N-CSR 1 c27710nvcsr.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 SHORT DURATION U.S. GOVERNMENT FUND ANNUAL REPORT FOR THE PERIOD ENDED MAY 31, 2008 (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. (SINGLE STRATEGY FUNDS ICON)
TABLE OF CONTENTS -------------------------------------------------------------- Your Fund at a Glance............... 2 Manager Commentary.................. 5 The Fund's Long-term Performance ... 10 Fund Expenses Example............... 12 Portfolio of Investments............ 14 Financial Statements................ 22 Notes to Financial Statements....... 26 Report of Independent Registered Public Accounting Firm........... 45 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. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 1 YOUR FUND AT A GLANCE ---------------------------------------------------------- FUND SUMMARY -------------------------------------------------------------------------------- > RiverSource Short Duration U.S. Government Fund (the Fund) Class A shares rose 4.27% (excluding sales charge) for the 12 months ended May 31, 2008. > The Fund underperformed its benchmark, the Lehman Brothers 1-3 Year Government Index, which gained 7.27% during the same period. > The Fund underperformed the Lipper Short U.S. Government Funds Index, representing the Fund's peer group, which advanced 5.23% during the same time frame. ANNUALIZED TOTAL RETURNS (for period ended May 31, 2008) --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------------------------------------------------- RiverSource Short Duration U.S. Government Fund Class A (excluding sales charge) +4.27% +3.45% +2.39% +3.66% ---------------------------------------------------------------------------------- Lehman Brothers 1-3 Year Government Index (unmanaged) +7.27% +4.68% +3.30% +4.77% ---------------------------------------------------------------------------------- Lipper Short U.S. Government Funds Index +5.23% +3.88% +2.74% +4.16% ----------------------------------------------------------------------------------
(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 3.00% sales charge applicable to Class A shares of the Fund, which changed from 4.75% effective March 3, 2008, is not reflected in the table above. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. See the Average Annual Total Returns table for performance of other share classes of the Fund. 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. -------------------------------------------------------------------------------- 2 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT -------------------------------------------------------------------------------- STYLE MATRIX ----------------------------------------
DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW
Shading within the style matrix indicates areas in which the Fund is designed to generally invest. 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 may serve 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 STATISTICS ---------------------------------------- Weighted average life(1) 3.4 years -------------------------------------------- Effective duration(2) 1.9 years -------------------------------------------- Weighted average bond rating(3) AAA --------------------------------------------
ANNUAL OPERATING EXPENSE RATIO (as of the current prospectus) ----------------------------------------
Total Net expenses(a) ------------------------------------------------------- Class A 1.04% 0.89% ------------------------------------------------------- Class B 1.80% 1.65% ------------------------------------------------------- Class C 1.80% 1.65% ------------------------------------------------------- Class I 0.60% 0.51% ------------------------------------------------------- Class R4 0.90% 0.76% ------------------------------------------------------- Class W 1.06% 0.96% -------------------------------------------------------
(a) The Investment Manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2009, 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. (1) 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. (2) 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. (3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. 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 -- 2008 ANNUAL REPORT 3 YOUR FUND AT A GLANCE (continued) ---------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS --------------------------------------------------------------------------------
AT MAY 31, 2008 SINCE WITHOUT SALES CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION* Class A (inception 8/19/95) +4.27% +3.45% +2.39% +3.66% N/A -------------------------------------------------------------------------------------------- Class B (inception 3/20/95) +3.48% +2.68% +1.63% +2.88% N/A -------------------------------------------------------------------------------------------- Class C (inception 6/26/00) +3.49% +2.68% +1.63% N/A +3.17% -------------------------------------------------------------------------------------------- Class I (inception 3/4/04) +4.45% +3.82% N/A N/A +2.97% -------------------------------------------------------------------------------------------- Class R4 (inception 3/20/95) +4.41% +3.62% +2.57% +3.82% N/A -------------------------------------------------------------------------------------------- Class W (inception 12/1/06) +4.21% N/A N/A N/A +3.77% -------------------------------------------------------------------------------------------- WITH SALES CHARGE Class A (inception 8/19/95) -0.77% +1.78% +1.39% +3.13% N/A -------------------------------------------------------------------------------------------- Class B (inception 3/20/95) -1.52% +1.41% +1.27% +2.88% N/A -------------------------------------------------------------------------------------------- Class C (inception 6/26/00) +2.49% +2.68% +1.63% N/A +3.17% --------------------------------------------------------------------------------------------
AT JUNE 30, 2008 SINCE WITHOUT SALES CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION* Class A (inception 8/19/95) +4.02% +3.35% +2.38% +3.59% N/A -------------------------------------------------------------------------------------------- Class B (inception 3/20/95) +3.23% +2.58% +1.61% +2.81% N/A -------------------------------------------------------------------------------------------- Class C (inception 6/26/00) +3.24% +2.58% +1.61% N/A +3.11% -------------------------------------------------------------------------------------------- Class I (inception 3/4/04) +4.20% +3.72% N/A N/A +2.89% -------------------------------------------------------------------------------------------- Class R4 (inception 3/20/95) +4.16% +3.52% +2.55% +3.75% N/A -------------------------------------------------------------------------------------------- Class W (inception 12/1/06) +3.96% N/A N/A N/A +3.49% -------------------------------------------------------------------------------------------- WITH SALES CHARGE Class A (inception 8/19/95) -1.01% +1.68% +1.37% +3.06% N/A -------------------------------------------------------------------------------------------- Class B (inception 3/20/95) -1.77% +1.32% +1.25% +2.81% N/A -------------------------------------------------------------------------------------------- Class C (inception 6/26/00) +2.24% +2.58% +1.61% N/A +3.11% --------------------------------------------------------------------------------------------
On March 3, 2008, the maximum sales charge for Class A shares changed from 4.75% to 3.00%. Class A share performance reflects the maximum sales charge of 4.75%, which was in effect at the beginning of all periods. 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. * For classes with less than 10 years performance. -------------------------------------------------------------------------------- 4 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT MANAGER COMMENTARY ------------------------------------------------------------- Dear Shareholders, RiverSource Short Duration U.S. Government Fund (the Fund) Class A shares rose 4.27% (excluding sales charge) for the 12 months ended May 31, 2008. The Fund underperformed its benchmark, the Lehman Brothers 1-3 Year Government Index (Lehman Index), which gained 7.27% for the same period. The Fund also underperformed the Lipper Short U.S. Government Funds Index, representing the Fund's peer group, which advanced 5.23% during the same time frame. SIGNIFICANT PERFORMANCE FACTORS The annual period ended May 31, 2008 was marked by chaos in the financial markets and volatile interest rates as a result of the 2007 subprime mortgage crisis and its aftermath. A classic flight to quality seized the U.S. fixed income market as investor aversion to risk remained elevated. During the last few months of the annual period, inflation became an additional concern for the fixed income market, with oil, gasoline and food prices reaching record highs. The Federal Reserve Board (the Fed) responded to the fallout from the chaos and concern by taking a variety of strong and decisive actions. The Fed embarked on an aggressive interest rate cutting campaign beginning in September 2007 to address the tighter credit markets and the ongoing downturn in the housing market. In all, the Fed cut the targeted federal funds rate a total of 325 basis points (3.25%). The Fed also introduced several new tools to provide liquidity to the financial system at large and the mortgage market in particular. For the annual period overall, interest rates fell significantly, as investors fled riskier assets for the relative safety of U.S. Treasuries, pushing yields sharply lower. While yields moved lower across the yield curve, they did so more significantly in the shorter segments than at the long-term end, SECTOR DIVERSIFICATION (at May 31, 2008; % of portfolio assets) ----------------------------------------------------------------- Asset-Backed 1.6% -------------------------------------------------------------- Commercial Mortgage-Backed 1.6% -------------------------------------------------------------- Mortgage-Backed(1) 54.7% -------------------------------------------------------------- U.S. Government Obligations & Agencies 19.2% -------------------------------------------------------------- Other(2) 22.9% --------------------------------------------------------------
(1) Of the 54.7%, 5.6% is due to forward commitment mortgage-backed securities activity. Short-term securities are held as collateral for these commitments. (2) Cash & Cash Equivalents(3). (3) Of the 22.9%, 1.7% is due to security lending activity and 21.2% is the Fund's cash equivalent position. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 5 MANAGER COMMENTARY (continued) ------------------------------------------------- causing the U.S. Treasury yield curve to steepen over the annual period. Away from Treasuries, other fixed income sectors posted positive but comparatively weaker results. The primary contributor to the Fund's performance was its exposure to Treasury Inflation Protected Securities, or TIPS. TIPS outperformed nominal Treasury securities, or non-inflation protected Treasury securities, as inflationary pressures grew and actual inflation came in higher than expected during the period. Also, issue selection within mortgage-backed securities boosted returns, particularly the Fund's emphasis on premium coupon securities. Higher coupon mortgage-backed securities outperformed lower coupon mortgage-backed securities for the period. Still, these positives were more than outweighed by the impact of yield curve positioning, which detracted from performance over the period. As mentioned, while U.S. Treasury yields moved lower across the yield curve, they did so more significantly in the shorter segments than at the long-term end, causing the U.S. Treasury yield curve to steepen over the annual period. The Fund, however, had a more modest exposure to the 1-3 year portion of the yield curve, which outperformed, and a more sizable allocation to the 10-year segment of the yield curve, which lagged. The Fund's sizable exposure to mortgage-backed securities and agency securities also detracted from results, as these spread, or non-Treasury sectors of the fixed income market, posted positive returns but underperformed Treasuries during the annual period. An exposure to non- QUALITY BREAKDOWN (at May 31, 2008; % of portfolio assets excluding cash equivalents and equities) ----------------------------------------------------------------- AAA bonds 99.3% -------------------------------------------------------------- AA bonds 0.7% --------------------------------------------------------------
Bond ratings apply to the 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. -------------------------------------------------------------------------------- 6 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT -------------------------------------------------------------------------------- As always, our strategy is to provide added portfolio value with a moderate amount of risk. agency mortgage-backed securities also detracted, as this sector of the fixed income market was especially hurt due to concerns regarding credit broadly, and residential credit in particular, grew. CHANGES TO THE FUND'S PORTFOLIO During the first half of the annual period, we shifted to a somewhat more aggressive strategy within the Fund's allocation to both mortgage- backed securities and agency securities, as spreads, or the difference in yields between these securities and U.S. Treasuries, widened and valuations reached compelling levels. In the last months of the fiscal year, we increased the Fund's position in TIPS, as actual and anticipated inflation pressures rose. We strategically adjusted the Fund's duration relative to the Lehman Index throughout the annual period, as market conditions shifted. The Fund ended the period with a duration slightly longer than the Lehman Index. The Fund's portfolio turnover rate for the 12-month period was 209%.* OUR FUTURE STRATEGY At the end of May, the market for high quality spread, or non-Treasury, securities finally appeared to be improving, and even lower quality bonds had rebounded from their lows. While economic growth over the coming months may not be as strong as earlier in the cycle, we expect the U.S. economy to narrowly avoid recession this year, as the economic stimulus package passed by Congress should help keep economic growth positive. However, we do believe that low interest rates and a weakened currency have combined to * A significant portion of the turnover was the result of rolling-maturity mortgage securities, processing of prepayments and opportunistic changes we made at the margin in response to valuations or market developments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 7 MANAGER COMMENTARY (continued) ------------------------------------------------- form an inflation problem that may weigh heavily on consumers and financial markets in the second half of this year and into 2009. To accommodate for this pressure, we believe that the Fed will eventually have to increase interest rates, and Treasury yields should continue to drift higher. In this environment, we intend to maintain the Fund's exposure to TIPS. We also believe the most compelling opportunities at the end of the annual period were in high-quality spread products, as they were priced at historically wide levels. We therefore view the Fund as well-positioned for a recovery in high quality spread, or non-Treasury, sectors of the fixed income market. Having begun in the last months of the annual period, we expect this recovery to continue over the months ahead, as fears ultimately subside and liquidity returns to the markets. Among its mortgage-backed holdings, we intend to maintain the Fund's premium coupon bias, as prepayments are expected to remain slow. We also view select pockets of non-agency mortgage-backed securities as attractively priced, though our focus is on those securities within this sector with superior credit enhancements. We intend to maintain the Fund's current duration positioning for the near term. 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. (PHOTO - JAMIE (PHOTO - SCOTT JACKSON) KIRBY) Jamie Jackson, Scott Kirby CFA(R) Portfolio Manager Portfolio Manager
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. -------------------------------------------------------------------------------- 8 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT THIS PAGE LEFT BLANK INTENTIONALLY 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 6/1/98 to 5/31/08) 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 a maximum sales charge of 4.75%, which changed to 3.00% effective March 3, 2008. 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 --------------------------------------------------------------------------------
Results at May 31, 2008 1 YEAR 3 YEARS 5 YEARS 10 YEARS RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND (INCLUDES SALES CHARGE(1)) CLASS A CUMULATIVE VALUE OF $10,000 $9,923 $10,544 $10,715 $13,642 ----------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN -0.77% +1.78% +1.39% +3.13% ----------------------------------------------------------------------------------------------- LEHMAN BROTHERS 1-3 YEAR GOVERNMENT INDEX(2) Cumulative value of $10,000 $10,727 $11,471 $11,763 $15,941 ----------------------------------------------------------------------------------------------- Average annual total return +7.27% +4.68% +3.30% +4.77% ----------------------------------------------------------------------------------------------- LIPPER SHORT U.S. GOVERNMENT FUNDS INDEX(3) Cumulative value of $10,000 $10,523 $11,210 $11,447 $15,035 ----------------------------------------------------------------------------------------------- Average annual total return +5.23% +3.88% +2.74% +4.16% -----------------------------------------------------------------------------------------------
Results for other share classes can be found on page 4. -------------------------------------------------------------------------------- 10 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT -------------------------------------------------------------------------------- (VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE SHORT DURATION U.S. GOVERNMENT 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(2) GOVERNMENT FUNDS INDEX(3) CHARGE(1)) ($13,642) ($15,941) ($15,035) -------------------------- ------------------------ ------------------------- 1998 $ 9,525 $10,000 $10,000 1999 9,915 10,528 10,481 2000 9,914 10,952 10,868 2001 10,924 12,054 11,932 2002 11,554 12,826 12,557 2003 12,120 13,550 13,135 2004 12,091 13,640 13,144 2005 12,323 13,896 13,411 2006 12,447 14,156 13,647 2007 13,084 14,861 14,288 2008 13,642 15,941 15,035
(1) On March 3, 2008, the maximum sales charge for Class A changed from 4.75% to 3.00%. Class A share performance reflects the maximum sales charge of 4.75%, which was in effect at the beginning of all periods. (2) 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. (3) 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. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 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, 2008. 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 -- 2008 ANNUAL REPORT --------------------------------------------------------------------------------
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED DEC. 1, 2007 MAY 31, 2008 THE PERIOD(A) EXPENSE RATIO ------------------------------------------------------------------------------------------- Class A ------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,007.30 $4.44 .89% ------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.44 $4.47 .89% ------------------------------------------------------------------------------------------- Class B ------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,003.50 $8.22 1.65% ------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.66 $8.27 1.65% ------------------------------------------------------------------------------------------- Class C ------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,003.50 $8.22 1.65% ------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.66 $8.27 1.65% ------------------------------------------------------------------------------------------- Class I ------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,009.20 $2.55 .51% ------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.33 $2.56 .51% ------------------------------------------------------------------------------------------- Class R4 ------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,008.00 $3.79 .76% ------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.08 $3.82 .76% ------------------------------------------------------------------------------------------- Class W ------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,007.00 $4.74 .95% ------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.14 $4.77 .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 182/366 (to reflect the one-half year period). (b) Based on the actual return for the six months ended May 31, 2008: +0.73% for Class A, +0.35% for Class B, +0.35% for Class C, +0.92% for Class I, +0.80% for Class R4 and +0.70% for Class W. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 13 PORTFOLIO OF INVESTMENTS ------------------------------------------------------- MAY 31, 2008 (Percentages represent value of investments compared to net assets) INVESTMENTS IN SECURITIES
BONDS (84.3%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) U.S. GOVERNMENT OBLIGATIONS & AGENCIES (21.0%) Federal Farm Credit Bank 10-10-08 4.25% $6,015,000 $6,054,994 Federal Home Loan Bank 11-21-08 4.63 6,500,000 6,564,370 12-29-08 5.13 24,390,000 24,752,776 Federal Home Loan Mtge Corp 06-15-08 3.88 4,010,000 4,012,798 08-23-17 5.50 5,500,000 5,863,666 Federal Natl Mtge Assn 10-15-08 4.50 10,615,000 10,701,204 04-09-13 3.25 18,880,000 18,223,070 11-15-30 6.63 1,945,000 2,289,487 U.S. Treasury 04-30-10 2.13 12,430,000(b) 12,318,329 05-31-10 2.63 21,705,000(e) 21,698,228 12-15-10 4.38 10,550,000 10,962,938 05-15-18 3.88 4,300,000 4,239,869 U.S. Treasury Inflation-Indexed Bond 01-15-14 2.00 17,330,475(g) 18,161,406 01-15-15 1.63 22,353,000(g) 22,869,258 --------------- Total 168,712,393 ------------------------------------------------------------------------------------ ASSET-BACKED (1.8%) Capital Auto Receivables Asset Trust Series 2006-SN1A Cl A4B 03-20-10 2.59 3,250,000(d,i) 3,227,747 Countrywide Asset-backed Ctfs Series 2007-7 Cl 2A2 10-25-37 2.55 2,600,000(i) 2,217,314 Fannie Mae Grantor Trust Series 2005-T4 Cl A1C 09-25-35 2.54 1,054,819(i) 1,044,469 MASTR Asset Backed Securities Trust Series 2006-HE1 Cl A2 01-25-36 2.53 747,697(i) 736,131 Residential Asset Securities Series 2007-KS3 Cl AI2 04-25-37 2.57 4,050,000(i) 3,576,636
