-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BoEUOgFNPSq689PMnKxHd94cPR2lhrQJMbwdipuVodhEgW+zvkqXsfDGtDrTapQd oJJgbxf5EVB8FJiIHzZT8g== 0000891804-03-001973.txt : 20030908 0000891804-03-001973.hdr.sgml : 20030908 20030908172234 ACCESSION NUMBER: 0000891804-03-001973 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030908 EFFECTIVENESS DATE: 20030908 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIBERTY STEIN ROE FUNDS INCOME TRUST CENTRAL INDEX KEY: 0000787491 IRS NUMBER: 366830365 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-04552 FILM NUMBER: 03886604 BUSINESS ADDRESS: STREET 1: ONE FINANCIAL CENTER STREET 2: 11TH FLOOR CITY: BOSTON STATE: MA ZIP: 02111 BUSINESS PHONE: 8003382550 MAIL ADDRESS: STREET 1: ONE FINANCIAL CT CITY: BOSTON STATE: MA ZIP: 02111 FORMER COMPANY: FORMER CONFORMED NAME: STEINROE INCOME TRUST DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: STEINROE HIGH YIELD BONDS DATE OF NAME CHANGE: 19880121 N-CSR 1 file001.txt LIBERTY-STEIN ROE FUNDS INCOME TRUST 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 811-4552 --------------------- Liberty-Stein Roe Funds Income Trust ------------------------------------------------------------------------------ (Exact name of registrant as specified in charter) One Financial Center, Boston, Massachusetts 02111 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip code) Russell L. Kane, Esq. Columbia Management Group, Inc. One Financial Center Boston, MA 02111 - ------------------------------------------------------------------------------ (Name and address of agent for service) Registrant's telephone number, including area code: 1-617-426-3363 ------------------- Date of fiscal year end: June 30, 2003 ------------------ Date of reporting period: June 30, 2003 ----------------- Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. LIBERTY INTERMEDIATE BOND FUND Annual Report June 30, 2003 [photo of couple reading paper] ELIMINATE CLUTTER IN TWO EASY STEPS. POINT. CLICK. LIBERTY eDELIVERY. For more information about receiving your shareholder reports electronically, call us at 800-345-6611. To sign up for eDelivery, visit us online at www.libertyfunds.com. LIBERTY INTERMEDIATE BOND FUND Annual Report June 30, 2003 [photo of couple reading paper] ELIMINATE CLUTTER IN TWO EASY STEPS. POINT. CLICK. LIBERTY eDELIVERY. To sign up for eDelivery, go to www.icsdelivery.com. PRESIDENT'S MESSAGE [photo of Joseph R. Palombo] Dear Shareholder: Despite the uncertainty that hung over the markets and the economy as the nation prepared to go to war in Iraq, the twelve-month period ended on a high note. Virtually all major segments of the stock and bond markets posted positive returns for the period. The economy, though still struggling, has made progress toward recovery. And, a new tax law is intended to boost consumer spending power and make investing more attractive. The Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerates income tax rate cuts for virtually all Americans and slashes the tax rates on dividends and long-term capital gains. The government is counting on Americans to turn their good fortune into higher spending. And the financial media has been full of advice on how to take advantage of the new rate structure. As you debate what you will do if the lower tax rate turns into a modest personal windfall, consider strategies that could have a long-term impact on your portfolio. If your take-home pay increases as a result of the tax break and any rebate check you are entitled to receive--and if it's not eaten up by higher state taxesinvesting at least one third of it. Consider adding it to your retirement account, using it to start an education account for your child or setting it aside for an emergency. But make a commitment and stick to it. Think of it as found money, because that is what it is. You didn't have it before. But now that you've found it, you can put it to work for a long-term goal. And before you take advice from a television pundit or a magazine cover story about how to take advantage of the recent tax changes, talk to your financial advisor. There may be tax-related strategies that make sense for you. But there are no one-size-fits-all solutions. Keep in mind that tax rates change, and many of the provisions of this law are set to expire in just a few short years. CONSOLIDATION AND A NEW NAME: COLUMBIA On a separate note, I am pleased to announce that, effective April 1, 2003, six of the asset management firms brought together when Columbia Management Group, Inc. was formed were consolidated and renamed Columbia Management Advisors, Inc. (Columbia Management). This consolidation does not affect the management or investment objectives of your fund and is the next step in our efforts to create a consistent identity and to streamline our organization. By consolidating these firms, we are able to create a more efficient organizational structure and strengthen certain key functions, such as research. Although the name of the asset manager familiar to you has changed, what hasn't changed is the commitment of our specialized investment teams to a multi-disciplined approach to investing, focused on our goal of offering shareholders