Putnam
Diversified
Income Trust
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-00
[SCALE LOGO OMITTED]
FROM THE TRUSTEES
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM III]
Dear Shareholder:
It is a pleasure to greet you in our new roles as Chairman of the
Trustees and President of the Funds. As you know, both of us have been
members of the Board of Trustees for a number of years -- years during
which the global securities markets, the mutual fund industry, and
Putnam itself have experienced tremendous growth and change.
As we look to the future, we are certain that the changes will be
breathtaking in their scope. What will not change is the Trustees'
dedication to serving the best interests of our shareholders.
We welcome the challenges that lie ahead and are confident that Putnam
and your Board will continue to face those challenges successfully as
they have for more than 60 years. We look forward to helping you meet
your financial objectives for many years to come.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
November 15, 2000
REPORT FROM FUND MANAGEMENT
David L. Waldman
and the Core Fixed
Income Team
Putnam Diversified Income Trust weathered a changing market environment
in the 12 months ended September 30, 2000. At the beginning of fiscal
2000, Y2K-related concerns weighed on the markets. However, anticipating
an uneventful transition, investors were confident enough to focus
attention on the riskier sectors of the market. This confidence
contributed to positive performance for these sectors into the new year.
After the Y2K transition passed without incident, the euphoria of the
market quickly dissipated into an environment filled with fears of
inflation and fallout from the Federal Reserve Board's decisions to
increase interest rates. At midyear a more stable market environment
returned. Inflation remained benign, the U.S. economy showed signs of
slowing, and the risk of further Fed rate increases ceased to be a real
threat. This most recent environment, combined with the fund's
diversified portfolio, helped the fund deliver solid performance over
the period.
Total return for 12 months ended 9/30/00
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
-----------------------------------------------------------------------
2.96% -1.95% 2.30% -2.40% 2.22% 1.28% 2.74% -0.59%
-----------------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 6.
* FIXED-INCOME MARKETS: TOPSY-TURVY YIELD CURVE
The performance of investment-grade securities was dominated by the
economic environment and the action of the Treasury yield curve. In
part, this environment was the result of the federal government's
ambitious buyback of long-term U.S. Treasury bonds. These securities'
shrinking supply and increasing demand pushed prices sharply higher;
whereas, at the other end of the yield spectrum, the Fed's six increases
in short-term interest rates from June 1999 through May 2000 depressed
the prices of short-term Treasury investments.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS FOR CORPORATE BONDS
AND NOTES]
TOP INDUSTRY SECTORS FOR CORPORATE BONDS AND NOTES*
Telecommunications 5.3%
Broadcasting 2.7%
Telephone 2.7%
Paper and
forest products 2.1%
Cable television 1.9%
Footnote reads:
*Based on net assets as of 9/30/00. Holdings will vary over time.
The sharp decline in long-term rates and the sustained rise in
short-term rates produced an inverted yield curve for most of the fiscal
year. This situation not only impacted the performance of Treasuries but
also affected the performance of other sectors, since Treasuries are
viewed as benchmarks for most other segments of the fixed-income market.
The fund's positions in long-term Treasuries benefited from this
environment and contributed to positive performance for the fund. The
other principal investment-grade holdings consisted of mortgage-backed
securities. With regard to the mortgage-backed holdings, the rising
trend of mortgage rates held down refinancings and thus reduced certain
risks inherent in these investments. We focused on securities that
benefited most from the slowing pace of prepayments.
* HIGH-YIELD BONDS: A CONVERGENCE OF CIRCUMSTANCES
The combination of poor equity markets, defaults, and negative mutual
fund cash flows contributed to the underperformance of high-yield bonds
during the period. Although the sector delivered attractive yields, the
price performance was negative as spreads widened throughout the period.
The high-yield bond market rallied in the fourth quarter of 1999,
consistent with the performance of U.S. equity markets, especially the
technology stocks. However, throughout most of 2000, as equity markets
were experiencing corrections, this volatility also spilled over into
the high-yield market.
Rising default rates over the past two years reduced demand for
high-yield bonds even more. The rise in the default rate has received a
great deal of attention. Historically the most stressful time for a
corporation is the three-year period following issuance of high-yield
bonds. The pattern of defaults that is now emerging can be attributed in
part to the strong issuance in 1997 and 1998.
As they did in the equity markets, the technology and telecommunications
sectors of the high-yield market hit a rough patch in 2000. We trimmed
back the fund's holdings in the sector but it did not completely escape
the effects.
* INTERNATIONAL MARKETS: MIXED RESULTS
Many emerging markets performed well during the period and we found
attractive valuations in some of those areas. The generally healthy
global economy was sustained during the period and commodity prices
remained firm. Many of these emerging markets are exporters of oil; as
oil prices rise, money flows into these countries.
"Glimmers of hope have begun to show up for bond funds . . . With the
stock market bouncing around on its way to nowhere, this year bond funds
are actually beating many stock funds, while also offering a much
smoother ride . . . Bond funds have bounced on the perception that the
U.S. economy has slowed and that the Federal Reserve is done raising
interest rates for the rest of the year."
-- The Wall Street Journal, October 9, 2000
The fund's positions in Mexico and Russia were among the strongest
performers in those markets. The Mexican securities did well as the
country experienced increased economic stability and the beneficial
effects of the still vibrant U.S. economy continued to spill across the
border. Russian holdings benefited not only from the positive fallout of
restructuring in the aftermath of 1998 but also from a more
market-oriented government and rising oil prices.
Within the developed market universe, we maintained an underweighted
position in Japan. The economic improvement, coupled with potential
supply issues, did not favor an overweight position. In addition, we
took advantage of opportunities for further European integration over
the fiscal year, notably in Greece and Denmark. Finally, the portfolio
opportunistically took advantage of the government bonds of other
countries, including, Canada, and Australia.
Unfortunately, the fund's currency exposure did not contribute to
positive performance. The euro, in particular, continued its slow
deterioration since the beginning of the period. The attractiveness of
the U.S. economy lured capital flows out of Europe and, as a result,
investors tended to buy the dollar and sell the euro.
OUTLOOK: A FEW MORE CLOUDS, THEN PERHAPS SOME SUN
Our current view is that Treasury yields will become more stable in the
months ahead. The prospect that the economy will indeed experience a
soft landing has become more of a likelihood. Such an eventuality has
already been priced into the expectation of no further Fed tightening
and the possibility of some easing in the months ahead.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR
HIGH-YIELD BONDS
Midland Funding II Corp. debentures
Series A, 11.75%, 2005
Echostar Broadband Corp. 144A senior
notes, 10.375%, 2007
Nextel Communications, Inc., senior
notes 9.375%, 2009
FOREIGN BONDS
Denmark (Kingdom of) bonds, 6.0%, 2009
Hellenic Greece (Republic of) bonds,
6.5%, 2014
Canada (Government of) bonds, series
WE00, 5.5%, 2002
U.S. INVESTMENT-GRADE SECURITIES
Federal National Mortgage Association
(Fannie Mae), 7.5%, TBA, October 1, 2015
U.S. Treasury Notes, 5.25%, May 15, 2004
U.S. Treasury Notes, 6.0%, August 15, 2009
Footnote reads:
These holdings represent 12.5% of the fund's net assets as of 9/30/00.
Portfolio holdings will vary over time.
Over the longer term, we continue to view mortgage-backed securities
positively, particularly as the overall market moves beyond its current
volatility. A stable environment generally favors mortgage-backed
securities, since it tends to reduce the risk of prepayments.
Several factors point to a positive long-term outlook for high-yield
bonds in 2001. Defaults should peak and start to decline. Yields are
attractive on a historical basis. Moreover, many of the uncertainties
that have caused the high-yield market to struggle show signs of
subsiding. As the market becomes more stable, the opportunities offered
by high-yield bonds should continue to improve.
Within the international marketplace, we continue to be cautious on
Japan. In addition, we believe the euro is poised to recover since its
fundamental value remains supportive. Finally, we currently are neutral
on emerging markets. Despite economic stability and supportive commodity
prices, specific country risks and improved valuations warrant a more
cautious approach.
Although a bit more volatility and uncertainty may be in store in the
months ahead, we believe the fund is well positioned to meet the
challenges of fiscal 2001.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 9/30/00, there is no guarantee the fund will
continue to hold these securities in the future. The lower credit
ratings of high-yield corporate bonds reflect a greater possibility that
adverse changes in the economy or their issuers may affect their ability
to pay principal and interest on the bonds. Investments in non-U.S.
securities may be subject to certain risks such as currency
fluctuations, economic instability, and political developments. Although
the U.S. government guarantees the timely payment of principal and
interest on some of the underlying securities, the value of the fund
share is not guaranteed and will fluctuate.
PERFORMANCE SUMMARY
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Diversified Income Trust is designed for investors seeking high current
income consistent with capital preservation through U.S. government and
investment-grade, high-yield, and international fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 9/30/00
Class A Class B Class C Class M
(inception dates) (10/3/88) (3/1/93) (2/1/99) (12/1/94)
NAV POP NAV CDSC NAV CDSC NAV POP
------------------------------------------------------------------------------
1 year 2.96% -1.95% 2.30% -2.40% 2.22% 1.28% 2.74% -0.59%
------------------------------------------------------------------------------
5 years 24.23 18.31 19.74 18.05 19.65 19.65 22.76 18.79
Annual average 4.43 3.42 3.67 3.37 3.65 3.65 4.19 3.50
------------------------------------------------------------------------------
10 years 122.42 111.93 106.39 106.39 106.60 106.60 116.59 109.57
Annual average 8.32 7.80 7.51 7.51 7.53 7.53 8.03 7.68
------------------------------------------------------------------------------
Annual average
(life of fund) 7.62 7.18 6.79 6.79 6.82 6.82 7.31 7.01
------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/00
Salomon Bros.
Lehman Bros. Non-U.S. First Boston
Aggregate World Govt. High Yield Consumer
Bond Index Bond Index Index price index
-------------------------------------------------------------------------
1 year 6.99% -7.86% 1.92% 3.46%
-------------------------------------------------------------------------
5 years 36.80 6.47 35.09 13.32
Annual average 6.47 1.26 6.20 2.53
-------------------------------------------------------------------------
10 years 116.80 101.90 204.16 30.82
Annual average 8.04 7.28 11.76 2.72
-------------------------------------------------------------------------
Annual average
(life of fund) 8.27 6.96 9.36 3.14
-------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 4.75% and
3.25%, respectively. Class B share returns for the 1-, 5- and 10-year,
if available, and life-of-fund periods reflect the applicable contingent
deferred sales charge (CDSC), which is 5% in the first year, declines to
1% in the sixth year, and is eliminated thereafter. Returns shown for
class B and class M shares for periods prior to their inception are
derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and in the case of class B and class M shares
the higher operating expenses applicable to such shares. For class C
shares, returns for periods prior to their inception are derived from
the historical performance of class A shares, adjusted to reflect both
the CDSC currently applicable to class C shares, which is 1% for the
first year and is eliminated thereafter, and the higher operating
expenses applicable to class C shares. All returns assume reinvestment
of distributions at NAV. Investment return and principal value will
fluctuate so that an investor's shares when redeemed may be worth more
or less than their original cost. Performance data reflects an expense
limitation previously in effect, without which returns would have been
lower.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 9/30/90
Lehman Bros.
Fund's class A Aggregate Bond Consumer price
Date shares at POP Index index
9/30/90 9,425 10,000 10,000
9/30/91 11,570 11,599 10,339
9/30/92 13,637 13,055 10,648
9/30/93 15,390 14,357 10,934
9/30/94 15,245 13,894 11,258
9/30/95 17,058 15,848 11,545
9/30/96 18,824 16,625 11,891
9/30/97 20,868 18,239 12,155
9/30/98 20,520 20,339 12,329
9/30/99 20,583 20,264 12,645
9/30/00 $21,193 $21,680 $13,082
Footnote reads:
Past performance is no assurance of 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 $20,639 and $20,660, respectively, and
no contingent deferred sales charges would apply; a $10,000 investment
in the fund's class M shares would have been valued at $21,659 ($20,957
at public offering price). See first page of performance section for
performance calculation methods.
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 9/30/00
Class A Class B Class C Class M
------------------------------------------------------------------------------
Distributions
(number) 12 12 12 12
------------------------------------------------------------------------------
Income $0.9500 $0.8713 $0.8733 $0.9261
------------------------------------------------------------------------------
Return of
capital 1 0.0040 0.0037 0.0037 0.0039
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Capital gains -- -- -- --
------------------------------------------------------------------------------
Total $0.9540 $0.8750 $0.8770 $0.9300
------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
------------------------------------------------------------------------------
9/30/99 $10.77 $11.31 $10.72 $10.75 $10.73 $11.09
------------------------------------------------------------------------------
9/30/00 10.13 10.64 10.09 10.11 10.09 10.43
------------------------------------------------------------------------------
Current return (end of period)
------------------------------------------------------------------------------
Current
dividend
rate 2 9.24% 8.80% 8.56% 8.55% 9.04% 8.74%
------------------------------------------------------------------------------
Current
30-day SEC
yield 3 9.43 8.97 8.65 8.65 9.17 8.86
------------------------------------------------------------------------------
1 See page 54.
2 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3 Based only on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
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.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
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 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C shares and assumes redemption at the
end of the period. Your fund's class B CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth year,
the CDSC no longer applies. The CDSC for class C shares is 1% for one
year after purchase.
COMPARATIVE BENCHMARKS
Lehman Bros. Aggregate Bond Index* is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage of
the original investment. Indexes are rebalanced monthly by market
capitalization.
Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged
list of bonds issued by 10 countries.
First Boston High Yield Index* is an unmanaged list of lower-rated
higher-yielding U.S. corporate bonds.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take into account brokerage fees or taxes. Securities
in the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, preceded by the Report of independent
accountants, 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 net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss
for the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that
remain in the portfolio -- any change in unrealized gains or losses over
the period.
Statement of changes in net assets shows how the fund's net assets were
affected 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 semiannual report, the highlight
table also includes the current reporting period. For open-end funds, a
separate table is provided for each share class.
REPORT OF INDEPENDENT ACCOUNTANTS
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, 2000, and the related statement of operations, statement
of changes in net assets and financial highlights for the year then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial
highlights based on our audit. The statement of changes in net assets
for the year ended September 30, 1999 and the financial highlights for
each of the years or periods in the four-year period ended September 30,
1999 were audited by other auditors whose report dated November 12, 1999
expressed an unqualified opinion on that financial statement and those
financial highlights.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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, 2000 by correspondence with the custodian and brokers.
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 audit
provides 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, 2000, the results of its operations, changes in its net assets and
financial highlights for the year then ended, in conformity with
accounting principles generally accepted in the United States of
America.