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) ASSET-BACKED (CONT.) Soundview Home Equity Loan Trust Series 2006-EQ1 Cl A2 10-25-36 2.50% $3,900,000(i) $3,447,233 --------------- Total 14,249,530 ------------------------------------------------------------------------------------ COMMERCIAL MORTGAGE-BACKED (1.7%)(f) Federal Home Loan Mtge Corp Multifamily Structured Pass-Through Ctfs Series K001 Cl A2 04-25-16 5.65 6,364,210 6,460,078 Federal Natl Mtge Assn #360800 01-01-09 5.74 3,006,335(n) 3,029,793 Federal Natl Mtge Assn #381990 10-01-09 7.11 4,091,489 4,167,643 --------------- Total 13,657,514 ------------------------------------------------------------------------------------ MORTGAGE-BACKED (59.8%)(f,m) Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2007-1 Cl 3A21 03-25-37 6.15 1,948,005(h) 1,834,751 American Home Mtge Assets Collateralized Mtge Obligation Series 2007-2 Cl A2A 03-25-47 2.56 3,293,527(h) 2,074,064 American Home Mtge Investment Trust Collateralized Mtge Obligation Series 2007-1 Cl GA1C 05-25-47 2.58 4,242,441(h) 3,289,222 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2006-9 Cl 1CB1 01-25-37 6.00 3,390,849 3,036,400 Barclays Capital LLC Trust Collateralized Mtge Obligation Series 2007-AA4 Cl 11A1 06-25-47 6.21 1,328,261(h) 1,009,969
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 14 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-6CB Cl 1A1 04-25-35 7.50% $1,496,265 $1,434,734 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-2CB Cl A11 03-25-36 6.00 5,722,243 4,940,802 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-OA11 Cl A3B1 09-25-46 2.57 4,167,120(i) 3,830,878 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-22 Cl 2A16 09-25-37 6.50 4,601,386 4,054,972 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-25 Cl 1A1 11-25-37 6.50 4,648,885 4,236,115 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OA9 Cl A2 06-25-47 2.74 5,598,315(i) 4,066,381 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OH3 Cl A3 09-25-47 2.89 3,863,997(i) 2,231,724 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-HYB8 Cl 4A1 12-20-35 5.62 3,215,796(h) 2,326,896 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00 4,332,761(d) 4,083,474 Countrywide Home Loans Collateralized Mtge Obligation Series 2007-17 Cl 2A1 10-25-37 6.50 4,490,811 4,445,727 Federal Home Loan Mtge Corp 06-01-38 6.00 8,000,000(e) 8,122,496 06-01-38 6.50 12,000,000(e) 12,386,257 Federal Home Loan Mtge Corp #1G2264 10-01-37 6.03 6,456,394(h) 6,627,793 Federal Home Loan Mtge Corp #1G2598 01-01-37 6.12 2,508,402(h) 2,567,548
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #1J0614 09-01-37 5.70% $3,263,270(h) $3,332,876 Federal Home Loan Mtge Corp #783049 03-01-35 4.85 6,215,555(h) 6,177,578 Federal Home Loan Mtge Corp #A18107 01-01-34 5.50 3,002,375 2,990,459 Federal Home Loan Mtge Corp #C00351 07-01-24 8.00 246,644 267,094 Federal Home Loan Mtge Corp #C00385 01-01-25 9.00 414,461 460,109 Federal Home Loan Mtge Corp #C80329 08-01-25 8.00 69,430 75,153 Federal Home Loan Mtge Corp #E00398 10-01-10 7.00 276,032 286,386 Federal Home Loan Mtge Corp #E81240 06-01-15 7.50 3,329,809 3,485,603 Federal Home Loan Mtge Corp #E90650 07-01-12 5.50 162,692 165,774 Federal Home Loan Mtge Corp #E92454 11-01-17 5.00 2,746,660 2,749,975 Federal Home Loan Mtge Corp #G00363 06-01-25 8.00 327,088 354,045 Federal Home Loan Mtge Corp #G00501 05-01-26 9.00 612,499 680,133 Federal Home Loan Mtge Corp #G10669 03-01-12 7.50 1,388,547 1,456,539 Federal Home Loan Mtge Corp #G11243 04-01-17 6.50 12,428,837 13,032,715 Federal Home Loan Mtge Corp #G12100 11-01-13 5.00 3,122,821 3,123,802 Federal Home Loan Mtge Corp #M30074 09-01-09 6.50 62,913 64,346 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 11 Cl B 01-01-20 17.54 7,061(k) 1,670 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 237 Cl IO 05-15-36 6.60 1,112,967(k) 294,109 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2590 Cl BI 02-15-14 50.12 711,585(k) 3,908
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 15
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2783 Cl MI 03-15-25 41.88% $3,177,468(k) $97,441 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only/Inverse Floater Series 2471 Cl SI 03-15-32 25.32 1,352,658(j,k) 149,490 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2617 Cl HD 06-15-16 7.00 6,335,511 6,585,943 Federal Natl Mtge Assn 06-01-38 5.00 2,500,000(e) 2,414,845 06-01-38 5.50 9,000,000(e) 8,935,308 06-01-38 6.00 4,500,000(e) 4,564,688 06-01-38 6.50 8,000,000(e) 8,247,504 Federal Natl Mtge Assn #125032 11-01-21 8.00 137,003 148,366 Federal Natl Mtge Assn #190129 11-01-23 6.00 980,843 1,003,801 Federal Natl Mtge Assn #190353 08-01-34 5.00 6,640,863 6,436,034 Federal Natl Mtge Assn #190785 05-01-09 7.50 74,483 74,702 Federal Natl Mtge Assn #190988 06-01-24 9.00 218,093 236,626 Federal Natl Mtge Assn #254384 06-01-17 7.00 326,456 342,025 Federal Natl Mtge Assn #254454 08-01-17 7.00 560,055 586,764 Federal Natl Mtge Assn #254723 05-01-23 5.50 8,790,214(n) 8,816,672 Federal Natl Mtge Assn #254748 04-01-13 5.50 5,324,419 5,423,420 Federal Natl Mtge Assn #254757 05-01-13 5.00 7,297,931 7,332,929 Federal Natl Mtge Assn #254774 05-01-13 5.50 1,704,312 1,733,507 Federal Natl Mtge Assn #255501 09-01-14 6.00 708,141(n) 725,858 Federal Natl Mtge Assn #303885 05-01-26 7.50 445,053 480,690 Federal Natl Mtge Assn #313007 07-01-11 7.50 186,834 193,687
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #313428 12-01-08 7.50% $1,387 $1,391 Federal Natl Mtge Assn #336512 02-01-26 6.00 63,192 64,718 Federal Natl Mtge Assn #357485 02-01-34 5.50 13,184,383 13,140,299 Federal Natl Mtge Assn #407327 01-01-14 5.50 402,885 409,918 Federal Natl Mtge Assn #456374 12-01-13 5.50 772,465 785,950 Federal Natl Mtge Assn #508402 08-01-14 6.50 261,541 271,883 Federal Natl Mtge Assn #545818 07-01-17 6.00 13,082,141 13,494,774 Federal Natl Mtge Assn #545864 08-01-17 5.50 10,832,051 11,037,976 Federal Natl Mtge Assn #545910 08-01-17 6.00 2,036,532 2,101,857 Federal Natl Mtge Assn #555063 11-01-17 5.50 7,799,946 7,946,725 Federal Natl Mtge Assn #555367 03-01-33 6.00 9,501,053(n) 9,700,872 Federal Natl Mtge Assn #579485 04-01-31 6.50 2,276,125(n) 2,395,615 Federal Natl Mtge Assn #593829 12-01-28 7.00 1,553,038 1,653,441 Federal Natl Mtge Assn #601416 11-01-31 6.50 765,524 800,977 Federal Natl Mtge Assn #630993 09-01-31 7.50 2,456,543 2,652,000 Federal Natl Mtge Assn #648040 06-01-32 6.50 2,153,933 2,238,946 Federal Natl Mtge Assn #648349 06-01-17 6.00 6,867,562(n) 7,087,844 Federal Natl Mtge Assn #651284 07-01-17 6.00 1,344,458 1,387,631 Federal Natl Mtge Assn #662866 11-01-17 6.00 1,165,637(n) 1,206,366 Federal Natl Mtge Assn #665752 09-01-32 6.50 1,184,465 1,231,214 Federal Natl Mtge Assn #670782 11-01-12 5.00 266,811 268,132 Federal Natl Mtge Assn #670830 12-01-12 5.00 409,589 411,956 Federal Natl Mtge Assn #671415 01-01-10 5.00 355,123 359,014 Federal Natl Mtge Assn #678940 02-01-18 5.50 2,071,723 2,110,422
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 16 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #686227 02-01-18 5.50% $2,737,518 $2,785,960 Federal Natl Mtge Assn #696837 04-01-18 5.50 2,940,296 2,993,858 Federal Natl Mtge Assn #704610 06-01-33 5.50 10,467,533(n) 10,432,533 Federal Natl Mtge Assn #712602 06-01-13 5.00 990,669 995,418 Federal Natl Mtge Assn #722325 07-01-33 4.96 5,004,441(h) 5,060,691 Federal Natl Mtge Assn #725232 03-01-34 5.00 9,851,975(n) 9,557,339 Federal Natl Mtge Assn #725425 04-01-34 5.50 9,184,956 9,157,055 Federal Natl Mtge Assn #725431 08-01-15 5.50 7,624,692 7,757,795 Federal Natl Mtge Assn #725773 09-01-34 5.50 7,779,139 7,745,835 Federal Natl Mtge Assn #730632 08-01-33 4.06 1,759,496(h) 1,760,736 Federal Natl Mtge Assn #735212 12-01-34 5.00 5,893,524 5,711,745 Federal Natl Mtge Assn #739243 09-01-33 6.00 2,909,087 2,988,651 Federal Natl Mtge Assn #739331 09-01-33 6.00 1,491,753 1,520,796 Federal Natl Mtge Assn #743524 11-01-33 5.00 2,942,024 2,854,039 Federal Natl Mtge Assn #753508 11-01-33 5.00 3,242,414(n) 3,145,446 Federal Natl Mtge Assn #791447 10-01-34 6.00 4,619,345 4,702,061 Federal Natl Mtge Assn #797046 07-01-34 5.50 2,778,576(n) 2,766,680 Federal Natl Mtge Assn #799769 11-01-34 5.05 3,888,967(h) 3,935,868 Federal Natl Mtge Assn #801344 10-01-34 5.05 4,301,717(h) 4,369,598 Federal Natl Mtge Assn #815463 02-01-35 5.50 1,833,638 1,825,787 Federal Natl Mtge Assn #832641 09-01-35 6.00 6,316,139 6,418,382 Federal Natl Mtge Assn #849082 01-01-36 5.82 2,686,500(h) 2,739,899 Federal Natl Mtge Assn #849170 01-01-36 5.94 3,433,100(h) 3,507,282 Federal Natl Mtge Assn #878661 02-01-36 5.50 7,642,170(n) 7,538,542
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #883267 07-01-36 6.50% $4,370,983(n) $4,563,126 Federal Natl Mtge Assn #887403 07-01-36 7.00 2,643,531 2,800,308 Federal Natl Mtge Assn #888989 06-01-37 6.06 6,157,959(h) 6,333,275 Federal Natl Mtge Assn #902818 11-01-36 5.91 2,136,461(h) 2,186,582 Federal Natl Mtge Assn #919341 05-01-37 6.50 3,437,068 3,547,290 Federal Natl Mtge Assn #928771 10-01-37 8.00 6,496,596(n) 6,919,920 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 163 Cl 2 07-25-22 28.60 546,443(k) 87,636 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-26 Cl MI 03-25-23 13.70 1,647,959(k) 313,880 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-63 Cl IP 07-25-33 7.52 3,767,136(k) 953,630 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12-25-31 9.86 1,965,795(k) 337,582 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-81 Cl LI 11-25-13 20.00 2,883,100(k) 52,001 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 36 Cl 2 08-01-18 14.00 4,306(k) 1,121 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 367 Cl 2 01-01-36 6.57 2,776,543(k) 736,903
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 17
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 379 Cl 2 05-25-37 6.52% $5,352,772(k) $1,379,848 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 70 Cl 2 01-15-20 27.28 198,839(k) 39,377 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only/Inverse Floater Series 2002-18 Cl SE 02-25-32 27.33 2,842,791(j,k) 322,419 Federal Natl Mtge Assn Collateralized Mtge Obligation Principal Only Series G-15 Cl A 06-25-21 2.49 25,970(l) 23,257 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-133 Cl GB 12-25-26 8.00 1,925,489 2,036,199 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-94 Cl QB 07-25-23 5.50 3,209,787 3,215,573 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-W11 Cl A1 06-25-33 7.28 120,425(h) 120,847 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2004-60 Cl PA 04-25-34 5.50 3,269,449 3,313,956 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2006-60 Cl JF 10-25-35 2.82 5,590,018(i) 5,506,244 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2006-90 Cl FE 09-25-36 2.84 7,117,965(i) 7,080,705 Govt Natl Mtge Assn 06-01-38 5.50 5,000,000(e) 5,000,000 Govt Natl Mtge Assn #615740 08-15-13 6.00 746,339 770,200
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Govt Natl Mtge Assn #781507 09-15-14 6.00% $3,541,731 $3,657,031 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-62 Cl IC 03-20-29 20.00 1,522,591(k) 38,160 Govt Natl Mtge Assn Collateralized Mtge Obligation Series 2006-32 Cl A 01-16-30 5.08 8,783,674 8,864,848 Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2004-4 Cl 3A 06-19-34 3.83 393,650(h) 371,823 Lehman XS Trust Series 2006-16N Cl A1B 11-25-46 2.51 2,491,877(i) 2,300,434 Merrill Lynch Alternative Note Asset Collateralized Mtge Obligation Series 2007-OAR1 Cl A1 02-25-37 2.56 5,365,533(i) 4,177,054 Morgan Stanley Mtge Loan Trust Series 2006-13AX Cl A1 10-25-36 2.48 3,857,608(i) 3,369,665 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2006-AR3 Cl A1A 02-25-46 4.79 1,889,490(h) 1,456,722 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-10 Cl A1 10-25-35 5.00 5,648,113 5,057,321 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-14 Cl 2A1 12-25-35 5.50 2,909,683 2,775,110 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-5 Cl 2A1 05-25-35 5.50 4,159,567 4,046,481 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR12 Cl 1A1 09-25-36 6.02 1,648,683(h) 1,628,277
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 18 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR6 Cl 5A1 03-25-36 5.11% $3,575,958(h) $3,455,489 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2007-11 Cl A68 08-25-37 6.00 4,729,138 4,465,820 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2007-15 Cl A1 11-25-37 6.00 3,320,161(e) 3,234,563 --------------- Total 481,705,371 ------------------------------------------------------------------------------------ TOTAL BONDS (Cost: $688,552,899) $678,324,808 ------------------------------------------------------------------------------------
MONEY MARKET FUND (1.6%)(c) SHARES VALUE(A) RiverSource Short-Term Cash Fund, 2.60% 12,901,974(o) $12,901,974 ----------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $12,901,974) $12,901,974 -----------------------------------------------------------------------------------
SHORT-TERM SECURITIES (23.4%)(c) AMOUNT EFFECTIVE PAYABLE AT ISSUER YIELD MATURITY VALUE(A) U.S. GOVERNMENT AGENCIES Federal Home Loan Bank Disc Nts 06-02-08 1.98% $63,800,000 $63,789,628 06-06-08 2.10 50,000,000 49,979,827 06-10-08 2.07 25,000,000 24,984,417 06-18-08 2.20 35,000,000 34,959,916 06-25-08 2.22 15,000,000 14,976,275 ------------------------------------------------------------------------------------ TOTAL SHORT-TERM SECURITIES (Cost: $188,700,839) $188,690,063 ------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN SECURITIES (Cost: $890,155,712)(p) $879,916,845 ====================================================================================
INVESTMENTS IN DERIVATIVES FUTURES CONTRACTS OUTSTANDING AT MAY 31, 2008
NUMBER OF UNREALIZED CONTRACTS NOTIONAL EXPIRATION APPRECIATION CONTRACT DESCRIPTION LONG (SHORT) MARKET VALUE DATE (DEPRECIATION) ------------------------------------------------------------------------------------ U.S. Long Bond, 20-year 30 $3,405,000 Sept. 2008 $(42,240) U.S. Treasury Note, 2-year 563 118,581,875 Sept. 2008 (326,467) U.S. Treasury Note, 5-year (412) (45,641,875) June 2008 1,306,402 U.S. Treasury Note, 5-year (69) (7,585,688) Sept. 2008 41,575 U.S. Treasury Note, 10-year (440) (50,139,377) June 2008 1,569,861 U.S. Treasury Note, 10-year (266) (29,900,062) Sept. 2008 (66,965) ------------------------------------------------------------------------------------ Total $2,482,166 ------------------------------------------------------------------------------------
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 19 NOTES TO PORTFOLIO OF INVESTMENTS (a) Securities are valued by using procedures described in Note 1 to the financial statements. (b) At May 31, 2008, security was partially or fully on loan. See Note 5 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 1.9% of net assets. See Note 5 to the financial statements. The Fund's cash equivalent position is 23.1% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security may be 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, 2008, the value of these securities amounted to $7,311,221 or 0.9% of net assets. (e) At May 31, 2008, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $74,993,839. See Note 1 to the financial statements. (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) 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. (h) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on May 31, 2008. (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, 2008. (j) 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, 2008. At May 31, 2008, the value of inverse floaters represented 0.1% of net assets. (k) 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, 2008. (l) 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, 2008. -------------------------------------------------------------------------------- 20 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (m) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments at May 31, 2008:
PRINCIPAL SETTLEMENT PROCEEDS SECURITY AMOUNT DATE RECEIVABLE VALUE --------------------------------------------------------------------------------------- Federal Natl Mtge Assn 06-01-23 5.50% $9,275,000 06-17-08 $9,390,938 $9,373,547
(n) At May 31, 2008, investments in securities included securities valued at $4,297,515 that were partially pledged as collateral to cover initial margin deposits on open interest rate futures contracts. (o) Affiliated Money Market Fund - See Note 6 to the financial statements. The rate shown is the seven-day current annualized yield at May 31, 2008. (p) At May 31, 2008, the cost of securities for federal income tax purposes was $898,115,672 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $6,583,564 Unrealized depreciation (24,782,391) ------------------------------------------------------------------------------ Net unrealized depreciation $(18,198,827) ------------------------------------------------------------------------------
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. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 21 FINANCIAL STATEMENTS ----------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES MAY 31, 2008 ASSETS Investments in securities, at value Unaffiliated issuers* (identified cost $877,253,738) $ 867,014,871 Affiliated money market fund (identified cost $12,901,974) 12,901,974 ------------------------------------------------------------------------------ Total investments in securities (identified cost $890,155,712) 879,916,845 Capital shares receivable 222,847 Dividends and accrued interest receivable 3,602,881 Receivable for investment securities sold 26,814,528 ------------------------------------------------------------------------------ Total assets 910,557,101 ------------------------------------------------------------------------------ LIABILITIES Forward sale commitments, at value (proceeds receivable $9,390,938) 9,373,547 Dividends payable to shareholders 153,257 Capital shares payable 1,437,850 Payable for investment securities purchased 3,655,269 Payable for securities purchased on a forward-commitment basis 74,993,839 Payable upon return of securities loaned 15,243,750 Variation margin payable 132,462 Accrued investment management services fees 10,554 Accrued distribution fees 154,657 Accrued transfer agency fees 1,534 Accrued administrative services fees 1,498 Accrued plan administration services fees 1,005 Other accrued expenses 557,617 ------------------------------------------------------------------------------ Total liabilities 105,716,839 ------------------------------------------------------------------------------ Net assets applicable to outstanding capital stock $ 804,840,262 ==============================================================================
-------------------------------------------------------------------------------- 22 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) MAY 31, 2008 REPRESENTED BY Capital stock -- $.01 par value $ 1,698,674 Additional paid-in capital 1,003,944,353 Excess of distributions over net investment income (195,666) Accumulated net realized gain (loss) (192,867,789) Unrealized appreciation (depreciation) on investments (7,739,310) ------------------------------------------------------------------------------ Total -- representing net assets applicable to outstanding capital stock $ 804,840,262 ==============================================================================
Net assets applicable to outstanding shares: Class A $ 539,251,179 Class B $ 158,544,398 Class C $ 9,625,747 Class I $ 92,658,581 Class R4 $ 4,755,371 Class W $ 4,986 Net asset value per share of outstanding Class A capital stock: shares(1) 113,827,935 $ 4.74 Class B shares 33,462,620 $ 4.74 Class C shares 2,031,863 $ 4.74 Class I shares 19,540,682 $ 4.74 Class R4 shares 1,003,265 $ 4.74 Class W shares 1,053 $ 4.74 ------------------------------------------------------------------------------------------- *Including securities on loan, at value $ 14,865,150 -------------------------------------------------------------------------------------------
(1) The maximum offering price per share for Class A is $4.89. The offering price is calculated by dividing the net asset value by 1.0 minus the maximum sales charge of 3.00%. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 23 STATEMENT OF OPERATIONS YEAR ENDED MAY 31, 2008 INVESTMENT INCOME Income: Interest $37,133,856 Income distributions from affiliated money market fund 847,869 Fee income from securities lending 174,341 --------------------------------------------------------------------------- Total income 38,156,066 --------------------------------------------------------------------------- Expenses: Investment management services fees 3,816,196 Distribution fees Class A 1,342,344 Class B 1,762,259 Class C 97,004 Class W 12 Transfer agency fees Class A 991,548 Class B 344,487 Class C 18,568 Class R4 2,240 Class W 10 Administrative services fees 541,748 Plan administration services fee -- Class R4 11,201 Compensation of board members 14,998 Custodian fees 78,474 Printing and postage 152,710 Registration fees 92,859 Professional fees 43,826 Other 31,484 --------------------------------------------------------------------------- Total expenses 9,341,968 Expenses waived/reimbursed by the Investment Manager and its affiliates (1,129,574) Earnings and bank fee credits on cash balances (56,289) --------------------------------------------------------------------------- Total net expenses 8,156,105 --------------------------------------------------------------------------- Investment income (loss) -- net 29,999,961 --------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions 2,483,642 Futures contracts (1,383,657) --------------------------------------------------------------------------- Net realized gain (loss) on investments 1,099,985 Net change in unrealized appreciation (depreciation) on investments (800,569) --------------------------------------------------------------------------- Net gain (loss) on investments 299,416 --------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $30,299,377 ===========================================================================
