-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TCN8gqoR2em26KYOLy9IbnxxV8KvlA+/+yAieOCoyQmNRi1s7Q8tbbFuGXsJDBFB pBhxKOSAZN1v6RXloVEdLg== 0000088053-04-000181.txt : 20040310 0000088053-04-000181.hdr.sgml : 20040310 20040310123454 ACCESSION NUMBER: 0000088053-04-000181 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040310 EFFECTIVENESS DATE: 20040310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONTGOMERY STREET INCOME SECURITIES INC CENTRAL INDEX KEY: 0000067813 IRS NUMBER: 942192107 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-02340 FILM NUMBER: 04659473 BUSINESS ADDRESS: STREET 1: 101 CALIFORNIA ST STE 4100 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 1-800-349-4281 MAIL ADDRESS: STREET 1: 101 CALIFORNIA ST STE 4100 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 N-CSR 1 msi.htm ANNUAL REPORT Scudder Investments 

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM N-CSR

Investment Company Act file number 811-2341

                    MONTGOMERY STREET INCOME SECURITIES, INC.
                    -----------------------------------------
               (Exact Name of Registrant as Specified in Charter)

                       101 California Street, Suite 4100
                            San Francisco, CA 94111
                   -------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

        Registrant's Telephone Number, including Area Code: (617) 295-2663
                                                            --------------

                               Salvatore Schiavone
                             Two International Place
                           Boston, Massachusetts 02110
                     ---------------------------------------
                     (Name and Address of Agent for Service)

Date of fiscal year end:        12/31

Date of reporting period:       12/31/03



ITEM 1.  REPORT TO STOCKHOLDERS

Montgomery Street
Income Securities

Annual Report to Stockholders

December 31, 2003


Portfolio Management Review


In the following interview, Portfolio Manager Gary Bartlett discusses the recent market environment and strategy in managing Montgomery Street Income Securities during its most recent fiscal year ended December 31, 2003.

The investments of Montgomery Street Income Securities Inc. (the "fund") provided a total return based on net asset value (NAV) of 8.22% for its most recent fiscal year ended December 31, 2003.1 The return of the fund's NYSE-traded shares was 4.53% for the same period.

The total NAV return of the fund exceeded the return of the unmanaged Lehman Brothers Aggregate Bond Index, which posted a total return of 4.10% for the 12-month period.2 The fund underperformed the 12.70% average return of the Lipper Corporate Debt Funds BBB-Rated category for closed-end funds.3 However, the fund remains ahead of the average return of its peer group for the three-, five- and 10-year periods. The fund ranked 14, 7, 4 and 7 for the one- three-, five- and 10-year periods, respectively. There were 17 funds in the category for the one-year period and 14 funds for the three-, five- and 10-year periods.4 Rankings are based on the fund's total return with distributions reinvested. Past results are not necessarily indicative of future performance of the fund. Investment return and principal value will fluctuate.

1 Total investment returns reflect changes in net asset value per share during each period and assume that dividends and capital gain distributions, if any, were reinvested. These percentages are not an indication of the performance of a shareholder's investment in the funds based on market price.
2 The Lehman Brothers Aggregate Bond Index is a total return index including fixed-rate debt issues rated investment grade or better. It contains government, corporate and mortgage securities and is generally considered representative of the market for investment-grade bonds as a whole.
3 The Lipper Corporate Debt BBB-Rated Funds category is comprised of closed-end funds that invest primarily in corporate and government debt issues rated in the top four grades.
4 Source: Lipper Inc. Rankings are historical and do not guarantee future results.

The fund's market price stood at $18.55 as of December 31, 2003, compared to $19.02 at the close of 2002. The market price discount of the shares, as a percentage of NAV, was 5.5% on December 31, 2003. Shares of closed-end funds frequently trade at a discount to net asset value. The price of the fund's shares is determined by a number of factors, several of which are beyond the control of the fund. Therefore, the fund cannot predict whether its shares will trade at, below, or above net asset value.

For 2003, the fund paid quarterly dividends of $0.31, $0.31, $0.32 and $0.35 on April 30, July 31, October 31 and December 31, respectively. The December dividend was higher than the October dividend because of a special year-end dividend of $0.03 per share, which included income that had accumulated over the year. Future dividends may not include this special dividend.

Q: How did the bond market perform during 2003?

A: Bonds, which provided strong gains for investors during the previous three calendar years, again provided solid returns in 2003. US Treasury securities returned 2.24% for the period, supported during the first half of the year by mixed economic data as well as heightened geopolitical concerns leading up to war in Iraq. In May, Treasuries were boosted by the Federal Open Market Committee's warning concerning deflationary risks. The Federal Reserve Board's May statement eventually drove yields of 10-year Treasury notes to a 45-year intra-day low yield of 3.11% on June 13. However, yields subsequently climbed as the FOMC disappointed investors by cutting the fed funds rate by only a quarter of a percentage point at its June 25 meeting. Treasury yields continued to rise in the third quarter as the US economy began to show signs of an improvement, and remained range-bound in the fourth quarter.

Most of the so-called "spread sectors" of the bond market outperformed Treasuries during the year.5 Corporate bonds - especially lower quality corporates - were among the strongest fixed-income performers for 2003. Corporates as measured by the Lehman Brothers Credit Index outperformed Treasuries by 527 basis points (duration-adjusted excess returns). The Lehman Brothers Credit Index narrowed in spread versus Treasuries from 169 basis points at the start of the year to 89 basis points by year's end.

5 Spread sectors are the areas of the bond market that typically offer yields higher than Treasuries. "Spread" refers the difference in yield between the individual non-Treasury sectors compared with the yields of Treasury securities. Treasury securities are guaranteed by the full faith and credit of the US government as to timely payment of principal and interest.

The year 2003 was an extraordinary one due to the rally and rebound in lower-rated credits. Throughout the year, BBB-rated securities performed strongest within the investment-grade category, with spreads versus Treasuries narrowing from 259 to 127 basis points in 2003; within high yield, lower-rated bonds outperformed as the spread between single B-rated bonds and Treasuries narrowed from 848 to 456 basis points. Due to a difficult third quarter, mortgage-backed securities performed only marginally better than equal-duration Treasuries during 2003.

Q: How did the fund perform in 2003?

A: The fund's outperformance compared with its benchmark was due mainly to its holdings of lower-quality bonds, within both the investment grade and high yield components of the portfolio. While the Lehman Brothers Aggregate Bond Index does not hold high-yield bonds and contains only 11% of BBB-rated bonds, as of December 31 the fund held 18% of its assets in high-yield bonds and 16% in BBB-rated bonds. The fund's allocation to lower-quality bonds gave it a distinct performance advantage over its benchmark. At the same time, the fund's holdings continued to be of higher quality than those of many of its peers within the Lipper Closed-End Corporate Debt Funds BBB-Rated category. Thus, our maintenance of higher average portfolio quality compared with the fund's peers detracted from comparative performance versus its Lipper peer group. The fund's lower comparative risk profile versus its peers is by design, as we seek to avoid volatile year-over-year performance, and provide a more consistent level of return over the long term.

Q: How is the fund positioned?

A: Corporate bonds continue to constitute the fund's largest sector weighting, at 46% of assets as of December 31, 2003. As previously mentioned, our most significant shift in strategy during the period was our decision to increase the fund's allocation in credits rated BBB or below. With investors searching for higher yields, default rates declining and corporations removing

Treasury Bond Yield Curve (as of 12/31/02 and 12/30/03)

msi_g10k140


Source: Deutsche Asset Management

Performance is historical and does not guarantee future results.

debt from their balance sheets, we found a number of attractively valued bond issues within this area of the market. During the year, we added to the fund's positions in the electric utility, media/telecom and automotive sectors.

Sector Distribution

msi_pie130

[]

[]

[]

[]

Corporate Bonds
US Government Agency
Sponsored Pass-Throughs
US Government Backed
Asset Backed
 39%
23%

12%
8%

[]

[]

[]

[]

Foreign Bond - US$ Denominated
Municipal Investments
Cash Equivalents
CMO
 6%
6%
4%
2%

As of December 31, 2003.

Sector distribution is subject to change.

Quality Distribution


msi_pie120

[]

[]

[]

[]

[]

[]

[]

[]

AAA
AA
A
BBB
BB
B or below
Treasuries
Agency
 15%
2%
10%
16%
9%
9%
13%
26%


As of December 31, 2003.

Quality distribution is subject to change.

We also continue to hold positions in asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS), both of which offer the potential to earn extra return compared with Treasuries. Within this sector, our portfolio management and research staff seeks individual securities that offer relatively low levels of risk. Our focus on identifying ABS and CMBS issues that offer both attractive value and quality enabled the portfolio to generate solid performance from these sectors in 2003.

During the year, we also increased the fund's position in taxable municipal bonds. We often employ these bonds as a surrogate for government agency notes, since taxable municipal bonds offer a combination of high quality and attractive yield. Our position in this sector grew during the year as an increased supply of issuance, beginning with the $10 billion Illinois pension obligation issue in June, created opportunities within the sector.

The portfolio continues to be managed with leverage, which was approximately 21.6% of total assets as of December 31, 2003. This is achieved utilizing the mortgage roll market. The year 2003 proved to be an opportune period to use leverage, as interest rates were little changed, the yield curve remained historically steep and credit spreads tightened. The steep yield curve allows the fund to borrow at low short-term interest rates, and to reinvest the proceeds in higher yielding, longer maturity issues. At the mid-point of the year we reduced the fund's holdings in mortgage-backed securities as valuations became full relative to other fixed-income sectors, which reduced the fund's level of leverage and duration. The fund invests in individual bonds whose yields and market values fluctuate so that your investment may be worth more or less than its original cost. Yields will fluctuate in response to changing interest rates and may be affected by the prepayment of mortgage-backed securities. The fund's investments in foreign securities are subject to currency fluctuation, political climate and economic changes, and risk of loss of principal and interest. All of these factors may result in greater share price volatility.

The views expressed in this report reflect those of the portfolio manager only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions and should not be construed as a recommendation.

Fund shares are not FDIC-insured and are not deposits or other obligations of, or guaranteed by, any bank. Fund shares involve investment risk, including possible loss of principal.

Past performance is no guarantee of future results.

This report is sent to stockholders of Montgomery Street Income Securities, Inc. for their information. It is not a prospectus, circular, or representation intended for use in the purchase or sale of shares of the fund or of any securities mentioned in the report.



Other Information


Limited Share Repurchases

The fund is authorized to repurchase a limited number of shares of the fund's common stock from time to time when the shares are trading at less than 95% of their NAV. Repurchases are limited to a number of shares each calendar quarter approximately equal to the number of new shares issued under the fund's Dividend Reinvestment and Cash Purchase Plan with respect to income earned for the second preceding calendar quarter. There were 13,000 shares repurchased during the fourth quarter of 2003. Up to 13,000 shares may be repurchased during the first quarter of 2004.

Dividend Reinvestment and Cash Purchase Option

The fund maintains an optional Dividend Reinvestment and Cash Purchase Plan (the "Plan") for the automatic reinvestment of your dividends and capital gain distributions in the shares of the fund. Stockholders who participate in the Plan can also purchase additional shares of the fund through the Plan's voluntary cash investment feature. We recommend that you consider enrolling in the Plan to build your investment. The Plan's features, including the voluntary cash investment feature, are described beginning on page 37 of this report.


Investment Objectives


Investment Objectives

Your fund is a closed-end diversified management investment company registered under the Investment Company Act of 1940, investing and reinvesting its assets in a portfolio of selected securities. The fund's primary investment objective is to seek as high a level of current income as is consistent with prudent investment risks, from a diversified portfolio primarily of debt securities. Capital appreciation is a secondary objective.

Principal Investment Policies

Investment of your fund is guided by the following principal investment policies:

Under normal circumstances, the fund will invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in income producing securities.1

1 The fund will provide stockholders with at least 60 days' notice prior to making any changes to this 80% investment policy.

At least 70% of total assets must be invested in: straight debt securities (other than municipal securities) rated within the four highest grades assigned by Moody's Investors Service, Inc. or Standard & Poor's Corporation; bank debt of comparable quality; US government or agency securities; commercial paper; cash; cash equivalents; or Canadian government, provincial, or municipal securities (not in excess of 25% of total assets).

Up to 30% of total assets (the "30% basket") may be invested in US or foreign securities that are straight debt securities, whether or not rated, convertible securities and preferred stocks.

Not more than 25% of total assets may be invested in securities of any one industry (neither utility companies as a whole nor finance companies as a whole are considered an "industry" for the purposes of this limitation).

Not more than 5% of total assets may be invested in securities of any one issuer, other than US government or agency securities.

The fund may invest money pursuant to repurchase agreements so long as the fund is initially wholly secured with collateral consisting of securities in which the fund can invest under its investment objectives and policies. In addition, investment in repurchase agreements must not, at the time of any such loan, be as a whole more than 20% - and be as to any one borrower more than 5% - of the fund's total assets.

The fund may loan portfolio securities so long as the fund is continuously secured by collateral at least equal to the market value of the securities loaned. In addition, loans of securities must not, at the time of any such loan, be as a whole more than 10% of the fund's total assets.

The fund may borrow funds to purchase securities, provided that the aggregate amount of such borrowings may not exceed 30% of the fund's assets (including aggregate borrowings), less liabilities (excluding such borrowings).

