government of) CPI Linked       
bonds Ser. 8, 1s, 2016  JPY 8,785,012,500  78,290,024 
Mexican (Government of)       
bonds Ser. M 10, 8s, 2015  MXN  72,676,000  6,507,689 
Peru (Republic of) bonds 8 3/4s, 2033    $2,510,000  2,961,800 
Russia (Federation of) unsub. 5s, 2030    5,092,913  5,118,378 
South Africa (Republic of)       
notes 5 7/8s, 2022    1,805,000  1,552,300 
Turkey (Republic of) bonds 16s, 2012  TRY  6,810,000  4,995,071 
Ukraine (Government of) 144A       
bonds 6 3/4s, 2017    $3,825,000  2,945,250 
Ukraine (Government of) 144A       
sr. unsub. 6.58s, 2016    2,530,000  2,039,813 
United Mexican States       
bonds Ser. MTN, 8.3s, 2031    7,635,000  8,932,950 
Venezuela (Republic of)       
notes 10 3/4s, 2013    8,290,000  7,543,900 
Venezuela (Republic of) unsec.       
note FRN Ser. REGS, 3.791s, 2011    3,250,000  2,616,250 
Venezuela (Republic of)       
unsub. bonds 5 3/8s, 2010    5,180,000  4,571,350 
Total foreign government bonds and notes     
(cost $226,410,951)      $216,448,426 

SENIOR LOANS (11.0%)* c  Principal   
  amount  Value 
Basic Materials (1.2%)     
Aleris International, Inc. bank term loan     
FRN Ser. B, 5 1/4s, 2013  $1,492,337  $1,188,896 
Domtar Corp. bank term loan FRN 4.804s,     
2014 (Canada)  1,368,708  1,250,086 
Georgia-Pacific, LLC bank term loan FRN     
Ser. B, 4.544s, 2013  4,236,766  3,730,561 
Georgia-Pacific, LLC bank term loan FRN     
Ser. B2, 4.299s, 2012  1,041,985  917,489 
Graphic Packaging Corp. bank term loan FRN     
Ser. C, 5.981s, 2014  1,414,125  1,259,985 
Hexion Specialty Chemicals, Inc. bank term     
loan FRN Ser. C, 6.063s, 2013  83,938  63,793 
Huntsman International, LLC bank term loan     
FRN Ser. B, 5.459s, 2012  6,105,000  5,326,613 
Momentive Performance Materials, Inc. bank     
term loan FRN 6s, 2013  1,342,578  1,163,344 
NewPage Holding Corp. bank term loan     
FRN 7s, 2014  1,184,053  1,071,938 
Novelis, Inc. bank term loan FRN Ser. B,     
4.81s, 2014  918,844  797,556 
Novelis, Inc. bank term loan FRN Ser. B,     
4.81s, 2014  2,021,456  1,754,624 
Rockwood Specialties Group, Inc. bank term     
loan FRN Ser. E, 4.299s, 2012  3,170,088  2,854,401 
Smurfit-Stone Container Corp. bank term     
loan FRN 5.22s, 2010  271,070  247,577 
Smurfit-Stone Container Corp. bank term     
loan FRN Ser. B, 5.065s, 2011  280,180  255,897 
Smurfit-Stone Container Corp. bank term loan     
FRN Ser. C, 5.025s, 2011  530,844  484,016 
    22,366,776 
Capital Goods (1.1%)     
Allied Waste Industries, Inc. bank term loan     
FRN 6.82s, 2012  1,679,677  1,613,690 
Allied Waste Industries, Inc. bank term loan     
FRN 5.471s, 2012  2,350,417  2,258,078 
Berry Plastics Holding Corp. bank term loan     
FRN 4.798s, 2015  591,000  476,642 
Graham Packaging Co., LP bank term loan     
FRN 5.059s, 2011  394,000  350,660 
Hawker Beechcraft Acquisition Co., LLC     
bank term loan FRN 2.601s, 2014  251,031  218,487 
Hawker Beechcraft Acquisition Co., LLC     
bank term loan FRN Ser. B, 5.762s, 2014  4,781,007  4,161,183 
Hexcel Corp. bank term loan FRN Ser. B,     
4.938s, 2012  1,796,015  1,724,174 
Manitowoc Co., Inc. (The) bank term loan     
FRN Ser. B, 6 1/2s, 2014 U  2,820,000  2,680,410 
Mueller Water Products, Inc. bank term loan     
FRN Ser. B, 4.908s, 2014  1,421,690  1,260,566 
Polypore, Inc. bank term loan FRN     
Ser. B, 6.03s, 2014  1,028,092  945,844 
Sensata Technologies BV bank term loan     
FRN 4.543s, 2013 (Netherlands)  1,311,903  1,091,340 
Sequa Corp. bank term loan FRN 6.812s, 2014  1,469,102  1,279,955 
Transdigm, Inc. bank term loan FRN 5.21s, 2013  1,855,000  1,701,963 
Wesco Aircraft Hardware Corp. bank term     
loan FRN 5.96s, 2013  618,000  557,359 
    20,320,351 

37

SENIOR LOANS (11.0%)* c cont.  Principal   
  amount  Value 
Communication Services (1.0%)     
Alltel Communications, Inc. bank term loan     
FRN Ser. B2, 5.316s, 2015  $3,102,332  $2,981,632 
Alltel Communications, Inc. bank term loan     
FRN Ser. B3, 4.997s, 2015  3,234,852  3,131,741 
Cricket Communications, Inc. bank term loan     
FRN Ser. B, 7.262s, 2013  102,216  97,054 
Crown Castle International Corp. bank term     
loan FRN 5.376s, 2014  306,665  267,259 
Fairpoint Communications, Inc. bank term loan     
FRN Ser. B, 5 3/4s, 2015  1,729,383  1,415,933 
Intelsat Corp. bank term loan FRN Ser. B2,     
5.288s, 2011  1,072,724  969,027 
Intelsat Corp. bank term loan FRN Ser. B2-A,     
5.288s, 2013  1,073,048  969,319 
Intelsat Corp. bank term loan FRN Ser. B2-C,     
5.288s, 2013  1,072,724  969,027 
Intelsat, Ltd. bank term loan FRN 6.883s,     
2014 (Bermuda)  1,987,780  1,689,613 
Intelsat, Ltd. bank term loan FRN Ser. B,     
5.288s, 2013 (Bermuda)  2,603,625  2,356,281 
Level 3 Communications, Inc. bank term     
loan FRN 4.952s, 2014  618,000  517,575 
MetroPCS Wireless, Inc. bank term loan     
FRN 5.4s, 2013  1,593,306  1,414,628 
PAETEC Holding Corp. bank term loan     
FRN 4.969s, 2013  293,525  245,093 
PAETEC Holding Corp. bank term loan     
FRN Ser. B1, 6.204s, 2013  601,100  501,919 
Time Warner Telecom, Inc. bank term loan     
FRN Ser. B, 5.71s, 2013  1,061,358  1,001,214 
West Corp. bank term loan FRN 5.813s, 2013  614,879  471,919 
    18,999,234 
Consumer Cyclicals (2.3%)     
Allison Transmission bank term loan     
FRN Ser. B, 5.377s, 2014  1,655,141  1,361,354 
Aramark Corp. bank term loan FRN     
2.025s, 2014  36,916  31,850 
Aramark Corp. bank term loan FRN Ser. B,     
5.637s, 2014  581,084  501,346 
Cenveo, Inc. bank term loan FRN Ser. C,     
4.954s, 2014  963,111  833,091 
Cenveo, Inc. bank term loan FRN Ser. DD,     
4.954s, 2014  32,092  27,760 
Dana Corp. bank term loan FRN 6.771s, 2015  1,868,878  1,582,706 
Dex Media West, LLC/Dex Media Finance Co.     
bank term loan FRN Ser. B, 7.405s, 2014  1,235,000  1,062,100 
GateHouse Media, Inc. bank term loan     
FRN Ser. B, 5.07s, 2014  885,000  407,100 
GateHouse Media, Inc. bank term loan     
FRN Ser. B, 4.81s, 2014  2,337,717  1,075,350 
GateHouse Media, Inc. bank term loan     
FRN Ser. DD, 4.801s, 2014  872,283  401,250 
Golden Nugget, Inc. bank term loan     
FRN Ser. B, 5.43s, 2014  404,091  315,191 
Golden Nugget, Inc. bank term loan     
FRN Ser. DD, 4.84s, 2014 U  230,909  180,109 
Goodman Global Holdings, Inc. bank term loan     
FRN Ser. B, 7.708s, 2011  4,413,103  4,319,400 
Goodyear Tire & Rubber Co. (The) bank term     
loan FRN 4.54s, 2010  6,918,000  5,828,415 

SENIOR LOANS (11.0%)* c cont.  Principal   
  amount  Value 
Consumer Cyclicals cont.     
Harrah’s Operating Co., Inc. bank term loan     
FRN Ser. B2, 5.805s, 2015  $614,910  $494,080 
Isle of Capri Casinos, Inc. bank term loan     
FRN 5.512s, 2014  822,917  655,591 
Isle of Capri Casinos, Inc. bank term loan     
FRN Ser. A, 5.512s, 2014  248,125  197,673 
Isle of Capri Casinos, Inc. bank term loan     
FRN Ser. B, 5.512s, 2014  329,167  262,236 
Lear Corp bank term loan FRN 6.045s, 2013  4,153,597  3,194,810 
Michaels Stores, Inc. bank term loan FRN     
Ser. B, 4.863s, 2013  1,421,910  1,038,502 
National Bedding Co. bank term loan FRN     
5.353s, 2011  286,545  219,207 
Navistar Financial Corp. bank term loan     
FRN 5.695s, 2012  894,133  765,975 
Navistar International Corp. bank term loan     
FRN 6.191s, 2012  2,458,867  2,106,430 
Neiman Marcus Group, Inc. (The) bank term     
loan FRN Ser. B, 4.565s, 2013  1,982,859  1,706,910 
Reader’s Digest Association, Inc. (The) bank     
term loan FRN Ser. B, 4.706s, 2014  1,674,500  1,188,895 
Realogy Corp. bank term loan FRN 2.3s, 2013 R  843,116  623,379 
Realogy Corp. bank term loan FRN Ser. B,     
5.57s, 2013 R  3,131,572  2,315,406 
Tribune Co. bank term loan FRN Ser. B,     
5.786s, 2014  3,826,563  1,999,379 
Tropicana Entertainment bank term loan     
FRN Ser. B, 6 1/4s, 2011  3,420,000  2,282,850 
TRW Automotive, Inc. bank term loan     
FRN Ser. B, 4.471s, 2014  752,400  703,494 
United Components, Inc. bank term loan     
FRN Ser. D, 4.81s, 2012  1,703,598  1,567,311 
Visant Holding Corp. bank term loan     
FRN Ser. C, 5.171s, 2010  1,354,173  1,295,493 
Visteon Corp. bank term loan FRN     
Ser. B, 5.47s, 2013  4,251,000  2,448,576 
Visteon Corp. bank term loan FRN     
Ser. B1, 6.1s, 2013  184,000  105,984 
Yankee Candle Co., Inc. bank term loan     
FRN 5.764s, 2014  366,010  299,824 
    43,399,027 
Consumer Staples (2.6%)     
Affinion Group, Inc. bank term loan     
FRN Ser. B, 5.345s, 2013  4,063,460  3,718,066 
Cablevision Systems Corp. bank term loan     
FRN 4.569s, 2013  3,767,819  3,300,877 
Cebridge Connections, Inc. bank term loan     
FRN Ser. B, 4.792s, 2013  2,905,750  2,512,567 
Charter Communications Operating, LLC     
bank term loan FRN 8.77s, 2014  985,050  917,151 
Charter Communications, Inc. bank term loan     
FRN 6.262s, 2014  900,000  648,000 
Charter Communications, Inc. bank term loan     
FRN 4.8s, 2014  7,278,059  5,761,799 
Cinemark USA, Inc. bank term loan FRN     
4.615s, 2013  1,789,738  1,530,226 
Citadel Communications bank term loan     
FRN Ser. B, 4.277s, 2014  705,000  514,650 

38

SENIOR LOANS (11.0%)* c cont.  Principal   
  amount  Value 
Consumer Staples cont.     
Dean Foods Co. bank term loan FRN     
Ser. B, 5.269s, 2014  $3,004,250  $2,631,723 
DirecTV Holdings, LLC bank term loan     
FRN 5.601s, 2013  1,396,500  1,321,787 
Idearc, Inc. bank term loan FRN Ser. B,     
5.767s, 2014  5,422,137  3,139,417 
Jarden Corp. bank term loan FRN Ser. B1,     
5.512s, 2012  1,066,627  929,299 
Jarden Corp. bank term loan FRN Ser. B2,     
5.512s, 2012  469,084  408,689 
Mediacom Communications Corp. bank term     
loan FRN Ser. C, 4.744s, 2015  1,835,644  1,610,777 
Mediacom Communications Corp. bank term     
loan FRN Ser. D2, 4.744s, 2015  530,550  462,242 
MGM Studios, Inc. bank term loan FRN Ser. B,     
6.051s, 2011  4,301,000  3,015,001 
Pinnacle Foods Holding Corp. bank term loan     
FRN Ser. B, 5.44s, 2014  1,897,092  1,568,263 
Prestige Brands, Inc. bank term loan FRN     
Ser. B, 5.954s, 2011  1,471,458  1,375,814 
R.H. Donnelley, Inc. bank term loan FRN     
6.828s, 2011  2,067,855  1,803,170 
Rental Service Corp. bank term loan FRN     
6.3s, 2013  2,045,000  1,595,100 
Rite-Aid Corp. bank term loan FRN Ser. B,     
5.014s, 2014  432,825  348,424 
Six Flags Theme Parks bank term loan FRN     
5.603s, 2015  2,606,013  2,088,719 
Spectrum Brands, Inc. bank term loan FRN     
2.336s, 2013  115,386  84,232 
Spectrum Brands, Inc. bank term loan FRN     
Ser. B1, 6.732s, 2013  2,057,383  1,501,890 
Ticketmaster bank term loan FRN Ser. B,     
6.64s, 2014  1,495,000  1,405,300 
Universal City Development Partners bank term     
loan FRN Ser. B, 5.921s, 2011  3,780,377  3,629,162 
Univision Communications, Inc. bank term loan     
FRN Ser. B, 5.121s, 2014  983,000  629,120 
VNU Group BV bank term loan FRN Ser. B,     
4.803s, 2013 (Netherlands)  613,309  527,752 
Warner Music Group bank term loan FRN Ser. B,     
5.073s, 2011  898,776  804,405 
Young Broadcasting, Inc. bank term loan FRN     
Ser. B, 5.32s, 2012  319,114  240,931 
    50,024,553 
Energy (0.4%)     
CR Gas Storage bank term loan     
FRN 4.847s, 2013  219,646  196,309 
CR Gas Storage bank term loan     
FRN 4.843s, 2013  91,197  81,507 
CR Gas Storage bank term loan     
FRN Ser. B, 4.847s, 2013  1,357,013  1,212,831 
CR Gas Storage bank term loan     
FRN Ser. DD, 4.844s, 2013  148,786  132,977 
Enterprise GP Holdings, LP bank term loan     
FRN 4.916s, 2014  485,000  448,625 
EPCO Holding, Inc. bank term loan     
FRN Ser. A, 4.563s, 2012  1,000,000  951,250 
Hercules Offshore, Inc. bank term loan     
FRN Ser. B, 4.55s, 2013  1,152,350  1,090,892 

SENIOR LOANS (11.0%)* c cont.  Principal   
  amount  Value 
Energy cont.     
MEG Energy Corp. bank term loan     
FRN 5.76s, 2013 (Canada)  $487,500  $453,375 
MEG Energy Corp. bank term loan     
FRN Ser. DD, 5.76s, 2013 (Canada)  496,875  462,094 
Petroleum Geo-Services ASA bank term loan     
FRN 5.51s, 2015 (Norway)  572,000  548,405 
Quicksilver Resources, Inc. bank term loan     
FRN 8.204s, 2013  1,386,525  1,324,131 
    6,902,396 
Financial (0.1%)     
General Growth Properties, Inc. bank term     
loan FRN Ser. A, 3.64s, 2010 R  430,000  338,410 
Hub International, Ltd. bank term loan     
FRN Ser. B, 5.301s, 2014  566,176  489,035 
Hub International, Ltd. bank term loan     
FRN Ser. DD, 5.568s, 2014  127,256  109,917 
Nuveen Investments, Inc. bank term loan     
FRN Ser. B, 6.726s, 2014  1,626,825  1,382,801 
    2,320,163 
Health Care (0.8%)     
Community Health Systems, Inc. bank term     
loan FRN Ser. B, 5.277s, 2014  2,340,902  2,048,290 
Community Health Systems, Inc. bank term     
loan FRN Ser. DD, 0 1/2s, 2014 U  121,079  105,944 
Davita, Inc. bank term loan FRN Ser. B,     
5.22s, 2012  1,194,000  1,072,809 
Health Management Associates, Inc. bank     
term loan FRN 5.512s, 2014  5,293,591  4,442,207 
Healthsouth Corp. bank term loan FRN     
Ser. B, 4.994s, 2013  1,670,999  1,499,722 
Hologic, Inc. bank term loan FRN Ser. B,     
6s, 2013  945,984  927,065 
IASIS Healthcare, LLC/IASIS Capital Corp.     
bank term loan FRN 8.043s, 2014  1,496,023  1,271,620 
IASIS Healthcare, LLC/IASIS Capital Corp.     
bank term loan FRN 7.62s, 2014  115,819  102,693 
IASIS Healthcare, LLC/IASIS Capital Corp.     
bank term loan FRN Ser. B, 5.704s, 2014  1,252,046  1,110,147 
IASIS Healthcare, LLC/IASIS Capital Corp.     
bank term loan FRN Ser. DD, 5.704s, 2014  433,235  384,135 
LifePoint, Inc. bank term loan FRN Ser. B,     
4.435s, 2012  1,191,232  1,078,065 
Sun Healthcare Group, Inc. bank term loan     
FRN 2.701s, 2014  103,035  92,732 
Sun Healthcare Group, Inc. bank term loan     
FRN Ser. B, 4.804s, 2014  478,055  430,249 
Sun Healthcare Group, Inc. bank term loan     
FRN Ser. DD, 5.422s, 2014  62,375  56,137 
Vanguard Health Systems, Inc. bank term loan     
FRN 5.988s, 2011  967,971  871,779 
    15,493,594 
Technology (0.6%)     
Activant Solutions Holdings, Inc. bank term loan     
FRN Ser. B, 4.804s, 2013  704,966  567,498 
Compucom Systems, Inc. bank term loan     
FRN 7.21s, 2014  876,150  797,297 
First Data Corp. bank term loan FRN Ser. B1,     
5.963s, 2014  1,428,118  1,213,901 