The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 24 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED MAY 31, 2008 2007 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 29,999,961 $ 34,864,001 Net realized gain (loss) on investments 1,099,985 (3,231,933) Net change in unrealized appreciation (depreciation) on investments (800,569) 13,960,710 --------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 30,299,377 45,592,778 --------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (21,333,414) (23,143,295) Class B (5,699,109) (8,304,295) Class C (312,941) (382,419) Class I (2,868,438) (2,092,223) Class R4 (183,760) (521,296) Class W (196) (92) --------------------------------------------------------------------------------------- Total distributions (30,397,858) (34,443,620) --------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS Proceeds from sales Class A shares 206,496,511 123,697,762 Class B shares 42,734,598 39,042,955 Class C shares 2,621,382 1,714,861 Class I shares 69,048,377 28,598,207 Class R4 shares 2,801,130 1,928,332 Class W shares -- 5,000 Reinvestment of distributions at net asset value Class A shares 19,605,781 20,974,512 Class B shares 5,406,615 7,756,733 Class C shares 299,079 362,001 Class I shares 2,844,139 2,093,754 Class R4 shares 185,296 523,566 Payments for redemptions Class A shares (200,741,788) (279,123,681) Class B shares (105,920,795) (172,096,057) Class C shares (3,568,542) (6,479,313) Class I shares (33,540,963) (38,743,791) Class R4 shares (2,086,457) (17,374,573) --------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions 6,184,363 (287,119,732) --------------------------------------------------------------------------------------- Total increase (decrease) in net assets 6,085,882 (275,970,574) Net assets at beginning of year 798,754,380 1,074,724,954 --------------------------------------------------------------------------------------- Net assets at end of year $ 804,840,262 $ 798,754,380 ======================================================================================= Excess of distributions over net investment income $ (195,666) $ (68,629) ---------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 25 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RiverSource Short Duration U.S. Government Fund (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 of Directors (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, Class R4 and Class W 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. Effective March 3, 2008, Class B shares were closed to new investors and new purchases. - Class C shares may be subject to a CDSC. - Class I and Class R4 shares are sold without a front-end sales charge or CDSC and are offered to qualifying institutional investors. - Class W shares are sold without a front-end sales charge or CDSC and are offered through qualifying discretionary accounts. At May 31, 2008, RiverSource Investments, LLC (RiverSource Investments or the Investment Manager) and the RiverSource affiliated funds-of-funds owned 100% of Class I shares, and the Investment Manager 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 services 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. 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 -------------------------------------------------------------------------------- 26 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 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 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 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, 2008, the Fund has outstanding when-issued securities of $71,704,061 and other forward-commitments of $3,289,778. 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. The Fund records the incremental difference between the forward purchase and sale of each forward roll as realized gain or loss. Losses may arise due to changes in the value of the securities or if a counterparty does not perform under the terms of the agreement. If a counterparty files for bankruptcy or becomes insolvent, the Fund's right to repurchase or sell securities may be limited. 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 Fund also may write over-the-counter options where completing the obligation depends upon the credit standing of the other party. Cash collateral may be collected by the Fund -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 27 to secure certain over-the-counter options trades. Cash collateral held by the Fund for such option trades must be returned to the counter party upon closure, exercise or expiration of the contract. 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. 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. At May 31, 2008, and for the year then ended, the Fund had no outstanding option contracts. 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. Futures are valued daily based upon the last sale price at the close of market on the principal exchange on which they are traded. 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. 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 -------------------------------------------------------------------------------- 28 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT "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 Portfolio of Investments. 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. The Fund has adopted Financial Accounting Standards Board (FASB) Interpretation 48 (FIN 48), "Accounting for Uncertainty in Income Taxes," which is effective for fiscal periods beginning after Dec. 15, 2006. 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. Management of the Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Generally, the tax authorities can examine all the tax returns filed for the last three years. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of futures and options contracts, recognition of unrealized appreciation (depreciation) for certain derivative investments and losses deferred due to wash sales. 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 -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 29 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 $270,860 and accumulated net realized loss has been decreased by $30,907,773 resulting in a net reclassification adjustment to decrease paid-in capital by $31,178,633. The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED MAY 31, 2008 2007* ---------------------------------------------------------------------------- CLASS A Distributions paid from: Ordinary income......................... $21,333,414 $23,143,295 Long-term capital gain.................. -- -- CLASS B Distributions paid from: Ordinary income......................... 5,699,109 8,304,295 Long-term capital gain.................. -- -- CLASS C Distributions paid from: Ordinary income......................... 312,941 382,419 Long-term capital gain.................. -- -- CLASS I Distributions paid from: Ordinary income......................... 2,868,438 2,092,223 Long-term capital gain.................. -- -- CLASS R4 Distributions paid from: Ordinary income......................... 183,760 521,296 Long-term capital gain.................. -- -- CLASS W Distributions paid from: Ordinary income......................... 196 92 Long-term capital gain.................. -- --
* Class W is for the period from Dec. 1, 2006 (inception date) to May 31, 2007. At May 31, 2008, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income............................ $ 277,566 Undistributed accumulated long-term gain................. $ -- Accumulated realized loss................................ $(183,673,285) Unrealized appreciation (depreciation)................... $ (17,253,789)
-------------------------------------------------------------------------------- 30 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT RECENT ACCOUNTING PRONOUNCEMENTS In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (SFAS 161), "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133," which requires enhanced disclosures about a fund's derivative and hedging activities. Funds are required to provide enhanced disclosures about (a) how and why a fund uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect a fund's financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after Nov. 15, 2008. As of May 31, 2008, management does not believe the adoption of SFAS 161 will impact the financial statement amounts; however, additional footnote disclosures may be required about the use of derivative instruments and hedging items. On Sept. 20, 2006, the 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 hierarchy for measuring fair value, and requires additional disclosures about the inputs used to develop the measurements of fair value and the effect of certain measurements reported in the Statement of Operations for a fiscal period. The application of SFAS 157 will be effective for the Fund's fiscal year beginning June 1, 2008. The adoption of SFAS 157 is not anticipated to have a material impact on the Fund's financial statements; however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain measurements reported in the Statement of Operations for a fiscal period. 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. Dividend income, if any, is recognized on the ex-dividend date and 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 INVESTMENT MANAGEMENT SERVICES FEES Under an Investment Management Services Agreement, the Investment Manager determines which securities will be purchased, held or sold. The management fee -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 31 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. The management fee for the year ended May 31, 2008 was 0.48% of the Fund's average daily net assets. ADMINISTRATIVE SERVICES FEES 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. The fee for the year ended May 31, 2008 was 0.07% of the Fund's average daily net assets. OTHER FEES Other expenses 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. For the year ended May 31, 2008, other expenses paid to this company were $3,512. COMPENSATION OF BOARD MEMBERS Compensation of board members includes, for a former Board Chair, compensation as well as retirement benefits. Certain other aspects of a 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. TRANSFER AGENCY FEES Under a Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains shareholder accounts and records. The Fund pays the Transfer Agent an annual account-based fee at a rate equal to $20.50 for Class A, $21.50 for Class B and $21.00 for Class C for this service. The Fund also 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 and an annual asset-based fee at a rate of 0.20% of the Fund's average daily net assets attributable to Class W shares. The Transfer Agent charges an annual 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. -------------------------------------------------------------------------------- 32 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT PLAN ADMINISTRATION FEES Under a Plan Administration Services Agreement with the Transfer Agent, the Fund pays an annual fee at a rate of 0.25% of the Fund's average daily net assets attributable to Class R4 shares for the provision of various administrative, recordkeeping, communication and educational services. DISTRIBUTION FEES The Fund has an agreement with RiverSource Distributors, Inc. (the Distributor) for distribution and shareholder services. Prior to Oct. 1, 2007, Ameriprise Financial Services, Inc. also served as a principal underwriter and distributor to the Fund. 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. SALES CHARGES Sales charges received by the Distributor for distributing Fund shares were $522,869 for Class A, $135,750 for Class B and $1,735 for Class C for the year ended May 31, 2008. EXPENSES WAIVED/REIMBURSED BY THE INVESTMENT MANAGER AND ITS AFFILIATES For the year ended May 31, 2008, the Investment Manager and its affiliates waived/reimbursed certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds*) were as follows: Class A..................................................... 0.89% Class B..................................................... 1.65 Class C..................................................... 1.65 Class I..................................................... 0.51 Class R4.................................................... 0.76 Class W..................................................... 0.95
The waived/reimbursed fees and expenses for the transfer agency fees at the class level were as follows: Class A..................................................... $296,755 Class B..................................................... 101,099 Class C..................................................... 5,347 Class R4.................................................... 2,240
The waived/reimbursed fees and expenses for the plan administration services fees at the class level were as follows: Class R4.................................................... $179
The management fees waived/reimbursed at the Fund level were $723,954. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 33 The Investment Manager and its affiliates have contractually agreed to waive certain fees and expenses until May 31, 2009, unless sooner terminate at the discretion of the Board, such that net expenses (excluding fees and expenses of acquired funds*), will not exceed the following percentage of the Fund's average daily net assets: Class A..................................................... 0.89% Class B..................................................... 1.65 Class C..................................................... 1.65 Class I..................................................... 0.51 Class R4.................................................... 0.76 Class W..................................................... 0.96
* 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. EARNINGS AND BANK FEE CREDITS During the year ended May 31, 2008, the Fund's custodian and transfer agency fees were reduced by $56,289 as a result of earnings and bank fee credits from overnight cash balances. The Fund pays custodian fees to Ameriprise Trust Company, a subsidiary of Ameriprise Financial. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $1,431,723,484 and $1,498,300,206, respectively, for the year ended May 31, 2008. Realized gains and losses are determined on an identified cost basis. -------------------------------------------------------------------------------- 34 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
YEAR ENDED MAY 31, 2008 ISSUED FOR REINVESTED NET SOLD DISTRIBUTIONS REDEEMED INCREASE (DECREASE) --------------------------------------------------------------------------------------- Class A 43,400,136 4,118,107 (42,186,985) 5,331,258 Class B 8,957,341 1,135,754 (22,307,379) (12,214,284) Class C 549,369 62,833 (750,024) (137,822) Class I 14,458,872 596,542 (7,078,714) 7,976,700 Class R4 587,072 38,907 (437,399) 188,580 ---------------------------------------------------------------------------------------
YEAR ENDED MAY 31, 2007 ISSUED FOR REINVESTED NET SOLD DISTRIBUTIONS REDEEMED INCREASE (DECREASE) --------------------------------------------------------------------------------------- Class A 26,249,182 4,438,028 (59,067,555) (28,380,345) Class B 8,265,255 1,641,653 (36,500,655) (26,593,747) Class C 362,929 76,605 (1,372,316) (932,782) Class I 6,032,035 442,337 (8,233,131) (1,758,759) Class R4 409,261 110,927 (3,673,601) (3,153,413) Class W* 1,053 -- -- 1,053 ---------------------------------------------------------------------------------------
* For the period from Dec. 1, 2006 (inception date) to May 31, 2007. 5. 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, 2008, securities valued at $14,865,150 were on loan to brokers. For collateral, the Fund received $15,243,750 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 Portfolio of Investments. Income from securities lending amounted to $174,341 for the year ended May 31, 2008. Expenses paid to the Investment Manager as securities -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 35 lending agent were $4,455 for the year ended May 31, 2008, which are included in other expenses on the Statement of Operations. 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. 6. 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. The cost of the Fund's purchases and proceeds from sales of shares of the RiverSource Short-Term Cash Fund aggregated $359,789,119 and $360,173,991, respectively, for the year ended May 31, 2008. The income distributions received with respect to the Fund's investment in RiverSource Short-Term Cash Fund can be found on the Statement of Operations and the Fund's invested balance in RiverSource Short-Term Cash Fund at May 31, 2008, can be found in the Portfolio of Investments. 7. BANK BORROWINGS The Fund has entered into a revolving credit facility 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 credit facility became effective on Oct. 18, 2007, replacing a prior credit facility. The credit facility agreement, which is a collective agreement between the Fund and certain other RiverSource funds, severally and not jointly, permits collective borrowings up to $500 million. Interest is charged to each Fund based on its borrowings at a rate equal to the federal funds rate plus 0.30%. Each borrowing under the credit facility matures no later than 60 days after the date of borrowing. 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. Under the prior credit facility, a Fund paid interest on its outstanding 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. The Fund had no borrowings during the year ended May 31, 2008. 8. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund had a capital loss carry-over of $183,673,285 at May 31, 2008, that if not offset by capital gains will expire as follows:
2009 2013 2014 2015 $117,356,906 $36,267,962 $20,469,230 $9,579,187
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 -- 2008 ANNUAL REPORT 9. 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 filed a notice of appeal with the Eighth Circuit Court of Appeals on August 8, 2007. In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. As a result, 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. AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. 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. 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 -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 37 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. 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. -------------------------------------------------------------------------------- 38 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 10. 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, 2008 2007 2006 2005 2004 Net asset value, beginning of period $4.73 $4.68 $4.79 $4.82 $4.94 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .19(b) .19 .15 .12 .11 Net gains (losses) (both realized and unrealized) .01 .05 (.10) (.03) (.12) ----------------------------------------------------------------------------------------------------------- Total from investment operations .20 .24 .05 .09 (.01) ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.19) (.19) (.16) (.12) (.11) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.74 $4.73 $4.68 $4.79 $4.82 ----------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $539 $514 $641 $894 $1,188 ----------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) 1.04% 1.03% 1.06% 1.01% .97% ----------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) .89% .89% .89% .93% .97% ----------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.93% 3.99% 3.27% 2.49% 2.19% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate 209% 168% 194% 169% 125% ----------------------------------------------------------------------------------------------------------- Total return(g) 4.27% 5.12% 1.00% 1.92% (.24%) -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for 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 have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. The ratio of net expenses after expense waiver/reimbursement and after reduction for earnings and bank fee credits was 0.88% for the year ended May 31, 2008. (g) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 39 CLASS B
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2008 2007 2006 2005 2004 Net asset value, beginning of period $4.73 $4.68 $4.79 $4.82 $4.94 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15(b) .15 .12 .08 .07 Net gains (losses) (both realized and unrealized) .01 .05 (.11) (.03) (.12) ----------------------------------------------------------------------------------------------------------- Total from investment operations .16 .20 .01 .05 (.05) ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.15) (.15) (.12) (.08) (.07) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.74 $4.73 $4.68 $4.79 $4.82 ----------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $159 $216 $338 $588 $963 ----------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) 1.80% 1.79% 1.82% 1.76% 1.72% ----------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) 1.65% 1.64% 1.64% 1.68% 1.72% ----------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.18% 3.23% 2.50% 1.73% 1.44% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate 209% 168% 194% 169% 125% ----------------------------------------------------------------------------------------------------------- Total return(g) 3.48% 4.34% .26% 1.16% (.99%) -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for 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 have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. The ratio of net expenses after expense waiver/reimbursement and after reduction for earnings and bank fee credits was 1.64% for the year ended May 31, 2008. (g) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- 40 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT CLASS C
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2008 2007 2006 2005 2004 Net asset value, beginning of period $4.73 $4.68 $4.79 $4.82 $4.94 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15(b) .15 .12 .08 .07 Net gains (losses) (both realized and unrealized) .02 .05 (.11) (.03) (.12) ----------------------------------------------------------------------------------------------------------- Total from investment operations .17 .20 .01 .05 (.05) ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) (.15) (.12) (.08) (.07) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.74 $4.73 $4.68 $4.79 $4.82 ----------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $10 $10 $15 $24 $38 ----------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) 1.80% 1.80% 1.83% 1.77% 1.73% ----------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) 1.65% 1.64% 1.64% 1.68% 1.73% ----------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.18% 3.24% 2.51% 1.73% 1.44% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate 209% 168% 194% 169% 125% ----------------------------------------------------------------------------------------------------------- Total return(g) 3.49% 4.34% .26% 1.16% (.99%) -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for 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 have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. The ratio of net expenses after expense waiver/reimbursement and after reduction for earnings and bank fee credits was 1.64% for the year ended May 31, 2008. (g) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 41 CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2008 2007 2006 2005 2004(B) Net asset value, beginning of period $4.74 $4.69 $4.79 $4.83 $4.90 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .20(c) .20 .17 .14 .03 Net gains (losses) (both realized and unrealized) .01 .05 (.10) (.04) (.07) ----------------------------------------------------------------------------------------------------------- Total from investment operations .21 .25 .07 .10 (.04) ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.20) (.17) (.14) (.03) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.74 $4.74 $4.69 $4.79 $4.83 ----------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $93 $55 $62 $31 $4 ----------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(d),(e) .60% .59% .62% .57% .63%(f) ----------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(e),(g),(h) .51% .54% .58% .57% .63%(f) ----------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.23% 4.37% 3.66% 2.98% 2.74%(f) ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate 209% 168% 194% 169% 125% ----------------------------------------------------------------------------------------------------------- Total return 4.45% 5.50% 1.56% 2.06% (.87%)(i) -----------------------------------------------------------------------------------------------------------
