N-CSR 1 c17098nvcsr.txt CERTIFIED SHAREHOLDER REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act File Number 811-4260 RIVERSOURCE GOVERNMENT INCOME SERIES, INC. (Exact name of registrant as specified in charter) 50606 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (Address of principal executive offices) (Zip code) Scott R. Plummer - 5228 Ameriprise Financial Center, Minneapolis, MN 55474 (Name and address of agent for service) Registrant's telephone number, including area code: (612) 671-1947 Date of fiscal year end: 5/31 Date of reporting period: 5/31 Annual Report and Prospectus (RIVERSOURCE INVESTMENTS LOGO) RIVERSOURCE(R) SHORT DURATION U.S. GOVERNMENT FUND ANNUAL REPORT FOR THE PERIOD ENDED MAY 31, 2007 (Prospectus also enclosed) RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND SEEKS TO PROVIDE SHAREHOLDERS WITH A HIGH LEVEL OF CURRENT INCOME AND SAFETY OF PRINCIPAL CONSISTENT WITH INVESTMENT IN U.S. GOVERNMENT AND GOVERNMENT AGENCY SECURITIES. This annual report includes a prospectus that describes in detail the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money. TABLE OF CONTENTS Fund Snapshot....................... 3 Performance Summary................. 5 Questions & Answers with Portfolio Management........ 7 The Fund's Long-term Performance ... 10 Fund Expenses Example............... 12 Investments in Securities........... 14 Financial Statements................ 21 Notes to Financial Statements....... 25 Report of Independent Registered Public Accounting Firm........... 46 Federal Income Tax Information...... 47 Board Members and Officers.......... 51 Approval of Investment Management Services Agreement............... 55 Proxy Voting........................ 57
(DALBAR LOGO) The RiverSource mutual fund shareholder reports have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. -------------------------------------------------------------------------------- 2 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT FUND SNAPSHOT AT MAY 31, 2007 FUND OBJECTIVE RiverSource Short Duration U.S. Government Fund seeks to provide shareholders with a high level of current income and safety of principal consistent with investment in U.S. government and government agency securities. SECTOR BREAKDOWN Percentage of bond and cash & cash equivalents portfolio assets (PIE CHART) Commercial Mortgage-Backed 1.7% Asset-Backed 1.9% Cash & Cash Equivalents(2) 14.8% U.S. Government Obligations & Agencies 27.6% Mortgage-Backed(1) 54.0%
(1) Of the 54.0%, 4.1% is due to forward commitment mortgage-backed securities activity. Short-term securities are held as collateral for these commitments. (2) Of the 14.8%, 4.0% is due to security lending activity and 10.8% is the Fund's cash equivalent position. QUALITY BREAKDOWN Percentage of bond portfolio assets (PIE CHART) AAA bonds 100.0%
Bond ratings apply to underlying holdings of the Fund and not the Fund itself. Whenever possible, the Standard and Poor's rating is used to determine the credit quality of a security. Standard and Poor's rates the creditworthiness of corporate bonds, with 15 categories, ranging from AAA (highest) to D (lowest). Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. If Standard and Poor's doesn't rate a security, then Moody's rating is used. RiverSource Investments, LLC, the Fund's investment manager, rates a security using an internal rating system when Moody's doesn't provide a rating. Shares of the RiverSource Short Duration U.S. Government Fund are not insured or guaranteed by the U.S. government. There are risks associated with an investment in a bond fund, including the impact of interest rates and credit. These and other risk considerations are discussed in the fund's prospectus. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 3 FUND SNAPSHOT AT MAY 31, 2007 STYLE MATRIX
DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW
Shading within the style matrix indicates areas in which the Fund generally invests. The style matrix can be a valuable tool for constructing and monitoring your portfolio. It provides a frame of reference for distinguishing the types of stocks or bonds owned by a mutual fund, and serves as a guideline for helping you build a portfolio. Investment products, including shares of mutual funds, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. PORTFOLIO MANAGERS*
YEARS IN INDUSTRY Jamie Jackson, CFA 19 Scott Kirby 28
* The Fund is managed by teams of investment professionals led by Jamie Jackson and Scott Kirby. FUND FACTS
TICKER SYMBOL INCEPTION DATE Class A IFINX 08/19/85 Class B ISHOX 03/20/95 Class C AXFCX 06/26/00 Class I AGMIX 03/04/04 Class R4(1) IDFYX 03/20/95 Class W RSDWX 12/01/06 (1) Effective Dec. 11, 2006, Class Y was renamed Class R4. Total net assets $798.8 million Number of holdings 159 Weighted average life(2) 3.3 years Effective duration(3) 2.1 years Weighted average bond rating(4) AAA
(2) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (3) EFFECTIVE DURATION measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (4) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. -------------------------------------------------------------------------------- 4 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT PERFORMANCE SUMMARY PERFORMANCE COMPARISON For the year ended May 31, 2007 (BAR CHART) RiverSource Short Duration U.S. Government Fund Class A (excluding sales charge) +5.12% Lehman Brothers 1-3 Year Government Index (unmanaged) +4.98% Lipper Short U.S. Government Funds Index +4.70%
(see "The Fund's Long-term Performance" for Index descriptions) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial institution or visiting riversource.com/funds. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. It is not possible to invest directly in an index. ANNUAL OPERATING EXPENSE RATIO (AS OF THE CURRENT PROSPECTUS)
TOTAL NET EXPENSES(A) Class A 1.03% 0.89% Class B 1.79% 1.65% Class C 1.80% 1.65% Class I 0.59% 0.51% Class R4(b) 0.89% 0.76% Class W(b) 1.01% 0.96%
(a) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2008, unless sooner terminated at the discretion of the Fund's Board. Any amounts waived will not be reimbursed by the Fund. Under this agreement, net fund expenses (excluding fees and expenses of acquired funds) will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.51% for Class I, 0.76% for Class R4 and 0.96% for Class W. (b) Effective Dec. 11, 2006, Class Y was renamed Class R4. Inception date for Class W was Dec. 1, 2006. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 5 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS
AT MAY 31, 2007 SINCE WITHOUT SALES CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION Class A (inception 8/19/85) +5.12% +2.67% +2.52% +4.04% +6.12% Class B (inception 3/20/95) +4.34% +1.90% +1.75% +3.26% +3.93% Class C (inception 6/26/00) +4.34% +1.90% +1.75% N/A +3.12% Class I (inception 3/4/04) +5.50% +3.02% N/A N/A +2.52% Class R4** (inception 3/20/95) +5.31% +2.85% +2.70% +4.19% +4.88% Class W (inception 12/1/06) N/A N/A N/A N/A +1.42%* WITH SALES CHARGE Class A (inception 8/19/85) +0.14% +1.02% +1.52% +3.53% +5.89% Class B (inception 3/20/95) -0.66% +0.63% +1.39% +3.26% +3.93% Class C (inception 6/26/00) +3.34% +1.90% +1.75% N/A +3.12%
AT JUNE 30, 2007 SINCE WITHOUT SALES CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION Class A (inception 8/19/85) +5.17% +2.71% +2.44% +3.97% +6.11% Class B (inception 3/20/95) +4.38% +1.94% +1.68% +3.19% +3.91% Class C (inception 6/26/00) +4.38% +1.94% +1.68% N/A +3.10% Class I (inception 3/4/04) +5.54% +3.06% N/A N/A +2.50% Class R4** (inception 3/20/95) +5.12% +2.89% +2.62% +4.12% +4.86% Class W (inception 12/1/06) N/A N/A N/A N/A +1.54%* WITH SALES CHARGE Class A (inception 8/19/85) +0.17% +1.05% +1.45% +3.46% +5.87% Class B (inception 3/20/95) -0.62% +0.67% +1.31% +3.19% +3.91% Class C (inception 6/26/00) +3.38% +1.94% +1.68% N/A +3.10%
Class A share performance reflects the maximum sales charge of 4.75%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second and third years 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be subject to a 1% CDSC if shares are sold within one year after purchase. Sales charges do not apply to Class I, Class R4 and Class W shares. Class I and Class R4 are available to institutional investors only. Class W shares are offered through qualifying discretionary accounts. * Not annualized. ** Effective Dec. 11, 2006, Class Y was renamed Class R4. -------------------------------------------------------------------------------- 6 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT QUESTIONS & ANSWERS WITH PORTFOLIO MANAGEMENT Below, Portfolio Managers Jamie Jackson and Scott Kirby discuss the Fund's results and positioning for the 12 months ended May 31, 2007. Q: How did RiverSource Short Duration U.S. Government Fund perform for the fiscal year? A: RiverSource Short Duration U.S. Government Fund's Class A shares (excluding sales charge) rose 5.12% for the 12 months ended May 31, 2007. The Fund outperformed the Lehman Brothers 1-3 Year Government Index (Lehman Index), which gained 4.98%. The Fund also outperformed the Lipper Short U.S. Government Funds Index, representing the Fund's peer group, which advanced 4.70% during the same time frame. THE PRIMARY CONTRIBUTOR TO THE FUND'S OUTPERFORMANCE WAS ITS SIZABLE EXPOSURE TO MORTGAGE-BACKED SECURITIES, WHICH OUTPERFORMED U.S. TREASURIES DURING THE ANNUAL PERIOD. Q: What factors most significantly affected the Fund's performance during the annual period? A: For the annual period overall, interest rates moved modestly lower across the spectrum of maturities, or yield curve. The strong performance across fixed income markets was supported by solid, albeit moderating U.S. economic growth and reasonably well-contained inflation. With economic growth slowing throughout the period and the Federal Reserve Board (the Fed) adopting a wait-and-see policy, bond investors began to anticipate that the Fed would begin cutting interest rates to stimulate growth; however, interest rates generally fell during the annual period. In May of this year, investors began to realize en masse that inflation pressures were too high -- and prospects for economic growth just strong enough -- to keep the Fed from cutting rates. Indeed, some strategists began to wonder if maybe the Fed's next move would be a rate hike. This change in sentiment caused interest rates to rise somewhat at the end of the period. The primary contributor to the Fund's outperformance was its sizable exposure to mortgage-backed securities, which outperformed U.S. Treasuries during the annual period. Also, issue selection within mortgage-backed securities boosted results, particularly the Fund's emphasis on premium coupon securities. Higher coupon mortgage-backed securities outperformed lower coupon mortgage-backed securities for the period. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 7 QUESTIONS & ANSWERS In addition, active management of duration positioning throughout the period contributed to the Fund's results. While there was not a notable change in duration stance from the start to the finish of the fiscal year, shifts made during the annual period as interest rates chugged unevenly downward proved beneficial. Duration is a measure of the Fund's sensitivity to changes in interest rates. There were no major detractors from the Fund's results during the period. To a modest degree, the Fund's exposure to Treasury Inflation Protected Securities, or TIPS, detracted, as TIPS underperformed nominal Treasury securities, or non-inflation protected Treasury securities, during the period. The TIPS in the Fund's portfolio matured in January 2007. Q: What changes did you make to the Fund and how is it currently positioned? A: Toward the end of the period, we became a bit less defensive, shifting from the conservative posture held throughout much of the fiscal year to a somewhat more aggressive strategy. We lengthened duration, primarily by increasing exposure to the longer end of the 1-3 year portion of the yield curve, as yields moved higher in the last weeks of the period and the yield curve became more positively sloped, meaning that longer-term yields grew higher than shorter-term yields. We also added TIPS back into the Fund's portfolio, based on attractive inflation rates. The portfolio turnover rate of 168% during the annual period can be attributed primarily to rolling-maturity mortgage securities, processing of prepayments and opportunistic changes we made in response to valuations or market developments. WE EXPECT THE FED TO KEEP SHORT-TERM INTEREST RATES ON HOLD THROUGH THE REMAINDER OF THE YEAR. -------------------------------------------------------------------------------- 8 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT QUESTIONS & ANSWERS Q: What is the Fund's tactical view and strategy for the months ahead? A: By the end of May, bond valuations had risen close to what we view as fair value. Interest rates, as indicated above, had risen steadily through the month, and the yield curve had steepened just a bit. Given this backdrop, we believe that we may see interest rates rise moderately during the next several months. We expect the Fed to keep short-term interest rates on hold through the remainder of the year. Based on this view, we intend to maintain the Fund's exposure to mortgage- backed securities. We may seek opportunities to add to the Fund's position in lower coupon and pass-through mortgage-backed securities. We also expect to continue adjusting duration tactically over the months ahead, lengthening and shortening the Fund's duration at opportune times. As always, our strategy is to provide added portfolio value with a moderate amount of risk. Quality issues and security selection remain a priority as we continue to seek attractive buying opportunities. Any specific securities mentioned are for illustrative purposes only and are not a complete list of securities that have increased or decreased in value. The views expressed in this statement reflect those of the portfolio manager(s) only through the end of the period of the report as stated on the cover and do not necessarily represent the views of RiverSource Investments, LLC (RiverSource) or any subadviser to the Fund or any other person in the RiverSource or subadviser organizations. Any such views are subject to change at any time based upon market or other conditions and RiverSource disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a RiverSource Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any RiverSource Fund. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 9 THE FUND'S LONG-TERM PERFORMANCE The chart on the facing page illustrates the total value of an assumed $10,000 investment in RiverSource Short Duration U.S. Government Fund Class A shares (from 6/1/97 to 5/31/07) as compared to the performance of two widely cited performance indices, the Lehman Brothers 1-3 Year Government Index and the Lipper Short U.S. Government Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distribution paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The table below and the chart on the facing page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial institution or visiting riversource.com/funds. Also see "Past Performance" in the Fund's current prospectus. COMPARATIVE RESULTS
SINCE Results at May 31, 2007 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION(3) RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $10,014 $10,309 $10,783 $14,150 $34,783 Average annual total return +0.14% +1.02% +1.52% +3.53% +5.89% LEHMAN BROTHERS 1-3 YEAR GOVERNMENT INDEX(1) Cumulative value of $10,000 $10,498 $10,895 $11,587 $15,897 $37,453 Average annual total return +4.98% +2.90% +2.99% +4.74% +6.26% LIPPER SHORT U.S. GOVERNMENT FUNDS INDEX(2) Cumulative value of $10,000 $10,470 $10,870 $11,380 $15,237 NA Average annual total return +4.70% +2.82% +2.62% +4.30% NA
Results for other share classes can be found on page 6. -------------------------------------------------------------------------------- 10 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT (VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE SHORT DURATION FUND LINE GRAPH)
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND LEHMAN BROTHERS 1-3 YEAR LIPPER SHORT U.S. CLASS A (INCLUDES SALES GOVERNMENT INDEX(1) GOVERNMENT FUNDS INDEX(2) CHARGE) ($14,150) ($15,897) ($15,237) -------------------------- ------------------------ ------------------------- '97 9525 10000 10000 '98 10301 10697 10664 '99 10723 11262 11177 '00 10722 11716 11589 '01 11814 12894 12724 '02 12496 13719 13391 '03 13108 14495 14007 '04 13077 14590 14016 '05 13328 14865 14301 '06 13461 15143 14553 '07 14150 15897 15237
(1) The Lehman Brothers 1-3 Year Government Index, an unmanaged index, is made up of all publicly issued, non-convertible domestic debt of the U.S. government, or agency thereof, or any quasi-federal corporation. The index also includes corporate debt guaranteed by the U.S. government. Only notes and bonds with a minimum maturity of one year up to a maximum maturity of 2.9 years are included. The index reflects reinvestment of all distributions and changes in market prices. (2) The Lipper Short U.S. Government Funds Index includes the 30 largest short U.S. government funds tracked by Lipper Inc. The index's returns include net reinvested dividends. (3) Fund data is from Aug. 19, 1985. Lehman Brothers 1-3 Government Index data is from Sept. 1, 1985. The Fund began operating before the inception of the Lipper peer group. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 11 FUND EXPENSES EXAMPLE (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, which may include management fees; distribution and service (12b-1) fees; and other Fund fees and expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. In addition to the ongoing expenses which the Fund bears directly, the Fund's shareholders indirectly bear the expenses of the funds in which it invests (also referred to as "acquired funds"), including affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds). The Fund's indirect expense from investing in the acquired funds is based on the Fund's pro rata portion of the cumulative expenses charged by the acquired funds using the acquired funds expense ratio as of the most recent shareholder report. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended May 31, 2007. ACTUAL EXPENSES The first line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading titled "Expenses paid during the period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. -------------------------------------------------------------------------------- 12 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED DEC. 1, 2006 MAY 31, 2007 THE PERIOD(A) EXPENSE RATIO Class A Actual(b) $1,000 $1,014.60 $ 4.47 .89% Hypothetical (5% return before expenses) $1,000 $1,020.49 $ 4.48 .89% Class B Actual(b) $1,000 $1,010.80 $ 8.22(c) 1.64% Hypothetical (5% return before expenses) $1,000 $1,016.75 $ 8.25(c) 1.64% Class C Actual(b) $1,000 $1,012.90 $ 8.23(c) 1.64% Hypothetical (5% return before expenses) $1,000 $1,016.75 $ 8.25(c) 1.64% Class I Actual(b) $1,000 $1,018.50 $ 2.72(c) .54% Hypothetical (5% return before expenses) $1,000 $1,022.24 $ 2.72(c) .54% Class R4 Actual(b) $1,000 $1,015.50 $ 3.62(c) .72% Hypothetical (5% return before expenses) $1,000 $1,021.34 $ 3.63(c) .72% Class W Actual(b) $1,000 $1,014.20 $ 4.77(c) .95% Hypothetical (5% return before expenses) $1,000 $1,020.19 $ 4.78(c) .95%
(a) Expenses are equal to the Fund's annualized expense ratio as indicated above, multiplied by the average account value over the period, multiplied by 182/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended May 31, 2007: +1.46% for Class A, +1.08% for Class B, +1.29% for Class C, +1.85% for Class I, +1.55% for Class R4 and +1.42% for Class W. (c) In September 2006, the Board approved renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from an account-based fee to an asset-based fee, and adopting a plan administration services agreement. These changes were effective Dec. 11, 2006. In addition, the investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2008, unless sooner terminated at the discretion of the Fund's Board, such that net expenses, (excluding fees and expenses of acquired funds), will not exceed 1.65% for Class B; 1.65% for Class C; 0.51% for Class I; 0.76% for Class R4 and 0.96% for Class W. Any amounts waived will not be reimbursed by the Fund. This change was effective June 1, 2007. If these changes had been in place for the entire six month period ended May 31, 2007, the actual expenses paid would have been $8.27 for Class B, $8.28 for Class C, $2.57 for Class I, $3.82 for Class R4 and $4.82 for Class W, the hypothetical expenses paid would have been $8.30 for Class B, $8.30 for Class C, $2.57 for Class I, $3.83 for Class R4 and $4.84 for Class W. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 13 INVESTMENTS IN SECURITIES MAY 31, 2007 (Percentages represent value of investments compared to net assets)
BONDS (92.8%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) U.S. GOVERNMENT OBLIGATIONS & AGENCIES (30.1%) Federal Farm Credit Bank 10-10-08 4.25% $6,015,000 $5,935,241 Federal Home Loan Bank 10-19-07 4.13 35,000,000 34,857,934 02-08-08 4.63 13,510,000 13,446,598 02-13-08 5.25 13,730,000 13,722,339 11-21-08 4.63 6,500,000 6,439,362 Federal Home Loan Mtge Corp 08-17-07 4.00 16,890,000 16,846,272 11-02-07 3.25 21,000,000 20,831,328 06-15-08 3.88 4,010,000 3,951,133 10-15-08 5.13 24,390,000 24,329,488 Federal Natl Mtge Assn 10-15-08 4.50 10,615,000 10,507,226 U.S. Treasury 11-30-07 4.25 14,901,000(b) 14,859,098 02-15-08 3.38 30,815,000(b,k) 30,461,121 02-15-09 4.50 10,000,000 9,923,440 04-30-12 4.50 2,110,000 2,077,196 05-15-17 4.50 16,770,000(b) 16,256,419 U.S. Treasury Inflation-Indexed Bond 04-15-12 2.00 16,591,552(n) 16,184,149 --------------- Total 240,628,344 ----------------------------------------------------------------------------------- ASSET-BACKED (2.0%) Capital Auto Receivables Asset Trust Series 2006-SN1A Cl A4B 03-20-10 5.43 3,250,000(d,m) 3,250,000 Countrywide Asset-Backed Certificates Series 2007-7 Cl 2A2 10-25-37 5.48 2,600,000(m) 2,597,807 Fannie Mae Grantor Trust Series 2005-T4 Cl A1C 09-25-35 5.47 6,376,698(m) 6,421,189 Residential Asset Securities Series 2007-KS3 Cl AI2 04-25-37 5.50 4,050,000(m) 4,056,642 --------------- Total 16,325,638 -----------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (1.9%)(f) Federal Home Loan Mtge Corp Multifamily Structured Pass-Through Ctfs Series K001 Cl A2 04-25-16 5.65% $7,398,304 $7,435,013 Federal Natl Mtge Assn #360800 01-01-09 5.74 3,074,307 3,076,421 Federal Natl Mtge Assn #381990 10-01-09 7.11 4,153,575 4,292,323 --------------- Total 14,803,757 ----------------------------------------------------------------------------------- MORTGAGE-BACKED (58.9%)(f,o) Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2007-1 Cl 3A21 03-25-37 6.20 2,292,000(j) 2,319,580 American Home Mtge Assets Collateralized Mtge Obligation Series 2007-2 Cl A2A 03-25-47 5.49 3,649,561(j) 3,645,601 American Home Mtge Investment Trust Collateralized Mtge Obligation Series 2007-1 Cl GA1C 05-25-47 5.51 4,630,500(j) 4,609,101 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2006-9 Cl 1CB1 01-25-37 6.00 3,800,531 3,764,944 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-6CB Cl 1A1 04-25-35 7.50 1,761,838 1,819,859 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-2CB Cl A11 03-25-36 6.00 6,161,831 6,146,451 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00 5,125,969(d) 5,313,104
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 14 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp 06-01-37 6.50% $28,000,000(e) $28,446,263 Federal Home Loan Mtge Corp #1G1067 07-01-36 5.69 6,464,356(j) 6,492,152 Federal Home Loan Mtge Corp #1G2496 09-01-36 6.20 2,766,398(j) 2,791,489 Federal Home Loan Mtge Corp #A18107 01-01-34 5.50 3,536,560 3,460,906 Federal Home Loan Mtge Corp #C00351 07-01-24 8.00 305,798 324,170 Federal Home Loan Mtge Corp #C00385 01-01-25 9.00 457,819 495,446 Federal Home Loan Mtge Corp #C80329 08-01-25 8.00 84,250 88,879 Federal Home Loan Mtge Corp #E00398 10-01-10 7.00 446,014 455,404 Federal Home Loan Mtge Corp #E81240 06-01-15 7.50 4,384,625 4,532,794 Federal Home Loan Mtge Corp #E90650 07-01-12 5.50 249,122 247,574 Federal Home Loan Mtge Corp #E92454 11-01-17 5.00 3,486,294 3,409,980 Federal Home Loan Mtge Corp #G00363 06-01-25 8.00 379,992 400,871 Federal Home Loan Mtge Corp #G00501 05-01-26 9.00 710,017 768,080 Federal Home Loan Mtge Corp #G10669 03-01-12 7.50 2,075,928 2,146,074 Federal Home Loan Mtge Corp #G11243 04-01-17 6.50 15,728,437 16,150,219 Federal Home Loan Mtge Corp #G12100 11-01-13 5.00 4,039,355 3,958,001 Federal Home Loan Mtge Corp #M30074 09-01-09 6.50 118,372 120,732 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 11 Cl B 01-01-20 20.00 7,744(h) 1,636 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 237 Cl IO 05-15-36 8.58 1,246,634(h) 323,336
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2564 Cl IX 12-15-12 20.00% $2,574,002(h) $31,612 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2590 Cl BI 02-15-14 20.00 3,688,038(h) 118,138 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2783 Cl MI 03-15-25 20.00 5,790,102(h) 279,819 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only/Inverse Floater Series 2471 Cl SI 03-15-32 11.83 1,606,653(g,h) 140,909 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only/Inverse Floater Series 2882 Cl XS 11-15-19 8.00 7,615,745(g,h) 532,463 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2617 Cl HD 06-15-16 7.00 8,085,210 8,306,578 Federal Natl Mtge Assn 06-01-37 6.00 6,000,000(e) 5,992,500 06-01-37 6.50 1,000,000(e) 1,015,625 Federal Natl Mtge Assn #124528 10-01-07 7.50 29,502 29,605 Federal Natl Mtge Assn #125032 11-01-21 8.00 162,787 171,677 Federal Natl Mtge Assn #190129 11-01-23 6.00 1,136,061 1,140,231 Federal Natl Mtge Assn #190353 08-01-34 5.00 7,268,819 6,934,204 Federal Natl Mtge Assn #190764 09-01-07 8.50 68 68 Federal Natl Mtge Assn #190785 05-01-09 7.50 277,431 278,400
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 15