39

SENIOR LOANS (11.0%)* c cont.  Principal   
  amount  Value 
Technology cont.     
First Data Corp. bank term loan FRN Ser. B3,     
5.982s, 2014  $1,941,072  $1,657,190 
Flextronics International, Ltd. bank term loan     
FRN Ser. B, 6.066s, 2014 (Singapore)  2,736,907  2,317,818 
Flextronics International, Ltd. bank term loan     
FRN Ser. B, 5.041s, 2014 (Singapore)  786,468  666,040 
Freescale Semiconductor, Inc. bank term loan     
FRN Ser. B, 5.47s, 2013  404,909  325,952 
JDA Software Group, Inc. bank term loan     
FRN Ser. B, 5.034s, 2013  138,710  133,161 
Sabre Holdings Corp. bank term loan     
FRN 4.666s, 2014  1,117,579  750,375 
SunGard Data Systems, Inc. bank term loan     
FRN 4.553s, 2014  3,020,443  2,618,347 
Travelport bank term loan FRN 6.262s, 2013  27,034  21,492 
Travelport bank term loan FRN Ser. B,     
6.012s, 2013  381,616  303,385 
Travelport bank term loan FRN Ser. DD,     
5.954s, 2013  368,319  296,313 
    11,668,769 
Transportation (0.3%)     
Ceva Group PLC bank term loan FRN 7.736s,     
2015 (Netherlands)  7,800,000  5,538,000 
Delta Airlines, Inc. bank term loan FRN     
5.64s, 2012  13,500  10,665 
UAL Corp. bank term loan FRN Ser. B,     
5.457s, 2014  516,074  313,085 
    5,861,750 
 

SENIOR LOANS (11.0%)* c cont.  Principal   
  amount  Value 
Utilities & Power (0.7%)     
Dynegy Holdings, Inc. bank term loan FRN     
5.21s, 2013  $3,090,000  $2,626,500 
Energy Future Holdings Corp. bank term     
loan FRN Ser. B2, 6.228s, 2014  2,776,503  2,342,675 
Energy Future Holdings Corp. bank term     
loan FRN Ser. B3, 6.28s, 2014  2,885,850  2,428,752 
NRG Energy, Inc. bank term loan FRN     
7.84s, 2014 U  730,000  675,250 
NRG Energy, Inc. bank term loan FRN     
5.262s, 2014  2,227,263  1,951,329 
NRG Energy, Inc. bank term loan FRN     
4.451s, 2014  1,094,229  958,666 
Reliant Energy, Inc. bank term loan FRN     
3.6s, 2014  1,820,000  1,504,534 
    12,487,706 
 
Total senior loans (cost $244,023,247)    $209,844,319 

PURCHASED OPTIONS OUTSTANDING (1.7%)*  Expiration date/  Contract  Value 
  strike price  amount   
Option on an interest rate swap with Goldman Sachs International for the right to pay a fixed       
rate of 5.355% versus the three month USD-LIBOR-BBA maturing on November 12, 2019.  Nov-09/5.355  $81,033,000  $1,638,212 
Option on an interest rate swap with Goldman Sachs International for the right to receive a       
fixed rate of 5.355% versus the three month USD-LIBOR-BBA maturing on November 12, 2019.  Nov-09/5.355  81,033,000  5,723,361 
Option on an interest rate swap with JPMorgan Chase Bank, N.A. for the right to pay a fixed       
rate of 4.83% versus the three month USD-LIBOR-BBA maturing on November 10, 2018.  Nov-08/4.83  113,617,000  881,668 
Option on an interest rate swap with JPMorgan Chase Bank, N.A. for the right to pay a fixed rate       
of 5.03% versus the three month USD-LIBOR-BBA maturing on February 16, 2020.  Feb-10/5.03  138,600,000  4,860,702 
Option on an interest rate swap with JPMorgan Chase Bank, N.A. for the right to pay a fixed       
rate of 5.355% versus the three month USD-LIBOR-BBA maturing on November 12, 2019.  Nov-09/5.355  81,033,000  1,744,640 
Option on an interest rate swap with JPMorgan Chase Bank, N.A. for the right to receive a       
fixed rate of 4.83% versus the three month USD-LIBOR-BBA maturing on November 10, 2018.  Nov-08/4.83  113,617,000  3,820,940 
Option on an interest rate swap with JPMorgan Chase Bank, N.A. for the right to receive a       
fixed rate of 5.03% versus the three month USD-LIBOR-BBA maturing on February 16, 2020.  Feb-10/5.03  138,600,000  7,627,158 
Option on an interest rate swap with JPMorgan Chase Bank, N.A. for the right to receive a       
fixed rate of 5.355% versus the three month USD-LIBOR-BBA maturing on November 12, 2019.  Nov-09/5.355  81,033,000  5,723,361 
Total purchased options outstandings (cost $28,572,276)      $32,020,042 
 
CONVERTIBLE BONDS AND NOTES (0.1%)*    Principal amount  Value 
General Cable Corp. cv. company guaranty sr. unsec. notes 1s, 2012    $2,147,000  $1,653,190 
Total convertible bonds and notes (cost $1,722,352)      $1,653,190 

40

SHORT-TERM INVESTMENTS (7.2%)*    Principal amount/shares  Value 
Egypt Treasury Bills for an effective yield of 10.56%, January 27, 2009  EGP  12,625,000  $2,243,878 
Egypt Treasury Bills for an effective yield of 10.02%, December 2, 2008  EGP  20,250,000  3,645,706 
Federated Prime Obligations Fund    70,314,838  70,314,838 
Short-term investments held as collateral for loaned securities with yields ranging from 0.50%       
to 3.01% and due dates ranging from October 1, 2008 to November 10, 2008 d    $24,077,784  24,052,060 
U.S. Treasury Bills for an effective yield of 0.30%, October 30, 2008 #    33,100,000  33,092,014 
U.S. Treasury Bills for an effective yield of 0.30%, October 16, 2008 #    3,100,000  3,099,613 
U.S. Treasury Bills for an effective yield of 0.20%, October 9, 2008 #    1,731,000  1,730,923 
Total short-term investments (cost $138,317,238)      $138,179,032 
 
TOTAL INVESTMENTS       
Total investments (cost $2,988,609,261)      $2,779,985,552 

Key to holding’s currency abbreviations

ARS  Argentine Peso 
AUD  Australian Dollar 
BRL  Brazilian Real 
CAD  Canadian Dollar 
CHF  Swiss Franc 
EGP  Egyptian Pound 
EUR  Euro 
GBP  British Pound 
INR  Indian Rupee 
JPY  Japanese Yen 
MXN  Mexican Peso 
RUB  Russian Ruble 
SEK  Swedish Krona 
TRY  Turkish Lira 
USD/$  United States Dollar 
ZAR  South African Rand 

* Percentages indicated are based on net assets of $1,908,436,696.

† Non-income-producing security.

†† 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.

‡‡ 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 September 30, 2008.

c Senior loans are exempt from registration under the Securities 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 rates shown for senior loans are the current interest rates at September 30, 2008. 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).

d See Note 1 to the financial statements.

F 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.

R Real Estate Investment Trust.

S Securities on loan, in part or in entirety, at September 30, 2008.

U These securities, in part or in entirety, represent unfunded loan commitments (Note 7).

At September 30, 2008, liquid assets totaling $284,534,858 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 under the Securities Act of 1933, as amended. 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 September 30, 2008.

41

The dates shown on debt obligations are the original maturity dates.

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 September 30, 2008.

DIVERSIFICATION BY COUNTRY           
 
Distribution of investments by country of issue at September 30, 2008 (as a percentage of Portfolio Value):     
 
United States  83.9%  Canada  1.0%  Colombia  0.5% 
Japan  3.6  Argentina  1.0  Ireland  0.5 
United Kingdom  2.1  Netherlands  0.6  Brazil  0.5 
 
Luxembourg  1.9    Mexico  0.6  Other  2.3 
Cayman Islands  1.0    Venezuela  0.5  Total  100.0% 
 

FORWARD CURRENCY CONTRACTS TO BUY at 9/30/08    Aggregate  Delivery  Unrealized appreciation/ 
(aggregate face value $360,431,791)  Value  face value  date  (depreciation) 
Australian Dollar  $44,335,841  $51,301,454  10/15/08  $(6,965,613) 
Canadian Dollar  2,788,723  2,906,001  10/15/08  (117,278) 
Danish Krone  2,032,404  2,050,123  12/17/08  (17,719) 
Euro  182,061,767  185,509,315  12/17/08  (3,447,548) 
Japanese Yen  6,166,701  6,048,890  11/19/08  117,811 
Malaysian Ringgit  7,919,073  8,272,294  11/19/08  (353,221) 
Mexican Peso  12,221  12,450  10/15/08  (229) 
New Zealand Dollar  25,078  28,003  10/15/08  (2,925) 
Norwegian Krone  29,994,114  31,587,583  12/17/08  (1,593,469) 
Polish Zloty  16,880,545  16,544,059  12/17/08  336,486 
South African Rand  5,423,628  6,084,162  10/15/08  (660,534) 
Swedish Krona  5,695,153  5,834,256  12/17/08  (139,103) 
Swiss Franc  43,910,391  44,253,201  12/17/08  (342,810) 
Total        $(13,186,152) 

FORWARD CURRENCY CONTRACTS TO SELL at 9/30/08    Aggregate  Delivery  Unrealized appreciation/ 
(aggregate face value $408,696,091)  Value  face value  date  (depreciation) 
Australian Dollar  $17,744,216  $18,880,163  10/15/08  $1,135,947 
British Pound  76,356,792  75,743,303  12/17/08  (613,489) 
Canadian Dollar  21,068,137  21,115,502  10/15/08  47,365 
Euro  183,801,583  187,591,377  12/17/08  3,789,794 
Hungarian Forint  14,731,770  14,653,447  12/17/08  (78,323) 
Japanese Yen  21,114,294  21,030,237  11/19/08  (84,057) 
Mexican Peso  6,666,313  6,925,376  10/15/08  259,063 
Norwegian Krone  45,065,322  45,538,037  12/17/08  472,715 
South African Rand  5,423,628  5,580,359  10/15/08  156,731 
South Korean Won  2,916,816  3,029,257  11/19/08  112,441 
Swedish Krona  8,325,871  8,531,975  12/17/08  206,104 
Swiss Franc  76,551  77,058  12/17/08  507 
Total        $5,404,798 

FUTURES CONTRACTS OUTSTANDING at 9/30/08  Number of    Expiration  Unrealized appreciation/ 
  contracts  Value  date  (depreciation) 
Australian Government Treasury Bond 10 yr (Long)  10  $5,614,157  Dec-08  $15,096 
Canadian Government Bond 10 yr (Long)  24  2,642,932  Dec-08  (35,290) 
Euro-Bobl 5 yr (Long)  1,398  215,976,589  Dec-08  2,083,957 
Euro-Bund 10 yr (Long)  746  120,874,430  Dec-08  (550,053) 
Euro-Dollar 90 day (Long)  185  44,652,063  Dec-08  (125,694) 
Euro-Dollar 90 day (Short)  85  20,485,000  Mar-10  (16,856) 
Euro-Dollar 90 day (Short)  2,700  651,780,000  Dec-09  1,517,898 
Euro-Dollar 90 day (Short)  1,289  312,179,688  Sep-09  312,532 
Euro-Dollar 90 day (Short)  518  125,563,200  Jun-09  269,704 
Euro-Schatz 2 yr (Short)  1,615  237,368,627  Dec-08  (1,960,678) 
Japanese Government Bond 10 yr (Long)  13  16,817,344  Dec-08  (40,405) 

42

FUTURES CONTRACTS OUTSTANDING at 9/30/08 cont.  Number of    Expiration  Unrealized appreciation/ 
  contracts  Value  date  (depreciation) 
Japanese Government Bond 10 yr Mini (Long)  2  $258,315  Dec-08  $(1,089) 
Sterling Interest Rate 90 day (Long)  273  57,847,269  Sep-09  234,701 
Sterling Interest Rate 90 day (Long)  395  83,628,190  Jun-09  184,905 
U.K. Gilt 10 yr (Long)  104  20,740,214  Dec-08  37,251 
U.S. Treasury Bond 20 yr (Long)  7,950  931,516,406  Dec-08  1,332,710 
U.S. Treasury Note 10 yr (Short)  295  33,814,375  Dec-08  (31,233) 
U.S. Treasury Note 5 yr (Short)  10,252  1,150,626,813  Dec-08  (6,112,066) 
U.S. Treasury Note 2 yr (Short)  17,385  3,710,610,938  Dec-08  (24,337,285) 
Total        $(27,221,895) 
   

WRITTEN OPTIONS OUTSTANDING at 9/30/08 (premiums received $11,957,653)  Contract  Expiration date/   
  amount  strike price  Value 
Option on an interest rate swap with JPMorgan Chase Bank, N.A. for the obligation to receive a fixed       
rate of 4.82% versus the three month USD-LIBOR-BBA maturing on September 12, 2018.  $132,437,000  Sep-13/4.82  $5,012,740 
Option on an interest rate swap with JPMorgan Chase Bank, N.A. for the obligation to pay a fixed rate       
of 5.00% versus the three month USD-LIBOR-BBA maturing on December 19, 2018.  29,188,000  Dec-08/5.00  1,394,895 
Option on an interest rate swap with JPMorgan Chase Bank, N.A. for the obligation to pay a fixed rate       
of 5.51% versus the three month USD-LIBOR-BBA maturing on May 14, 2022.  21,412,000  May-12/5.51  1,648,724 
Option on an interest rate swap with JPMorgan Chase Bank, N.A. for the obligation to pay a fixed rate       
of 4.82% versus the three month USD-LIBOR-BBA maturing on September 12, 2018.  132,437,000  Sep-13/4.82  4,419,423 
Option on an interest rate swap with JPMorgan Chase Bank, N.A. for the obligation to receive a fixed       
rate of 5.00% versus the three month USD-LIBOR-BBA maturing on December 19, 2018.  29,188,000  Dec-08/5.00  278,745 
Option on an interest rate swap with JPMorgan Chase Bank, N.A. for the obligation to receive a fixed       
rate of 5.51% versus the three month USD-LIBOR-BBA maturing on May 14, 2022.  21,412,000  May-12/5.51  878,320 
Total      $13,632,847 
   

TBA SALE COMMITMENTS OUTSTANDING at 9/30/08 (proceeds receivable $322,732,500)  Principal  Settlement   
Agency  amount  date  Value 
FNMA, 6s, October 1, 2038  $39,000,000  10/14/08  $39,469,217 
FNMA, 5 1/2s, October 1, 2038  22,000,000  10/14/08  21,910,625 
FNMA, 5s, October 1, 2038  264,000,000  10/14/08  256,946,237 
Total      $318,326,079 
   