The fund may enter into forward foreign currency sale contracts to hedge portfolio positions, provided, among other things, that such contracts have a maturity of one year or that at the time of purchase, the fund's obligations under such contracts do not exceed either the market value of portfolio securities denominated in the foreign currency or 15% of the fund's total assets.

Subject to adoption of Board guidelines, the fund may enter into interest rate futures contracts and purchase or write options on interest rate futures contracts, provided, among other things, that the fund's obligations under such instruments may not exceed the market value of the fund's assets not subject to the 30% basket.

New Investment Policies Effective December 31, 2003

On December 12, 2003, the Board approved certain amendments to the fund's investment policies:

Effective December 31, 2003, it is the intention of the fund to invest exclusively in non-voting securities. The fund's registration statement previously provided that the fund was authorized to exercise conversion rights, warrants or other rights to purchase common stocks or other equity securities. Henceforth, under normal circumstances, the fund does not intend to exercise conversion, exchange or other rights to purchase common stock or other equity securities, or otherwise to hold voting securities. In the unlikely event that the fund does come into possession of any voting securities, the fund intends to dispose of such securities as soon as it is reasonably practicable and prudent to do so.

In addition, the fund was authorized to invest in the common stocks of utility companies. In light of the fund's intention to invest exclusively in non-voting securities, the fund's ability to invest in common stocks of utility companies has been eliminated.


Investment Portfolio as of December 31, 2003



Principal
Amount ($)

Value ($)



Corporate Bonds 46.4%

Consumer Discretionary 7.6%
American Achieve Corp., 11.625%, 1/1/2007
140,000
 154,000
Bally Total Fitness Holdings, 144A, 10.5%, 7/15/2011
125,000
 125,625
Boca Resorts, Inc., 9.875%, 4/15/2009
220,000
 234,300
Buffets, Inc., 11.25%, 7/15/2010
180,000
 193,050
Carrols Corp., 9.5%, 12/1/2008
65,000
 65,975
Central Garden & Pet Co., 9.125%, 2/1/2013
90,000
 99,900
Choctaw Resort Development Enterprises, 9.25%, 4/1/2009
190,000
 206,150
Cinemark USA, Inc., 8.5%, 8/1/2008
155,000
 161,394
Circus & Eldorado, 10.125%, 3/1/2012
190,000
 197,125
Comcast Cable Communications:


6.375%, 1/30/2006

750,000
 807,411

6.875%, 6/15/2009

430,000
 484,755
Cox Communications, Inc., 7.5%, 8/15/2004
1,000,000
 1,033,435
CSC Holdings, Inc., 7.875%, 12/15/2007
580,000
 611,900
Dex Media East LLC/Financial, 12.125%, 11/15/2012
630,000
 774,900
Dex Media West LLC/Finance Co., 144A, 9.875%, 8/15/2013
250,000
 290,625
DIMON, Inc.:


144A, 7.75%, 6/1/2013

265,000
 272,950

Series B, 9.625%, 10/15/2011

580,000
 646,700
EchoStar DBS Corp., 144A, 6.375%, 10/1/2011
305,000
 312,625
El Pollo Loco, Inc., 144A, 9.25%, 12/15/2009
65,000
 65,813
Finlay Fine Jewelry Corp., 8.375%, 5/1/2008
300,000
 310,500
General Motors Corp., 8.25%, 7/15/2023
150,000
 170,311
Group 1 Automotive, Inc., 8.25%, 8/15/2013
130,000
 139,100
Herbst Gaming, Inc., 10.75%, 9/1/2008
400,000
 450,000
Host Marriott LP, 144A, 7.125%, 11/1/2013
200,000
 204,000
International Game Technology, 8.375%, 5/15/2009
335,000
 401,014
Intrawest Corp., 10.5%, 2/1/2010
170,000
 187,850
J.C. Penney Co., Inc., 6.875%, 10/15/2015
90,000
 94,613
Jacobs Entertainment Co., 11.875%, 2/1/2009
100,000
 112,000
Jafra Cosmetics International, Inc., 10.75%, 5/15/2011
225,000
 246,937
Kellwood Co., 7.625%, 10/15/2017
80,000
 84,200
Keystone Automotive Operation, 144A, 9.75%, 11/1/2013
65,000
 69,875
Krystal, Inc., 10.25%, 10/1/2007
65,000
 65,325
Laidlaw International, Inc., 144A, 10.75%, 6/15/2011
135,000
 152,550
Liberty Media Corp., Series A, 2.67%*, 9/17/2006
1,000,000
 1,010,870
Lin Television Corp., 144A, 6.5%, 5/15/2013
80,000
 80,100
Mediacom LLC, 7.875%, 2/15/2011
110,000
 110,000
Meritage Corp., 9.75%, 6/1/2011
50,000
 55,875
MGM Mirage, Inc., 6.0%, 10/1/2009
115,000
 118,162
Norcraft Co./Finance, 144A, 9.0%, 11/1/2011
60,000
 64,800
Penn National Gaming, Inc., 8.875%, 3/15/2010
60,000
 65,100
PRIMEDIA, Inc., 7.625%, 4/1/2008
230,000
 232,300
Remington Arms Co., 10.5%, 2/1/2011
190,000
 202,350
River Rock Entertainment, 144A, 9.75%, 11/1/2011
150,000
 161,250
Schuler Homes, Inc., 10.5%, 7/15/2011
260,000
 301,600
Scientific Games Corp., 12.5%, 8/15/2010
72,000
 85,140
Sealy Mattress Co., Series B, 9.875%, 12/15/2007
50,000
 51,750
Sinclair Broadcast Group, Inc.:


8.0%, 3/15/2012

110,000
 118,800

8.75%, 12/15/2011

475,000
 527,250
Six Flags, Inc., 8.875%, 2/1/2010
280,000
 287,350
Sonic Automotive, Inc.:


8.625%, 8/15/2013

265,000
 279,575

144A, 8.625%, 8/15/2013

25,000
 26,375
Time Warner, Inc., 8.11%, 8/15/2006
1,250,000
 1,415,039
Transwestern Publishing, Series F, 9.625%, 11/15/2007
370,000
 382,950
Venetian Casino Resort LLC, 11.0%, 6/15/2010
85,000
 98,600
Wheeling Island Gaming, Inc., 10.125%, 12/15/2009
205,000
 217,300
Williams Scotsman, Inc., 9.875%, 6/1/2007
170,000
 172,125
Worldspan LP/ WS Finance Corp., 144A, 9.625%, 6/15/2011
110,000
 113,300

15,604,869

Consumer Staples 0.6%
Agrilink Foods, Inc., 11.875%, 11/1/2008
46,000
 48,875
Elizabeth Arden, Inc., Series B, 11.75%, 2/1/2011
181,000
 215,390
General Nutrition Center, 144A, 8.5%, 12/1/2010
60,000
 61,500
Michael Foods, Inc., 144A, 8.0%, 11/15/2013
80,000
 83,400
National Beef Pack, 144A, 10.5%, 8/1/2011
60,000
 61,800
Pilgrim's Pride Corp., 9.625%, 9/15/2011
90,000
 99,000
Pinnacle Foods Holding Corp., 144A, 8.25%, 12/1/2013
100,000
 103,500
PPC Escrow Corp., 144A, 9.25%, 11/15/2013
50,000
 51,750
Salton, Inc., 10.75%, 12/15/2005
65,000
 66,300
Stater Brothers Holdings, Inc., 10.75%, 8/15/2006
300,000
 316,125
United Agri Products, 144A, 8.25%, 12/15/2011
115,000
 118,162

1,225,802

Energy 5.6%
Avista Corp., 9.75%, 6/1/2008
700,000
 833,000
Citgo Petroleum Corp., 11.375%, 2/1/2011
590,000
 684,400
Devon Energy Corp., 7.95%, 4/15/2032
1,600,000
 1,929,219
Devon Financing Corp., 7.875%, 9/30/2031
430,000
 513,679
Dynegy Holdings, Inc., 144A, 9.875%, 7/15/2010
50,000
 56,250
FirstEnergy Corp., Series B, 6.45%, 11/15/2011
1,545,000
 1,601,312
Gulfterra Energy Partner, 6.25%, 6/1/2010
65,000
 67,600
Hanover Compressor Co., 8.625%, 12/15/2010
125,000
 130,000
Lone Star Technologies, Inc., Series B, 9.0%, 6/1/2011
170,000
 168,300
National Fuel Gas Co., 6.7%, 11/21/2011
1,000,000
 1,131,563
Newpark Resources, Inc., 8.625%, 12/15/2007
190,000
 196,650
Parker Drilling Co.:


144A, 9.625%, 10/1/2013

85,000
 88,400

Series B, 10.125%, 11/15/2009

185,000
 196,100
Pioneer Natural Resources Co., 9.625%, 4/1/2010
565,000
 703,098
Southern Natural Gas, 8.875%, 3/15/2010
130,000
 146,250
Stone Energy Corp., 8.25%, 12/15/2011
330,000
 359,700
Tri-State Generation & Trans Association, 144A, 7.144%, 7/31/2033
2,000,000
 2,128,420
Westport Resources Corp., 8.25%, 11/1/2011
155,000
 170,500
Williams Cos., Inc.:


1.0%, 3/15/2012

50,000
 55,500

8.75%, 3/15/2032

135,000
 152,550
Williams Holdings of Delaware, Inc., 6.5%, 12/1/2008
115,000
 118,881

11,431,372

Financials 10.0%
Agfirst Farm Credit Bank, 8.393%*, 12/15/2016
1,170,000
 1,333,426
Ahold Finance USA, Inc., 6.25%, 5/1/2009
420,000
 421,050
AmeriCredit Corp.:


9.25%, 5/1/2009

305,000
 320,250

9.875%, 4/15/2006

270,000
 283,500
AMSouth Bank NA, 2.82%, 11/3/2006
1,495,000
 1,499,931
CBRE Escrow, Inc., 144A, 9.75%, 5/15/2010
140,000
 155,400
Couche-Tard US/ Finance, 144A, 7.5%, 12/15/2013
55,000
 57,613
Dollar Financial Group, Inc., 144A, 9.75%, 11/15/2011
190,000
 196,650
Farmers Insurance Exchange, 144A, 8.625%, 5/1/2024
260,000
 271,700
Ford Motor Credit Co.:


5.8%, 1/12/2009

805,000
 829,032

6.875%, 2/1/2006

1,425,000
 1,520,914

7.0%, 10/1/2013

50,000
 52,734
General Motors Acceptance Corp.:


6.875%, 9/15/2011

875,000
 942,486

7.75%, 1/19/2010

729,000
 826,364
Household Finance Corp., 6.5%, 1/24/2006
475,000
 513,701
IOS Capital LLC, 7.25%, 6/30/2008
200,000
 213,000
iStar Financial, Inc.:


6.0%, 12/15/2010

85,000
 86,700

6.5%, 12/15/2013

125,000
 127,500
Kraton Polymers LLC, 144A, 8.125%, 1/15/2014
50,000
 52,000
Mantis Reef Ltd., 144A, 4.692%, 11/14/2008
1,925,000
 1,934,602
NiSource Finance Corp., 7.875%, 11/15/2010
1,500,000
 1,784,086
OneAmerica Financial Partners, 144A, 7.0%, 10/15/2033
680,000
 673,159
PEI Holding, Inc., 11.0%, 3/15/2010
105,000
 121,800
Pemex Project Funding Master Trust, 8.5%, 2/15/2008
1,896,000
 2,161,440
PNC Funding Corp., 5.75%, 8/1/2006
895,000
 960,880
Poster Financial Group, 144A, 8.75%, 12/1/2011
50,000
 52,875
PXRE Capital Trust I, 8.85%, 2/1/2027
115,000
 106,087
R.H. Donnelly Finance Corp.:


10.875%, 12/15/2012

155,000
 183,868

144A, 10.875%, 12/15/2012

115,000
 136,419
Thornburg Mortgage, Inc., 8.0%, 5/15/2013
250,000
 262,500
Universal City Development, 144A, 11.75%, 4/1/2010
90,000
 105,300
US West Communications, Inc., 7.25%, 10/15/2035
50,000
 49,750
Verizon Global Funding Corp., 7.25%, 12/1/2010
1,650,000
 1,899,789
Wachovia Corp., 7.5%, 7/15/2006
155,000
 174,846

20,311,352

Health Care 1.6%
AmerisourceBergen Corp., 7.25%, 11/15/2012
240,000
 258,600
Biovail Corp., 7.875%, 4/1/2010
195,000
 198,900
Genesis Healthcare Corp., 144A, 8.0%, 10/15/2013
50,000
 52,125
Health Care Service Corp., 144A, 7.75%, 6/15/2011
1,500,000
 1,755,829
Neighbor, Inc., 144A, 6.875%, 11/15/2013
55,000
 55,963
Norcross Safety Products, 144A, 9.875%, 8/15/2011
80,000
 87,800
Tenet Healthcare Corp.:


6.375%, 12/1/2011

515,000
 494,400

7.375%, 2/1/2013

410,000
 412,050

3,315,667

Industrials 5.1%
Allied Waste North America, Inc.:


Series B, 8.5%, 12/1/2008

210,000
 233,625

Series B, 8.875%, 4/1/2008

275,000
 308,000
AMI Semiconductor, Inc., 10.75%, 2/1/2013
72,000
 85,860
Amsted Industries, Inc., 144A, 10.25%, 10/15/2011
50,000
 55,250
Atrium Companies, Inc., 144A, 10.5%, 5/1/2009
75,000
 80,250
AutoNation, Inc., 9.0%, 8/1/2008
115,000
 131,963
Avondale Mills, Inc., 10.25%, 7/1/2013
190,000
 119,700
Browning-Ferris Industries:


7.4%, 9/15/2035

50,000
 47,375

9.25%, 5/1/2021

50,000
 55,313
Collins & Aikman Floor Cover, Series B, 9.75%, 2/15/2010
270,000
 288,900
Collins & Aikman Products, 10.75%, 12/31/2011
225,000
 221,063
Corrections Corp. of America, 9.875%, 5/1/2009
270,000
 301,387
CP Ships Ltd., 10.375%, 7/15/2012
255,000
 295,800
Dana Corp., 7.0%, 3/1/2029
290,000
 288,187
Delta Air Lines, Inc.:


Series 02-1, 6.417%, 7/2/2012

1,510,000
 1,618,498

7.7%, 12/15/2005

255,000
 240,656
Eagle-Picher, Inc., 144A, 9.75%, 9/1/2013
85,000
 91,800
Equistar Chemicals LP, 144A, 10.625%, 5/1/2011
50,000
 55,250
Golden State Petroleum Transportation, 8.04%, 2/1/2019
125,000
 121,615
Hercules, Inc., 11.125%, 11/15/2007
635,000
 760,412
Hornbeck Offshore Services, Inc., 10.625%, 8/1/2008
170,000
 187,850
ISP Chemco, Inc., Series B, 10.25%, 7/1/2011
150,000
 168,750
ISP Holdings, Inc., Series B, 10.625%, 12/15/2009
100,000
 110,000
Kansas City Southern:


7.5%, 6/15/2009

240,000
 246,000

9.5%, 10/1/2008

170,000
 188,700
Metaldyne Corp., 144A, 10.0%, 11/1/2013
125,000
 126,250
Millennium America, Inc.:


7.625%, 11/15/2026

130,000
 120,900

9.25%, 6/15/2008

720,000
 784,800

144A, 9.25%, 6/15/2008

95,000
 103,550
Mobile Mini, Inc., 9.5%, 7/1/2013
140,000
 154,000
Overseas Shipholding Group, 8.75%, 12/1/2013
75,000
 82,219
Quintiles Transnational Corp., 144A, 10.0%, 10/1/2013
110,000
 118,800
Seabulk International, Inc., 9.5%, 8/15/2013
150,000
 156,000
Ship Finance International Ltd., 144A, 8.5%, 12/15/2013
350,000
 346,500
System 2001 Asset Trust LLC:

"B", Series 2001, 144A, 7.156%, 12/15/2011

710,592
 775,640

"G", Series 2001, 144A, 6.664%, 9/15/2013

562,697
 621,893
Tech Olympic USA, Inc., 10.375%, 7/1/2012
105,000
 117,600
The Brickman Group, Ltd., 11.75%, 12/15/2009
100,000
 116,500
Westlake Chemical Corp., 144A, 8.75%, 7/15/2011
305,000
 333,975

10,260,831

Information Technology 0.1%
Activant Solutions, Inc., 10.5%, 6/15/2011
50,000
 53,813
DigitalNet, Inc., 9.0%, 7/15/2010
84,000
 90,930
Mediacom Broadband LLC, 11.0%, 7/15/2013
50,000
 56,125
Telex Communications, Inc., 144A, 11.5%, 10/15/2008
55,000
 58,437

259,305

Materials 2.7%
ARCO Chemical Co., 9.8%, 2/1/2020
455,000
 457,275
Buckeye Technologies, Inc., 8.5%, 10/1/2013
50,000
 53,500
Caraustar Industries, Inc., 9.875%, 4/1/2011
145,000
 156,600
Cascades, Inc., 7.25%, 2/15/2013
250,000
 263,750
Dayton Superior Corp., 144A, 10.75%, 9/15/2008
110,000
 112,750
Dow Chemical Co., 7.0%, 8/15/2005
425,000
 454,628
Equistar Chemicals LP, 8.75%, 2/15/2009
755,000
 788,975
Georgia-Pacific Corp.:


7.375%, 12/1/2025

85,000
 82,556

7.7%, 6/15/2015

710,000
 738,400

144A, 8.0%, 1/15/2024

160,000
 163,200

8.875%, 2/1/2010

200,000
 228,000

9.375%, 2/1/2013

145,000
 166,750
Huntsman Advanced Materials LLC, 144A, 11.0%, 7/15/2010
155,000
 171,275
Huntsman International LLC, 144A, 11.625%, 10/15/2010
70,000
 71,400
IMC Global, Inc., 144A, 10.875%, 8/1/2013
270,000
 295,650
Owens-Brockway Glass Container, 8.25%, 5/15/2013
305,000
 327,494
Pliant Corp., 11.125%, 9/1/2009
205,000
 221,400
Rockwood Specialties Corp., 144A, 10.625%, 5/15/2011
75,000
 83,625
Tekni-Plex, Inc., 144A, 8.75%, 11/15/2013
85,000
 88,613
Texas Industries, Inc., 144A, 10.25%, 6/15/2011
80,000
 90,400
TriMas Corp., 9.875%, 6/15/2012
165,000
 172,012
United States Steel LLC, 9.75%, 5/15/2010
260,000
 292,500

5,480,753

Telecommunication Services 2.0%
ACC Escrow Corp., 144A, 10.0%, 8/1/2011
450,000
 501,750
Cincinnati Bell, Inc., 144A, 8.375%, 1/15/2014
475,000
 510,625
Continental Cable, 9.0%, 9/1/2008
750,000
 904,343
General Cable Corp., 144A, 9.5%, 11/15/2010
50,000
 53,500
Insight Midwest:


9.75%, 10/1/2009

50,000
 52,875

10.5%, 11/1/2010

50,000
 54,375
144A, 10.5%, 11/1/2010
150,000
 163,125
Nortel Networks Corp., 6.125%, 2/15/2006
380,000
 384,750
Northern Telecom Capital, 7.875%, 6/15/2026
100,000
 100,000
PCCW Capital Ltd., 144A, 6.0%, 7/15/2013
280,000
 285,835
Qwest Services Corp., 5.625%, 11/15/2008
940,000
 930,600
Shaw Communications, Inc., 8.25%, 4/11/2010
65,000
 73,613
Triton PCS, Inc., 8.5%, 6/1/2013
50,000
 53,750
US West Communication, Inc., 7.25%, 9/15/2025
80,000
 80,000

4,149,141

Utilities 11.1%
AES Corp., 144A, 9.0%, 5/15/2015
70,000
 79,100
American Electric Power, 6.125%, 5/15/2006
2,000,000
 2,155,174
Appalachian Power Co., 6.8%, 3/1/2006
1,000,000
 1,077,665
Cincinnati Gas & Electric Co., Series A, 5.4%, 6/15/2033
700,000
 631,177
Cleveland Electric Illuminating Co., 144A, 5.65%, 12/15/2013
635,000
 625,025
CMS Energy Corp., 8.5%, 4/15/2011
190,000
 205,200
Consolidated Edison, Inc., 8.125%, 5/1/2010
1,115,000
 1,364,858
Consumers Energy Co., 6.25%, 9/15/2006
1,500,000
 1,619,640
Duke Energy Corp., Series D, 7.375%, 3/1/2010
1,500,000
 1,728,366
El Paso Production Holding Corp., 144A, 7.75%, 6/1/2013
565,000
 556,525
Entergy Gulf States, 144A, 6.2%, 7/1/2033
1,600,000
 1,521,503
Illinova Corp., 11.5%, 12/15/2010
200,000
 240,000
Kansas City Power & Light Co., 7.125%, 12/15/2005
1,300,000
 1,416,037
MSW Energy Holdings/Finance, 144A, 8.5%, 9/1/2010
55,000
 59,950
NRG Energy, Inc., 144A, 8.0%, 12/15/2013
345,000
 362,681
PP&L Capital Funding, 7.75%, 4/15/2005
2,000,000
 2,142,066
Progress Energy, Inc., 6.75%, 3/1/2006
1,050,000
 1,138,354
PSI Energy, Inc.:


8.57%, 12/27/2011

1,250,000
 1,544,950

8.85%, 1/15/2022

1,225,000
 1,611,108
TNP Enterprises, Inc., Series B, 10.25%, 4/1/2010
280,000
 305,200
Xcel Energy, Inc., 7.0%, 12/1/2010
2,000,000
 2,267,900

22,652,479

Total Corporate Bonds (Cost $90,358,108)

94,691,571


Foreign Bonds - US$ Denominated 7.3%

Arcel Finance Ltd., 144A, 7.048%, 9/1/2011
540,000
 556,200
Axtel SA, 144A, 11.0%, 12/15/2013
245,000
 249,900
Brazilian Merchant Voucher, 144A, 5.911%, 6/15/2011
500,000
 487,500
Burns, Philip & Co., Ltd., 144A, 9.75%, 7/15/2012
105,000
 112,350
Conproca SA de CV, 12.0%, 6/16/2010
225,000
 289,125
Crown Euro Holdings SA, 10.875%, 3/1/2013
235,000
 276,419
Deutsche Telekom International Finance BV, 8.25%, 6/15/2005
1,500,000
 1,627,132
Eircom Funding, 8.25%, 8/15/2013
210,000
 232,575
Fage Dairy Industry SA, 9.0%, 2/1/2007
140,000
 142,975
Gazprom OAO, 144A, 9.625%, 3/1/2013
200,000
 220,500
Gerdau Ameristeel Corp., 144A, 10.375%, 7/15/2011
50,000
 55,250
Hutchinson Whamp International Ltd., 144A, 7.45%, 11/24/2033
165,000
 171,851
Innova S. de R.L.:


144A, 9.375%, 9/19/2013

235,000
 241,169

12.875%, 4/1/2007

18,539
 18,863
LeGrand SA, 8.5%, 2/15/2025
190,000
 200,688
Luscar Coal Ltd., 9.75%, 10/15/2011
210,000
 237,825
Millicom International Cellular SA, 144A, 10.0%, 12/1/2013
195,000
 205,725
Mobile Telesystems Financial SA, 144A, 8.375%, 10/14/2010
190,000
 193,800
PacifiCorp Australia LLC, 144A, 6.15%, 1/15/2008
1,000,000
 1,085,961
PTC International Finance II SA, 11.25%, 12/1/2009
110,000
 121,000
QBE Insurance Group Ltd., 144A, Step-Up Coupon, 5.647% to 7/1/2013, 3-month LIBOR plus 3.18% to 7/1/2023
750,000
 714,746
Royal Bank of Scotland, 9.118%, 3/31/2049
2,000,000
 2,497,922
Sappi Papier Holding AG, 144A, 7.5%, 6/15/2032
470,000
 528,428
Stena AB:


144A, 7.5%, 11/1/2013

80,000
 82,400

9.625% , 12/1/2012

50,000
 56,375
Tembec Industries, Inc., , 8.5%, 2/1/2011
575,000
 595,125
TFM SA de CV:


10.25%, 6/15/2007

310,000
 323,950

11.75%*, 6/15/2009

310,000
 318,525

12.5%, 6/15/2012

175,000
 199,500
Tyco International Group SA:


5.8%, 8/1/2006

1,240,000
 1,311,300

144A, 6.0%, 11/15/2013

25,000
 25,750

6.375%, 2/15/2006

650,000
 692,250
Vicap SA, 11.375%, 5/15/2007
180,000
 176,400
Vitro SA de CV, Series A, 144A, 11.75%, 11/1/2013
140,000
 135,800
Vivendi Universal SA:


144A, 6.25%, 7/15/2008

110,000
 116,463

144A, 9.25%, 4/15/2010

320,000
 379,200
Yell Finance BV, Step-up Coupon, 0% to 8/1/2006, 13.5% to 8/1/2011
32,000
 29,440
Total Foreign Bonds - US$ Denominated (Cost $14,388,570)

14,910,382

Asset Backed 9.8%

Automobile Receivables 2.8%
AmeriCredit Automobile Receivables Trust, "A4", Series 2001-C, 5.01%, 7/14/2008
1,580,000
 1,628,995
Capital One Auto Finance Trust, "A4", Series 2003-B, 3.18%, 9/15/2010
795,000
 795,869
MMCA Automobile Trust, "A4", Series 2002-2, 4.3%, 3/15/2010
1,610,000
 1,627,986
WFS Financial Owner Trust, "A4", Series 2002-2, 4.5%, 2/20/2010
1,540,000
 1,593,940

5,646,790

Credit Card Receivables 3.9%
Bank One Issuance Trust, "A1", Series 2002-A1, 1.23%*, 1/15/2010
8,000,000

8,016,219

Home Equity Loans 2.1%
Asset Backed Securities Corp. Home Equity, "A", Series 2003-HE2, 144A, 7.0%, 4/17/2033
693,201
 682,803
Countrywide Home Loans, "NIM", Series 2002-3, 144A, 9.0%, 9/25/2032
110,325
 110,879
Renaissance NIM Trust, "NOTE", Series 2002-C, 144A, 8.353%, 12/25/2032
227,266
 228,055
Residential Asset Securities Corp., "AI6", Series 2000-KS1, 7.905%, 2/25/2031
1,511,557
 1,608,804
Southern Pacific Secured Assets Corp., "A8", Series 1998-2, 6.37%, 7/25/2029
1,594,486
 1,627,589