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #190988 06-01-24 9.00% $300,508 $320,017 Federal Natl Mtge Assn #254384 06-01-17 7.00 423,303 436,932 Federal Natl Mtge Assn #254454 08-01-17 7.00 751,010 775,191 Federal Natl Mtge Assn #254723 05-01-23 5.50 10,236,702 10,077,271 Federal Natl Mtge Assn #254748 04-01-13 5.50 7,345,741 7,297,822 Federal Natl Mtge Assn #254757 05-01-13 5.00 9,907,614 9,783,211 Federal Natl Mtge Assn #254774 05-01-13 5.50 2,328,114 2,318,918 Federal Natl Mtge Assn #255501 09-01-14 6.00 987,993 997,955 Federal Natl Mtge Assn #303885 05-01-26 7.50 524,626 550,048 Federal Natl Mtge Assn #313007 07-01-11 7.50 301,432 308,582 Federal Natl Mtge Assn #313428 12-01-08 7.50 66,766 66,999 Federal Natl Mtge Assn #336512 02-01-26 6.00 65,183 65,643 Federal Natl Mtge Assn #357485 02-01-34 5.50 14,715,823 14,408,846 Federal Natl Mtge Assn #407327 01-01-14 5.50 530,289 528,303 Federal Natl Mtge Assn #456374 12-01-13 5.50 914,263 910,838 Federal Natl Mtge Assn #508402 08-01-14 6.50 297,993 305,231 Federal Natl Mtge Assn #545818 07-01-17 6.00 16,754,648 16,991,076 Federal Natl Mtge Assn #545864 08-01-17 5.50 13,256,981 13,219,821 Federal Natl Mtge Assn #545910 08-01-17 6.00 2,546,964 2,582,919 Federal Natl Mtge Assn #555063 11-01-17 5.50 9,607,750 9,574,215 Federal Natl Mtge Assn #555367 03-01-33 6.00 11,226,823 11,282,501 Federal Natl Mtge Assn #579485 04-01-31 6.50 2,467,945 2,546,799
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #593829 12-01-28 7.00% $1,691,166 $1,761,328 Federal Natl Mtge Assn #601416 11-01-31 6.50 1,010,839 1,046,005 Federal Natl Mtge Assn #630993 09-01-31 7.50 2,612,436 2,738,467 Federal Natl Mtge Assn #648040 06-01-32 6.50 2,382,560 2,442,202 Federal Natl Mtge Assn #648349 06-01-17 6.00 8,350,926 8,468,812 Federal Natl Mtge Assn #651284 07-01-17 6.00 1,732,361 1,756,800 Federal Natl Mtge Assn #662866 11-01-17 6.00 1,261,118 1,282,015 Federal Natl Mtge Assn #665752 09-01-32 6.50 1,483,437 1,520,572 Federal Natl Mtge Assn #670782 11-01-12 5.00 494,174 488,059 Federal Natl Mtge Assn #670830 12-01-12 5.00 657,283 649,091 Federal Natl Mtge Assn #671415 01-01-10 5.00 361,740 361,354 Federal Natl Mtge Assn #678940 02-01-18 5.50 2,529,893 2,521,341 Federal Natl Mtge Assn #686227 02-01-18 5.50 3,425,596 3,413,605 Federal Natl Mtge Assn #696837 04-01-18 5.50 3,583,331 3,569,405 Federal Natl Mtge Assn #704610 06-01-33 5.50 11,941,223 11,692,126 Federal Natl Mtge Assn #712602 06-01-13 5.00 1,352,716 1,335,727 Federal Natl Mtge Assn #722325 07-01-33 4.97 5,675,065(j) 5,592,209 Federal Natl Mtge Assn #722589 08-01-33 6.89 175,139(j) 176,304 Federal Natl Mtge Assn #725232 03-01-34 5.00 10,852,210 10,358,062 Federal Natl Mtge Assn #725425 04-01-34 5.50 10,359,574 10,143,753 Federal Natl Mtge Assn #725431 08-01-15 5.50 10,228,490 10,190,170 Federal Natl Mtge Assn #725737 08-01-34 4.54 4,160,489(j) 4,140,477
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 16 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #725773 09-01-34 5.50% $8,799,556 $8,611,032 Federal Natl Mtge Assn #730632 08-01-33 4.12 2,208,297(j) 2,150,563 Federal Natl Mtge Assn #735212 12-01-34 5.00 6,446,166 6,149,422 Federal Natl Mtge Assn #739243 09-01-33 6.00 3,231,089 3,268,988 Federal Natl Mtge Assn #739331 09-01-33 6.00 1,708,968 1,715,695 Federal Natl Mtge Assn #743524 11-01-33 5.00 3,363,831 3,210,662 Federal Natl Mtge Assn #753508 11-01-33 5.00 3,638,235 3,472,571 Federal Natl Mtge Assn #791447 10-01-34 6.00 5,080,059 5,089,100 Federal Natl Mtge Assn #797046 07-01-34 5.50 3,488,414 3,413,677 Federal Natl Mtge Assn #799769 11-01-34 5.05 4,583,300(j) 4,547,963 Federal Natl Mtge Assn #801344 10-01-34 5.07 4,883,235(j) 4,855,255 Federal Natl Mtge Assn #815463 02-01-35 5.50 2,565,546 2,510,581 Federal Natl Mtge Assn #832641 09-01-35 6.00 7,171,613 7,168,731 Federal Natl Mtge Assn #845070 12-01-35 5.09 2,543,712(j) 2,527,501 Federal Natl Mtge Assn #849082 01-01-36 5.82 2,846,388(j) 2,859,419 Federal Natl Mtge Assn #849170 01-01-36 5.95 3,893,687(j) 3,920,935 Federal Natl Mtge Assn #878661 02-01-36 5.50 8,724,175 8,477,106 Federal Natl Mtge Assn #883267 07-01-36 6.50 4,738,279 4,869,985 Federal Natl Mtge Assn #886461 08-01-36 6.19 2,854,652(j) 2,889,907 Federal Natl Mtge Assn #887096 07-01-36 5.81 5,199,321(j) 5,223,381 Federal Natl Mtge Assn #887403 07-01-36 7.00 3,322,699 3,456,621 Federal Natl Mtge Assn #900197 10-01-36 5.94 3,211,380(j) 3,247,541
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #902818 11-01-36 5.94% $2,747,616(j) $2,775,669 Federal Natl Mtge Assn #919341 05-01-37 6.50 5,256,271(e) 5,339,080 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 163 Cl 2 07-25-22 20.00 669,479(h) 105,725 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-24 Cl PI 12-25-12 20.00 1,759,955(h) 17,629 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-26 Cl MI 03-25-23 10.96 1,950,702(h) 365,201 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12-25-31 12.80 2,308,224(h) 394,290 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-81 Cl LI 11-25-13 20.00 6,096,141(h) 224,786 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 36 Cl 2 08-01-18 20.00 5,295(h) 1,032 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 367 Cl 2 01-01-36 8.78 3,104,426(h) 804,110 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 70 Cl 2 01-15-20 20.00 231,297(h) 44,821
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 17
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only/Inverse Floater Series 2002-18 Cl SE 02-25-32 12.80% $3,424,897(g,h) $312,053 Federal Natl Mtge Assn Collateralized Mtge Obligation Principal Only Series G-15 Cl A 06-25-21 4.50 32,482(i) 28,099 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-133 Cl GB 12-25-26 8.00 2,342,824 2,455,311 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-94 Cl QB 07-25-23 5.50 9,050,224 9,019,983 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-W11 Cl A1 06-25-33 7.99 187,549(j) 189,179 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2004-60 Cl PA 04-25-34 5.50 3,764,805 3,754,258 Govt Natl Mtge Assn #615740 08-15-13 6.00 986,791 999,031 Govt Natl Mtge Assn #781507 09-15-14 6.00 4,879,832 4,941,050 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-62 Cl IC 03-20-29 20.00 2,871,380(h) 147,294 Govt Natl Mtge Assn Collateralized Mtge Obligation Series 2006-32 Cl A 01-16-30 5.08 9,160,222 9,063,972 Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2004-4 Cl 3A 06-19-34 6.07 1,809,611(j) 1,805,681
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Lehman XS Net Interest Margin Nts Collateralized Mtge Obligation Series 2006-GPM6 Cl A1 10-28-46 6.25% $688,577(d) $685,995 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-10 Cl A1 10-25-35 5.00 6,271,666 5,959,588 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-5 Cl 2A1 05-25-35 5.50 4,854,478 4,711,878 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR6 Cl 5A1 03-25-36 5.11 3,925,803(j) 3,862,371 --------------- Total 469,846,219 ----------------------------------------------------------------------------------- TOTAL BONDS (Cost: $749,280,923) $741,603,958 -----------------------------------------------------------------------------------
MONEY MARKET FUND (1.7%)(c) SHARES VALUE(A) RiverSource Short-Term Cash Fund 13,286,846(l) $13,286,846 ----------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $13,286,846) $13,286,846 -----------------------------------------------------------------------------------
SHORT-TERM SECURITIES (14.4%)(c) AMOUNT EFFECTIVE PAYABLE AT ISSUER YIELD MATURITY VALUE(A) U.S. GOVERNMENT AGENCIES Federal Home Loan Bank Disc Nts 06-01-07 5.10% $22,500,000 $22,496,812 02-21-08 5.36 30,000,000 29,983,980 03-07-08 5.12 24,000,000 23,975,712
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 18 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT
SHORT-TERM SECURITIES (CONTINUED) AMOUNT EFFECTIVE PAYABLE AT ISSUER YIELD MATURITY VALUE(A) U.S. GOVERNMENT AGENCIES (CONT.) Federal Natl Mtge Assn Disc Nts 06-07-07 5.17% $39,000,000 $38,960,869 ----------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $115,464,358) $115,417,373 ----------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $878,032,127)(p) $870,308,177 ===================================================================================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At May 31, 2007, security was partially or fully on loan. See Note 6 to the financial statements. (c) Cash collateral received from security lending activity is invested in an affiliated money market fund/short-term securities and represents 4.3% of net assets. See Note 6 to the financial statements. 11.8% of net assets is the Fund's cash equivalent position. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At May 31, 2007, the value of these securities amounted to $9,249,099 or 1.2% of net assets. (e) At May 31, 2007, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $41,097,130. (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) Inverse floaters represent securities that pay interest at a rate that increases (decreases) in the same magnitude as, or in a multiple of, a decline (increase) in market short-term rates. Interest rate disclosed is the rate in effect on May 31, 2007. At May 31, 2007, the value of inverse floaters represented 0.1% of net assets. (h) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at May 31, 2007. (i) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows at May 31, 2007. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 19 NOTES TO INVESTMENTS IN SECURITIES (CONTINUED) (j) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on May 31, 2007. (k) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 5 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT ------------------------------------------------------------------------------- PURCHASE CONTRACTS U.S. Treasury Note, Sept. 2007, 2-year $124,200,000 U.S. Treasury Note, Sept. 2007, 5-year 9,300,000 SALE CONTRACTS U.S. Long Bond, June 2007, 20-year 3,300,000 U.S. Long Bond, Sept. 2007, 20-year 100,000 U.S. Treasury Note, June 2007, 10-year 48,900,000 U.S. Treasury Note, Sept. 2007, 10-year 100,000
(l) Affiliated Money Market Fund -- See Note 7 to the financial statements. (m) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 2007. (n) Inflation-indexed bonds are securities in which the principal amount is adjusted for inflation and the semiannual interest payments equal a fixed percentage of the inflation-adjusted principal amount. (o) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments at May 31, 2007:
PRINCIPAL SETTLEMENT PROCEEDS SECURITY AMOUNT DATE RECEIVABLE VALUE -------------------------------------------------------------------------------------- Federal Natl Mtge Assn 06-01-37 5.00% $6,000,000 6-12-07 $5,793,750 $5,709,372
(p) At May 31, 2007, the cost of securities for federal income tax purposes was $880,842,402 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $1,921,885 Unrealized depreciation (12,456,110) ------------------------------------------------------------------------------ Net unrealized depreciation $(10,534,225) ------------------------------------------------------------------------------
HOW TO FIND INFORMATION ABOUT THE FUND'S PORTFOLIO HOLDINGS (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii)The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as disclosed in its annual and semiannual shareholder reports and in its filings on Form N-Q, can be found at riversource.com/funds. -------------------------------------------------------------------------------- 20 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES MAY 31, 2007 ASSETS Investments in securities, at value (Note 1) Unaffiliated issuers* (identified cost $864,745,281) $ 857,021,331 Affiliated money market fund (identified cost $13,286,846) (Note 7) 13,286,846 ------------------------------------------------------------------------------ Total investments in securities (identified cost $878,032,127) 870,308,177 Cash in bank on demand deposit 310,963 Capital shares receivable 143,099 Accrued interest receivable 4,793,623 Receivable for investment securities sold 11,064,026 ------------------------------------------------------------------------------ Total assets 886,619,888 ------------------------------------------------------------------------------ LIABILITIES Dividends payable to shareholders 481,817 Capital shares payable 161,849 Payable for investment securities purchased 5,179,411 Payable for securities purchased on a forward-commitment basis (Note 1) 41,097,130 Payable upon return of securities loaned (Note 6) 34,476,250 Accrued investment management services fee 10,517 Accrued distribution fee 179,503 Accrued transfer agency fee 2,400 Accrued administrative services fee 1,493 Accrued plan administration services fee 879 Other accrued expenses 564,887 Forward sale commitments, at value (proceeds receivable $5,793,750) (Note 1) 5,709,372 ------------------------------------------------------------------------------ Total liabilities 87,865,508 ------------------------------------------------------------------------------ Net assets applicable to outstanding capital stock $ 798,754,380 ==============================================================================
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 21 STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) MAY 31, 2007 REPRESENTED BY Capital stock -- $.01 par value (Note 1) $ 1,687,230 Additional paid-in capital 1,028,950,067 Excess of distributions over net investment income (68,629) Accumulated net realized gain (loss) (Note 9) (224,875,547) Unrealized appreciation (depreciation) on investments (Note 5) (6,938,741) ------------------------------------------------------------------------------ Total -- representing net assets applicable to outstanding capital stock $ 798,754,380 ==============================================================================
Net assets applicable to outstanding shares: Class A $ 513,555,337 Class B $ 216,252,753 Class C $ 10,269,796 Class I $ 54,815,256 Class R4 $ 3,856,258 Class W $ 4,980 Net asset value per share of outstanding capital stock: Class A shares 108,496,677 $ 4.73 Class B shares 45,676,904 $ 4.73 Class C shares 2,169,685 $ 4.73 Class I shares 11,563,982 $ 4.74 Class R4 shares 814,685 $ 4.73 Class W shares 1,053 $ 4.73 ------------------------------------------------------------------------------------------- *Including securities on loan, at value (Note 6) $ 33,523,780 -------------------------------------------------------------------------------------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 22 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT STATEMENT OF OPERATIONS YEAR ENDED MAY 31, 2007 INVESTMENT INCOME Income: Interest $44,366,403 Income distributions from affiliated money market fund (Note 7) 317,054 Fee income from securities lending (Note 6) 118,643 --------------------------------------------------------------------------- Total income 44,802,100 --------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 4,419,003 Distribution fee Class A 1,466,190 Class B 2,610,675 Class C 119,778 Class W 6 Transfer agency fee Class A 1,134,146 Class B 534,146 Class C 24,748 Class R4 16,370 Class W 5 Service fee -- Class R4 9,797 Administrative services fees and expenses 623,283 Plan administration services fee -- Class R4 5,891 Compensation of board members 18,777 Custodian fees 99,540 Printing and postage 132,455 Registration fees 67,555 Professional fees 50,860 Other 19,171 --------------------------------------------------------------------------- Total expenses 11,352,396 Expenses waived/reimbursed by the Investment Manager and its affiliates (Note 2) (1,300,812) --------------------------------------------------------------------------- 10,051,584 Earnings and bank fee credits on cash balances (Note 2) (113,485) --------------------------------------------------------------------------- Total net expenses 9,938,099 --------------------------------------------------------------------------- Investment income (loss) -- net 34,864,001 --------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (Note 3) (1,954,086) Futures contracts (1,540,595) Payment from affiliate (Note 2) 262,748 --------------------------------------------------------------------------- Net realized gain (loss) on investments (3,231,933) Net change in unrealized appreciation (depreciation) on investments 13,960,710 --------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies 10,728,777 --------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $45,592,778 ===========================================================================
See accompanying notes to financial statements. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 23 STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED MAY 31, 2007 2006 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 34,864,001 $ 39,876,174 Net realized gain (loss) on investments (3,231,933) (9,828,156) Net change in unrealized appreciation (depreciation) on investments 13,960,710 (19,214,087) --------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 45,592,778 10,833,931 --------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (23,143,295) (25,344,232) Class B (8,304,295) (11,112,963) Class C (382,419) (475,216) Class I (2,092,223) (1,917,196) Class R4 (521,296) (1,202,674) Class W (92) N/A --------------------------------------------------------------------------------------- Total distributions (34,443,620) (40,052,281) --------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales Class A shares (Note 2) 123,697,762 152,023,244 Class B shares 39,042,955 57,560,792 Class C shares 1,714,861 2,800,362 Class I shares 28,598,207 40,699,356 Class R4 shares 1,928,332 8,191,458 Class W shares 5,000 N/A Reinvestment of distributions at net asset value Class A shares 20,974,512 22,725,811 Class B shares 7,756,733 10,224,074 Class C shares 362,001 442,952 Class I shares 2,093,754 1,887,079 Class R4 shares 523,566 1,156,490 Payments for redemptions Class A shares (279,123,681) (410,945,903) Class B shares (Note 2) (172,096,057) (307,798,780) Class C shares (Note 2) (6,479,313) (11,908,336) Class I shares (38,743,791) (10,310,796) Class R4 shares (17,374,573) (89,611,333) --------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (287,119,732) (532,863,530) --------------------------------------------------------------------------------------- Total increase (decrease) in net assets (275,970,574) (562,081,880) Net assets at beginning of year 1,074,724,954 1,636,806,834 --------------------------------------------------------------------------------------- Net assets at end of year $ 798,754,380 $1,074,724,954 =======================================================================================
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 24 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of RiverSource Government Income Series, Inc. and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. RiverSource Government Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the Board. The Fund invests in direct obligations of the U.S. government, such as Treasury bonds, bills and notes, and of its agencies and instrumentalities. The Fund offers Class A, Class B, Class C, Class I and Class R4 shares. - Class A shares are sold with a front-end sales charge. - Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth year of ownership. - Class C shares may be subject to a CDSC. - Class I and Class R4 shares have no sales charge and are offered only to qualifying institutional investors. Effective Dec. 11, 2006, the Board approved renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from account-based to asset-based, and adopting a plan administration services agreement. At May 31, 2007, Ameriprise Financial, Inc. (Ameriprise Financial) and the affiliated funds-of-funds owned 100% of Class I shares. Effective Dec. 1, 2006, the Fund offers an additional class of shares, Class W, through qualifying discretionary accounts. Class W shares are sold without a front-end sales charge or CDSC. At May 31, 2007, Ameriprise Financial owned 100% of Class W shares. All classes of shares have identical voting, dividend and liquidation rights. Class specific expenses (e.g., distribution and service fees, transfer agency fees, plan administration fees) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. The Fund's significant accounting policies are summarized below: USE OF ESTIMATES Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 25 VALUATION OF SECURITIES All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Foreign securities are valued based on quotations from the principal market in which such securities are normally traded. The procedures adopted by the Board of Directors of the funds generally contemplate the use of fair valuation in the event that price quotations or valuations are not readily available, price quotations or valuations from other sources are not reflective of market value and thus deemed unreliable, or a significant event has occurred in relation to a security or class of securities (such as foreign equities) that is not reflected in price quotations or valuations from other sources. A fair value price is a good faith estimate of the value of a security at a given point in time. Many securities markets and exchanges outside the U.S. close prior to the close of the New York Stock Exchange and therefore the closing prices for securities in such markets or on such exchanges may not fully reflect events that occur after such close but before the close of the New York Stock Exchange, including significant movements in the U.S. market after foreign exchanges have closed. Accordingly, in those situations, Ameriprise Financial will fair value foreign equity securities pursuant to procedures adopted by the Board of Directors of the funds, including utilizing a third party pricing service to determine these fair values. These procedures take into account multiple factors, including movements in the U.S. securities markets, to determine a good faith estimate that reasonably reflects the current market conditions as of the close of the New York Stock Exchange. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS Delivery and payment for securities that have been purchased by the Fund on a forward-commitment basis, including when-issued securities and other forward- commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Fund's net assets the same as owned securities. The Fund designates cash or liquid securities at least equal to the amount of its forward-commitments. At May 31, 2007, the Fund has entered into outstanding when-issued securities of $35,711,332 and other forward-commitments of $5,385,798. -------------------------------------------------------------------------------- 26 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT The Fund also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Fund to "roll over" its purchase commitments, the Fund receives negotiated amounts in the form of reductions of the purchases price of the commitment. OPTION TRANSACTIONS To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Fund may buy and sell put and call options and write put and call options. This may include purchasing mortgage-backed security (MBS) put spread options and writing covered MBS call spread options. MBS spread options are based upon the changes in the price spread between a specified mortgage-backed security and a like-duration Treasury security. The risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Fund pays a premium whether or not the option is exercised. The Fund also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. The Fund also may write over-the-counter options where completing the obligation depends upon the credit standing of the other party. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Fund will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Fund will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. FUTURES TRANSACTIONS To gain exposure to or protect itself from market changes, the Fund may buy and sell financial futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Fund each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Fund recognizes a realized gain or loss when the contract is closed or expires. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 27 SHORT SALES The Fund may engage in short sales. In these transactions, the Fund sells a security that it does not own. The Fund is obligated to replace the security that was short by purchasing it at the market price at the time of replacement or entering into an offsetting transaction with the broker. The price at such time may be more or less than the price at which the Fund sold the security. FORWARD SALE COMMITMENTS The Fund may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to- market" daily and the change in market value is recorded by the Fund as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss. If the Fund delivers securities under the commitment, the Fund realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the "Notes to investments in securities." GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. FEDERAL TAXES The Fund's policy is to comply with Subchapter M of the Internal Revenue Code that applies to regulated investment companies and to distribute substantially all of its taxable income to the shareholders. No provision for income or excise taxes is thus required. -------------------------------------------------------------------------------- 28 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of deferred losses on certain futures contracts and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been increased by $262,748 and accumulated net realized loss has been increased by $262,748. The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED MAY 31, 2007 2006 ---------------------------------------------------------------------------- CLASS A Distributions paid from: Ordinary income......................... $23,143,295 $25,344,232 Long-term capital gain.................. -- -- CLASS B Distributions paid from: Ordinary income......................... 8,304,295 11,112,963 Long-term capital gain.................. -- -- CLASS C Distributions paid from: Ordinary income......................... 382,419 475,216 Long-term capital gain.................. -- -- CLASS I Distributions paid from: Ordinary income......................... 2,092,223 1,917,196 Long-term capital gain.................. -- -- CLASS R4* Distributions paid from: Ordinary income......................... 521,296 1,202,674 Long-term capital gain.................. -- -- CLASS W** Distributions paid from: Ordinary income......................... 92 N/A Long-term capital gain.................. -- N/A
* Effective Dec. 11, 2006, Class Y was renamed Class R4. ** For the period from Dec. 1, 2006 (inception date) to May 31, 2007. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 29 At May 31, 2007, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income............................ $ 1,071,766 Accumulated long-term gain (loss)........................ $(220,701,443) Unrealized appreciation (depreciation)................... $ (11,771,423)