INTEREST RATE SWAP CONTRACTS OUTSTANDING at 9/30/08
  Upfront         
  premium         
Swap  Notional  received  Termination  Payments made by  Payments received by  Unrealized appreciation/ 
counterparty  amount  (paid)  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  $(535,751) 
223,264,000  —  5/23/10  3 month USD-LIBOR-BBA  3.155%  1,477,371 
109,900,000  —  7/18/13  4.14688%  3 month USD-LIBOR-BBA  (645,868) 
1,000,000  —  7/29/18  3 month USD-LIBOR-BBA  4.75%  25,105 
62,381,000  —  8/26/18  3 month USD-LIBOR-BBA  4.54375%  458,931 
98,480,000 E  —  8/28/28  5.3175%  3 month USD-LIBOR-BBA  (1,507,729) 
29,380,000 E  —  9/4/28  5.2375%  3 month USD-LIBOR-BBA  (336,522) 
993,472,000  —  9/10/10  3 month USD-LIBOR-BBA  3.22969%  (1,906,666) 
87,540,000 E  —  9/17/28  3 month USD-LIBOR-BBA  4.9775%  (143,566) 
61,400,000 E  —  9/18/28  3 month USD-LIBOR-BBA  4.765%  (747,852) 
30,888,000  —  9/18/38  4.36125%  3 month USD-LIBOR-BBA  1,599,496 
3,055,029,000  —  9/18/10  3 month USD-LIBOR-BBA  2.86667%  (28,025,185) 
1,000,000  —  9/19/18  3 month USD-LIBOR-BBA  4.07%  (32,244) 
63,790,000  —  9/26/38  3 month USD-LIBOR-BBA  4.725%  603,278 
3,853,000  12,027  10/1/18  3 month USD-LIBOR-BBA  4.30%  (47,309) 
185,536,000  —  9/24/09  3 month USD-LIBOR-BBA  4.7375%  2,764,383 
5,000,000  —  9/1/15  3 month USD-LIBOR-BBA  4.53%  82,225 
46,300,000  —  5/8/28  4.95%  3 month USD-LIBOR-BBA  (2,326,054) 

43

INTEREST RATE SWAP CONTRACTS OUTSTANDING at 9/30/08 cont.  
    Upfront         
    premium         
Swap  Notional  received  Termination  Payments made by  Payments received by  Unrealized appreciation/ 
counterparty  amount  (paid)  date  fund per annum  fund per annum  (depreciation) 
Citibank, N.A.    
JPY  4,864,700,000  $—  9/11/16  1.8675%  6 month JPY-LIBOR-BBA  $(1,057,389) 
  $59,890,000  —  9/29/13  5.078%  3 month USD-LIBOR-BBA  (2,608,972) 
  136,000,000  —  7/21/18  4.80625%  3 month USD-LIBOR-BBA  (4,055,926) 
MXN  163,555,000 F  —  7/18/13  1 month MXN-TIIE-BANXICO  9.175%  313,608 
MXN  49,090,000 F  —  7/22/13  1 month MXN-TIIE-BANXICO  9.21%  100,270 
CAD  16,520,000  —  8/8/18  4.119%  3 month CAD-BA-CDOR  62,399 
AUD  45,831,000 E  —  8/13/18  6 month AUD-BBR-BBSW  6.67%  258,907 
  $143,956,000  —  8/26/10  3 month USD-LIBOR-BBA  3.34125%  48,629 
ZAR  86,305,000 F  —  8/27/13  9.86%  3 month ZAR-JIBAR-SAFEX  (64,075) 
ZAR  43,152,500 F  —  9/2/13  9.97%  3 month ZAR-JIBAR-SAFEX  (57,066) 
  $15,225,000  —  9/8/18  3 month USD-LIBOR-BBA  4.3152%  (175,111) 
  226,512,000  —  9/10/10  3 month USD-LIBOR-BBA  3.1825%  (640,286) 
AUD  18,300,000 E  —  9/11/18  6.1%  6 month AUD-BBR-BBSW  152,029 
  $72,482,000  —  9/16/10  3.175%  3 month USD-LIBOR-BBA  219,009 
  3,278,000  —  9/16/18  3 month USD-LIBOR-BBA  4.355%  (27,797) 
  484,921,000  —  9/17/13  3 month USD-LIBOR-BBA  3.4975%  (12,096,388) 
  29,859,000  —  9/18/38  4.45155%  3 month USD-LIBOR-BBA  1,111,685 
  1,180,349,000  —  9/18/10  3 month USD-LIBOR-BBA  2.92486%  (9,492,894) 
EUR  40,830,000  —  9/25/38  6 month EUR-EURIBOR-Reuters  4.9425%  3,547,061 
  $21,000,000  —  9/17/09  3 month USD-LIBOR-BBA  4.765%  338,265 
  124,384,000  —  10/26/12  4.6275%  3 month USD-LIBOR-BBA  (4,934,356) 
  62,086,000  —  11/9/17  5.0825%  3 month USD-LIBOR-BBA  (4,009,354) 
  148,961,000  —  11/23/17  4.885%  3 month USD-LIBOR-BBA  (7,236,266) 
Citibank, N.A., London  
JPY  6,200,000,000  —  2/10/16  6 month JPY-LIBOR-BBA  1.755%  986,518 
Credit Suisse International  
CHF  23,610,000  —  3/13/18  6 month CHF-LIBOR-BBA  3.3175%  346,243 
CHF  104,340,000  —  3/15/10  2.59%  6 month CHF-LIBOR-BBA  (1,182,627) 
CHF  109,340,000  —  3/15/10  2.6625%  6 month CHF-LIBOR-BBA  (1,370,452) 
CHF  24,810,000  —  3/14/18  6 month CHF-LIBOR-BBA  3.3%  327,754 
EUR  30,810,000 E  —  8/13/28  6 month EUR-EURIBOR-Reuters  5.22%  1,062,463 
  $46,410,000 E  —  8/13/28  5.46%  3 month USD-LIBOR-BBA  (1,033,551) 
  80,970,500  —  9/16/10  3.143%  3 month USD-LIBOR-BBA  294,319 
  49,312,800  —  9/16/18  4.299%  3 month USD-LIBOR-BBA  641,719 
  17,503,000  —  9/18/38  4.41338%  3 month USD-LIBOR-BBA  759,191 
  636,461,000  —  9/18/10  3 month USD-LIBOR-BBA  2.91916%  (5,190,024) 
  210,919,000  —  9/19/13  3.635%  3 month USD-LIBOR-BBA  4,095,871 
  84,554,000 F  —  9/23/10  3 month USD-LIBOR-BBA  3.32%  (127,718) 
SEK  181,200,000  —  9/29/18  4.80%  3 month SEK-STIBOR-SIDE  (313,333) 
EUR  18,790,000  —  9/29/18  6 month EUR-EURIBOR-Reuters  4.85%  300,153 
SEK  45,300,000  —  9/30/18  4.76%  3 month SEK-STIBOR-SIDE  (57,616) 
EUR  4,697,500  —  9/30/18  6 month EUR-EURIBOR-Reuters  4.81%  54,612 
  $112,738,000 F  —  9/23/38  4.7375%  3 month USD-LIBOR-BBA  (1,110,659) 
EUR  120,880,000  —  7/4/15  3.93163%  6 month EUR-EURIBOR-Telerate  7,801,976 
Deutsche Bank AG  
  $24,344,349  —  8/2/32  5.86%  3 month USD-LIBOR-BBA  (4,181,661) 
  21,693,259  —  8/2/22  3 month USD-LIBOR-BBA  5.7756%  2,699,893 
  44,645,000  —  9/23/38  4.75%  3 month USD-LIBOR-BBA  (440,299) 
EUR  44,645,000  —  9/24/38  6 month EUR-EURIBOR-Reuters  4.977%  4,229,313 
  $134,812,000  —  9/24/10  3 month USD-LIBOR-BBA  3.395%  17,310 
ZAR  52,785,000  —  7/6/11  3 month ZAR-JIBAR-SAFEX  9.16%  (195,830) 
  $10,536,000  —  10/16/17  3 month USD-LIBOR-BBA  5.297%  866,260 
  7,300,000  —  11/7/17  3 month USD-LIBOR-BBA  5.056%  455,325 

44

INTEREST RATE SWAP CONTRACTS OUTSTANDING at 9/30/08 cont.     
    Upfront         
    premium         
Swap  Notional  received  Termination  Payments made by  Payments received by  Unrealized appreciation/ 
counterparty  amount  (paid)  date  fund per annum  fund per annum  (depreciation) 
Goldman Sachs Capital Markets, L.P.  
  $48,888,992  $—  8/1/32  5.919%  3 month USD-LIBOR-BBA  $(8,828,349) 
  43,565,000  —  8/1/22  3 month USD-LIBOR-BBA  5.845%  5,746,492 
  24,344,349  —  8/12/32  5.689%  3 month USD-LIBOR-BBA  (3,569,107) 
  21,693,259  —  8/12/22  3 month USD-LIBOR-BBA  5.601%  2,298,173 
Goldman Sachs International  
SEK  394,630,000 E  —  3/2/11  3 month SEK-STIBOR-SIDE  4.2475%  (256,042) 
SEK  94,520,000 E  —  3/4/19  4.80%  3 month SEK-STIBOR-SIDE  (205,558) 
  $105,536,000  —  3/11/38  5.029%  3 month USD-LIBOR-BBA  (5,890,836) 
EUR  103,570,000  —  3/26/10  6 month EUR-EURIBOR-Reuters  4.129%  2,053,964 
GBP  86,280,000  —  3/29/10  6 month GBP-LIBOR-BBA  5.25%  (424,901) 
GBP  20,880,000  —  3/27/18  5.0675%  6 month GBP-LIBOR-BBA  3,480 
  $35,010,000  —  4/2/18  4.076%  3 month USD-LIBOR-BBA  609,116 
  201,331,000  —  4/3/18  3 month USD-LIBOR-BBA  4.19%  (1,610,956) 
CHF  167,240,000  —  4/5/10  2.89%  6 month CHF-LIBOR-BBA  (311,045) 
CHF  38,210,000  —  4/3/18  6 month CHF-LIBOR-BBA  3.42%  287,419 
  $424,238,000  —  4/8/10  3 month USD-LIBOR-BBA  2.64%  (1,858,642) 
CHF  53,300,000  —  4/1/10  2.9%  6 month CHF-LIBOR-BBA  (67,656) 
CHF  12,140,000  —  4/2/18  6 month CHF-LIBOR-BBA  3.44%  99,775 
  $58,036,000  —  4/23/18  4.43%  3 month USD-LIBOR-BBA  (659,079) 
  87,142,000  —  5/19/18  4.525%  3 month USD-LIBOR-BBA  (1,599,646) 
  300,300,000  —  3/10/10  4.779%  3 month USD-LIBOR-BBA  (6,953,317) 
JPY  16,640,830,000  —  5/7/10  6 month JPY-LIBOR-BBA  1.09125%  122,711 
JPY  3,660,980,000 E  —  5/7/18  2.205%  6 month JPY-LIBOR-BBA  (291,308) 
JPY  3,003,000,000  —  6/10/16  1.953%  6 month JPY-LIBOR-BBA  (897,290) 
   $329,900,000 E  —  3/8/12  3 month USD-LIBOR-BBA  4.99%  4,350,757 
  9,430,000  —  9/14/14  4.906%  3 month USD-LIBOR-BBA  (370,011) 
  4,600,000  —  9/14/17  5.0625%  3 month USD-LIBOR-BBA  (225,341) 
  12,940,000  —  9/14/09  3 month USD-LIBOR-BBA  4.717%  201,135 
  219,058,200  —  9/19/09  3 month USD-LIBOR-BBA  4.763%  3,407,852 
  333,932,000  —  9/21/09  3 month USD-LIBOR-BBA  4.60%  4,504,430 
  93,119,100  —  9/21/17  5.149%  3 month USD-LIBOR-BBA  (5,042,987) 
GBP  8,940,000 E  —  1/7/38  4.33625%  6 month GBP-LIBOR-BBA  (481,364) 
JPMorgan Chase Bank, N.A.  
  $649,451,000  —  4/27/09  5.034%  3 month USD-LIBOR-BBA  (16,527,211) 
  16,234,000  —  3/7/18  4.45%  3 month USD-LIBOR-BBA  (26,373) 
  77,188,000  —  3/12/18  3 month USD-LIBOR-BBA  4.4525%  137,712 
  65,961,000  —  3/11/38  5.0025%  3 month USD-LIBOR-BBA  (3,401,842) 
  336,858,000  —  3/14/18  4.775%  3 month USD-LIBOR-BBA  (8,993,921) 
  146,495,000  —  3/20/13  3 month USD-LIBOR-BBA  3.145%  (5,135,336) 
  352,958,000  —  3/26/10  3 month USD-LIBOR-BBA  2.33375%  (4,940,946) 
  151,351,000  —  4/8/13  3 month USD-LIBOR-BBA  3.58406%  (1,231,245) 
  3,204,000  —  5/7/13  3.9325%  3 month USD-LIBOR-BBA  (23,419) 
  167,525,000  —  5/23/10  3 month USD-LIBOR-BBA  3.16%  1,124,918 
  98,000,000  —  6/13/13  4.47%  3 month USD-LIBOR-BBA  (3,056,348) 
  33,130,000  —  10/10/13  5.054%  3 month USD-LIBOR-BBA  (1,995,221) 
  46,090,000  —  10/10/13  5.09%  3 month USD-LIBOR-BBA  (2,867,028) 
  3,000,000  —  6/27/18  3 month USD-LIBOR-BBA  4.8305%  119,471 
  31,575,000  —  7/16/10  3 month USD-LIBOR-BBA  3.384%  37,926 
  13,290,000  —  7/17/18  4.52%  3 month USD-LIBOR-BBA  (87,746) 
  93,626,000  —  7/22/10  3 month USD-LIBOR-BBA  3.565%  441,837 
MXN  163,690,000 F  —  7/19/13  1 month MXN-TIIE-BANXICO  9.235%  349,798 
  $245,041,000  —  7/28/10  3 month USD-LIBOR-BBA  3.5141%  914,774 

45

INTEREST RATE SWAP CONTRACTS OUTSTANDING at 9/30/08 cont.     
    Upfront         
    premium         
Swap  Notional  received  Termination  Payments made by  Payments received by  Unrealized appreciation/ 
counterparty  amount  (paid)  date  fund per annum  fund per annum  (depreciation) 
JPMorgan Chase Bank, N.A. cont.  
AUD  93,320,000 EF  $—  8/6/18  6 month AUD-BBR-BBSW  6.865%  $1,410,368 
CAD  31,720,000  —  8/5/18  4.172%  6 month CAD-BA-CDOR  (3,756) 
  $84,190,000 E  —  8/20/28  5.37%  3 month USD-LIBOR-BBA  (1,496,898) 
ZAR  55,295,000 F  —  8/27/13  9.86%  3 month ZAR-JIBAR-SAFEX  (41,052) 
AUD  45,831,000 EF  —  9/2/18  6.53%  6 month AUD-BBR-BBSW  (309,345) 
ZAR  27,647,500 F  —  9/8/13  9.95%  3 month ZAR-JIBAR-SAFEX  (34,962) 
ZAR  55,295,000 F  —  9/9/13  9.94%  3 month ZAR-JIBAR-SAFEX  (93,906) 
  $84,190,000 E  —  9/17/28  3 month USD-LIBOR-BBA  4.9675%  (179,325) 
JPY  14,660,710,000  —  9/18/15  6 month JPY-LIBOR-BBA  1.19%  (2,775,809) 
JPY  14,980,000  —  9/18/38  2.17%  6 month JPY-LIBOR-BBA  3,976 
  $84,580,000  —  9/23/38  4.70763%  3 month USD-LIBOR-BBA  (256,515) 
  113,000,000  —  5/10/15  3 month USD-LIBOR-BBA  4.687%  4,386,301 
  49,000,000  —  5/10/35  5.062%  3 month USD-LIBOR-BBA  (3,476,782) 
  15,300,000  —  8/13/12  3 month USD-LIBOR-BBA  5.2%  751,339 
  12,715,000  —  8/29/17  5.2925%  3 month USD-LIBOR-BBA  (847,183) 
  5,812,000  —  8/29/17  5.263%  3 month USD-LIBOR-BBA  (375,469) 
  62,800,000  —  9/11/27  5.27%  3 month USD-LIBOR-BBA  (4,846,411) 
  102,399,000  —  5/4/16  5.62375%  3 month USD-LIBOR-BBA  (10,369,353) 
JPY  21,270,000,000  —  6/6/13  1.83%  6 month JPY-LIBOR-BBA  (4,926,252) 
  $452,683,600  —  9/21/09  3 month USD-LIBOR-BBA  4.6125%  6,162,014 
  126,203,300  —  9/21/17  5.15%  3 month USD-LIBOR-BBA  (6,844,833) 
  6,961,000  —  9/27/17  5.2335%  3 month USD-LIBOR-BBA  (408,411) 
  171,199,000  —  10/30/12  4.68375%  3 month USD-LIBOR-BBA  (7,207,870) 
  3,640,000  —  11/7/17  3 month USD-LIBOR-BBA  5.05771%  227,537 
  60,418,000  —  11/9/09  4.3975%  3 month USD-LIBOR-BBA  (1,566,970) 
  62,086,000  —  11/9/17  5.0895%  3 month USD-LIBOR-BBA  (4,043,974) 
  263,238,000  —  11/30/17  4.705%  3 month USD-LIBOR-BBA  (8,889,072) 
  138,200,000  —  12/11/17  3 month USD-LIBOR-BBA  4.65%  4,052,621 
  22,600,000  —  8/4/16  3 month USD-LIBOR-BBA  5.5195%  1,841,046 
  200,033,000  —  1/31/18  3 month USD-LIBOR-BBA  4.25%  (2,608,166) 
Merrill Lynch Capital Services, Inc.  
  146,535,000  —  10/26/12  4.6165%  3 month USD-LIBOR-BBA  (5,744,699) 
  168,070,000  —  5/19/10  3.2925%  3 month USD-LIBOR-BBA  (1,518,950) 
  116,909,000  —  7/22/10  3 month USD-LIBOR-BBA  3.5375%  489,436 
JPY  3,003,000,000  —  6/10/16  1.99625%  6 month JPY-LIBOR-BBA  (989,998) 
Merrill Lynch Derivative Products AG  
JPY  1,501,500,000  —  6/11/17  2.05625%  6 month JPY-LIBOR-BBA  (545,366) 
Morgan Stanley Capital Services, Inc.  
  $2,000,000  —  10/2/10  6.94%  3 month USD-LIBOR-BBA  (187,961) 
  15,000,000  —  5/17/12  3 month USD-LIBOR-BBA  5.7775%  1,234,103 
GBP  33,000,000  —  3/28/18  5.065%  6 month GBP-LIBOR-BBA  21,370 
GBP  137,130,000  —  3/29/10  6 month GBP-LIBOR-BBA  5.21%  (663,912) 
  $1,987,000  —  8/29/17  5.26021%  3 month USD-LIBOR-BBA  (127,963) 
EUR  47,912,000  —  8/13/18  6 month EUR-EURIBOR-Reuters  4.761%  315,629 
Total            $(171,316,579) 

E See Note 1 to the financial statements regarding extended effective dates.