KPMG LLP
Boston, Massachusetts
November 2, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
September 30, 2000
CORPORATE BONDS AND NOTES (42.7%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Advertising and Marketing Services (0.6%)
-------------------------------------------------------------------------------------------------------------------
$ 800,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 824,000
3,446,050 Interact Operating Co. notes 14s, 2003 172,303
3,755,000 Lamar Media Corp. sr. sub. notes 9 1/4s, 2007 3,811,325
4,365,000 Lamar Media Corp. company guaranty 8 5/8s, 2007 4,299,525
3,940,000 SFX Entertainment, Inc. company guaranty 9 1/8s, 2008 4,117,300
4,340,000 SFX Entertainment, Inc. 144A company guaranty Ser. B,
9 1/8s, 2008 4,535,300
2,000,000 TDL Infomedia Group, Ltd. 144A 12 1/8s, 2009
(United Kingdom) 3,414,180
-------------
21,173,933
Aerospace and Defense (0.6%)
-------------------------------------------------------------------------------------------------------------------
3,925,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 3,238,125
1,600,000 Argo-Tech Corp. company guaranty Ser. D, 8 5/8s, 2007 1,312,000
290,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 9 7/8s, 2006 287,100
1,750,000 BE Aerospace, Inc. sr. sub. notes 9 1/2s, 2008 1,710,625
3,790,000 BE Aerospace, Inc. sr. sub. notes Ser. B, 8s, 2008 3,401,525
2,160,000 Decrane Aircraft Holdings company guaranty Ser. B,
12s, 2008 1,998,000
3,100,000 L-3 Communications Corp. sr. sub. notes Ser. B,
10 3/8s, 2007 3,169,750
1,870,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 1,743,775
2,500,000 L-3 Communications Corp. company guaranty
Ser. B, 8s, 2008 2,262,500
2,690,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 2,669,825
850,000 Sequa Corp. med. term notes 10s, 2001 856,018
290,000 Sequa Corp. sr. notes 9s, 2009 284,200
-------------
22,933,443
Agriculture (0.3%)
-------------------------------------------------------------------------------------------------------------------
11,609,573 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 10,564,711
Airlines (0.6%)
-------------------------------------------------------------------------------------------------------------------
5,350,000 Airbus Industries 144A 12.266s, 2020 5,678,784
4,960,000 Calair LLC 144A company guaranty 8 1/8s, 2008 4,662,400
860,000 Continental Airlines, Inc. notes 8s, 2005 816,174
370,000 Northwest Airlines, Inc. company guaranty 8.52s, 2004 357,361
1,120,000 Northwest Airlines, Inc. company guaranty 8 3/8s, 2004 1,072,859
2,370,000 Northwest Airlines, Inc. company guaranty 7 5/8s, 2005 2,216,377
1,300,000 US Air, Inc. pass-through certificates Ser. 93A3, 10 3/8s, 2013 1,186,250
-------------
15,990,205
Automotive (1.0%)
-------------------------------------------------------------------------------------------------------------------
2,850,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 2,850,000
1,413,000 Aftermarket Technology Corp. sr. sub. notes Ser. D, 12s, 2004 1,413,000
1,060,000 Collins & Aikman Products, Inc. company guaranty
11 1/2s, 2006 1,028,200
5,370,000 Dura Operating Corp. company guaranty Ser. B, 9s, 2009 4,618,200
1,160,000 Exide Corp. sr. notes 10s, 2005 893,200
2,280,000 Federal Mogul Corp. notes 7 7/8s, 2010 866,400
910,000 Federal Mogul Corp. notes 7 3/4s, 2006 354,900
7,600,000 Federal Mogul Corp. notes 7 1/2s, 2009 2,888,000
2,415,000 Federal Mogul Corp. notes 7 3/8s, 2006 941,850
1,410,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 1,254,900
3,620,000 Hayes Wheels International, Inc. 144A sr. sub. notes
9 1/8s, 2007 3,167,500
4,990,000 Lear Corp. company guaranty 8.11s, 2009 4,743,793
1,210,000 Lear Corp. company guaranty Ser. B, 7.96s, 2005 1,159,325
4,740,000 Oxford Automotive, Inc. company guaranty Ser. D,
10 1/8s, 2007 4,266,000
2,780,000 Safety Components International, Inc. sr. sub. notes
Ser. B, 10 1/8s, 2007 (In default) (NON) 1,112,000
4,870,000 Tenneco, Inc. company guaranty Ser. B, 11 5/8s,
2009 (Malaysia) 3,116,800
-------------
34,674,068
Banking (1.0%)
-------------------------------------------------------------------------------------------------------------------
1,765,000 Bangko Sentral NG Pilipinas bonds 8.6s, 2027 (Philippines) 1,201,965
870,000 Bank United Corp. sub. notes 8 7/8s, 2007 860,743
540,000 Chevy Chase Savings Bank, Inc. sub. deb. 9 1/4s, 2008 498,150
2,845,000 Chevy Chase Savings Bank, Inc. sub. deb. 9 1/4s, 2005 2,677,856
3,015,000 Colonial Capital II 144A company guaranty 8.92s, 2027 2,774,825
440,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 404,558
250,000 GS Escrow Corp. sr. notes 7 1/8s, 2005 230,830
8,490,000 Hanvit Bank 144A sub. notes 11 3/4s, 2010 (Korea) 8,426,325
3,230,000 Local Financial Corp. sr. notes 11s, 2004 3,230,000
635,000 North Fork Capital Trust I company guaranty 8.7s, 2026 618,344
660,000 Peoples Heritage Capital Trust company guaranty Ser. B,
9.06s, 2027 646,688
2,400,000 Provident Capital Trust company guaranty 8.6s, 2026 2,027,544
1,610,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 1,287,002
4,440,000 Sovereign Bancorp, Inc. sr. notes 10 1/2s, 2006 4,506,600
2,260,000 Sovereign Capital Trust company guaranty 9s, 2027 1,658,162
3,120,000 Superior Financial 144A sr. notes 8.65s, 2003 3,024,896
2,095,000 Webster Capital Trust I 144A bonds 9.36s, 2027 1,783,034
-------------
35,857,522
Beverage (0.2%)
-------------------------------------------------------------------------------------------------------------------
6,650,000 Triarc Consumer Products, Inc. company guaranty
10 1/4s, 2009 7,439,688
Broadcasting (2.7%)
-------------------------------------------------------------------------------------------------------------------
5,475,000 Acme Television sr. disc. notes 10.78s, 2004 5,201,250
2,930,000 Allbritton Communications Co. sr. sub. notes Ser. B,
8 7/8s, 2008 2,739,550
3,198,500 AMFM Operating, Inc. deb. 12 5/8s, 2006 (PIK) 3,662,283
50,635 Australis Media, Ltd. sr. disc. notes 15 3/4s, 2003
(In default) (Australia) (PIK) (NON) 5
856,252 Australis Media, Ltd. sr. sec. disc. notes zero %, 2000
(In default) (Australia) (NON) 128,438
5,615,000 Benedek Communications Corp. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 4,842,938
4,420,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 (STP) 4,232,150
2,535,900 Capstar Broadcasting sub. deb. 12s, 2009 (PIK) 2,916,285
1,665,000 Central European Media Enterprises, Ltd. sr. notes 9 3/8s,
2004 (Bermuda) 366,300
1,369,410 Citadel Broadcasting, Inc. sr. sub. notes 10 1/4s, 2007 1,424,186
9,918,000 Diva Systems Corp. sr. disc. notes, stepped-coupon Ser. B,
zero % (12 5/8s, 3/1/03), 2008 (STP) 4,363,920
15,980,000 Echostar Broadband Corp. 144A sr. notes 10 3/8s, 2007 15,980,000
2,340,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 1,702,350
2,142,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 2,050,965
2,330,000 Golden Sky DBS, Inc. sr. disc. notes, stepped-coupon Ser. B,
zero % (13 1/2s, 3/1/04), 2007 (STP) 1,642,650
3,600,000 Golden Sky Systems company guaranty Ser. B, 12 3/8s, 2006 3,942,000
1,690,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 1,183,000
4,595,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon zero %
(11 7/8s, 10/15/02), 2007 (STP) 2,412,375
4,490,000 Lin Holdings Corp. sr. disc. notes stepped-coupon zero %
(10s, 3/1/2003), 2008 (STP) 3,232,800
175,000 LIN Television Corp. company guaranty 8 3/8s, 2008 167,563
3,420,000 OnePoint Communications, Inc. company guaranty
Ser. B, 14 1/2s, 2008 3,437,100
170,000 Pegasus Communications Corp. sr. notes 12 1/2s, 2007 180,200
1,420,000 Pegasus Communications Corp. sr. notes Ser. B, 9 3/4s, 2006 1,384,500
380,000 Pegasus Communications Corp. 144A sr. notes Ser. B,
9 5/8s, 2005 370,500
130,000 Pegasus Media & Communications notes Ser. B,
12 1/2s, 2005 135,200
7,826,000 PHI Holdings, Inc. sr. sub. notes zero %, 2001 7,362,701
3,635,000 Radio One, Inc. company guaranty Ser. B, 7s,
(12s, 11/15/02), 2004 (STP) 3,853,100
2,360,000 RCN Corp. sr. notes 10 1/8s, 2010 1,687,400
2,420,000 Spanish Broadcasting System, Inc. sr. sub notes 9 5/8s, 2009 2,413,950
6,465,000 TV Azteca SA de CV sr. notes 10 1/2s, 2007 (Mexico) 5,972,044
4,000,000 Young Broadcasting bank term loan Ser. B, FRN 10s, 2005 4,000,000
2,750,000 XM Satellite Radio, Inc. 144A sr. notes 14s, 2010 2,035,000
-------------
95,022,703
Building Materials (0.4%)
-------------------------------------------------------------------------------------------------------------------
2,040,000 American Architectural Products Corp. company guaranty
11 3/4s, 2007 (In default) (NON) 367,200
2,350,000 American Standard, Inc. company guaranty 7 5/8s, 2010 2,214,875
1,500,000 American Standard, Inc. company guaranty 7 1/8s, 2006 1,293,526
370,000 American Standard, Inc. company guaranty 7 1/8s, 2003 359,825
1,740,000 Atrium Companies, Inc. company guaranty Ser. B,
10 1/2s, 2009 1,566,000
4,170,000 Building Materials Corp. company guaranty 8s, 2008 2,627,100
4,480,000 Dayton Superior Corp. company guaranty 13s, 2009 4,502,400
3,060,000 NCI Building Systems, Inc. sr. sub. notes Ser. B, 9 1/4s, 2009 2,884,050
-------------
15,814,976
Cable Television (1.9%)
-------------------------------------------------------------------------------------------------------------------
830,000 Adelphia Communications Corp. sr. notes Ser. B, 9 7/8s, 2007 780,200
1,380,000 Adelphia Communications Corp. sr. notes Ser. B, 8 3/8s, 2008 1,204,050
2,150,000 Adelphia Communications Corp. sr. notes 7 7/8s, 2009 1,789,875
3,380,000 Century Communications Corp. sr. notes 8 7/8s, 2007 3,092,700
270,000 Charter Communications Holdings LLC sr. disc. notes,
stepped-coupon zero % (11 3/4s, 1/15/05), 2010 (STP) 157,950
12,645,000 Charter Communications Holdings LLC sr. notes
8 5/8s, 2009 11,317,275
5,000,000 Charter Communications Holdings LLC bank term loan
FRN 7 1/2s, 2008 4,962,500
550,000 Classic Cable, Inc. company guaranty 10 1/2s, 2010 467,500
3,017,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) (STP) 2,851,065
5,750,000 CSC Holdings, Inc. sr. sub. deb. 10 1/2s, 2016 6,159,688
4,595,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 3,526,663
9,560,000 NTL Communications Corp. 144A sr. notes 11 7/8s, 2010 9,368,800
2,500,000 NTL Communications Corp. sr. notes Ser. B, 11 1/2s, 2008 2,431,250
2,000,000 NTL Communications Corp. sr. notes Ser. B, 9 1/4s, 2006 1,587,960
4,170,000 Supercanal Holdings S.A. 144A sr. notes 11 1/2s, 2005
(In default) (Argentina) (NON) 1,751,400
3,580,000 TeleWest Communications PLC deb. stepped-coupon
zero %, (11s, 10/1/00), 2007 (United Kingdom) 3,418,900
2,010,000 TeleWest Communications PLC structured note
(issued by DLJ International Capital) 10 7/8s, 2005
(United Kingdom) 2,066,280
3,000,000 TeleWest Communications PLC sr. notes 9 7/8s, 2010
(United Kingdom) 3,857,580
2,670,000 Williams Communications Group, Inc. 144A sr. notes
11.7s, 2008 2,589,900
7,060,000 United Pan-Europe NV sr. disc. notes stepped-coupon
zero % (13 3/4s, 2/01/05), 2010 (Netherlands) 3,247,600
1,490,000 United Pan-Europe NV sr. notes 10 7/8s, 2009 (Netherlands) 1,262,775
2,450,000 United Pan-Europe NV 144A sr. disc. notes zero %
(12 1/2s, 2/1/01), 2009 (Netherlands) (STP) 1,176,000
-------------
69,067,911
Chemicals (1.9%)
-------------------------------------------------------------------------------------------------------------------
4,610,000 Arco Chemical Co. deb. 9.8s, 2020 4,517,800
1,875,000 CP Kelco bank term loan FRN 6.655s, 2008 (Denmark) 1,870,313
1,815,000 CP Kelco bank term loan FRN 6.653s, 2008 (Denmark) 1,810,463
4,540,000 Geo Specialty Chemicals, Inc. sr. sub. notes 10 1/8s, 2008 3,995,200
560,000 Huntsman Corp. 144A sr. sub. notes 9 1/2s, 2007 481,600
4,690,000 Huntsman Corp. 144A sr. sub. notes FRN 9.188s, 2007 3,798,900
10,070,000 Huntsman ICI Chemicals, Inc. company guaranty
10 1/8s, 2009 9,918,950
1,710,000 Huntsman ICI Holdings sr. disc. notes zero %, 2009 581,400
3,250,000 Ineos Acrylics Finance bonds 10 1/4s, 2010
(United Kingdom) 2,795,471
2,040,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 1,994,100
11,460,000 Lyondell Petrochemical Co. sec. notes Ser. B, 9 7/8s, 2007 11,230,800
5,175,000 PCI Chemicals & Pharmaceuticals company guaranty
9 1/4s, 2007 (India) 2,561,625
2,590,000 Pioneer Americas Acquisition 144A sr. notes 9 1/4s, 2007 1,657,600
860,000 Polymer Group, Inc. company guaranty Ser. B, 9s, 2007 688,000
2,560,000 Polymer Group, Inc. company guaranty Ser. B, 8 3/4s, 2008 2,022,400
5,838,118 Polytama International notes 11 1/4s, 2007
(Indonesia) (in default) (NON) 474,639
5,140,000 Royster-Clark, Inc. 1st mtge. 10 1/4s, 2009 3,855,000
5,010,000 Sterling Chemicals Holdings sr. disc. notes stepped-coupon
zero % (13 1/2s, 8/15/01), 2008 (STP) 2,004,000
2,830,000 Sterling Chemicals, Inc. company guaranty Ser. B,
12 3/8s, 2006 2,886,600
2,250,000 Sterling Chemicals, Inc. sr. sub. notes 11 3/4s, 2006 1,575,000
2,020,000 Sterling Chemicals, Inc. sr. sub. notes Ser. A, 11 1/4s, 2007 1,373,600
970,000 Texas Petrochemical Corp. sr. sub. notes Ser. B,
11 1/8s, 2006 824,500
5,090,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 3,995,650
-------------
66,913,611
Coal (--%)
-------------------------------------------------------------------------------------------------------------------
8,130,000 Lodestar Holdings, Inc. company guaranty 11 1/2s, 2005 1,138,200
Commercial and Consumer Services (0.3%)
-------------------------------------------------------------------------------------------------------------------
5,700,000 Coinmach Corp. sr. notes Ser. D, 11 3/4s, 2005 5,700,000
6,300,000 GS Superhighway Holdings sr. notes 10 1/4s, 2007 (China) 4,472,764
-------------
10,172,764
Communications Equipment (--%)
-------------------------------------------------------------------------------------------------------------------