RECENT ACCOUNTING PRONOUNCEMENTS On Sept. 20, 2006, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards No. 157 "Fair Value Measurements" (SFAS 157). SFAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The application of SFAS 157 is required for fiscal years beginning after Nov. 15, 2007 and interim periods within those fiscal years. The impact of SFAS 157 on the Fund's financial statements is being evaluated. In June 2006, the FASB issued FASB Interpretation 48 (FIN 48), "Accounting for Uncertainty in Income Taxes." FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement 109, "Accounting for Income Taxes." FIN 48 prescribes a two-step process to recognize and measure a tax position taken or expected to be taken in a tax return. The first step is to determine whether a tax position has met the more-likely-than-not recognition threshold and the second step is to measure a tax position that meets the threshold to determine the amount of benefit to recognize. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after Dec. 15, 2006. Tax positions of the Fund are being evaluated to determine the impact, if any, to the Fund. The adoption of FIN 48 is not anticipated to have a material impact on the Fund. DIVIDENDS TO SHAREHOLDERS Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. OTHER Security transactions are accounted for on the date securities are purchased or sold. Interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. 2. EXPENSES AND SALES CHARGES Under an Investment Management Services Agreement, RiverSource Investments, LLC (the Investment Manager) determines which securities will be purchased, held or sold. The management fee is a percentage of the Fund's average daily net assets that declines from 0.48% to 0.25% annually as the Fund's assets increase. -------------------------------------------------------------------------------- 30 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT Under an Administrative Services Agreement, the Fund pays Ameriprise Financial a fee for administration and accounting services at a percentage of the Fund's average daily net assets that declines from 0.07% to 0.04% annually as the Fund's assets increase. Other expenses in the amount of $10,702 are for, among other things, certain expenses of the Fund or the Board including: Fund boardroom and office expense, employee compensation, employee health and retirement benefits, and certain other expenses. Payment of these Fund and Board expenses is facilitated by a company providing limited administrative services to the Fund and the Board. Compensation of Board members includes, for the former Board Chair, compensation as well as retirement benefits. Certain other aspects of the former Board Chair's compensation, including health benefits and payment of certain other expenses, are included under other expenses. Under a Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other RiverSource funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. Professional fees include fees paid by the Fund for legal services and independent auditor services. Under a Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains shareholder accounts and records. The Fund pays the Transfer Agent an annual fee per shareholder account for this service as follows: - Class A $20.50 - Class B $21.50 - Class C $21.00 Effective Dec. 11, 2006, as part of the Board's approval to rename Class Y as Class R4, the fee structure under the Transfer Agency Agreement was revised from an account-based fee for Class Y to an asset-based fee for Class R4. The Fund pays the Transfer Agent an annual asset-based fee at a rate of 0.05% of the Fund's average daily net assets attributable to Class R4 shares. Prior to Dec. 11, 2006, the Fund paid the Transfer agent an annual account-based fee of $18.50 per shareholder account. In addition, the Fund pays the Transfer agent an annual asset-based fee at a rate of 0.20% of the Funds' average daily net assets attributable to Class W shares. Prior to Dec. 11, 2006, Class I paid a transfer agency fee at an annual rate per shareholder account of $1. This amount is included in the transfer agency fee on the statement of operations. Effective Dec. 11, 2006, this fee was eliminated. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 31 The Transfer Agent charges an annual closed account fee of $5 per inactive account, charged on a pro rata basis for 12 months from the date the account becomes inactive. These fees are included in the transfer agency fees on the statement of operations. The Fund has agreements with Ameriprise Financial Services, Inc. and RiverSource Distributors, Inc. (collectively, the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A and Class W shares and a fee at an annual rate of up to 1.00% of the Fund's average daily net assets attributable to Class B and Class C shares. Effective Dec. 11, 2006, a new Plan Administration Services Agreement was adopted for the restructured Class R4. The fee is calculated at a rate of 0.25% of the Fund's average daily net assets attributable to Class R4 shares. Prior to Dec. 11, 2006, under a Shareholder Service Agreement, the Fund paid the Distributor a fee for service provided to shareholders by the Distributor and other servicing agents with respect to Class Y shares. The fee was calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Effective Dec. 11, 2006, this agreement was terminated. Sales charges received by the Distributor for distributing Fund shares were $648,968 for Class A, $310,529 for Class B and $2,528 for Class C for the year ended May 31, 2007. In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the funds in which it invests (also referred to as "acquired funds"), including affiliated and non- affiliated pooled investment vehicles (including mutual funds and exchange traded funds). Because the acquired funds have varied expense and fee levels and the Fund may own different proportions of acquired funds at different times, the amount of fees and expenses incurred indirectly by the Fund will vary. -------------------------------------------------------------------------------- 32 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT For the year ended May 31, 2007, the Investment Manager and its affiliates waived certain fees and expenses (excluding fees and expenses of acquired funds), such that net expenses were 0.89% for Class A, 1.64% for Class B, 1.64% for Class C, 0.54% for Class I, 0.72% for Class R4 and 0.95% for Class W. Of these waived fees and expenses, the transfer agency fees waived for Class A, Class B, Class C, Class R4 and Class W were $547,670, $273,079, $12,770, $10,182 and $1, respectively, and the management fees waived at the Fund level were $457,110. Under an agreement, which was effective until May 31, 2007, the Investment Manager and its affiliates agreed to waive certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds) would not exceed 0.89% for Class A, 1.64% for Class B, 1.64% for Class C, 0.54% for Class I, 0.72% for Class R4 and 0.95% for Class W of the Fund's average daily net assets. Effective June 1, 2007, the Investment Manager and its affiliates have agreed to waive certain fees and expenses until May 31, 2008, unless sooner terminated at the discretion of the Board, such that net expenses (excluding fees and expenses of acquired funds) will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.51% for Class I, 0.76% for Class R4 and 0.96% for Class W of the Fund's average daily net assets. During the year ended May 31, 2007, the Fund's custodian and transfer agency fees were reduced by $113,485 as a result of earnings and bank fee credits from overnight cash balances. The Fund also pays custodian fees to Ameriprise Trust Company, an affiliate of Ameriprise Financial. In addition, the Fund received a one time payment of $262,748 by Ameriprise Financial for additional earnings from overnight cash balances determined to be owed for prior years. This amount was insignificant to the Fund's net asset value and total return. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $1,503,191,160 and $1,881,852,163, respectively, for the year ended May 31, 2007. Realized gains and losses are determined on an identified cost basis. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 33 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
YEAR ENDED MAY 31, 2007 CLASS A CLASS B CLASS C CLASS I CLASS R4* CLASS W** ---------------------------------------------------------------------------------------------------- Sold 26,249,182 8,265,255 362,929 6,032,035 409,261 1,053 Issued for reinvested distributions 4,438,028 1,641,653 76,605 442,337 110,927 -- Redeemed (59,067,555) (36,500,655) (1,372,316) (8,233,131) (3,673,601) -- ---------------------------------------------------------------------------------------------------- Net increase (decrease) (28,380,345) (26,593,747) (932,782) (1,758,759) (3,153,413) 1,053 ----------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31, 2006 CLASS A CLASS B CLASS C CLASS I CLASS R4* ---------------------------------------------------------------------------------------------------- Sold 32,049,091 12,143,861 590,775 8,560,843 1,723,849 Issued for reinvested distributions 4,799,507 2,159,088 93,548 398,566 243,480 Redeemed (86,699,539) (64,869,864) (2,511,821) (2,172,038) (18,793,148) ---------------------------------------------------------------------------------------------------- Net increase (decrease) (49,850,941) (50,566,915) (1,827,498) 6,787,371 (16,825,819) ----------------------------------------------------------------------------------------------------
* Effective Dec. 11, 2006, Class Y was renamed Class R4. ** For the period from Dec. 1, 2006 (inception date) to May 31, 2007. 5. INTEREST RATE FUTURES CONTRACTS At May 31, 2007, investments in securities valued at $350,923 were pledged as collateral to cover initial margin deposits on 714 open purchase contracts and 524 open sale contracts. The notional market value of the open purchase contracts at May 31, 2007 was $136,270,550 with a net unrealized loss of $135,783. The notional market value of the open sale contracts at May 31, 2007 was $55,842,674 with a net unrealized gain of $836,614. See "Summary of significant accounting policies" and "Notes to investments in securities." -------------------------------------------------------------------------------- 34 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 6. LENDING OF PORTFOLIO SECURITIES In order to generate additional income, the Fund may lend securities representing up to one-third of the value of its total assets (which includes collateral for securities on loan) to broker-dealers, banks, or other institutional borrowers of securities. The Fund receives collateral in the form of cash and U.S. government securities, equal to at least 100% of the value of securities loaned, which is marked to the market value of the loaned securities daily until the securities are returned, e.g., if the value of the securities on loan increases, additional cash collateral is provided by the borrower. The Investment Manager serves as securities lending agent for the Fund under the investment management services agreement pursuant to which the Fund has agreed to reimburse the Investment Manager for expenses incurred by it in connection with the lending program, and pursuant to guidelines adopted by and under the oversight of the Board. At May 31, 2007, securities valued at $33,523,780 were on loan to brokers. For collateral, the Fund received $34,476,250 in cash. Cash collateral received is invested in an affiliated money market fund and short-term securities, including U.S. government securities or other high grade debt obligations, which are included in the "Investments in securities." Income from securities lending amounted to $118,643 for the year ended May 31, 2007. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. 7. AFFILIATED MONEY MARKET FUND The fund may invest its daily cash balance in RiverSource Short-Term Cash Fund, a money market fund established for the exclusive use of the RiverSource funds and other institutional clients of RiverSource Investments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 35 8. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by JPMorgan Chase Bank, N.A. (JPMCB), whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The agreement went into effect Sept. 19, 2006. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other RiverSource funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the higher of the Federal Funds Effective Rate plus 0.40% or the JPMCB Prime Commercial Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.06% per annum. Prior to this agreement, the Fund paid a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.07% per annum. The Fund had no borrowings under the facility outstanding during the year ended May 31, 2007. 9. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund had a capital loss carry-over of $220,701,443 at May 31, 2007, that if not offset by capital gains will expire as follows:
2008 2009 2013 2014 2015 2016 $35,174,077 $117,356,906 $36,267,962 $20,469,230 $9,579,187 $1,854,081
It is unlikely the Board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. -------------------------------------------------------------------------------- 36 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 10. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS In June 2004, an action captioned John E. Gallus et al. v. American Express Financial Corp. and American Express Financial Advisors Inc., was filed in the United States District Court for the District of Arizona. The plaintiffs allege that they are investors in several American Express Company mutual funds and they purport to bring the action derivatively on behalf of those funds under the Investment Company Act of 1940. The plaintiffs allege that fees allegedly paid to the defendants by the funds for investment advisory and administrative services are excessive. The plaintiffs seek remedies including restitution and rescission of investment advisory and distribution agreements. The plaintiffs voluntarily agreed to transfer this case to the United States District Court for the District of Minnesota. In response to defendants' motion to dismiss the complaint, the Court dismissed one of plaintiffs' four claims and granted plaintiffs limited discovery. Defendants moved for summary judgment in April 2007. Summary judgment was granted in the defendants' favor on July 9, 2007. The plaintiffs may file a notice of appeal with the Eighth Circuit Court of Appeals within 30 days from the date of judgment. In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), the parent company of RiverSource Investments, LLC (RiverSource Investments), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. In connection with these matters, the SEC and MDOC issued orders (the Orders) alleging that AEFC violated certain provisions of the federal and Minnesota securities laws by failing to adequately disclose market timing activities by allowing certain identified market timers to continue to market time contrary to disclosures in mutual fund and variable annuity product prospectuses. The Orders also alleged that AEFC failed to implement procedures to detect and prevent market timing in 401(k) plans for employees of AEFC and related companies and failed to adequately disclose that there were no such procedures. Pursuant to the MDOC Order, the MDOC also alleged that AEFC allowed inappropriate market timing to occur by failing to have written policies and procedures and failing to properly supervise its employees. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 37 As a result of the Orders, AEFC was censured and ordered to cease and desist from committing or causing any violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. Pursuant to the terms of the Orders, AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to make presentations at least annually to its board of directors and the relevant mutual funds' board that include an overview of policies and procedures to prevent market timing, material changes to these policies and procedures and whether disclosures related to market timing are consistent with the SEC order and federal securities laws. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. In addition, AEFC agreed to complete and submit to the MDOC a compliance review of its procedures regarding market timing within one year of the MDOC Order, including a summary of actions taken to ensure compliance with applicable laws and regulations and certification by a senior officer regarding compliance and supervisory procedures. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the RiverSource Funds' Boards of Directors/Trustees. Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal, arbitration and regulatory proceedings, including routine litigation, class actions, and governmental actions, concerning matters arising in connection with the conduct of their business activities. Ameriprise Financial believes that the Funds are not currently the subject of, and that neither Ameriprise Financial nor any of its affiliates are the subject of, any pending legal, arbitration or regulatory proceedings that are likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds. Ameriprise Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the Securities and Exchange Commission on legal and regulatory matters that relate to Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing the SEC website at www.sec.gov. -------------------------------------------------------------------------------- 38 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT There can be no assurance that these matters, or the adverse publicity associated with them, will not result in increased fund redemptions, reduced sale of fund shares or other adverse consequences to the Funds. Further, although we believe proceedings are not likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds, these proceedings are subject to uncertainties and, as such, we are unable to estimate the possible loss or range of loss that may result. An adverse outcome in one or more of these proceedings could result in adverse judgments, settlements, fines, penalties or other relief that could have a material adverse effect on the consolidated financial condition or results of operations of Ameriprise Financial. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 39 11. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results. CLASS A
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.68 $4.79 $4.82 $4.94 $4.85 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .19 .15 .12 .11 .15 Net gains (losses) (both realized and unrealized) .05 (.10) (.03) (.12) .09 ----------------------------------------------------------------------------------------------------------- Total from investment operations .24 .05 .09 (.01) .24 ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.19) (.16) (.12) (.11) (.15) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.73 $4.68 $4.79 $4.82 $4.94 ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $514 $641 $894 $1,188 $1,728 ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b),(c) .89%(d) .89%(d) .93%(d) .97% .95% ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.99% 3.27% 2.49% 2.19% 2.90% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 168% 194% 169% 125% 218% ----------------------------------------------------------------------------------------------------------- Total return(e) 5.12% 1.00% 1.92% (.24%) 4.90% -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (d) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 1.03%, 1.06% and 1.01% for the years ended May 31, 2007, 2006 and 2005, respectively. (e) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- 40 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT CLASS B
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.68 $4.79 $4.82 $4.94 $4.85 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15 .12 .08 .07 .11 Net gains (losses) (both realized and unrealized) .05 (.11) (.03) (.12) .09 ----------------------------------------------------------------------------------------------------------- Total from investment operations .20 .01 .05 (.05) .20 ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.15) (.12) (.08) (.07) (.11) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.73 $4.68 $4.79 $4.82 $4.94 ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $216 $338 $588 $963 $1,578 ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b),(c) 1.64%(d) 1.64%(d) 1.68%(d) 1.72% 1.71% ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.23% 2.50% 1.73% 1.44% 2.15% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 168% 194% 169% 125% 218% ----------------------------------------------------------------------------------------------------------- Total return(e) 4.34% .26% 1.16% (.99%) 4.11% -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (d) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class B would have been 1.79%, 1.82% and 1.76% for the years ended May 31, 2007, 2006 and 2005, respectively. (e) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 41 CLASS C
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.68 $4.79 $4.82 $4.94 $4.85 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15 .12 .08 .07 .11 Net gains (losses) (both realized and unrealized) .05 (.11) (.03) (.12) .09 ----------------------------------------------------------------------------------------------------------- Total from investment operations .20 .01 .05 (.05) .20 ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.15) (.12) (.08) (.07) (.11) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.73 $4.68 $4.79 $4.82 $4.94 ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $10 $15 $24 $38 $58 ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b),(c) 1.64%(d) 1.64%(d) 1.68%(d) 1.73% 1.72% ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.24% 2.51% 1.73% 1.44% 2.10% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 168% 194% 169% 125% 218% ----------------------------------------------------------------------------------------------------------- Total return(e) 4.34% .26% 1.16% (.99%) 4.11% -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (d) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class C would have been 1.80%, 1.83% and 1.77% for the years ended May 31, 2007, 2006 and 2005, respectively. (e) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- 42 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2007 2006 2005 2004(B) Net asset value, beginning of period $4.69 $4.79 $4.83 $4.90 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .20 .17 .14 .03 Net gains (losses) (both realized and unrealized) .05 (.10) (.04) (.07) ----------------------------------------------------------------------------------------------------------- Total from investment operations .25 .07 .10 (.04) ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.20) (.17) (.14) (.03) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.74 $4.69 $4.79 $4.83 ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $55 $62 $31 $4 ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .54%(e) .58%(e) .57% .63%(f) ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.37% 3.66% 2.98% 2.74%(f) ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 168% 194% 169% 125% ----------------------------------------------------------------------------------------------------------- Total return(g) 5.50% 1.56% 2.06% (.87%)(h) -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from March 4, 2004 (inception date) to May 31, 2004. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class I would have been 0.59% and 0.62% for the years ended May 31, 2007 and 2006, respectively. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 43 CLASS R4*
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.68 $4.79 $4.82 $4.94 $4.85 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .19 .16 .13 .12 .15 Net gains (losses) (both realized and unrealized) .05 (.11) (.03) (.12) .09 ----------------------------------------------------------------------------------------------------------- Total from investment operations .24 .05 .10 -- .24 ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.19) (.16) (.13) (.12) (.15) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.73 $4.68 $4.79 $4.82 $4.94 ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $4 $19 $100 $115 $164 ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b),(c) .72%(d) .72%(d) .76%(d) .81% .79% ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.09% 3.27% 2.66% 2.35% 3.12% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 168% 194% 169% 125% 218% ----------------------------------------------------------------------------------------------------------- Total return(e) 5.31% 1.19% 2.10% (.08%) 5.07% -----------------------------------------------------------------------------------------------------------
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (d) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class R4 would have been 0.86%, 0.88% and 0.84% for the years ended May 31, 2007, 2006 and 2005, respectively. (e) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- 44 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT CLASS W
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2007(B) Net asset value, beginning of period $4.75 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .08 Net gains (losses) (both realized and unrealized) (.02) ----------------------------------------------------------------------------------------------------------- Total from investment operations .06 ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.08) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.73 ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets (c),(d) .95%(e),(f) ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.02%(f) ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 168% ----------------------------------------------------------------------------------------------------------- Total return(g) 1.42%(h) -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 1, 2006 (inception date) to May 31, 2007. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratio. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class W would have been 1.00% for the period ended May 31, 2007. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 45 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE BOARD AND SHAREHOLDERS RIVERSOURCE GOVERNMENT INCOME SERIES, INC. We have audited the accompanying statement of assets and liabilities of RiverSource Short Duration U.S. Government Fund (a series of RiverSource Government Income Series, Inc.) as of May 31, 2007, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended May 31, 2007, and the financial highlights for each of the years or periods in the five-year period ended May 31, 2007. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2007, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of RiverSource Short Duration U.S. Government Fund as of May 31, 2007, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with U.S. generally accepted accounting principles. KPMG LLP Minneapolis, Minnesota July 20, 2007 -------------------------------------------------------------------------------- 46 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT FEDERAL INCOME TAX INFORMATION (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. Fiscal year ended May 31, 2007 CLASS A