(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) Per share amount has been calculated using the average shares outstanding method. (d) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (e) 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. (f) Adjusted to an annual basis. (g) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (h) Expense ratio is before reduction for earnings and bank fee credits on cash balances. The ratio of net expenses after expense waiver/reimbursement and after reduction for earnings and bank fee credits was 0.50% for the year ended May 31, 2008. (i) Not annualized. -------------------------------------------------------------------------------- 42 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT CLASS R4
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2008 2007 2006 2005 2004 Net asset value, beginning of period $4.73 $4.68 $4.79 $4.82 $4.94 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .19(b) .19 .16 .13 .12 Net gains (losses) (both realized and unrealized) .02 .05 (.11) (.03) (.12) ----------------------------------------------------------------------------------------------------------- Total from investment operations .21 .24 .05 .10 -- ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.20) (.19) (.16) (.13) (.12) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.74 $4.73 $4.68 $4.79 $4.82 ----------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $5 $4 $19 $100 $115 ----------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) .90% .86% .88% .84% .81% ----------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) .76% .72% .72% .76% .81% ----------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.06% 4.09% 3.27% 2.66% 2.35% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate 209% 168% 194% 169% 125% ----------------------------------------------------------------------------------------------------------- Total return 4.41% 5.31% 1.19% 2.10% (.08%) -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for 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 have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. The ratio of net expenses after expense waiver/reimbursement and after reduction for earnings and bank fee credits was 0.75% for the year ended May 31, 2008. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 43 CLASS W
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2008 2007(B) Net asset value, beginning of period $4.73 $4.75 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18(c) .08 Net gains (losses) (both realized and unrealized) .02 (.02) ----------------------------------------------------------------------------------------------------------- Total from investment operations .20 .06 ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.19) (.08) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.74 $4.73 ----------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- ----------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(d),(e) 1.06% 1.00%(f) ----------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(e),(g),(h) .95% .95%(f) ----------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.87% 4.02%(f) ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate 209% 168% ----------------------------------------------------------------------------------------------------------- Total return 4.21% 1.42%(i) -----------------------------------------------------------------------------------------------------------
(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) Per share amount has been calculated using the average shares outstanding method. (d) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (e) 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. (f) Adjusted to an annual basis. (g) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (h) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended May 31, 2008 were less than 0.01% of average net assets. (i) Not annualized. -------------------------------------------------------------------------------- 44 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------ TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RiverSource Short Duration U.S. Government Fund (the Fund) (one of the portfolios constituting the RiverSource Government Income Series, Inc.) as of May 31, 2008, and the related statements of operations, changes in net assets, and financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The financial statements and financial highlights of the Fund for the periods presented through May 31, 2007, were audited by other auditors whose report dated July 20, 2007, expressed an unqualified opinion on those financial statements and financial highlights. We conducted our audit 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 financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of May 31, 2008, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audit provides a reasonable basis for our opinion. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 45 In our opinion, the 2008 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 of the RiverSource Government Income Series, Inc. at May 31, 2008, the results of its operations, changes in its net assets and the financial highlights for the year then ended, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota July 22, 2008 -------------------------------------------------------------------------------- 46 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 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, 2008 CLASS A
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00% U.S. Government Obligations........................... 38.48%
PAYABLE DATE PER SHARE June 25, 2007............................................... $0.01634 July 25, 2007............................................... 0.01800 Aug. 24, 2007............................................... 0.01800 Sept. 24, 2007.............................................. 0.01700 Oct. 26, 2007............................................... 0.01750 Nov. 26, 2007............................................... 0.01750 Dec. 17, 2007............................................... 0.01630 Jan. 28, 2008............................................... 0.01630 Feb. 27, 2008............................................... 0.01557 March 27, 2008.............................................. 0.01340 April 28, 2008.............................................. 0.01220 May 28, 2008................................................ 0.01330 Total distributions......................................... $0.19141
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 47 CLASS B
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00% U.S. Government Obligations........................... 38.48%
PAYABLE DATE PER SHARE June 25, 2007............................................... $0.01330 July 25, 2007............................................... 0.01497 Aug. 24, 2007............................................... 0.01504 Sept. 24, 2007.............................................. 0.01393 Oct. 26, 2007............................................... 0.01433 Nov. 26, 2007............................................... 0.01441 Dec. 17, 2007............................................... 0.01421 Jan. 28, 2008............................................... 0.01219 Feb. 27, 2008............................................... 0.01257 March 27, 2008.............................................. 0.01053 April 28, 2008.............................................. 0.00905 May 28, 2008................................................ 0.01034 Total distributions......................................... $0.15487
CLASS C
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00% U.S. Government Obligations........................... 38.48%
PAYABLE DATE PER SHARE June 25, 2007............................................... $0.01331 July 25, 2007............................................... 0.01505 Aug. 24, 2007............................................... 0.01505 Sept. 24, 2007.............................................. 0.01395 Oct. 26, 2007............................................... 0.01434 Nov. 26, 2007............................................... 0.01442 Dec. 17, 2007............................................... 0.01422 Jan. 28, 2008............................................... 0.01213 Feb. 27, 2008............................................... 0.01258 March 27, 2008.............................................. 0.01054 April 28, 2008.............................................. 0.00907 May 28, 2008................................................ 0.01036 Total distributions......................................... $0.15502
-------------------------------------------------------------------------------- 48 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT CLASS I
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00% U.S. Government Obligations........................... 38.48%
PAYABLE DATE PER SHARE June 25, 2007............................................... $0.01787 July 25, 2007............................................... 0.01949 Aug. 24, 2007............................................... 0.01949 Sept. 24, 2007.............................................. 0.01855 Oct. 26, 2007............................................... 0.01911 Nov. 26, 2007............................................... 0.01906 Dec. 17, 2007............................................... 0.01736 Jan. 28, 2008............................................... 0.01838 Feb. 27, 2008............................................... 0.01708 March 27, 2008.............................................. 0.01485 April 28, 2008.............................................. 0.01379 May 28, 2008................................................ 0.01480 Total distributions......................................... $0.20983
CLASS R4
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00% U.S. Government Obligations........................... 38.48%
PAYABLE DATE PER SHARE June 25, 2007............................................... $0.01690 July 25, 2007............................................... 0.01850 Aug. 24, 2007............................................... 0.01851 Sept. 24, 2007.............................................. 0.01754 Oct. 26, 2007............................................... 0.01805 Nov. 26, 2007............................................... 0.01804 Dec. 17, 2007............................................... 0.01666 Jan. 28, 2008............................................... 0.01702 Feb. 27, 2008............................................... 0.01609 March 27, 2008.............................................. 0.01390 April 28, 2008.............................................. 0.01276 May 28, 2008................................................ 0.01383 Total distributions......................................... $0.19780
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 49 CLASS W
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00% U.S. Government Obligations........................... 38.48%
PAYABLE DATE PER SHARE June 25, 2007............................................... $0.01615 July 25, 2007............................................... 0.01771 Aug. 24, 2007............................................... 0.01771 Sept. 24, 2007.............................................. 0.01678 Oct. 26, 2007............................................... 0.01729 Nov. 26, 2007............................................... 0.01731 Dec. 17, 2007............................................... 0.01616 Jan. 28, 2008............................................... 0.01592 Feb. 27, 2008............................................... 0.01529 March 27, 2008.............................................. 0.01319 April 28, 2008.............................................. 0.01190 May 28, 2008................................................ 0.01310 Total distributions......................................... $0.18851
The Fund also designates as distributions of long-term gains, to the extent necessary to fully distribute such capital gains, earnings and profits distributed to shareholders on the redemption of shares. -------------------------------------------------------------------------------- 50 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 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 101 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 None 901 S. Marquette Ave. since 2006 Court, 1998-2006; Attorney Minneapolis, MN 55402 Age 53 ----------------------------------------------------------------------------------------------------- Arne H. Carlson Board member Chair, RiverSource Funds, None 901 S. Marquette Ave. since 1999 1999-2006; former Governor of Minneapolis, MN 55402 Minnesota Age 73 ----------------------------------------------------------------------------------------------------- Pamela G. Carlton Board member President, Springboard -- Partners None 901 S. Marquette Ave. since 2007 in Cross Cultural Leadership Minneapolis, MN 55402 (consulting company) Age 53 ----------------------------------------------------------------------------------------------------- Patricia M. Flynn Board member Trustee Professor of Economics and None 901 S. Marquette Ave. since 2004 Management, Bentley College; former Minneapolis, MN 55402 Dean, McCallum Graduate School of Age 57 Business, Bentley College ----------------------------------------------------------------------------------------------------- Anne P. Jones Board member Attorney and Consultant None 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 73 ----------------------------------------------------------------------------------------------------- Jeffrey Laikind, CFA Board member Former Managing Director, Shikiar American Progressive 901 S. Marquette Ave. since 2005 Asset Management Insurance Minneapolis, MN 55402 Age 72 ----------------------------------------------------------------------------------------------------- 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 69 Board since 2007 -----------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 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 None 901 S. Marquette Ave. since 2004 Management, Inc. (private real Minneapolis, MN 55402 estate and asset management Age 55 company) ----------------------------------------------------------------------------------------------------- Alison Taunton-Rigby Board member Chief Executive Officer and Idera 901 S. Marquette Ave. since 2002 Director, RiboNovix, Inc. since Pharmaceutical, Inc. Minneapolis, MN 55402 2003 (biotechnology); former (biotechnology); Age 64 President, Forester Biotech Healthways, 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 None 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 47 and Chief Investment Officer, RiverSource Investments, LLC since 2005; Director, President, and Chief Executive Officer, Ameriprise Certificate Company since 2006; Chairman of the Board, Chief Executive Officer and President, RiverSource Distributors, Inc. 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 -- 2008 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 Director and Senior Vice President, Asset 172 Ameriprise 2006 Management, Products and Marketing, Financial Center RiverSource Investments, LLC since 2006; Minneapolis, MN 55474 Director and Vice President -- Asset Age 42 Management, Products and Marketing, RiverSource Distributors, Inc. since 2006; Managing Director and Global Head of Product, Morgan Stanley Investment Management, 2004-2006; President, Touchstone Investments, 2002-2004 ------------------------------------------------------------------------------------------ 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 44 Certificate Company since 2003; Senior Vice President -- Fixed Income, Ameriprise Financial, Inc., 2002-2006 and RiverSource Investments, LLC, 2004-2006 ------------------------------------------------------------------------------------------ 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 42 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; Chief Financial Center Financial Officer, RiverSource Distributors, Minneapolis, MN 55474 Inc. since 2006 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; Chief Counsel, RiverSource Distributors, Minneapolis, MN 55474 since 2006 Inc. since 2006; Vice President, General Age 48 Counsel and Secretary, Ameriprise Certificate Company since 2005; Vice President -- Asset Management Compliance, Ameriprise Financial, Inc., 2004-2005; Senior Vice President and Chief Compliance Officer, USBancorp Asset Management, 2002-2004 ------------------------------------------------------------------------------------------ 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 47 Voyageur Asset Management, 2000-2003 ------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 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 44 Compliance Director and Bank Secrecy Act Officer, American Express Centurion Bank, 2000-2003 ------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 54 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT ---------------------------------------------------------------------- RiverSource Investments, LLC ("RiverSource Investments" or the "investment manager"), 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 Investments provides investment advice and other services to the Fund and all RiverSource funds (collectively, the "Funds"). On an annual basis, the Fund's Board of Directors (the "Board"), including the independent Board members (the "Independent Directors"), considers renewal of the IMS Agreement. RiverSource Investments prepared detailed reports for the Board and its Contracts Committee in March and April 2008, 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 Investments addressing the services RiverSource Investments provides and Fund performance. The Board accords particular weight to the work, deliberations and conclusions of the Contracts, Investment Review and Compliance Committees in determining whether to continue the IMS Agreement. At the April 9-10, 2008 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 Investments: The Board analyzed various reports and presentations it had received detailing the services performed by RiverSource Investments, as well as its expertise, resources and capabilities. The Board specifically considered many developments during the past year concerning the services provided by RiverSource Investments, including, in particular, the continued investment in, and resources dedicated to, the Fund's operations, particularly in the areas of trading systems, new product initiatives, legal and compliance. Further, in connection with the Board's evaluation of the overall package of services provided by RiverSource Investments, the Board considered the quality of the administrative and transfer agency services provided by RiverSource Investments' affiliates to the Fund. The Board also reviewed the financial condition of RiverSource Investments (and its affiliates) and each 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 Investments). The Board concluded that the services being performed under the IMS Agreement were of a reasonably high quality, particularly in light of recent market conditions. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2008 ANNUAL REPORT 55 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT (continued) ---------------------------------------------------------- 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 concluded that RiverSource Investments and its affiliates were 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 2007. The Board observed that the Fund's investment performance reflected the interrelationship of particularly volatile market conditions with the investment strategies employed by the portfolio management team. Comparative Fees, Costs of Services Provided and the Profits Realized By RiverSource Investments 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 Investments' 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 slightly 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 -- 2008 ANNUAL REPORT -------------------------------------------------------------------------------- The Board also considered the expected profitability of RiverSource Investments and its affiliates in connection with RiverSource Investments providing investment management services to the Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to RiverSource Investments and Ameriprise Financial from managing and operating the Fund, including data showing comparative profitability over the past two 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 Investments 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 10, 2008, 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 -- 2008 ANNUAL REPORT 57 RIVERSOURCE 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., Member FINRA, and managed by RiverSource Investments, LLC. These companies are part of Ameriprise Financial, Inc. (RIVERSOURCE INVESTMENTS LOGO) (C) 2008 RiverSource Distributors, Inc. S-6042 AE (7/08)
Annual Report and Prospectus (RIVERSOURCE INVESTMENTS LOGO) RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND ANNUAL REPORT FOR THE PERIOD ENDED MAY 31, 2008 (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. (SINGLE STRATEGY FUNDS ICON)
TABLE OF CONTENTS -------------------------------------------------------------- Your Fund at a Glance............... 2 Manager Commentary.................. 5 The Fund's Long-term Performance ... 10 Fund Expenses Example............... 12 Portfolio of Investments............ 14 Financial Statements................ 25 Notes to Financial Statements....... 28 Report of Independent Registered Public Accounting Firm........... 46 Federal Income Tax Information...... 48 Board Members and Officers.......... 51 Approval of Investment Management Services Agreement............... 54 Proxy Voting........................ 56
(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. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 1 YOUR FUND AT A GLANCE ---------------------------------------------------------- FUND SUMMARY -------------------------------------------------------------------------------- > RiverSource U.S. Government Mortgage Fund (the Fund) Class A shares rose 4.31% (excluding sales charge) for the 12 months ended May 31, 2008. > The Fund underperformed its benchmark, the Lehman Brothers Mortgage-Backed Securities Index, which gained 7.44% during the same period. > The Fund performed in line with the Lipper U.S. Mortgage Funds Index, representing the Fund's peer group, which advanced 4.37% during the same time frame. ANNUALIZED TOTAL RETURNS (for period ended May 31, 2008) --------------------------------------------------------------------------------
Since 1 year 3 years 5 years inception(a) ----------------------------------------------------------------------------------- RiverSource U.S. Government Mortgage Fund Class A (excluding sales charge) +4.31% +3.55% +3.53% +4.18% ----------------------------------------------------------------------------------- Lehman Brothers Mortgage-Backed Securities Index (unmanaged) +7.44% +4.97% +4.61% +4.96% ----------------------------------------------------------------------------------- Lipper U.S. Mortgage Funds Index +4.37% +3.60% +3.48% +3.96% -----------------------------------------------------------------------------------