4,258,130

Miscellaneous 1.0%
US Airways Aircraft Certificate Owner Trust, "C", Series 2003-1A, 144A, 5.551%, 9/20/2022
2,000,000

2,067,640

Total Asset Backed (Cost $19,855,592)

19,988,779


US Government Backed 14.3%

US Treasury Bond:


5.375%, 2/15/2031

235,000
 245,070

6.0%, 2/15/2026

740,000
 820,620
US Treasury Note:


4.0%, 11/15/2012

250,000
 247,598

5.0%, 8/15/2011

1,296,000
 1,386,922

6.125%, 8/15/2007

3,455,000
 3,866,767

7.0%, 7/15/2006

20,065,000
 22,475,147
Total US Government Backed (Cost $29,482,785)

29,042,124


US Government Agency Sponsored Pass-Thrus 28.6%

Federal Home Loan Mortgage Corp., 6.0%, 5/1/2017
3,531,044
 3,705,344
Federal National Mortgage Association:


4.5%, 1/1/2034 (c)

9,000,000
 9,008,442

5.0%, 1/1/2034 (c)

13,000,000
 13,255,944

5.5%, 1/1/2034 (c)

9,000,000
 9,115,308

6.0% with various maturities from 1/1/2023 until 1/1/2034 (c)

14,213,033
 14,695,222

6.061%, 5/1/2012

1,248,146
 1,370,147

6.5% with various maturities from 11/1/2024 until 7/1/2032

3,567,933
 3,748,576

6.53%, 2/1/2016

1,654,965
 1,799,089

7.5%, 2/1/2033

781,216
 834,774

9.0%, 5/1/2009

835,489
 914,267
Total US Government Agency Sponsored Pass-Thrus (Cost $58,106,293)

58,447,113


Collateralized Mortgage Obligations 2.2%

Federal Home Loan Mortgage Corp.:


"CH", Series 2390, 5.5%, 12/15/2016

590,000
 612,420

"LA", Series 1343, 8.0%, 8/15/2022

631,480
 665,672
Federal National Mortgage Association:


"QC", Series 2002-11, 5.5%, 3/25/2017

855,000
 888,777

"A5", Series 2002-W4, 7.5%, 5/25/2042

1,025,446
 1,119,659
Federal National Mortgage Association Grantor Trust, "A2", Series 2002-T19, 7.0%, 7/25/2042
436,218
 470,707
Structured Asset Securities Corp., "2A1", Series 2003-1, 6.0%, 2/25/2018
576,746
 595,040
Washington Mutual Mortgage Securities Corp., "A22", Series 2001-S9, 6.75%, 9/25/2031
172,559
 172,979
Total Collateralized Mortgage Obligations (Cost $4,507,723)

4,525,254


Municipal Investments 7.2%

Delaware, NJ, Port Authority Revenue, Port District Project, Series A, 7.46%, 1/1/2011 (b)
1,000,000
 1,180,010
Fultondale, AL, Core City, GO, 6.4%, 2/1/2022 (b)
1,340,000
 1,443,609
Guin, AL, County GO, Series B, 8.25%, 6/1/2027 (b)
1,515,000
 1,802,744
Idaho, Higher Education Revenue, Nazarene College Facilities, 8.34%, 11/1/2016 (d)
1,000,000
 1,123,500
Illinois:


State GO, General Obligation, 4.95%, 6/1/2023

665,000
 620,212

State GO, Taxable Pension, 5.1%, 6/1/2033

550,000
 503,074
Pell City, AL, Core City GO, 5.4%, 8/1/2017 (b)
1,385,000
 1,372,452
Reeves County, TX, County (GO) Lease, Certificate of Participation, Series IBC, 7.25%, 6/1/2011 (b)
1,150,000
 1,161,040
St. Paul, MN, Sales & Special Tax Revenue, Series A, 6.94%, 11/1/2019 (b)
2,000,000
 2,135,840
Texas, Multi Family Housing Revenue, Housing & Community Affairs Multi-Family, 6.85%, 12/1/2020 (b)
1,500,000
 1,592,895
Washington, Industrial Development Revenue, 4.0%, 10/1/2012 (b)
915,000
 866,907
Wisconsin, State GO, General Revenue, Series A, 5.7%, 5/1/2026 (b)
700,000
 705,901
Total Municipal Investments (Cost $14,844,927)

14,508,184


Convertible Bond 0.1%

DIMON, Inc., 6.25%, 3/31/2007 (Cost $96,087)
110,000

103,400




Shares

Value ($)



Preferred Stock 0.3%

Farm Credit Bank of Texas,
490,000
 491,352
TNP Enterprises, Inc.
644

69,820

Total Preferred Stock (Cost $537,926)

561,172


Convertible Preferred Stock 0.0%

Hercules Trust II (Cost $55,060)
90

70,200


Short-Term Investment 2.9%

US Treasury Bill, 0.895** 1/8/2004 (Cost $5,999,244)
6,000,000

5,999,244


Principal Amount ($)

Value ($)



Repurchase Agreements 1.5%

State Street Bank and Trust Co., 0.78%, dated 12/31/2003 to be repurchased at $2,997,130 on 1/2/2004 (Cost $2,997,000) (e)
2,997,000

2,997,000



% of Net Assets

Value ($)



Total Investment Portfolio (Cost $241,229,315) (a)
120.6

245,844,423

Other Assets and Liabilities, Net
(20.6)

(41,945,230)

Net Assets
100.0

203,899,193


* Floating rate securities are securities whose yields vary with a designated market index or market rate, such as the coupon-equivalent of the US Treasury bill rate. These securities are shown at their current rate as of December 31, 2003.
** Annualized yield at time of purchase; not a coupon rate.
(a) The cost for federal income tax purposes was $242,581,935. At December 31, 2003, net unrealized appreciation for all securities based on tax cost was $3,262,488. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $5,167,715 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $1,905,227.
(b) Bond is insured by one of these companies:
Insurance coverage
As a % of total
investment portfolio
AMBAC
 AMBAC Assurance Corp.

0.6

FSA
 Financial Security Assurance

1.6

MBIA
 Municipal Bond Investors Assurance

2.0

RADIAN
RADIAN Asset Assurance Incorporated

0.8


(c) Mortgage dollar rolls included.
(d) Security incorporates a letter of credit or line of credit from a major bank.
(e) Repurchase agreements are collateralized by $3,050,000 US Treasury Note, maturing on 9/30/2005 with a value of $3,059,598.

Included in the portfolio are investments in mortgage or asset-backed securities which are interests in separate pools of mortgages or assets. Effective maturities of these investments may be shorter than stated maturities due to prepayments. Some separate investments in the Federal National Mortgage Association issues which have similar coupon rates have been aggregated for presentation purposes in the investment portfolio.

144A: Security 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.

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


Financial Statements


Statement of Assets and Liabilities as of December 31, 2003

Assets
Investments in securities, at value (cost $241,229,315)
 $ 245,844,423
Foreign currency, at value (cost $5,553)
 5,630
Receivable for investments sold
 182,047
Interest receivable
 3,066,720
Other assets
 3,257
Total assets
 249,102,077
Liabilities
Due to custodian bank
 81,759
Payable for investments purchased
 11,513
Payable for investments purchased - mortgage dollar rolls
 44,801,097
Deferred mortgage dollar roll income
 76,665
Accrued management and investment advisory fee
 82,856
Dividends payable
 1,067
Other accrued expenses and payables
 147,927
Total liabilities
 45,202,884
Net assets, at value

$ 203,899,193

Net Assets
Net assets consist of:
Undistributed net investment income
 134,519
Net unrealized appreciation (depreciation) on investments
 4,615,108
Accumulated net realized gain (loss)
 (3,618,691)
Paid-in capital
 202,768,257
Net assets, at value

$ 203,899,193

Net Asset Value per share ($203,899,193 / 10,383,340 shares of common stock outstanding, $.01 par value, 30,000,000 shares authorized)

$ 19.64


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

Statement of Operations for the year ended December 31, 2003

Investment Income
Income:
Interest
 $ 10,374,579
Mortgage dollar roll income
 2,118,078
Dividends
 7,563
Total Income
 12,500,220
Expenses:
Management and investment advisory fee
 942,258
Services to shareholders
 36,304
Custodian fees
 28,075
Auditing
 57,898
Legal
 27,715
Directors' fees and expenses
 74,435
Reports to shareholders
 62,364
NYSE listing fee
 33,489
Other
 23,906
Total expenses
 1,286,444
Net investment income

11,213,776

Realized and Unrealized Gain (Loss) on Investment Transactions
Net realized gain (loss) from investments
 6,475,254
Net unrealized appreciation (depreciation) during the period on investments
 (2,106,834)
Net gain (loss) on investment transactions

4,368,420

Net increase (decrease) in net assets resulting from operations

$ 15,582,196


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

Statement of Cash Flows for the year ended December 31, 2003

Cash flows from operating activities

Investment income received
 $ 11,751,246
Mortgage dollar roll income
 2,151,316
Payment of operating expenses
 (1,296,315)
Proceeds from sale and maturities of investments
 1,034,036,105
Purchases of investments
 (1,031,780,620)
Net sales of short-term investments
 12,678,074
Cash provided (used) by operating activities

$ 27,539,806

Cash flows from financing activities

Net decrease in payable for investments purchased - mortgage dollar rolls
 $ (14,730,309)
Distributions paid (net of reinvestment of distributions)
 (12,426,526)
Cost of shares repurchased
 (460,013)
Cash provided (used) by financing activities
(27,616,848)
Decrease in cash
(77,042)
Cash at beginning of period
913

Cash at end of period

$ (76,129)

Reconciliation of net increase (decrease) in net assets from operations to cash provided (used) by operating activities
Net increase in net assets resulting from operations
 $ 15,582,196
Net increase in cost of investments
 10,490,243
Net increase in unrealized appreciation (depreciation) on investments
 2,106,834
Decrease in receivable for investments sold
 36,359
Increase in dividends and interest receivable
 (587,260)
Increase in other assets
 (3,257)
Decrease in payable for investments purchased
 (42,200)
Decrease in deferred mortgage dollar roll income
 (33,238)
Decrease in accrued expenses and payables
 (9,871)
Cash provided (used) by operating activities

$ 27,539,806

Non-cash financing activities
Reinvestment of distributions

485,382


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

Statement of Changes in Net Assets

Increase (Decrease) in Net Assets

Years Ended December 31,

2003

2002

Operations:
Net investment income
 $ 11,213,776 $ 12,559,369
Net realized gain (loss) on investment transactions
 6,475,254 (108,172)
Net unrealized appreciation (depreciation) on investment transactions during the period
 (2,106,834) 5,726,881
Net increase (decrease) in net assets resulting from operations
 15,582,196 18,178,078
Dividends to shareholders from net investment income
 (13,372,988) (13,730,435)
Fund share transactions:
Reinvestment of dividends from net investment income
 945,395 1,277,976
Cost of shares repurchased
 (460,013) -
Net increase (decrease) in net assets from Fund share transactions
 485,382 1,277,976
Increase (decrease) in net assets
2,694,590 5,725,619
Net assets at beginning of period
 201,204,603 195,478,984
Net assets at end of period (including undistributed net investment income of $134,519 and $68,692, respectively)

$ 203,899,193

$ 201,204,603

Other Information
Shares outstanding at beginning of period
 10,357,412 10,289,119
Shares issued to shareholders in reinvestment of dividends from net investment income
 51,228 68,293
Shares repurchased
 (25,300) -
Net increase (decrease) in Fund shares
 25,928 68,293
Shares outstanding at end of period
 10,383,340 10,357,412

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


Financial Highlights


Years Ended December 31,

2003

2002

2001a

2000

1999

Selected Per Share Data
Net asset value, beginning of period

$ 19.43

$ 19.00

$ 18.83

$ 18.37

$ 19.93

Income (loss) from investment operations:
Incomeb
1.20 1.36 1.45 1.48 1.49
Operating expensesb
(.12) (.14) (.14) (.13) (.14)
Net investment incomeb
1.08 1.22 1.31 1.35 1.35
Net realized and unrealized gain (loss) on investment transactions
.42 .54 .20 .46 (1.55)

Total from investment operations

1.50 1.76 1.51 1.81 (.20)
Less distributions from:
Net investment income
(1.29) (1.33) (1.34) (1.35) (1.36)
Net asset value, end of period

$ 19.64

$ 19.43

$ 19.00

$ 18.83

$ 18.37

Per share market value, end of period

$ 18.55

$ 19.02

$ 18.53

$ 17.38

$ 15.50

Price range on New York Stock Exchange for each share of Common Stock outstanding during the period (Unaudited):
High ($)
20.45 19.67 19.95 17.38 19.94
Low ($)
17.50 17.91 17.65 15.06 15.06
Total Return
Based on market value (%)c
 4.53 10.12 14.57 21.65 (14.90)
Based on net asset value (%)c
 8.22 9.71 8.49 11.21 (.05)
Ratios to Average Net Assets and Supplemental Data
Net assets, end of period ($ millions)
 204 201 196 193 189
Ratio of expenses (%)
 .63 .72 .71 .69 .70
Ratio of net investment income (%)
 5.47 6.36 6.78 7.32 7.01
Portfolio turnover rate (%)d
 160 259 143 131 82

a As required, effective January 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premiums on debt securities. In addition, paydowns on mortgage-backed securities which were included in realized gain/loss on investment transactions prior to January 1, 2001 are included as interest income. The effect of this change for the period ended December 31, 2001 was to decrease net investment income by $0.03, increase net realized and unrealized gains and losses per share by $0.03, and decrease the ratio of net investment income to average net assets from 6.92% to 6.78%. Per share, ratios and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation.
b Based on average shares outstanding during the period.
c Total return based on net asset value reflects changes in the Fund's net asset value during the period. Total return based on market value reflects changes in market value. Each figure includes reinvestment of dividends. These figures will differ depending upon the level of any discount from or premium to net asset value at which the Fund's shares trade during the period.
d The portfolio turnover rates excluding mortgage dollar roll transactions are stated in the Financial Highlights. The portfolio turnover rates including mortgage dollar roll transactions were 426%, 520%, 356%, 335% and 209%, for the periods ended December 31, 2003, December 31, 2002, December 31, 2001, December 31, 2000 and December 31, 1999, respectively.