F Is valued at fair value following procedures approved by the Trustees.

46

TOTAL RETURN SWAP CONTRACTS OUTSTANDING at 9/30/08  
    Termi-  Fixed payments  Total return  Unrealized 
Swap  Notional  nation  received (paid) by  received by  appreciation/ 
counterparty  amount  date  fund per annum  or paid by fund  (depreciation) 
Bank of America, N.A.    
  $124,254,000 1F  11/1/08  Banc of America Securities AAA 10 year  The spread return of Banc of  $(14,386,004) 
      Index multiplied by the modified duration  America Securities CMBS AAA   
      factor minus 20 bp  10 year Index   
Goldman Sachs International    
  6,497,000  9/15/11  678 bp (1 month USD-LIBOR-BBA)  Ford Credit Auto Owner Trust  6,382 
        Series 2005-B Class D   
EUR  85,960,000  3/26/09  (2.27%)  Eurostat Eurozone HICP  878,869 
        excluding tobacco   
EUR  48,050,000  4/30/13  2.375%  French Consumer Price Index  (749,664) 
        excluding tobacco   
EUR  48,050,000  4/30/13  (2.41%)  Eurostat Eurozone HICP  862,655 
        excluding tobacco   
EUR  48,050,000  5/6/13  2.34%  French Consumer Price Index  (830,204) 
        excluding tobacco   
EUR  48,050,000  5/6/13  (2.385%)  Eurostat Eurozone HICP  938,460 
        excluding tobacco   
GBP  28,830,000  5/9/13  3.10%  GBP Non-revised Retail Price  (619,794) 
        Index   
GBP  6,436,000 F  1/7/38  3.485%  GBP Non-revised UK Retail Price  (1,728,132) 
        Index excluding tobacco   
GBP  8,588,000  1/7/18  (3.11%)  GBP Non-revised UK Retail Price  863,757 
        Index excluding tobacco   
Merrill Lynch Capital Services    
  296,898,514  10/14/08  (2.87%) 5.00%  FNMA 5.00% 30 YR TBA  (3,097,384) 
UBS AG           
  492,000,000  10/14/08  (2.87%) 5.50%  FNMA 5.50% 30 YR TBA  12,577,801 
Total          $(5,283,258) 

1 Fund receives the net fixed and total return payment if positive and pays the net fixed and total return payment if negative.

F Is valued at fair value following procedures approved by the Trustees.

47

CREDIT DEFAULT CONTRACTS OUTSTANDING at 9/30/08 Fixed payments  Unrealized 
  Upfront premium    Notional  Termination  received (paid) by  appreciation/ 
Swap counterparty / Referenced debt*  received (paid)**    amount  date  fund per annum  (depreciation) 
Bank of America, N.A.             
Abitibibowater Inc., 6 1/2%, 6/15/13  $ —    $560,000  12/20/08  550 bp  $216 
Clear Channel Communications, 5 3/4%, 1/15/13  —    1,680,000  9/20/09  635 bp  (2,474) 
DJ ABX NA CMBX BBB Index  623    906,000 F  10/12/52  (134 bp)  420,250 
DJ CDX NA HY Series 9 Index  55,331    29,509,920  12/20/12  (375 bp)  3,589,513 
Financial Security Assurance Inc.  —    2,480,000  12/20/12  95 bp  (719,950) 
Ford Motor Co., 7.45%, 7/16/31  —    2,000,000  3/20/12  (525 bp)  785,515 
Ford Motor Credit Co., 7%, 10/1/13  —    6,000,000  3/20/12  285 bp  (2,545,485) 
Lehman Brothers Holdings, 6 5/8%, 1/18/12  —    4,785,000  9/20/13  269 bp  (4,040,107) 
Visteon Corp., 7%, 3/10/14  (626,875)    2,360,000  9/20/13  (500 bp)  510,362 
Barclays Bank PLC             
Peru CD  —    4,507,349  1/7/09  170 bp  57,260 
Peru CD  —    4,278,686  11/10/08  170 bp  52,785 
Bear Stearns Credit Products, Inc.             
Claire’s Stores, 9 5/8%, 6/1/15  —    285,000  6/20/12  230 bp  (84,512) 
Citibank, N.A.             
Abitibibowater Inc., 6 1/2%, 6/15/13  —    570,000  12/20/08  725 bp  2,755 
Abitibibowater Inc., 6 1/2%, 6/15/13  —    560,000  12/20/08  800 bp  3,769 
Abitibibowater Inc., 6 1/2%, 6/15/13  —    560,000  12/20/08  825 bp  4,129 
Advanced Micro Devices Inc., 7.75%, 11/1/12  —    9,940,000  3/20/09  575 bp  (601,991) 
DJ ABX HE A Index  11,045,115    15,556,500  1/25/38  369 bp  (3,140,624) 
DJ ABX HE AAA Index  739,474    3,902,781  5/25/46  11 bp  173,077 
DJ ABX HE AAA Index  3,601,589    19,536,406  5/25/46  11 bp  766,338 
DJ ABX HE AAA Index  2,706,831    9,333,900  1/25/38  76 bp  (1,906,916) 
DJ ABX NA HE AAA Index  455,024    4,208,710  7/25/45  18 bp  107,931 
DJ ABX NA HE AAA Index  1,782,368    21,067,817  7/25/45  18 bp  44,905 
DJ ABX NA HE AAA Index  1,998,306    18,132,591  7/25/45  18 bp  432,361 
DJ ABX NA HE PEN AAA Index  2,956,550    21,454,493  5/25/46  11 bp  (157,067) 
DJ ABX NA HE PEN AAA Index  2,947,826    18,017,958  5/25/46  11 bp  377,322 
Freescale Semiconductor, 8 7/8%, 12/15/14  —    960,000  9/20/12  495 bp  (143,695) 
Lear Corp., term loan  —    1,305,000 F  6/20/13  (225 bp)  173,499 
Lear Corp., term loan  —    1,305,000 F  6/20/13  700 bp  (25,350) 
Republic of Argentina, 8.28%, 12/31/33  —    1,435,000 F  9/20/13  (1,170 bp)  (76,356) 
Republic of Argentina, 8.28%, 12/31/33  —    1,437,000  9/20/13  (945 bp)  31,819 
Republic of Venezuela, 9 1/4%, 9/15/27  —    1,210,000 F  9/20/13  940 bp  22,431 
Sanmina-Sci Corp., 8 1/8%, 3/1/16  —    1,155,000  6/20/13  585 bp  (27,313) 
Sanmina-Sci Corp., 8 1/8%, 3/1/16  —    235,000  3/20/09  275 bp  (163) 
Sara Lee Corp., 6 1/8%, 11/1/32  —    1,340,000  9/20/11  (43 bp)  593 
Seat Pagine Gialle S.P.A., 8%, 4/30/14  —  EUR  2,090,000  3/20/13  815 bp  (420,970) 
Wind Acquisition 9 3/4%, 12/1/15  —  EUR  1,089,000  3/20/13  (495 bp)  37,239 
Credit Suisse First Boston International             
Ukraine Government, 7.65%, 6/11/13  —    $4,715,000  10/20/11  194 bp  (546,592) 
Credit Suisse International             
Advanced Micro Devices, 7 3/4%, 11/1/12  —    870,000  6/20/09  165 bp  (103,545) 
DJ ABX HE AAA Index  1,262,847    6,489,633  5/25/46  11 bp  370,642 
DJ ABX NA HE AAA Index  7,358,190    13,258,000  1/25/38  76 bp  861,770 
DJ CDX NA HY Series 10  451,500    4,300,000  6/20/13  500 bp  33,411 
DJ CDX NA HY Series 10  3,155,625    29,700,000  6/20/13  500 bp  267,894 
DJ CDX NA IG Series 10  4,367,970    211,550,000  6/20/13  155 bp  3,176,415 
DJ CMB NA CMBX AA Index  (186,986)    468,000 F  2/17/51  (165 bp)  (57,247) 
DJ CMB NA CMBX AA Index  (1,019,771)    4,562,000  10/12/52  (25 bp)  (172,000) 
DJ CMB NA CMBX AAA Index  654,297    3,931,000  12/13/49  8 bp  257,266 
DJ CMB NA CMBX AAA Index  2,577,078    16,450,500  2/17/51  35 bp  1,117,445 
DJ CMB NA CMBX AAA Index  5,715,234    44,194,000  2/17/51  35 bp  1,793,410 
DJ CMB NA CMBX AAA Index  5,854,684    44,194,000  2/17/51  35 bp  1,932,860 

48

CREDIT DEFAULT CONTRACTS OUTSTANDING at 9/30/08 cont.        Fixed payments  Unrealized 
  Upfront premium    Notional  Termination  received (paid) by  appreciation/ 
Swap counterparty / Referenced debt*  received (paid)**    amount  date  fund per annum  (depreciation) 
Credit Suisse International cont.             
DJ CMB NA CMBX AAA Index  $4,923,636    $44,194,000  2/17/51  35 bp  $1,001,813 
DJ CMB NA CMBX AAA Index  1,491,255    11,047,000  2/17/51  35 bp  510,934 
DJ CMB NA CMBX AAA Index  6,216,536    54,534,000  2/17/51  35 bp  1,377,129 
DJ CMB NA CMBX AAA Index  (481,034)    6,125,000  2/17/51  (35 bp)  49,265 
DJ CMB NA CMBX AAA Index  (230,088)    3,085,000  2/17/51  (35 bp)  43,678 
Dynegy Holdings Inc., 6 7/8%, 4/1/11  —    610,000  6/20/17  297 bp  (122,639) 
Freeport-McMoRan Copper & Gold, Inc., bank term loan  —    2,440,000  3/20/12  41 bp  (27,883) 
Freeport-McMoRan Copper & Gold, Inc., bank term loan  —    2,439,300  3/20/12  (82 bp)  (3,964) 
Harrahs Operating Co. Inc., 5 5/8%, 6/1/15  —    735,000  3/20/09  600 bp  (22,335) 
Liberty Mutual Insurance, 7 7/8%, 10/15/26  —    465,000  12/20/13  (210 bp)  (1,030) 
MediaCom LLC/ Cap Corp., 9 1/2%, 1/15/13  —    1,095,000  9/20/13  735 bp  (21,609) 
MediaCom LLC/ Cap Corp., 9 1/2%, 1/15/13  —    410,000  6/20/13  725 bp  (8,329) 
Republic of Peru, 8 3/4%, 11/21/33  —    2,500,000  4/20/17  125 bp  (163,576) 
Deutsche Bank AG             
DJ ABX NA HE A Index  6,405,490    7,039,000  1/25/38  369 bp  3,832 
DJ ABX NA HE AAA Index  426,465    4,057,290  7/25/45  18 bp  91,861 
DJ ABX NA HE AAA Index  1,151,143    14,967,322  7/25/45  18 bp  (83,212) 
DJ ABX NA HE PEN AAA Index  2,943,050    21,454,493  5/25/46  11 bp  (153,521) 
DJ CDX NA IG Series 10  4,525,013    199,610,000  6/20/13  155 bp  3,400,710 
DJ CDX NA IG Series 10  4,732,729    201,600,000  6/20/13  155 bp  3,597,217 
DJ iTraxx Europe Series 8 Version 1  (240,767)  EUR  2,510,000  12/20/12  (375 bp)  15,460 
DJ iTraxx Europe Series 9 Version 1  711,462  EUR  10,415,000  6/20/13  (650 bp)  391,359 
General Electric Capital Corp., 6%, 6/15/12  —    $1,470,000  9/20/13  109 bp  (244,667) 
Grohe Holding GmBh, 8 5/8%, 10/1/14  —  EUR  600,000  6/20/09  400 bp  (3,989) 
Grohe Holding GmBh, 8 5/8%, 10/1/14  —  EUR  2,195,000  6/20/09  400 bp  (14,594) 
India Government Bond, 5.87%, 1/2/10  —    $17,880,000 F  1/11/10  170 bp  75,677 
iStar Financial, Inc., 6%, 12/15/10  117,788    1,745,000  3/20/09  500 bp  (66,711) 
Korea Monetary STAB Bond, 5%, 2/14/09  —    6,120,000  2/23/09  105 bp  9,976 
Korea Monetary STAB Bond, 5.04%, 1/24/09  —    4,960,000  2/2/09  130 bp  17,616 
Korea Monetary STAB Bond, 5.15%, 2/12/10  —    6,120,000 F  2/19/10  115 bp  22,221 
Malaysian Government, 6.844%, 10/1/09  —    7,548,000  10/1/09  90 bp  (6,982) 
Republic of Argentina, 8.28%, 12/31/33  —    987,500  4/20/13  (565 bp)  114,765 
Republic of Argentina, 8.28%, 12/31/33  —    2,875,000  8/20/12  (380 bp)  509,998 
Republic of Argentina, 8.28%, 12/31/33  —    6,155,000  3/20/13  (551 bp)  884,166 
Republic of Brazil, 12 1/4%, 3/6/30  —    3,770,000  10/20/17  105 bp  (296,306) 
Republic of China, zero coupon, 12/5/08  —    10,200,000 F  12/12/08  115 bp  65,823 
Republic of Indonesia, 6.75%, 2014  —    2,130,000  9/20/16  292 bp  (130,348) 
Republic of Peru, 8 3/4%, 11/21/33  —    2,500,000  4/20/17  126 bp  (160,737) 
Republic of South Korea, 5.45%, 1/23/10  —    6,185,000 F  2/1/10  101 bp  12,172 
Republic of Turkey, 11 7/8%, 1/15/30  —    3,735,000  6/20/14  195 bp  (201,656) 
Republic of Venezuela, 9 1/4%, 9/15/27  —    2,420,000  6/20/14  220 bp  (588,132) 
Republic of Venezuela, 9 1/4%, 9/15/27  —    1,210,000  9/20/13  940 bp  26,614 
Russian Federation, 7 1/2%, 3/31/30  —    987,500  4/20/13  (112 bp)  51,212 
Russian Federation, 7.5%, 3/31/30  —    3,115,000  8/20/17  86 bp  (381,235) 
Smurfit Kappa Funding, 10 1/8%, 10/1/12  —  EUR  2,065,000  6/20/09  135 bp  (29,309) 
Smurfit Kappa Funding, 7 3/4%, 4/1/15  —  EUR  2,045,000  9/20/13  715 bp  (99,760) 
United Mexican States, 7.5%, 4/8/33  —    $6,115,000  3/20/14  56 bp  (281,417) 
United Mexican States, 7.5%, 4/8/33  —    2,230,000  4/20/17  66 bp  (159,784) 
Virgin Media Finance PLC, 8 3/4%, 4/15/14  —  EUR  1,975,000  9/20/13  477 bp  (187,389) 
Virgin Media Finance PLC, 8 3/4%, 4/15/14  —  EUR  1,975,000  9/20/13  535 bp  (129,181) 