(a) Fund data is from Feb. 14, 2002. Lehman Brothers Mortgage-Backed Securities Index and Lipper peer group data is from March 1, 2002. (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 table above. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. See the Average Annual Total Returns table for performance of other share classes of the Fund. 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. -------------------------------------------------------------------------------- 2 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT -------------------------------------------------------------------------------- STYLE MATRIX ----------------------------------------
DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW
Shading within the style matrix indicates areas in which the Fund is designed to generally invest. 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 may serve 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 STATISTICS ---------------------------------------- Weighted average life(1) 6.9 years -------------------------------------------- Effective duration(2) 3.7 years -------------------------------------------- Weighted average bond rating(3) AAA --------------------------------------------
ANNUAL OPERATING EXPENSE RATIO (as of the current prospectus) ----------------------------------------
Net Total Expenses(a) ------------------------------------------------------ Class A 1.09% 0.89% ------------------------------------------------------ Class B 1.86% 1.65% ------------------------------------------------------ Class C 1.85% 1.65% ------------------------------------------------------ Class I 0.63% 0.48% ------------------------------------------------------ Class R4 0.93% 0.75% ------------------------------------------------------
(a) The Investment Manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2009, 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. (1) 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. (2) 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. (3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. Shares of the RiverSource U.S. Government Mortgage 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 U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 3 YOUR FUND AT A GLANCE (continued) ---------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS --------------------------------------------------------------------------------
AT MAY 31, 2008 SINCE WITHOUT SALES CHARGE 1 YEAR 3 YEARS 5 YEARS INCEPTION Class A (inception 2/14/02) +4.31% +3.55% +3.53% +4.18% ------------------------------------------------------------------------------- Class B (inception 2/14/02) +3.53% +2.77% +2.72% +3.41% ------------------------------------------------------------------------------- Class C (inception 2/14/02) +3.53% +2.77% +2.72% +3.40% ------------------------------------------------------------------------------- Class I (inception 3/4/04) +4.74% +3.97% N/A +3.86% ------------------------------------------------------------------------------- Class R4 (inception 2/14/02) +4.46% +3.79% +3.71% +4.36% ------------------------------------------------------------------------------- WITH SALES CHARGE Class A (inception 2/14/02) -0.65% +1.85% +2.52% +3.38% ------------------------------------------------------------------------------- Class B (inception 2/14/02) -1.46% +1.53% +2.37% +3.41% ------------------------------------------------------------------------------- Class C (inception 2/14/02) +2.53% +2.77% +2.72% +3.40% -------------------------------------------------------------------------------
AT JUNE 30, 2008 SINCE WITHOUT SALES CHARGE 1 YEAR 3 YEARS 5 YEARS INCEPTION Class A (inception 2/14/02) +4.34% +3.36% +3.39% +4.06% ------------------------------------------------------------------------------- Class B (inception 2/14/02) +3.55% +2.59% +2.61% +3.29% ------------------------------------------------------------------------------- Class C (inception 2/14/02) +3.55% +2.52% +2.62% +3.28% ------------------------------------------------------------------------------- Class I (inception 3/4/04) +4.77% +3.65% N/A +3.64% ------------------------------------------------------------------------------- Class R4 (inception 2/14/02) +4.28% +3.47% +3.52% +4.20% ------------------------------------------------------------------------------- WITH SALES CHARGE Class A (inception 2/14/02) -0.67% +1.73% +2.38% +3.27% ------------------------------------------------------------------------------- Class B (inception 2/14/02) -1.44% +1.35% +2.27% +3.29% ------------------------------------------------------------------------------- Class C (inception 2/14/02) +2.55% +2.52% +2.62% +3.28% -------------------------------------------------------------------------------
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 are available to institutional investors only. -------------------------------------------------------------------------------- 4 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT MANAGER COMMENTARY ------------------------------------------------------------- At May 31, 2008, approximately 55% 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 37, 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 34. Dear Shareholders, RiverSource U.S. Government Mortgage Fund (the Fund) Class A shares rose 4.31% (excluding sales charge) for the 12 months ended May 31, 2008. The Fund underperformed the Lehman Brothers Mortgage-Backed Securities Index (Lehman Index), which gained 7.44% during the same period. The Fund performed in line with the Lipper U.S. Mortgage Funds Index, representing the Fund's peer group, which advanced 4.37% during the same time frame. SIGNIFICANT PERFORMANCE FACTORS Overall, the mortgage market struggled, posting positive results but underperforming U.S. Treasuries during the 12-month period. Mortgage securities, including high quality, premium coupon securities, were swept up in the bond market turmoil, as concerns regarding subprime mortgages surfaced and significant losses on these lower quality mortgage securities SECTOR DIVERSIFICATION (at May 31, 2008; % of portfolio assets) ----------------------------------------------------------------- Asset-Backed 0.6% -------------------------------------------------------------- Commercial Mortgage-Backed 2.8% -------------------------------------------------------------- Mortgage-Backed(1) 91.0% -------------------------------------------------------------- U.S. Government Obligations & Agencies 0.9% -------------------------------------------------------------- Other(2) 4.7% --------------------------------------------------------------
(1) Of the 91.0%, 25.4% is due to forward commitment mortgage-backed securities activity. Short-term securities are held as collateral for these commitments. (2) Cash & Cash Equivalents. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 5 MANAGER COMMENTARY (continued) ------------------------------------------------- became evident. What had started in the mortgage sector then spread to all corners of the bond market, resulting in an en masse flight to quality. Heightened fears, in turn, dramatically reduced liquidity. In response, the Federal Reserve Board (the Fed) lowered interest rates an aggressive 325 basis points (3.25%) over the period and made other changes designed to support liquidity in the banking and financial systems. Securities with credit risk - especially those with mortgage-related credit risk - faced significant selling pressure during the July and August "credit panic." Although the market stabilized temporarily in the fall, November brought a fresh round of panic, as the market was spooked by increasing talk of an impending recession. The mortgage securities sector faced a period of deleveraging and forced selling of assets. At the same time, there were not enough buyers, as residential credit concerns not seen before came to the surface, and investors tried to figure out where fair value was. Following 10 months of extreme dislocation and high levels of volatility, the mortgage market finally rebounded beginning in mid-March, triggered by the Fed's non-traditional measures and willingness to provide liquidity to the markets. Mortgage securities continued to perform well through May. For the annual period overall, interest rates fell significantly, as investors fled riskier assets for the relative safety of U.S. Treasuries, pushing yields sharply lower. While yields moved lower across the yield curve, they did so more significantly in the shorter segments than at the long-term end, causing the U.S. Treasury yield curve to steepen over the annual period. QUALITY BREAKDOWN (at May 31, 2008; % of portfolio assets excluding cash equivalents and equities) ----------------------------------------------------------------- AAA bonds 99.6% -------------------------------------------------------------- AA bonds 0.2% -------------------------------------------------------------- BBB bonds 0.2% -------------------------------------------------------------- Non-investment grade bonds --% --------------------------------------------------------------
Bond ratings apply to the 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. -------------------------------------------------------------------------------- 6 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT -------------------------------------------------------------------------------- On the positive side, issue selection helped the Fund's results, particularly an emphasis on premium coupon securities. The Fund produced solid positive absolute returns for the annual period, but underperformed the Lehman Index. 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. Also, many of the Fund's long-held specified pools of mortgages helped its results during the period, as interest rates declined. These specified pools added some stability to the Fund's portfolio, given their attractive prepayment profile. The Fund's yield curve steepening bias, maintained throughout the annual period, further contributed to the Fund's performance, as short-term rates declined more than longer-term rates. Conversely, the Fund's duration positioning detracted from its relative results. We maintained the Fund's duration shorter than that of the Lehman Index throughout the annual period. This stance helped the Fund during the last two months of the fiscal year when interest rates rose. However, it hurt when interest rates declined with the unexpectedly strong flight-to-quality during the first 10 months of the period. Duration is a measure of the Fund's sensitivity to changes in interest rates. Another reason the Fund lagged the Lehman Index was its significant allocation to AAA-rated super-senior commercial mortgage-backed securities (CMBS). While these securities performed well in April and May, they lagged the Lehman Index for the period as a whole. An exposure to non-agency mortgage-backed securities also detracted; this sector of the fixed income market was especially hurt as concerns regarding credit broadened, and residential credit in particular, grew. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 7 MANAGER COMMENTARY (continued) ------------------------------------------------- CHANGES TO THE FUND'S PORTFOLIO During the first half of the annual period, we sought to take advantage of weakness in the mortgage market by shifting to a somewhat more aggressive strategy within the mortgage sector, as spreads, or the difference in yields between these securities and U.S. Treasuries, widened and valuations reached compelling levels. We reduced the Fund's position in agency pass-through mortgages and increased its exposure to non-agency pass-through mortgages and CMBS. In the last months of the fiscal year, we rotated out of some CMBS and into more non-agency pass-through mortgages, as spreads on these latter securities were comparatively more compelling. We also lengthened the Fund's duration a bit in May, though still maintaining a duration shorter than the Lehman Index. Even with these changes, 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 throughout the annual period. We maintained our focus on higher coupon mortgage securities and emphasized investment in more seasoned pools of mortgages. The Fund's portfolio turnover rate for the 12-month period was 354%.* * A significant portion of the turnover was the result of rolling-maturity mortgage securities, processing of prepayments and opportunistic changes we made at the margin in response to valuations or market developments. OUR FUTURE STRATEGY At the end of May, the market for high quality spread or non-Treasury, securities, finally appeared to be improving, and even lower quality bonds had rebounded from their lows. While economic growth over the coming months may not be as strong as earlier in the cycle, we expect the U.S. economy to narrowly avoid recession this year, as the economic stimulus package passed by Congress should help keep economic growth positive. However, we do believe that low interest rates and a weakened currency have combined to form an inflation problem that may weigh heavily on consumers and financial markets in the second half of this year and into 2009. To accommodate for this pressure, we believe that the Fed will eventually have to increase interest rates, and Treasury yields should continue to drift higher. -------------------------------------------------------------------------------- 8 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT -------------------------------------------------------------------------------- In this environment, we intend to position the Fund to take advantage of the compelling valuations we saw in the last months of the period and to participate in the recovery of high quality spread sectors, or non-Treasury sectors. We expect this recovery to continue over the months ahead, as fears ultimately subside and liquidity returns to the markets. We intend to maintain the Fund's premium coupon bias among its mortgage-backed holdings, as prepayments are expected to remain slow. We also view select pockets of non-agency mortgage-backed securities as attractively priced, though our focus is on those securities within this sector with superior credit enhancements. As we expect rates may well move higher over the coming months, we intend to maintain the Fund's shorter-than-Lehman Index duration. 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. (PHOTO - STEVE SCHROLL) Scott Kirby Portfolio Manager
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 -- 2008 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 5/31/08)* 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 --------------------------------------------------------------------------------
SINCE Results at May 31, 2008 1 YEAR 3 YEARS 5 YEARS INCEPTION(3) RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $9,935 $10,565 $11,325 $12,324 --------------------------------------------------------------------------------------------------- Average annual total return -0.65% +1.85% +2.52% +3.38% --------------------------------------------------------------------------------------------------- LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX(1) Cumulative value of $10,000 $10,744 $11,566 $12,528 $13,554 --------------------------------------------------------------------------------------------------- Average annual total return +7.44% +4.97% +4.61% +4.96% --------------------------------------------------------------------------------------------------- LIPPER U.S. MORTGAGE FUNDS INDEX(2) Cumulative value of $10,000 $10,437 $11,119 $11,865 $12,746 --------------------------------------------------------------------------------------------------- Average annual total return +4.37% +3.60% +3.48% +3.96% ---------------------------------------------------------------------------------------------------
Results for other share classes can be found on page 4. -------------------------------------------------------------------------------- 10 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT ------------------------------------------------------------------------------- (RiverSource U.S. Government Mortgage Fund Class A LINE GRAPH)
RIVERSOURCE U.S. GOVERNMENT MORTGAGE LEHMAN BROTHERS FUND CLASS A (INCLUDES SALES MORTGAGE-BACKED SECURITIES LIPPER U.S. MORTGAGE CHARGE) INDEX(1) FUNDS INDEX(2) ---------------------------- -------------------------- -------------------- 3/1/02 $ 9,525 $10,000 $10,000 5/02 9,692 10,169 10,128 5/03 10,363 10,822 10,744 5/04 10,495 10,984 10,887 5/05 11,102 11,719 11,463 5/06 11,115 11,785 11,489 5/07 11,815 12,615 12,213 5/08 12,324 13,554 12,746
(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 -- 2008 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, 2008. 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 -- 2008 ANNUAL REPORT --------------------------------------------------------------------------------
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED DEC. 1, 2007 MAY 31, 2008 THE PERIOD(A) EXPENSE RATIO ------------------------------------------------------------------------------------------- Class A ------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,008.80 $4.45 .89% ------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.44 $4.47 .89% ------------------------------------------------------------------------------------------- Class B ------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,005.00 $8.23 1.65% ------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.66 $8.27 1.65% ------------------------------------------------------------------------------------------- Class C ------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,003.00 $8.22 1.65% ------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.66 $8.27 1.65% ------------------------------------------------------------------------------------------- Class I ------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,010.80 $2.40 .48% ------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.48 $2.41 .48% ------------------------------------------------------------------------------------------- Class R4 ------------------------------------------------------------------------------------------- Actual(b) $1,000 $1,009.50 $3.75 .75% ------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.13 $3.77 .75% -------------------------------------------------------------------------------------------
(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 182/366 (to reflect the one-half year period). (b) Based on the actual return for the six months ended May 31, 2008: +0.88% for Class A, +0.50% for Class B, +0.30% for Class C, +1.08% for Class I and +0.95% for Class R4. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 13 PORTFOLIO OF INVESTMENTS -------------------------------------------------------------- MAY 31, 2008 (Percentages represent value of investments compared to net assets) INVESTMENTS IN SECURITIES
BONDS (126.8%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) U.S. GOVERNMENT OBLIGATIONS & AGENCIES (1.1%) U.S. Treasury Inflation-Indexed Bond 01-15-16 2.00% $4,300,920(i) $4,492,691 ----------------------------------------------------------------------------------- ASSET-BACKED (0.8%) Countrywide Asset-backed Ctfs Series 2007-7 Cl 2A2 10-25-37 2.55 1,200,000(h) 1,023,376 Fannie Mae Grantor Trust Series 2005-T4 Cl A1C 09-25-35 2.54 471,472(h) 466,846 Renaissance Home Equity Loan Trust Series 2007-2 Cl M4 06-25-37 6.31 195,000 29,889 Renaissance Home Equity Loan Trust Series 2007-2 Cl M5 06-25-37 6.66 130,000 18,734 Renaissance Home Equity Loan Trust Series 2007-2 Cl M6 06-25-37 7.01 190,000 25,101 Residential Asset Securities Series 2006-KS1 Cl A2 02-25-36 2.53 213,201(h) 207,371 Residential Asset Securities Series 2007-KS3 Cl AI2 04-25-37 2.57 1,700,000(h) 1,501,304 --------------- Total 3,272,621 ----------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (3.7%)(f) Citigroup/Deutsche Bank Commercial Mtge Trust Series 2007-CD4 Cl A2B 12-11-49 5.21 3,000,000 2,982,060 Credit Suisse Mtge Capital Ctfs Series 2007-C3 Cl A4 06-15-39 5.72 3,000,000 2,944,373 Federal Home Loan Mtge Corp Multifamily Structured Pass-Through Ctfs Series K001 Cl A2 04-25-16 5.65 2,139,458 2,171,686
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) GS Mtge Securities II Series 2007-EOP Cl J 03-06-20 3.57% $1,000,000(d,h) $883,204 Wachovia Bank Commercial Mtge Trust Series 2006-C29 Cl A4 11-15-48 5.31 6,000,000 5,804,170 --------------- Total 14,785,493 ----------------------------------------------------------------------------------- MORTGAGE-BACKED (121.2%)(f) Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-12 Cl 2A1 03-25-36 5.69 612,970(c) 492,449 Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2006-1 Cl 2A1 03-25-36 5.92 164,558(c) 142,959 American Home Mtge Assets Collateralized Mtge Obligation Series 2007-2 Cl A2A 03-25-47 2.56 1,215,732(c) 765,594 American Home Mtge Investment Trust Collateralized Mtge Obligation Series 2007-1 Cl GA1C 05-25-47 2.58 1,779,088(c) 1,379,351 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 1A1 01-25-34 6.00 528,591 447,252 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 4A1 01-25-19 4.75 272,901 267,102 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2006-9 Cl 1CB1 01-25-37 6.00 2,543,137 2,277,300
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 14 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Banc of America Funding Collateralized Mtge Obligation Series 2006-2 Cl N1 11-25-46 7.25% $72,081(d,l) $45,051 Banc of America Funding Collateralized Mtge Obligation Series 2006-A Cl 3A2 02-20-36 5.87 666,149(c) 524,866 Banc of America Funding Collateralized Mtge Obligation Series 2007-8 Cl 1A1 10-25-37 6.00 993,220 889,398 Banc of America Mtge Securities Collateralized Mtge Obligation Series 2005-9 Cl 3A3 10-25-20 5.00 1,592,199 1,541,261 Banc of America Mtge Securities Collateralized Mtge Obligation Series 2007-3 Cl 1A2 09-25-37 6.00 945,284 863,459 Barclays Capital LLC Trust Collateralized Mtge Obligation Series 2007-AA4 Cl 11A1 06-25-47 6.21 885,507(c) 673,313 ChaseFlex Trust Collateralized Mtge Obligation Series 2005-2 Cl 2A2 06-25-35 6.50 525,395 505,036 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-8CB Cl A13 05-25-37 7.73 1,913,840(e) 295,210 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-20CB Cl 1A1 10-25-33 5.50 4,788,620 4,525,246 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-50CB Cl 2A1 11-25-35 6.00 924,601 790,967 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 2A3 11-25-35 5.50 449,068 424,899
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-6CB Cl 1A1 04-25-35 7.50% $369,314 $354,127 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-2CB Cl A11 03-25-36 6.00 1,430,561 1,235,201 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-45T1 Cl 2A5 02-25-37 6.00 946,746 864,794 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-22 Cl 2A16 09-25-37 6.50 5,061,525 4,460,469 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-25 Cl 1A1 11-25-37 6.50 929,777 847,223 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OA9 Cl A2 06-25-47 2.74 1,234,609(h) 896,768 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OH3 Cl A3 09-25-47 2.89 1,874,154(h) 1,082,453 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-27 Cl 2A1 12-25-35 5.50 860,782 814,515 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-HYB1 Cl 6A1 03-25-35 5.11 968,704(c) 916,164 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00 453,653(d) 427,552 Countrywide Home Loans Collateralized Mtge Obligation Series 2006-HYB1 Cl 1A1 03-20-36 5.35 419,902(c) 329,552