Notes to Financial Statements


A. Significant Accounting Policies

Montgomery Street Income Securities, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, (the "1940 Act"), as a closed-end, diversified management investment company.

The Fund's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require the use of management estimates. Actual results could differ from those estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements.

Security Valuation. Investments are stated at value determined as of the close of regular trading on the New York Stock Exchange on each day the exchange is open for trading. Debt securities are valued by independent pricing services approved by the Directors of the Fund. If the pricing services are unable to provide valuations, the securities are valued at the most recent bid quotation or evaluated price, as applicable, obtained from one or more broker-dealers. Such services may use various pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data, as well as broker quotes.

Money market instruments purchased with an original or remaining maturity of sixty days or less, maturing at par, are valued at amortized cost.

Securities and other assets for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value are valued in a manner that is intended to reflect their fair value as determined in accordance with procedures approved by the Directors.

Repurchase Agreements. The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund, through its custodian or sub-custodian bank, receives delivery of the underlying securities, the amount of which at the time of purchase and each subsequent business day is required to be maintained at such a level that the market value is equal to at least the principal amount of the repurchase price plus accrued interest. The custodian or agent bank holds the collateral in a separate account until the agreement matures. If the value of the securities falls below the principal amount of the repurchase agreement plus accrued interest, the financial institution deposits additional collateral by the following business day. If the financial institution either fails to deposit the required additional collateral or fails to repurchase the securities as agreed, the Fund has the right to sell the securities and recover any resulting loss from the financial institution. If the financial institution enters into bankruptcy, the Fund's claims on the collateral may be subject to legal proceedings.

Mortgage Dollar Rolls. The Fund may enter into mortgage dollar rolls in which the Fund sells to a bank or broker/dealer (the "counterparty") mortgage-backed securities for delivery in the current month and simultaneously contracts to repurchase similar, but not identical, securities on a fixed date. The counterparty receives all principal and interest payments, including prepayments, made on the security while it is the holder. The Fund receives compensation as consideration for entering into the commitment to repurchase. The compensation is paid in the form of a lower price for the security upon its repurchase, or alternatively, a fee. Mortgage dollar rolls may be renewed with a new sale and repurchase price and a cash settlement made at each renewal without physical delivery of the securities subject to the contract.

Mortgage dollar rolls may be treated for purposes of the 1940 Act as borrowings by the Fund because they involve the sale of a security coupled with an agreement to repurchase. A mortgage dollar roll involves costs to the Fund. For example, while the Fund receives compensation as consideration for agreeing to repurchase the security, the Fund forgoes the right to receive all principal and interest payments while the counterparty holds the security. These payments to the counterparty may exceed the compensation received by the Fund, thereby effectively charging the Fund interest on its borrowing. Further, although the Fund can estimate the amount of expected principal prepayment over the term of the mortgage dollar roll, a variation in the actual amount of prepayment could increase or decrease the cost of the Fund's borrowing.

Certain risks may arise upon entering into mortgage dollar rolls from the potential inability of counterparties to meet the terms of their commitments. Additionally, the value of such securities may change adversely before the Fund is able to repurchase them. There can be no assurance that the Fund's use of the cash that it receives from a mortgage dollar roll will provide a return that exceeds its borrowing costs.

Delayed Delivery Securities. The Fund may purchase securities with delivery or payment to occur at a later date beyond the normal settlement period. At the time the Fund enters into a commitment to purchase a security, the transaction is recorded and the value of the security is reflected in the net asset value. The price of such security and the date when the security will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security may vary with market fluctuations. No interest accrues to the Fund until payment takes place. At the time the Fund enters into this type of transaction it is required to segregate cash or other liquid assets at least equal to the amount of the commitment.

Certain risks may arise upon entering into delayed delivery securities from the potential inability of counterparties to meet the terms of their contracts or if the issuer does not issue the securities due to political, economic, or other factors. Additionally, losses may arise due to changes in the value of the underlying securities.

Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code, as amended, which are applicable to regulated investment companies and to distribute all of its taxable income to its shareholders. Accordingly, the Fund paid no federal income taxes and no federal income tax provision was required.

At December 31, 2003, the Fund had a net tax basis capital loss carryforward of approximately $2,304,000, which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until December 31, 2010, the expiration date, whichever occurs first.

Distribution of Income and Gains. Distributions of net investment income, if any, are made quarterly. During any particular year, net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed and, therefore, will be distributed to shareholders. An additional distribution may be made to the extent necessary to avoid the payment of a four percent federal excise tax. The Fund uses the specific identification method for determining realized gain or loss on investments sold for both financial and federal income tax reporting purposes.

The timing and characterization of certain income and capital gains distributions are determined annually in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences primarily relate to investments in mortgage-backed securities, foreign-denominated securities and premium amortization on debt securities. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.

At December 31, 2003, the Fund's components of distributable earnings (accumulated losses) on a tax basis are as follows:

Undistributed ordinary income*
 $ 211,184
Undistributed net long-term capital gains
 $ -
Capital loss carryforwards
 $ 2,304,000
Unrealized appreciation (depreciation) on investments
 $ 3,262,488

In addition, the tax character of distributions paid to shareholders by the Fund is as follows:

Years Ended December 31,
2003
2002
Distributions from ordinary income*
 $ 13,372,988 $ 13,730,435

* For tax purposes short-term capital gains distributions are considered ordinary income distributions.

Statement of Cash Flows. Information on financial transactions which have been settled through the receipt and disbursement of cash is presented in the Statement of Cash Flows. The cash amount shown in the Statement of Cash Flows represents the cash position in the Fund's custodian bank at December 31, 2003. Significant non-cash activity from market discount accretion has been excluded from the Statement of Cash Flows.

Other. Investment transactions are accounted for on a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment transactions are reported on trade date. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. All premiums and discounts, with the exception of mortgage-backed securities, are amortized/accreted for financial reporting purposes.

B. Purchases and Sales of Securities

During the year ended December 31, 2003, purchases and sales (excluding US Treasury obligations, short-term investments and mortgage dollar roll transactions) of investment securities aggregated $287,376,382 and $245,776,469, respectively. Purchases and sales of US Treasury obligations aggregated $149,836,551 and $141,287,060, respectively. Purchases and sales of mortgage dollar roll transactions aggregated $594,525,487 and $646,973,903, respectively.

C. Related Parties

Management and Investment Advisory Agreement. Under the Management and Investment Advisory Agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DeIM" or the "Advisor"), the Fund agrees to pay the Advisor for the services rendered, an annual fee, payable monthly, equal to 0.50 of 1% of the value of net assets of the Fund up to and including $100 million; 0.45 of 1% of the value of the net assets of the Fund over $100 million and up to and including $150 million; 0.40% of 1% of the value of the net assets of the Fund over $150 million and up to and including $200 million; and 0.35 of 1% of the value of the net assets of the Fund over $200 million.

The Agreement also provides that the Advisor will reimburse the Fund for all expenses (excluding interest, taxes, brokerage commissions and extraordinary expenses) borne by the Fund in any fiscal year in excess of the sum of one and one-half percent of the first $30 million of average net assets and one percent of average net assets in excess of $30 million. Further, if annual expenses as defined in the Agreement exceed 25% of the Fund's annual gross income, the excess will be reimbursed by the Advisor.

For the year ended December 31, 2003, the fees pursuant to the Agreement amounted to $942,258, equivalent to an effective annualized rate of 0.46% of the Fund's average monthly net assets.

Service Provider Fees. Scudder Investments Service Company ("SISC"), an affiliate of the Advisor, is the transfer, dividend-paying and shareholder service agent for the Fund. Effective January 15, 2003, pursuant to a sub-transfer agency agreement between SISC and DST Systems, Inc. ("DST"), SISC has delegated certain transfer agent and dividend paying agent functions to DST. SISC compensates DST out of the shareholder servicing fee it receives from the Fund. For the year ended December 31, 2003, the amount charged to the Fund by SISC aggregated $36,304, of which $14,489 is unpaid at December 31, 2003.

Directors' Fees and Expenses. The Fund pays each Director not affiliated with the Advisor retainer fees plus specified amounts for attended board and committee meetings.

D. Share Repurchases

The Fund is authorized to effect periodic repurchases of its shares in the open market from time to time when the Fund's shares trade at a discount to their NAV. During the year ended December 31, 2003, the Fund purchased 25,300 shares of common stock on the open market at a total cost of $460,013.


Report of Ernst & Young LLP, Independent Auditors


To the Shareholders and Board of Directors of
Montgomery Street Income Securities, Inc.

We have audited the accompanying statement of assets and liabilities of Montgomery Street Income Securities, Inc. (the "Fund"), including the investment portfolio, as of December 31, 2003, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the 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 and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2003, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Montgomery Street Income Securities, Inc. at December 31, 2003, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States.

Boston, Massachusetts
February 18, 2004

/s/ Ernst & Young LLP


Dividend Reinvestment and Cash Purchase Plan


All registered stockholders of the fund's Common Stock are offered the opportunity of participating in a Dividend Reinvestment and Cash Purchase Plan (the "Plan"). Registered stockholders, on request or on becoming registered stockholders, are mailed information regarding the Plan, including a form by which they may elect to participate in the Plan and thereby cause their future net investment income dividends and capital gains distributions to be invested in shares of the fund's Common Stock. UMB Bank, N.A. is the agent (the "Plan Agent") for stockholders who elect to participate in the Plan.

If a stockholder chooses to participate in the Plan, the stockholder's dividends and capital gains distributions will be promptly invested, automatically increasing the stockholder's holdings in the fund. If the fund declares a dividend or capital gains distributions payable either in cash or in stock of the fund, the stockholder will automatically receive stock. If the market price per share on the payment date for the dividend (the "Valuation Date") equals or exceeds the net asset value per share, the fund will issue new shares to the stockholder at the greater of the following on the Valuation Date: (a) net asset value per share or (b) 95% of the market price per share. If the market price per share on the Valuation Date is less than the net asset value per share, the fund will issue new shares to the stockholder at the market price per share on the Valuation Date. In either case, for federal income tax purposes the stockholder will be deemed to receive a distribution equal to the market value on the Valuation Date of the new shares issued. If dividends or capital gains distributions are payable only in cash, then the stockholder will receive shares purchased on the New York Stock Exchange or otherwise on the open market. In this event, for federal income tax purposes the amount of the distribution will equal the cash distribution paid. State and local taxes may also apply. All reinvestments are in full and fractional shares, carried to three decimal places.

Stockholders participating in the Plan can also purchase additional shares quarterly in any amount from $100 to $5,000 (a "Voluntary Cash Investment") by sending in a check together with the cash remittance slip, which will be sent with each statement of the stockholder's account, to Scudder Investments Service Company, the Fund's transfer agent or its delegate (the "Transfer Agent"). Such additional shares will be purchased on the open market by the Plan Agent. The purchase price of shares purchased on the open market, whether pursuant to a reinvestment of dividends payable only in cash or a Voluntary Cash Investment, will be the average price (including brokerage commissions) of all shares purchased by the Plan Agent on the date such purchases are effected. In addition, stockholders may be charged a service fee in an amount up to 5% of the value of the Voluntary Cash Investment. Although subject to change, stockholders are currently charged $1 for each Voluntary Cash Investment.

Stockholders may terminate their participation in the Plan at any time and elect to receive dividends and other distributions in cash by notifying the Transfer Agent in writing. Such notification must be received not less than 10 days prior to the record date of any distribution. There is no charge or other penalty for such termination. The Plan may be terminated by the fund upon written notice mailed to the stockholders at least 30 days prior to the record date of any distribution. Upon termination, the fund will issue certificates for all full shares held under the Plan and cash for any fractional share.

Alternatively, stockholders may request the Transfer Agent to instruct the Plan Agent to sell any full shares and remit the proceeds, less a $2.50 service fee and less brokerage commissions. The sale of shares (including fractional shares) will be a taxable event for federal income tax purposes and may be taxable for state and local tax purposes.

The Plan may be amended by the fund at any time. Except when required by law, written notice of any amendment will be mailed to stockholders at least 30 days prior to its effective date. The amendment will be deemed accepted unless written notice of termination is received by the Transfer Agent prior to the effective date.

An investor holding shares in its own name can participate directly in the Plan. An investor holding shares in the name of a brokerage firm, bank or other nominee should contact that nominee, or any successor nominee, to determine whether the nominee can participate in the Plan on the investor's behalf and to make any necessary arrangements for such participation.