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE June 26, 2006............................................... $0.01450 July 26, 2006............................................... 0.01500 Aug. 28, 2006............................................... 0.01600 Sept. 25, 2006.............................................. 0.01650 Oct. 26, 2006............................................... 0.01800 Nov. 27, 2006............................................... 0.01800 Dec. 18, 2006............................................... 0.01700 Jan. 23, 2007............................................... 0.00800 Feb. 23, 2007............................................... 0.01550 March 26, 2007.............................................. 0.01600 April 25, 2007.............................................. 0.01600 May 25, 2007................................................ 0.01562 Total distributions......................................... $0.18612
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 47 CLASS B
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE June 26, 2006............................................... $0.01142 July 26, 2006............................................... 0.01205 Aug. 28, 2006............................................... 0.01280 Sept. 25, 2006.............................................. 0.01378 Oct. 26, 2006............................................... 0.01499 Nov. 27, 2006............................................... 0.01489 Dec. 18, 2006............................................... 0.01495 Jan. 23, 2007............................................... 0.00450 Feb. 23, 2007............................................... 0.01248 March 26, 2007.............................................. 0.01297 April 25, 2007.............................................. 0.01307 May 25, 2007................................................ 0.01269 Total distributions......................................... $0.15059
CLASS C
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE June 26, 2006............................................... $0.01143 July 26, 2006............................................... 0.01211 Aug. 28, 2006............................................... 0.01281 Sept. 25, 2006.............................................. 0.01378 Oct. 26, 2006............................................... 0.01498 Nov. 27, 2006............................................... 0.01488 Dec. 18, 2006............................................... 0.01495 Jan. 23, 2007............................................... 0.00450 Feb. 23, 2007............................................... 0.01248 March 26, 2007.............................................. 0.01297 April 25, 2007.............................................. 0.01307 May 25, 2007................................................ 0.01269 Total distributions......................................... $0.15065
-------------------------------------------------------------------------------- 48 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT CLASS I
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE June 26, 2006............................................... $0.01594 July 26, 2006............................................... 0.01635 Aug. 28, 2006............................................... 0.01752 Sept. 25, 2006.............................................. 0.01779 Oct. 26, 2006............................................... 0.01943 Nov. 27, 2006............................................... 0.01948 Dec. 18, 2006............................................... 0.01797 Jan. 23, 2007............................................... 0.00965 Feb. 23, 2007............................................... 0.01694 March 26, 2007.............................................. 0.01744 April 25, 2007.............................................. 0.01739 May 25, 2007................................................ 0.01700 Total distributions......................................... $0.20290
CLASS R4*
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE June 26, 2006............................................... $0.01520 July 26, 2006............................................... 0.01565 Aug. 28, 2006............................................... 0.01673 Sept. 25, 2006.............................................. 0.01712 Oct. 26, 2006............................................... 0.01869 Nov. 27, 2006............................................... 0.01871 Dec. 18, 2006............................................... 0.01770 Jan. 23, 2007............................................... 0.00887 Feb. 23, 2007............................................... 0.01619 March 26, 2007.............................................. 0.01669 April 25, 2007.............................................. 0.01667 May 25, 2007................................................ 0.01628 Total distributions......................................... $0.19450
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 49 CLASS W
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Dec. 18, 2006............................................... $0.01413 Jan. 23, 2007............................................... 0.00788 Feb. 23, 2007............................................... 0.01519 March 26, 2007.............................................. 0.01572 April 25, 2007.............................................. 0.01578 May 25, 2007................................................ 0.01544 Total distributions......................................... $0.08414
* Effective Dec. 11, 2006, Class Y was renamed Class R4. -------------------------------------------------------------------------------- 50 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT BOARD MEMBERS AND OFFICERS Shareholders elect a Board that oversees the Fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of the Fund's Board members. Each member oversees 102 RiverSource funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the Board. Under the current Board policy, members may serve until the end of the meeting following their 75th birthday, or the fifteenth anniversary of the first Board meeting they attended as members of the Board, whichever occurs first. This policy does not apply to Ms. Jones who may retire after her 75th birthday. INDEPENDENT BOARD MEMBERS
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ----------------------------------------------------------------------------------------------------- Kathleen Blatz Board member Chief Justice, Minnesota Supreme 901 S. Marquette Ave. since 2006 Court, 1998-2005 Minneapolis, MN 55402 Age 53 ----------------------------------------------------------------------------------------------------- Arne H. Carlson Board member Chair, RiverSource Funds, 901 S. Marquette Ave. since 1999 1999-2006; former Governor of Minneapolis, MN 55402 Minnesota Age 72 ----------------------------------------------------------------------------------------------------- Pamela G. Carlton Board member President, Springboard-Partners 901 S. Marquette Ave. since 2007 in Cross Cultural Leadership Minneapolis, MN 55402 (consulting company) Age 52 ----------------------------------------------------------------------------------------------------- Patricia M. Flynn Board member Trustee Professor of Economics and 901 S. Marquette Ave. since 2004 Management, Bentley College; former Minneapolis, MN 55402 Dean, McCallum Graduate School of Age 56 Business, Bentley College ----------------------------------------------------------------------------------------------------- Anne P. Jones Board member Attorney and Consultant 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 72 ----------------------------------------------------------------------------------------------------- Jeffrey Laikind, CFA Board member Former Managing Director, Shikiar American Progressive 901 S. Marquette Ave. since 2005 Asset Management Insurance Minneapolis, MN 55402 Age 71 ----------------------------------------------------------------------------------------------------- Stephen R. Lewis, Jr. Board member President Emeritus and Professor of Valmont Industries, 901 S. Marquette Ave. since 2002 and Economics, Carleton College Inc. (manufactures Minneapolis, MN 55402 Chair of the irrigation systems) Age 68 Board since 2007 -----------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 51 INDEPENDENT BOARD MEMBERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ----------------------------------------------------------------------------------------------------- Catherine James Paglia Board member Director, Enterprise Asset Strategic 901 S. Marquette Ave. since 2004 Management, Inc. (private real Distribution, Inc. Minneapolis, MN 55402 estate and asset management (transportation, Age 54 company) distribution and logistics consultants) ----------------------------------------------------------------------------------------------------- Alison Taunton-Rigby Board member Chief Executive Officer, RiboNovix, Hybridon, Inc. 901 S. Marquette Ave. since 2002 Inc. since 2003 (biotechnology); (biotechnology); Minneapolis, MN 55402 former President, Forester Biotech American Healthways, Age 63 Inc. (health management programs) -----------------------------------------------------------------------------------------------------
BOARD MEMBER AFFILIATED WITH RIVERSOURCE INVESTMENTS*
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ----------------------------------------------------------------------------------------------------- William F. Truscott Board member President -- U.S. Asset Management 53600 Ameriprise since 2001, and Chief Investment Officer, Financial Center Vice President Ameriprise Financial, Inc. and Minneapolis, MN 55474 since 2002 President, Chairman of the Board Age 46 and Chief Investment Officer, RiverSource Investments, LLC since 2005; President, Ameriprise Certificate Company since 2006; Senior Vice President -- Chief Investment Officer, Ameriprise Financial, Inc. and Chairman of the Board and Chief Investment Officer, RiverSource Investments, LLC, 2001-2005 -----------------------------------------------------------------------------------------------------
* Interested person by reason of being an officer, director, security holder and/or employee of RiverSource Investments. The SAI has additional information about the Fund's Board members and is available, without charge, upon request by calling RiverSource Funds at (888) 791-3380; contacting your financial institution; or visiting riversource.com/funds. -------------------------------------------------------------------------------- 52 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT The Board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the Fund's other officers are: FUND OFFICERS
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS ------------------------------------------------------------------------------------------ Patrick T. Bannigan President since Senior Vice President -- Asset Management, 172 Ameriprise 2006 RiverSource Investments, LLC since 2006; Financial Center Managing Director and Global Head of Product, Minneapolis, MN 55474 Morgan Stanley Investment Management, Age 41 2004-2006; President, Touchstone Investments, 2002-2004; Director of Strategic Planning, Evergreen Investments, 1995-2002 ------------------------------------------------------------------------------------------ Michelle M. Keeley Vice President Executive Vice President -- Equity and Fixed 172 Ameriprise since 2004 Income, Ameriprise Financial, Inc. and Financial Center RiverSource Investments, LLC since 2006; Vice Minneapolis, MN 55474 President -- Investments, Ameriprise Age 43 Certificate Company since 2003; Senior Vice President -- Fixed Income, Ameriprise Financial, Inc., 2002-2006 and RiverSource Investments, LLC, 2004-2006; Managing Director, Zurich Global Assets, 2001-2002 ------------------------------------------------------------------------------------------ Amy K. Johnson Vice President Vice President -- Asset Management and Trust 5228 Ameriprise since 2006 Company Services, RiverSource Investments, LLC Financial Center since 2006; Vice President -- Operations and Minneapolis, MN 55474 Compliance, RiverSource Investments, LLC, Age 41 2004-2006; Director of Product Development -- Mutual Funds, Ameriprise Financial, Inc., 2001-2004 ------------------------------------------------------------------------------------------ Jeffrey P. Fox Treasurer since Vice President -- Investment Accounting, 105 Ameriprise 2002 Ameriprise Financial, Inc. since 2002; Vice Financial Center President -- Finance, American Express Minneapolis, MN 55474 Company, 2000-2002 Age 52 ------------------------------------------------------------------------------------------ Scott R. Plummer Vice President, Vice President and Chief Counsel -- Asset 5228 Ameriprise General Counsel Management, Ameriprise Financial, Inc. since Financial Center and Secretary 2005; Vice President, General Counsel and Minneapolis, MN 55474 since 2006 Secretary, Ameriprise Certificate Company Age 47 since 2005; Vice President -- Asset Management Compliance, Ameriprise Financial, Inc., 2004-2005; Senior Vice President and Chief Compliance Officer, U.S. Bancorp Asset Management, 2002-2004; Second Vice President and Assistant General Counsel, Hartford Life, 2001-2002 ------------------------------------------------------------------------------------------ Jennifer D. Lammers Chief Compliance U.S. Asset Management Chief Compliance 172 Ameriprise Officer since Officer, RiverSource Investments, LLC since Financial Center 2006 2006; Director -- Mutual Funds, Voyageur Asset Minneapolis, MN 55474 Management, 2003-2006; Director of Finance, Age 46 Voyageur Asset Management, 2000-2003 ------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 53 FUND OFFICERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS ------------------------------------------------------------------------------------------ Neysa M. Alecu Money Laundering Compliance Director and Anti-Money Laundering 2934 Ameriprise Prevention Officer, Ameriprise Financial, Inc. since Financial Center Officer since 2004; Manager Anti-Money Laundering, Minneapolis, MN 55474 2004 Ameriprise Financial, Inc., 2003-2004; Age 43 Compliance Director and Bank Secrecy Act Officer, American Express Centurion Bank, 2000-2003 ------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 54 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT RiverSource Investments, LLC ("RiverSource"), a wholly-owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), serves as the investment manager to the Fund. Under an investment management services agreement (the "IMS Agreement") RiverSource provides investment advice and other services to the Fund and all RiverSource funds (collectively, the "Funds"). The Fund's Board of Directors (the "Board") and the Board's Investment Review and Contracts Committees monitor these services throughout the year. On an annual basis, the Board, including the independent Board members (the "Independent Directors"), considers renewal of the IMS Agreement. RiverSource prepares detailed reports for the Board and its Contracts Committee in March and April, including reports based on data provided by independent organizations to assist the Board in making this determination. In addition, throughout the year, the Board (or its committees) reviews information prepared by RiverSource addressing the services RiverSource provides and Fund performance. The Board accords particular weight to the work, deliberations and conclusions of the Contracts and Investment Review Committees in determining whether to continue the IMS Agreement. At the April 11-12, 2007 in-person Board meeting, independent legal counsel to the Independent Directors reviewed with the Independent Directors various factors relevant to the Board's consideration of advisory agreements and the Board's legal responsibilities related to such consideration. Following an analysis and discussion of the factors identified below, the Board, including all of the Independent Directors, approved renewal of the IMS Agreement. Nature, Extent and Quality of Services Provided by RiverSource: The Board analyzed various reports and presentations it had received detailing the services performed by RiverSource, as well as its expertise, resources and capabilities. The Board specifically considered many developments during the past year concerning the services provided by RiverSource, including, in particular, the growing strength and capabilities of many RiverSource offices and the increased investment and resources dedicated to the Fund's operations, particularly in the areas of trading systems, legal and compliance. Further, in connection with the Board's evaluation of the overall package of services provided by RiverSource, the Board considered the quality of the administrative, custody and transfer agency services provided by RiverSource affiliates to the Fund. The Board also reviewed the financial condition of RiverSource and the entity's ability to carry out its responsibilities under the IMS Agreement. The Board also discussed the acceptability of the terms of the IMS Agreement (including the relatively broad scope of services required to be performed by RiverSource). The Board concluded that the services being performed under the IMS Agreement were of a reasonably high quality. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 55 Based on the foregoing, and based on other information received (both oral and written, including the information on investment performance referenced below) and other considerations, the Board determined that RiverSource was in a position to continue to provide a high quality and level of services to the Fund. Investment Performance: For purposes of evaluating the nature, extent and quality of services provided under the IMS Agreement, the Board carefully reviewed the investment performance of the Fund. In this regard, the Board considered: (i) detailed reports containing data prepared by an independent organization showing, for various periods, the performance of the Fund, the performance of a benchmark index, the percentage ranking of the Fund among its comparison group and the net assets of the Fund; and (ii) a report detailing the Fund's performance over various periods (including since inception), recent Fund inflows (and outflows) and a comparison of the Fund's net assets from December 2006 to December 2005. The Board observed that the Fund's investment performance met expectations. Comparative Fees, Costs of Services Provided and the Profits Realized By RiverSource and its Affiliates from their Relationships with the Fund: The Board reviewed comparative fees and the costs of services to be provided under the IMS Agreement. The Board members considered detailed comparative information set forth in an annual report on fees and expenses, including, among other things, data (prepared by an independent organization) showing a comparison of the Fund's expenses with median expenses paid by funds in its peer group, as well as data showing the Fund's contribution to RiverSource's profitability. The Board accorded particular weight to the notion that the level of fees should reflect a rational pricing model applied consistently across the various product lines in the Funds' family, while assuring that the overall fees for each fund are generally in line with the "pricing philosophy" (i.e., that the total expense ratio of each fund, with few exceptions, is at or below the median expense ratio of funds in the same comparison group). The Board took into account that the Fund's total expense ratio (after considering proposed expense caps/waivers) was below the peer group's median expense ratio shown in the reports. Based on its review, the Board concluded that the Fund's management fee was fair and reasonable in light of the extent and quality of services that the Fund receives. -------------------------------------------------------------------------------- 56 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT The Board also considered the expected profitability of RiverSource and its affiliates in connection with RiverSource providing investment management services to the Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to RiverSource and Ameriprise Financial from managing and operating the Fund, including data showing comparative profitability over the last three years. The Board also considered the services acquired by the investment manager through the use of commission dollars paid by the Funds on portfolio transactions. The Board noted that the fees paid by the Fund should permit the investment manager to offer competitive compensation to its personnel, make necessary investments in its business and earn an appropriate profit. The Board concluded that profitability levels were reasonable. Economies of Scale to be Realized: The Board also considered the economies of scale that might be realized by RiverSource as the Fund grows and took note of the extent to which Fund shareholders might also benefit from such growth. The Board considered that the IMS Agreement provides for lower fees as assets increase at pre-established breakpoints and concluded that the IMS Agreement satisfactorily provided for sharing these economies of scale. Based on the foregoing, the Board, including all of the Independent Directors, concluded that the investment management service fees were fair and reasonable in light of the extent and quality of services provided. In reaching this conclusion, no single factor was determinative. On April 12, 2007, the Board, including all of the Independent Directors, approved the renewal of the IMS Agreement. PROXY VOTING The policy of the Board is to vote the proxies of the companies in which the Fund holds investments consistent with the procedures as stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling RiverSource Funds at (888) 791-3380; contacting your financial institution; visiting riversource.com/funds; or searching the website of the Securities and Exchange Commission (SEC) at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities is filed with the SEC by August 31 for the most recent 12-month period ending June 30 of that year, and is available without charge by visiting riversource.com/funds; or searching the website of the SEC at www.sec.gov. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2007 ANNUAL REPORT 57 THIS PAGE LEFT BLANK INTENTIONALLY THIS PAGE LEFT BLANK INTENTIONALLY RIVERSOURCE(R) SHORT DURATION U.S. GOVERNMENT FUND 734 Ameriprise Financial Center Minneapolis, MN 55474 RIVERSOURCE.COM/FUNDS This report must be accompanied or preceded by the Fund's current prospectus. RiverSource(R) mutual funds are distributed by RiverSource Distributors, Inc. and Ameriprise Financial Services, Inc., Members NASD, and managed by (RIVERSOURCE INVESTMENTS RiverSource Investments, LLC. These companies are part of LOGO) Ameriprise Financial, Inc. S-6042 AD (7/07)
Annual Report and Prospectus (RIVERSOURCE INVESTMENTS LOGO) RIVERSOURCE(R) U.S. GOVERNMENT MORTGAGE FUND ANNUAL REPORT FOR THE PERIOD ENDED MAY 31, 2007 (Prospectus also enclosed) RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND SEEKS TO PROVIDE SHAREHOLDERS WITH CURRENT INCOME AS ITS PRIMARY OBJECTIVE AND, AS ITS SECONDARY OBJECTIVE, PRESERVATION OF CAPITAL. This annual report includes a prospectus that describes in detail the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money. TABLE OF CONTENTS Fund Snapshot....................... 3 Performance Summary................. 5 Questions & Answers with Portfolio Management........ 7 The Fund's Long-term Performance ... 10 Fund Expenses Example............... 12 Investments in Securities........... 14 Financial Statements................ 23 Notes to Financial Statements....... 26 Report of Independent Registered Public Accounting Firm........... 45 Federal Income Tax Information...... 46 Board Members and Officers.......... 49 Approval of Investment Management Services Agreement............... 53 Proxy Voting........................ 55
(DALBAR LOGO) The RiverSource mutual fund shareholder reports have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. -------------------------------------------------------------------------------- 2 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT FUND SNAPSHOT AT MAY 31, 2007 FUND OBJECTIVE RiverSource U.S. Government Mortgage Fund seeks to provide shareholders with current income as its primary objective and, as its secondary objective, preservation of capital. SECTOR BREAKDOWN Percentage of portfolio assets (PIE CHART) MORTGAGE-BACKED* 86.1 COMMERCIAL MORTGAGE-BACKED 1.0 CASH & CASH EQUIVALENTS* 11.5 ASSET-BACKED 1.4
* Of the 86.1%, 13.7% is due to forward commitment mortgage-backed securities activity. Short-term securities are held as collateral for these commitments. QUALITY BREAKDOWN Percentage of bond portfolio assets (PIE CHART) AAA BONDS 99.0 AA BONDS 0.3 BBB BONDS 0.5 NON-RATED BONDS 0.2
Bond ratings apply to underlying holdings of the Fund and not the Fund itself. Whenever possible, the Standard and Poor's rating is used to determine the credit quality of a security. Standard and Poor's rates the creditworthiness of corporate bonds, with 15 categories, ranging from AAA (highest) to D (lowest). Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. If Standard and Poor's doesn't rate a security, then Moody's rating is used. RiverSource Investments, LLC, the Fund's investment manager, rates a security using an internal rating system when Moody's doesn't provide a rating. There are risks associated with an investment in a bond fund, including the impact of interest rates and credit. These and other risk considerations are discussed in the fund's prospectus. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. Shares of the RiverSource U.S. Government Mortgage Fund are not insured or guaranteed by the U.S. government. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 3 FUND SNAPSHOT AT MAY 31, 2007 STYLE MATRIX
DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW
Shading within the style matrix indicates areas in which the Fund generally invests. The style matrix can be a valuable tool for constructing and monitoring your portfolio. It provides a frame of reference for distinguishing the types of stocks or bonds owned by a mutual fund, and serves as a guideline for helping you build a portfolio. Investment products, including shares of mutual funds, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. PORTFOLIO MANAGER
YEARS IN INDUSTRY Scott Kirby* 28
* The Fund is managed by a team of investment professionals led by Scott Kirby. FUND FACTS
TICKER SYMBOL INCEPTION DATE Class A AUGAX 02/14/02 Class B AUGBX 02/14/02 Class C AUGCX 02/14/02 Class I RVGIX 03/04/04 Class R4(1) RSGYX 02/14/02 (1) Effective Dec. 11, 2006, Class Y was renamed Class R4. Total net assets $407.1 million Number of holdings 250 Weighted average life(2) 6.0 years Effective duration(3) 3.6 years Weighted average bond rating(4) AAA
(2) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (3) EFFECTIVE DURATION measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (4) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. -------------------------------------------------------------------------------- 4 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT PERFORMANCE SUMMARY PERFORMANCE COMPARISON For the year ended May 31, 2007 (BAR CHART) RiverSource U.S. Government Mortgage Fund Class A (excluding sales charge) +6.30 Lehman Brothers Mortgage-Backed Securities Index (unmanaged) +7.05 Lipper U.S. Mortgage Funds Index +6.30
(see "The Fund's Long-term Performance" for Index descriptions) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial institution or visiting riversource.com/funds. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. It is not possible to invest directly in an index. ANNUAL OPERATING EXPENSE RATIO (AS OF THE CURRENT PROSPECTUS)
TOTAL NET EXPENSES(A) Class A 1.17% 0.89% Class B 1.94% 1.65% Class C 1.94% 1.65% Class I 0.63% 0.48% Class R4(b) 0.99% 0.75%
(a) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2008, unless sooner terminated at the discretion of the Fund's Board. Any amounts waived will not be reimbursed by the Fund. Under this agreement, net fund expenses (excluding fees and expenses of acquired funds) will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.48% for Class I and 0.75% for Class R4. (b) Effective Dec. 11, 2006, Class Y was renamed Class R4. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 5 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS
AT MAY 31, 2007 SINCE WITHOUT SALES CHARGE 1 YEAR 3 YEARS 5 YEARS INCEPTION Class A (inception 2/14/02) +6.30% +4.03% +4.04% +4.16% Class B (inception 2/14/02) +5.30% +3.19% +3.23% +3.39% Class C (inception 2/14/02) +5.30% +3.19% +3.22% +3.38% Class I (inception 3/4/04) +6.68% +4.36% N/A +3.59% Class R4* (inception 2/14/02) +6.51% +4.22% +4.23% +4.34% WITH SALES CHARGE Class A (inception 2/14/02) +1.26% +2.35% +3.03% +3.20% Class B (inception 2/14/02) +0.30% +1.93% +2.88% +3.22% Class C (inception 2/14/02) +4.30% +3.19% +3.22% +3.38%
AT JUNE 30, 2007 SINCE WITHOUT SALES CHARGE 1 YEAR 3 YEARS 5 YEARS INCEPTION Class A (inception 2/14/02) +5.65% +3.64% +3.78% +4.00% Class B (inception 2/14/02) +4.66% +2.80% +3.01% +3.24% Class C (inception 2/14/02) +4.66% +2.80% +3.01% +3.23% Class I (inception 3/4/04) +5.82% +3.90% N/A +3.31% Class R4* (inception 2/14/02) +5.85% +3.82% +3.97% +4.19% WITH SALES CHARGE Class A (inception 2/14/02) +0.63% +1.97% +2.78% +3.07% Class B (inception 2/14/02) -0.34% +1.55% +2.66% +3.08% Class C (inception 2/14/02) +3.66% +2.80% +3.01% +3.23%
Class A share performance reflects the maximum sales charge of 4.75%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second and third years 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be subject to a 1% CDSC if shares are sold within one year after purchase. Sales charges do not apply to Class I and Class R4 shares. Class I and Class R4 shares are available to institutional investors only. * Effective Dec. 11, 2006, Class Y was renamed Class R4. -------------------------------------------------------------------------------- 6 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT QUESTIONS & ANSWERS WITH PORTFOLIO MANAGEMENT Below, Portfolio Manager Scott Kirby discusses the Fund's results and positioning for the 12 months ended May 31, 2007. At May 31, 2007, approximately 51% of the Fund's shares were owned in the aggregate by affiliated funds-of-funds managed by RiverSource Investments, LLC (RiverSource). As a result of asset allocation decisions by RiverSource, it is possible that RiverSource U.S. Government Mortgage Fund may experience relatively large purchases or redemptions from affiliated funds-of-funds (see page 35, Class I capital share transactions for related activity during the most recent fiscal period). RiverSource seeks to minimize the impact of these transactions by structuring them over a reasonable period of time. RiverSource U.S. Government Mortgage Fund may experience increased expenses as it buys and sells securities as a result of purchases or redemptions by affiliated funds-of- funds. For more information on the Fund's expenses, see the discussions beginning on pages 12 and 32. Q: How did RiverSource U.S. Government Mortgage Fund perform for the fiscal year? A: RiverSource U.S. Government Mortgage Fund's Class A shares (excluding sales charge) rose 6.30% for the 12 months ended May 31, 2007. The Fund underperformed the Lehman Brothers Mortgage-Backed Securities Index (Lehman Index), which gained 7.05%. The Fund matched the Lipper U.S. Mortgage Funds Index, representing the Fund's peer group, which advanced 6.30% during the same time frame. Q: What factors most significantly affected performance during the annual period? A: Overall, the mortgage market performed well, notably outperforming U.S. Treasuries, as rates moved modestly lower during the 12-month period. Such strong performance was supported by solid, albeit moderating U.S. economic growth and reasonably well-contained inflation. With economic growth slowing throughout the period and the Federal Reserve Board (the Fed) adopting a wait-and-see policy, bond investors began to anticipate that the Fed would begin cutting interest rates to stimulate growth; however, interest rates generally fell during the annual period. In May of this year, investors began to realize en masse that inflation pressures were too high -- and prospects for economic growth just strong enough -- to keep the Fed from cutting rates. Indeed, some strategists began to wonder if maybe the Fed's next move would be a rate hike. This change in sentiment caused interest rates to rise somewhat at the end of the period. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 7 QUESTIONS & ANSWERS The Fund produced solid returns and matched the results of its Lipper peer group for the fiscal year. However, the Fund underperformed the Lehman Index for two primary reasons. First, we anticipated that rates, after falling in August, would have stabilized or even risen and we positioned the Fund accordingly. That is, the Fund had a comparatively shorter duration than that of the Lehman Index. However, this position detracted from results, as rates instead continued to decline. Duration is a measure of the Fund's sensitivity to changes in interest rates. MANY OF THE FUND'S LONG-HELD SPECIFIED POOLS OF MORTGAGES HELPED FUND RESULTS DURING THE PERIOD, AS INTEREST RATES DECLINED AND REFINANCING ACTIVITY PICKED UP SOMEWHAT. The second reason for the Fund's results relative to the Lehman Index was our conservative positioning within the mortgage sector. The Fund had significant positions, for example, in hybrid adjustable-rate mortgages (ARMs), well- structured collateralized mortgage obligations (CMOs) and commercial mortgage-backed securities (CMBS). These more defensive sub-sectors, which are not part of the Lehman Index, historically perform well in a rising rate environment and thus, lagged the Lehman Index for the period. On the positive side, issue selection helped the Fund's results, particularly an emphasis on premium coupon securities. Higher coupon mortgage-backed securities outperformed lower coupon mortgage-backed securities for the period. Many of the Fund's long-held specified pools of mortgages helped Fund results during the period, as interest rates declined and refinancing activity picked up somewhat. Q: What changes did you make to the Fund and how is it currently positioned? A: During the second half of the fiscal year, we shifted from a yield curve flattening bias in the Fund's positioning to a yield curve steepening bias, given our view that longer-term yields would rise. In the final month of the period, this scenario finally began to be realized. Other than that, we made no significant changes to the Fund during the period. -------------------------------------------------------------------------------- 8 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT QUESTIONS & ANSWERS We maintained our overall relatively conservative positioning. We continued to emphasize higher quality issues, namely those securities issued by government mortgage agencies, including Ginnie Mae, Fannie Mae and Freddie Mac, and those rated AAA. We maintained our focus on higher coupon mortgage securities and emphasized investments in more seasoned pools of mortgages. We kept the Fund's duration shorter than the Lehman Index throughout. The portfolio turnover rate of 306% during the annual period can be attributed primarily to rolling-maturity mortgage securities, processing of prepayments and opportunistic changes we made in response to valuations or market developments. WE MAINTAINED OUR FOCUS ON HIGHER COUPON MORTGAGE SECURITIES AND EMPHASIZED INVESTMENTS IN MORE SEASONED POOLS OF MORTGAGES. Q: What is the Fund's tactical view and strategy for the months ahead? A: During the next several months, we anticipate a period of relative stability with the Fed on hold through the remainder of the year. Such an environment is typically a good one for mortgages. Thus, we intend to shift somewhat from our current conservative posture to a more aggressive strategy within the mortgage sector, lengthening duration toward a more neutral position versus the Lehman Index and adding to lower coupon and pass-through mortgage allocations. As always, however, our strategy is to provide added portfolio value with a moderate amount of risk. Quality issues and security selection remain a priority as we continue to seek attractive buying opportunities. Any specific securities mentioned are for illustrative purposes only and are not a complete list of securities that have increased or decreased in value. The views expressed in this statement reflect those of the portfolio manager(s) only through the end of the period of the report as stated on the cover and do not necessarily represent the views of RiverSource Investments, LLC (RiverSource) or any subadviser to the Fund or any other person in the RiverSource or subadviser organizations. Any such views are subject to change at any time based upon market or other conditions and RiverSource disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a RiverSource Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any RiverSource Fund. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 9 THE FUND'S LONG-TERM PERFORMANCE The chart on the facing page illustrates the total value of an assumed $10,000 investment in RiverSource U.S. Government Mortgage Fund Class A shares (from 3/1/02 to 5/31/07 )* as compared to the performance of two widely cited performance indices, the Lehman Brothers Mortgage-Backed Securities Index and the Lipper U.S. Mortgage Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distribution paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The table below and the chart on the facing page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial institution or visiting riversource.com/funds. Also see "Past Performance" in the Fund's current prospectus. * Fund data is from Feb. 14, 2002. Lehman Brothers Mortgage-Backed Securities Index and Lipper peer group data is from March 1, 2002. COMPARATIVE RESULTS
Results at May 31, 2007 SINCE 1 YEAR 3 YEARS 5 YEARS INCEPTION(3) RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $10,126 $10,722 $11,610 $11,815 Average annual total return +1.26% +2.35% +3.03% +3.20% LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX(1) Cumulative value of $10,000 $10,705 $11,487 $12,408 $12,615 Average annual total return +7.05% +4.73% +4.41% +4.50% LIPPER U.S. MORTGAGE FUNDS INDEX(2) Cumulative value of $10,000 $10,630 $11,216 $12,056 $12,213 Average annual total return +6.30% +3.90% +3.81% +3.88%
Results for other share classes can be found on page 6. -------------------------------------------------------------------------------- 10 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT (VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND LINE GRAPH)
RIVERSOURCE U.S. GOVERNMENT MORTGAGE LEHMAN BROTHERS FUND CLASS A (INCLUDES MORTGAGE-BACKED SECURITIES LIPPER U.S. MORTGAGE SALES CHARGE) ($11,815) INDEX(1) ($12,615) FUNDS INDEX(2) ($12,213) ----------------------- -------------------------- ------------------------ 3/1/02 9525 10000 10000 5/02 9692 10169 10128 5/03 10363 10822 10744 5/04 10495 10984 10887 5/05 11102 11719 11463 5/06 11115 11785 11489 5/07 11815 12615 12213
(1) The Lehman Brothers Mortgage-Backed Securities Index, an unmanaged index, includes 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal National Mortgage Association (FNMA). The index reflects reinvestment of all distributions and changes in market prices. (2) The Lipper U.S. Mortgage Funds Index includes the 10 largest U.S. mortgage funds tracked by Lipper Inc. The index's returns include net reinvested dividends. (3) Fund data is from Feb. 14, 2002. Lehman Brothers Mortgage-Backed Securities Index and Lipper peer group data is from March 1, 2002. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 11 FUND EXPENSES EXAMPLE (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, which may include management fees; distribution and service (12b-1) fees; and other Fund fees and expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. In addition to the ongoing expenses which the Fund bears directly, the Fund's shareholders indirectly bear the expenses of the funds in which it invests (also referred to as "acquired funds"), including affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds). The Fund's indirect expense from investing in the acquired funds is based on the Fund's pro rata portion of the cumulative expenses charged by the acquired funds using the acquired funds expense ratio as of the most recent shareholder report. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended May 31, 2007. ACTUAL EXPENSES The first line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading titled "Expenses paid during the period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. -------------------------------------------------------------------------------- 12 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED DEC. 1, 2006 MAY 31, 2007 THE PERIOD(A) EXPENSE RATIO Class A Actual(b) $1,000 $1,011.60 $4.46 .89% Hypothetical (5% return before expenses) $1,000 $1,020.49 $4.48 .89% Class B Actual(b) $1,000 $1,007.80 $8.21(c) 1.64% Hypothetical (5% return before expenses) $1,000 $1,016.75 $8.25(c) 1.64% Class C Actual(b) $1,000 $1,007.80 $8.21(c) 1.64% Hypothetical (5% return before expenses) $1,000 $1,016.75 $8.25(c) 1.64% Class I Actual(b) $1,000 $1,015.40 $2.71(c) .54% Hypothetical (5% return before expenses) $1,000 $1,022.24 $2.72(c) .54% Class R4 Actual(b) $1,000 $1,014.60 $3.57(c) .71% Hypothetical (5% return before expenses) $1,000 $1,021.39 $3.58(c) .71%
(a) Expenses are equal to the Fund's annualized expense ratio as indicated above, multiplied by the average account value over the period, multiplied by 182/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended May 31, 2007: +1.16% for Class A, +0.78% for Class B, +0.78% for Class C, +1.54% for Class I and +1.46% for Class R4. (c) In September 2006, the Board approved renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from an account-based fee to an asset-based fee, and adopting a plan administration services agreement. These changes were effective Dec. 11, 2006. In addition, the investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2008, unless sooner terminated at the discretion of the Fund's Board, such that net expenses, (excluding fees and expenses of acquired funds), will not exceed: 1.65% for Class B, 1.65% for Class C, 0.48% for Class I and 0.75% for Class R4. Any amounts waived will not be reimbursed by the Fund. This change was effective June 1, 2007. If these changes had been in place for the entire six month period ended May 31, 2007, the actual expenses paid would have been $8.26 for Class B, $8.26 for Class C, $2.41 for Class I and $3.77 for Class R4; the hypothetical expenses paid would have been $8.30 for Class B, $8.30 for Class C, $2.42 for Class I and $3.78 for Class R4. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 13 INVESTMENTS IN SECURITIES MAY 31, 2007 (Percentages represent value of investments compared to net assets)
BONDS (106.7%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) ASSET-BACKED (1.7%)(i) Countrywide Asset-Backed Certificates Series 2007-7 Cl 2A2 10-25-37 5.48% $1,200,000 $1,198,988 Fannie Mae Grantor Trust Series 2005-T4 Cl A1C 09-25-35 5.47 2,850,191 2,870,077 Renaissance Home Equity Loan Trust Series 2007-2 Cl M4 06-25-37 6.31 195,000(b) 193,050 Renaissance Home Equity Loan Trust Series 2007-2 Cl M5 06-25-37 6.66 130,000(b) 128,700 Renaissance Home Equity Loan Trust Series 2007-2 Cl M6 06-25-37 7.01 190,000(b) 188,100 Residential Asset Securities Series 2006-KS1 Cl A2 02-25-36 5.46 830,000 830,000 Residential Asset Securities Series 2007-KS3 Cl AI2 04-25-37 5.50 1,700,000 1,702,788 --------------- Total 7,111,703 ----------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (1.2%)(f) Citigroup/Deutsche Bank Commercial Mtge Trust Series 2007-CD4 Cl A2B 12-11-49 5.21 3,000,000 2,959,800 Commercial Mtge Pass-Through Ctfs Series 2007-FL14 Cl MKL1 06-15-22 6.12 2,000,000(d,i) 2,000,000 --------------- Total 4,959,800 ----------------------------------------------------------------------------------- MORTGAGE-BACKED (103.7%)(f) Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-12 Cl 2A1 03-25-36 5.69 692,147(c) 692,614
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) American Home Mtge Assets Collateralized Mtge Obligation Series 2007-2 Cl A2A 03-25-47 5.49% $1,347,153(c) $1,345,692 American Home Mtge Investment Trust Collateralized Mtge Obligation Series 2007-1 Cl GA1C 05-25-47 5.51 1,941,823(c) 1,932,849 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 1A1 01-25-34 6.00 588,645 582,081 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 4A1 01-25-19 4.75 307,393 294,761 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2006-9 Cl 1CB1 01-25-37 6.00 2,850,398 2,823,708 Banc of America Funding Collateralized Mtge Obligation Series 2006-2 Cl N1 11-25-46 7.25 170,790(d) 169,296 Banc of America Funding Collateralized Mtge Obligation Series 2006-A Cl 3A2 02-20-36 5.90 769,554(c) 768,292 ChaseFlex Trust Collateralized Mtge Obligation Series 2005-2 Cl 2A2 06-25-35 6.50 614,268 621,467 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-8CB Cl A13 05-25-37 7.73 2,201,977(g) 382,505
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 14 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 2A3 11-25-35 5.50% $526,857 $523,652 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-6CB Cl 1A1 04-25-35 7.50 434,864 449,185 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-2CB Cl A11 03-25-36 6.00 1,600,476 1,596,481 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-HYB1 Cl 6A1 03-25-35 5.16 1,164,538(c) 1,144,821 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00 536,705(d) 556,298 Countrywide Home Loans Collateralized Mtge Obligation Series 2006-HYB1 Cl 1A1 03-20-36 5.37 491,694(c) 489,638 Downey Savings & Loan Assn Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR5 Cl X1 08-19-45 6.38 4,197,605(g) 43,944 Federal Home Loan Mtge Corp 06-01-37 6.00 4,400,000(b) 4,397,250 06-01-37 6.50 20,000,000(b) 20,318,759 Federal Home Loan Mtge Corp #1B7116 08-01-36 5.88 4,412,742(c) 4,414,383 Federal Home Loan Mtge Corp #1G2496 09-01-36 6.20 1,600,395(c) 1,614,911 Federal Home Loan Mtge Corp #1J0283 02-01-37 5.84 3,848,088(c) 3,860,548 Federal Home Loan Mtge Corp #1J1445 01-01-37 5.92 2,481,109(c) 2,485,925 Federal Home Loan Mtge Corp #1J1484 02-01-37 5.59 2,999,613(c) 3,001,391 Federal Home Loan Mtge Corp #1J1536 03-01-37 5.53 2,999,031(c) 2,995,160
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #1J1621 05-01-37 5.89% $3,100,000(b,c) $3,116,723 Federal Home Loan Mtge Corp #555140 03-01-10 8.00 70,790 71,982 Federal Home Loan Mtge Corp #555300 10-01-17 8.00 281,276 290,105 Federal Home Loan Mtge Corp #A10892 07-01-33 6.00 583,746 587,837 Federal Home Loan Mtge Corp #A15111 10-01-33 6.00 927,084 931,333 Federal Home Loan Mtge Corp #A21059 04-01-34 6.50 565,646 577,707 Federal Home Loan Mtge Corp #A25174 08-01-34 6.50 570,786 582,956 Federal Home Loan Mtge Corp #C02699 01-01-37 6.50 3,089,025 3,138,504 Federal Home Loan Mtge Corp #C02853 05-01-37 6.50 8,824,872(b) 8,966,659 Federal Home Loan Mtge Corp #C53098 06-01-31 8.00 325,547 343,885 Federal Home Loan Mtge Corp #C53878 12-01-30 5.50 1,033,169 1,013,848 Federal Home Loan Mtge Corp #C68876 07-01-32 7.00 132,988 137,715 Federal Home Loan Mtge Corp #C69665 08-01-32 6.50 2,600,144 2,666,336 Federal Home Loan Mtge Corp #C79930 06-01-33 5.50 1,574,497 1,541,720 Federal Home Loan Mtge Corp #D95232 03-01-22 6.50 407,758 419,803 Federal Home Loan Mtge Corp #D95371 04-01-22 6.50 316,345 326,243 Federal Home Loan Mtge Corp #E00285 01-01-09 7.00 58,776 59,466 Federal Home Loan Mtge Corp #E81240 06-01-15 7.50 868,180 897,518 Federal Home Loan Mtge Corp #E88036 02-01-17 6.50 1,306,250 1,340,204 Federal Home Loan Mtge Corp #E88468 12-01-16 6.50 307,408 316,284 Federal Home Loan Mtge Corp #E89232 04-01-17 7.00 606,272 627,667 Federal Home Loan Mtge Corp #E92454 11-01-17 5.00 1,767,374 1,728,687
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 15
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #E93685 01-01-18 5.50% $1,296,866 $1,291,051 Federal Home Loan Mtge Corp #E99684 10-01-18 5.00 411,903 402,769 Federal Home Loan Mtge Corp #G01169 01-01-30 5.50 1,663,493 1,633,434 Federal Home Loan Mtge Corp #G01535 04-01-33 6.00 2,151,507 2,180,155 Federal Home Loan Mtge Corp #G02776 03-01-37 6.00 4,990,324 4,988,496 Federal Home Loan Mtge Corp #G12101 11-01-18 5.00 854,904 835,677 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 237 Cl IO 05-15-36 8.58 1,869,951(g) 485,004 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2590 Cl BI 02-15-14 20.00 458,890(g) 14,700 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2639 Cl UI 03-15-22 10.11 1,283,302(g) 190,665 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2718 Cl IA 10-15-22 20.00 537,179(g) 14,927 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2795 Cl IY 07-15-17 13.68 535,028(g) 52,195 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2824 Cl EI 09-15-20 16.07 3,190,076(g) 305,951
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only/Inverse Floater Series 2471 Cl SI 03-15-32 11.83% $308,956(e,g) $27,097 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only/Inverse Floater Series 2882 Cl XS 11-15-19 8.00 1,142,362(e,g) 79,869 Federal Natl Mtge Assn 06-01-22 5.00 2,000,000(b) 1,949,376 06-01-22 5.50 7,900,000(b) 7,838,284 06-01-22 6.00 3,000,000(b) 3,030,000 06-01-37 5.00 5,000,000(b) 4,757,810 06-01-37 5.50 8,000,000(b) 7,809,999 06-01-37 6.00 17,000,000(b) 16,978,749 Federal Natl Mtge Assn #13481 05-01-08 7.75 24,805 25,058 Federal Natl Mtge Assn #190353 08-01-34 5.00 1,708,172 1,629,538 Federal Natl Mtge Assn #252409 03-01-29 6.50 1,553,389 1,595,580 Federal Natl Mtge Assn #254759 06-01-18 4.50 2,263,622 2,172,151 Federal Natl Mtge Assn #254793 07-01-33 5.00 2,416,327 2,306,301 Federal Natl Mtge Assn #254916 09-01-23 5.50 1,995,297 1,964,221 Federal Natl Mtge Assn #256135 02-01-36 5.50 7,873,152 7,647,816 Federal Natl Mtge Assn #313470 08-01-10 7.50 221,016 224,955 Federal Natl Mtge Assn #323362 11-01-28 6.00 2,986,734 3,006,885 Federal Natl Mtge Assn #323715 05-01-29 6.00 553,408 557,142 Federal Natl Mtge Assn #344909 04-01-25 8.00 791,331 837,997 Federal Natl Mtge Assn #357514 03-01-34 5.50 2,502,790 2,450,581 Federal Natl Mtge Assn #426860 10-01-09 8.50 7,001 7,079 Federal Natl Mtge Assn #483691 12-01-28 7.00 1,147,241 1,206,126
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 16 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #487757 09-01-28 7.50% $890,972 $933,836 Federal Natl Mtge Assn #514704 01-01-29 6.00 756,892 761,999 Federal Natl Mtge Assn #545008 06-01-31 7.00 1,617,599 1,702,665 Federal Natl Mtge Assn #545339 11-01-31 6.50 266,456 274,958 Federal Natl Mtge Assn #545818 07-01-17 6.00 3,010,767 3,053,253 Federal Natl Mtge Assn #545864 08-01-17 5.50 1,635,986 1,631,401 Federal Natl Mtge Assn #555063 11-01-17 5.50 1,190,564 1,186,409 Federal Natl Mtge Assn #555458 05-01-33 5.50 1,746,786 1,709,684 Federal Natl Mtge Assn #555528 04-01-33 6.00 2,320,529 2,332,037 Federal Natl Mtge Assn #555734 07-01-23 5.00 777,788 752,459 Federal Natl Mtge Assn #555740 08-01-18 4.50 3,913,917 3,756,137 Federal Natl Mtge Assn #581418 06-01-31 7.00 974,431 1,017,402 Federal Natl Mtge Assn #583088 06-01-29 6.00 3,028,437 3,066,816 Federal Natl Mtge Assn #592270 01-01-32 6.50 801,776 832,184 Federal Natl Mtge Assn #596505 08-01-16 6.50 197,160 202,421 Federal Natl Mtge Assn #601416 11-01-31 6.50 375,857 388,932 Federal Natl Mtge Assn #624979 01-01-32 6.00 837,563 843,776 Federal Natl Mtge Assn #626670 03-01-32 7.00 727,320 764,910 Federal Natl Mtge Assn #627426 03-01-17 6.50 537,022 549,838 Federal Natl Mtge Assn #630992 09-01-31 7.00 2,082,766 2,191,336 Federal Natl Mtge Assn #630993 09-01-31 7.50 2,028,163 2,126,007 Federal Natl Mtge Assn #631388 05-01-32 6.50 1,891,444 1,939,986