90,000 USA Mobile Communication, Inc. sr. notes 9 1/2s, 2004 66,150
Computers (0.1%)
-------------------------------------------------------------------------------------------------------------------
4,610,000 Unisys Corp. sr. notes 7 7/8s, 2008 4,264,250
Construction (0.4%)
-------------------------------------------------------------------------------------------------------------------
6,970,000 Better Minerals & Aggregates Co. company guaranty
13s, 2009 6,482,100
4,405,000 Morrison Knudsen Corp. 144A sr. notes 11s, 2010 4,515,125
2,740,000 Republic Group, Inc. sr. sub. notes 9 1/2s, 2008 2,712,600
-------------
13,709,825
Consumer (0.2%)
-------------------------------------------------------------------------------------------------------------------
5,290,000 Home Interiors & Gifts, Inc. company guaranty
10 1/8s, 2008 1,580,388
5,680,000 Samsonite Corp. sr. sub. notes 10 3/4s, 2008 4,487,200
-------------
6,067,588
Consumer Finance (0.2%)
-------------------------------------------------------------------------------------------------------------------
5,165,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 (In default) (NON) 723,100
7,380,000 Contifinancial Corp. sr. notes 8 1/8s, 2008 (In default) (NON) 1,033,200
5,880,000 Contifinancial Corp. sr. notes 7 1/2s, 2002 (In default) (NON) 823,200
820,000 Finova Capital Corp. sr. notes 7 5/8s, 2009 569,900
1,160,000 Finova Capital Corp. sr. notes 6 3/4s, 2009 794,600
500,000 Finova Capital Corp. notes 6 1/8s, 2004 370,000
2,815,000 Outsourcing Solutions, Inc. sr. sub. notes Ser. B, 11s, 2006 2,392,750
-------------
6,706,750
Consumer Goods (0.4%)
-------------------------------------------------------------------------------------------------------------------
1,800,000 French Fragrances, Inc. company guaranty Ser. D,
10 3/8s, 2007 1,755,000
1,225,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 1,218,875
3,540,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 1,522,200
6,665,000 NBTY, Inc. 144A sr. sub. notes 8 5/8s, 2007 5,698,575
2,005,000 Revlon Consumer Products sr. notes 9s, 2006 1,443,600
1,550,000 Revlon Consumer Products sr. notes 8 1/8s, 2006 1,100,500
-------------
12,738,750
Consumer Services (0.1%)
-------------------------------------------------------------------------------------------------------------------
5,490,000 Iron Mountain, Inc. sr. sub. notes 8 1/4s, 2011 4,995,900
Consumer Staples (--%)
-------------------------------------------------------------------------------------------------------------------
2,830,000 Doskcil Manufacturing Co 144A sr. sub. notes 10 1/8s, 2007 962,200
Containers (0.8%)
-------------------------------------------------------------------------------------------------------------------
5,340,000 AEP Industries, Inc. sr. sub. notes 9 7/8s, 2007 4,512,300
2,250,000 Ball Corp. company guaranty 8 1/4s, 2008 2,115,000
2,000,000 Huntsman Packaging Corp. 144A company guaranty
13s, 2010 1,770,000
2,740,000 Owens-Illinois, Inc. sr. notes 8.1s, 2007 2,493,071
4,920,000 Owens-Illinois, Inc. sr. notes 7.35s, 2008 4,237,744
440,000 Owens-Illinois, Inc. sr. notes 7.15s, 2005 402,217
1,400,000 Radnor Holdings, Inc. sr. notes 10s, 2003 1,246,000
6,520,000 Tekni-Plex, Inc. 144A sr. sub. notes 12 3/4s, 2010 6,422,200
-------------
23,198,532
Distribution (0.2%)
-------------------------------------------------------------------------------------------------------------------
6,900,000 RAB Enterprises, Inc. company guaranty 10 1/2s, 2005 5,520,000
Electric Utilities (0.7%)
-------------------------------------------------------------------------------------------------------------------
4,180,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 2,926,000
940,000 CMS Energy Corp. sr. notes 7 1/2s, 2009 839,260
270,000 CMS Energy Corp. pass-through certificates 7s, 2005 248,503
7,930,000 CMS Energy Corp. sr. notes Ser. B, 6 3/4s, 2004 7,414,550
2,830,608 Northeast Utilities System notes Ser. A, 8.58s, 2006 2,879,436
2,044,718 Northeast Utilities System notes Ser. B, 8.38s, 2005 2,050,259
9,535,000 Panda Global Energy Co. company guaranty 12 1/2s,
2004 (China) 4,290,750
3,184,000 TNP Enterprises Inc. bank term loan FRN 9.375s, 2005 3,187,980
-------------
23,836,738
Energy (0.7%)
-------------------------------------------------------------------------------------------------------------------
8,200,000 AES Corp. sr. notes 9 3/8s, 2010 8,323,000
2,790,000 Leviathan Gas Corp. company guaranty Ser. B, 10 3/8s, 2009 2,943,450
2,872,000 Parker Drilling Corp. company guaranty Ser. D, 9 3/4s, 2006 2,893,540
1,390,000 RBF Finance Co. company guaranty 11 3/8s, 2009 1,605,450
9,415,000 RBF Finance Co. company guaranty 11s, 2006 10,780,175
-------------
26,545,615
Entertainment (0.6%)
-------------------------------------------------------------------------------------------------------------------
5,095,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 2,343,700
4,410,000 Autotote Corp. 144A company guaranty 12 1/2s, 2010 4,476,150
5,035,000 Carmike Cinemas bank term loan FRN 6.69s, 2005 3,725,900
1,785,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 (Mexico) 838,950
1,970,000 Cinemark USA, Inc. sr. sub. notes 8 1/2s, 2008 (Mexico) 945,600
5,675,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 5,284,844
8,440,000 Regal Cinemas, Inc. sr. sub. notes 9 1/2s, 2008 1,012,800
4,250,000 Regal Cinemas, Inc. sr. sub. notes 8 7/8s, 2010 467,500
4,610,000 Silver Cinemas, Inc. sr. sub. notes 10 1/2s, 2005 (In default) (NON) 368,800
4,867,393 United Artists Theatre bank term loan Ser. C, FRN 12.25s, 2007 3,407,175
2,773,000 United Artists Theatre 144A FRB 10.415s, 2007 (In default) (NON) 55,460
8,490,000 United Artists Theatre sr. sub. notes 9 3/4s, 2008 (In default) (NON) 148,575
-------------
23,075,454
Financial (1.3%)
-------------------------------------------------------------------------------------------------------------------
3,950,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 2,024,375
8,585,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 8,192,580
2,525,000 Advanta Corp. med. term notes Ser. D, 6.98s, 2002 2,262,122
5,090,000 AMRESCO, Inc. sr. sub. notes Ser. 97-A, 10s, 2004 2,290,500
1,247,000 AMRESCO, Inc. sr. sub. notes Ser. 98-A, 9 7/8s, 2005 561,150
1,190,000 CSBI Capital Trust I 144A company guaranty 11 3/4s, 2027 1,190,000
1,430,000 Conseco Finance Trust III, Inc. bonds 8.796s, 2027 614,900
3,500,000 Conseco Financial Corp. sr. sub. notes 10 1/4s, 2002 2,625,000
6,905,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 3,107,250
5,405,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 3,513,250
9,000,000 Liberty Mutual Insurance 144A notes 7.697s, 2097 6,620,040
2,085,000 Nationwide Credit, Inc. sr. notes Ser. A, 10 1/4s, 2008 1,313,550
1,875,000 Ocwen Capital Trust I company guaranty 10 7/8s, 2027 956,250
2,995,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 2,755,400
2,490,000 Ocwen Financial Corp. notes 11 7/8s, 2003 2,247,225
4,145,000 Resource America, Inc. 144A sr. notes 12s, 2004 3,771,950
500,000 Sun Life Canada Capital Trust 144A 8.526s, 2049 443,955
-------------
44,489,497
Food (0.3%)
-------------------------------------------------------------------------------------------------------------------
720,000 Archibald Candy Corp. company guaranty 10 1/4s, 2004 417,600
994,987 Aurora Foods, Inc. bank term loan Ser. B, FRN 10.37s, 2010 935,288
1,435,000 Aurora Foods, Inc. sr. sub. notes Ser. B, 9 7/8s, 2007 1,126,475
2,570,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D, 9 7/8s, 2007 2,017,450
4,040,000 Doane Pet Care Corp. sr. sub. notes 9 3/4s, 2007 3,494,600
310,000 Eagle Family Foods company guaranty Ser. B, 8 3/4s, 2008 164,300
920,000 Premier International Foods PLC sr. notes 12s, 2009
(United Kingdom) 763,600
4,300,000 Vlasic Foods Intl., Inc. sr. sub notes Ser. B, 10 1/4s, 2009 2,365,000
-------------
11,284,313
Gaming & Lottery (1.9%)
-------------------------------------------------------------------------------------------------------------------
1,270,000 Ameristar Casinos, Inc. company guaranty Ser. B,
10 1/2s, 2004 1,273,175
6,040,000 Fitzgeralds Gaming Corp. company guaranty Ser. B,
12 1/4s, 2004 (In default) (NON) 3,261,600
2,230,000 Harrahs Entertainment, Inc. company guaranty 7 1/2s, 2009 2,101,284
6,410,000 Hollywood Casino Corp. company guaranty 11 1/4s, 2007 6,714,475
5,000,000 Hollywood Park, Inc. company guaranty Ser. B, 9 1/4s, 2007 5,100,000
350,000 International Game Technology 144A sr. notes 8 3/8s, 2009 343,000
2,085,000 Isle of Capri Black Hawk LLC 144A 1st mortgage Ser. B,
13s, 2004 2,272,650
4,120,000 Isle of Capri Black Hawk LLC company guaranty 8 3/4s, 2009 3,831,600
3,980,000 MGM Grand, Inc. company guaranty 9 3/4s, 2007 4,109,350
1,490,000 Mohegan Tribal Gaming, Auth. sr. sub. notes 8 3/4s, 2009 1,478,825
3,905,000 Mohegan Tribal Gaming, Auth. sr. notes 8 1/8s, 2006 3,807,375
470,000 Park Place Entertainment sr. sub. notes 9 3/8s, 2007 478,813
2,740,000 Park Place Entertainment sr. sub. notes 8 7/8s, 2008 2,712,600
2,992,500 Penn National Gaming, Inc. bank term loan Ser. B, FRN
10.63s, 2006 2,992,500
15,860,000 Trump A.C. 1st mtge. 11 1/4s, 2006 10,983,050
780,000 Trump Castle Funding, Inc. 144A sr. sub. notes 11 3/4s, 2003 651,300
11,360,000 Trump Castle Funding, Inc. 144A sub. notes 10 1/4s, 2003 11,360,000
4,190,000 Venetian Casino, Inc. company guaranty 12 1/4s, 2004 4,315,700
-------------
67,787,297
Health Care (1.5%)
-------------------------------------------------------------------------------------------------------------------
3,685,000 ALARIS Medical Systems, Inc. company guaranty 9 3/4s, 2006 2,690,050
1,690,000 Bio-Rad Labs Corp. sr. sub. notes 11 5/8s, 2007 1,774,500
5,400,000 Columbia/HCA Healthcare Corp. med. term notes 8.85s, 2007 5,413,500
1,750,000 Columbia/HCA Healthcare Corp. deb. 8.36s, 2024 1,636,250
1,850,000 Columbia/HCA Healthcare Corp. med. term notes notes
7.69s, 2025 1,549,375
1,810,000 Columbia/HCA Healthcare Corp. notes 6.91s, 2005 1,701,400
1,950,000 Columbia/HCA Healthcare Corp. med. term notes
6.63s, 2045 1,871,435
2,930,000 Conmed Corp. company guaranty 9s, 2008 2,461,200
1,760,000 HCA -The Healthcare Co. notes 8 3/4s, 2010 1,783,606
3,365,000 Kinetic Concepts, Inc. company guaranty Ser. B, 9 5/8s, 2007 2,591,050
2,840,000 Lifepoint Hospital Holdings company guaranty Ser. B,
10 3/4s, 2009 2,982,000
4,280,139 Magellan Health bank term loan Ser. B, FRN 10.375s, 2004 3,852,125
3,260,000 Magellan Health sr. sub. notes 9s, 2008 2,151,600
4,510,000 Mediq, Inc. company guaranty 11s, 2008 (In default) (NON) 135,300
4,350,000 Mediq, Inc. deb. stepped-coupon zero % (13s, 6/1/03),
2009 (in default) (NON) (STP) 435
5,755,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 (In default) (NON) 2,302,000
2,275,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 2,240,875
1,188,000 Tenet Healthcare Corp. sr. notes 8 5/8s, 2003 1,193,940
5,150,000 Tenet Healthcare Corp. sr. notes Ser. B, 8 1/8s, 2008 4,911,813
4,090,000 Tenet Healthcare Corp. sr. notes Ser. B, 7 5/8s, 2008 3,854,825
4,560,000 Triad Hospitals Holdings company guaranty Ser. B, 11s, 2009 4,674,000
2,985,003 Vanguard Health bank term loan Ser. B, FRN 11s, 2001 2,977,541
-------------
54,748,820
Homebuilding (0.6%)
-------------------------------------------------------------------------------------------------------------------
2,460,000 D.R. Horton, Inc. company guaranty 8s, 2009 2,297,025
3,053,000 Del Webb Corp. sr. sub. deb. 9 3/8s, 2009 2,808,760
3,260,000 K. Hovnanian Enterprises, Inc. 144A company guaranty
10 1/2s, 2007 3,190,725
3,380,000 Lennar Corp. sr. notes 7 5/8s, 2009 3,109,600
2,870,000 Ryland Group, Inc. sr. notes 9 3/4s, 2010 2,905,875
2,700,000 Standard Pacific Corp. sr. notes 9 1/2s, 2010 2,706,750
4,100,000 Toll Corp. company guaranty 8 1/8s, 2009 3,884,750
-------------
20,903,485
Household Furniture & Appliances (0.2%)
-------------------------------------------------------------------------------------------------------------------
3,955,000 Albecca, Inc. company guaranty 10 3/4s, 2008 3,569,388
2,010,000 Sealy Mattress Co. company guaranty stepped-coupon
Ser. B, zero % (10 7/8s, 12/15/02), 2007 (STP) 1,497,450
1,750,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 1,693,125
-------------
6,759,963
Lodging/Tourism (0.7%)
-------------------------------------------------------------------------------------------------------------------
GBP 6,330,078 Blackstone Hotel Acquisition Co. jr. mtge. loan
FRN 10 1/4s, 2003 (United Kingdom) 8,888,062
$ 3,610,000 Epic Resorts LLC company guaranty Ser. B, 13s, 2005 1,083,000
1,615,000 HMH Properties, Inc. sr. notes Ser. C, 8.45s, 2008 1,542,325
2,960,000 HMH Properties, Inc. company guaranty Ser. B,
7 7/8s, 2008 2,730,600
3,440,000 Host Marriott L.P. sr. notes Ser. E, 8 3/8s, 2006 3,311,000
6,146,000 ITT Corp. notes 6 3/4s, 2005 5,736,861
970,000 Starwood Hotels & Resorts notes 6 3/4s, 2003 932,073
1,970,000 Strategic Hotel bank term loan FRN 10.37s, 2004 1,984,775
-------------
26,208,696
Machinery (0.2%)
-------------------------------------------------------------------------------------------------------------------
7,751,088 Terex bank term loan Ser. B, FRN 9.37s, 2005 7,712,333
Manufacturing (0.8%)
-------------------------------------------------------------------------------------------------------------------
6,850,000 Blount, Inc. company guaranty 13s, 2009 7,038,375
3,972,487 Blount, Inc. bank term loan Ser. B2, FRN 10.62s, 2006 3,987,384
2,705,000 Continental Global Group sr. notes Ser. B, 11s, 2007 892,650
860,000 Flextronics International, Ltd. 144A sr. sub. notes 9 7/8s, 2010 890,100
4,420,000 Flowserve Corp. 144A company guaranty 12 1/4s, 2010 4,530,500
1,000,000 Flowserve Corp. bank term loan FRN 9.464s, 2006 1,003,750
5,525,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 5,414,500