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 15
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Countrywide Home Loans Collateralized Mtge Obligation Series 2007-HY3 Cl 4A1 06-25-47 6.00% $1,445,293(c) $1,380,794 Downey Savings & Loan Assn Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR5 Cl X1 08-19-45 5.30 2,603,432(e) 13,424 Federal Home Loan Mtge Corp 06-01-38 6.00 12,400,000(b) 12,589,868 06-01-38 6.50 20,500,000(b) 21,159,853 Federal Home Loan Mtge Corp #1B7116 08-01-36 5.89 3,958,945(c) 4,040,749 Federal Home Loan Mtge Corp #1J0149 11-01-36 6.10 2,120,228(c) 2,170,979 Federal Home Loan Mtge Corp #1J1445 01-01-37 5.89 2,298,779(c) 2,343,076 Federal Home Loan Mtge Corp #1J1621 05-01-37 5.89 3,029,389(c) 3,097,581 Federal Home Loan Mtge Corp #555140 03-01-10 8.00 8,533 8,656 Federal Home Loan Mtge Corp #555300 10-01-17 8.00 201,697 213,052 Federal Home Loan Mtge Corp #783049 03-01-35 4.85 2,952,389(c) 2,934,350 Federal Home Loan Mtge Corp #A10892 07-01-33 6.00 521,586 533,752 Federal Home Loan Mtge Corp #A15111 10-01-33 6.00 829,965 846,902 Federal Home Loan Mtge Corp #A21059 04-01-34 6.50 484,631 501,790 Federal Home Loan Mtge Corp #A25174 08-01-34 6.50 432,220 447,523 Federal Home Loan Mtge Corp #C53098 06-01-31 8.00 277,250 299,960 Federal Home Loan Mtge Corp #C53878 12-01-30 5.50 892,657 891,346 Federal Home Loan Mtge Corp #C68876 07-01-32 7.00 131,082 139,037 Federal Home Loan Mtge Corp #C69665 08-01-32 6.50 2,316,643 2,410,974 Federal Home Loan Mtge Corp #C79930 06-01-33 5.50 1,327,326 1,323,302
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #D95232 03-01-22 6.50% $232,242 $241,454 Federal Home Loan Mtge Corp #D95371 04-01-22 6.50 272,940 284,650 Federal Home Loan Mtge Corp #E00285 01-01-09 7.00 15,586 15,816 Federal Home Loan Mtge Corp #E81240 06-01-15 7.50 659,320 690,168 Federal Home Loan Mtge Corp #E88036 02-01-17 6.50 1,012,863 1,062,212 Federal Home Loan Mtge Corp #E88468 12-01-16 6.50 265,435 281,426 Federal Home Loan Mtge Corp #E89232 04-01-17 7.00 440,549 463,453 Federal Home Loan Mtge Corp #E92454 11-01-17 5.00 1,392,418 1,394,098 Federal Home Loan Mtge Corp #E93685 01-01-18 5.50 1,148,587 1,166,933 Federal Home Loan Mtge Corp #E99684 10-01-18 5.00 349,016 349,579 Federal Home Loan Mtge Corp #G01169 01-01-30 5.50 1,466,882 1,465,644 Federal Home Loan Mtge Corp #G01535 04-01-33 6.00 1,938,097 1,997,022 Federal Home Loan Mtge Corp #G02757 06-01-36 5.00 10,930,003 10,582,633 Federal Home Loan Mtge Corp #G03419 07-01-37 6.00 4,530,646 4,604,693 Federal Home Loan Mtge Corp #G12101 11-01-18 5.00 718,363 718,332 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 237 Cl IO 05-15-36 6.60 1,669,451(e) 441,164 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2590 Cl BI 02-15-14 35.06 88,540(e) 486 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2639 Cl UI 03-15-22 6.01 1,078,623(e) 152,116
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 16 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2718 Cl IA 10-15-22 0.00% $90,936(e) $512 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2795 Cl IY 07-15-17 15.27 406,810(e) 33,609 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2824 Cl EI 09-15-20 12.05 2,473,120(e) 216,011 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only/Inverse Floater Series 2471 Cl SI 03-15-32 33.06 260,114(e,g) 29,140 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only/Inverse Floater Series 2817 Cl SA 06-15-32 39.93 891,221(e,g) 69,953 Federal Natl Mtge Assn 06-01-23 6.00 3,000,000(b) 3,078,750 06-01-38 5.00 2,500,000(b) 2,414,845 06-01-38 5.50 38,500,000(b) 38,223,261 06-01-38 6.00 34,500,000(b) 34,995,937 06-01-38 7.00 10,000,000(b) 10,509,379 Federal Natl Mtge Assn #190353 08-01-34 5.00 1,560,603 1,512,468 Federal Natl Mtge Assn #252409 03-01-29 6.50 1,312,494 1,360,800 Federal Natl Mtge Assn #254759 06-01-18 4.50 1,906,486 1,873,308 Federal Natl Mtge Assn #254793 07-01-33 5.00 2,167,634 2,102,808 Federal Natl Mtge Assn #254916 09-01-23 5.50 1,747,428 1,752,688 Federal Natl Mtge Assn #256135 02-01-36 5.50 7,089,155 6,982,419 Federal Natl Mtge Assn #313470 08-01-10 7.50 123,541 126,959
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #323362 11-01-28 6.00% $2,571,227 $2,632,535 Federal Natl Mtge Assn #323715 05-01-29 6.00 475,473(j) 486,810 Federal Natl Mtge Assn #344909 04-01-25 8.00 632,862 689,044 Federal Natl Mtge Assn #357514 03-01-34 5.50 2,269,077 2,261,490 Federal Natl Mtge Assn #483691 12-01-28 7.00 1,114,067 1,203,903 Federal Natl Mtge Assn #487757 09-01-28 7.50 732,756 791,291 Federal Natl Mtge Assn #514704 01-01-29 6.00 737,157 754,734 Federal Natl Mtge Assn #545008 06-01-31 7.00 1,356,663(j) 1,451,409 Federal Natl Mtge Assn #545339 11-01-31 6.50 225,219 236,360 Federal Natl Mtge Assn #545818 07-01-17 6.00 2,350,827 2,424,976 Federal Natl Mtge Assn #545864 08-01-17 5.50 1,336,736(j) 1,362,149 Federal Natl Mtge Assn #555063 11-01-17 5.50 966,547 984,735 Federal Natl Mtge Assn #555458 05-01-33 5.50 1,599,246 1,592,753 Federal Natl Mtge Assn #555528 04-01-33 6.00 2,026,019 2,068,629 Federal Natl Mtge Assn #555734 07-01-23 5.00 698,891 684,296 Federal Natl Mtge Assn #555740 08-01-18 4.50 3,270,906 3,215,964 Federal Natl Mtge Assn #581418 06-01-31 7.00 856,388 908,832 Federal Natl Mtge Assn #583088 06-01-29 6.00 2,670,157 2,755,182 Federal Natl Mtge Assn #592270 01-01-32 6.50 729,869 768,171 Federal Natl Mtge Assn #596505 08-01-16 6.50 156,686 164,223 Federal Natl Mtge Assn #601416 11-01-31 6.50 284,642 297,825 Federal Natl Mtge Assn #624979 01-01-32 6.00 685,285 703,469
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 17
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #626670 03-01-32 7.00% $487,558 $524,520 Federal Natl Mtge Assn #627426 03-01-17 6.50 448,654(j) 470,822 Federal Natl Mtge Assn #630992 09-01-31 7.00 1,784,261(j) 1,921,590 Federal Natl Mtge Assn #630993 09-01-31 7.50 1,907,135 2,058,878 Federal Natl Mtge Assn #631388 05-01-32 6.50 1,499,570 1,577,151 Federal Natl Mtge Assn #632412 12-01-17 5.50 1,038,474 1,057,905 Federal Natl Mtge Assn #632856 03-01-17 6.00 467,362 481,322 Federal Natl Mtge Assn #633674 06-01-32 6.50 821,365 867,090 Federal Natl Mtge Assn #635231 04-01-32 7.00 74,215 79,001 Federal Natl Mtge Assn #635908 04-01-32 6.50 1,049,474 1,104,095 Federal Natl Mtge Assn #636812 04-01-32 7.00 109,906 117,565 Federal Natl Mtge Assn #640200 10-01-31 9.50 102,210(j) 115,356 Federal Natl Mtge Assn #640207 03-01-17 7.00 38,446 39,636 Federal Natl Mtge Assn #640208 04-01-17 7.50 47,347 48,563 Federal Natl Mtge Assn #644805 05-01-32 7.00 985,430 1,054,090 Federal Natl Mtge Assn #645053 05-01-32 7.00 533,370 565,313 Federal Natl Mtge Assn #646189 05-01-32 6.50 348,126 361,866 Federal Natl Mtge Assn #654071 09-01-22 6.50 537,071 557,375 Federal Natl Mtge Assn #654685 11-01-22 6.00 564,210 577,088 Federal Natl Mtge Assn #655635 08-01-32 6.50 777,047(j) 812,667 Federal Natl Mtge Assn #656514 09-01-17 6.50 1,016,455 1,066,108 Federal Natl Mtge Assn #660186 11-01-32 6.00 2,187,397 2,251,266
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #663651 10-01-17 5.50% $352,699 $358,818 Federal Natl Mtge Assn #663667 11-01-17 5.50 235,448 239,550 Federal Natl Mtge Assn #665752 09-01-32 6.50 1,109,057 1,152,830 Federal Natl Mtge Assn #667302 01-01-33 7.00 550,462(j) 587,484 Federal Natl Mtge Assn #667604 10-01-32 5.50 517,254(j) 515,686 Federal Natl Mtge Assn #670382 09-01-32 6.00 1,079,116 1,101,811 Federal Natl Mtge Assn #676683 12-01-32 6.00 1,212,942 1,238,451 Federal Natl Mtge Assn #677089 01-01-33 5.50 604,313(j) 602,481 Federal Natl Mtge Assn #677294 01-01-33 6.00 1,569,876 1,602,893 Federal Natl Mtge Assn #681080 02-01-18 5.00 826,149(j) 826,888 Federal Natl Mtge Assn #682229 03-01-33 5.50 4,246,170 4,233,299 Federal Natl Mtge Assn #684585 02-01-33 5.50 1,464,728(j) 1,463,765 Federal Natl Mtge Assn #684843 02-01-18 5.50 1,494,441 1,520,475 Federal Natl Mtge Assn #684853 03-01-33 6.50 214,672 223,581 Federal Natl Mtge Assn #688002 03-01-33 5.50 1,392,558 1,393,145 Federal Natl Mtge Assn #689026 05-01-33 5.50 373,518 372,993 Federal Natl Mtge Assn #689093 07-01-28 5.50 929,197(j) 927,832 Federal Natl Mtge Assn #694628 04-01-33 5.50 1,996,943 1,998,359 Federal Natl Mtge Assn #694795 04-01-33 5.50 2,477,920 2,479,152 Federal Natl Mtge Assn #695460 04-01-18 5.50 1,912,678 1,948,255 Federal Natl Mtge Assn #697145 03-01-23 5.50 1,159,619 1,171,711 Federal Natl Mtge Assn #699424 04-01-33 5.50 1,531,190 1,532,025
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 18 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #701101 04-01-33 6.00% $2,001,378 $2,040,343 Federal Natl Mtge Assn #704610 06-01-33 5.50 2,021,380 2,014,621 Federal Natl Mtge Assn #705655 05-01-33 5.00 705,521(j) 684,422 Federal Natl Mtge Assn #708503 05-01-33 6.00 272,500 279,523 Federal Natl Mtge Assn #708504 05-01-33 6.00 582,858 597,858 Federal Natl Mtge Assn #710780 05-01-33 6.00 217,183 221,411 Federal Natl Mtge Assn #711206 05-01-33 5.50 1,309,482 1,305,104 Federal Natl Mtge Assn #711239 07-01-33 5.50 534,394 532,607 Federal Natl Mtge Assn #711501 05-01-33 5.50 753,775 754,730 Federal Natl Mtge Assn #720378 06-01-18 4.50 1,508,816 1,482,558 Federal Natl Mtge Assn #723771 08-01-28 5.50 843,004 841,765 Federal Natl Mtge Assn #725017 12-01-33 5.50 2,792,541(j) 2,783,203 Federal Natl Mtge Assn #725232 03-01-34 5.00 1,653,725 1,604,268 Federal Natl Mtge Assn #725424 04-01-34 5.50 9,203,835 9,173,059 Federal Natl Mtge Assn #725425 04-01-34 5.50 2,638,823 2,630,807 Federal Natl Mtge Assn #725684 05-01-18 6.00 712,172 733,107 Federal Natl Mtge Assn #725773 09-01-34 5.50 1,824,074 1,816,265 Federal Natl Mtge Assn #726940 08-01-23 5.50 1,224,650 1,237,684 Federal Natl Mtge Assn #730153 08-01-33 5.50 733,862 731,408 Federal Natl Mtge Assn #733367 08-01-23 5.50 974,742 984,841 Federal Natl Mtge Assn #735212 12-01-34 5.00 8,756,092 8,486,022 Federal Natl Mtge Assn #735841 11-01-19 4.50 5,937,809 5,821,484
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #743524 11-01-33 5.00% $1,789,731 $1,736,207 Federal Natl Mtge Assn #743579 11-01-33 5.50 1,504,308 1,499,278 Federal Natl Mtge Assn #747339 10-01-23 5.50 1,142,297 1,153,659 Federal Natl Mtge Assn #753507 12-01-18 5.00 945,168(j) 947,190 Federal Natl Mtge Assn #753940 12-01-18 5.00 851,458 852,220 Federal Natl Mtge Assn #759342 01-01-34 6.50 381,121 398,596 Federal Natl Mtge Assn #761141 12-01-18 5.00 1,377,213 1,378,445 Federal Natl Mtge Assn #765760 02-01-19 5.00 849,025 849,785 Federal Natl Mtge Assn #766641 03-01-34 5.00 2,884,354 2,795,390 Federal Natl Mtge Assn #770403 04-01-34 5.00 1,451,871 1,407,090 Federal Natl Mtge Assn #776962 04-01-29 5.00 1,315,164 1,282,244 Federal Natl Mtge Assn #779676 06-01-34 5.00 2,565,088 2,485,971 Federal Natl Mtge Assn #785506 06-01-34 5.00 5,529,993 5,359,427 Federal Natl Mtge Assn #793622 09-01-34 5.50 6,137,512(j) 6,111,236 Federal Natl Mtge Assn #797232 09-01-34 5.50 6,989,979 6,960,053 Federal Natl Mtge Assn #878661 02-01-36 5.50 1,901,131(j) 1,875,352 Federal Natl Mtge Assn #881629 02-01-36 5.50 1,268,917 1,251,710 Federal Natl Mtge Assn #886020 07-01-36 6.50 1,017,385 1,053,042 Federal Natl Mtge Assn #886291 07-01-36 7.00 743,892 789,855 Federal Natl Mtge Assn #888414 11-01-35 5.00 3,923,707(j) 3,799,007 Federal Natl Mtge Assn #893101 10-01-36 6.50 2,500,343 2,581,057 Federal Natl Mtge Assn #894800 12-01-36 6.50 3,740,025(j) 3,860,758
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 19
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #902818 11-01-36 5.91% $2,825,072(c) $2,891,348 Federal Natl Mtge Assn #919341 05-01-37 6.50 3,269,493(j) 3,374,341 Federal Natl Mtge Assn #923744 04-01-37 6.50 1,654,473 1,697,107 Federal Natl Mtge Assn #928046 01-01-37 6.00 3,807,292 3,867,138 Federal Natl Mtge Assn #928146 03-01-37 6.00 5,169,503 5,250,761 Federal Natl Mtge Assn #928771 10-01-37 8.00 3,408,880 3,631,005 Federal Natl Mtge Assn #928870 11-01-37 8.50 239,415 250,050 Federal Natl Mtge Assn #959716 11-01-37 7.00 9,630,157 10,129,347 Federal Natl Mtge Assn #960606 10-01-36 5.50 3,632,841 3,617,288 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-119 Cl GI 12-25-33 7.32 488,869(e) 125,305 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-63 Cl IP 07-25-33 7.52 1,944,111(e) 492,141 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12-25-31 9.86 436,843(e) 75,018 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2004-84 Cl GI 12-25-22 10.56 194,871(e) 26,725 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2005-70 Cl YJ 08-25-35 18.49 2,373,126(e) 324,056
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 6.57% $1,461,339(e) $392,232 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 379 Cl 2 05-25-37 6.52 2,812,473(e) 733,339 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-133 Cl GB 12-25-26 8.00 275,070 290,886 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2006-60 Cl JF 10-25-35 2.82 4,192,513(h) 4,129,683 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2006-90 Cl FE 09-25-36 2.84 7,117,965(h) 7,080,705 Govt Natl Mtge Assn 06-01-38 5.50 5,000,000(b) 5,000,000 06-01-38 6.00 6,000,000(b) 6,106,872 Govt Natl Mtge Assn #3931 12-20-36 6.00 4,210,058 4,289,483 Govt Natl Mtge Assn #518371 02-15-30 7.00 119,360 127,774 Govt Natl Mtge Assn #528344 03-15-30 7.00 364,144 389,812 Govt Natl Mtge Assn #556293 12-15-31 6.50 361,966 375,902 Govt Natl Mtge Assn #583182 02-15-32 6.50 561,556 582,649 Govt Natl Mtge Assn #595256 12-15-32 6.00 320,806 327,904 Govt Natl Mtge Assn #619613 09-15-33 5.00 1,279,731 1,251,497 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-AR25 Cl 3A3 09-25-36 18.17 10,587,645(e) 78,442
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 20 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR8 Cl AX1 04-25-35 4.50% $5,645,949(e) $14,997 JP Morgan Mtge Trust Collateralized Mtge Obligation Series 2004-S2 4A5 11-25-34 6.00 958,629 820,077 Lehman XS Trust Collateralized Mtge Obligation Series 2007-5H Cl 1A1 05-25-37 6.50 5,114,512 4,529,456 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-2 Cl 4A1 02-25-19 5.00 391,482 386,712 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-7 Cl 8A1 08-25-19 5.00 348,417 319,670 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-8 Cl 7A1 09-25-19 5.00 495,109 462,050 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2005-3 Cl 1A2 04-25-35 5.50 1,537,000 1,315,026 MASTR Asset Securitization Trust Collateralized Mtge Obligation Series 2004-10 Cl 1A1 10-25-19 4.50 1,096,151 1,059,156 Morgan Stanley Mtge Loan Trust Collateralized Mtge Obligation Series 2007-12 Cl 3A22 08-25-37 6.00 959,840 883,637 Structured Adjustable Rate Mtge Loan Trust Collateralized Mtge Obligation Series 2005-15 Cl 4A1 07-25-35 5.50 1,018,147(c) 966,396 Structured Asset Securities Collateralized Mtge Obligation Series 2003-33H Cl 1A1 10-25-33 5.50 1,194,641 1,130,429
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2004-CB2 Cl 6A 07-25-19 4.50% $608,834 $559,488 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2005-AR14 Cl 2A1 12-25-35 5.28 397,597(c) 389,808 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2006-AR10 Cl 1A1 09-25-36 5.93 1,850,585(c) 1,819,829 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-10 Cl A1 10-25-35 5.00 2,291,520 2,051,827 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-5 Cl 2A1 05-25-35 5.50 911,639 886,854 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR12 Cl 1A1 09-25-36 6.02 1,768,830(c) 1,746,937 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR12 Cl 2A1 09-25-36 6.10 2,114,520(c) 2,035,424 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR6 Cl 5A1 03-25-36 5.11 868,152(c) 838,905 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2007-11 Cl A68 08-25-37 6.00 945,828 893,164 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2007-14 Cl 1A2 10-25-37 6.00 945,044 846,257
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 21
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2007-15 Cl A1 11-25-37 6.00% $1,897,235(b) $1,848,322 --------------- Total 481,158,649 ----------------------------------------------------------------------------------- TOTAL BONDS (Cost: $509,703,963) $503,709,454 -----------------------------------------------------------------------------------
MONEY MARKET FUND (6.3%) SHARES VALUE(A) RiverSource Short-Term Cash Fund, 2.60% 24,895,772(k) $24,895,772 ------------------------------------------------------------------------------------ TOTAL MONEY MARKET FUND (Cost: $24,895,772) $24,895,772 ------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN SECURITIES (Cost: $534,599,735)(m) $528,605,226 ====================================================================================
INVESTMENTS IN DERIVATIVES FUTURES CONTRACTS OUTSTANDING AT MAY 31, 2008
NUMBER OF UNREALIZED CONTRACTS NOTIONAL EXPIRATION APPRECIATION CONTRACT DESCRIPTION LONG (SHORT) MARKET VALUE DATE (DEPRECIATION) --------------------------------------------------------------------------------------------------- U.S. Long Bond, 20-year (71) $(8,127,281) June 2008 $119,161 U.S. Treasury Note, 2-year (89) (18,745,625) Sept. 2008 40,172 U.S. Treasury Note, 5-year (43) (4,763,594) June 2008 65,769 U.S. Treasury Note, 5-year (14) (1,539,125) Sept. 2008 9,062 U.S. Treasury Note, 10-year (235) (26,778,986) June 2008 656,463 U.S. Treasury Note, 10-year (141) (15,849,281) Sept. 2008 (35,497) --------------------------------------------------------------------------------------------------- Total $(75,803,892) $855,130 ---------------------------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS (a) Securities are valued by using procedures described in Note 1 to the financial statements. (b) At May 31, 2008, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $137,117,630. See Note 1 to the financial statements. (c) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on May 31, 2008. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security may be 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, 2008, the value of these securities amounted to $1,355,807 or 0.3% of net assets. (e) 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, 2008. -------------------------------------------------------------------------------- 22 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT NOTES TO PORTFOLIO OF INVESTMENTS (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) 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, 2008. At May 31, 2008, the value of inverse floaters represented 0.02% of net assets. (h) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 2008. (i) 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. (j) At May 31, 2008, investments in securities included securities valued at $3,681,169 that were partially pledged as collateral to cover initial margin deposits on open interest rate futures contracts. (k) Affiliated Money Market Fund -- See Note 5 to the financial statements. The rate shown is the seven-day current annualized yield at May 31, 2008. (l) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). These securities may be valued at fair value according to procedures approved, in good faith, by the Fund's Board of Directors. Information concerning such security holdings at May 31, 2008, is as follows
ACQUISITION SECURITY DATES COST --------------------------------------------------------------------------------- Banc of America Funding* Series 2006-2 Cl N1 7.25% 2046 11-14-06 $71,453
* Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. (m) At May 31, 2008, the cost of securities for federal income tax purposes was $538,772,843 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $3,064,212 Unrealized depreciation (13,231,829) ------------------------------------------------------------------------------ Net unrealized depreciation $(10,167,617) ------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 23 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. -------------------------------------------------------------------------------- 24 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT FINANCIAL STATEMENTS ----------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES MAY 31, 2008 ASSETS Investments in securities, at value Unaffiliated issuers (identified cost $509,703,963) $503,709,454 Affiliated money market fund (identified cost $24,895,772) 24,895,772 ---------------------------------------------------------------------------- Total investments in securities (identified cost $534,599,735) 528,605,226 Cash 42,211 Capital shares receivable 4,042,641 Dividends and accrued interest receivable 2,093,020 Receivable for investment securities sold 6,296,673 ---------------------------------------------------------------------------- Total assets 541,079,771 ---------------------------------------------------------------------------- LIABILITIES Dividends payable to shareholders 101,502 Capital shares payable 322,374 Payable for investment securities purchased 6,049,223 Payable for securities purchased on a forward-commitment basis 137,117,630 Variation margin payable 147,844 Accrued investment management services fees 5,155 Accrued distribution fees 29,414 Accrued transfer agency fees 597 Accrued administrative services fees 752 Accrued plan administration services fees 8,997 Other accrued expenses 102,373 ---------------------------------------------------------------------------- Total liabilities 143,885,861 ---------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $397,193,910 ============================================================================ REPRESENTED BY Capital stock -- $.01 par value $ 796,061 Additional paid-in capital 403,222,558 Undistributed net investment income 69,436 Accumulated net realized gain (loss) (1,754,766) Unrealized appreciation (depreciation) on investments (5,139,379) ---------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $397,193,910 ============================================================================
Net assets applicable to outstanding shares: Class A $ 95,365,293 Class B $ 33,665,806 Class C $ 4,185,697 Class I $221,547,618 Class R4 $ 42,429,496 Net asset value per share of outstanding Class A capital stock: shares(1) 19,102,220 $ 4.99 Class B shares 6,741,320 $ 4.99 Class C shares 838,003 $ 4.99 Class I shares 44,419,486 $ 4.99 Class R4 shares 8,505,084 $ 4.99 -------------------------------------------------------------------------------------------