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #632412 12-01-17 5.50% $1,276,990 $1,271,595 Federal Natl Mtge Assn #632856 03-01-17 6.00 578,781 586,953 Federal Natl Mtge Assn #633674 06-01-32 6.50 986,811 1,020,188 Federal Natl Mtge Assn #635231 04-01-32 7.00 162,684 169,878 Federal Natl Mtge Assn #635908 04-01-32 6.50 1,317,111 1,351,049 Federal Natl Mtge Assn #636812 04-01-32 7.00 135,869 141,940 Federal Natl Mtge Assn #640200 10-01-31 9.50 103,564(h) 114,581 Federal Natl Mtge Assn #640207 03-01-17 7.00 41,446 42,319 Federal Natl Mtge Assn #640208 04-01-17 7.50 52,527 53,782 Federal Natl Mtge Assn #644805 05-01-32 7.00 1,173,767 1,234,907 Federal Natl Mtge Assn #645053 05-01-32 7.00 690,793 719,449 Federal Natl Mtge Assn #646189 05-01-32 6.50 430,220 440,989 Federal Natl Mtge Assn #654071 09-01-22 6.50 667,627 687,064 Federal Natl Mtge Assn #654685 11-01-22 6.00 587,634 592,951 Federal Natl Mtge Assn #655635 08-01-32 6.50 884,291(h) 917,616 Federal Natl Mtge Assn #656514 09-01-17 6.50 1,223,380 1,256,356 Federal Natl Mtge Assn #660186 11-01-32 6.00 2,470,748 2,497,971 Federal Natl Mtge Assn #663651 10-01-17 5.50 523,057 521,225 Federal Natl Mtge Assn #663667 11-01-17 5.50 445,067 443,481 Federal Natl Mtge Assn #665752 09-01-32 6.50 1,388,996 1,423,766 Federal Natl Mtge Assn #667302 01-01-33 7.00 628,531 657,948 Federal Natl Mtge Assn #667604 10-01-32 5.50 561,253 549,582
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 17
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #670382 09-01-32 6.00% $1,288,553 $1,294,943 Federal Natl Mtge Assn #676683 12-01-32 6.00 1,343,227 1,349,889 Federal Natl Mtge Assn #677089 01-01-33 5.50 665,024 651,194 Federal Natl Mtge Assn #677294 01-01-33 6.00 1,601,061 1,609,001 Federal Natl Mtge Assn #681080 02-01-18 5.00 996,055 973,615 Federal Natl Mtge Assn #682229 03-01-33 5.50 2,380,544 2,331,039 Federal Natl Mtge Assn #684585 02-01-33 5.50 1,689,492 1,655,072 Federal Natl Mtge Assn #684843 02-01-18 5.50 1,877,162 1,870,781 Federal Natl Mtge Assn #684853 03-01-33 6.50 268,340 275,343 Federal Natl Mtge Assn #688002 03-01-33 5.50 1,590,782 1,559,499 Federal Natl Mtge Assn #689026 05-01-33 5.50 407,372 399,026 Federal Natl Mtge Assn #689093 07-01-28 5.50 1,037,039 1,018,318 Federal Natl Mtge Assn #694628 04-01-33 5.50 2,209,776 2,168,795 Federal Natl Mtge Assn #694795 04-01-33 5.50 2,758,197 2,706,941 Federal Natl Mtge Assn #695460 04-01-18 5.50 2,341,160 2,332,099 Federal Natl Mtge Assn #697145 03-01-23 5.50 1,224,665 1,204,914 Federal Natl Mtge Assn #699424 04-01-33 5.50 1,770,947 1,738,065 Federal Natl Mtge Assn #701101 04-01-33 6.00 2,198,659 2,207,313 Federal Natl Mtge Assn #704610 06-01-33 5.50 2,305,964 2,257,861 Federal Natl Mtge Assn #705655 05-01-33 5.00 783,742 748,055 Federal Natl Mtge Assn #708503 05-01-33 6.00 281,592 283,152 Federal Natl Mtge Assn #708504 05-01-33 6.00 678,960 683,833
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #710780 05-01-33 6.00% $295,071 $296,233 Federal Natl Mtge Assn #711206 05-01-33 5.50 1,378,650 1,349,891 Federal Natl Mtge Assn #711239 07-01-33 5.50 607,732 595,055 Federal Natl Mtge Assn #711501 05-01-33 5.50 901,340 883,686 Federal Natl Mtge Assn #720378 06-01-18 4.50 1,735,982 1,665,833 Federal Natl Mtge Assn #723771 08-01-28 5.50 1,073,173 1,053,799 Federal Natl Mtge Assn #725017 12-01-33 5.50 3,157,181 3,091,322 Federal Natl Mtge Assn #725232 03-01-34 5.00 1,821,621 1,738,675 Federal Natl Mtge Assn #725424 04-01-34 5.50 10,381,080 10,164,527 Federal Natl Mtge Assn #725425 04-01-34 5.50 2,976,289 2,914,284 Federal Natl Mtge Assn #725684 05-01-18 6.00 882,662 893,420 Federal Natl Mtge Assn #725719 07-01-33 4.84 572,810(c) 561,548 Federal Natl Mtge Assn #725773 09-01-34 5.50 7,221,705 7,066,984 Federal Natl Mtge Assn #726940 08-01-23 5.50 1,382,829 1,361,607 Federal Natl Mtge Assn #730153 08-01-33 5.50 811,893 794,957 Federal Natl Mtge Assn #733367 08-01-23 5.50 1,172,910 1,154,794 Federal Natl Mtge Assn #735057 01-01-19 4.50 6,268,457 6,015,157 Federal Natl Mtge Assn #735212 12-01-34 5.00 9,577,161 9,136,283 Federal Natl Mtge Assn #735949 10-01-35 4.98 1,299,230(c) 1,294,417 Federal Natl Mtge Assn #743524 11-01-33 5.00 2,046,331 1,953,153 Federal Natl Mtge Assn #743579 11-01-33 5.50 1,714,245 1,678,485 Federal Natl Mtge Assn #747339 10-01-23 5.50 1,380,602 1,358,800
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 18 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #747536 11-01-33 5.00% $2,787,318 $2,660,400 Federal Natl Mtge Assn #750932 10-01-18 4.50 900,412 864,027 Federal Natl Mtge Assn #753507 12-01-18 5.00 1,174,300 1,148,062 Federal Natl Mtge Assn #753940 12-01-18 5.00 1,045,050 1,021,507 Federal Natl Mtge Assn #759342 01-01-34 6.50 471,087 486,254 Federal Natl Mtge Assn #761141 12-01-18 5.00 1,610,035 1,573,763 Federal Natl Mtge Assn #765760 02-01-19 5.00 1,061,042 1,037,138 Federal Natl Mtge Assn #766641 03-01-34 5.00 3,227,325 3,078,758 Federal Natl Mtge Assn #770403 04-01-34 5.00 1,642,940 1,567,308 Federal Natl Mtge Assn #776962 04-01-29 5.00 1,430,656 1,365,899 Federal Natl Mtge Assn #779676 06-01-34 5.00 2,893,625 2,760,420 Federal Natl Mtge Assn #785506 06-01-34 5.00 6,076,086 5,796,378 Federal Natl Mtge Assn #793622 09-01-34 5.50 6,830,912 6,684,564 Federal Natl Mtge Assn #797232 09-01-34 5.50 8,252,757 8,075,946 Federal Natl Mtge Assn #844257 11-01-35 5.07 1,119,370(c) 1,119,788 Federal Natl Mtge Assn #845070 12-01-35 5.09 553,571(c) 550,043 Federal Natl Mtge Assn #850855 12-01-35 5.01 1,298,175(c) 1,289,053 Federal Natl Mtge Assn #878661 02-01-36 5.50 2,170,300 2,108,837 Federal Natl Mtge Assn #881629 02-01-36 5.50 1,426,007 1,385,623 Federal Natl Mtge Assn #886020 07-01-36 6.50 1,230,772 1,265,207 Federal Natl Mtge Assn #886291 07-01-36 7.00 902,450 938,837 Federal Natl Mtge Assn #893101 10-01-36 6.50 3,202,115 3,252,599
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #894800 12-01-36 6.50% $4,611,704 $4,684,412 Federal Natl Mtge Assn #900197 10-01-36 5.94 1,747,369(c) 1,767,044 Federal Natl Mtge Assn #901922 10-01-36 5.79 1,682,818(c) 1,692,697 Federal Natl Mtge Assn #902818 11-01-36 5.94 3,633,212(c) 3,670,307 Federal Natl Mtge Assn #909471 02-01-37 5.55 2,439,856(c) 2,436,860 Federal Natl Mtge Assn #916696 04-01-37 6.00 4,999,512 4,967,865 Federal Natl Mtge Assn #919341 05-01-37 6.50 5,000,000(b) 5,078,772 Federal Natl Mtge Assn #928046 01-01-37 6.00 4,065,850 4,062,841 Federal Natl Mtge Assn #928146 03-01-37 6.00 5,489,015 5,483,576 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-119 Cl GI 12-25-33 8.21 528,952(g) 129,019 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-24 Cl PI 12-25-12 20.00 215,505(g) 2,159 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12-25-31 12.80 512,939(g) 87,620 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2004-84 Cl GI 12-25-22 12.17 233,590(g) 32,240 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2005-70 Cl YJ 08-25-35 20.00 3,174,514(g) 362,362
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 19
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 367 Cl 2 01-01-36 8.78% $1,633,908(g) $423,216 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-133 Cl GB 12-25-26 8.00 334,689 350,759 Govt Natl Mtge Assn #3931 12-20-36 6.00 4,884,999 4,904,721 Govt Natl Mtge Assn #518371 02-15-30 7.00 121,491 127,052 Govt Natl Mtge Assn #528344 03-15-30 7.00 375,209 392,382 Govt Natl Mtge Assn #556293 12-15-31 6.50 448,563 461,236 Govt Natl Mtge Assn #583182 02-15-32 6.50 571,291 587,225 Govt Natl Mtge Assn #595256 12-15-32 6.00 374,757 377,679 Govt Natl Mtge Assn #619613 09-15-33 5.00 1,523,785 1,464,763 Harborview Nim Collateralized Mtge Obligation Series 2006-10 Cl N1 11-19-36 6.41 257,073(d) 256,832 Harborview Nim Collateralized Mtge Obligation Series 2006-7A Cl N1 09-19-36 6.41 184,176(d) 183,688 Harborview Nim Collateralized Mtge Obligation Series 2006-8A Cl N1 07-21-36 6.41 73,238(d) 72,597 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR8 Cl AX1 04-25-35 4.50 8,990,385(g) 68,833 IndyMac Index Nim Collateralized Mtge Obligation Series 2006-AR6 Cl N1 06-25-46 6.65 106,016(d) 105,618
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Lehman XS Net Interest Margin Nts Collateralized Mtge Obligation Series 2006-GPM6 Cl A1 10-28-46 6.25% $353,270(d) $351,945 Lehman XS Net Interest Margin Nts Series 2006-AR8 Cl A1 10-28-46 6.25 227,266(d) 226,626 Lehman XS Trust Collateralized Mtge Obligation Series 2007-5H Cl 1A1 05-25-37 6.50 5,913,873 5,989,645 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-2 Cl 4A1 02-25-19 5.00 471,763 456,653 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-7 Cl 8A1 08-25-19 5.00 396,989 382,709 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-8 Cl 7A1 09-25-19 5.00 555,006 534,026 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2005-3 Cl 1A2 04-25-35 5.50 1,537,000 1,444,841 Structured Adjustable Rate Mtge Loan Trust Collateralized Mtge Obligation Series 2005-15 Cl 4A1 07-25-35 5.51 1,144,856(c) 1,126,253 Structured Asset Securities Collateralized Mtge Obligation Series 2003-33H Cl 1A1 10-25-33 5.50 1,383,140 1,339,310 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2004-CB2 Cl 6A 07-25-19 4.50 666,016 630,851 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2005-AR14 Cl 2A1 12-25-35 5.30 424,506(c) 418,476
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 20 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2006-AR10 Cl 1A1 09-25-36 5.95% $2,151,268(c) $2,156,642 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-10 Cl A1 10-25-35 5.00 2,239,881 2,128,424 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-5 Cl 2A1 05-25-35 5.50 809,080 785,313 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR12 Cl 1A1 09-25-36 6.03 2,047,673(c) 2,053,248 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR12 Cl 2A1 09-25-36 6.10 2,236,740(c) 2,245,083 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR6 Cl 5A1 03-25-36 5.11 953,085(c) 937,685 --------------- Total 422,214,641 ----------------------------------------------------------------------------------- TOTAL BONDS (Cost: $439,797,072) $434,286,144 -----------------------------------------------------------------------------------
MONEY MARKET FUND (1.9%) SHARES VALUE(A) RiverSource Short-Term Cash Fund 7,543,343(j) $7,543,343 ----------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $7,543,343) $7,543,343 -----------------------------------------------------------------------------------
SHORT-TERM SECURITIES (12.0%) AMOUNT EFFECTIVE PAYABLE AT ISSUER YIELD MATURITY VALUE(A) U.S. GOVERNMENT AGENCIES Federal Home Loan Bank Disc Nts 06-01-07 5.10% $8,700,000 $8,698,767 02-21-08 5.36 10,000,000 9,994,660 03-07-08 5.12 15,000,000 14,984,820 Federal Natl Mtge Assn Disc Nts 06-07-07 5.17 15,000,000 14,984,941 ----------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $48,686,392) $48,663,188 ----------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $496,026,807)(k) $490,492,675 ===================================================================================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At May 31, 2007, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $85,398,333. (c) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on May 31, 2007. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At May 31, 2007, the value of these securities amounted to $3,922,900 or 1.0% of net assets. (e) Inverse floaters represent securities that pay interest at a rate that increases (decreases) in the same magnitude as, or in a multiple of, a decline (increase) in the LIBOR (London InterBank Offering Rate) Index. Interest rate disclosed is the rate in effect on May 31, 2007. At May 31, 2007, the value of inverse floaters represented 0.03% of net assets. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 21 NOTES TO INVESTMENTS IN SECURITIES (CONTINUED) (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at May 31, 2007. (h) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 5 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT ------------------------------------------------------------------------------- PURCHASE CONTRACTS U.S. Long Bond, Sept. 2007, 20-year $6,600,000 U.S. Treasury Note, Sept. 2007, 10-year 2,500,000 SALE CONTRACTS U.S. Treasury Note, June 2007, 2-year 9,200,000 U.S. Treasury Note, June 2007, 5-year 2,600,000 U.S. Treasury Note, Sept. 2007, 2-year 10,600,000
(i) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 2007. (j) Affiliated Money Market Fund -- See Note 7 to the financial statements. (k) At May 31, 2007, the cost of securities for federal income tax purposes was $496,153,675 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 536,353 Unrealized depreciation (6,197,353) ------------------------------------------------------------------------------ Net unrealized depreciation $(5,661,000) ------------------------------------------------------------------------------
HOW TO FIND INFORMATION ABOUT THE FUND'S PORTFOLIO HOLDINGS (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii)The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as disclosed in its annual and semiannual shareholder reports and in its filings on Form N-Q, can be found at riversource.com/funds. -------------------------------------------------------------------------------- 22 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES MAY 31, 2007 ASSETS Investments in securities, at value (Note 1) Unaffiliated issuers (identified cost $488,483,464) $482,949,332 Affiliated money market fund (identified cost $7,543,343) (Note 7) 7,543,343 ---------------------------------------------------------------------------- Total investments in securities (identified cost $496,026,807) 490,492,675 Cash in bank on demand deposit 1,184 Capital shares receivable 89,824 Accrued interest receivable 2,289,596 Receivable for investment securities sold 26,099,478 Unrealized appreciation on swap transactions, at value (Note 6) 19,328 ---------------------------------------------------------------------------- Total assets 518,992,085 ---------------------------------------------------------------------------- LIABILITIES Dividends payable to shareholders 289,521 Capital shares payable 30,604 Payable for investment securities purchased 26,031,686 Payable for securities purchased on a forward-commitment basis (Note 1) 85,398,333 Accrued investment management services fee 5,344 Accrued distribution fee 38,801 Accrued transfer agency fee 774 Accrued administrative services fee 779 Accrued plan administration services fee 9,240 Other accrued expenses 70,755 ---------------------------------------------------------------------------- Total liabilities 111,875,837 ---------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $407,116,248 ============================================================================ REPRESENTED BY Capital stock -- $.01 par value (Note 1) $ 814,517 Additional paid-in capital 412,951,718 Undistributed net investment income 239,916 Accumulated net realized gain (loss) (Note 9) (1,467,647) Unrealized appreciation (depreciation) on investments (5,422,256) ---------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $407,116,248 ============================================================================
Net assets applicable to outstanding shares: Class A $110,626,774 Class B $ 44,391,082 Class C $ 4,878,851 Class I $207,377,398 Class R4 $ 39,842,143 Net asset value per share of outstanding capital stock: Class A shares 22,121,800 $ 5.00 Class B shares 8,873,574 $ 5.00 Class C shares 975,139 $ 5.00 Class I shares 41,508,753 $ 5.00 Class R4 shares 7,972,479 $ 5.00 ------------------------------------------------------------------------------------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 23 STATEMENT OF OPERATIONS YEAR ENDED MAY 31, 2007 INVESTMENT INCOME Income: Interest $14,895,692 Income distributions from affiliated money market fund (Note 7) 158,040 --------------------------------------------------------------------------- Total income 15,053,732 --------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 1,348,887 Distribution fee Class A 299,282 Class B 529,573 Class C 56,655 Transfer agency fee Class A 332,925 Class B 155,858 Class C 16,524 Class R4 65,259 Service fee -- Class R4 19,315 Administrative services fees and expenses 196,713 Plan administration services fee -- Class R4 45,602 Compensation of board members 5,161 Custodian fees 74,050 Printing and postage 89,045 Registration fees 45,020 Professional fees 25,581 Other 15,146 --------------------------------------------------------------------------- Total expenses 3,320,596 Expenses waived/reimbursed by the Investment Manager and its affiliates (Note 2) (675,407) --------------------------------------------------------------------------- 2,645,189 Earnings and bank fee credits on cash balances (Note 2) (17,069) --------------------------------------------------------------------------- Total net expenses 2,628,120 --------------------------------------------------------------------------- Investment income (loss) -- net 12,425,612 --------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (Note 3) 327,958 Futures contracts 363,294 Payment from affiliate (Note 2) 6,038 --------------------------------------------------------------------------- Net realized gain (loss) on investments 697,290 Net change in unrealized appreciation (depreciation) on investments 1,881,245 --------------------------------------------------------------------------- Net gain (loss) on investments 2,578,535 --------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $15,004,147 ===========================================================================
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 24 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED MAY 31, 2007 2006 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 12,425,612 $ 9,995,067 Net realized gain (loss) on investments 697,290 (1,546,011) Net change in unrealized appreciation (depreciation) on investments 1,881,245 (8,342,100) -------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 15,004,147 106,956 -------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (5,407,728) (5,735,409) Class B (1,999,233) (2,557,549) Class C (214,172) (274,662) Class I (3,051,378) (22,389) Class R4 (1,761,395) (1,002,420) Net realized gain Class A -- (240,137) Class B -- (129,909) Class C -- (13,809) Class I -- (16) Class R4 -- (56,235) -------------------------------------------------------------------------------------- Total distributions (12,433,906) (10,032,535) -------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales Class A shares (Note 2) 29,049,243 37,325,046 Class B shares 9,006,830 13,027,075 Class C shares 470,592 872,372 Class I shares 201,892,945 6,177,343 Class R4 shares 5,512,362 35,864,407 Reinvestment of distributions at net asset value Class A shares 4,873,804 5,347,437 Class B shares 1,827,201 2,476,785 Class C shares 194,782 264,470 Class I shares 2,900,308 17,221 Class R4 shares 1,758,106 1,032,159 Payments for redemptions Class A shares (51,596,469) (70,083,963) Class B shares (Note 2) (31,868,944) (45,885,010) Class C shares (Note 2) (2,626,838) (4,632,367) Class I shares (2,611,222) (621) Class R4 shares (2,593,585) (1,208,975) -------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions 166,189,115 (19,406,621) -------------------------------------------------------------------------------------- Total increase (decrease) in net assets 168,759,356 (29,332,200) Net assets at beginning of year 238,356,892 267,689,092 -------------------------------------------------------------------------------------- Net assets at end of year $407,116,248 $238,356,892 ====================================================================================== Undistributed net investment income $ 239,916 $ 242,172 --------------------------------------------------------------------------------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 25 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of RiverSource Government Income Series, Inc. and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. RiverSource Government Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the Board. The Fund invests primarily in mortgage-backed securities that either are issued or guaranteed as to principal and interest by the U.S. government, its agencies, authorities or instrumentalities. The Fund offers Class A, Class B, Class C, Class I and Class R4 shares. - Class A shares are sold with a front-end sales charge. - Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth year of ownership. - Class C shares may be subject to a CDSC. - Class I and Class R4 shares have no sales charge and are offered only to qualifying institutional investors. Effective Dec. 11, 2006, the Board approved renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from account-based to asset-based, and adopting a plan administration services agreement. At May 31, 2007, Ameriprise Financial, Inc. (Ameriprise Financial) and the affiliated funds-of-funds owned 100% of Class I shares. At May 31, 2007, Ameriprise Financial and the affiliated funds-of-funds owned approximately 51% of the total outstanding Fund shares. All classes of shares have identical voting, dividend and liquidation rights. Class specific expenses (e.g., distribution and service fees, transfer agency fees, plan administration fees) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. The Fund's significant accounting policies are summarized below: USE OF ESTIMATES Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. -------------------------------------------------------------------------------- 26 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT VALUATION OF SECURITIES All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. The procedures adopted by the Board of Directors of the funds generally contemplate the use of fair valuation in the event that price quotations or valuations are not readily available, price quotations or valuations from other sources are not reflective of market value and thus deemed unreliable, or a significant event has occurred in relation to a security or class of securities that is not reflected in price quotations or valuations from other sources. A fair value price is a good faith estimate of the value of a security at a given point in time. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS Delivery and payment for securities that have been purchased by the Fund on a forward-commitment basis, including when-issued securities and other forward- commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Fund's net assets the same as owned securities. The Fund designates cash or liquid securities at least equal to the amount of its forward-commitments. At May 31, 2007, the Fund has entered into outstanding when-issued securities of $68,118,650 and other forward-commitments of $17,279,683. The Fund also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Fund to "roll over" its purchase commitments, the Fund receives negotiated amounts in the form of reductions of the purchase price of the commitment. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 27 OPTION TRANSACTIONS To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Fund may buy and sell put and call options and write put and call options. This may include purchasing mortgage-backed security (MBS) put spread options and writing covered MBS call spread options. MBS spread options are based upon the changes in the price spread between a specified mortgage-backed security and a like-duration Treasury security. The risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Fund pays a premium whether or not the option is exercised. The Fund also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. The Fund also may write over-the-counter options where completing the obligation depends upon the credit standing of the other party. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Fund will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Fund will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. FUTURES TRANSACTIONS To gain exposure to or protect itself from market changes, the Fund may buy and sell financial futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Fund each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Fund recognizes a realized gain or loss when the contract is closed or expires. SHORT SALES The Fund may engage in short sales. In these transactions, the Fund sells a security that it does not own. The Fund is obligated to replace the security that was short by purchasing it at the market price at the time of replacement or entering into an offsetting transaction with the broker. The price at such time may be more or less than the price at which the Fund sold the security. -------------------------------------------------------------------------------- 28 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT FORWARD SALE COMMITMENTS The Fund may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to- market" daily and the change in market value is recorded by the Fund as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss. If the Fund delivers securities under the commitment, the Fund realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the "Notes to investments in securities." MBS TOTAL RETURN SWAP TRANSACTIONS The Fund may enter into swap agreements to earn the total return on a specified security or index of fixed income securities. CMBS total return swaps are bilateral financial contracts designed to replicate synthetically the total returns of collateralized mortgage-backed securities. Under the terms of the swaps, the Fund either receives or pays the total return on a reference security or index applied to a notional principal amount. In return, the Fund agrees to pay or receive from the counterparty a floating rate, which is reset periodically based on short-term interest rates, applied to the same notional amount. The notional amounts of swap contracts are not recorded in the financial statements. Swaps are valued daily, and the change in value is recorded as unrealized appreciation (depreciation) until the termination of the swap, at which time realized gain (loss) is recorded. Payments received or made are recorded as realized gains (losses). Swap agreements may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. It may not be possible for the Fund to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses. Total return swaps are subject to the risk that the counterparty will default on its obligation to pay net amounts due to the Fund. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 29 GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. FEDERAL TAXES The Fund's policy is to comply with Subchapter M of the Internal Revenue Code that applies to regulated investment companies and to distribute substantially all of its taxable income to shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of deferred losses on certain futures contracts and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been increased by $6,038 and accumulated net realized loss has been decreased by $6,038. -------------------------------------------------------------------------------- 30 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED MAY 31, 2007 2006 ---------------------------------------------------------------------------- CLASS A Distributions paid from: Ordinary income........................... $5,407,728 $5,975,546 Long-term capital gain.................... -- -- CLASS B Distributions paid from: Ordinary income........................... 1,999,233 2,687,458 Long-term capital gain.................... -- -- CLASS C Distributions paid from: Ordinary income........................... 214,172 288,471 Long-term capital gain.................... -- -- CLASS I Distributions paid from: Ordinary income........................... 3,051,378 22,405 Long-term capital gain.................... -- -- CLASS R4* Distributions paid from: Ordinary income........................... 1,761,395 1,058,655 Long-term capital gain.................... -- --