4,700,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 4,324,000
-------------
28,081,259
Medical Services (0.1%)
-------------------------------------------------------------------------------------------------------------------
5,060,000 Extendicare Health Services, Inc. company guaranty
9.35s, 2007 2,934,800
4,680,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/2s, 2007 (In default) (NON) 46,800
2,940,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/4s, 2008 (In default) (NON) 29,400
2,410,000 Mariner Post-Acute Network, Inc. sr. sub. notes
stepped-coupon Ser. B, zero % (10 1/2s, 11/1/02),
2007 (In default) (STP) (NON) 18,075
11,280,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B,
9 1/2s, 2007 (In default) (NON) 84,600
12,585,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 (In default) (NON) 692,175
710,000 Service Corp. International debs. 7 7/8s, 2013 379,850
720,000 Service Corp. International notes 6s, 2005 408,600
4,975,000 Sun Healthcare Group, Inc. sr. sub. notes Ser. B, 9 1/2s,
2007 (In default) (NON) 99,500
5,820,000 Sun Healthcare Group, Inc. 144A sr. sub. notes 9 3/8s,
2008 (In default) (NON) 123,675
-------------
4,817,475
Medical Technology (--%)
-------------------------------------------------------------------------------------------------------------------
1,770,000 Hanger Orthopedic Group, Inc. sr. sub. notes 11 1/4s, 2009 1,584,150
Metals (0.7%)
-------------------------------------------------------------------------------------------------------------------
4,800,000 AK Steel Corp. company guaranty 7 7/8s, 2009 4,296,000
3,029,495 Anker Coal Group, Inc. company guaranty Ser. B,
14 1/4s, 2007 (PIK) 1,363,273
4,475,000 Kaiser Aluminum & Chemical Corp. sr. sub. notes
12 3/4s, 2003 3,982,750
350,000 Kaiser Aluminum & Chemical Corp. sr. notes Ser. B,
10 7/8s, 2006 344,750
500,000 Kaiser Aluminum & Chemical Corp. sr. notes 9 7/8s, 2002 490,000
6,790,000 LTV Corp. company guaranty 11 3/4s, 2009 3,530,800
6,585,000 National Steel Corp. 1st mtge. Ser. D, 9 7/8s, 2009 3,951,000
1,470,000 Oregon Steel Mills 1st mtge. 11s, 2003 1,176,000
2,490,000 WCI Steel, Inc. sr. notes Ser. B, 10s, 2004 2,241,000
360,000 Weirton Steel Corp. 144A sr. notes 10 3/4s, 2005 289,800
2,590,000 Wheeling-Pittsburgh Steel Corp. sr. notes 9 1/4s, 2007 906,500
3,120,000 WHX Corp. sr. notes 10 1/2s, 2005 1,731,600
-------------
24,303,473
Oil & Gas (1.2%)
-------------------------------------------------------------------------------------------------------------------
6,520,000 Belco Oil & Gas Corp. company guaranty Ser. B,
10 1/2s, 2006 6,536,300
2,060,000 Belco Oil & Gas Corp. sr. sub. notes Ser. B, 8 7/8s, 2007 1,946,700
2,110,000 Giant Industries Corp. company guaranty 9s, 2007 1,946,475
520,000 Gulf Canada Resources, Ltd. sr. sub. notes 9 5/8s,
2005 (Canada) 533,650
3,930,000 HS Resources, Inc. company guaranty 9 1/4s, 2006 3,959,475
2,800,000 Nuevo Energy Co. sr. sub. notes Ser. B, 9 1/2s, 2008 2,807,000
1,740,000 Nuevo Energy Co. 144A sr. sub. notes 9 3/8s, 2010 1,731,300
1,150,000 Ocean Energy, Inc. company guaranty Ser. B, 8 7/8s, 2007 1,161,500
6,950,000 Ocean Energy, Inc. company guaranty Ser. B, 8 3/8s, 2008 6,915,250
1,600,000 Pioneer Natural Resources Co. company guaranty
9 5/8s, 2010 1,696,000
420,000 Port Arthur Finance Corp. company guaranty 12 1/2s, 2009 420,000
1,655,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 397,200
2,820,000 Snyder Oil Corp. sr. sub. notes 8 3/4s, 2007 2,885,819
3,600,000 Triton Energy, Ltd. 144A sr. notes 8 7/8s, 2007
(Cayman Islands) 3,600,000
6,005,000 Vintage Petroleum sr. sub. notes 9 3/4s, 2009 6,275,225
-------------
42,811,894
Paper & Forest Products (2.1%)
-------------------------------------------------------------------------------------------------------------------
4,104,911 Alabama River Newsprint bank term loan FRN
8.625s, 2002 3,489,174
5,990,000 APP China Group, Ltd. 144A sr. disc. notes 14s,
2010 (Bermuda) 2,935,100
3,750,000 APP Finance II Mauritius, Ltd. bonds stepped-coupon 12s,
(16s, 2/15/04), 2049 (Indonesia) (STP) 1,350,000
4,060,000 Doman Industries, Ltd. company guaranty 12s, 2004 (Canada) 4,120,900
5,500,000 Doman Industries, Ltd. 144A sr. notes 8 3/4s, 2004 (Canada) 3,960,000
1,450,000 Four M Corp. sr. notes Ser. B, 12s, 2006 1,381,125
2,140,000 Gaylord Container Corp. sr. sub. notes 9 7/8s, 2008 963,000
1,440,000 Gaylord Container Corp. sr. notes Ser. B, 9 3/4s, 2007 979,200
1,320,000 Gaylord Container Corp. sr. notes Ser. B, 9 3/8s, 2007 884,400
4,095,000 Indah Kiat Financial Mauritius, Ltd. company guaranty
10s, 2007 (Indonesia) 2,006,550
5,680,000 Pacifica Papers, Inc. sr. notes 10s, 2009 (Canada) 5,708,400
2,210,000 Packaging Corp. company guaranty 9 5/8s, 2009 2,232,100
10,335,000 Pindo Deli Finance Mauritius, Ltd. company guaranty
10 3/4s, 2007 (Indonesia) 5,064,150
6,840,000 PT Pabrik Kertas Tjiwi Kimia company guaranty 10s, 2004
(Indonesia) 3,693,600
9,545,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 9,831,350
12,065,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 11,220,450
3,819,025 Stone Container Corp. bank term loan Ser. H, FRN
10.188s, 2006 3,819,025
6,963,478 Stone Container Corp. bank term loan Ser. F, FRN 9.938s, 2006 6,946,070
3,720,000 Tembec Industries, Inc. company guaranty 8 5/8s,
2009 (Canada) 3,627,000
-------------
74,211,594
Pharmaceuticals (0.2%)
-------------------------------------------------------------------------------------------------------------------
4,190,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 4,158,575
4,250,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 4,207,500
370,000 ICN Pharmaceuticals, Inc. 144A sr. notes 8 3/4s, 2008 366,300
-------------
8,732,375
Power Producers (1.0%)
-------------------------------------------------------------------------------------------------------------------
1,860,000 Calpine Corp. sr. notes 10 1/2s, 2006 1,915,800
800,000 Calpine Corp. sr. notes 9 1/4s, 2004 799,897
2,245,000 Calpine Corp. sr. notes 8 3/4s, 2007 2,257,325
1,280,000 Calpine Corp. sr. notes 7 7/8s, 2008 1,227,633
120,000 Calpine Corp. sr. notes 7 3/4s, 2009 114,150
1,915,000 Midland Funding II Corp. deb. Ser. B, 13 1/4s, 2006 2,154,662
18,310,000 Midland Funding II Corp. deb. Ser. A, 11 3/4s, 2005 19,797,675
7,102,000 York Power Funding 144A notes 12s, 2007 (Cayman Islands) 7,173,020
-------------
35,440,162
Publishing (0.6%)
-------------------------------------------------------------------------------------------------------------------
8,085,000 Affinity Group Holdings sr. notes 11s, 2007 6,710,550
2,770,072 Big Flower Holdings bank term loan FRN 9.625s, 2010 2,763,146
5,270,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B,
8 3/4s, 2009 4,927,450
5,560,000 Garden State Newspapers, Inc. sr. sub. notes 8 5/8s, 2011 5,115,200
-------------
19,516,346
Railroads (0.2%)
-------------------------------------------------------------------------------------------------------------------
3,570,000 Kansas City Southern Railway 144A sr. notes 9 1/2s, 2008 3,623,550
6,295,000 TFM SA de CV company guaranty stepped-coupon zero %
(11 3/4s, 6/15/02), 2009 (Mexico) (STP) 4,768,463
-------------
8,392,013
Restaurants (0.3%)
-------------------------------------------------------------------------------------------------------------------
2,660,000 Felcor Lodging 144A sr. notes 9 1/2s, 2008 2,666,650
3,735,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 1,736,775
4,000,000 Sbarro, Inc. company guaranty 11s, 2009 4,120,000
2,130,000 Tricon Global Restaurants, Inc. sr. notes 7.65s, 2008 1,989,037
-------------
10,512,462
Retail (0.9%)
-------------------------------------------------------------------------------------------------------------------
6,200,000 Amazon.com, Inc. sr. disc. notes stepped-coupon zero %
(10s,05/01/03), 2008 (STP) 3,286,000
1,950,000 Iron Age Corp. company guaranty 9 7/8s, 2008 1,365,000
160,000 Iron Age Holdings Corp. sr. disc. notes stepped-coupon
zero % (12 1/8s, 5/1/03), 2009 (STP) 24,000
5,190,000 Grupo Elektra SA de c.v.144A notes 12s, 2008 (Mexico) 5,021,325
4,600,000 K mart Corp. pass-thru certificates Ser. 95K4, 9.35s, 2020 4,179,468
8,410,000 K mart Corp. notes 8 3/8s, 2004 7,226,797
3,780,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 3,477,600
12,610,000 Saks, Inc. company guaranty 8 1/4s, 2008 7,566,000
670,000 Southland Corp. sr. sub. deb. 5s, 2003 580,924
-------------
32,727,114
Semiconductor (0.1%)
-------------------------------------------------------------------------------------------------------------------
1,950,000 Amkor Technologies, Inc., structured note (issued by
Steers Credit Linked Trust 2000) 12.58s, 2005 1,954,875
670,000 Amkor Technologies, Inc. sr. sub. notes 10 1/2s, 2009 676,700
1,060,000 Amkor Technologies, Inc. sr. notes 9 1/4s, 2006 1,049,400
1,320,000 ChipPac Intl., Ltd. company guaranty Ser. B, 12 3/4s, 2009 1,399,200
-------------
5,080,175
Shipping (0.4%)
-------------------------------------------------------------------------------------------------------------------
1,875,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s,
2003 (Greece) 1,771,875
1,530,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 1,331,100
1,200,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 (In default) (NON) 684,000
8,475,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 7,797,000
1,000,000 Pegasus Shipping Hellas, Ltd.144A 11 7/8s, 2004 (In default) (NON) 345,000
980,000 Transportacion Maritima Mexicana SA de CV notes
9 1/4s, 2003 (Mexico) 793,800
-------------
12,722,775
Software (--%)
-------------------------------------------------------------------------------------------------------------------
2,980,000 Telehub Communications Corp. company guaranty
stepped-coupon zero % (13 7/8s, 7/31/02), 2005 (STP) 536,400
Specialty Printing (0.2%)
-------------------------------------------------------------------------------------------------------------------
4,520,000 Perry-Judd company guaranty 10 5/8s, 2007 4,022,800
1,184,212 Von Hoffman Press, Inc. 144A sr. sub. notes 13 1/2s, 2009 1,065,791
2,625,000 Von Hoffman Press, Inc. 144A sr. sub. notes 10 3/8s, 2007 2,415,000
-------------
7,503,591
Technology (1.1%)
-------------------------------------------------------------------------------------------------------------------
3,145,000 Celestica International, Ltd. 144A sr. sub. notes 10 1/2s,
2006 (Canada) 3,239,350
390,000 Fairchild Semiconductor Corp. company guaranty
10 3/8s, 2007 393,900
6,280,000 Fairchild Semiconductor Corp. sr. sub. notes 10 1/8s, 2007 6,280,000
8,655,000 Flextronics International, Ltd. sr. sub. notes Ser. B, 8 3/4s, 2007 8,481,900
3,060,000 Kookinlet Voicestream bank term loan Ser. B, FRN 10.63s, 2008 3,090,600
7,360,000 Telecommunications Techniques, Inc. company guaranty
9 3/4s, 2008 6,918,400
1,810,000 U.S. Can Corp. 144A sr. sub. notes 12 3/8s, 2010 1,828,100
7,120,000 Viasystems, Inc. sr. notes Ser. B, 9 3/4s, 2007 6,479,200
1,080,000 Viasystems, Inc. sr. sub notes 9 3/4s, 2007 1,015,200
-------------
37,726,650
Technology Services (0.4%)
-------------------------------------------------------------------------------------------------------------------
3,730,000 Equinix, Inc. sr. notes 13s, 2007 2,984,000
1,740,000 Globix Corp. sr. notes 12 1/2s, 2010 1,252,800
5,780,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 5,606,600
3,900,000 PSINet, Inc. sr. notes 11s, 2009 2,535,000
2,330,000 Rhythms Netconnections sr. notes Ser. B, 14s, 2010 1,537,800
-------------
13,916,200
Telecommunications (5.3%)
-------------------------------------------------------------------------------------------------------------------
3,480,000 360Networks, Inc. sr. notes 13s, 2008 (Canada) 3,236,400
20,000 American Mobile Satellite Corp. company guaranty
12 1/4s, 2008 14,900
2,160,000 Arch Communications Group sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/15/01), 2008 (STP) 1,096,200
4,590,000 Barak I.T.C. sr. disc. notes stepped-coupon Ser. B, zero %
(12 1/2s, 11/15/02), 2007 (Israel) (STP) 2,478,600
3,630,000 Bestel SA de CV sr. disc. notes stepped-coupon zero %
(12 3/4s, 5/15/03), 2005 (Mexico) (STP) 2,377,650
2,950,000 Call-Net Enterprises, Inc. sr. notes 8s, 2008 (Canada) 1,180,000
4,630,000 Carrier1 Intl. SA sr. notes Ser. B, 13 1/4s, 2009 (Luxembourg) 4,074,400
10,185,000 Celcaribe S.A. sr. notes stepped-coupon zero %
(13 1/2s, 3/15/04), 2004 (STP) 7,740,600
20,442,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (In default) (STP) (NON) 1,430,940
370,000 Clearnet Communications, Inc. sr. disc. notes stepped-coupon
zero % (14 3/4s, 12/15/00), 2005 (STP) 388,500
1,000,000 Clearnet Racers notes Ser. 00-17A, 9.709s, 2007 995,000
3,560,000 Crown Castle Intl., Corp. sr. notes 10 3/4s, 2011 3,595,600
2,400,000 Crown Castle Intl., Corp. bank term loan Ser. B, FRN 9.37s 2008 2,400,000
2,355,000 Dobson Communications Corp. sr. notes 10 7/8s, 2010 2,296,125
1,530,000 Dobson/Sygnet Communications, Inc. sr. notes 12 1/4s, 2008 1,537,650
7,975,000 Econophone, Inc. company guaranty 13 1/2s, 2007 4,944,500
2,420,000 Esprit Teleom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 1,131,350
2,660,000 Exodus Communications, Inc. sr. notes 11 1/4s, 2008 2,620,100
6,590,000 Exodus Communications, Inc. 144A sr. notes 11 5/8s, 2010 6,622,950
1,190,000 Exodus Communications, Inc. sr. notes 10 3/4s, 2009 1,151,325
4,270,000 Flag, Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 3,757,600
3,680,000 Global Crossing Holdings, Ltd. company guaranty 9 5/8s,
2008 (Bermuda) 3,670,800
2,050,000 Global Crossing Holdings, Ltd. company guaranty 9 1/2s,
2009 (Bermuda) 2,039,750
5,140,000 Global Crossing Holdings, Ltd. company guaranty 9 1/8s,
2006 (Bermuda) 5,075,750
2,945,000 Grupo Iusacell SA de c.v. sr. notes 14 1/4s, 2006 (Mexico) 3,129,063
3,740,000 Innova S. de R.L. sr. notes 12 7/8s, 2007 (Mexico) 3,553,000