Additional information, including a copy of the Plan and its Terms and Conditions and an enrollment form, can be obtained from the Transfer Agent by writing Scudder Investments Service Company, P.O. Box 219066, Kansas City, MO 64121-9066, or by calling (800) 294-4366.

For annual report requests, please call Shareholder Services at 800-349-4281 or the Transfer Agent at 800-294-4366.


Directors and Officers


The following table presents certain information regarding the Directors and Officers of Montgomery Street Income Securities, Inc. as of December 31, 2003. Each Director's and Officer's age as of December 31, 2003 is set forth in parentheses after his or her name. Unless otherwise noted, (i) each Director and Officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Director is c/o Montgomery Street Income Securities, Inc., 101 California Street, Suite 4100, San Francisco, California 94111. The term of office for each Director is until the next annual meeting of stockholders or until the election and qualification of a successor. Officers are appointed annually by, and serve at the discretion of, the Board of Directors.

Non-Interested Directors

Name, Age, Position(s) Held with the Fund and Length of Time Served1
Principal Occupation(s) During Past 5 Years and
Other Directorships Held in Public Companies
Number of Funds in Fund Complex Overseen
James C. Van Horne (68)
Chairman and Director
1985 to present
 A.P. Giannini Professor of Finance, Graduate School of Business, Stanford University. Directorships: Suntron Corporation (electronic manufacturing services) and Bailard, Biehl & Kaiser Opportunity Fund Group, Inc. (registered investment company)

1

Richard J. Bradshaw (55)
Director
1991 to present

 Executive Director, Cooley Godward LLP (law firm)

1

Maryellie K. Johnson (68)
Director
1989 to present

 Private investor; formerly, Director, London and Overseas Freighters, Ltd. (oil tanker operator) (1989-1998)

1

Wendell G. Van Auken (59)
Director
1994 to present

 General Partner of several venture capital funds affiliated with Mayfield Fund. Directorship: Advent Software (portfolio software company)

1


Interested Director

Name, Age, Position(s) Held with the Fund and Length of Time Served
Principal Occupation(s) During Past 5 Years and
Other Directorships Held
Number of Funds in Fund Complex Overseen
John T. Packard1 (70)
Director
2001 to present

 Managing Director, Weiss, Peck & Greer LLC (investment adviser and broker-dealer) (2002-present); Advisory Managing Director of the same firm (2000-2002); formerly, Advisory Managing Director, Zurich Scudder Investments, Inc. (the Fund's Advisor) (1999-2000), Managing Director of the same firm (1985-1998), and President of the Fund (1988-2000)

1


Officers

Name, Age, Position(s) Held with the Fund and Length of Time Served
Principal Occupation(s) During Past 5 Years and
Other Directorships Held
Number of Funds in Fund Complex Overseen
Richard T. Hale2 (58)
President
2002 to present
 Managing Director, Deutsche Investment Management Americas Inc. (2003-present); Managing Director, Deutsche Bank Securities Inc. (formerly Deutsche Banc Alex. Brown Inc.) and Deutsche Asset Management (1999-present); Director and President, Investment Company Capital Corp. (registered investment advisor) (1996-present); Director, Deutsche Global Funds, Ltd. (2000-present), CABEI Fund (2000-present), North American Income Fund (2000-present) (registered investment companies); Director, Scudder Global Opportunities Fund (since 2003); Director/Officer Deutsche/Scudder Mutual Funds (various dates) (registered investment companies); Vice President, Deutsche Asset Management, Inc. (2000-present); formerly, Director, ISI Family of Funds (registered investment companies; 4 funds overseen) (1992-1999)

201

Gary W. Bartlett3 (44)
Vice President
2002 to present

 Managing Director of Deutsche Asset Management

n/a

Andrew P. Cestone3 (34)
Vice President
2003 to present

 Managing Director, Deutsche Asset Management (1998-present); prior thereto, investment analyst, Phoenix Investment Partners (1997-1998), credit officer in asset-based lending group, Fleet Bank (1993-1997)

n/a

Maureen E.
Kane4 (41)
Vice President and Secretary
1999 to present

 Vice President of Deutsche Asset Management

n/a

Charles A. Rizzo4 (46)
Treasurer and Chief Financial Officer
2003 to present
 Director of Deutsche Asset Management (2000 to present); formerly, Vice President and Department Head, BT Alex. Brown Incorporated (now Deutsche Bank Securities Inc.) (1998-1999); Senior Manager, Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP) (1993-1998)

n/a


1 Mr. Packard may be considered an "interested person" of the Fund, as defined in the Investment Company Act of 1940, as amended, by reason of his past relationships with the Fund and the Advisor.
2 Address: One South Street, Baltimore, Maryland
3 Address: 150 South Independence Boulevard, Philadelphia, Pennsylvania
4 Address: Two International Place, Boston, Massachusetts


General Information


Investment Manager

Deutsche Investment Management Americas Inc.
345 Park Avenue
New York, NY 10154

Transfer Agent

Scudder Investments Service Company
P.O. Box 219066
Kansas City, MO 64121-9066

Custodian

State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110

Legal Counsel

Howard, Rice, Nemerovski, Canady, Falk & Rabkin PC
Three Embarcadero Center
San Francisco, CA 94111

Independent Auditors

Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116


DIRECTORS
RICHARD J. BRADSHAW
MARYELLIE K. JOHNSON
JOHN T. PACKARD
WENDELL G. VAN AUKEN
JAMES C. VAN HORNE
Chairman
OFFICERS
RICHARD T. HALE
President
GARY W. BARTLETT
Vice President
ANDREW P. CESTONE
Vice President
MAUREEN E. KANE
Vice President and Secretary
CHARLES A. RIZZO
Treasurer and Chief Financial Officer


Notes



Notes



Notes



Notes


msi_backcover0 


ITEM 2.         CODE OF ETHICS.

As of the end of the period,  December 31, 2003,  Montgomery  Street  Securities
Trust,  Inc.  has adopted a code of ethics,  as defined in Item 2 of Form N-CSR,
that applies to its President and Treasurer and its Chief Financial  Officer.  A
copy of the code of ethics is filed as an exhibit to this Form N-CSR.

ITEM 3.         AUDIT COMMITTEE FINANCIAL EXPERT.

The Fund's  Board of  Directors  has  determined  that the Fund has at least one
"audit committee  financial expert" serving on its audit committee:  Mr. John C.
Atwater,  Mr. Richard J. Bradshaw,  and Mr. Wendell G. Van Auken.  Each of these
audit committee members is "independent,"  meaning that he is not an "interested
person"  of the  Fund  (as that  term is  defined  in  Section  2(a)(19)  of the
Investment Company Act of 1940) and he does not accept any consulting, advisory,
or other  compensatory  fee from the Fund  (except in the capacity as a Board or
committee member).

An "audit  committee  financial  expert"  is not an  "expert"  for any  purpose,
including for purposes of Section 11 of the  Securities Act of 1933, as a result
of being  designated as an "audit  committee  financial  expert."  Further,  the
designation of a person as an "audit committee  financial  expert" does not mean
that the person has any greater  duties,  obligations,  or liability  than those
imposed  on  the  person  without  the  "audit   committee   financial   expert"
designation.  Similarly,  the  designation  of a person as an  "audit  committee
financial expert" does not affect the duties,  obligations,  or liability of any
other member of the audit committee or board of directors.

ITEM 4.         PRINCIPAL ACCOUNTANT FEES AND SERVICES.

                 MONTGOMERY STREET INCOME SECURITIES FUND, INC.
                      FORM N-CSR DISCLOSURE RE: AUDIT FEES

The following table shows the amount of fees that Ernst & Young, LLP
("E&Y"), the Fund's auditor, billed to the Fund during the Fund's last two
fiscal years. For engagements with E&Y entered into on or after May 6, 2003,
the Audit Committee approved in advance all audit services and non-audit
services that E&Y provided to the Fund.

The Audit Committee has delegated certain pre-approval responsibilities to its
Chairman (or, in his absence, any other member of the Audit Committee).

               Services that the Fund's Auditor Billed to the Fund

- ----------- ------------------ ------------------- ------------------- -----------------
Fiscal Year                                                                   All
   Ended     Audit Fees Billed    Audit-Related     Tax Fees Billed to Other Fees Billed
December 31       to Fund      Fees Billed to Fund         Fund             to Fund
- ----------- ------------------ ------------------- ------------------- -----------------
- ----------- ------------------ ------------------- ------------------- -----------------
2003              $46,800               $0                $7,500               $0
- ----------- ------------------ ------------------- ------------------- -----------------
- ----------- ------------------ ------------------- ------------------- -----------------
2002              $59,459               $0                $8,250               $0
- ----------- ------------------ ------------------- ------------------- -----------------

The above "Tax Fees" were billed for professional services rendered for tax
compliance.

           Services that the Fund's Auditor Billed to the Adviser and
                        Affiliated Fund Service Providers

The following table shows the amount of fees billed by E&Y to Deutsche
Investment Management Americas, Inc. ("DeIM" or the "Adviser"), and any entity
controlling, controlled by or under common control with DeIM ("Control
Affiliate") that provides ongoing services to the Fund ("Affiliated Fund Service
Provider"), for engagements directly related to the Fund's operations and
financial reporting, during the Fund's last two fiscal years.


- ----------- --------------------- ---------------------- -------------------
               Audit-Related                                    All
               Fees Billed to       Tax Fees Billed to    Other Fees Billed
Fiscal Year     Adviser and            Adviser and         to Adviser and
   Ended      Affiliated Fund        Affiliated Fund      Affiliated Fund
December 31  Service Providers      Service Providers    Service Providers
- ----------- --------------------- ---------------------- -------------------
2003              $112,900                 $0                    $0
- ----------- --------------------- ---------------------- -------------------
2002              $212,800                 $0                    $0
- ----------- --------------------- ---------------------- -------------------

The "Audit-Related Fees" were billed for services in connection with the
assessment of internal controls and additional related procedures.






                               Non-Audit Services

The following table shows the amount of fees that E&Y billed during the
Fund's last two fiscal years for non-audit services. For engagements entered
into on or after May 6, 2003, the Audit Committee pre-approved all non-audit
services that E&Y provided to the Adviser and any Affiliated Fund Service
Provider that related directly to the Fund's operations and financial reporting.
The Audit Committee requested and received information from E&Y about any
non-audit services that E&Y rendered during the Fund's last fiscal year to
the Adviser and any Affiliated Fund Service Provider. The Committee considered
this information in evaluating E&Y's independence.


- ----------- --------------- ----------------------- -------------------- -------------------
                             Total Non-Audit Fees
                             billed to Adviser and
                               Affiliated Fund
                              Service Providers     Total Non-Audit Fees
                             (engagements related     billed to Adviser
                               directly to the       and Affiliated Fund
                 Total          operations and        Service Providers
             Non-Audit Fees   financial reporting         (all other
Fiscal Year  Billed to Fund      of the Fund)           engagements)     Total of (A), (B)
   Ended
December 31        (A)               (B)                     (C)             and (C)
- ----------- --------------- ----------------------- -------------------- -------------------
2003            $7,500                $0               $3,742,000             $3,749,500
- ----------- --------------- ----------------------- -------------------- -------------------
2002            $8,250                $0                $963,492               $971,742
- ----------- --------------- ----------------------- -------------------- -------------------


All other engagement fees were billed for services in connection with risk
management and process improvement initiatives for DeIM and other related
entities that provide support for the operations of the fund.

ITEM 5.         [RESERVED]

ITEM 6.         [RESERVED]

ITEM 7.         DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
                CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Proxy Voting Guidelines. The Fund has delegated proxy voting responsibilities to
its investment advisor, subject to the Board's general oversight. The Fund has
delegated proxy voting to the advisor with the direction that proxies should be
voted consistent with the Fund's best economic interests. The advisor has
adopted its own Proxy Voting Policies and Procedures ("Policies"), a Proxy
Voting Desktop Manual ("Manual"), and Proxy Voting Guidelines ("Guidelines") for
this purpose. The Policies address, among other things, conflicts of interest
that may arise between the interests of the Fund, and the interests of the
advisor and its affiliates, including the Fund's principal underwriter. The
Manual sets forth the procedures that the advisor has implemented to vote
proxies, including monitoring for corporate events, communicating with the
fund's custodian regarding proxies, considering the merits of each proposal, and
executing and recording the proxy vote. The Guidelines set forth the advisor's
general position on various proposals, such as:

o    Shareholder  Rights -- The advisor  generally votes against  proposals that
     restrict shareholder rights.

o    Corporate  Governance -- The advisor  generally votes for  confidential and
     cumulative voting and against supermajority voting requirements for charter
     and bylaw amendments.

o    Anti-Takeover  Matters -- The advisor  generally  votes for proposals  that
     require shareholder  ratification of poison pills or that request boards to
     redeem  poison pills,  and votes  "against" the adoption of poison pills if
     they are  submitted for  shareholder  ratification.  The advisor  generally
     votes for fair price proposals.

o    Routine  Matters -- The advisor  generally  votes for the  ratification  of
     auditors,  procedural matters related to the annual meeting, and changes in
     company name, and against bundled proposals and adjournment.