* Effective Dec. 11, 2006 Class Y was renamed R4. At May 31, 2007, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income.............................. $ 623,858 Accumulated long-term gain (loss).......................... $(1,209,634) Unrealized appreciation (depreciation)..................... $(5,774,690)
RECENT ACCOUNTING PRONOUNCEMENTS On Sept. 20, 2006, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards No. 157 "Fair Value Measurements" (SFAS 157). SFAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The application of SFAS 157 is required for fiscal years beginning after Nov. 15, 2007 and interim periods within those fiscal years. The impact of SFAS 157 on the Fund's financial statements is being evaluated. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 31 In June 2006, the FASB issued FASB Interpretation 48 (FIN 48), "Accounting for Uncertainty in Income Taxes." FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement 109, "Accounting for Income Taxes." FIN 48 prescribes a two-step process to recognize and measure a tax position taken or expected to be taken in a tax return. The first step is to determine whether a tax position has met the more-likely-than-not recognition threshold and the second step is to measure a tax position that meets the threshold to determine the amount of benefit to recognize. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after Dec. 15, 2006. Tax positions of the Fund are being evaluated to determine the impact, if any, to the Fund. The adoption of FIN 48 is not anticipated to have a material impact on the Fund. DIVIDENDS TO SHAREHOLDERS Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. OTHER Security transactions are accounted for on the date securities are purchased or sold. Interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. 2. EXPENSES AND SALES CHARGES Under an Investment Management Services Agreement, RiverSource Investments, LLC (the Investment Manager) determines which securities will be purchased, held or sold. The management fee is a percentage of the Fund's average daily net assets that declines from 0.48% to 0.29% annually as the Fund's assets increase. Under an Administrative Services Agreement, the Fund pays Ameriprise Financial a fee for administration and accounting services at a percentage of the Fund's average daily net assets that declines from 0.07% to 0.04% annually as the Fund's assets increase. Other expenses in the amount of $6,867 are for, among other things, certain expenses of the Fund or the Board including: Fund boardroom and office expense, employee compensation, employee health and retirement benefits, and certain other expenses. Payment of these Fund and Board expenses is facilitated by a company providing limited administrative services to the Fund and the Board. Compensation of Board members includes, for the former Board Chair, compensation as well as retirement benefits. Certain other aspects of the former Board Chair's compensation, including health benefits and payment of certain other expenses, are included under other expenses. -------------------------------------------------------------------------------- 32 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT Under a Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other RiverSource funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. Professional fees include fees paid by the Fund for legal services and independent auditor services. Under a Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains shareholder accounts and records. The Fund pays the Transfer Agent an annual fee per shareholder account for this service as follows: - Class A $20.50 - Class B $21.50 - Class C $21.00 Effective Dec. 11, 2006, as part of the Board's approval to rename Class Y as Class R4, the fee structure under the Transfer Agency Agreement was revised from an account-based fee for Class Y to an asset-based fee for Class R4. The Fund pays the Transfer Agent an annual asset-based fee at a rate of 0.05% of the Fund's average daily net assets attributable to Class R4 shares. Prior to Dec. 11, 2006, the Fund paid the Transfer Agent an annual account-based fee of $18.50 per shareholder account Prior to Dec. 11, 2006, Class I paid a transfer agency fee at an annual rate per shareholder account of $1. This amount is included in the transfer agency fee on the statement of operations. Effective Dec. 11, 2006, this fee was eliminated. The Transfer Agent charges an annual closed account fee of $5 per inactive account, charged on a pro rata basis for 12 months from the date the account becomes inactive. These fees are included in the transfer agency fees on the statement of operations. The Fund has agreements with Ameriprise Financial Services, Inc. and RiverSource Distributors, Inc. (collectively, the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A shares and a fee at an annual rate of up to 1.00% of the Fund's average daily net assets attributable to Class B and Class C shares. Effective Dec. 11, 2006, a new Plan Administration Services Agreement was adopted for the restructured Class R4. The fee is calculated at a rate of 0.25% of the Fund's average daily net assets attributable to Class R4 shares. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 33 Prior to Dec. 11, 2006, under a Shareholder Service Agreement, the Fund paid the Distributor a fee for service provided to shareholders by the Distributor and other servicing agents with respect to Class Y shares. The fee was calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Effective Dec. 11, 2006, this agreement was terminated. Sales charges received by the Distributor for distributing Fund shares were $176,539 for Class A, $74,724 for Class B and $1,139 for Class C for the year ended May 31, 2007. In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the funds in which it invests (also referred to as "acquired funds"), including affiliated and non- affiliated pooled investment vehicles (including mutual funds and exchange traded funds). Because the acquired funds have varied expense and fee levels and the Fund may own different proportions of acquired funds at different times, the amount of fees and expenses incurred indirectly by the Fund will vary. For the year ended May 31, 2007, the Investment Manager and its affiliates waived certain fees and expenses (excluding fees and expenses of acquired funds), such that net expenses were 0.89% for Class A, 1.64% for Class B, 1.64% for Class C, 0.54% for Class I and 0.71% for Class R4. Of these waived fees and expenses, the transfer agency fees waived for Class A, Class B, Class C and Class R4 were $213,212, $102,901, $10,858 and $66,331, respectively, and the management fees waived at the Fund level were $282,105. Under an agreement which was effective until May 31, 2007, net expenses would not exceed 0.89% for Class A, 1.64% for Class B, 1.64% for Class C, 0.54% for Class I and 0.71% for Class R4 of the Fund's average daily net assets. Effective June 1, 2007, the Investment Manager and its affiliates have agreed to waive certain fees and expenses until May 31, 2008, unless sooner terminated at the discretion of the Board, such that net expenses (excluding fees and expenses of acquired funds), will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.48% for Class I and 0.75% for Class R4 of the Fund's average daily net assets. During the year ended May 31, 2007, the Fund's custodian and transfer agency fees were reduced by $17,069 as a result of earnings and bank fee credits from overnight cash balances. The Fund also pays custodian fees to Ameriprise Trust Company, an affiliate of Ameriprise Financial. In addition, the Fund received a one time payment of $6,038 by Ameriprise Financial for additional earnings from overnight cash balances determined to be owed for prior years. This amount was insignificant to the Fund's net asset value and total return. -------------------------------------------------------------------------------- 34 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $1,109,230,195 and $930,764,290, respectively, for the year ended May 31, 2007. Realized gains and losses are determined on an identified cost basis. 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
YEAR ENDED MAY 31, 2007 CLASS A CLASS B CLASS C CLASS I CLASS R4* ------------------------------------------------------------------------------------ Sold 5,818,196 1,802,802 94,036 40,197,102 1,103,924 Issued for reinvested distributions 974,704 365,504 38,962 578,113 351,589 Redeemed (10,325,253) (6,386,285) (525,990) (521,207) (520,939) ------------------------------------------------------------------------------------ Net increase (decrease) (3,532,353) (4,217,979) (392,992) 40,254,008 934,574 ------------------------------------------------------------------------------------
YEAR ENDED MAY 31, 2006 CLASS A CLASS B CLASS C CLASS I CLASS R4* ------------------------------------------------------------------------------------ Sold 7,402,343 2,584,566 172,998 1,249,439 7,065,659 Issued for reinvested distributions 1,063,575 492,215 52,554 3,488 206,582 Redeemed (13,940,058) (9,109,562) (920,171) (124) (241,174) ------------------------------------------------------------------------------------ Net increase (decrease) (5,474,140) (6,032,781) (694,619) 1,252,803 7,031,067 ------------------------------------------------------------------------------------
* Effective Dec. 11, 2006, Class Y was renamed Class R4. 5. INTEREST RATE FUTURES CONTRACTS At May 31, 2007, investments in securities included securities valued at $343,466 that were pledged as collateral to cover initial margin deposits on 91 open purchase contracts and 125 open sale contracts. The notional market value of the open purchase contracts at May 31, 2007 was $9,861,625 with a net unrealized loss of $9,843. The notional market value of the open sale contracts at May 31, 2007 was $22,874,860 with a net unrealized gain of $102,390. See "Summary of significant accounting policies" and "Notes to investments in securities." -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 35 6. SWAP CONTRACTS At May 31, 2007, the Fund had the following open CBMS total return swap contract:
UNREALIZED TERMINATION NOTIONAL APPRECIATION DATE AMOUNT (DEPRECIATION) ---------------------------------------------------------------------------------- Receive spread on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index plus 1.00% times notional amount plus spread return amount, if such amount is positive, and pay the absolute value of the spread return amount, if such amount is negative. Counterparty: Citigroup Jan. 1, 2008 $2,000,000 $19,328 ----------------------------------------------------------------------------------
7. AFFILIATED MONEY MARKET FUND The Fund may invest its daily cash balance in RiverSource Short-Term Cash Fund, a money market fund established for the exclusive use of the RiverSource funds and other institutional clients of RiverSource Investments. 8. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by JPMorgan Chase Bank, N.A. (JPMCB), whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The agreement went into effect Sept. 19, 2006. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other RiverSource funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the higher of the Federal Funds Effective Rate plus 0.40% or the JPMCB Prime Commercial Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.06% per annum. Prior to this agreement, the Fund paid a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.07% per annum. The Fund had no borrowings under the facility outstanding during the year ended May 31, 2007. 9. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund had a capital loss carry-over of $1,209,634 at May 31, 2007, that if not offset by capital gains will expire as follows:
2014 2015 $545,026 $664,608
-------------------------------------------------------------------------------- 36 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT It is unlikely the Board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. 10. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS In June 2004, an action captioned John E. Gallus et al. v. American Express Financial Corp. and American Express Financial Advisors Inc., was filed in the United States District Court for the District of Arizona. The plaintiffs allege that they are investors in several American Express Company mutual funds and they purport to bring the action derivatively on behalf of those funds under the Investment Company Act of 1940. The plaintiffs allege that fees allegedly paid to the defendants by the funds for investment advisory and administrative services are excessive. The plaintiffs seek remedies including restitution and rescission of investment advisory and distribution agreements. The plaintiffs voluntarily agreed to transfer this case to the United States District Court for the District of Minnesota. In response to defendants' motion to dismiss the complaint, the Court dismissed one of plaintiffs' four claims and granted plaintiffs limited discovery. Defendants moved for summary judgment in April 2007. Summary judgment was granted in the defendants' favor on July 9, 2007. The plaintiffs may file a notice of appeal with the Eighth Circuit Court of Appeals within 30 days from the date of judgment. In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), the parent company of RiverSource Investments, LLC (RiverSource Investments), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. In connection with these matters, the SEC and MDOC issued orders (the Orders) alleging that AEFC violated certain provisions of the federal and Minnesota securities laws by failing to adequately disclose market timing activities by allowing certain identified market timers to continue to market time contrary to disclosures in mutual fund and variable annuity product prospectuses. The Orders also alleged that AEFC failed to implement procedures to detect and prevent market timing in 401(k) plans for employees of AEFC and related companies and failed to adequately disclose that there were no such procedures. Pursuant to the MDOC Order, the MDOC also alleged that AEFC allowed inappropriate market timing to occur by failing to have written policies and procedures and failing to properly supervise its employees. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 37 As a result of the Orders, AEFC was censured and ordered to cease and desist from committing or causing any violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. Pursuant to the terms of the Orders, AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to make presentations at least annually to its board of directors and the relevant mutual funds' board that include an overview of policies and procedures to prevent market timing, material changes to these policies and procedures and whether disclosures related to market timing are consistent with the SEC order and federal securities laws. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. In addition, AEFC agreed to complete and submit to the MDOC a compliance review of its procedures regarding market timing within one year of the MDOC Order, including a summary of actions taken to ensure compliance with applicable laws and regulations and certification by a senior officer regarding compliance and supervisory procedures. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the RiverSource Funds' Boards of Directors/Trustees. Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal, arbitration and regulatory proceedings, including routine litigation, class actions, and governmental actions, concerning matters arising in connection with the conduct of their business activities. Ameriprise Financial believes that the Funds are not currently the subject of, and that neither Ameriprise Financial nor any of its affiliates are the subject of, any pending legal, arbitration or regulatory proceedings that are likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds. Ameriprise Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the Securities and Exchange Commission on legal and regulatory matters that relate to Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing the SEC website at www.sec.gov. -------------------------------------------------------------------------------- 38 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT There can be no assurance that these matters, or the adverse publicity associated with them, will not result in increased fund redemptions, reduced sale of fund shares or other adverse consequences to the Funds. Further, although we believe proceedings are not likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds, these proceedings are subject to uncertainties and, as such, we are unable to estimate the possible loss or range of loss that may result. An adverse outcome in one or more of these proceedings could result in adverse judgments, settlements, fines, penalties or other relief that could have a material adverse effect on the consolidated financial condition or results of operations of Ameriprise Financial. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 39 11. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results. CLASS A
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.92 $5.12 $5.03 $5.19 $5.06 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .22 .21 .19 .16 .19 Net gains (losses) (both realized and unrealized) .09 (.20) .10 (.09) .16 ----------------------------------------------------------------------------------------------------------- Total from investment operations .31 .01 .29 .07 .35 ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.23) (.20) (.20) (.16) (.20) Tax return of capital -- -- -- (.01) -- Distributions from realized gains -- (.01) -- (.06) (.02) ----------------------------------------------------------------------------------------------------------- Total distributions (.23) (.21) (.20) (.23) (.22) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $5.00 $4.92 $5.12 $5.03 $5.19 ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $111 $126 $159 $177 $251 ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b),(c),(d) .89% .89% .95% .98% .99% ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.45% 4.08% 3.67% 3.11% 3.31% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 306% 178% 137% 163% 227% ----------------------------------------------------------------------------------------------------------- Total return(e) 6.30% .12% 5.78% 1.27% 6.93% -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (d) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 1.17%, 1.19%, 1.10%, 1.05% and 1.06% for the years ended May 31, 2007, 2006, 2005, 2004 and 2003, respectively. (e) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- 40 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT CLASS B
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.93 $5.12 $5.04 $5.20 $5.07 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .19 .17 .15 .12 .15 Net gains (losses) (both realized and unrealized) .07 (.19) .09 (.09) .16 ----------------------------------------------------------------------------------------------------------- Total from investment operations .26 (.02) .24 .03 .31 ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.19) (.16) (.16) (.12) (.16) Tax return of capital -- -- -- (.01) -- Distributions from realized gains -- (.01) -- (.06) (.02) ----------------------------------------------------------------------------------------------------------- Total distributions (.19) (.17) (.16) (.19) (.18) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $5.00 $4.93 $5.12 $5.04 $5.20 ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $44 $64 $98 $129 $200 ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b),(c),(d) 1.64% 1.64% 1.69% 1.74% 1.75% ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.70% 3.31% 2.90% 2.35% 2.49% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 306% 178% 137% 163% 227% ----------------------------------------------------------------------------------------------------------- Total return(e) 5.30% (.42%) 4.78% .52% 6.12% -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (d) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class B would have been 1.94%, 1.95%, 1.86%, 1.80% and 1.82% for the years ended May 31, 2007, 2006, 2005, 2004 and 2003, respectively. (e) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 41 CLASS C
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.93 $5.12 $5.04 $5.20 $5.07 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .19 .17 .15 .12 .15 Net gains (losses) (both realized and unrealized) .07 (.19) .09 (.09) .16 ----------------------------------------------------------------------------------------------------------- Total from investment operations .26 (.02) .24 .03 .31 ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.19) (.16) (.16) (.12) (.16) Tax return of capital -- -- -- (.01) -- Distributions from realized gains -- (.01) -- (.06) (.02) ----------------------------------------------------------------------------------------------------------- Total distributions (.19) (.17) (.16) (.19) (.18) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $5.00 $4.93 $5.12 $5.04 $5.20 ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $5 $7 $11 $15 $22 ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b),(c),(d) 1.64% 1.64% 1.70% 1.74% 1.75% ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.70% 3.31% 2.90% 2.36% 2.50% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 306% 178% 137% 163% 227% ----------------------------------------------------------------------------------------------------------- Total return(e) 5.30% (.43%) 4.79% .52% 6.12% -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (d) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class C would have been 1.94%, 1.95%, 1.85%, 1.80% and 1.82% for the years ended May 31, 2007, 2006, 2005, 2004 and 2003, respectively. (e) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- 42 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2007 2006 2005 2004(B) Net asset value, beginning of period $4.92 $5.11 $5.03 $5.15 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .24 .22 .20 .05 Net gains (losses) (both realized and unrealized) .08 (.19) .09 (.11) ----------------------------------------------------------------------------------------------------------- Total from investment operations .32 .03 .29 (.06) ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.24) (.21) (.21) (.06) Distributions from realized gains -- (.01) -- -- ----------------------------------------------------------------------------------------------------------- Total distributions (.24) (.22) (.21) (.06) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $5.00 $4.92 $5.11 $5.03 ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $207 $6 $-- $-- ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .54%(e) .54%(e) .62%(e) .64%(f) ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.90% 4.99% 3.99% 3.39%(f) ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 306% 178% 137% 163% ----------------------------------------------------------------------------------------------------------- Total return(g) 6.68% .59% 5.92% (1.38%)(h) -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from March 4, 2004 (inception date) to May 31, 2004. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class I would have been 0.63%, 0.73% and 0.66% for the years ended May 31, 2007, 2006 and 2005, respectively. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 43 CLASS R4*
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.92 $5.11 $5.03 $5.19 $5.06 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .23 .21 .20 .17 .19 Net gains (losses) (both realized and unrealized) .08 (.19) .08 (.09) .16 ----------------------------------------------------------------------------------------------------------- Total from investment operations .31 .02 .28 .08 .35 ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.23) (.20) (.20) (.17) (.20) Tax return of capital -- -- -- (.01) -- Distributions from realized gains -- (.01) -- (.06) (.02) ----------------------------------------------------------------------------------------------------------- Total distributions (.23) (.21) (.20) (.24) (.22) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $5.00 $4.92 $5.11 $5.03 $5.19 ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $40 $35 $-- $-- $-- ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b),(c),(d) .71% .71% .77% .81% .80% ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.63% 4.40% 3.99% 3.29% 3.68% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 306% 178% 137% 163% 227% ----------------------------------------------------------------------------------------------------------- Total return(e) 6.51% .49% 5.75% 1.45% 7.10% -----------------------------------------------------------------------------------------------------------
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (d) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class R4 would have been 0.99%, 1.04%, 0.94%, 0.87% and 0.88% for the years ended May 31, 2007, 2006, 2005, 2004 and 2003, respectively. (e) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- 44 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE BOARD AND SHAREHOLDERS RIVERSOURCE GOVERNMENT INCOME SERIES, INC. We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of RiverSource U.S. Government Mortgage Fund (a series of RiverSource Government Income Series, Inc.) as of May 31, 2007, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended May 31, 2007, and the financial highlights for each of the years or periods in the five-year period ended May 31, 2007. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2007, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of RiverSource U.S. Government Mortgage Fund as of May 31, 2007, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with U.S. generally accepted accounting principles. KPMG LLP Minneapolis, Minnesota July 20, 2007 -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 45 FEDERAL INCOME TAX INFORMATION (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. Fiscal year ended May 31, 2007 CLASS A