49

CREDIT DEFAULT CONTRACTS OUTSTANDING at 9/30/08 cont. Fixed payments  Unrealized 
  Upfront premium    Notional  Termination  received (paid) by  appreciation/ 
Swap counterparty / Referenced debt*  received (paid)**    amount  date  fund per annum  (depreciation) 
Goldman Sachs International             
Advanced Micro Devices, 7 3/4%, 11/1/12  $ —    $1,715,000  3/20/09  515 bp  $(108,667) 
Any one of the underlying securities in the basket             
of BB CMBS securities  —    28,743,000  a  2.461%  (4,769,396) 
DJ ABX HE A Index  2,358,761    3,520,000  1/25/38  369 bp  (851,074) 
DJ ABX HE AAA Index  827,274    3,520,000  1/25/38  76 bp  (914,754) 
DJ ABX NA HE AAA Index  556,162    7,231,294  7/25/45  18 bp  (40,203) 
DJ CDX NA CMBX AAA Index  211,407    5,780,000  3/15/49  7 bp  (224,138) 
DJ CDX NA HY Series 9 Index  2,417,920    50,242,500  12/20/12  375 bp  (3,599,247) 
DJ CDX NA HY Series 9 Index 25-35% tranche  —    12,400,000 F  12/20/10  429 bp  292,733 
DJ CDX NA HY Series 9 Index 25-35% tranche  —    12,551,000 F  12/20/10  108.65 bp  (588,734) 
DJ CDX NA HY Series 9 Index 25-35% tranche  —    14,540,000 F  12/20/10  305 bp  (53,616) 
DJ CDX NA IG Series 10 Index  (217,566)    29,480,000  6/20/13  155 bp  (383,612) 
DJ CDX NA IG Series 10 Index  449,699    23,428,000  6/20/18  (150 bp)  498,078 
DJ CDX NA IG Series 10 Index 30-100% tranche  —    96,265,000 F  6/20/13  (50 bp)  (139,392) 
Lehman Brothers Holdings, 6 5/8%, 1/18/12  —    4,785,000  9/20/17  (67.8 bp)  4,042,514 
Lighthouse International Co, SA, 8%, 4/30/14  —  EUR  1,835,000  3/20/13  680 bp  (463,119) 
Merrill Lynch & Co., 5%, 1/15/15  —    $4,785,000  9/20/17  (59.8 bp)  802,600 
Rhodia SA, Euribor+275, 10/15/13  —  EUR  1,000,000  9/20/13  (367 bp)  61,305 
Rhodia SA, Euribor+275, 10/15/13  —  EUR  835,000  9/20/13  (387 bp)  42,181 
Smurfit Kappa Funding, 7 3/4%, 4/1/15  —  EUR  1,910,000  9/20/13  720 bp  (94,782) 
Wind Acquisition 9 3/4%, 12/1/15  —  EUR  1,835,000  3/20/13  597 bp  23,579 
Wind Acquisition 9 3/4%, 12/1/15  —  EUR  2,480,000  12/20/10  (340 bp)  59,846 
JPMorgan Chase Bank, N.A.             
Codere Finance (Luxembourg) S.A., 8.25%, 6/15/15  —  EUR  1,835,000  3/20/13  795 bp  (9,655) 
DJ ABX HE AAA Index  814,633    $4,186,308  5/25/46  11 bp  239,092 
DJ CDX NA HY Series 9 Index 25-35% tranche  —    12,886,000 F  12/20/10  105.5 bp  (613,390) 
DJ CDX NA IG Series 10  180,888    10,160,000  6/20/13  155 bp  123,662 
DJ CDX NA IG Series 10  3,579    170,000  6/20/13  155 bp  2,621 
DJ CDX NA IG Series 10 Index  (42,377)    7,090,000  6/20/13  155 bp  (82,311) 
DJ CDX NA IG Series 9 Index, 30-100% tranche  —    42,530,000 F  12/20/12  (13.55 bp)  551,449 
DJ CMB NA CMBX AAA Index  (245,473)    3,152,000 F  2/17/51  (35 bp)  38,968 
DJ iTraxx Europe Crossover Series 8 Version 1  (980,758)  EUR  7,340,000  12/20/12  (375 bp)  (231,473) 
Freeport-McMoRan Copper & Gold, Inc., bank term loan  —    $4,878,600  3/20/12  (85 bp)  (12,550) 
General Growth Properties, conv. bond 3.98%, 4/15/27  —    6,725,000 F  9/20/13  775 bp  (1,415,923) 
iStar Financial, Inc., 6%, 12/15/10  115,500    1,650,000  3/20/09  500 bp  (58,954) 
Republic of Argentina, 8.28%, 12/31/33  —    2,860,000  6/20/14  235 bp  (798,902) 
Republic of Hungary, 4 3/4%, 2/3/15  —    2,595,000  4/20/13  (171.5 bp)  4,592 
Republic of Indonesia, 6.75%, 3/10/14  —    3,925,000  6/20/17  171.5 bp  (578,746) 
Republic of Turkey, 11 7/8%, 1/15/30  —    4,010,000  5/20/17  230 bp  (249,969) 
Republic of Turkey, 11 7/8%, 1/15/30  —    2,960,000  5/20/17  244 bp  (192,808) 
Russian Federation, 7 1/2%, 3/31/30  —    1,955,000  5/20/17  60 bp  (269,166) 
Russian Federation, 7 1/2%, 3/31/30  —    495,000 F  9/20/13  276 bp  4,102 
Russian Federation, 7.5%, 3/31/30  —    4,675,000  8/20/12  65 bp  (301,039) 
Russian Federation, 7.5%, 3/31/30  —    3,115,000  8/20/17  85 bp  (401,736) 
Sanmina-Sci Corp., 8 1/8%, 3/1/16  —    920,000  6/20/13  595 bp  (18,439) 
Smurfit-Stone Container Enterprises, 7 1/2%, 6/1/13  —    545,000  3/20/13  685 bp  (26,551) 
JPMorgan Securities, Inc.             
DJ CMB NA CMBX AAA Index  7,489,718    87,164,000 F  2/17/51  35 bp  (376,107) 
Merrill Lynch Capital Services, Inc.             
Bombardier, Inc, 6 3/4%, 5/1/12  —    4,865,000  6/20/12  (150 bp)  51,496 
D.R. Horton Inc., 7 7/8%, 8/15/11  —    3,320,000  9/20/11  (426 bp)  38,827 
Pulte Homes Inc., 5.25%, 1/15/14  —    3,111,000  9/20/11  (482 bp)  (182,880) 

50

CREDIT DEFAULT CONTRACTS OUTSTANDING at 9/30/08 cont. Fixed payments  Unrealized 
  Upfront premium    Notional  Termination  received (paid) by  appreciation/ 
Swap counterparty / Referenced debt*  received (paid)**    amount  date  fund per annum  (depreciation) 
Merrill Lynch International             
Dynegy Holdings Inc., 6 7/8%, 4/1/11  $ —    $610,000  6/20/17  295 bp  $(123,240) 
KinderMorgan, 6 1/2%, 9/1/12  —  EUR  6,397,000  9/20/12  (128 bp)  66,273 
Morgan Stanley Capital Services, Inc.             
Advanced Micro Devices, 7 3/4%, 11/1/12  —    $1,250,000  6/20/09  190 bp  (146,644) 
Aramark Services, Inc., 8.5%, 2/1/15  —    560,000  12/20/12  355 bp  (20,716) 
Bombardier, Inc, 6 3/4%, 5/1/12  —    2,430,000  6/20/12  (114 bp)  59,435 
Bundesrepublic of Deutschland, 6%, 6/20/16  —    11,537,000  6/20/18  8 bp  (92,411) 
DJ ABX NA CMBX AAA Index  834,782    11,728,000  3/15/49  7 bp  (62,343) 
DJ ABX NA CMBX BBB Index  177    244,027  10/12/52  (134 bp)  115,668 
DJ CDX NA HY Series 7 Index  254,076    5,348,970  12/20/09  (325 bp)  401,787 
DJ CDX NA HY Series 9 Index  298,178    7,454,450  12/20/12  375 bp  (594,586) 
DJ CDX NA IG Series 10 Index  1,784,599    91,602,000  6/20/18  (150 bp)  1,973,757 
DJ CDX NA IG Series 10 Index 30-100% tranche  —    186,061,000 F  6/20/13  (52 bp)  (434,452) 
DJ CDX NA IG Series 10 Index 30-100% tranche  —    54,755,000 F  6/20/13  (38.6 bp)  197,583 
DJ CDX NA IG Series 7 Index 10-15% tranche  216,120    5,403,000  12/20/09  0 bp  (363,784) 
DJ CMB NA CMBX AA Index  (1,487,347)    6,519,000  10/12/52  (25 bp)  (260,524) 
DJ CMB NA CMBX AAA Index  5,306,479    44,236,000  12/13/49  8 bp  776,377 
DJ CMB NA CMBX AAA Index  14,798,211    136,363,000  2/17/51  35 bp  2,523,986 
Dominican Republic, 8 5/8%, 4/20/27  —    5,020,000  11/20/11  (170 bp)  199,757 
Dynegy Holdings Inc., 6 7/8%, 4/1/11  —    610,000  6/20/12  225 bp  (68,032) 
Freeport-McMoRan Copper & Gold, Inc., bank term loan  —    7,317,200  3/20/12  44 bp  (76,611) 
Freeport-McMoRan Copper & Gold, Inc., bank term loan  —    2,439,300  3/20/12  (83 bp)  (4,726) 
Nalco, Co. 7.75%, 11/15/11  —    835,000  3/20/13  460 bp  15,837 
Republic of Austria, 5 1/4%, 1/4/11  —    11,537,000  6/20/18  (17 bp)  42,941 
Republic of Venezuela, 9 1/4%, 9/15/27  —    3,545,000  10/12/12  339 bp  (526,542) 
UBS, AG             
Meritage Homes Corp., 7%, 5/1/14  —    460,000 F  9/20/13  (760 bp)  (14,462) 
Total            $3,726,668 

*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.

F Is valued at fair value following procedures approved by the Trustees.

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

51

Statement of assets and liabilities 9/30/08

ASSETS   
Investment in securities, at value, including $23,497,491   
of securities on loan (Note 1):   
Unaffiliated issuers (identified cost $2,988,609,261)  $2,779,985,552 
Cash  8,747,302 
Interest and other receivables  27,775,202 
Receivable for shares of the fund sold  5,286,098 
Receivable for securities sold  16,222,783 
Receivable for sales of delayed delivery securities   
(Notes 1, 6 and 7)  323,377,721 
Receivable from Manager (Note 2)  40,079 
Receivable for variation margin (Note 1)  50,795,316 
Receivable for open forward currency contracts (Note 1)  7,228,675 
Receivable for closed forward currency contracts (Note 1)  8,221,374 
Unrealized appreciation on swap contracts (Note 1)  144,866,701 
Premiums paid on swap contracts (Note 1)  5,759,042 
Receivable for open swap contracts (Note 1)  12,027 
Receivable for closed swap contracts (Note 1)  59,513,534 
Total assets  3,437,831,406 
 
LIABILITIES   
Payable to custodian (Note 2)  3,440,781 
Payable for securities purchased  27,574,279 
Payable for purchases of delayed delivery securities   
(Notes 1, 6 and 7)  569,599,115 
Payable for shares of the fund repurchased  12,052,924 
Payable for compensation of Manager (Notes 2 and 5)  3,092,854 
Payable for investor servicing fees (Note 2)  280,412 
Payable for Trustee compensation and expenses (Note 2)  384,471 
Payable for administrative services (Note 2)  3,397 
Payable for distribution fees (Note 2)  1,180,541 
Payable for receivable purchase agreement (Note 2)  816,903 
Payable for open forward currency contracts (Note 1)  15,010,029 
Payable for closed forward currency contracts (Note 1)  16,673,474 
Written options outstanding, at value   
(premiums received $11,957,653) (Notes 1 and 3)  13,632,847 
TBA sale commitments, at value   
(proceeds receivable $322,732,500) (Note 1)  318,326,079 
Unrealized depreciation on swap contracts (Note 1)  317,739,870 
Premiums received on swap contracts (Note 1)  132,261,219 
Payable for open swap contracts (Note 1)  65 
Payable for closed swap contracts (Note 1)  73,033,281 
Collateral on securities loaned, at value (Note 1)  24,052,060 
Other accrued expenses  240,109 
Total liabilities  1,529,394,710 
 
Net assets  $1,908,436,696 

REPRESENTED BY   
Paid-in capital (Unlimited shares authorized) (Notes 1 and 4)  $2,902,498,416 
Undistributed net investment income (Note 1)  105,970,815 
Accumulated net realized loss on investments   
and foreign currency transactions (Note 1)  (687,038,580) 
Net unrealized depreciation of investments   
and assets and liabilities in foreign currencies  (412,993,955) 
Total — Representing net assets applicable   
to capital shares outstanding  $1,908,436,696 
 
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE 
Net asset value and redemption price per class A share   
($1,084,321,100 divided by 133,808,779 shares)  $8.10 
Offering price per class A share (100/96.00 of $8.10)*  $8.44 
Net asset value and offering price per class B share   
($109,173,016 divided by 13,580,889 shares)**  $8.04 
Net asset value and offering price per class C share   
($115,325,277 divided by 14,363,045 shares)**  $8.03 
Net asset value and redemption price per class M share   
($514,664,195 divided by 64,172,682 shares)  $8.02 
Offering price per class M share (100/96.75 of $8.02)***  $8.29 
Net asset value, offering price and redemption price per class R share 
($2,755,983 divided by 342,127 shares)  $8.06 
Net asset value, offering price and redemption price per class Y share 
($82,197,125 divided by 10,169,040 shares)  $8.08 

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

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

52

Statement of operations Year ended 9/30/08

INVESTMENT INCOME   
Interest (net of foreign tax of $437,378)(including interest   
income of $1,025,310 from investments in affiliated issuers)   
(Note 5)  $196,906,511 
Securities lending  124,363 
Total investment income  197,030,874 
 
EXPENSES   
Compensation of Manager (Note 2)  13,518,511 
Investor servicing fees (Note 2)  3,830,065 
Custodian fees (Note 2)  177,142 
Trustee compensation and expenses (Note 2)  81,621 
Administrative services (Note 2)  62,192 
Distribution fees — Class A (Note 2)  3,321,312 
Distribution fees — Class B (Note 2)  1,572,295 
Distribution fees — Class C (Note 2)  1,267,742 
Distribution fees — Class M (Note 2)  3,249,690 
Distribution fees — Class R (Note 2)  15,839 
Other  855,754 
Non-recurring costs (Notes 2 and 8)  4,331 
Costs assumed by Manager (Notes 2 and 8)  (4,331) 
Fees waived and reimbursed by Manager (Note 5)  (21,922) 
Total expenses  27,930,241 
 
Expense reduction (Note 2)  (390,370) 
Net expenses  27,539,871 
 
Net investment income  169,491,003 
Net realized gain on investments (Notes 1 and 3)  134,315,132 
Net increase from payments by affiliates (Note 2)  203,418 
Net realized loss on swap contracts (Note 1)  (53,669,187) 
Net realized loss on futures contracts (Note 1)  (34,621,678) 
Net realized loss on foreign currency transactions (Note 1)  (49,203,626) 
Net realized gain on written options (Notes 1 and 3)  13,073,007 
Net unrealized appreciation of assets and liabilities in   
foreign currencies during the year  6,495,734 
Net unrealized depreciation of investments, futures   
contracts, swap contracts, written options, and TBA   
sale commitments during the year  (486,145,080) 
Net loss on investments  (469,552,280) 
Net decrease in net assets resulting from operations  $(300,061,277) 

Statement of changes in net assets

DECREASE IN NET ASSETS     
  Year ended  Year ended 
  9/30/08  9/30/07 
Operations:     
Net investment income  $169,491,003  $134,080,006 
Net realized gain (loss) on investments     
and foreign currency transactions  10,097,066  (12,994,204) 
Net unrealized appreciation (depreciation)     
of investments and assets and liabilities in     
foreign currencies  (479,649,346)  15,175,357 
Net increase (decrease) in net assets     
resulting from operations  (300,061,277)  136,261,159 
Distributions to shareholders (Note 1):     
From ordinary income     
Net investment income     
Class A  (84,521,691)  (76,065,220) 
Class B  (8,637,540)  (11,177,431) 
Class C  (7,206,139)  (5,669,952) 
Class M  (40,077,969)  (46,959,894) 
Class R  (194,303)  (80,190) 
Class Y  (6,103,511)  (1,049,694) 
Redemption fees (Note 1)  19,607  10,126 
Decrease from capital share transactions     
(Note 4)  (204,167,730)  (266,136,908) 
Total decrease in net assets  (650,950,553)  (270,868,004) 
 
NET ASSETS     
Beginning of year  2,559,387,249  2,830,255,253 
End of year (including undistributed net     
investment income of $105,970,815 and     
$7,297,638, respectively)  $1,908,436,696  $2,559,387,249 