The general provisions described above do not apply to investment companies. The
advisor generally votes proxies solicited by investment companies in accordance
with the recommendations of an independent third-party, except for proxies
solicited by or with respect to investment companies for which the advisor or an
affiliate serves as investment advisor or principal underwriter ("affiliated
investment companies"). The advisor votes affiliated investment company proxies
in the same proportion as the vote of the investment company's other
shareholders (sometimes called "mirror" or "echo" voting). Master fund proxies
solicited from feeder funds are voted in accordance with applicable requirements
of the Investment Company Act of 1940.

Although the Guidelines set forth the advisor's general voting positions on
various proposals, the advisor may, consistent with the Fund's best interests,
determine under some circumstances to vote contrary to those positions.

The Guidelines on a particular issue may or may not reflect the view of
individual members of the board, or of a majority of the board. In addition, the
Guidelines may reflect a voting position that differs from the actual practices
of the public companies within the Deutsche Bank organization or of the
investment companies for which the advisor or an affiliate serves as investment
advisor or sponsor.

The advisor may consider the views of a portfolio company's management in
deciding how to vote a proxy or in establishing general voting positions for the
Guidelines, but management's views are not determinative.

As mentioned above, the Policies describe the way in which the advisor resolves
conflicts of interest. To resolve conflicts, the advisor, under normal
circumstances, votes proxies in accordance with its Guidelines. If the advisor
departs from the Guidelines with respect to a particular proxy or if the
Guidelines do not specifically address a certain proxy proposal, a committee
established by the advisor will vote the proxy. Before voting any such proxy,
however, the committee will exclude from the voting discussions and
determinations any member who is involved in or aware of a material conflict of
interest. If, after excluding any and all such members, there are fewer than
three voting members remaining, the advisor will engage an independent third
party to vote the proxy or follow the proxy voting recommendations of an
independent third party.

Under certain circumstances, the advisor may not be able to vote proxies or the
advisor may find that the expected economic costs from voting outweigh the
benefits associated with voting. For example, the advisor may not vote proxies
on certain foreign securities due to local restrictions or customs. The advisor
generally does not vote proxies on securities subject to share blocking
restrictions.

ITEM 8.         [RESERVED]

ITEM 9.         CONTROLS AND PROCEDURES.

(a) The Chief Executive and Financial Officers concluded that the Registrant's
Disclosure Controls and Procedures are effective based on the evaluation of the
Disclosure Controls and Procedures as of a date within 90 days of the filing
date of this report.

(b) During the filing period of the report, management identified issues
relating to the overall fund expense payment and accrual process. Management
discussed these matters with the Registrant's Audit Committee and auditors,
instituted additional procedures to enhance its internal controls and will
continue to develop additional controls and redesign work flow to strengthen the
overall control environment associated with the processing and recording of fund
expenses.

ITEM 10.        EXHIBITS.

(a)(1)   Code of Ethics  pursuant to Item 2 of Form N-CSR is filed and  attached
         hereto as EX-99.CODE ETH.

(a)(2)   Certification  pursuant to Rule 30a-2(a) under the  Investment  Company
         Act of 1940 (17 CFR  270.30a-2(a))  is filed  and  attached  hereto  as
         Exhibit 99.CERT.

(b)      Certification  pursuant to Rule 30a-2(b) under the  Investment  Company
         Act of 1940 (17 CFR  270.30a-2(b))  is furnished and attached hereto as
         Exhibit 99.906CERT.



Form N-CSR Item F

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

Registrant:                        Montgomery Street Income Securities


By:                                 /s/Richard T. Hale
                                    ---------------------------
                                    Richard T. Hale
                                    Chief Executive Officer

Date:                               February 27, 2004
                                    ---------------------------


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

Registrant:                         Montgomery Street Income Securities

By:                                 /s/Richard T. Hale
                                    ---------------------------
                                    Richard T. Hale
                                    Chief Executive Officer

Date:                               February 27, 2004
                                    ---------------------------



By:                                 /s/Richard T. Hale
                                    ---------------------------
                                    Charles A. Rizzo
                                    Chief Financial Officer