(1) The maximum offering price per share for Class A is $5.24. The offering price is calculated by dividing the net asset value by 1.0 minus the maximum sales charge of 4.75%. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 25 STATEMENT OF OPERATIONS YEAR ENDED MAY 31, 2008 INVESTMENT INCOME Income: Interest $21,978,182 Income distributions from affiliated money market fund 199,305 --------------------------------------------------------------------------- Total income 22,177,487 --------------------------------------------------------------------------- Expenses: Investment management services fees 1,958,404 Distribution fees Class A 260,643 Class B 373,486 Class C 45,007 Transfer agency fees Class A 221,852 Class B 83,847 Class C 9,870 Class R4 21,055 Administrative services fees 285,601 Plan administration services fees -- Class R4 105,276 Compensation of board members 7,704 Custodian fees 94,369 Printing and postage 97,099 Registration fees 67,153 Professional fees 40,613 Other 14,697 --------------------------------------------------------------------------- Total expenses 3,686,676 Expenses waived/reimbursed by the Investment Manager and its affiliates (702,554) Earnings and bank fee credits on cash balances (8,343) --------------------------------------------------------------------------- Total net expenses 2,975,779 --------------------------------------------------------------------------- Investment income (loss) -- net 19,201,708 --------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions 5,541,748 Futures contracts (5,686,855) Swap transactions (738,697) --------------------------------------------------------------------------- Net realized gain (loss) on investments (883,804) Net change in unrealized appreciation (depreciation) on investments 282,877 --------------------------------------------------------------------------- Net gain (loss) on investments (600,927) --------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $18,600,781 ===========================================================================
The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 26 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED MAY 31, 2008 2007 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 19,201,708 $ 12,425,612 Net realized gain (loss) on investments (883,804) 697,290 Net change in unrealized appreciation (depreciation) on investments 282,877 1,881,245 -------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 18,600,781 15,004,147 -------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (4,636,312) (5,407,728) Class B (1,375,945) (1,999,233) Class C (166,238) (214,172) Class I (10,669,521) (3,051,378) Class R4 (1,927,487) (1,761,395) -------------------------------------------------------------------------------------- Total distributions (18,775,503) (12,433,906) -------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS Proceeds from sales Class A shares 21,261,899 29,049,243 Class B shares 7,521,919 9,006,830 Class C shares 493,948 470,592 Class I shares 60,497,906 201,892,945 Class R4 shares 3,560,740 5,512,362 Reinvestment of distributions at net asset value Class A shares 4,221,397 4,873,804 Class B shares 1,272,184 1,827,201 Class C shares 153,418 194,782 Class I shares 10,765,444 2,900,308 Class R4 shares 1,945,056 1,758,106 Payments for redemptions Class A shares (40,583,767) (51,596,469) Class B shares (19,411,598) (31,868,944) Class C shares (1,336,741) (2,626,838) Class I shares (57,241,980) (2,611,222) Class R4 shares (2,867,441) (2,593,585) -------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (9,747,616) 166,189,115 -------------------------------------------------------------------------------------- Total increase (decrease) in net assets (9,922,338) 168,759,356 Net assets at beginning of year 407,116,248 238,356,892 -------------------------------------------------------------------------------------- Net assets at end of year $397,193,910 $407,116,248 ====================================================================================== Undistributed net investment income $ 69,436 $ 239,916 --------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 27 NOTES TO FINANCIAL STATEMENTS -------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RiverSource U.S. Government Mortgage Fund (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 of Directors (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 are sold without a front-end sales charge or CDSC and are offered to qualifying institutional investors. At May 31, 2008, RiverSource Investments, LLC (RiverSource Investments or the Investment Manager) and the RiverSource affiliated funds-of-funds owned 100% of Class I shares. At May 31, 2008, the Investment Manager, RiverSource Life Insurance Company and the RiverSource affiliated funds-of-funds owned approximately 55% 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 services 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. -------------------------------------------------------------------------------- 28 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 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 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. ILLIQUID SECURITIES At May 31, 2008, investments in securities included issues that are illiquid which the Fund currently limits to 15% of net assets, at market value, at the time of purchase. Prior to July 12, 2007, the Fund limited the percent held in securities and other instruments that were illiquid to 10% of the Fund's net assets. The aggregate value of such securities at May 31, 2008 was $45,051 representing 0.01% of net assets. These securities may be valued at fair value according to procedures approved, in good faith, by the Board. According to Board guidelines, certain unregistered securities are determined to be liquid and are not included within the 15% limitation specified above. Assets are liquid if they can be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the asset is valued by the Fund. 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, 2008, the Fund has outstanding when-issued securities of $135,237,757 and other forward-commitments of $1,879,873. 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 -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 29 the form of reductions of the purchase price of the commitment. The Fund records the incremental difference between the forward purchase and sale of each forward roll as realized gain or loss. Losses may arise due to changes in the value of the securities or if a counterparty does not perform under the terms of the agreement. If a counterparty files for bankruptcy or becomes insolvent, the Fund's right to repurchase or sell securities may be limited. 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. At May 31, 2008, and for the year then ended, the Fund had no outstanding option contracts. 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. Futures are valued daily based upon the last sale price at the close of market on the principal exchange on which they are traded. 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 -------------------------------------------------------------------------------- 30 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT recorded as unrealized gains and losses. The Fund recognizes a realized gain or loss when the contract is closed or expires. 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. At May 31, 2008, the Fund had no outstanding forward sale commitments. CMBS 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 commercial 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. At May 31, 2008, the Fund had no outstanding CMBS total return swap contracts. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 31 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. The Fund has adopted Financial Accounting Standards Board (FASB) Interpretation 48 (FIN 48), "Accounting for Uncertainty in Income Taxes", which is effective for fiscal periods beginning after Dec. 15, 2006. 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. Management of the Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Generally, the tax authorities can examine all the tax returns filed for the last three years. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of futures and options contracts, recognition of unrealized appreciation (depreciation) for certain derivative investments, post-October losses and losses deferred due to wash sales. 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 decreased by $596,685 and accumulated net realized loss has been decreased by $596,685. -------------------------------------------------------------------------------- 32 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED MAY 31, 2008 2007 ---------------------------------------------------------------------------- CLASS A Distributions paid from: Ordinary income.......................... $ 4,636,312 $5,407,728 Long-term capital gain................... -- -- CLASS B Distributions paid from: Ordinary income.......................... 1,375,945 1,999,233 Long-term capital gain................... -- -- CLASS C Distributions paid from: Ordinary income.......................... 166,238 214,172 Long-term capital gain................... -- -- CLASS I Distributions paid from: Ordinary income.......................... 10,669,521 3,051,378 Long-term capital gain................... -- -- CLASS R4 Distributions paid from: Ordinary income.......................... 1,927,487 1,761,395 Long-term capital gain................... -- --
At May 31, 2008, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income.............................. $ 2,976,198 Undistributed accumulated long-term gain................... $ -- Accumulated realized loss.................................. $ (210,465) Unrealized appreciation (depreciation)..................... $(9,488,940)
RECENT ACCOUNTING PRONOUNCEMENTS In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (SFAS 161), "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133," which requires enhanced disclosures about a fund's derivative and hedging activities. Funds are required to provide enhanced disclosures about (a) how and why a fund uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect a fund's financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after Nov. 15, 2008. As of May 31, 2008, management does not believe the adoption of SFAS 161 will impact the financial statement amounts; however, additional -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 33 footnote disclosures may be required about the use of derivative instruments and hedging items. On Sept. 20, 2006, the 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 hierarchy for measuring fair value, and requires additional disclosures about the inputs used to develop the measurements of fair value and the effect of certain measurements reported in the Statement of Operations for a fiscal period. The application of SFAS 157 will be effective for the Fund's fiscal year beginning June 1, 2008. The adoption of SFAS 157 is not anticipated to have a material impact on the Fund's financial statements; however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain measurements reported in the Statement of Operations for a fiscal period. 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. Dividend income, if any, is recognized on the ex-dividend date and 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 INVESTMENT MANAGEMENT SERVICES FEES Under an Investment Management Services Agreement, 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. The management fee for the year ended May 31, 2008 was 0.48% of the Fund's average daily net assets. ADMINISTRATIVE SERVICES FEES Under an Administrative Services Agreement, the Fund pays Ameriprise Financial, Inc. (Ameriprise Financial), the parent company of the Investment Manager, 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. The fee for the year ended May 31, 2008 was 0.07% of the Fund's average daily net assets. -------------------------------------------------------------------------------- 34 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT OTHER FEES Other expenses 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. For the year ended May 31, 2008, other expenses paid to this company were $1,843. COMPENSATION OF BOARD MEMBERS Compensation of board members includes, for a former Board Chair, compensation as well as retirement benefits. Certain other aspects of a 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. TRANSFER AGENCY FEES Under a Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains shareholder accounts and records. The Fund pays the Transfer Agent an annual account-based fee at a rate equal to $20.50 for Class A, $21.50 for Class B and $21.00 for Class C for this service. The Fund also 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. The Transfer Agent charges an annual 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. PLAN ADMINISTRATION SERVICES FEES Under a Plan Administration Services Agreement with the Transfer Agent, the Fund pays an annual fee at a rate of 0.25% of the Fund's average daily net assets attributable to Class R4 shares for the provision of various administrative, recordkeeping, communication and educational services. DISTRIBUTION FEES The Fund has an agreement with RiverSource Distributors, Inc. (the Distributor) for distribution and shareholder services. Prior to Oct. 1, 2007, Ameriprise Financial Services, Inc. also served as a principal underwriter and distributor to the Fund. 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 -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 35 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. SALES CHARGES Sales charges received by the Distributor for distributing Fund shares were $100,681 for Class A, $35,769 for Class B and $441 for Class C for the year ended May 31, 2008. EXPENSES WAIVED/REIMBURSED BY THE INVESTMENT MANAGER AND ITS AFFILIATES For the year ended May 31, 2008, the Investment Manager and its affiliates waived/reimbursed certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds*) were as follows: Class A.................................................... 0.89% Class B.................................................... 1.65 Class C.................................................... 1.65 Class I.................................................... 0.48 Class R4................................................... 0.75
The waived/reimbursed fees and expenses for the transfer agency fees at the class level were as follows: Class A................................................. $55,741 Class B................................................. 21,080 Class C................................................. 2,400 Class R4................................................ 12,814
The waived/reimbursed fees and expenses for the plan administration services fees were as follows: Class R4.................................................. $103
The management fees waived/reimbursed at the Fund level were $610,416. The Investment Manager and its affiliates have contractually agreed to waive certain fees and expenses until May 31, 2009, unless sooner terminated at the discretion of the Board, such that net expenses (excluding fees and expenses of acquired funds*), will not exceed the following percentage of the Fund's average daily net assets: Class A................................................... 0.89% Class B................................................... 1.65 Class C................................................... 1.65 Class I................................................... 0.48 Class R4.................................................. 0.75
* 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. -------------------------------------------------------------------------------- 36 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT EARNINGS AND BANK FEE CREDITS During the year ended May 31, 2008, the Fund's custodian and transfer agency fees were reduced by $8,343 as a result of earnings and bank fee credits from overnight cash balances. The Fund pays custodian fees to Ameriprise Trust Company, a subsidiary of Ameriprise Financial. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $1,846,596,271 and $1,781,798,531, respectively, for the year ended May 31, 2008. 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, 2008 ISSUED FOR REINVESTED NET SOLD DISTRIBUTIONS REDEEMED INCREASE (DECREASE) ---------------------------------------------------------------------------------------------- Class A 4,250,751 842,644 (8,112,975) (3,019,580) Class B 1,496,899 253,951 (3,883,104) (2,132,254) Class C 98,644 30,621 (266,401) (137,136) Class I 12,137,691 2,151,644 (11,378,602) 2,910,733 Class R4 715,755 388,748 (571,898) 532,605 ----------------------------------------------------------------------------------------------
YEAR ENDED MAY 31, 2007 ISSUED FOR REINVESTED NET SOLD DISTRIBUTIONS REDEEMED INCREASE (DECREASE) ---------------------------------------------------------------------------------------------- Class A 5,818,196 974,704 (10,325,253) (3,532,353) Class B 1,802,802 365,504 (6,386,285) (4,217,979) Class C 94,036 38,962 (525,990) (392,992) Class I 40,197,102 578,113 (521,207) 40,254,008 Class R4 1,103,924 351,589 (520,939) 934,574 ----------------------------------------------------------------------------------------------
5. 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. The cost of the Fund's purchases and proceeds from sales of shares of the RiverSource Short-Term Cash Fund aggregated $138,476,149 and $121,123,720, respectively, for the year ended May 31, 2008. The income distributions received with respect to the Fund's investment in RiverSource Short-Term Cash Fund can be found on the Statement -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 37 of Operations and the Fund's invested balance in RiverSource Short-Term Cash Fund at May 31, 2008, can be found in the Portfolio of Investments. 6. BANK BORROWINGS The Fund has entered into a revolving credit facility 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 credit facility became effective on Oct. 18, 2007, replacing a prior credit facility. The credit facility agreement, which is a collective agreement between the Fund and certain other RiverSource funds, severally and not jointly, permits collective borrowings up to $500 million. Interest is charged to each Fund based on its borrowings at a rate equal to the federal funds rate plus 0.30%. Each borrowing under the credit facility matures no later than 60 days after the date of borrowing. 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. Under the prior credit facility, a Fund paid interest on its outstanding 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. The Fund had no borrowings during the year ended May 31, 2008. 7. POST-OCTOBER LOSS Because the measurement periods for a regulated investment company's income are different for excise tax purposes versus income tax purposes, special rules are in place to protect the amount of earnings and profits needed to support excise tax distributions. As a result, the Fund is permitted to treat net capital losses realized between Nov. 1, 2007 and its fiscal year end ("post-October loss") as occurring on the first day of the following tax year. At May 31, 2008, the Fund had a post-October loss of $210,465 that is treated for income tax purposes as occurring on June 1, 2008. 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. 8. 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 -------------------------------------------------------------------------------- 38 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 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 filed a notice of appeal with the Eighth Circuit Court of Appeals on August 8, 2007. In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. As a result, 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. AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. 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. 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. 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 -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 39 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. -------------------------------------------------------------------------------- 40 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 9. 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, 2008 2007 2006 2005 2004 Net asset value, beginning of period $5.00 $4.92 $5.12 $5.03 $5.19 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .23(b) .22 .21 .19 .16 Net gains (losses) (both realized and unrealized) (.02) .09 (.20) .10 (.09) ----------------------------------------------------------------------------------------------------------- Total from investment operations .21 .31 .01 .29 .07 ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.23) (.20) (.20) (.16) Tax return of capital -- -- -- -- (.01) Distributions from realized gains -- -- (.01) -- (.06) ----------------------------------------------------------------------------------------------------------- Total distributions (.22) (.23) (.21) (.20) (.23) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.99 $5.00 $4.92 $5.12 $5.03 ----------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $95 $111 $126 $159 $177 ----------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) 1.09% 1.17% 1.19% 1.10% 1.05% ----------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) .89% .89% .89% .95% .98% ----------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.56% 4.45% 4.08% 3.67% 3.11% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate 354% 306% 178% 137% 163% ----------------------------------------------------------------------------------------------------------- Total return(g) 4.31% 6.30% .12% 5.78% 1.27% -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for 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 have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended May 31, 2008 were less than 0.01% of average net assets. (g) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 41 CLASS B
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2008 2007 2006 2005 2004 Net asset value, beginning of period $5.00 $4.93 $5.12 $5.04 $5.20 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .19(b) .19 .17 .15 .12 Net gains (losses) (both realized and unrealized) (.01) .07 (.19) .09 (.09) ----------------------------------------------------------------------------------------------------------- Total from investment operations .18 .26 (.02) .24 .03 ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.19) (.19) (.16) (.16) (.12) Tax return of capital -- -- -- -- (.01) Distributions from realized gains -- -- (.01) -- (.06) ----------------------------------------------------------------------------------------------------------- Total distributions (.19) (.19) (.17) (.16) (.19) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.99 $5.00 $4.93 $5.12 $5.04 ----------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $34 $44 $64 $98 $129 ----------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) 1.86% 1.94% 1.95% 1.86% 1.80% ----------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) 1.65% 1.64% 1.64% 1.69% 1.74% ----------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.79% 3.70% 3.31% 2.90% 2.35% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate 354% 306% 178% 137% 163% ----------------------------------------------------------------------------------------------------------- Total return(g) 3.53% 5.30% (.42%) 4.78% .52% -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for 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 have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended May 31, 2008 were less than 0.01% of average net assets. (g) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- 42 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT CLASS C