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

53

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

                         
INVESTMENT OPERATIONS:       LESS DISTRIBUTIONS:     RATIOS AND SUPPLEMENTAL DATA:  
                        Ratio of net   
  Net asset value,    Net realized and  Total from          Total return  Net assets,  Ratio of expenses  investment income   
  beginning  Net investment  unrealized gain (loss)  investment  From net  Total  Redemption  Net asset value,  at net asset  end of period  to average  (loss) to average  Portfolio 
Period ended  of period  income (loss) a,b  on investments  operations  investment income  distributions  fees c  end of period  value (%) d  (in thousands)  net assets (%) b,e  net assets (%) b  turnover (%) 
Class A                           
September 30, 2008  $9.91  .69  (1.90)  (1.21)  (.60)  (.60)  —  $8.10  (12.80)  $1,084,321  1.04  7.36  156.65 f 
September 30, 2007  9.93  .52  — c  .52  (.54)  (.54)  —  9.91  5.36  1,457,286  .98  5.17  73.94 f 
September 30, 2006  10.20  .53 g  (.05)  .48  (.75)  (.75)  —  9.93  5.03  1,336,319  .95 g  5.32 g  71.35 f 
September 30, 2005  10.10  .51  .13  .64  (.54)  (.54)  —  10.20  6.50  1,364,862  .91  4.97  125.82 f 
September 30, 2004  9.85  .54  .39  .93  (.68)  (.68)  —  10.10  9.73  1,340,885  .95  5.44  99.17 
Class B                           
September 30, 2008  $9.83  .61  (1.88)  (1.27)  (.52)  (.52)  —  $8.04  (13.40)  $109,173  1.79  6.57  156.65 f 
September 30, 2007  9.85  .44  .01  .45  (.47)  (.47)  —  9.83  4.61  201,481  1.73  4.45  73.94 f 
September 30, 2006  10.12  .45 g  (.04)  .41  (.68)  (.68)  —  9.85  4.26  273,563  1.70 g  4.59 g  71.35 f 
September 30, 2005  10.02  .43  .14  .57  (.47)  (.47)  —  10.12  5.72  391,133  1.66  4.23  125.82 f 
September 30, 2004  9.78  .47  .37  .84  (.60)  (.60)  —  10.02  8.85  516,726  1.70  4.73  99.17 
Class C                           
September 30, 2008  $9.84  .61  (1.89)  (1.28)  (.53)  (.53)  —  $8.03  (13.57)  $115,325  1.79  6.62  156.65 f 
September 30, 2007  9.87  .44  — c  .44  (.47)  (.47)  —  9.84  4.49  129,666  1.73  4.42  73.94 f 
September 30, 2006  10.14  .45 g  (.04)  .41  (.68)  (.68)  —  9.87  4.25  120,990  1.70 g  4.61 g  71.35 f 
September 30, 2005  10.04  .43  .14  .57  (.47)  (.47)  —  10.14  5.71  226,005  1.66  4.23  125.82 f 
September 30, 2004  9.80  .47  .37  .84  (.60)  (.60)  —  10.04  8.87  265,151  1.70  4.67  99.17 
Class M                           
September 30, 2008  $9.81  .66  (1.88)  (1.22)  (.57)  (.57)  —  $8.02  (12.95)  $514,664  1.29  7.10  156.65 f 
September 30, 2007  9.84  .49  — c  .49  (.52)  (.52)  —  9.81  5.05  745,508  1.23  4.96  73.94 f 
September 30, 2006  10.11  .50 g  (.04)  .46  (.73)  (.73)  —  9.84  4.82  1,082,428  1.20 g  5.10 g  71.35 f 
September 30, 2005  10.02  .48  .13  .61  (.52)  (.52)  —  10.11  6.19  1,898,276  1.16  4.73  125.82 f 
September 30, 2004  9.78  .51  .38  .89  (.65)  (.65)  —  10.02  9.43  3,174,449  1.20  5.17  99.17 
Class R                           
September 30, 2008  $9.89  .66  (1.92)  (1.26)  (.57)  (.57)  —  $8.06  (13.29)  $2,756  1.29  7.09  156.65 f 
September 30, 2007  9.91  .46  .04  .50  (.52)  (.52)  —  9.89  5.13  4,896  1.23  4.66  73.94 f 
September 30, 2006  10.18  .50 g  (.04)  .46  (.73)  (.73)  —  9.91  4.79  703  1.20 g  5.06 g  71.35 f 
September 30, 2005  10.09  .48  .14  .62  (.53)  (.53)  —  10.18  6.20  563  1.16  4.66  125.82 f 
September 30, 2004†  9.93  .46  .24  .70  (.54)  (.54)  —  10.09  7.30 *  94  1.00 *  4.32 *  99.17 
Class Y                           
September 30, 2008  $9.92  .71  (1.93)  (1.22)  (.62)  (.62)  —  $8.08  (12.88)  $82,197  .79  7.59  156.65 f 
September 30, 2007  9.93  .54  .01  .55  (.56)  (.56)  —  9.92  5.72  20,550  .73  5.40  73.94 f 
September 30, 2006  10.20  .55 g  (.04)  .51  (.78)  (.78)  —  9.93  5.29  16,251  .70 g  5.59 g  71.35 f 
September 30, 2005  10.10  .53  .14  .67  (.57)  (.57)  —  10.20  6.74  32,129  .66  5.22  125.82 f 
September 30, 2004  9.85  .56  .39  .95  (.70)  (.70)  —  10.10  9.99  27,017  .70  5.68  99.17 

*Not annualized.

†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 Reflects an involuntary contractual expense limitation and/or waivers of certain fund expenses in connection with investments in Putnam Prime Money Market Fund in effect during the period. As a result of such limitation and/ or waivers, the expenses of each class reflect a reduction of the following amounts (Notes 2 and 5):

  Percentage of average net assets 
September 30, 2008  <0.01% 
September 30, 2007  <0.01 
September 30, 2006  0.01 
September 30, 2005  0.01 
September 30, 2004  <0.01 

c Amount represents less than $0.01 per share.

d Total return assumes dividend reinvestment and does not reflect the effect of sales charges.

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

f Portfolio turnover excludes dollar roll transactions.

g Reflects a non-recurring reimbursement from Putnam Investments relating to the calculation of certain amounts paid by the fund to Putnam in previous years for transfer agent services, which amounted to less than $0.01 per share and 0.01% of average net assets for the period ended September 30, 2006.

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

54  55 

Notes to financial statements 9/30/08

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, a 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 may invest in higher yielding, lower rated bonds that may have a higher rate of default. The fund may invest a significant portion of its assets in securitized debt instruments, including mortgage-backed and asset-backed investments. The yields and values of these investments are sensitive to changes in interest rates, the rate of principal payments on the underlying assets and the market’s perception of the issuers. The market for these investments may be volatile and limited, which may make them difficult to buy or sell.

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 4.00% 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 at net asset value. 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 generally only available to corporate and institutional clients and clients in other approved programs.

A 1.00% redemption fee may apply on any shares that are redeemed (either by selling or exchanging into another fund) within 7 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. If the fund were liquidated, shares of each class would receive their pro-rata share of the net assets of the fund. 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’s management team 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 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. To the extent a pricing service or dealer is unable to value a security or provides a valuation which Putnam Management does not believe accurately reflects the security’s fair value, the security will be valued at fair value by Putnam Management. Certain investments, including certain restricted securities and derivatives, are also valued at fair value following procedures approved by the Trustees. Such valuations and procedures are reviewed periodically by the Trustees. Certain securities may be valued on the basis of a price provided by a single source. The fair value of securities is generally determined as the amount that the fund could reasonably expect to realize from an orderly disposition of such securities over a reasonable period of time. By its nature, a fair value price is a good faith estimate of the value of a security at a given point in time and does not reflect an actual market price, which may be different by a material amount.

B) Joint trading account Pursuant to an exemptive order from the Securities and Exchange Commission (the “SEC”), 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 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 counterparty. 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 securities The fund may invest in stripped securities which represent a participation in securities that 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.

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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 is 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 fluctuations 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 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 counter-parties 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, owned 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 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 an unrealized gain or loss. Payments received or made are recorded as realized gains or losses. Certain total return swap contracts may include extended effective dates. Payments related to these swap contracts are accrued based on the terms of the contract. 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. An interest rate swap can be purchased or sold with an upfront premium. An upfront payment received by the fund is recorded as a liability on the fund’s books. An upfront payment made by the fund is recorded as an asset on the fund’s books. 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 an unrealized gain or loss. Payments received or made are recorded as realized gains or losses. Certain interest rate swap contracts may include extended effective dates. Payments related to these swap contracts are accrued based on the terms of the contract. 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 counterparty, 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. Payments are made upon a credit default event of the disclosed primary referenced obligation or all other equally ranked obligations of the reference entity. 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 an 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

57

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 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 the 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 TBA 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, on settlement date. 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) Securities 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 September 30, 2008, the value of securities loaned amounted to $23,497,491. The fund received cash collateral of $24,052,060 which is pooled with collateral of other Putnam funds into 52 issues of short-term investments.

P) Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code of 1986, as amended (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. 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, 2008, the fund had a capital loss carryover of $623,378,607 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 
$110,840,621  September 30, 2009 
164,353,970  September 30, 2010 
311,230,234  September 30, 2011 
4,275,641  September 30, 2012 
13,963,696  September 30, 2015 
18,714,445  September 30, 2016 

Pursuant to federal income tax regulations applicable to regulated investment companies, the fund has elected to defer to its fiscal year ending September 30, 2009 $77,972,892 of losses recognized during the period November 1, 2007 to September 30, 2008.

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. These differences include temporary and/or permanent differences of foreign currency gains and losses, post-October loss deferrals, the expiration of a capital loss carryover, unrealized and realized gains and losses on certain futures contracts, income on swap contracts, and interest only securities. 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. For the year ended September 30, 2008, the fund reclassified $75,923,327 to increase undistributed net investment income and $234,662,970 to decrease paid-in-capital, with a decrease to accumulated net realized losses of $158,739,643.

The tax basis components of distributable earnings and the federal tax cost as of September 30, 2008 were as follows:

Unrealized appreciation  $66,227,406 
Unrealized depreciation  (287,722,367) 
Net unrealized depreciation  (221,494,961) 
Undistributed ordinary income  82,484,021 
Capital loss carryforward  (623,378,607) 
Post-October loss  (77,972,892) 
Cost for federal income tax purposes  $3,001,480,513 

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Note 2: Management fee, administrative services
and other transactions

The fund pays Putnam Management 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 June 30, 2009 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 year ended September 30, 2008, Putnam Management did not waive any of its management fee from the fund.

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

For the year ended September 30, 2008, Putnam Management has assumed $4,331 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).

In October 2007, Putnam Management agreed to reimburse the fund in the amount of $190,401 in connection with the misidentification in 2006 of the characteristics of certain securities in the fund’s portfolio. The reimbursement by Putnam Management had less than a 0.05% impact on total return during the period.

Putnam Management voluntarily reimbursed the fund $13,017 for a trading error which occurred during the period. The effect of the loss incurred and the reimbursement by Putnam Management of such amounts had no impact on total return.

On September 26, 2008, the fund entered into Agreements with other registered investment companies (each a “Seller”) managed by Putnam Management. Under the Agreements, the Seller sold to the fund the right to receive, in the aggregate, $3,169,854 in net payments from Lehman Brothers Special Financing, Inc. in connection with certain terminated derivatives transactions (the “Receivable”), in each case in exchange for an initial payment plus (or minus) additional amounts based on the fund’s ultimate realized gain (or loss) with respect to the Receivable. The Receivable will be offset against the fund’s net payable to Lehman Brothers Special Financing, Inc. The Agreements, which are included in the Statement of assets and liabilities, are valued at fair value following procedures approved by the Trustees. All remaining payments under the Agreement will be recorded as realized gain or loss.

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 services for the fund’s assets were provided by Putnam Fiduciary Trust Company (“PFTC”), an affiliate of Putnam Management, and by State Street Bank and Trust Company (“State Street”). Custody fees are based on the fund’s asset level, the number of its security holdings, transaction volumes and with respect to PFTC, certain fees related to the transition of assets to State Street. Putnam Investor Services, a division of PFTC, provided investor servicing agent functions to the fund. Putnam Investor Services received fees for investor servicing, subject to certain limitations, based on the number of shareholder accounts in the fund and the level of defined contribution plan assets in the fund. During the year ended September 30, 2008, the fund incurred $3,851,370 for custody and investor servicing agent functions provided by PFTC.

Under the custodian contract between the fund and State Street, the custodian bank has a lien on the securities of the fund to the extent permitted by the fund’s investment restrictions to cover any advances made by the custodian bank for the settlement of securities purchased by the fund. At September 30, 2008, the payable to the custodian bank represents the amount due for cash advanced for the settlement of securities purchased.

The fund has entered into expense offset arrangements with PFTC and State Street whereby PFTC’s and State Street’s fees are reduced by credits allowed on cash balances. For the year ended September 30, 2008, the fund’s expenses were reduced by $390,370 under the expense offset arrangements.

Each independent Trustee of the fund receives an annual Trustee fee, of which $801, 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 and industry seminars and for certain compliance-related matters. Trustees also are reimbursed for expenses they incur relating to their services as Trustees.

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. The retirement benefit is payable during a Trustee’s lifetime, beginning the year following retirement, for the number of years of service through December 31, 2006. 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 Limited Partnership, 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 Limited Partnership 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 year ended September 30, 2008, Putnam Retail Management Limited Partnership, acting as underwriter, received net commissions of $152,779 and $1,484 from the sale of class A and class M shares, respectively, and received $192,482 and $24,039 in contingent deferred sales charges from redemptions of class B and class C shares, respectively.

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 year ended September 30, 2008, Putnam Retail Management Limited Partnership, acting as underwriter, received $12,332 and no monies on class A and class M redemptions, respectively.

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Note 3: Purchases and sales of securities

During the year ended September 30, 2008, cost of purchases and proceeds from sales of investment securities other than U.S. government securities and short-term investments aggregated $3,563,034,610 and $3,664,330,031, respectively. Purchases and sales of U.S. government securities aggregated $227,266,758 and $356,651,321, respectively.

Written option transactions during the year ended September 30, 2008 are summarized as follows:

    Contract  Premiums 
    Amounts  Received 
Written options outstanding       
at beginning of year  USD  473,089,000  $11,851,941 
  EUR  22,180,000  $903,152 
Options opened  USD  3,472,578,000  78,537,275 
  EUR  —  — 
Options exercised  USD  —  — 
  EUR  —  — 
Options expired  USD  (1,691,950,000)  (34,414,879) 
  EUR  —  — 
Options closed  USD  (1,887,643,000)  (44,016,684) 
  EUR  (22,180,000)  (903,152) 
Written options outstanding       
at end of year  USD  366,074,000  $11,957,653 
  EUR  —  $— 

Note 4: Capital shares

At September 30, 2008, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows:

   
  Year ended 9/30/08   Year ended 9/30/07  
Class A  Shares  Amount  Shares  Amount 
Shares sold  25,743,066  $240,817,491  38,675,424  $385,448,367 
Shares issued in  7,142,819  65,825,251  5,905,369  58,673,912 
connection with         
reinvestment of         
distributions         
  32,885,885  306,642,742  44,580,793  444,122,279 
Shares  (46,149,513)  (427,295,104)  (32,090,327)  (319,652,032) 
repurchased         
Net increase  (13,263,628)  $(120,652,362)  12,490,466  $124,470,247 
(decrease)         
 
  Year ended 9/30/08    Year ended 9/30/07   
Class B  Shares  Amount  Shares  Amount 
Shares sold  2,120,304  $19,700,872  4,004,820  $39,595,942 
Shares issued in  670,138  6,146,077  807,510  7,962,076 
connection with         
reinvestment of         
distributions         
  2,790,442  25,846,949  4,812,330  47,558,018 
Shares  (9,715,761)  (90,012,277)  (12,082,096)  (119,441,963) 
repurchased         
Net decrease  (6,925,319)  $(64,165,328)  (7,269,766)  $(71,883,945) 

   
  Year ended 9/30/08   Year ended 9/30/07  
Class C  Shares  Amount  Shares  Amount 
Shares sold  5,034,404  $46,318,261  5,699,789  $56,422,531 
Shares issued in  371,190  3,382,876  206,143  2,034,463 
connection with         
reinvestment of         
distributions         
  5,405,594  49,701,137  5,905,932  58,456,994 
Shares  (4,213,695)  (38,722,101)  (4,995,813)  (49,458,675) 
repurchased         
Net increase  1,191,899  $10,979,036  910,119  $8,998,319 
 
  Year ended 9/30/08    Year ended 9/30/07   
Class M  Shares  Amount  Shares  Amount 
Shares sold  390,126  $3,584,666  586,754  $5,799,910 
Shares issued in  113,740  1,037,137  98,080  965,485 
connection with         
reinvestment of         
distributions         
  503,866  4,621,803  684,834  6,765,395 
Shares  (12,309,284)  (112,942,354)  (34,733,892)  (343,087,030) 
repurchased         
Net decrease  (11,805,418)  $(108,320,551)  (34,049,058)  $(336,321,635) 
 
  Year ended 9/30/08    Year ended 9/30/07   
Class R  Shares  Amount  Shares  Amount 
Shares sold  234,203  $2,131,283  430,731  $4,251,178 
Shares issued in  20,368  186,967  8,078  79,732 
connection with         
reinvestment of         
distributions         
  254,571  2,318,250  438,809  4,330,910 
Shares  (407,510)  (3,839,145)  (14,708)  (146,588) 
repurchased         
Net increase  (152,939)  $(1,520,895)  424,101  $4,184,322 
(decrease)         
 
  Year ended 9/30/08    Year ended 9/30/07   
Class Y  Shares  Amount  Shares  Amount 
Shares sold  14,318,389  $138,099,479  1,153,598  $11,523,013 
Shares issued in  639,247  5,881,588  102,906  1,023,026 
connection with         
reinvestment of         
distributions         
  14,957,636  143,981,067  1,256,504  12,546,039 
Shares  (6,861,204)  (64,468,697)  (819,738)  (8,130,255) 
repurchased         
Net increase  8,096,432  $79,512,370  436,766  $4,415,784 

Note 5: Investment in Putnam Prime Money Market Fund

The fund invested in Putnam Prime Money Market Fund, an open-end management investment company managed by Putnam Management. Investments in Putnam Prime Money Market Fund were valued at its closing net asset value each business day. Management fees paid by the fund were reduced by an amount equal to the management fees paid by Putnam Prime Money Market Fund with respect to assets invested by the fund in Putnam

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Prime Money Market Fund. For the year ended September 30, 2008, management fees paid were reduced by $21,922 relating to the fund’s investment in Putnam Prime Money Market Fund. Income distributions earned by the fund were recorded as interest income in the Statement of operations and totaled $1,025,310 for the year ended September 30, 2008. During the year ended September 30, 2008, cost of purchases and proceeds of sales of investments in Putnam Prime Money Market Fund aggregated $476,080,445 and $476,080,445, respectively.