5,120,000 Intira Corp. bonds zero % (13s, 8/1/05), 2010 (STP) 2,662,400
1,860,000 Level 3 Communications, Inc. sr. notes 11 1/4s, 2010 1,794,900
2,140,000 Level 3 Communications, Inc. sr. notes 11s, 2008 2,075,800
4,460,000 Level 3 Communications, Inc. sr. notes 9 1/8s, 2008 3,846,750
2,120,000 Loral Space & Communication, Ltd. sr. notes 9 1/2s, 2006 1,537,000
5,010,000 Maxcom Telecomunicaciones SA de CV 144A sr. notes
13 3/4s, 2007 (Mexico) 2,830,650
1,070,000 Metrocall, Inc. sr. sub. notes 11s, 2008 716,900
860,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 533,200
910,000 Metrocall, Inc. sr. sub. notes 9 3/4s, 2007 602,875
4,210,000 Metromedia Fiber Network, Inc. sr. notes 10s, 2009 3,936,350
500,000 Metromedia Fiber Network, Inc. sr. notes 10s, 2009 416,840
4,570,000 Metromedia Fiber Network, Inc. sr. notes Ser. B, 10s, 2008 4,272,950
10,088,000 Millicom International Cellular SA sr. disc. notes stepped-
coupon zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) (STP) 8,675,680
2,270,000 Nextel Communications, Inc. sr. disc. notes stepped-
coupon zero % (12 1/8s, 4/15/03), 2008 (STP) 1,469,825
9,180,000 Nextel Communications, Inc. sr. notes 12s, 2008 9,822,600
14,150,000 Nextel Communications, Inc. sr. notes 9 3/8s, 2009 13,867,000
6,230,000 Nextel International, Inc. 144A sr. notes 12 3/4s, 2010 6,167,700
5,630,000 Nextel Partners, Inc. sr. notes 11s, 2010 5,658,150
3,560,000 Nextel Partners, Inc. 144A sr. notes 11s, 2010 3,560,000
2,930,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 2,519,800
2,530,000 NorthPoint Communications Group, Inc. sr. notes
12 7/8s, 2010 2,530,000
4,250,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 1,572,500
4,710,000 Pagemart Wireless, Inc. sr. disc. notes stepped-coupon
zero % (11 1/4s, 2/1/03), 2008 (STP) 1,884,000
900,000 Paging Net Yankee sr. notes 13 1/2s, 2005 (Brazil) 58,500
1,680,000 Paging Network, Inc. sr. sub. notes 10s, 2008 (In default) (NON) 604,800
840,000 Paging Network, Inc. sr. sub. notes 8 7/8s, 2006 (In default) (NON) 302,400
7,460,000 Pinnacle Holdings, Inc. sr. disc. notes stepped-coupon zero %
(10s, 3/15/03), 2008 (STP) 5,371,200
2,640,000 Price Communications Wireless, Inc. 144A sr. notes
9 1/8s, 2006 2,640,000
5,390,000 Primus Telecommunications Group, Inc. sr. notes Ser. B,
9 7/8s, 2008 3,018,400
1,500,000 RSL Communications PLC company guaranty 12 7/8s,
2010 (United Kingdom) 270,000
3,976,000 RSL Communications PLC company guaranty 12 1/4s,
2006 (United Kingdom) 1,192,800
3,430,000 RSL Communications PLC 144A company guaranty
10 1/2s, 2008 (United Kingdom) 874,650
1,000,000 RSL Communications PLC company guaranty, stepped-coupon
zero % (10 1/8s, 3/1/03), 2008 (United Kingdom) (STP) 170,000
1,395,000 RSL Communications PLC company guaranty 9 1/8s,
2008 (United Kingdom) 348,750
2,500,000 Rural Cellular bank term loan Ser. C, FRN 9.87s, 2009 2,493,750
1,020,000 Satelites Mexicanos SA de CV 144A sr. notes 10 1/8s,
2004 (Mexico) 637,500
2,125,000 Spectrasite Holdings, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (12 7/8s, 3/15/05), 2010 (STP) 1,083,750
1,550,000 Spectrasite Holdings, Inc. sr. disc. notes stepped-coupon
zero % (11 1/4s, 4/15/04), 2009 (STP) 844,750
4,710,000 Startec Global Communications Corp. sr. notes 12s, 2008 3,768,000
3,800,000 Viatel, Inc. sr. disc. notes stepped-coupon zero %
(12 1/2s, 4/15/03), 2008 (STP) 1,368,000
7,860,000 Viatel, Inc. sr. notes 11 1/4s, 2008 4,008,600
2,100,000 Williams Communications Group, Inc. sr. notes 10 7/8s, 2009 1,916,250
4,375,000 World Access, Inc. sr. notes Ser. B, 13 1/4s, 2008 3,412,500
-------------
189,877,223
Telephone (2.7%)
-------------------------------------------------------------------------------------------------------------------
2,700,000 Airgate PCS, Inc. sr. sub. notes stepped-coupon zero %
(13 1/2s, 10/1/04), 2009 (STP) 1,620,000
6,965,000 Alamosa PCS Holdings, Inc. company guaranty stepped-
coupon zero % (12 7/8s, 2/15/05), 2010 (STP) 3,691,450
2,320,000 Alaska Communications Systems Corp. company guaranty
9 3/8s, 2009 2,134,400
230,000 Allegiance Telecom, Inc. sr. disc. notes stepped-coupon Ser. B,
zero % (11 3/4s, 2/15/03), 2008 (STP) 154,100
3,630,000 Birch Telecommunications, Inc. sr. notes 14s, 2008 2,178,000
5,770,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 3,346,600
1,211,000 Covad Communications Group, Inc. sr. notes Ser. B,
12s, 2010 896,140
4,940,000 Covad Communications Group, Inc. sr. notes 12 1/2s, 2009 3,729,700
7,930,000 Firstworld Communication Corp. sr. disc. notes stepped-
coupon zero % (13, 4/15/03), 2008 (STP) 1,903,200
2,335,000 Focal Communications Corp. sr. disc. notes, stepped-coupon
Ser. B, zero % (12 1/8s, 02/15/03), 2008 (STP) 1,167,500
2,165,000 Focal Communications Corp. sr. notes 11 7/8s, 2010 1,667,050
2,410,000 ICG Holdings, Inc. company guaranty stepped-coupon zero %
(12 1/2s, 5/1/01), 2006 (STP) 482,000
6,850,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(10s, 2/15/03), 2008 (STP) 924,750
10,070,000 ICG Services, Inc. sr. disc. notes stepped-coupon zero %
(9 7/8s, 5/1/03), 2008 (STP) 1,334,275
2,690,000 Intermedia Communications, Inc. sr. disc. notes stepped-
coupon Ser. B, zero %, (12 1/4s, 3/1/04), 2009 (STP) 1,896,450
18,000,000 KMC Telecommunications Holdings, Inc. sr. disc. notes
stepped-coupon zero % (12 1/2s, 2/15/03), 2008 (STP) 7,200,000
6,880,000 Madison River Capital Corp. sr. notes 13 1/4s, 2010 5,504,000
3,290,000 McLeodUSA, Inc. sr. notes 8 1/8s, 2009 2,862,300
2,310,000 MGC Communications, Inc. sr. notes 13s, 2010 1,386,000
4,910,000 Microcell Telecommunications sr. disc. notes stepped-
coupon Ser. B, zero % (14s, 12/1/01), 2006 (Canada) (STP) 4,701,325
2,960,000 Netia Holdings B.V. 144A company guaranty stepped-
coupon zero % (11 1/4s, 11/1/01), 2007 (Poland) (STP) 1,983,200
1,570,000 Netia Holdings B.V. 144A company guaranty 10 1/4s,
2007 (Poland) 1,208,900
2,140,000 NEXTLINK Communications, Inc. sr. notes 10 1/2s, 2009 1,947,400
3,000,000 Tele1 Europe B.V. sr. notes 11 7/8s, 2009 (Netherlands) 2,448,105
8,400,000 Telecorp PCS, Inc. 144A sr. sub. notes 10 5/8s, 2010 8,442,000
2,330,000 Time Warner Telecom, Inc. sr. notes 9 3/4s, 2008 2,161,075
1,800,000 Transtel pass-through certificates 12 1/2s, 2007 612,000
810,000 Triton PCS Inc. company guaranty zero %, 2008
(11s, 5/1/08) (STP) 615,600
8,070,000 UbiquiTel Operating Co. company guaranty
stepped-coupon zero % (14s, 4/15/05), 2010 (STP) 3,833,250
8,230,000 US Unwired, Inc. company guaranty, stepped-coupon
Ser. B, zero % (13 3/8s, 11/1/04), 2009 (STP) 4,361,900
3,820,000 Versatel Telecom NV sr. notes 13 1/4s, 2008 (Netherlands) 3,438,000
1,275,000 Versatel Telecom NV sr. notes 13 1/4s, 2008 (Netherlands) 1,147,500
7,690,000 VoiceStream Wireless, Inc. sr. notes 10 3/8s, 2009 8,266,750
14,568,000 WinStar Communications, Inc. 144A sr. disc. notes zero %
(14 3/4s,), 2010 (STP) 4,516,080
1,580,000 WinStar Communications, Inc. 144A sr. notes 12 3/4s, 2010 1,137,600
-------------
94,898,600
Textiles (0.7%)
-------------------------------------------------------------------------------------------------------------------
1,380,000 Galey & Lord, Inc. company guaranty 9 1/8s, 2008 876,300
2,190,000 GFSI, Inc. sr. disc. notes stepped-coupon Ser. B, zero %
(11 3/8s, 9/15/04), 2009 (STP) 328,500
7,020,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 6,976,125
3,945,000 Kasper A.S.L., Ltd. sr. notes 12 3/4s, 2004 2,248,650
4,940,000 Levi Strauss & Co. notes 6.8s, 2003 4,149,600
6,630,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2008 5,502,900
3,280,000 Westpoint Stevens, Inc. sr. notes 7 7/8s, 2005 2,837,200
2,215,000 William Carter Holdings Co. sr. sub. notes Ser. A, 12s, 2008 2,037,800
1,000,000 William Carter Holdings Co. sr. sub. notes Ser. A,
10 3/8s, 2006 965,000
-------------
25,922,075
Tobacco (0.2%)
-------------------------------------------------------------------------------------------------------------------
6,965,000 North Atlantic Trading Co. company guaranty Ser. B,
11s, 2004 5,920,250
Transportation Services (0.1%)
-------------------------------------------------------------------------------------------------------------------
5,000,000 North American Van Lines, Inc. 144A sr. sub. notes
13 3/8s, 2009 4,612,500
Trucks & Parts (0.1%)
-------------------------------------------------------------------------------------------------------------------
4,360,000 Transportation Manufacturing Operations, Inc. company
guaranty 11 1/4s, 2009 3,270,000
Utilities (0.1%)
-------------------------------------------------------------------------------------------------------------------
7,260,000 Cathay International, Ltd. 144A sr. notes 13s, 2008 (China) 3,775,200
Waste Management (0.6%)
-------------------------------------------------------------------------------------------------------------------
10,610,000 Allied Waste Industries, Inc. company guaranty Ser. B,
10s, 2009 9,204,172
3,600,000 Allied Waste Industries, Inc.bank term loan Ser. C, FRN
9.813s, 2007 3,529,440
2,910,000 Allied Waste Industries, Inc.bank term loan Ser. B, FRN
9.563s, 2006 2,840,364
5,750,000 Browning-Ferris Industries, Inc. deb. 7.4s, 2035 4,154,375
1,860,000 USA Waste Services, Inc. sr. notes 7 1/8s, 2007 1,736,384
225,000 Waste Management, Inc. company guaranty 6 7/8s, 2009 204,219
--------------
21,668,954
Water Utilities (--%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Azurix Corp. sr. notes 10 3/8s, 2007 1,315,420
360,000 Azurix Corp. 144A notes 10 3/8s, 2007 327,600
--------------
1,643,020
--------------
Total Corporate Bonds and Notes
(cost $1,827,469,542) $1,518,549,821
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (14.9%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
USD 8,923,000 Argentina (Republic of) bonds 11 3/4s, 2015 $ 8,142,238
USD 7,625,000 Argentina (Republic of) notes Ser. XW, 11s, 2005 7,377,188
USD 19,144,000 Argentina (Republic of) unsub. 11 3/4s, 2009 18,020,247
USD 6,028,000 Brazil (Federal Republic of) notes 14 1/2s, 2009 6,630,800
USD 15,925,000 Brazil (Federal Republic of) 12 3/4s, 2020 15,229,078
USD 13,820,000 Brazil (Federal Republic of) bonds 12 1/4s, 2030 12,507,100
CAD 8,915,000 Canada (Government of) bonds Ser. WB60,
7 1/4s, 2007 6,393,005
CAD 35,570,000 Canada (Government of) bonds Ser. WL43,
5 3/4s, 2029 23,979,775
CAD 61,250,000 Canada (Government of) bonds Ser. WE00,
5 1/2s, 2002 40,526,561
USD 4,790,000 Colombia (Republic of) 11 3/4s, 2020 4,023,600
DKK 127,205,000 Denmark (Kingdom of) 7s, 2024 17,307,417
DKK 413,950,000 Denmark (Kingdom of) bonds 6s, 2009 50,214,495
EUR 33,675,000 Germany (Federal Republic of) bonds Ser. 132,
4 1/8s, 2004 28,698,010
EUR 23,095,000 Germany (Federal Republic of) bonds Ser. 98,
5 5/8s, 2028 20,374,409
GRD 15,356,000,000 Hellenic Greece (Republic of) bonds 6 1/2s, 2014 41,162,526
EUR 8,705,000 Italy (Government of) sr. unsub. 4 1/4s, 2002 7,668,032
USD 4,785,000 Korea (Republic of) unsub. 8 7/8s, 2008 5,018,508
USD 5,340,833 Morocco (Government of) bonds Ser. A,
6.844s, 2009 4,806,750
NZD 54,145,000 New Zealand (Government of) bonds Ser. 709,
7s, 2009 22,307,115
USD 13,425,000 Philippines (Republic of) 10 5/8s, 2025 11,361,578
USD 5,680,000 Philippines (Republic of) 9 7/8s, 2019 4,657,600
USD 11,145,000 Russia (Federation of) 144A bonds 12 3/4s, 2028 9,640,425
USD 11,580,000 Russia (Federation of) unsub. 10s, 2007 8,887,650
USD 8,372,883 Russia (Federation of) 144A unsub. 8 1/4s, 2010 5,578,852
USD 55,084,375 Russia (Federation of) 144A unsub. stepped-coupon
2 1/4s, (5s, 4/1/01), 2030 (STP) 21,345,195
GBP 13,975,000 United Kingdom Treasury bonds 10s, 2003 22,958,088
GBP 11,245,000 United Kingdom Treasury bonds Ser. 85,
9 3/4s, 2002 17,750,277
GBP 25,535,000 United Kingdom Treasury bonds 8s, 2000 37,872,823
USD 29,537,000 United Mexican States bonds Ser. XW, IO,
10 3/8s, 2009 32,047,645
USD 10,320,000 United Mexican States bonds 11 3/8s, 2016 11,971,200
USD 4,590,000 Venezuela (Republic of) bonds 9 1/4s, 2027 3,104,217
-------------
Total Foreign Government Bonds and Notes
(cost $550,907,585) $ 527,562,404
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (13.8%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
U.S. Government Agency Mortgage Obligations (5.0%)
-------------------------------------------------------------------------------------------------------------------
$ 106,195,000 Federal National Mortgage Association 7 1/2s, TBA,
October 1, 2015 $ 106,958,542
Federal National Mortgage Association Pass-Through
Certificates
8,772,040 8s, with due dates from July 1, 2030 to August 1, 2030 8,889,849
4,265,984 7 1/2s, with due dates from August 1, 2017 to
March 1, 2030 4,257,985
55,611 7s, January 1, 2006 55,298
457,242 6 1/2s, with due dates from September 1, 2010 to
November 1, 2010 448,307
491,174 6s, July 1, 2029 458,938
439,415 5 1/2s, August 15, 2014 413,735
Government National Mortgage Association Pass-
Through Certificates
35,334,792 8s, with due dates from January 15, 2022 to
December 15, 2027 35,994,214
16,287,441 7 1/2s, with due dates from December 15, 2022 to
August 15, 2026 16,379,301
4,564,131 7s, with due dates from October 15, 2024 to
December 15, 2028 4,500,568
1,298,675 6 1/2s, with due dates from August 15, 2027 to
November 15, 2028 1,251,479
-------------
179,608,216
U.S. Treasury Obligations (8.8%)
-------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
49,360,000 6 1/2s, November 15, 2026 52,151,802
44,150,000 6 1/8s, November 15, 2027 44,557,063
U.S. Treasury Notes
57,220,000 6 1/2s, February 15, 2010 59,624,957
68,658,000 6s, August 15, 2009 69,001,290
88,111,000 5 1/4s, May 15, 2004 (SEG) 86,224,543
-------------
311,559,655
-------------
Total U.S. Government and Agency Obligations
(cost $488,275,568) $ 491,167,871
<CAPTION>
COLLATERALIZED MORTGAGE OBLIGATIONS (12.4%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
Commercial Mortgage Acceptance Corp.