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2008 2007 2006 2005 2004 Net asset value, beginning of period $5.00 $4.93 $5.12 $5.04 $5.20 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .19(b) .19 .17 .15 .12 Net gains (losses) (both realized and unrealized) (.01) .07 (.19) .09 (.09) ----------------------------------------------------------------------------------------------------------- Total from investment operations .18 .26 (.02) .24 .03 ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.19) (.19) (.16) (.16) (.12) Tax return of capital -- -- -- -- (.01) Distributions from realized gains -- -- (.01) -- (.06) ----------------------------------------------------------------------------------------------------------- Total distributions (.19) (.19) (.17) (.16) (.19) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.99 $5.00 $4.93 $5.12 $5.04 ----------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $4 $5 $7 $11 $15 ----------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) 1.85% 1.94% 1.95% 1.85% 1.80% ----------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) 1.65% 1.64% 1.64% 1.70% 1.74% ----------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.80% 3.70% 3.31% 2.90% 2.36% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate 354% 306% 178% 137% 163% ----------------------------------------------------------------------------------------------------------- Total return(g) 3.53% 5.30% (.43%) 4.79% .52% -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for 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 have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended May 31, 2008 were less than 0.01% of average net assets. (g) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 43 CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2008 2007 2006 2005 2004(B) Net asset value, beginning of period $5.00 $4.92 $5.11 $5.03 $5.15 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .25(c) .24 .22 .20 .05 Net gains (losses) (both realized and unrealized) (.02) .08 (.19) .09 (.11) ----------------------------------------------------------------------------------------------------------- Total from investment operations .23 .32 .03 .29 (.06) ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.24) (.24) (.21) (.21) (.06) Distributions from realized gains -- -- (.01) -- -- ----------------------------------------------------------------------------------------------------------- Total distributions (.24) (.24) (.22) (.21) (.06) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.99 $5.00 $4.92 $5.11 $5.03 ----------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $222 $207 $6 $-- $-- ----------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(d),(e) .63% .63% .73% .66% .64%(f) ----------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(e),(g),(h) .48% .54% .54% .62% .64%(f) ----------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.97% 4.90% 4.99% 3.99% 3.39%(f) ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate 354% 306% 178% 137% 163% ----------------------------------------------------------------------------------------------------------- Total return 4.74% 6.68% .59% 5.92% (1.38%)(i) -----------------------------------------------------------------------------------------------------------
(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) Per share amount has been calculated using the average shares outstanding method. (d) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (e) 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. (f) Adjusted to an annual basis. (g) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (h) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended May 31, 2008 were less than 0.01% of average net assets. (i) Not annualized. -------------------------------------------------------------------------------- 44 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT CLASS R4
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED MAY 31, 2008 2007 2006 2005 2004 Net asset value, beginning of period $5.00 $4.92 $5.11 $5.03 $5.19 ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .23(b) .23 .21 .20 .17 Net gains (losses) (both realized and unrealized) (.01) .08 (.19) .08 (.09) ----------------------------------------------------------------------------------------------------------- Total from investment operations .22 .31 .02 .28 .08 ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.23) (.23) (.20) (.20) (.17) Tax return of capital -- -- -- -- (.01) Distributions from realized gains -- -- (.01) -- (.06) ----------------------------------------------------------------------------------------------------------- Total distributions (.23) (.23) (.21) (.20) (.24) ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.99 $5.00 $4.92 $5.11 $5.03 ----------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $42 $40 $35 $-- $-- ----------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) .93% .99% 1.04% .94% .87% ----------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) .75% .71% .71% .77% .81% ----------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.69% 4.63% 4.40% 3.99% 3.29% ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate 354% 306% 178% 137% 163% ----------------------------------------------------------------------------------------------------------- Total return 4.46% 6.51% .49% 5.75% 1.45% -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for 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 have agreed to waive certain/reimburse fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended May 31, 2008 were less than 0.01% of average net assets. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 45 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------ TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RiverSource U.S. Government Mortgage Fund (the Fund) (one of the portfolios constituting the RiverSource Government Income Series, Inc.) as of May 31, 2008, and the related statements of operations, changes in net assets, and financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The financial statements and financial highlights of the Fund for the periods presented through May 31, 2007, were audited by other auditors whose report dated July 20, 2007, expressed an unqualified opinion on those financial statements and financial highlights. We conducted our audit 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 financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of May 31, 2008, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audit provides a reasonable basis for our opinion. -------------------------------------------------------------------------------- 46 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT In our opinion, the 2008 financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of RiverSource U.S. Government Mortgage Fund of the RiverSource Government Income Series, Inc. at May 31, 2008, the results of its operations, changes in its net assets, and the financial highlights for the year then ended, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota July 22, 2008 -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 47 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, 2008 CLASS A
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00% U.S. Government Obligations........................... 4.03%
PAYABLE DATE PER SHARE June 25, 2007............................................... $0.01877 July 25, 2007............................................... 0.01910 Aug. 24, 2007............................................... 0.01910 Sept. 24, 2007.............................................. 0.02025 Oct. 26, 2007............................................... 0.02020 Nov. 26, 2007............................................... 0.02040 Dec. 17, 2007............................................... 0.01950 Jan. 28, 2008............................................... 0.01950 Feb. 27, 2008............................................... 0.01790 March 27, 2008.............................................. 0.01670 April 28, 2008.............................................. 0.01665 May 28, 2008................................................ 0.01628 Total distributions......................................... $0.22435
-------------------------------------------------------------------------------- 48 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT CLASS B
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00% U.S. Government Obligations........................... 4.03%
PAYABLE DATE PER SHARE June 25, 2007............................................... $0.01558 July 25, 2007............................................... 0.01596 Aug. 24, 2007............................................... 0.01600 Sept. 24, 2007.............................................. 0.01702 Oct. 26, 2007............................................... 0.01686 Nov. 26, 2007............................................... 0.01715 Dec. 17, 2007............................................... 0.01730 Jan. 28, 2008............................................... 0.01516 Feb. 27, 2008............................................... 0.01475 March 27, 2008.............................................. 0.01368 April 28, 2008.............................................. 0.01334 May 28, 2008................................................ 0.01316 Total distributions......................................... $0.18596
CLASS C
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00% U.S. Government Obligations........................... 4.03%
PAYABLE DATE PER SHARE June 25, 2007............................................... $0.01559 July 25, 2007............................................... 0.01602 Aug. 24, 2007............................................... 0.01602 Sept. 24, 2007.............................................. 0.01704 Oct. 26, 2007............................................... 0.01688 Nov. 26, 2007............................................... 0.01717 Dec. 17, 2007............................................... 0.01732 Jan. 28, 2008............................................... 0.01510 Feb. 27, 2008............................................... 0.01477 March 27, 2008.............................................. 0.01370 April 28, 2008.............................................. 0.01336 May 28, 2008................................................ 0.01317 Total distributions......................................... $0.18614
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 49 CLASS I
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00% U.S. Government Obligations........................... 4.03%
PAYABLE DATE PER SHARE June 25, 2007............................................... $0.02044 July 25, 2007............................................... 0.02074 Aug. 24, 2007............................................... 0.02076 Sept. 24, 2007.............................................. 0.02197 Oct. 26, 2007............................................... 0.02198 Nov. 26, 2007............................................... 0.02213 Dec. 17, 2007............................................... 0.02067 Jan. 28, 2008............................................... 0.02184 Feb. 27, 2008............................................... 0.01958 March 27, 2008.............................................. 0.01831 April 28, 2008.............................................. 0.01842 May 28, 2008................................................ 0.01795 Total distributions......................................... $0.24479
CLASS R4
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00% U.S. Government Obligations........................... 4.03%
PAYABLE DATE PER SHARE June 25, 2007............................................... $0.01939 July 25, 2007............................................... 0.01965 Aug. 24, 2007............................................... 0.01966 Sept. 24, 2007.............................................. 0.02083 Oct. 26, 2007............................................... 0.02080 Nov. 26, 2007............................................... 0.02098 Dec. 17, 2007............................................... 0.01989 Jan. 28, 2008............................................... 0.02029 Feb. 27, 2008............................................... 0.01847 March 27, 2008.............................................. 0.01724 April 28, 2008.............................................. 0.01725 May 28, 2008................................................ 0.01685 Total distributions......................................... $0.23130
The Fund also designates as distributions of long-term gains, to the extent necessary to fully distribute such capital gains, earnings and profits distributed to shareholders on the redemption of shares. -------------------------------------------------------------------------------- 50 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 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 101 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 None 901 S. Marquette Ave. since 2006 Court, 1998-2006; Attorney Minneapolis, MN 55402 Age 53 ----------------------------------------------------------------------------------------------------- Arne H. Carlson Board member Chair, RiverSource Funds, None 901 S. Marquette Ave. since 1999 1999-2006; former Governor of Minneapolis, MN 55402 Minnesota Age 73 ----------------------------------------------------------------------------------------------------- Pamela G. Carlton Board member President, Springboard -- Partners None 901 S. Marquette Ave. since 2007 in Cross Cultural Leadership Minneapolis, MN 55402 (consulting company) Age 53 ----------------------------------------------------------------------------------------------------- Patricia M. Flynn Board member Trustee Professor of Economics and None 901 S. Marquette Ave. since 2004 Management, Bentley College; former Minneapolis, MN 55402 Dean, McCallum Graduate School of Age 57 Business, Bentley College ----------------------------------------------------------------------------------------------------- Anne P. Jones Board member Attorney and Consultant None 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 73 ----------------------------------------------------------------------------------------------------- Jeffrey Laikind, CFA Board member Former Managing Director, Shikiar American Progressive 901 S. Marquette Ave. since 2005 Asset Management Insurance Minneapolis, MN 55402 Age 72 ----------------------------------------------------------------------------------------------------- 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 69 Board since 2007 -----------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 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 None 901 S. Marquette Ave. since 2004 Management, Inc. (private real Minneapolis, MN 55402 estate and asset management Age 55 company) ----------------------------------------------------------------------------------------------------- Alison Taunton-Rigby Board member Chief Executive Officer and Idera 901 S. Marquette Ave. since 2002 Director, RiboNovix, Inc. since Pharmaceutical, Inc. Minneapolis, MN 55402 2003 (biotechnology); former (biotechnology); Age 64 President, Forester Biotech Healthways, 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 None 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 47 and Chief Investment Officer, RiverSource Investments, LLC since 2005; Director, President, and Chief Executive Officer, Ameriprise Certificate Company since 2006; Chairman of the Board, Chief Executive Officer and President, RiverSource Distributors, Inc. 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 U.S. GOVERNMENT MORTGAGE FUND -- 2008 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 Director and Senior Vice President, Asset 172 Ameriprise 2006 Management, Products and Marketing, Financial Center RiverSource Investments, LLC since 2006; Minneapolis, MN 55474 Director and Vice President -- Asset Age 42 Management, Products and Marketing, RiverSource Distributors, Inc. since 2006; Managing Director and Global Head of Product, Morgan Stanley Investment Management, 2004-2006; President, Touchstone Investments, 2002-2004 ------------------------------------------------------------------------------------------ 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 44 Certificate Company since 2003; Senior Vice President -- Fixed Income, Ameriprise Financial, Inc., 2002-2006 and RiverSource Investments, LLC, 2004-2006 ------------------------------------------------------------------------------------------ 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 42 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; Chief Financial Center Financial Officer, RiverSource Distributors, Minneapolis, MN 55474 Inc. since 2006 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; Chief Counsel, RiverSource Distributors, Minneapolis, MN 55474 since 2006 Inc. since 2006; Vice President, General Age 48 Counsel and Secretary, Ameriprise Certificate Company since 2005; Vice President -- Asset Management Compliance, Ameriprise Financial, Inc., 2004-2005; Senior Vice President and Chief Compliance Officer, USBancorp Asset Management, 2002-2004 ------------------------------------------------------------------------------------------ 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 47 Voyageur Asset Management, 2000-2003 ------------------------------------------------------------------------------------------ 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 44 Compliance Director and Bank Secrecy Act Officer, American Express Centurion Bank, 2000-2003 ------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 53 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT ---------------------------------------------------------------------- RiverSource Investments, LLC ("RiverSource Investments" or the "investment manager"), 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 Investments provides investment advice and other services to the Fund and all RiverSource funds (collectively, the "Funds"). On an annual basis, the Fund's Board of Directors (the "Board"), including the independent Board members (the "Independent Directors"), considers renewal of the IMS Agreement. RiverSource Investments prepared detailed reports for the Board and its Contracts Committee in March and April 2008, 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 Investments addressing the services RiverSource Investments provides and Fund performance. The Board accords particular weight to the work, deliberations and conclusions of the Contracts, Investment Review and Compliance Committees in determining whether to continue the IMS Agreement. At the April 9-10, 2008 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 Investments: The Board analyzed various reports and presentations it had received detailing the services performed by RiverSource Investments, as well as its expertise, resources and capabilities. The Board specifically considered many developments during the past year concerning the services provided by RiverSource Investments, including, in particular, the continued investment in, and resources dedicated to, the Fund's operations, particularly in the areas of trading systems, new product initiatives, legal and compliance. Further, in connection with the Board's evaluation of the overall package of services provided by RiverSource Investments, the Board considered the quality of the administrative and transfer agency services provided by RiverSource Investments' affiliates to the Fund. The Board also reviewed the financial condition of RiverSource Investments (and its affiliates) and each 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 Investments). The Board concluded that the services -------------------------------------------------------------------------------- 54 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT -------------------------------------------------------------------------------- being performed under the IMS Agreement were of a reasonably high quality, particularly in light of recent market conditions. 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 concluded that RiverSource Investments and its affiliates were 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 2007. 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 Investments 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 Investments' 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. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT 55 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT (continued) ---------------------------------------------------------- The Board also considered the expected profitability of RiverSource Investments and its affiliates in connection with RiverSource Investments providing investment management services to the Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to RiverSource Investments and Ameriprise Financial from managing and operating the Fund, including data showing comparative profitability over the past two 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 Investments 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 10, 2008, 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. -------------------------------------------------------------------------------- 56 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2008 ANNUAL REPORT RIVERSOURCE 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., Member FINRA, and managed by RiverSource Investments, LLC. These companies are part of Ameriprise Financial, Inc. (RIVERSOURCE INVESTMENTS LOGO) (C) 2008 RiverSource Distributors, Inc. S-6245 K (7/08)
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 Pamela G. Carlton, 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 for the year ended May 31, to Ernst & Young LLP for professional services rendered for the audit of the annual financial statements for RiverSource Government Income Series, Inc. were as follows: 2008 - $49,300 (b) Audit - Related Fees. The fees for the year ended May 31, to Ernst & Young LLP for additional professional services rendered in connection with the registrant's security count pursuant to Rule 17f-2 and the semiannual financial statement review for RiverSource Government Income Series, Inc. were as follows: 2008 - $1,590 (c) Tax Fees. The fees for the year ended May 31, to Ernst & Young LLP for tax compliance related services for RiverSource Government Income Series, Inc. were as follows: 2008 - $6,600 (d) All Other Fees. The fees for the year ended May 31, to Ernst & Young LLP for additional professional services rendered for RiverSource Government Income Series, Inc. were as follows: 2008 - $0 (e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley pre-approval requirements, all services to be performed by Ernst & Young 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 2008 were pre-approved by the audit committee. (f) Not applicable. (g) Non-Audit Fees. The fees for the year ended May 31, to Ernst & Young LLP by the registrant for non-audit fees and 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: 2008 - $619,990 (h) 100% of the services performed in item (g) above during 2008 were pre-approved by the Ameriprise Financial Audit Committee and/or the RiverSource Mutual Funds Audit Committee. 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 1, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By /s/ Patrick T. Bannigan ----------------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date August 1, 2008 By /s/ Jeffrey P. Fox ----------------------------------------- Jeffrey P. Fox Treasurer and Principal Financial Officer Date August 1, 2008