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE June 26, 2006............................................... $0.01900 July 26, 2006............................................... $0.02100 Aug. 28, 2006............................................... $0.02100 Sept. 25, 2006.............................................. $0.02000 Oct. 26, 2006............................................... $0.01900 Nov. 27, 2006............................................... $0.01850 Dec. 18, 2006............................................... $0.01850 Jan. 23, 2007............................................... $0.01850 Feb. 23, 2007............................................... $0.01700 March 26, 2007.............................................. $0.01800 April 25, 2007.............................................. $0.01720 May 25, 2007................................................ $0.01800 Total distributions......................................... $0.22570
CLASS B
Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE June 26, 2006............................................... $0.01576 July 26, 2006............................................... $0.01794 Aug. 28, 2006............................................... $0.01763 Sept. 25, 2006.............................................. $0.01713 Oct. 26, 2006............................................... $0.01582 Nov. 27, 2006............................................... $0.01519 Dec. 18, 2006............................................... $0.01631 Jan. 23, 2007............................................... $0.01478 Feb. 23, 2007............................................... $0.01381 March 26, 2007.............................................. $0.01479 April 25, 2007.............................................. $0.01410 May 25, 2007................................................ $0.01490 Total distributions......................................... $0.18816
-------------------------------------------------------------------------------- 46 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT CLASS C
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE June 26, 2006............................................... $0.01576 July 26, 2006............................................... $0.01797 Aug. 28, 2006............................................... $0.01764 Sept. 25, 2006.............................................. $0.01713 Oct. 26, 2006............................................... $0.01582 Nov. 27, 2006............................................... $0.01520 Dec. 18, 2006............................................... $0.01632 Jan. 23, 2007............................................... $0.01478 Feb. 23, 2007............................................... $0.01381 March 26, 2007.............................................. $0.01479 April 25, 2007.............................................. $0.01410 May 25, 2007................................................ $0.01490 Total distributions......................................... $0.18822
CLASS I
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE June 26, 2006............................................... $0.02049 July 26, 2006............................................... $0.02239 Aug. 28, 2006............................................... $0.02255 Sept. 25, 2006.............................................. $0.02132 Oct. 26, 2006............................................... $0.02047 Nov. 27, 2006............................................... $0.02012 Dec. 18, 2006............................................... $0.01943 Jan. 23, 2007............................................... $0.02021 Feb. 23, 2007............................................... $0.01847 March 26, 2007.............................................. $0.01948 April 25, 2007.............................................. $0.01863 May 25, 2007................................................ $0.01943 Total distributions......................................... $0.24299
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 47 CLASS R4*
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE June 26, 2006............................................... $0.01977 July 26, 2006............................................... $0.02171 Aug. 28, 2006............................................... $0.02180 Sept. 25, 2006.............................................. $0.02068 Oct. 26, 2006............................................... $0.01975 Nov. 27, 2006............................................... $0.01929 Dec. 18, 2006............................................... $0.01926 Jan. 23, 2007............................................... $0.01950 Feb. 23, 2007............................................... $0.01776 March 26, 2007.............................................. $0.01876 April 25, 2007.............................................. $0.01794 May 25, 2007................................................ $0.01873 Total distributions......................................... $0.23495
* Effective Dec. 11, 2006, Class Y was renamed Class R4. -------------------------------------------------------------------------------- 48 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT BOARD MEMBERS AND OFFICERS Shareholders elect a Board that oversees the Fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of the Fund's Board members. Each member oversees 102 RiverSource funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the Board. Under the current Board policy, members may serve until the end of the meeting following their 75th birthday, or the fifteenth anniversary of the first Board meeting they attended as members of the Board, whichever occurs first. This policy does not apply to Ms. Jones who may retire after her 75th birthday. INDEPENDENT BOARD MEMBERS
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ----------------------------------------------------------------------------------------------------- Kathleen Blatz Board member Chief Justice, Minnesota Supreme 901 S. Marquette Ave. since 2006 Court, 1998-2005 Minneapolis, MN 55402 Age 53 ----------------------------------------------------------------------------------------------------- Arne H. Carlson Board member Chair, RiverSource Funds, 901 S. Marquette Ave. since 1999 1999-2006; former Governor of Minneapolis, MN 55402 Minnesota Age 72 ----------------------------------------------------------------------------------------------------- Pamela G. Carlton Board member President, Springboard-Partners in 901 S. Marquette Ave. since 2007 Cross Cultural Leadership Minneapolis, MN 55402 (consulting company) Age 52 ----------------------------------------------------------------------------------------------------- Patricia M. Flynn Board member Trustee Professor of Economics and 901 S. Marquette Ave. since 2004 Management, Bentley College; former Minneapolis, MN 55402 Dean, McCallum Graduate School of Age 56 Business, Bentley College ----------------------------------------------------------------------------------------------------- Anne P. Jones Board member Attorney and Consultant 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 72 ----------------------------------------------------------------------------------------------------- Jeffrey Laikind, CFA Board member Former Managing Director, Shikiar American Progressive 901 S. Marquette Ave. since 2005 Asset Management Insurance Minneapolis, MN 55402 Age 71 ----------------------------------------------------------------------------------------------------- Stephen R. Lewis, Jr. Board member President Emeritus and Professor of Valmont Industries, 901 S. Marquette Ave. since 2002 and Economics, Carleton College Inc. (manufactures Minneapolis, MN 55402 Chair of the irrigation systems) Age 68 Board since 2007 -----------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 49 INDEPENDENT BOARD MEMBERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ----------------------------------------------------------------------------------------------------- Catherine James Paglia Board member Director, Enterprise Asset Strategic 901 S. Marquette Ave. since 2004 Management, Inc. (private real Distribution, Inc. Minneapolis, MN 55402 estate and asset management (transportation, Age 54 company) distribution and logistics consultants) ----------------------------------------------------------------------------------------------------- Alison Taunton-Rigby Board member Chief Executive Officer, RiboNovix, Hybridon, Inc. 901 S. Marquette Ave. since 2002 Inc. since 2003 (biotechnology); (biotechnology); Minneapolis, MN 55402 former President, Forester Biotech American Healthways, Age 63 Inc. (health management programs) -----------------------------------------------------------------------------------------------------
BOARD MEMBER AFFILIATED WITH RIVERSOURCE INVESTMENTS*
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ----------------------------------------------------------------------------------------------------- William F. Truscott Board member President -- U.S. Asset Management 53600 Ameriprise since 2001, and Chief Investment Officer, Financial Center Vice President Ameriprise Financial, Inc. and Minneapolis, MN 55474 since 2002 President, Chairman of the Board Age 46 and Chief Investment Officer, RiverSource Investments, LLC since 2005; President, Ameriprise Certificate Company since 2006; Senior Vice President -- Chief Investment Officer, Ameriprise Financial, Inc. and Chairman of the Board and Chief Investment Officer, RiverSource Investments, LLC, 2001-2005 -----------------------------------------------------------------------------------------------------
* Interested person by reason of being an officer, director, security holder and/or employee of RiverSource Investments. The SAI has additional information about the Fund's Board members and is available, without charge, upon request by calling RiverSource Funds at (888) 791-3380; contacting your financial institution; or visiting riversource.com/funds. -------------------------------------------------------------------------------- 50 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT The Board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the Fund's other officers are: FUND OFFICERS
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS ------------------------------------------------------------------------------------------ Patrick T. Bannigan President since Senior Vice President -- Asset Management, 172 Ameriprise 2006 RiverSource Investments, LLC since 2006; Financial Center Managing Director and Global Head of Product, Minneapolis, MN 55474 Morgan Stanley Investment Management, Age 41 2004-2006; President, Touchstone Investments, 2002-2004; Director of Strategic Planning, Evergreen Investments, 1995-2002 ------------------------------------------------------------------------------------------ Michelle M. Keeley Vice President Executive Vice President -- Equity and Fixed 172 Ameriprise since 2004 Income, Ameriprise Financial, Inc. and Financial Center RiverSource Investments, LLC since 2006; Vice Minneapolis, MN 55474 President -- Investments, Ameriprise Age 43 Certificate Company since 2003; Senior Vice President -- Fixed Income, Ameriprise Financial, Inc., 2002-2006 and RiverSource Investments, LLC, 2004-2006; Managing Director, Zurich Global Assets, 2001-2002 ------------------------------------------------------------------------------------------ Amy K. Johnson Vice President Vice President -- Asset Management and Trust 5228 Ameriprise since 2006 Company Services, RiverSource Investments, LLC Financial Center since 2006; Vice President -- Operations and Minneapolis, MN 55474 Compliance, RiverSource Investments, LLC, Age 41 2004-2006; Director of Product Development -- Mutual Funds, Ameriprise Financial, Inc., 2001-2004 ------------------------------------------------------------------------------------------ Jeffrey P. Fox Treasurer since Vice President -- Investment Accounting, 105 Ameriprise 2002 Ameriprise Financial, Inc. since 2002; Vice Financial Center President -- Finance, American Express Minneapolis, MN 55474 Company, 2000-2002 Age 52 ------------------------------------------------------------------------------------------ Scott R. Plummer Vice President, Vice President and Chief Counsel -- Asset 5228 Ameriprise General Counsel Management, Ameriprise Financial, Inc. since Financial Center and Secretary 2005; Vice President, General Counsel and Minneapolis, MN 55474 since 2006 Secretary, Ameriprise Certificate Company Age 47 since 2005; Vice President -- Asset Management Compliance, Ameriprise Financial, Inc., 2004-2005; Senior Vice President and Chief Compliance Officer, U.S. Bancorp Asset Management, 2002-2004; Second Vice President and Assistant General Counsel, Hartford Life, 2001-2002 ------------------------------------------------------------------------------------------ Jennifer D. Lammers Chief Compliance U.S. Asset Management Chief Compliance 172 Ameriprise Officer since Officer, RiverSource Investments, LLC since Financial Center 2006 2006; Director -- Mutual Funds, Voyageur Asset Minneapolis, MN 55474 Management, 2003-2006; Director of Finance, Age 46 Voyageur Asset Management, 2000-2003 ------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 51 FUND OFFICERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS ------------------------------------------------------------------------------------------ Neysa M. Alecu Money Laundering Compliance Director and Anti-Money Laundering 2934 Ameriprise Prevention Officer, Ameriprise Financial, Inc. since Financial Center Officer since 2004; Manager Anti-Money Laundering, Minneapolis, MN 55474 2004 Ameriprise Financial, Inc., 2003-2004; Age 43 Compliance Director and Bank Secrecy Act Officer, American Express Centurion Bank, 2000-2003 ------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 52 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT RiverSource Investments, LLC ("RiverSource"), a wholly-owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), serves as the investment manager to the Fund. Under an investment management services agreement (the "IMS Agreement") RiverSource provides investment advice and other services to the Fund and all RiverSource funds (collectively, the "Funds"). The Fund's Board of Directors (the "Board") and the Board's Investment Review and Contracts Committees monitor these services throughout the year. On an annual basis, the Board, including the independent Board members (the "Independent Directors"), considers renewal of the IMS Agreement. RiverSource prepares detailed reports for the Board and its Contracts Committee in March and April, including reports based on data provided by independent organizations to assist the Board in making this determination. In addition, throughout the year, the Board (or its committees) reviews information prepared by RiverSource addressing the services RiverSource provides and Fund performance. The Board accords particular weight to the work, deliberations and conclusions of the Contracts and Investment Review Committees in determining whether to continue the IMS Agreement. At the April 11-12, 2007 in-person Board meeting, independent legal counsel to the Independent Directors reviewed with the Independent Directors various factors relevant to the Board's consideration of advisory agreements and the Board's legal responsibilities related to such consideration. Following an analysis and discussion of the factors identified below, the Board, including all of the Independent Directors, approved renewal of the IMS Agreement. Nature, Extent and Quality of Services Provided by RiverSource: The Board analyzed various reports and presentations it had received detailing the services performed by RiverSource, as well as its expertise, resources and capabilities. The Board specifically considered many developments during the past year concerning the services provided by RiverSource, including, in particular, the growing strength and capabilities of many RiverSource offices and the increased investment and resources dedicated to the Fund's operations, particularly in the areas of trading systems, legal and compliance. Further, in connection with the Board's evaluation of the overall package of services provided by RiverSource, the Board considered the quality of the administrative, custody and transfer agency services provided by RiverSource affiliates to the Fund. The Board also reviewed the financial condition of RiverSource and the entity's ability to carry out its responsibilities under the IMS Agreement. The Board also discussed the acceptability of the terms of the IMS Agreement (including the relatively broad scope of services required to be performed by RiverSource). The Board concluded that the services being performed under the IMS Agreement were of a reasonably high quality. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 53 Based on the foregoing, and based on other information received (both oral and written, including the information on investment performance referenced below) and other considerations, the Board determined that RiverSource was in a position to continue to provide a high quality and level of services to the Fund. Investment Performance: For purposes of evaluating the nature, extent and quality of services provided under the IMS Agreement, the Board carefully reviewed the investment performance of the Fund. In this regard, the Board considered: (i) detailed reports containing data prepared by an independent organization showing, for various periods, the performance of the Fund, the performance of a benchmark index, the percentage ranking of the Fund among its comparison group and the net assets of the Fund; and (ii) a report detailing the Fund's performance over various periods (including since inception), recent Fund inflows (and outflows) and a comparison of the Fund's net assets from December 2006 to December 2005. The Board observed that the Fund's investment performance was appropriate in light of the particular management style and market conditions involved. Comparative Fees, Costs of Services Provided and the Profits Realized By RiverSource and its Affiliates from their Relationships with the Fund: The Board reviewed comparative fees and the costs of services to be provided under the IMS Agreement. The Board members considered detailed comparative information set forth in an annual report on fees and expenses, including, among other things, data (prepared by an independent organization) showing a comparison of the Fund's expenses with median expenses paid by funds in its peer group, as well as data showing the Fund's contribution to RiverSource's profitability. The Board accorded particular weight to the notion that the level of fees should reflect a rational pricing model applied consistently across the various product lines in the Funds' family, while assuring that the overall fees for each fund are generally in line with the "pricing philosophy" (i.e., that the total expense ratio of each fund, with few exceptions, is at or below the median expense ratio of funds in the same comparison group). The Board took into account that the Fund's total expense ratio (after considering proposed expense caps/waivers) was below the peer group's median expense ratio shown in the reports. Based on its review, the Board concluded that the Fund's management fee was fair and reasonable in light of the extent and quality of services that the Fund receives. -------------------------------------------------------------------------------- 54 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT The Board also considered the expected profitability of RiverSource and its affiliates in connection with RiverSource providing investment management services to the Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to RiverSource and Ameriprise Financial from managing and operating the Fund, including data showing comparative profitability over the last three years. The Board also considered the services acquired by the investment manager through the use of commission dollars paid by the Funds on portfolio transactions. The Board noted that the fees paid by the Fund should permit the investment manager to offer competitive compensation to its personnel, make necessary investments in its business and earn an appropriate profit. The Board concluded that profitability levels were reasonable. Economies of Scale to be Realized: The Board also considered the economies of scale that might be realized by RiverSource as the Fund grows and took note of the extent to which Fund shareholders might also benefit from such growth. The Board considered that the IMS Agreement provides for lower fees as assets increase at pre-established breakpoints and concluded that the IMS Agreement satisfactorily provided for sharing these economies of scale. Based on the foregoing, the Board, including all of the Independent Directors, concluded that the investment management service fees were fair and reasonable in light of the extent and quality of services provided. In reaching this conclusion, no single factor was determinative. On April 12, 2007, the Board, including all of the Independent Directors, approved the renewal of the IMS Agreement. PROXY VOTING The policy of the Board is to vote the proxies of the companies in which the Fund holds investments consistent with the procedures as stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling RiverSource Funds at (888) 791-3380; contacting your financial institution; visiting riversource.com/funds; or searching the website of the Securities and Exchange Commission (SEC) at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities is filed with the SEC by August 31 for the most recent 12-month period ending June 30 of that year, and is available without charge by visiting riversource.com/funds; or searching the website of the SEC at www.sec.gov. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2007 ANNUAL REPORT 55 THIS PAGE LEFT BLANK INTENTIONALLY THIS PAGE LEFT BLANK INTENTIONALLY THIS PAGE LEFT BLANK INTENTIONALLY THIS PAGE LEFT BLANK INTENTIONALLY RIVERSOURCE(R) U.S. GOVERNMENT MORTGAGE FUND 734 Ameriprise Financial Center Minneapolis, MN 55474 RIVERSOURCE.COM/FUNDS This report must be accompanied or preceded by the Fund's current prospectus. RiverSource(R) mutual funds are distributed by RiverSource Distributors, Inc. and Ameriprise Financial Services, Inc., Members NASD, and managed by (RIVERSOURCE INVESTMENTS RiverSource Investments, LLC. These companies are part of LOGO) Ameriprise Financial, Inc. S-6245 J (7/07)
Item 2. (a) The Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer and principal financial officer. A copy of the code of ethics is filed as an exhibit to this form N-CSR. (b) During the period covered by this report, there were not any amendments to the provisions of the code of ethics adopted in 2(a) above. (c) During the period covered by this report, there were not any implicit or explicit waivers to the provisions of the code of ethics adopted in 2(a). Item 3. The Registrant's board of directors has determined that independent directors Jeffrey Laikind and Anne P. Jones, each qualify as audit committee financial experts. Item 4. Principal Accountant Fees and Services Fund - Related Fees* (a) Audit Fees. The fees paid for the years ended May 31, to KPMG LLP for professional services rendered for the audits of the annual financial statements for RiverSource Government Income Series, Inc. were as follows: 2007 - $67,450; 2006 - $33,575 (b) Audit - Related Fees. The fees paid for the years ended May 31, to KPMG LLP for additional professional services rendered in connection with the registrant's security count pursuant to Rule 17f-2 for RiverSource Government Income Series, Inc. were as follows: 2007 - $281; 2006 - $332 (c) Tax Fees. The fees paid for the years ended May 31, to KPMG LLP for tax compliance related services for RiverSource Government Income Series, Inc. were as follows: 2007 - $11,400; 2006 - $6,088 (d) All Other Fees. The fees paid for the years ended May 31, to KPMG LLP for additional professional services rendered for RiverSource Government Income Series, Inc. were as follows: 2007 - $255; 2006 - $814 (e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley pre-approval requirements, all services to be performed by KPMG LLP for the registrant and to the registrant's investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant must be pre-approved by the audit committee. (e) (2) 100% of the services performed for items (b) through (d) above during 2007 and 2006 were pre-approved by the audit committee. (f) Not applicable. (g) Non-Audit Fees. The fees paid for the years ended May 31, by the registrant for non-audit services to KPMG LLP were as follows: 2007 - $68,305; 2006 - $60,402 The fees paid for the years ended May 31, to KPMG LLP by the registrant's investment adviser, and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant were as follows: 2007 - $56,650; 2006 - $53,500 (h) 100% of the services performed for item (g) above during 2007 and 2006 were pre-approved by the audit committee. * 2006 represents bills paid 6/1/05 - 5/31/06 2007 represents bills paid 6/1/06 - 5/31/07 Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. The complete schedule of investments is included in Item 1 of this Form N-CSR. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not applicable. Item 9. Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 10. Submission of matters to a vote of security holders. Not applicable. Item 11. Controls and Procedures. (a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's Principal Financial Officer and Principal Executive Officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal controls over financial reporting that occurred during the registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) Code of ethics as applies to the Registrant's principal executive officer and principal financial officer, as required to be disclosed under Item 2 of Form N-CSR, is attached as Ex. 99.CODE ETH. (a)(2) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. (a)(3) Not applicable. (b) A certification by the Registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as EX.99.906 CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) RiverSource Government Income Series, Inc. By /s/ Patrick T. Bannigan ---------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date August 3, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By /s/ Patrick T. Bannigan ---------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date August 3, 2007 By /s/ Jeffrey P. Fox ---------------------------------- Jeffrey P. Fox Treasurer and Principal Financial Officer Date August 3, 2007