$ 9,470,000 Ser. 97-ML1, Class D, 7.053s, 2030 $ 8,989,102
88,404,143 Ser. 97-ML1, Interest Only (IO), 0.956s, 2017 3,950,560
291,898,945 Commercial Mortgage Asset Trust Ser. 99-C1, Class X,
IO, 1.17s, 2020 18,323,181
Criimi Mae Commercial Mortgage Trust
45,076,000 Ser. 98-C1, Class A2, 7s, 2011 41,005,074
16,806,000 Ser. 98-C1, Class B, 7s, 2011 14,009,377
293,422,198 Deutsche Mortgage & Asset Receiving Corp. Ser. 98-C1,
Class X, IO, 1.241s, 2031 14,785,728
Fannie Mae
11,944,482 Ser. 98-51, Class SG, IO, 16.04s, 2022 6,094,911
24,194,675 Ser. 281, Class 2, IO, 9s, 2026 6,695,120
3,911,866 Ser. 176, Class 2, IO, 8s, 2022 1,043,368
17,797,970 Ser. 203, IO, Class 2, 8s, 2023 5,050,174
10,772,573 Ser. 217, Class 2, IO, 8s, 2023 2,873,247
19,414,656 Ser. 251, Class 2, IO, 8s, 2023 5,508,909
20,988,380 Ser. 254, Class 2, IO, 7 1/2s, 2024 6,112,866
20,942,655 Ser. 266, Class 2, IO, 7 1/2s, 2024 5,903,211
2,956,614 Ser. 218, Class 2, IO, 7 1/2s, 2023 841,711
55,859,750 Ser. 221, Class 2, IO, 7 1/2s, 2023 15,920,029
18,251,863 Ser. 231, Class 2, IO, 7 1/2s, 2023 5,273,077
43,357,666 Ser. 252, Class 2, IO, 7 1/2s, 2023 12,600,822
29,635,176 Ser. 93-251, Class Z, 6 1/2s, 2023 26,041,911
8,745,693 Ser. 98-28, Class SD, IO, 5.303s, 2023 2,104,432
16,211,016 Ser. 96-34, Class SC, IO, 4.883s, 2023 3,639,880
8,366,162 Ser. 97-91, Class FB, IO, 4.738s, 2023 1,537,282
33,597,780 Ser. 00-31, Class SC, IO, 3.51s, 2022 3,464,771
9,378,819 Ser. 92-124, Class SA, IO, 3.144s, 2022 862,570
40,107,875 Ser. 99-51, Class S, IO, 2.378s, 2029 3,108,360
50,687,938 Ser. 99-64, Class SE, IO, 1.778s, 2030 2,827,437
Freddie Mac
2,424,962 Ser. 2209, Class S, 10.658s, 2024 2,388,587
13,816,179 Ser. 2200, Class S, 10.658s, 2023 13,349,883
7,749,985 Ser. 1849 Class DA, IO, 9.687s, 2022 2,424,292
3,970,220 Ser. 1208, Class F, PO, 9s, 2022 3,006,201
5,521,004 Ser. 2032, Class SK, IO, 8.927s, 2024 2,610,400
21,593,339 Ser. 147, Class IO, 8s, 2023 6,032,639
9,674,586 Ser. 2219, Class SA, 7.725s, 2030 8,323,820
38,182,857 Ser. 1455, Class GA, IO, 7s, 2020 6,819,220
6,345,872 Ser. 1717, Class L, 6 1/2s, 2024 6,166,651
5,145,133 Ser. 2122, Class ZA, 6 1/4s, 2028 4,141,832
9,930,000 Ser. 2183, Class SG, 3.96s, 2014 8,130,188
11,441,133 Ser. 44, Class SG, IO, 2.89s, 2023 1,737,622
32,046,654 Ser. 2090, Class SB, IO, 2.18s, 2028 1,802,620
11,151,435 Ser. 2090, Class SC, IO, 2.18s, 2028 627,268
21,298,948 Ser. 203, Class PO, zero %, 2029 13,671,262
12,337,280 Ser. 195, Class PO, zero %, 2028 8,740,192
1,656,744 Ser. 180, Class PO, zero %, 2026 1,191,044
5,024,832 GE Capital Mortgage Services, Inc. Ser. 98-11,
Class 2A4, 6 3/4s, 2028 4,774,696
11,505,000 General Growth Properties Ala Moana Ser. 99-C1,
Class E, FRB, 8.87s, 2009 11,508,146
General Growth Properties-Homart
2,200,000 Ser. 99-C1, Class G, 9.12s, 2003 2,203,781
2,615,000 Ser. 99-C1, Class F, FRB, 8.87s, 2003 2,619,495
General Growth Properties-Ivanhoe
4,920,000 Ser. 99-C1, Class F, FRB, 9.87s, 2004 4,920,961
2,830,000 Ser. 99-C1, Class G, FRB, 9.87s, 2004 2,830,553
Government National Mortgage Association
657,804 Ser. 00-16, Class SA, 11.663s, 2026 605,443
10,360,571 Ser. 00-17, Class SB, 9.138s, 2026 10,692,316
3,769,209 Ser. 99-44, Class SZ, 9.1312s, 2029 3,623,153
6,925,793 Ser. 00-11, Class SA, 8.381s, 2021 6,548,121
6,701,145 Ser. 98-2, PO, Class EA, zero %, 2028 4,690,801
4,163,650 Headlands Mortgage Securities, Inc. Ser. 98-1,
Class X2, 2.871s, 2028 765,071
Merrill Lynch Mortgage Investors, Inc.
7,476,000 Ser. 1995-C3, Class D, 7.782s, 2025 7,433,948
656,000 Ser. 98-C2, Class D, 7.105s, 2030 616,128
1,283,000 Ser. 96-C2, Class E, 6.96s, 2028 1,138,663
5,588,000 Ser. 98-C2, Class F, 6 1/4s, 2030 3,634,819
9,168,408 Ser. 98-C2, Class IO, 1.568s, 2030 626,030
93,081,126 Ser. 96-C2, Class IO, 3.061s, 2028 6,050,273
Mortgage Capital Funding, Inc.
40,866,555 Ser. 97-MC2, Class X, IO, 1.579s, 2012 2,697,831
67,314,897 Ser. 98-MC1, Class X, IO, 0.854s, 2009 2,361,281
7,116,346 PNC Mortgage Securities Corp. Ser. 97-6,
Class A2, 6.6s, 2027 7,093,830
1,443,019 Prudential Home Mortgage Securities Ser. 93-57,
Class A4, 5.9s, 2023 1,421,316
6,800,000 Residential Mortgage Securities Ser. 8, Class M, FRB,
7.202s, 2038 9,919,745
6,121,850 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 5,976,884
12,790,000 Starwood Asset Receivables Trust Ser. 00-1, Class E,
9.372s, 2005 12,845,956
13,160,132 Structured Asset Security Corp. Ser. 98-RF2, 8.58s, 2028 13,470,645
-------------
Total Collateralized Mortgage Obligations
(cost $460,924,550) $ 440,800,717
<CAPTION>
PREFERRED STOCKS (3.0%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
76,002 AmeriKing, Inc. 3.25 cum. pfd. (PIK) $ 304,008
2,182 Benedek Communications Corp. 11.50 pfd. (PIK) 1,178,280
130,000 CGA Group, Ltd. 144A Ser. A, 13.75 pfd. (PIK) 3,510,000
139,570 Chevy Chase Preferred Corp. Ser. A, 5.188 pfd. 7,118,070
19,700 Chevy Chase Savings Bank, Inc. 3.25 pfd. 502,350
37,778 Citadel Broadcasting Co. Ser. B, 13.25 cum. pfd. (PIK) 4,250,025
117,505 CSC Holdings, Inc. Ser. M, 11.125 cum. pfd. (PIK) 12,602,412
10,000 Decrane Aircraft Holdings 16.00 pfd. (PIK) 1,000,000
219,600 Diva Systems Corp. Ser. C, 6.00 cum. pfd. 1,811,700
68,400 Doane Pet Care Enterpris. 7.125 pfd. 2,736,000
10,256 Dobson Communications 13.00% pfd. (PIK) 9,691,920
2,350 First Republic Capital Corp.144A, 10.50% pfd. 1,985,750
172,935 Fitzgeralds Gaming Corp. zero % cum. pfd. 1,729
2,915 Fresenius Medical Capital Trust I Ser. D, 9.00% company
guaranty, pfd. (Germany) 2,893,138
4,160 Fresenius Medical Capital Trust II 7.875% company
guaranty, pfd. (Germany) 3,910,400
272,400 Golden State Bancorp Ser. A, 2.281 pfd. 6,333,300
4,968 Granite Broadcasting 12.75 cum. pfd. (PIK) 3,229,200
7,233 ICG Holdings, Inc. 14.25% pfd. (Canada) (PIK) 144,660
2,425 ICG Holdings, Inc. 14.00% pfd. (Canada) (PIK) 48,500
6,433 Intermedia Communications Ser. B, 13.50% pfd. (PIK) 6,111,312
4,916 Nextel Communications, Inc. 13.00% cum. pfd. (PIK) 5,260,120
1,316 Nextel Communications, Inc. Ser. E, 11.125% pfd. (PIK) 1,269,940
124,988 NEXTLINK Communications, Inc. 7.00 cum. pfd. 5,624,460
3,573 NEXTLINK Communications, Inc. Ser. B, 13.50% pfd. (PIK) 2,751,210
1,042 Paxson Communications Corp. 144A 13.25% cum. pfd. (PIK) 10,211,600
4 Paxson Communications Corp. 12.50% pfd.(PIK) 4,160
660 Pegasus Communications Corp. Ser. A, 12.75% cum. pfd. 686,400
11,945 Public Service Co. of New Hampshire 2.651 1st mtge. pfd. 301,611
4,098 R&B Falcon Corp. 13.875% cum. pfd. (PIK) 5,245,734
4,813 Rural Cellular Corp. 12.25% pfd. (PIK) 4,091,050
-------------
Total Preferred Stocks (cost $124,518,537) $ 104,809,039
BRADY BONDS (2.9%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 2,973,600 Argentina (Republic of) deb. FRB 6.688s, 2005 $ 2,720,844
10,195,000 Argentina (Republic of) bonds, stepped-coupon
Ser. L-GP, 6s, 2023 6,881,625
41,776,816 Brazil (Federal Republic of) bonds FRB 8s, 2014 (POR) 31,959,265
6,380,000 Bulgaria (Government of) FRB Ser. A, 7.063s, 2024 4,880,700
1,880,000 Bulgaria (Government of) deb. Ser. PDI, FRB, 7.063s, 2011 1,428,800
15,375,000 Bulgaria (Government of) Ser. A, FLIRB, 3s, 2012 11,146,875
32,180,000 United Mexican States sec. Ser. W-B, 6 1/4s, 2019 28,682,034
11,071,340 Venezuela (Republic of) deb. Ser. DL, FRB, 7s, 2007 9,480,388
7,775,000 Venezuela (Republic of) Ser. W-A, 6 3/4s, 2020 5,753,500
-------------
Total Brady Bonds (cost $97,929,044) $ 102,934,031
<CAPTION>
ASSET-BACKED SECURITIES (1.6%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 36,115,000 Conseco Finance Securitization Ser. 00-4, Class A6,
8.31s, 2032 $ 36,859,691
14,532,755 First Plus Ser. 98-A, Class A, 8 1/2s, 2023 10,822,361
7,707,249 Structured Asset Security Corp. 8.712s, 2027 7,916,802
-------------
Total Asset-Backed Securities (cost $58,863,755) $ 55,598,854
<CAPTION>
UNITS (0.7%) (a)
NUMBER OF UNITS VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
2,960 Australis Media, Ltd. units 15 3/4s, 2003 (In default)
(Australia) (NON) $ 3
6,790 CFW Communications Co. 144A units 13s, 2010 6,314,700
2,160 Colo.com 144A units 13 7/8s, 2010 2,203,200
5,340 Horizon Pcs., Inc. units stepped-coupon zero %
(14s, 10/1/05), 2010 (STP) 2,723,400
4,410 iPCS, Inc. units stepped-coupon zero % (14s 7/15/05), 2010 2,293,200
4,450 Jostens, Inc. units 12 3/4s, 2010 4,583,500
6,600 Pegasus Shipping 144A units stepped-coupon zero %
(14 1/2s, 12/20/03), 2008 (STP) 297,000
2,480 Railamerica Transportation Corp. units sr. sub. notes
12 7/8s, 2010 2,331,200
2,890 Stone Container Corp. units 12 1/4s, 2002 2,918,900
3,945 XCL, Ltd. units sr. sec. notes 13 1/2s, 2004 (In default) (NON) 710,100
23,198 XCL, Ltd. 144A units cum. pfd. zero % (PIK) 11,599
-------------
Total Units (cost $36,900,320) $ 24,386,802
<CAPTION>
COMMON STOCKS (0.5%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
185,581 360Networks, Inc. 144A (Canada) (NON) $ 3,154,877
1,750 AmeriKing, Inc. (NON) 17,500
70,930 Aurora Foods, Inc. (NON) 239,389
1,289,757 Celcaribe S.A. (Colombia) (NON) 161,220
223,713 Fitzgeralds Gaming Corp. (NON) (AFF) 2,237
11,244 MGC Communications, Inc. (NON) 98,034
844 Mothers Work, Inc. (NON) 8,124
900 Paging Do Brazil Holdings Co., LLC 144A Class B, (Brazil) (NON) 9
1,942 Premium Holdings (L.P.) 144A (acquired various dates from
1/4/94 to 12/15/99, cost 126,599) (NON) (RES) 27,189
9,780 PSF Holdings Inc. LLC 144A Class A (NON) (AFF) 13,719,549
2,872 RSL Communications, Ltd., Class A (NON) 5,744
73,800 Spanish Broadcasting System, Inc. (NON) 876,375
-------------
Total Common Stocks (cost $37,859,980) $ 18,310,247
<CAPTION>
PURCHASED OPTIONS OUTSTANDING (0.5%) (a) EXPIRATION DATE/
CONTRACT AMOUNT STRIKE PRICE VALUE
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$7,100,000,000 Japanese Government Bond
10-year (call) Dec 00/133.26 JPY $ 18,027,678
5,000,000 North American Van Lines (put) Oct 00/93 USD 39,750
34,873,418 Japanese Government Bond future
contracts (JP Morgan) (call) Oct 00/110.6 USD 19,459
35,090,416 Japanese Government Bond future
contracts (Merril Lynch) (call) Oct 00/110.6 USD 21,054
-------------
Total Purchased Options Outstanding
(cost $19,212,589) $ 18,107,941
<CAPTION>
CONVERTIBLE BONDS AND NOTES (0.4%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 12,250,000 Cybernet Internet Services Intl., Inc. 144A cv. sr. disc.
notes stepped-coupon zero %, (13s, 8/15/04), 2009 (STP) $ 5,267,500
6,815,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 3,168,975
3,660,000 HEALTHSOUTH Corp. cv. sub. deb. 3 1/4s, 2003 3,046,950
2,360,000 Parker Drilling Corp. cv. sub. notes 5 1/2s, 2004 2,000,100
2,500,000 Waste Management, Inc. cv. sub. notes 4s, 2002 2,325,000
-------------
Total Convertible Bonds and Notes (cost $18,011,747) $ 15,808,525
<CAPTION>
CONVERTIBLE PREFERRED STOCKS (0.4%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
10,000 Global Crossing, Ltd. 7.00% cv. cum.pfd. (Bermuda) $ 1,985,000
13,200 Global Crossing, Ltd. 6.75% cv. cum. pfd. (Bermuda) 3,304,126
137,070 Global Telesystems Group, Inc. 144A 3.625 cv. cum. pfd. 1,422,101
6,030 Interact Systems, Inc. 14.00% cv. cum. pfd. 60
27,900 LTV Corp. (The) 144A 4.125 cv. pfd. 641,700
273 Paxson Communications Corp. 144A 9.75% cv. pfd. (PIK) 2,648,100
121,000 PsiNet, Inc. 144A 3.50 cv. pfd. 2,072,125
819 World Access, Inc. 144A Ser. D, zero %, cv. pfd. 712,530
4,586 XCL, Ltd 144A Ser. A, 9.50% cv. cum. pfd. 2,293
-------------
Total Convertible Preferred Stocks (cost $22,117,786) $ 12,788,035
<CAPTION>
WARRANTS (0.2%) (a) (NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
66 Anker Coal Group, Inc. 144A 10/28/09 $ 1
5,990 Asia Pulp & Paper Co., Ltd.144A 3/15/05 1
3,630 Bestel SA de CV (Mexico) 5/15/05 435,600
3,630 Birch Telecommunications, Inc. 144A (PIK) 6/15/08 363,000
5,612 Carrier1 Intl. SA 2/19/09 1,403,000
28,657 CellNet Data Systems, Inc. 10/1/07 29
130,000 CGA Group, Ltd. 144A 2/11/07 1,300
12,400 Comunicacion Cellular 144A (Colombia) 11/15/03 24,800
4,480 Dayton Superior Corp. 6/15/09 89,600
80 Decrane Aircraft Holdings 9/30/08 1
10,155 Destia Communications 144A 7/15/07 456,975
4,650 Diva Systems Corp. 5/15/06 2,650,500
32,194 Diva Systems Corp. 3/1/08 531,201
4,250 Epic Resorts 6/15/05 43
4,820 Firstworld Communication Corp. 4/15/08 96,400
5,350 Globalstar Telecommunications 2/15/04 5,350
2,000 Huntsman Packaging Corp. 144A 6/1/10 0
65,538 ICG Communications 10/15/05 65,538
6,030 Interact Systems, Inc. 8/1/03 60
6,030 Interact Systems, Inc. 144A 12/15/09 60
2,780 International Wireless
Communications Holdings 144A 8/15/01 3
84,592 Intira Corp. Class A 2/1/10 8
29,070 Intira Corp. Class B 2/1/10 3
6,500 Iridium World Com 144A 7/15/05 1
9,460 KMC Telecommunications Holdings, Inc. 4/15/08 28,380
8,835 Knology Holdings 10/22/07 53,010
5,010 Maxcom Telecomunicaciones SA
de CV 144A (Mexico) 4/1/07 50
14,715 McCaw International, Ltd. 4/15/07 294,300
4,350 Mediq, Inc. 144A 6/1/09 44
1,550 Metronet Communications 144A 8/15/07 131,750
470 Motient Corp. 144A 4/1/08 17,860
2,510 Onepoint Communications, Inc. 6/1/08 200,800
4,250 Orbital Imaging Corp. 144A 3/1/05 21,250
8,485 Orion Network Systems 1/15/07 44,546
13,800 Pagemart, Inc. 144A 12/31/03 158,700
7,360 Paxson Communications Corp. 144A 6/30/03 40,480
4,390 Raintree Resort 144A 12/1/04 44
3,980 Signature Brands, Ltd. 8/15/02 40
8,690 Startec Global Communications Corp. 5/15/08 8,690
2,160 Sterling Chemicals Holdings 8/15/08 8,640
2,980 Telehub Communications Corp. 7/31/05 1,490
8,070 Ubiquitel, Inc. 144A 4/15/10 322,800
14,235 UIH Australia/Pacific, Inc. 144A 5/15/06 427,050
110 Versatel Telecom NV (Netherlands) 5/15/08 28,600
1,000,580 Wright Medical Technology, Inc. 144A 6/30/03 10
2,750 XM Satellite Radio Holdings, Inc. 144A 3/15/10 522,500
--------------
Total Warrants (cost $6,970,948) $ 8,434,508
<CAPTION>
SHORT-TERM INVESTMENTS (6.8%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 25,000,000 Park Avenue Receivables for an effective yield of 6.52%,
October 17, 2000 $ 24,927,556
30,000,000 Sheffield Receivables Corp. for an effective yield of 6.52%,
October 6, 2000 29,972,875
65,358,000 Interest in $65,358,000 repurchase agreement dated
September 29, 2000 with Morgan (J.P.) & Co., Inc.due
October 2, 2000 with respect to various U.S. Treasury
obligations -- maturity value of $65,394,219 for an
effective yield of 6.65% 65,358,000
47,935,000 Interest in $789,642,000 joint repurchase agreement dated
September 29, 2000 with Morgan (J.P.) & Co., Inc.