On September 17, 2008, the Trustees of the Putnam Prime Money Market Fund voted to close that fund effective September 17, 2008. On September 24, 2008, the fund received shares of Federated Prime Obligations Fund, an unaffiliated management investment company registered under the Investment Company Act of 1940, in liquidation of its shares of Putnam Prime Money Market Fund.

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 September 30, 2008, the fund had unfunded loan commitments of $2,820,018, which could be extended at the option of the borrower, pursuant to the following loan agreements with the following borrowers:

Borrower  Unfunded Commitments 
Community Health Systems, Inc.  $121,079 
Golden Nugget, Inc.  153,939 
Manitowoc Co., Inc. (The)  1,815,000 
NRG Energy, Inc.  730,000 
Total  $2,820,018 

Note 8: Regulatory matters and litigation

In late 2003 and 2004, Putnam Management settled charges brought by the SEC and the Massachusetts Securities Division in connection with excessive short-term trading in Putnam funds. Distribution of payments from Putnam Management to certain open-end Putnam funds and their shareholders is expected to be completed in the next several months. These allegations and related matters have served as the general basis for certain lawsuits, including purported class action lawsuits against Putnam Management and, in a limited number of cases, some Putnam funds. Putnam Management believes that these lawsuits will have no material adverse effect on the funds or on Putnam Management’s ability to provide investment management services. In addition, Putnam Management has agreed to bear any costs incurred by the Putnam funds as a result of these matters.

Note 9: New accounting pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (the “Interpretation”). The Interpretation prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken by a filer in the filer’s tax return. Upon adoption, the Interpretation did not have a material effect on the fund’s financial statements. However, the conclusions regarding the Interpretation may be subject to review and adjustment at a later date based on factors including, but not limited to, further implementation guidance expected from the FASB, and on-going analysis of tax laws, regulations and interpretations thereof. Each of the fund’s federal tax returns for the prior three fiscal years remains subject to examination by the Internal Revenue Service.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (the “Standard”). The Standard defines fair value, sets out a framework for measuring fair value and expands disclosures about fair value measurements. The Standard applies to fair value measurements already required or permitted by existing standards. The Standard is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Putnam Management does not believe the adoption of the Standard will impact the amounts reported in the financial statements; however, additional disclosures will be required about the inputs used to develop the measurements of fair value.

In March 2008, Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”) — an amendment of FASB Statement No. 133, was issued and is effective for fiscal years beginning after November 15, 2008. SFAS 161 requires enhanced disclosures about how and why an entity uses derivative instruments and how derivative instruments affect an entity’s financial position. Putnam Management is currently evaluating the impact the adoption of SFAS 161 will have on the fund’s financial statement disclosures.

In September 2008, FASB Staff Position FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (“Amendment”) was issued and is effective for annual and interim reporting periods ending after November 15, 2008. The Amendment requires enhanced disclosures regarding a fund’s credit derivatives holdings and hybrid financial instruments containing embedded credit derivatives. Management is currently evaluating the impact the adoption of the Amendment will have on the Funds’ financial statement disclosures.

Note 10: Market conditions

Recent events in the financial sector have resulted in an unusually high degree of volatility in the financial markets. The fund’s investments in the financial sector, as reflected in the fund’s schedule of investments, exposes investors to the negative (or positive) performance resulting from these events.

Federal tax information (unaudited)

The Form 1099 you receive in January 2009 will show the tax status of all distributions paid to your account in calendar 2008.

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About the Trustees

Jameson A. Baxter
Born 1943, Trustee since 1994,
Vice Chairman since 2005

Ms. Baxter is the President of Baxter Associates, Inc., a private investment firm.

Ms. Baxter serves as a Director of ASHTA Chemicals, Inc., and the Mutual Fund Directors Forum. Until 2007, she was a Director of Banta Corporation (a printing and supply chain management company), Ryerson, Inc. (a metals service corporation), and Advocate Health Care. Until 2004, she was a Director of BoardSource (formerly the National Center for Nonprofit Boards); and until 2002, she was a Director of Intermatic Corporation (a manufacturer of energy control products). She is Chairman Emeritus of the Board of Trustees, Mount Holyoke College, having served as Chairman for five years.

Ms. Baxter has held various positions in investment banking and corporate finance, including Vice President of and Consultant to First Boston Corporation and Vice President and Principal of the Regency Group. She is a graduate of Mount Holyoke College.

Charles B. Curtis
Born 1940, Trustee since 2001

Mr. Curtis is President and Chief Operating Officer of the Nuclear Threat Initiative (a private foundation dealing with national security issues), and serves as Senior Advisor to the United Nations Foundation.

Mr. Curtis is a member of the Council on Foreign Relations and serves as Director of Edison International and Southern California Edison. Until 2006, Mr. Curtis served as a member of the Trustee Advisory Council of the Applied Physics Laboratory, Johns Hopkins University. Until 2003, Mr. Curtis was a member of the Electric Power Research Institute Advisory Council and the University of Chicago Board of Governors for Argonne National Laboratory. Prior to 2002, Mr. Curtis was a member of the Board of Directors of the Gas Technology Institute and the Board of Directors of the Environment and Natural Resources Program Steering Committee, John F. Kennedy School of Government, Harvard University. Until 2001, Mr. Curtis was a member of the Department of Defense Policy Board and Director of EG&G Technical Services, Inc. (a fossil energy research and development support company).

From August 1997 to December 1999, Mr. Curtis was a Partner at Hogan & Hartson LLP, an international law firm headquartered in Washington, D.C. Prior to May 1997, Mr. Curtis was Deputy Secretary of Energy and Under Secretary of the U.S. Department of Energy. He served as Chairman of the Federal Energy Regulatory Commission from 1977 to 1981 and has held positions on the staff of the U.S. House of Representatives, the U.S. Treasury Department, and the SEC.

Robert J. Darretta
Born 1946, Trustee since 2007

Mr. Darretta serves as Director of United-Health Group, a diversified health-care company.

Until April 2007, Mr. Darretta was Vice Chairman of the Board of Directors of Johnson & Johnson, one of the world’s largest and most broadly based health-care companies. Prior to 2007, he had responsibility for Johnson & Johnson’s finance, investor relations, information technology, and procurement function. He served as Johnson & Johnson Chief Financial Officer for a decade, prior to which he spent two years as Treasurer of the corporation and over ten years leading various Johnson & Johnson operating companies.

Mr. Darretta received a B.S. in Economics from Villanova University.

Myra R. Drucker
Born 1948, Trustee since 2004

Ms. Drucker is Chair of the Board of Trustees of Commonfund (a not-for-profit firm specializing in managing assets for educational endowments and foundations), Vice Chair of the Board of Trustees of Sarah Lawrence College, and a member of the Investment Committee of the Kresge Foundation (a charitable trust). She is also a Director of New York Stock Exchange LLC (a wholly-owned subsidiary of NYSE Euronext), and a Director of Interactive Data Corporation (a provider of financial market data and analytics to financial institutions and investors).

Ms. Drucker is an ex-officio member of the New York Stock Exchange (NYSE) Pension Managers Advisory Committee, having served as Chair for seven years. She serves as an advisor to RCM Capital Management (an investment management firm) and to the Employee Benefits Investment Committee of The Boeing Company (an aerospace firm).

From November 2001 until August 2004, Ms. Drucker was Managing Director and a member of the Board of Directors of General Motors Asset Management and Chief Investment Officer of General Motors Trust Bank. From December 1992 to November 2001, Ms. Drucker served as Chief Investment Officer of Xerox Corporation (a document company). Prior to December 1992, Ms. Drucker was Staff Vice President and Director of Trust Investments for International Paper (a paper and packaging company).

Ms. Drucker received a B.A. degree in Literature and Psychology from Sarah Lawrence College and pursued graduate studies in economics, statistics, and portfolio theory at Temple University.

Charles E. Haldeman, Jr.*
Born 1948, Trustee since 2004 and
President of the Funds since 2007

Mr. Haldeman is Chairman of Putnam Investment Management, LLC and President of the Putnam Funds. Prior to July 2008, he was President and Chief Executive Officer of Putnam, LLC (“Putnam Investments”). Prior to November 2003, Mr. Haldeman served as Co-Head of Putnam Investments’ Investment Division.

Prior to joining Putnam in 2002, he held executive positions in the investment management industry. He previously served as Chief Executive Officer of Delaware Investments and President and Chief Operating Officer of United Asset Management. Mr. Haldeman was also a

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Partner and Director of Cooke & Bieler, Inc. (an investment management firm).

Mr. Haldeman currently serves on the Board of Governors of the Investment Company Institute and as Chair of the Board of Trustees of Dartmouth College. He also serves on the Partners HealthCare Investment Committee, the Tuck School of Business Overseers, and the Harvard Business School Board of Dean’s Advisors. He is a graduate of Dartmouth College, Harvard Law School, and Harvard Business School. Mr. Haldeman is also a Chartered Financial Analyst (CFA) charterholder.

John A. Hill
Born 1942, Trustee since 1985 and
Chairman since 2000

Mr. Hill is founder and Vice-Chairman of First Reserve Corporation, the leading private equity buyout firm specializing in the worldwide energy industry, with offices in Greenwich, Connecticut; Houston, Texas; London, England; and Shanghai, China. The firm’s investments on behalf of some of the nation’s largest pension and endowment funds are currently concentrated in 26 companies with annual revenues in excess of $13 billion, which employ over 100,000 people in 23 countries.

Mr. Hill is Chairman of the Board of Trustees of the Putnam Mutual Funds, a Director of Devon Energy Corporation and various private companies owned by First Reserve, and serves as a Trustee of Sarah Lawrence College where he chairs the Investment Committee.

Prior to forming First Reserve in 1983, Mr. Hill served as President of F. Eberstadt and Company, an investment banking and investment management firm. Between 1969 and 1976, Mr. Hill held various senior positions in Washington, D.C. with the federal government, including Deputy Associate Director of the Office of Management and Budget and Deputy Administrator of the Federal Energy Administration during the Ford Administration.

Born and raised in Midland, Texas, he received his B.A. in Economics from Southern Methodist University and pursued graduate studies as a Woodrow Wilson Fellow.

Paul L. Joskow
Born 1947, Trustee since 1997

Dr. Joskow is an economist and President of the Alfred P. Sloan Foundation (a philanthropic institution focused primarily on research and education on issues related to science, technology, and economic performance). He is on leave from his position as the Elizabeth and James Killian Professor of Economics and Management at the Massachusetts Institute of Technology (MIT), where he has been on the faculty since 1972. Dr. Joskow was the Director of the Center for Energy and Environmental Policy Research at MIT from 1999 through 2007.

Dr. Joskow serves as a Trustee of Yale University, as a Director of TransCanada Corporation (an energy company focused on natural gas transmission and power services) and of Exelon Corporation (an energy company focused on power services), and as a member of the Board of Overseers of the Boston Symphony Orchestra. Prior to August 2007, he served as a Director of National Grid (a UK-based holding company with interests in electric and gas transmission and distribution and telecommunications infrastructure). Prior to July 2006, he served as President of the Yale University Council and continues to serve as a member of the Council. Prior to February 2005, he served on the board of the Whitehead Institute for Biomedical Research (a non-profit research institution). Prior to February 2002, he was a Director of State Farm Indemnity Company (an automobile insurance company), and prior to March 2000, he was a Director of New England Electric System (a public utility holding company).

Dr. Joskow has published six books and numerous articles on industrial organization, government regulation of industry, and competition policy. He is active in industry restructuring, environmental, energy, competition, and privatization policies — serving as an advisor to governments and corporations worldwide. Dr. Joskow holds a Ph.D. and MPhil from Yale University and a B.A. from Cornell University.

Elizabeth T. Kennan
Born 1938, Trustee since 1992

Dr. Kennan is a Partner of Cambus-Kenneth Farm (thoroughbred horse and cattle breeding). She is President Emeritus of Mount Holyoke College.

Dr. Kennan served as Chairman and is now Lead Director of Northeast Utilities. She is a Trustee of the National Trust for Historic Preservation, of Centre College, and of Midway College in Midway, Kentucky. Until 2006, she was a member of The Trustees of Reservations. Prior to 2001, Dr. Kennan served on the oversight committee of the Folger Shakespeare Library. Prior to June 2005, she was a Director of Talbots, Inc., and she has served as Director on a number of other boards, including Bell Atlantic, Chastain Real Estate, Shawmut Bank, Berkshire Life Insurance, and Kentucky Home Life Insurance. Dr. Kennan has also served as President of Five Colleges Incorporated and as a Trustee of Notre Dame University, and is active in various educational and civic associations.

As a member of the faculty of Catholic University for twelve years, until 1978, Dr. Kennan directed the post-doctoral program in Patristic and Medieval Studies, taught history, and published numerous articles and two books. Dr. Kennan holds a Ph.D. from the University of Washington in Seattle, an M.S. from St. Hilda’s College at Oxford University, and an A.B. from Mount Holyoke College. She holds several honorary doctorates.

Kenneth R. Leibler
Born 1949, Trustee since 2006

Mr. Leibler is a founder and former Chairman of the Boston Options Exchange, an electronic marketplace for the trading of derivative securities.

Mr. Leibler currently serves as a Trustee of Beth Israel Deaconess Hospital in Boston. He is also Lead Director of Ruder Finn Group, a global communications and advertising firm, and a Director of Northeast Utilities, which operates New England’s largest energy delivery system. Prior to December 2006, he served as a Director of the Optimum Funds group. Prior to October 2006, he served as a Director of ISO New England, the

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organization responsible for the operation of the electric generation system in the New England states. Prior to 2000, Mr. Leibler was a Director of the Investment Company Institute in Washington, D.C.

Prior to January 2005, Mr. Leibler served as Chairman and Chief Executive Officer of the Boston Stock Exchange. Prior to January 2000, he served as President and Chief Executive Officer of Liberty Financial Companies, a publicly traded diversified asset management organization. Prior to June 1990, Mr. Leibler served as President and Chief Operating Officer of the American Stock Exchange (AMEX), and at the time was the youngest person in AMEX history to hold the title of President. Prior to serving as AMEX President, he held the position of Chief Financial Officer, and headed its management and marketing operations. Mr. Leibler graduated magna cum laude with a degree in Economics from Syracuse University, where he was elected Phi Beta Kappa.

Robert E. Patterson
Born 1945, Trustee since 1984

Mr. Patterson is Senior Partner of Cabot Properties, LP and Chairman of Cabot Properties, Inc. (a private equity firm investing in commercial real estate).

Mr. Patterson serves as Chairman Emeritus and Trustee of the Joslin Diabetes Center. Prior to June 2003, he was a Trustee of Sea Education Association. Prior to December 2001, Mr. Patterson was President and Trustee of Cabot Industrial Trust (a publicly traded real estate investment trust). Prior to February 1998, he was Executive Vice President and Director of Acquisitions of Cabot Partners Limited Partnership (a registered investment adviser involved in institutional real estate investments). Prior to 1990, he served as Executive Vice President of Cabot, Cabot & Forbes Realty Advisors, Inc. (the predecessor company of Cabot Partners).

Mr. Patterson practiced law and held various positions in state government, and was the founding Executive Director of the Massachusetts Industrial Finance Agency. Mr. Patterson is a graduate of Harvard College and Harvard Law School.

George Putnam, III
Born 1951, Trustee since 1984

Mr. Putnam is Chairman of New Generation Research, Inc. (a publisher of financial advisory and other research services), and President of New Generation Advisers, Inc. (a registered investment adviser to private funds). Mr. Putnam founded the New Generation companies in 1986.

Mr. Putnam is a Director of The Boston Family Office, LLC (a registered investment adviser). He is a Trustee of St. Mark’s School and a Trustee of the Marine Biological Laboratory in Woods Hole, Massachusetts. Until 2006, he was a Trustee of Shore Country Day School, and until 2002, was a Trustee of the Sea Education Association.

Mr. Putnam previously worked as an attorney with the law firm of Dechert LLP (formerly known as Dechert Price & Rhoads) in Philadelphia. He is a graduate of Harvard College, Harvard Business School, and Harvard Law School.

Robert L. Reynolds*
Born 1952, Trustee since 2008

Mr. Reynolds is President and Chief Executive Officer of Putnam Investments, and a member of Putnam Investments’ Executive Board of Directors. He has more than 30 years of investment and financial services experience.

Prior to joining Putnam Investments in 2008, Mr. Reynolds was Vice Chairman and Chief Operating Officer of Fidelity Investments from 2000 to 2007. During this time, he served on the Board of Directors for FMR Corporation, Fidelity Investments Insurance Ltd., Fidelity Investments Canada Ltd., and Fidelity Management Trust Company. He was also a Trustee of the Fidelity Family of Funds. From 1984 to 2000, Mr. Reynolds served in a number of increasingly responsible leadership roles at Fidelity.