Date:                               February 27, 2004
                                    ---------------------------
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MW:F:QZO M_/*\_ZS[M\X_'Y;;#VI'L.?2:T2]APY!':;CV5^T_6A1I^N1]WZ'W]W1Y2>M M_E3CD__Y_.\G%?W0(-=?4?PO1GZW_A+AGX#@9C4`&N9^H-N3`8TF-O\I<('= M0^#9\@?!P#60<%JKH`4+1D"R:=!KD,.@V3X(PJ-%2&`OPQH)MV5"['5PA1N\ M%86\X\"\P3!-'!S<#5F8PQK";(?^*/37"TWS)O"%3X`!&B(*H8:](TKP<#_T MTPSIY\00IE!B0`PBOY281?<)48?X.UD5+WC%#$)1A=)#8F$`I\4)BM&-0ANC ML9#6QC-BT7#/4R.P&E='TM4MCT_TX_]TI\ EX-99.CODE ETH 7 code_prinofficersmsi.txt Scudder/DeAM Funds Principal Executive and Principal Financial Officer Code of Ethics For the Registered Management Investment Companies Listed on Appendix A Effective Date [July 15, 2003] Table of Contents Page Number I. Overview..........................................................3 II. Purposes of the Officer Code......................................3 III. Responsibilities of Covered Officers..............................4 A. Honest and Ethical Conduct........................................4 B. Conflicts of Interest.............................................4 C. Use of Personal Fund Shareholder Information......................6 D. Public Communications.............................................6 E. Compliance with Applicable Laws, Rules and Regulations............6 IV. Violation Reporting...............................................7 A. Overview..........................................................7 B. How to Report.....................................................7 C. Process for Violation Reporting to the Fund Board.................7 D. Sanctions for Code Violations.....................................7 V. Waivers from the Officer Code.....................................7 VI. Amendments to the Code............................................8 VII. Acknowledgement and Certification of Adherence to the Officer Code..................................................8 IX. Recordkeeping.....................................................8 X. Confidentiality...................................................9 Appendices................................................................10 Appendix A: List of Officers Covered under the Code, by Board.........10 Appendix B: Officer Code Acknowledgement and Certification Form.......11 Appendix C: Definitions...............................................13 I. Overview This Principal Executive Officer and Principal Financial Officer Code of Ethics ("Officer Code") sets forth the policies, practices, and values expected to be exhibited in the conduct of the Principal Executive Officers and Principal Financial Officers of the investment companies ("Funds") they serve ("Covered Officers"). A list of Covered Officers and Funds is included on Appendix A. The Boards of the Funds listed on Appendix A have elected to implement the Officer Code, pursuant to Section 406 of the Sarbanes-Oxley Act of 2002 and the SEC's rules thereunder, to promote and demonstrate honest and ethical conduct in their Covered Officers. Deutsche Asset Management, Inc. or its affiliates ("DeAM") serves as the investment adviser to each Fund. All Covered Officers are also employees of DeAM or an affiliate. Thus, in addition to adhering to the Officer Code, these individuals must comply with DeAM policies and procedures, such as the DeAM Code of Ethics governing personal trading activities, as adopted pursuant to Rule 17j-1 under the Investment Company Act of 1940.1 In addition, such individuals also must comply with other applicable Fund policies and procedures. The DeAM Compliance Officer, who shall not be a Covered Officer and who shall serve as such subject to the approval of the Fund's Board (or committee thereof), is primarily responsible for implementing and enforcing this Code. The Compliance Officer has the authority to interpret this Officer Code and its applicability to particular circumstances. Any questions about the Officer Code should be directed to the DeAM Compliance Officer. The DeAM Compliance Officer and his or her contact information can be found in Appendix A. II. Purposes of the Officer Code The purposes of the Officer Code are to deter wrongdoing and to: o promote honest and ethical conduct among Covered Officers, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o promote full, fair, accurate, timely and understandable disclosures in reports and documents that the Funds file with or submit to the SEC (and in other public communications from the Funds) and that are within the Covered Officer's responsibilities; o promote compliance with applicable laws, rules and regulations; o encourage the prompt internal reporting of violations of the Officer Code to the DeAM Compliance Officer; and o establish accountability for adherence to the Officer Code. Any questions about the Officer Code should be referred to DeAM's Compliance Officer. - -------- 1 The obligations imposed by the Officer Code are separate from, and in addition to, any obligations imposed under codes of ethics adopted pursuant to Rule 17j-1 under the Investment Company Act of 1940, and any other code of conduct applicable to Covered Officers in whatever capacity they serve. The Officer Code does not incorporate any of those other codes and, accordingly, violations of those codes will not necessarily be considered violations of the Officer Code and waivers granted under those codes would not necessarily require a waiver to be granted under this Code. Sanctions imposed under those codes may be considered in determining appropriate sanctions for any violation of this Code. 3 III. Responsibilities of Covered Officers A. Honest and Ethical Conduct It is the duty of every Covered Officer to encourage and demonstrate honest and ethical conduct, as well as adhere to and require adherence to the Officer Code and any other applicable policies and procedures designed to promote this behavior. Covered Officers must at all times conduct themselves with integrity and distinction, putting first the interests of the Fund(s) they serve. Covered Officers must be honest and candid while maintaining confidentiality of information where required by law, DeAM policy or Fund policy. Covered Officers also must, at all times, act in good faith, responsibly and with due care, competence and diligence, without misrepresenting or being misleading about material facts or allowing their independent judgment to be subordinated. Covered Officers also should maintain skills appropriate and necessary for the performance of their duties for the Fund(s). Covered Officers also must responsibly use and control all Fund assets and resources entrusted to them. Covered Officers may not retaliate against others for, or otherwise discourage the reporting of, actual or apparent violations of the Officer Code or applicable laws or regulations. Covered Officers should create an environment that encourages the exchange of information, including concerns of the type that this Code is designed to address. B. Conflicts of Interest A "conflict of interest" occurs when a Covered Officer's personal interests interfere with the interests of the Fund for which he or she serves as an officer. Covered Officers may not improperly use their position with a Fund for personal or private gain to themselves, their family, or any other person. Similarly, Covered Officers may not use their personal influence or personal relationships to influence decisions or other Fund business or operational matters where they would benefit personally at the Fund's expense or to the Fund's detriment. Covered Officers may not cause the Fund to take action, or refrain from taking action, for their personal benefit at the Fund's expense or to the Fund's detriment. Some examples of conflicts of interest follow (this is not an all-inclusive list): being in the position of supervising, reviewing or having any influence on the job evaluation, pay or benefit of any immediate family member who is an employee of a Fund service provider or is otherwise associated with the Fund; or having an ownership interest in, or having any consulting or employment relationship with, any Fund service provider other than DeAM or its affiliates. Certain conflicts of interest covered by this Code arise out of the relationships between Covered Officers and the Fund that already are subject to conflict of interest provisions in the Investment Company Act and the Investment Advisers Act. For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as "affiliated persons" of the Fund. Covered Officers must comply with applicable laws and regulations. Therefore, any violations of existing statutory and regulatory prohibitions on individual behavior could be considered a violation of this Code. As to conflicts arising from, or as a result of the advisory relationship (or any other relationships) between the Fund and DeAM, of which the Covered Officers are also officers or employees, it is recognized by the Board that, subject to DeAM's fiduciary duties to the Fund, the Covered Officers will in the normal course of their duties (whether formally for the Fund or for DeAM, or for both) be involved in establishing policies and implementing decisions which will have different effects on 4 DeAM and the Fund. The Board recognizes that the participation of the Covered Officers in such activities is inherent in the contract relationship between the Fund and DeAM, and is consistent with the expectation of the Board of the performance by the Covered Officers of their duties as officers of the Fund. Covered Officers should avoid actual conflicts of interest, and appearances of conflicts of interest, between the Covered Officer's duties to the Fund and his or her personal interests beyond those contemplated or anticipated by applicable regulatory schemes. If a Covered Officer suspects or knows of a conflict or an appearance of one, the Covered Officer must immediately report the matter to the DeAM Compliance Officer. If a Covered Officer, in lieu of reporting such a matter to the DeAM Compliance Officer, may report the matter directly to the Fund's Board (or committee thereof), as appropriate (e.g., if the conflict involves the DeAM Compliance Officer or the Covered Officer reasonably believes it would be futile to report the matter to the DeAM Compliance Officer). When actual, apparent or suspected conflicts of interest arise in connection with a Covered Officer, DeAM personnel aware of the matter should promptly contact the DeAM Compliance Officer. There will be no reprisal or retaliation against the person reporting the matter. Upon receipt of a report of a possible conflict, the DeAM Compliance Officer will take steps to determine whether a conflict exists. In so doing, the DeAM Compliance Officer may take any actions he or she determines to be appropriate in his or her sole discretion and may use all reasonable resources, including retaining or engaging legal counsel, accounting firms or other consultants, subject to applicable law.2 The costs associated with such actions may be borne by the Fund, if appropriate, after consultation with the Fund's Board (or committee thereof). Otherwise, such costs will be borne by DeAM or other appropriate Fund service provider. After full review of a report of a possible conflict of interest, the DeAM Compliance Officer may determine that no conflict or reasonable appearance of a conflict exists. If, however, the DeAM Compliance Officer determines that an actual conflict exists, the Compliance Officer will resolve the conflict solely in the interests of the Fund, and will report the conflict and its resolution to the Fund's Board (or committee thereof). If the DeAM Compliance Officer determines that the appearance of a conflict exists, the DeAM Compliance Officer will take appropriate steps to remedy such appearance. In lieu of determining whether a conflict exists and/or resolving a conflict, the DeAM Compliance Officer instead may refer the matter to the Fund's Board (or committee thereof), as appropriate. However, the DeAM Compliance Officer must refer the matter to the Fund's Board (or committee thereof) if the DeAM Compliance Officer is directly involved in the conflict or under similar appropriate circumstances. After responding to a report of a possible conflict of interest, the DeAM Compliance Officer will discuss the matter with the person reporting it (and with the Covered Officer at issue, if different) for purposes of educating those involved on conflicts of interests (including how to detect and avoid them, if appropriate). Appropriate resolution of conflicts may restrict the personal activities of the Covered Officer and/or his family, friends or other persons. Solely because a conflict is disclosed to the DeAM Compliance Officer (and/or the Board or Committee thereof) and/or resolved by the DeAM Compliance Officer does not mean that the conflict or its resolution constitutes a waiver from the Code's requirements. - -------- 2 For example, retaining a Fund's independent accounting firm may require pre-approval by the Fund's audit committee. 5 Any questions about conflicts of interests, including whether a particular situation might be a conflict or an appearance of one, should be directed to the DeAM Compliance Officer. C. Use of Personal Fund Shareholder Information A Covered Officer may not use or disclose personal information about Fund shareholders, except in the performance of his or her duties for the Fund. Each Covered Officer also must abide by the Funds' and DeAM's privacy policies under SEC Regulation S-P. D. Public Communications In connection with his or her responsibilities for or involvement with a Fund's public communications and disclosure documents (e.g., shareholder reports, registration statements, press releases), each Covered Officer must provide information to Fund service providers (within the DeAM organization or otherwise) and to the Fund's Board (and any committees thereof), independent auditors, government regulators and self-regulatory organizations that is fair, accurate, complete, objective, relevant, timely and understandable. Further, within the scope of their duties, Covered Officers having direct or supervisory authority over Fund disclosure documents or other public Fund communications will, to the extent appropriate within their area of responsibility, endeavor to ensure full, fair, timely, accurate and understandable disclosure in Fund disclosure documents. Such Covered Officers will oversee, or appoint others to oversee, processes for the timely and accurate creation and review of all public reports and regulatory filings. Within the scope of his or her responsibilities as a Covered Officer, each Covered Officer also will familiarize himself or herself with the disclosure requirements applicable to the Fund, as well as the business and financial operations of the Fund. Each Covered Officer also will adhere to, and will promote adherence to, applicable disclosure controls, processes and procedures, including DeAM's Disclosure Controls and Procedures, which govern the process by which Fund disclosure documents are created and reviewed. To the extent that Covered Officers participate in the creation of a Fund's books or records, they must do so in a way that promotes the accuracy, fairness and timeliness of those records. E. Compliance with Applicable Laws, Rules and Regulations In connection with his or her duties and within the scope of his or her responsibilities as a Covered Officer, each Covered Officer must comply with governmental laws, rules and regulations, accounting standards, and Fund policies/procedures that apply to his or her role, responsibilities and duties with respect to the Funds ("Applicable Laws"). These requirements do not impose on Covered Officers any additional substantive duties. Additionally, Covered Officers should promote compliance with Applicable Laws. If a Covered Officer knows of any material violations of Applicable Laws or suspects that such a violation may have occurred, the Covered Officer is expected to promptly report the matter to the DeAM Compliance Officer. 6 IV. Violation Reporting A. Overview Each Covered Officer must promptly report to the DeAM Compliance Officer, and promote the reporting of, any known or suspected violations of the Officer Code. Failure to report a violation may be a violation of the Officer Code. Examples of violations of the Officer Code include, but are not limited to, the following: o Unethical or dishonest behavior o Obvious lack of adherence to policies surrounding review and approval of public communications and regulatory filings o Failure to report violations of the Officer Code o Known or obvious deviations from Applicable Laws o Failure to acknowledge and certify adherence to the Officer Code The DeAM Compliance Officer has the authority to take any and all action he or she considers appropriate in his or her sole discretion to investigate known or suspected Code violations, including consulting with the Fund's Board, the independent Board members, a Board committee, the Fund's legal counsel and/or counsel to the independent Board members. The Compliance Officer also has the authority to use all reasonable resources to investigate violations, including retaining or engaging legal counsel, accounting firms or other consultants, subject to applicable law.3 The costs associated with such actions may be borne by the Fund, if appropriate, after consultation with the Fund's Board (or committee thereof). Otherwise, such costs will be borne by DeAM. B. How to Report Any known or suspected violations of the Officer Code must be promptly reported to the DeAM Compliance Officer. C. Process for Violation Reporting to the Fund Board The DeAM Compliance Officer will promptly report any violations of the Code to the Fund's Board (or committee thereof). D. Sanctions for Code Violations Violations of the Code will be taken seriously. In response to reported or otherwise known violations, DeAM and the relevant Fund's Board may impose sanctions within the scope of their respective authority over the Covered Officer at issue. Sanctions imposed by DeAM could include termination of employment. Sanctions imposed by a Fund's Board could include termination of association with the Fund. V. Waivers from the Officer Code A Covered Officer may request a waiver from the Officer Code by transmitting a written request for a waiver to the DeAM Compliance Officer.4 The request must include the rationale for the request and must explain how the waiver would be in furtherance of the standards of conduct described in and underlying purposes of the Officer Code. The DeAM Compliance Officer will present this information to the Fund's Board (or committee thereof). The Board (or committee) - -------- 3 For example, retaining a Fund's independent accounting firm may require pre-approval by the Fund's audit committee. 4 Of course, it is not a waiver of the Officer Code if the Fund's Board (or committee thereof) determines that a matter is not a deviation from the Officer Code's requirements or is otherwise not covered by the Code. 7 will determine whether to grant the requested waiver. If the Board (or committee) grants the requested waiver, the DeAM Compliance Officer thereafter will monitor the activities subject to the waiver, as appropriate, and will promptly report to the Fund's Board (or committee thereof) regarding such activities, as appropriate. The DeAM Compliance Officer will coordinate and facilitate any required public disclosures of any waivers granted or any implicit waivers. VI. Amendments to the Code The DeAM Compliance Officer will review the Officer Code from time to time for its continued appropriateness and will propose any amendments to the Fund's Board (or committee thereof) on a timely basis. In addition, the Board (or committee thereof) will review the Officer Code at least annually for its continued appropriateness and may amend the Code as necessary or appropriate. The DeAM Compliance Officer will coordinate and facilitate any required public disclosures of Code amendments. VII. Acknowledgement and Certification of Adherence to the Officer Code Each Covered Officer must sign a statement upon appointment as a Covered Officer and annually thereafter acknowledging that he or she has received and read the Officer Code, as amended or updated, and confirming that he or she has complied with it (see Appendix B: Acknowledgement and Certification of Obligations Under the Officer Code). Understanding and complying with the Officer Code and truthfully completing the Acknowledgement and Certification Form is each Covered Officer's obligation. The DeAM Compliance Officer will maintain such Acknowledgements in the Fund's books and records. VIII. Scope of Responsibilities A Covered Officer's responsibilities under the Officer Code are limited to: (1) Fund matters over which the Officer has direct responsibility or control, matters in which the Officer routinely participates, and matters with which the Officer is otherwise involved (i.e., matters within the scope of the Covered Officer's responsibilities as a Fund officer); and (2) Fund matters of which the Officer has actual knowledge. IX. Recordkeeping The DeAM Compliance Officer will create and maintain appropriate records regarding the implementation and operation of the Officer Code, including records relating to conflicts of interest determinations and investigations of possible Code violations. 8 X. Confidentiality All reports and records prepared or maintained pursuant to this Officer Code shall be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Officer Code, such matters shall not be disclosed to anyone other than the DeAM Compliance Officer, the Fund's Board (or committee thereof), legal counsel, independent auditors, and any consultants engaged by the Compliance Officer. 9 Appendices Appendix A: List of Officers Covered under the Code, by Board: ================================================================================ Fund Board Principal Executive Principal Financial Other Persons with Officers Officers Similar Functions - -------------------------------------------------------------------------------- Montgomery Richard T. Hale Charles A. Rizzo -- Street Income Securities, Inc. ================================================================================ DeAM Compliance Officer: Name: Amy Olmert DeAM Department: Compliance Phone Numbers: 410-895-3661 (Baltimore) and 212-454-0111 (New York) Fax Numbers: 410-895-3837 (Baltimore) and 212-454-2152 (New York) As of: [July 15], 2003 10 Appendix B: Acknowledgement and Certification Initial Acknowledgement and Certification of Obligations Under the Officer Code - -------------------------------------------------------------------------------- Print Name Department Location Telephone 1. I acknowledge and certify that I am a Covered Officer under the Scudder Fund Principal Executive and Financial Officer Code of Ethics ("Officer Code"), and therefore subject to all of its requirements and provisions. 2. I have received and read the Officer Code and I understand the requirements and provisions set forth in the Officer Code. 3. I have disclosed any conflicts of interest of which I am aware to the DeAM Compliance Officer. 4. I will act in the best interest of the Funds for which I serve as an officer and have maintained the confidentiality of personal information about Fund shareholders. 5. I will report any known or suspected violations of the Officer Code in a timely manner to the DeAM Compliance Officer. - -------------------------------------------------------------------------------- Signature Date 11 Annual Acknowledgement and Certification of Obligations Under the Officer Code - -------------------------------------------------------------------------------- Print Name Department Location Telephone 6. I acknowledge and certify that I am a Covered Officer under the Scudder Fund Principal Executive and Financial Officer Code of Ethics ("Officer Code"), and therefore subject to all of its requirements and provisions. 7. I have received and read the Officer Code, and I understand the requirements and provisions set forth in the Officer Code. 8. I have adhered to the Officer Code. 9. I have not knowingly been a party to any conflict of interest, nor have I had actual knowledge about actual or apparent conflicts of interest that I did not report to the DeAM Compliance Officer in accordance with the Officer Code's requirements. 10. I have acted in the best interest of the Funds for which I serve as an officer and have maintained the confidentiality of personal information about Fund shareholders. 11. With respect to the duties I perform for the Fund as a Fund officer, I believe that effective processes are in place to create and file public reports and documents in accordance with applicable regulations. 12. With respect to the duties I perform for the Fund as a Fund officer, I have complied to the best of my knowledge with all Applicable Laws (as that term is defined in the Officer Code) and have appropriately monitored those persons under my supervision for compliance with Applicable Laws. 13. I have reported any known or suspected violations of the Officer Code in a timely manner to the DeAM Compliance Officer. - -------------------------------------------------------------------------------- Signature Date 12 Appendix C: Definitions Principal Executive Officer Individual holding the office of President of the Fund or series of Funds, or a person performing a similar function. Principal Financial Officer Individual holding the office of Treasurer of the Fund or series of Funds, or a person performing a similar function. Registered Investment Management Investment Company Registered investment companies other than a face-amount certificate company or a unit investment trust. Waiver A waiver is an approval of an exemption from a Code requirement. Implicit Waiver An implicit waiver is the failure to take action within a reasonable period of time regarding a material departure from a requirement or provision of the Officer Code that has been made known to the DeAM Compliance Officer or the Fund's Board (or committee thereof). 13 EX-99.CERT 8 cert.txt CERTIFICATION Deutsche Asset Management [LOGO] A Member of the Deutsche Bank Group Chief Executive Officer Form N-CSR Certification under Sarbanes Oxley Act I, Richard T. Hale, certify that: 1. I have reviewed this report, filed on behalf of Montgomery Street Income Securities, Inc., on Form N-CSR; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. February 27, 2004 /s/Richard T. Hale Richard T. Hale Chief Executive Officer Montgomery Street Income Securities, Inc. Deutsche Asset Management [LOGO] A Member of the Deutsche Bank Group Chief Financial Officer Form N-CSR Certification under Sarbanes Oxley Act I, Charles A. Rizzo, certify that: 1. I have reviewed this report, filed on behalf of Montgomery Street Income Securities, Inc., on Form N-CSR; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. February 27, 2004 /s/Charles A. Rizzo Charles A. Rizzo Chief Financial Officer Montgomery Street Income Securities, Inc. EX-99.906 9 cert906.txt 906 CERTIFICATION Deutsche Asset Management [LOGO] A Member of the Deutsche Bank Group Chief Executive Officer Section 906 Certification under Sarbanes Oxley Act I, Richard T. Hale, certify that: 1. I have reviewed this report, filed on behalf of Montgomery Street Income Securities, Inc., on Form N-CSR; 2. Based on my knowledge and pursuant to 18 U.S.C. ss. 1350, the periodic report on Form N-CSR (the "Report") fully complies with the requirements of ss. 13 (a) or ss. 15 (d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. February 27, 2004 /s/Richard T. Hale Richard T. Hale Chief Executive Officer Montgomery Street Income Securities, Inc. Deutsche Asset Management [LOGO] A Member of the Deutsche Bank Group Chief Financial Officer Section 906 Certification under Sarbanes Oxley Act I, Charles A. Rizzo, certify that: 1. I have reviewed this report, filed on behalf of Montgomery Street Income Securities, Inc., on Form N-CSR; 2. Based on my knowledge and pursuant to 18 U.S.C. ss. 1350, the periodic report on Form N-CSR (the "Report") fully complies with the requirements of ss. 13 (a) or ss. 15 (d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. February 27, 2004 /s/Charles A. Rizzo Charles A. Rizzo Chief Financial Officer Montgomery Street Income Securities, Inc. -----END PRIVACY-ENHANCED MESSAGE-----