due October 2, 2000 with respect to various U.S. Treasury
obligations -- maturity value of $47,961,564 for an
effective yield of 6.65% 47,935,000
71,815,000 Interest in $800,000,000 joint repurchase agreement
dated September 29, 2000 with S.B.C. Warburg, Inc.
due October 2, 2000 with respect to various U.S. Treasury
obligations -- maturity value of $71,854,797 for an
effective yield of 6.65% 71,815,000
--------------
Total Short-Term Investments (cost $240,008,431) $ 240,008,431
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $3,989,970,382) (b) $3,579,267,226
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $3,552,461,565.
(b) The aggregate identified cost on a tax basis is $3,998,770,886,
resulting in gross unrealized appreciation and depreciation of
$70,111,537 and $489,615,197, respectively, or net unrealized
depreciation of $419,503,660.
(NON) Non-income-producing security.
(STP) The interest rate and date shown parenthetically represent the new
interest rate to be paid and the date the fund will begin receiving
interest at this rate.
(POR) A portion of the income will be received in additional securities.
(PIK) Income may be received in cash or additional securities at the
discretion of the issuer.
(AFF) Affiliated Companies (Note 5).
(SEG) A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at
September 30, 2000.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at September 30, 2000
was $27,189 or less than 0.1% of net assets.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
TBA after the name of a security represents to be announced
securities (Note 1).
FLIRB represents Front Loaded Interest Reduction Bond.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate
Notes (FRN) are the current interest rates shown at September 30, 2000,
which are subject to change based on the terms of the security.
DIVERSIFICATION BY COUNTRY
Distribution of investments by country of issue at September 30, 2000:
(as percentage of Market Value)
Argentina 1.0%
Brazil 1.1
Canada 3.1
Denmark 2.0
Germany 1.6
Greece 1.2
Mexico 1.0
Russia 1.3
United Kingdom 3.1
United States 79.6
Others 5.0
------
Total 100.0%
------------------------------------------------------------------------------
Forward Currency Contracts to Buy at September 30, 2000
(aggregate face value $621,773,326)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
------------------------------------------------------------------------------
Australian Dollars $ 80,170,597 $84,910,744 12/20/00 $ (4,740,147)
Canadian Dollars 26,034,337 26,444,498 12/20/00 (410,161)
Euro Dollars 262,607,259 264,220,771 12/20/00 (1,613,512)
Japanese Yen 35,905,287 36,177,886 10/16/00 (272,599)
Japanese Yen 173,743,168 179,125,851 12/20/00 (5,382,683)
Swedish Kronas 21,303,779 21,457,712 12/20/00 (153,933)
Swiss Francs 9,453,991 9,435,864 12/20/00 18,127
------------------------------------------------------------------------------
$(12,554,908)
------------------------------------------------------------------------------
Forward Currency Contracts to Sell at September 30, 2000
(aggregate face value $706,342,118)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
------------------------------------------------------------------------------
Australian Dollars $ 2,348,583 $2,385,681 12/20/00 $ 37,098
British Pounds 107,559,847 105,877,896 12/20/00 (1,681,951)
Canadian Dollar 100,935,643 102,832,709 12/20/00 1,897,066
Danish Krone 64,905,688 65,792,680 12/20/00 886,992
Euro Dollars 201,361,178 202,598,639 12/20/00 1,237,461
Japanese Yen 196,786,774 203,061,907 12/20/00 6,275,133
New Zealand
Dollars 22,582,532 23,792,606 12/20/00 1,210,074
------------------------------------------------------------------------------
$ 9,861,873
------------------------------------------------------------------------------
Futures Contracts Outstanding at September 30, 2000
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
------------------------------------------------------------------------------
Euribor Future
(Short) $ 7,112,141 $ 7,109,922 Jun-01 $ (2,219)
Euro-bonds (Short) 60,010,586 59,913,368 Dec-00 (97,218)
Euro Dollars 90
day (Long) 7,100,893 7,098,563 Jun-02 2,330
Euroyen (Short) 48,966,537 48,949,176 Sep-01 (17,361)
Gilt (Short) 12,723,392 12,626,493 Dec-00 (96,899)
Libor Future 90
day (Long) 17,647,874 17,626,917 Jun-02 20,957
Libor Future 90
day (Long) 5,885,137 5,880,245 Mar-02 4,892
Libor Future 90
day (Short) 5,890,791 5,888,773 Mar-01 (2,018)
Libor Future 90
day (Short) 17,668,603 17,656,897 Jun-01 (11,706)
U.S. Treasury
Bonds (Long) 8,681,750 8,830,749 Dec-00 (148,999)
U.S. Treasury
Bonds 10 year
(Long) 74,362,313 74,226,046 Dec-00 136,267
------------------------------------------------------------------------------
$(211,974)
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2000
<S> <C>
Assets
-------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $3,989,970,382) (Note 1) $3,579,267,226
-------------------------------------------------------------------------------------------------
Foreign currency (cost $ 2,292,362) 2,292,022
-------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 75,830,321
-------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 24,203,799
-------------------------------------------------------------------------------------------------
Receivable for securities sold 41,275,867
-------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 11,561,951
-------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 528,032
-------------------------------------------------------------------------------------------------
Total assets 3,734,959,218
Liabilities
-------------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 1,221,873
-------------------------------------------------------------------------------------------------
Payable for variation margin 138,777
-------------------------------------------------------------------------------------------------
Distributions payable to shareholders 77,806
-------------------------------------------------------------------------------------------------
Payable for securities purchased 146,134,962
-------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 9,314,511
-------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 4,913,174
-------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 635,095
-------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 204,537
-------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 7,152
-------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 2,263,516
-------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 14,254,986
-------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 3,104,479
-------------------------------------------------------------------------------------------------
Other accrued expenses 226,785
-------------------------------------------------------------------------------------------------
Total liabilities 182,497,653
-------------------------------------------------------------------------------------------------
Net assets $3,552,461,565
Represented by
-------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $4,457,934,051
-------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (67,212,575)
-------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (424,195,457)
-------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and
liabilities in foreign currencies (414,064,454)
-------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $3,552,461,565
Computation of net asset value and offering price
-------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,285,717,172 divided by 126,913,292 shares) $10.13
-------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $10.13)* $10.64
-------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($1,214,668,422 divided by 120,436,125 shares)** $10.09
-------------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($12,440,985 divided by 1,231,095 shares)** $10.11
-------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,022,624,505 divided by 101,384,596 shares) $10.09
-------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $10.09)* $10.43
-------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per class Y share
($17,010,481 divided by 1,676,571 shares) $10.15
-------------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000
or more and on group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year ended September 30, 2000
<S> <C>
Investment income:
-------------------------------------------------------------------------------------------
Interest $ 356,856,923
-------------------------------------------------------------------------------------------
Dividends 15,961,108
-------------------------------------------------------------------------------------------
Total investment income 372,818,031
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 21,093,229
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 4,313,759
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 83,251
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 29,253
-------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 3,453,533
-------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 14,639,191
-------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 93,596
-------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 5,021,510
-------------------------------------------------------------------------------------------
Other 1,260,424
-------------------------------------------------------------------------------------------
Total expenses 49,987,746
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (931,077)
-------------------------------------------------------------------------------------------
Net expenses 49,056,669
-------------------------------------------------------------------------------------------
Net investment income 323,761,362
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (148,359,243)
-------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 6,552,521
-------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (32,690,414)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (1,726,109)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures
during the year (39,920,650)
-------------------------------------------------------------------------------------------
Net loss on investments (216,143,895)
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 107,617,467
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year ended September 30
---------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 323,761,362 $ 362,221,857
--------------------------------------------------------------------------------------------------
Net realized loss on investments and
foreign currency transactions (174,497,136) (196,140,309)
--------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments
and assets and liabilities in foreign currencies (41,646,759) (166,068,998)
--------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 107,617,467 12,550
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income
Class A (119,435,246) (138,363,215)
--------------------------------------------------------------------------------------------------
Class B (117,128,256) (143,702,788)
--------------------------------------------------------------------------------------------------
Class C (734,624) (190,341)
--------------------------------------------------------------------------------------------------
Class M (85,286,799) (78,578,491)
--------------------------------------------------------------------------------------------------
Class Y (1,176,437) (1,387,021)
--------------------------------------------------------------------------------------------------
In excess of net investment income
Class A (5,087,333) (2,769,429)
--------------------------------------------------------------------------------------------------
Class B (4,989,066) (2,876,304)
--------------------------------------------------------------------------------------------------
Class C (31,291) (3,810)
--------------------------------------------------------------------------------------------------
Class M (3,632,784) (1,572,799)
--------------------------------------------------------------------------------------------------
Class Y (50,109) (27,762)
--------------------------------------------------------------------------------------------------
From return of capital
Class A (521,976) (857,766)
--------------------------------------------------------------------------------------------------
Class B (511,895) (890,868)
--------------------------------------------------------------------------------------------------
Class C (3,211) (1,180)
--------------------------------------------------------------------------------------------------
Class M (372,735) (487,138)
--------------------------------------------------------------------------------------------------
Class Y (5,141) (8,599)
--------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (535,275,712) (433,837,511)
--------------------------------------------------------------------------------------------------
Total decrease in net assets (766,625,148) (805,542,472)
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 4,319,086,713 5,124,629,185
--------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $67,212,575 and
$99,104, respectively) $3,552,461,565 $4,319,086,713
--------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS A
-----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.77 $11.66 $12.70 $12.29 $11.99
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .92(c) .91(c) .99(c) .89(c) .89
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.61) (.87) (1.17) .39 .30
-----------------------------------------------------------------------------------------------------
Total from
investment operations .31 .04 (.18) 1.28 1.19
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.91) (.91) (.70) (.87) (.89)
-----------------------------------------------------------------------------------------------------
In excess of net
investment income (.04) (.01) -- -- --
-----------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- (.16) -- --
-----------------------------------------------------------------------------------------------------
From return of capital --(d) (.01) -- -- --
-----------------------------------------------------------------------------------------------------
Total distributions (.95) (.93) (.86) (.87) (.89)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.13 $10.77 $11.66 $12.70 $12.29
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 2.96 0.31 (1.67) 10.86 10.35
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,285,717 $1,506,532 $1,911,024 $2,104,971 $1,845,901
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .94 .94 .97 .99 1.02
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 8.73 8.04 7.88 7.17 7.32
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 142.85 142.29 188.75 250.93 304.39
-----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(d) Amount represents less than $.01 per share.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS B
-----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.72 $11.61 $12.65 $12.24 $11.95
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .83(c) .82(c) .89(c) .79(c) .80
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.59) (.87) (1.17) .40 .29
-----------------------------------------------------------------------------------------------------
Total from
investment operations .24 (.05) (.28) 1.19 1.09
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.83) (.82) (.60) (.78) (.80)
-----------------------------------------------------------------------------------------------------
In excess of net
investment income (.04) (.01) -- -- --
-----------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- (.16) -- --
-----------------------------------------------------------------------------------------------------
From return of capital --(d) (.01) -- -- --
-----------------------------------------------------------------------------------------------------
Total distributions (.87) (.84) (.76) (.78) (.80)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.09 $10.72 $11.61 $12.65 $12.24
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 2.30 (0.47) (2.42) 10.08 9.47
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,214,668 $1,722,284 $2,174,770 $2,366,410 $2,135,148
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.69 1.69 1.72 1.74 1.77
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.96 7.29 7.13 6.42 6.57
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 142.85 142.29 188.75 250.93 304.39
-----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(d) Amount represents less than $.01 per share.
</TABLE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS C
--------------------------------------------------------------
For the period
Per-share Year ended Feb. 1, 1999+
operating performance Sept. 30 to Sept. 30
--------------------------------------------------------------
2000 1999
--------------------------------------------------------------
Net asset value,
beginning of period $10.75 $11.51
--------------------------------------------------------------
Investment operations
--------------------------------------------------------------
Net investment income (c) .84 .59
--------------------------------------------------------------
Net realized and unrealized
loss on investments (.61) (.75)
--------------------------------------------------------------
Total from
investment operations .23 (.16)
--------------------------------------------------------------
Less distributions:
--------------------------------------------------------------
From net
investment income (.83) (.59)
--------------------------------------------------------------
In excess of net
investment income (.04) (.01)
--------------------------------------------------------------
From net realized gain
on investments -- --
--------------------------------------------------------------
From return of capital (d) -- --
--------------------------------------------------------------
Total distributions (.87) (.60)
--------------------------------------------------------------
Net asset value,
end of period $10.11 $10.75
--------------------------------------------------------------
Ratios and supplemental data
--------------------------------------------------------------
Total return at
net asset value (%)(a) 2.22 (1.40)*
--------------------------------------------------------------
Net assets, end of period
(in thousands) $12,441 $6,301
--------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.69 1.12*
--------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 8.07 5.00*
--------------------------------------------------------------
Portfolio turnover (%) 142.85 142.29
--------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(d) Amount represents less than $.01 per share.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS M
-----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.73 $11.62 $12.67 $12.27 $11.97
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .88(c) .87(c) .96(c) .82(c) .86
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.59) (.86) (1.18) .43 .31
-----------------------------------------------------------------------------------------------------
Total from
investment operations .29 .01 (.22) 1.25 1.17
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.89) (.87) (.67) (.85) (.87)
-----------------------------------------------------------------------------------------------------
In excess of net
investment income (.04) (.02) -- -- --
-----------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- (.16) -- --
-----------------------------------------------------------------------------------------------------
From return of capital --(d) (.01) -- -- --
-----------------------------------------------------------------------------------------------------
Total distributions (.93) (.90) (.83) (.85) (.87)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.09 $10.73 $11.62 $12.67 $12.27
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 2.74 0.09 (1.97) 10.59 10.12
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,022,625 $1,066,821 $1,019,477 $513,351 $46,327
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.19 1.19 1.22 1.24 1.28
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 8.48 7.81 7.69 6.88 7.09
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 142.85 142.29 188.75 250.93 304.39
-----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(d) Amount represents less than $.01 per share.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS Y
-----------------------------------------------------------------------------------------------------
For the period
Per-share July 1, 1996+
operating performance Year ended September 30 to Sept. 30
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.78 $11.66 $12.70 $12.29 $12.07
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .92(c) .93(c) 1.03(c) .93(c) .24
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.57) (.86) (1.18) .38 .20
-----------------------------------------------------------------------------------------------------
Total from
investment operations .35 .07 (.15) 1.31 .44
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.94) (.93) (.73) (.90) (.22)
-----------------------------------------------------------------------------------------------------
In excess of net
investment income (.04) (.01) -- -- --
-----------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- (.16) -- --
-----------------------------------------------------------------------------------------------------
From return of capital --(d) (.01) -- -- --
-----------------------------------------------------------------------------------------------------
Total distributions (.98) (.95) (.89) (.90) (.22)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.15 $10.78 $11.66 $12.70 $12.29
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 3.29 0.63 (1.40) 11.14 3.70*
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $17,010 $17,149 $19,358 $19,763 $2,662
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .69 .69 .72 .74 .19*
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 8.97 8.27 8.15 7.29 1.95*
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 142.85 142.29 188.75 250.93 304.39
-----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) The ratio of expenses to average net assets includes amounts paid
through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(d) Amount represents less than $.01 per share.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
Note 1
Significant accounting policies
Putnam Diversified Income Trust (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund seeks high current income
consistent with preservation of capital by allocating its investments
among the U.S. government sector, high yield sector and international
sector of the fixed-income securities market.