Mr. Reynolds serves on several not-for-profit boards, including those of the West Virginia University Foundation, Concord Museum, Dana-Farber Cancer Institute, Lahey Clinic, and Initiative for a Competitive Inner City in Boston. He is a member of the Chief Executives Club of Boston, the National Innovation Initiative, and the Council on Competitiveness.

Mr. Reynolds received a B.S. in Business Administration/Finance from West Virginia University.

Richard B.Worley
Born 1945, Trustee since 2004

Mr. Worley is Managing Partner of Permit Capital LLC, an investment management firm.

Mr. Worley serves as a Trustee of the University of Pennsylvania Medical Center, The Robert Wood Johnson Foundation (a philanthropic organization devoted to health-care issues), and the National Constitution Center. He is also a Director of The Colonial Williamsburg Foundation (a historical preservation organization), and the Philadelphia Orchestra Association. Mr. Worley also serves on the investment committees of Mount Holyoke College and World Wildlife Fund (a wildlife conservation organization).

Prior to joining Permit Capital LLC in 2002, Mr. Worley served as President, Chief Executive Officer, and Chief Investment Officer of Morgan Stanley Dean Witter Investment Management and as a Managing Director of Morgan Stanley, a financial services firm. Mr. Worley also was the Chairman of Miller Anderson & Sherrerd, an investment management firm that was acquired by Morgan Stanley in 1996.

Mr. Worley holds a B.S. degree from the University of Tennessee and pursued graduate studies in economics at the University of Texas.

The address of each Trustee is One Post Office Square, Boston, MA 02109.

As of September 30, 2008, there were 99 Putnam funds. All Trustees serve as Trustees of all Putnam funds.

Each Trustee serves for an indefinite term, until his or her resignation, retirement at age 72, death, or removal.

* Trustee who is an “interested person” (as defined in the Investment Company Act of 1940) of the fund, Putnam Management, and/or Putnam Retail Management. Mr. Reynolds is President and Chief Executive Officer of Putnam Investments. Mr. Haldeman is the President of your fund and each of the other Putnam funds and Chairman of Putnam Investment Management, LLC, and prior to July 2008 was President and Chief Executive Officer of Putnam Investments.

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Officers

In addition to Charles E. Haldeman, Jr., the other officers of the fund are shown below:

Charles E. Porter (Born 1938)  James P. Pappas (Born 1953)  Wanda M. McManus (Born 1947) 
Executive Vice President, Principal Executive  Vice President  Vice President, Senior Associate Treasurer 
Officer, Associate Treasurer, and  Since 2004  and Assistant Clerk 
Compliance Liaison  Managing Director, Putnam Investments and  Since 2005 
Since 1989  Putnam Management. During 2002, Chief   
  Operating Officer, Atalanta/Sosnoff    Nancy E. Florek (Born 1957) 
Jonathan S. Horwitz (Born 1955)  Management Corporation    Vice President, Assistant Clerk, Assistant 
Senior Vice President and Treasurer    Treasurer and Proxy Manager 
Since 2004  Francis J. McNamara, III (Born 1955)  Since 2005 
Prior to 2004, Managing Director,  Vice President and Chief Legal Officer   
Putnam Investments  Since 2004   
  Senior Managing Director, Putnam   
Steven D. Krichmar (Born 1958)  Investments, Putnam Management     
Vice President and Principal Financial Officer  and Putnam Retail Management. Prior     
Since 2002  to 2004, General Counsel, State Street     
Senior Managing Director,  Research & Management Company     
Putnam Investments     
  Robert R. Leveille (Born 1969)   
Janet C. Smith (Born 1965)  Vice President and Chief Compliance Officer    
Vice President, Principal Accounting Officer  Since 2007     
and Assistant Treasurer  Managing Director, Putnam Investments,    
Since 2007  Putnam Management, and Putnam Retail    
Managing Director, Putnam Investments and  Management. Prior to 2004, member of    
Putnam Management  Bell Boyd & Lloyd LLC. Prior to 2003,     
  Vice President and Senior Counsel,     
Susan G. Malloy (Born 1957)  Liberty Funds Group LLC   
Vice President and Assistant Treasurer   
Since 2007  Mark C. Trenchard (Born 1962)     
Managing Director, Putnam Investments  Vice President and BSA Compliance Officer    
  Since 2002     
Beth S. Mazor (Born 1958)  Managing Director, Putnam Investments   
Vice President   
Since 2002  Judith Cohen (Born 1945)     
Managing Director, Putnam Investments  Vice President, Clerk and Assistant Treasurer    
  Since 1993   

The address of each Officer is One Post Office Square, Boston, MA 02109.

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The Putnam Family of Funds

The following is a list of Putnam’s open-end mutual funds offered to the public. Investors should carefully consider the investment objective, risks, charges, and expenses of a fund before investing. For a prospectus containing this and other information for any Putnam fund or product, call your financial advisor at 1-800-225-1581 and ask for a prospectus. Please read the prospectus carefully before investing.

Growth funds
Discovery Growth Fund
Growth Opportunities Fund
Health Sciences Trust
International New Opportunities Fund*
New Opportunities Fund
OTC & Emerging Growth Fund
Small Cap Growth Fund*
Vista Fund
Voyager Fund

Blend funds
Capital Appreciation Fund
Capital Opportunities Fund*
Europe Equity Fund*
Global Equity Fund*
Global Natural Resources Fund*
International Capital Opportunities Fund*
International Equity Fund*
Investors Fund
Research Fund
Tax Smart Equity Fund®
Utilities Growth and Income Fund

Value funds
Classic Equity Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
International Growth and Income Fund*
Mid Cap Value Fund
New Value Fund
Small Cap Value Fund*

Income funds
American Government Income Fund
Diversified Income Trust
Floating Rate Income Fund
Global Income Trust*
High Yield Advantage Fund*
High Yield Trust*
Income Fund
Money Market Fund†
U.S. Government Income Trust

Tax-free income funds
AMT-Free Insured Municipal Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund†
Tax-Free High Yield Fund

State tax-free income funds:
Arizona, California, Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio, and Pennsylvania

Asset allocation funds
Income Strategies Fund
Putnam Asset Allocation Funds — three investment portfolios that spread your money across a variety of stocks, bonds, and money market investments.

The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio

Putnam RetirementReady® Funds
Putnam RetirementReady Funds — 10 investment portfolios that offer diversification among stocks, bonds, and money market instruments and adjust to become more conservative over time based on a target date for withdrawing assets.

The 10 funds:
Putnam RetirementReady 2050 Fund
Putnam RetirementReady 2045 Fund
Putnam RetirementReady 2040 Fund
Putnam RetirementReady 2035 Fund
Putnam RetirementReady 2030 Fund
Putnam RetirementReady 2025 Fund
Putnam RetirementReady 2020 Fund
Putnam RetirementReady 2015 Fund
Putnam RetirementReady 2010 Fund
Putnam RetirementReady Maturity Fund

* A 1% redemption fee on total assets redeemed or exchanged within 90 days of purchase may be imposed for all share classes of these funds.

†An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

With the exception of money market funds, a 1% redemption fee may be applied to shares exchanged or sold within 7 days of purchase (90 days, for certain funds).

Check your account balances and the most recent month-end performance in the Individual Investors section at www.putnam.com.

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Services for shareholders

Investor services

Systematic investment plan Tell us how much you wish to invest regularly — weekly, semimonthly, or monthly — and the amount you choose will be transferred automatically from your checking or savings account. There’s no additional fee for this service, and you can suspend it at any time. This plan may be a great way to save for college expenses or to plan for your retirement.

Please note that regular investing does not guarantee a profit or protect against loss in a declining market. Before arranging a systematic investment plan, consider your financial ability to continue making purchases in periods when prices are low.

Systematic exchange You can make regular transfers from one Putnam fund to another Putnam fund. There are no additional fees for this service, and you can cancel or change your options at any time.

Dividends PLUS You can choose to have the dividend distributions from one of your Putnam funds automatically reinvested in another Putnam fund at no additional charge.

Free exchange privilege You can exchange money between Putnam funds free of charge, as long as they are the same class of shares. A signature guarantee is required if you are exchanging more than $500,000.

Reinstatement privilege If you’ve sold Putnam shares or received a check for a dividend or capital gain, you may reinvest the proceeds with Putnam within 90 days of the transaction and they will be reinvested at the fund’s current net asset value —with no sales charge. However, reinstatement of class B shares may have special tax consequences. Ask your financial or tax representative for details.

Check-writing service You have ready access to many Putnam accounts. It’s as simple as writing a check, and there are no special fees or service charges. For more information about the check-writing service, call Putnam or visit our Web site.

Dollar cost averaging When you’re investing for long-term goals, it’s time, not timing, that counts. Investing on a systematic basis is a better strategy than trying to figure out when the markets will go up or down. This means investing the same amount of money regularly over a long period. This method of investing is called dollar cost averaging. When a fund’s share price declines, your investment dollars buy more shares at lower prices. When it increases, they buy fewer shares. Over time, you will pay a lower average price per share.

For more information

Visit the Individual Investors section at www.putnam.com A secure section of our Web site contains complete information on your account, including balances and transactions, updated daily. You may also conduct transactions, such as exchanges, additional investments, and address changes. Log on today to get your password.

Call us toll free at 1-800-225-1581 Ask a helpful Putnam representative or your financial advisor for details about any of these or other services, or see your prospectus.

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Putnam puts your interests first

Putnam has introduced a number of voluntary initiatives designed to reduce fund expenses, provide investors with more useful information, and help safeguard the interests of all Putnam investors. Visit the Individual Investors section at www.putnam.com for details.

Cost-cutting initiatives

Ongoing expenses will be limited Through calendar 2008, total ongoing expenses, including management fees for all funds, will be maintained at or below the average of each fund’s industry peers in its Lipper load-fund universe. For more information, please see the Statement of Additional information.

Lower class B purchase limit To help ensure that investors are in the most cost-effective share class, the maximum amount that can be invested in class B shares has been reduced to $100,000. (Larger trades or accumulated amounts will be refused.)

Improved disclosure

Putnam fund prospectuses and shareholder reports have been revised to disclose additional information that will help shareholders compare funds and weigh their costs and risks along with their potential benefits. Shareholders will find easy-to-understand information about fund expense ratios, portfolio manager compensation, risk comparisons, turnover comparisons, brokerage commissions, and employee and trustee ownership of Putnam funds. Disclosure of breakpoint discounts has also been enhanced to alert investors to potential cost savings.

Protecting investors’ interests

Short-term trading fee introduced To discourage short-term trading, which can interfere with a fund’s long-term strategy, a 1% short-term trading fee may be imposed on any Putnam fund shares (other than money market funds) redeemed or exchanged within 7 calendar days of purchase (for certain funds, this fee applies for 90 days).

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Fund information

Founded over 70 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 nearly 100 mutual funds in growth, value, blend, fixed income, and international.

Investment Manager  Officers  Wanda M. McManus 
Putnam Investment  Charles E. Haldeman, Jr.  Vice President, Senior Associate Treasurer 
Management, LLC  President  and Assistant Clerk 
One Post Office Square     
Boston, MA 02109    Charles E. Porter  Nancy E. Florek 
  Executive Vice President, Principal  Vice President, Assistant Clerk, 
Investment Sub-Manager  Executive Officer, Associate Treasurer  Assistant Treasurer and Proxy Manager 
Putnam Investments Limited  and Compliance Liaison   
57-59 St. James’s Street     
London, England SW1A 1LD    Jonathan S. Horwitz   
  Senior Vice President and Treasurer   
Marketing Services     
Putnam Retail Management    Steven D. Krichmar   
One Post Office Square  Vice President and Principal Financial Officer     
Boston, MA 02109     
Janet C. Smith     
Custodian    Vice President, Principal Accounting Officer    
State Street Bank and Trust Company    and Assistant Treasurer   
 
Legal Counsel    Susan G. Malloy   
Ropes & Gray LLP    Vice President and Assistant Treasurer   
 
Independent Registered Public    Beth S. Mazor   
Accounting Firm    Vice President   
KPMG LLP       
James P. Pappas   
Trustees    Vice President   
John A. Hill, Chairman     
Jameson A. Baxter, Vice Chairman  Francis J. McNamara, III   
Charles B. Curtis  Vice President and Chief Legal Officer   
Robert J. Darretta       
Myra R. Drucker    Robert R. Leveille   
Charles E. Haldeman, Jr.    Vice President and Chief Compliance Officer   
Paul L. Joskow     
Elizabeth T. Kennan  Mark C. Trenchard   
Kenneth R. Leibler    Vice President and BSA Compliance Officer   
Robert E. Patterson     
George Putnam, III  Judith Cohen   
Robert L. Reynolds  Vice President, Clerk and Assistant Treasurer   
Richard B. Worley     

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.


Item 2. Code of Ethics:

(a) The fund’s principal executive, financial and accounting officers are employees of Putnam Investment Management, LLC, the Fund's investment manager. As such they are subject to a comprehensive Code of Ethics adopted and administered by Putnam Investments which is designed to protect the interests of the firm and its clients. The Fund has adopted a Code of Ethics which incorporates the Code of Ethics of Putnam Investments with respect to all of its officers and Trustees who are employees of Putnam Investment Management, LLC. For this reason, the Fund has not adopted a separate code of ethics governing its principal executive, financial and accounting officers.

(c) In May 2008, the Code of Ethics of Putnam Investment Management, LLC was updated in its entirety to include the amendments adopted in August 2007 as well as a several additional technical, administrative and non-substantive changes.

Item 3. Audit Committee Financial Expert:

The Funds' Audit and Compliance Committee is comprised solely of Trustees who are "independent" (as such term has been defined by the Securities and Exchange Commission ("SEC") in regulations implementing Section 407 of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe that each of the members of the Audit and Compliance Committee also possess a combination of knowledge and experience with respect to financial accounting matters, as well as other attributes, that qualify them for service on the Committee. In addition, the Trustees have determined that each of Mr. Patterson, Mr. Leibler, Mr. Hill and Mr. Darretta meets the financial literacy requirements of the New York Stock Exchange's rules and qualifies as an "audit committee financial expert" (as such term has been defined by the Regulations) based on their review of his pertinent experience and education. Certain other Trustees, although not on the Audit and Compliance Committee, would also qualify as "audit committee financial experts." The SEC has stated that the designation or identification of a person as an audit committee financial expert pursuant to this Item 3 of Form N-CSR does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit and Compliance Committee and the Board of Trustees in the absence of such designation or identification.

Item 4. Principal Accountant Fees and Services:

The following table presents fees billed in each of the last two fiscal years for services rendered to the fund by the fund’s independent auditor:

Fiscal    Audit-     
year  Audit  Related  Tax  All Other 
ended  Fees  Fees  Fees  Fees 
September 30, 2008    $97,075  $--  $6,000  $- 
September 30, 2007  $80,800  $--  $5,450  $ - 

For the fiscal years ended September 30, 2008 and September 30, 2007, the fund’s independent auditor billed aggregate non-audit fees in the amounts of $74,733 and $5,450respectively, to the fund, Putnam Management and any entity controlling, controlled by or under common control with Putnam Management that provides ongoing services to the fund.

Audit Fees represent fees billed for the fund's last two fiscal years relating to the audit and review of the financial statements included in annual reports and registration statements, and other

services that are normally provided in connection with statutory and regulatory filings or engagements.

Audit-Related Fees represent fees billed in the fund’s last two fiscal years for services traditionally performed by the fund’s auditor, including accounting consultation for proposed transactions or concerning financial accounting and reporting standards and other audit or attest services not required by statute or regulation.

Tax Fees represent fees billed in the fund’s last two fiscal years for tax compliance, tax planning and tax advice services. Tax planning and tax advice services include assistance with tax audits, employee benefit plans and requests for rulings or technical advice from taxing authorities.

Pre-Approval Policies of the Audit and Compliance Committee. The Audit and Compliance Committee of the Putnam funds has determined that, as a matter of policy, all work performed for the funds by the funds’ independent auditors will be pre-approved by the Committee itself and thus will generally not be subject to pre-approval procedures.

The Audit and Compliance Committee also has adopted a policy to pre-approve the engagement by Putnam Management and certain of its affiliates of the funds’ independent auditors, even in circumstances where pre-approval is not required by applicable law. Any such requests by Putnam Management or certain of its affiliates are typically submitted in writing to the Committee and explain, among other things, the nature of the proposed engagement, the estimated fees, and why this work should be performed by that particular audit firm as opposed to another one. In reviewing such requests, the Committee considers, among other things, whether the provision of such services by the audit firm are compatible with the independence of the audit firm.

The following table presents fees billed by the fund’s independent auditor for services required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.

Fiscal  Audit-    All  Total 
year  Related  Tax  Other  Non-Audit 
ended    Fees  Fees  Fees  Fees 
September 30, 2008  $ -  $ -  $ -  $ - 
September 30, 2007  $ -   $ -  $ -  $ - 

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) The Code of Ethics of The Putnam Funds, which incorporates the Code of Ethics of Putnam Investments, is filed herewith.

(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/Janet C. Smith
Janet C. Smith
Principal Accounting Officer

Date: November 26, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By (Signature and Title):

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

Date: November 26, 2008

By (Signature and Title):

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

Date: November 26, 2008