The fund offers class A, class B, class C, class M and class Y shares.
Class A shares are sold with a maximum front-end sales charge of 4.75%.
Class B shares, which convert to class A shares after approximately
eight years, do not pay a front-end sales charge but pay a higher
ongoing distribution fee than class A shares, and are subject to a
contingent deferred sales charge, if those shares are redeemed within
six years of purchase. Class C shares are subject to the same fees and
expenses as class B shares, except that class C shares have a one-year
1.00% contingent deferred sales charge and do not convert to class A
shares. Class M shares are sold with a maximum front end sales charge of
3.25% and pay an ongoing distribution fee that is higher than class A
shares but lower than class B and class C shares. Class Y shares, which
are sold at net asset value, are generally subject to the same expenses
as class A, class B, class C and class M shares, but do not bear a
distribution fee. Class Y shares are sold to defined contribution plans
that invest at least $150 million in a combination of Putnam funds and
other accounts managed by affiliates of Putnam Investment Management,
Inc. ("Putnam Management"), the fund's manager, a wholly-owned
subsidiary of Putnam Investments, Inc.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if that fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
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 generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities of 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 Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sales price on its principal exchange, or if no sales
are reported -- as in the case of some securities traded
over-the-counter -- the last reported bid price. Securities quoted in
foreign currencies are translated into U.S. dollars at the current
exchange rate. Short-term investments having remaining maturities of 60
days or less are stated at amortized cost, which approximates market
value. Other investments, including restricted securities, are stated at
fair value following procedures approved by the Trustees. Market
quotations are not considered to be readily available for certain debt
obligations; such investments are stated at fair value on the basis of
valuations furnished by a pricing service or dealers, approved by the
Trustees, which determine valuations for normal institutional-size
trading units of such securities using methods based on market
transactions for comparable securities and variable relationships
between securities that are generally recognized by institutional
traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances 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 one or more
repurchase agreements and/or short-term money market instruments.
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 accounted for on the trade date (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. Dividend income is
recorded on the ex-dividend date except that certain dividends from
foreign securities are recorded as soon as the fund is informed of the
ex-dividend date. Non-cash dividends, if any, are recorded at the fair
market value of the securities received. Discounts on zero coupon bonds,
original issue discount bonds, stepped-coupon bonds and payment in kind
bonds are accreted according to the yield-to-maturity basis.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued 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 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.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, 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).
The U.S. dollar value of forward currency contracts is determined using
current forward currency exchange rates supplied by a quotation service.
The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is "marked to market" daily and the change
in market value is recorded as an unrealized gain or loss. When the
contract is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened
and the value at the time it was closed. The fund could be exposed to risk
if the value of the currency changes unfavorably, if the counterparties to
the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
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. 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.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. 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.
H) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase 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 fluctuate
more than 0.01% 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 in 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 the current market value of the
underlying securities, according to the procedures described under
"Security valuation" above.
Although the fund will generally enter into TBA purchase commitments
with the intention of acquiring securities for their 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.
I) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
September 30, 2000, the fund had no borrowings against the line of
credit.
J) 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 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 Internal Revenue Code of 1986, as amended. Therefore, no
provision has been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on income
and capital gains.
At September 30, 2000, the fund had a capital loss carryover of
approximately $320,062,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
-------------- ------------------
$22,379,000 September 30, 2006
71,604,000 September 30, 2007
226,079,000 September 30, 2008
K) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, 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 permanent
differences of losses on wash sale transactions, foreign currency gains
and losses, post-October loss deferrals, defaulted bond interest,
unrealized gains and losses on certain futures contracts, paydown gains
and losses on mortgage-backed securities, market discount, interest on
payment-in-kind securities and book accretion/amortization adjustment.
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, 2000, the fund reclassified $53,322,888 to increase distributions in
excess of net investment income and $1,943,837 to decrease
paid-in-capital, with a decrease to accumulated net realized losses of
$55,266,725. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management for management and investment advisory
services is paid 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 net assets, 0.60% of the next $500 million, 0.55% of the next
$500 million, 0.50% 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.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor
Services, a division of PFTC.
Under the subcustodian contract between the subcustodian bank and PFTC,
the subcustodian 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 subcustodian bank for the settlement of securities
purchased by the fund. At September 30, 2000, the payable to the
subcustodian bank represents the amount due for cash advance for the
settlement of a security purchased.
For the year ended September 30, 2000, fund expenses were reduced by
$931,077 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $2,724
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.
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. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Compensation of Trustees in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B, class C and class M shares pursuant to Rule 12b-1
under the Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Retail Management, Inc., a wholly-owned subsidiary of
Putnam Investments Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plans provide for payments by
the fund to Putnam Retail Management, Inc. at an annual rate up to
0.35%, 1.00%, 1.00% and 1.00% of the average net assets attributable to
class A, class B, class C and class M shares, respectively. The Trustees
have approved payment by the fund at an annual rate of 0.25%, 1.00%,
1.00% and 0.50% of the average net assets attributable to class A, class
B, class C and class M shares, respectively.
For the year ended September 30, 2000, Putnam Retail Management, Inc.,
acting as underwriter received net commissions of $215,260 and
$1,105,030 from the sale of class A and class M shares, respectively,
and received $2,898,745 and $4,653 in contingent deferred sales charges
from redemptions of class B and class C shares, respectively. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended September 30, 2000, Putnam Retail Management,
Inc., acting as underwriter received $11,918 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended September 30, 2000, cost of purchases and proceeds
from sales of investment securities other than U.S. government
obligations and short-term investments aggregated $3,003,161,418 and
$3,631,651,550, respectively. Purchases and sales of U.S. government
obligations aggregated $2,247,261,867 and $2,434,584,176, respectively.
Note 4
Capital shares
At September 30, 2000, there were an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended September 30, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 31,209,684 $ 327,959,754
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions: 8,434,622 88,642,757
---------------------------------------------------------------------------
39,644,306 416,602,511
Shares
repurchased (52,647,043) (554,877,895)
---------------------------------------------------------------------------
Net decrease (13,002,737) $(138,275,384)
---------------------------------------------------------------------------
Year ended September 30, 1999
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 23,185,937 $ 262,223,067
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions: 8,899,020 99,795,354
---------------------------------------------------------------------------
32,084,957 362,018,421
Shares
repurchased (56,040,869) (631,115,193)
---------------------------------------------------------------------------
Net decrease (23,955,912) $(269,096,772)
---------------------------------------------------------------------------
Year ended September 30, 2000
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 14,047,145 $ 144,153,768
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,532,328 82,176,597
---------------------------------------------------------------------------
21,579,473 226,330,365
Shares
repurchased (61,843.915) (649,096,342)
---------------------------------------------------------------------------
Net decrease (40,264,442) $(422,765,977)
---------------------------------------------------------------------------
Year ended September 30, 1999
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 20,095,147 $ 226,033,109
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 8,832,582 98,618,613
---------------------------------------------------------------------------
28,927,729 324,651,722
Shares
repurchased (55,520,167) (621,977,692)
---------------------------------------------------------------------------
Net decrease (26,592,438) $(297,325,970)
---------------------------------------------------------------------------
Year ended September 30, 2000
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 944,964 $ 9,918,628
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 53,989 564,212
---------------------------------------------------------------------------
998,953 10,482,840
Shares
repurchased (354,197) (3,709,857)
---------------------------------------------------------------------------
Net increase 644,756 $ 6,772,983
---------------------------------------------------------------------------
For the period February 1, 1999
(commencement of operations) to
September 30, 1999
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 698,506 $7,813,038
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 12,323 135,025
---------------------------------------------------------------------------
710,829 7,948,063
Shares
repurchased (124,490) (1,372,987)
---------------------------------------------------------------------------
Net increase 586,339 $6,575,076
---------------------------------------------------------------------------
Year ended September 30, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 41,470,953 $431,225,693
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 391,487 4,101,596
---------------------------------------------------------------------------
41,862,440 435,327,289
Shares
repurchased (39,930,463) (417,021,263)
---------------------------------------------------------------------------
Net increase 1,931,977 $ 18,306,026
---------------------------------------------------------------------------
Year ended September 30, 1999
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 65,331,032 $734,046,798
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 415,621 4,642,718
---------------------------------------------------------------------------
65,746,653 738,689,516
---------------------------------------------------------------------------
Shares
repurchased (53,993,131) (611,857,677)
---------------------------------------------------------------------------
Net increase 11,753,522 $126,831,839
---------------------------------------------------------------------------
Year ended September 30, 2000
---------------------------------------------------------------------------
Class Y Shares Amount
---------------------------------------------------------------------------
Shares sold 951,655 $ 9,861,047
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 115,508 1,231,689
---------------------------------------------------------------------------
1,067,163 11,092,736
Shares
repurchased (981,851) (10,406,096)
---------------------------------------------------------------------------
Net increase 85,312 $ 686,640
---------------------------------------------------------------------------
Year ended September 30, 1999
---------------------------------------------------------------------------
Class Y Shares Amount
---------------------------------------------------------------------------
Shares sold 684,770 $7,737,679
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 124,669 1,414,783
---------------------------------------------------------------------------
809,439 9,152,462
Shares
repurchased (877,835) (9,974,146)
---------------------------------------------------------------------------
Net decrease (68,396) $ (821,684)
---------------------------------------------------------------------------
Note 5
Transactions with Affiliated Companies
Transactions during the year with companies in which the fund owns at
least 5% of the voting securities were as follows:
Purchase Sales Dividend Market
Affiliates cost cost Income Value
-----------------------------------------------------------------------------
Name of affiliate
-----------------------------------------------------------------------------
Fitzgeralds Gaming Corp. $-- $-- $-- $ 2,237
PSF Holdings, Inc. LLC, Class A -- -- -- 13,719,549
-----------------------------------------------------------------------------
Totals $-- $-- $-- $13,721,786
Note 6
Change in independent
accountants (unaudited)
Based on the recommendation of the Audit Committee of the fund, the
Board of Trustees has determined not to retain PricewaterhouseCoopers
LLP as this funds' independent accountant and voted to appoint KPMG LLP
for the fund's fiscal year ended September 30, 2000. During the two
previous fiscal years, PricewaterhouseCoopers LLP audit reports
contained no adverse opinion or disclaimer of opinion; nor were its
reports qualified or modified as to uncertainty, audit scope, or
accounting principle. Further, in connection with its audits for the two
previous fiscal years and through July 24, 2000, there were no
disagreements between the fund and PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which if not resolved to the
satisfaction of PricewaterhouseCoopers LLP would have caused it to make
reference to the disagreements in its report on the financial statements
for such years.
FEDERAL TAX INFORMATION
(Unaudited)
The fund has designated 0.55% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
For the year ended September 30, 2000, a portion of the fund's
distribution represents a return of capital and is therefore not taxable
to shareholders.
The Form 1099 you receive in January 2001 will show the tax status of
all distributions paid to your account in calendar 2000.
WELCOME TO WWW.PUTNAMINVESTMENTS.COM
Now you can use your PC to get up-to-date information about your funds,
learn more about investing and retirement planning, and access market
news and economic outlooks from Putnam.
VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
* the benefits of investing with Putnam
* Putnam's money management philosophy
* complete fund information, daily pricing and long-term performance
* your current account value, portfolio value and transaction history
* the latest on new funds and other Putnam news
You can also read Putnam economist Dr. Robert Goodman's commentary and
Putnam's Capital Markets outlook, search for a particular fund by name
or objective, use our glossary to decode investment terms . . . and much
more.
The site can be accessed through any of the major online services
(America Online, CompuServe, Prodigy) that offer web access. Of course,
you can also access it via Netscape or Microsoft Internet Explorer,
using an independent Internet service provider.
New features will be added to the site regularly. So be sure to bookmark us at
http://www.putnaminvestments.com
THE PUTNAM FAMILY OF FUNDS
The following is a complete list of Putnam's open-end mutual funds.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Capital Opportunities Fund
Europe Growth Fund
Global Equity Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Century Growth Fund
New Opportunities Fund
OTC & Emerging Growth Fund
Research Fund
Tax Smart Equity Fund
Technology Fund
Vista Fund
Voyager Fund
Voyager Fund II
GROWTH AND INCOME FUNDS
Balanced Fund
Balanced Retirement Fund
Classic Equity Fund *
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
International Growth and Income Fund
New Value Fund
Small Cap Value Fund
Utilities Growth and Income Fund
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund
U.S. Government Income Trust
TAX-FREE INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund **
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK] **
California, New York
ASSET ALLOCATION FUNDS
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
* Formerly Putnam Growth and Income Fund II
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
** 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 funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
Check your account balances and current performance at
www.putnaminvestments.com.
FUND INFORMATION
WEB SITE
www.putnaminvestments.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management, Inc.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
KPMG LLP
TRUSTEES
John A. Hill, Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam, III
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Edward H. D'Alelio
Vice President
David L. Waldman
Vice President and Fund Manager
Richard A. Monaghan
Vice President
Richard G. Leibovitch
Vice President
John R. Verani
Vice President
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, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary and
Putnam's Quarterly Ranking Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' Web site:
www.putnaminvestments.com.
Not FDIC Insured, May Lose Value, No Bank Guarantee
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
---------------------
PRST STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminvestments.com
AN028-65466 075/387/803 11/00
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
----------------------------------------------------------------------------
Putnam Diversified Income Trust
Supplement to Annual Report dated 9/30/00
The following information has been prepared to provide class Y shareholders
with a performance overview specific to their holdings. Class Y shares are
offered exclusively to defined contribution plans investing $150 million or
more in one or more of Putnam's funds or private accounts. Performance of
class Y shares, which incur neither a front-end load, distribution fee, nor
contingent deferred sales charge, will differ from performance of class A,
B, C, and M shares, which are discussed more extensively in the annual
report.
ANNUAL RESULTS AT A GLANCE
----------------------------------------------------------------------------
Total return
for periods ended 9/30/00 NAV
1 year 3.29%
5 years 25.78
Annual average 4.69
10 years 125.20
Annual average 8.46
Life of fund (since class A inception, 10/3/88)
Annual average 7.73
Share value: NAV
9/30/99 $10.78
9/30/00 $10.15
----------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
12 $0.978 0.000 $0.978
----------------------------------------------------------------------------
Please note that past performance does not indicate future results. More
recent returns may be more or less than those shown. Returns shown for
class Y shares for periods prior to their inception are derived from the
historical performance of class A shares, adjusted to reflect the initial
sales charge currently applicable to class A shares. These returns have not
been adjusted to reflect differences in operating expenses which, for class
Y shares, are lower than the operating expenses applicable to class A
shares. All returns assume reinvestment of distributions at net asset value.
Investment return and principal value will fluctuate so your shares, when
redeemed, may be worth more or less than their original cost. See full
report for information on comparative benchmarks. If you have questions,
please consult your fund prospectus or call Putnam toll free at
1-800-752-9894.