the best products and services. The following report will provide you with more detailed information about fund performance and the strategies used by the fund's managers, Michael Kennedy and Thomas LaPointe. As always, we thank you for investing in Liberty funds and for giving us the opportunity to help you build a strong financial future. Sincerely, /s/ Joseph R. Palombo Joseph R. Palombo President - -------------------------------------------------------------------------------- MEET THE NEW PRESIDENT Joseph R. Palombo, president and chairman of the Board of Trustees for Liberty Funds, is also chief operating officer and executive vice president of Columbia Management. Mr. Palombo has over 19 years of experience in the financial services industry. Prior to joining Columbia Management, he was chief operating officer and chief compliance officer for Putnam Mutual Funds. Prior to that, he was a partner at Coopers & Lybrand. Mr. Palombo received his degree in economics/accounting from the College of the Holy Cross, where he was a member of Phi Beta Kappa. He earned his master's degree in taxation from Bentley College and participated in the Executive Program at the Amos B. Tuck School at Dartmouth College. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE as of 6/30/03 ($) Class A 9.18 Class B 9.18 Class C 9.18 Class Z 9.18 DISTRIBUTIONS DECLARED PER SHARE 7/1/02 - 6/30/03 ($) Class A 0.48 Class B 0.41 Class C 0.43 Class Z 0.50 - -------------------------------------------------------------------------------- The examples provided should be viewed as illustrations. They do not constitute tax or legal advice. Neither Columbia Management Advisors, Inc., nor its affiliates, including Liberty Funds Distributor, Inc., provide tax or legal advice. A tax advisor or attorney can provide you with answers to specific questions about taxes and other legal issues. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE Economic and market conditions change frequently. There is no assurance that the trends described in this report will continue or commence. PERFORMANCE INFORMATION Value of a $10,000 investment 6/30/93 -- 6/30/03 PERFORMANCE OF A $10,000 INVESTMENT 6/30/93 -- 6/30/03 ($) without with sales sales charge charge - ------------------------------------- Class A 19,559 18,633 - ------------------------------------- Class B 19,354 19,354 - ------------------------------------- Class C 19,394 19,394 - ------------------------------------- Class Z 19,715 n/a - ------------------------------------- [mountain chart data]: Lehman Brothers Class A shares Class A shares Aggregate without sales charge with sales charge Bond Index 6/1993 $10,000 $ 9,525 $10,000 10,022 9,546 10,057 10,176 9,693 10,233 10,204 9,719 10,261 10,243 9,756 10,299 10,170 9,687 10,211 10,257 9,770 10,266 10,422 9,927 10,405 10,257 9,770 10,224 10,032 9,556 9,971 9,970 9,496 9,891 9,944 9,472 9,890 9,953 9,480 9,869 10,102 9,622 10,065 10,136 9,654 10,077 10,024 9,548 9,929 10,009 9,534 9,920 9,946 9,474 9,898 9,996 9,521 9,967 10,144 9,662 10,164 10,350 9,858 10,406 10,414 9,919 10,469 10,563 10,061 10,616 10,876 10,360 11,027 10,960 10,440 11,107 10,958 10,437 11,083 11,109 10,581 11,217 11,208 10,676 11,326 11,335 10,796 11,473 11,514 10,967 11,645 11,682 11,127 11,808 11,799 11,238 11,886 11,612 11,061 11,679 11,532 10,984 11,597 11,463 10,918 11,532 11,463 10,918 11,509 11,596 11,045 11,664 11,649 11,096 11,695 11,646 11,093 11,675 11,836 11,273 11,878 12,071 11,498 12,142 12,304 11,720 12,350 12,211 11,631 12,235 12,284 11,700 12,273 12,323 11,738 12,303 12,183 11,604 12,167 12,369 11,782 12,349 12,501 11,908 12,467 12,676 12,074 12,615 13,036 12,417 12,956 12,901 12,288 12,846 13,083 12,461 13,034 13,211 12,583 13,223 13,263 12,633 13,284 13,349 12,715 13,418 13,524 12,881 13,590 13,549 12,906 13,579 13,622 12,975 13,625 13,693 13,043 13,696 13,812 13,156 13,826 13,884 13,225 13,944 13,916 13,255 13,973 13,849 13,192 14,201 14,140 13,469 14,533 13,915 13,254 14,456 14,130 13,459 14,539 14,206 13,531 14,582 14,354 13,672 14,686 14,169 13,496 14,429 14,329 13,648 14,508 14,390 13,707 14,555 14,292 13,614 14,426 14,245 13,569 14,380 14,247 13,570 14,318 14,242 13,566 14,311 14,386 13,703 14,477 14,404 13,719 14,531 14,435 13,750 14,529 14,386 13,703 14,460 14,416 13,732 14,412 14,565 13,873 14,586 14,712 14,013 14,779 14,622 13,928 14,736 14,540 13,850 14,729 14,904 14,196 15,035 15,066 14,351 15,172 15,303 14,576 15,392 15,448 14,714 15,489 15,470 14,735 15,591 15,632 14,890 15,847 15,912 15,156 16,141 16,296 15,521 16,406 16,491 15,708 16,549 16,602 15,813 16,632 16,558 15,772 16,562 16,762 15,966 16,661 16,772 15,975 16,724 17,163 16,348 17,099 17,384 16,559 17,296 17,204 16,386 17,498 17,446 16,617 17,864 17,437 16,609 17,617 17,350 16,526 17,505 17,484 16,653 17,646 17,578 16,743 17,818 17,455 16,626 17,522 17,611 16,774 17,862 17,781 16,937 18,013 17,627 16,789 18,168 17,491 16,660 18,388 17,762 16,918 18,699 17,845 16,998 19,002 17,622 16,785 18,915 17,892 17,042 18,909 18,286 17,417 19,300 18,370 17,497 19,318 18,638 17,753 19,584 18,698 17,809 19,569 19,030 18,126 19,731 19,491 18,565 20,098 6/2003 19,559 18,633 20,064
AVERAGE ANNUAL TOTAL RETURN AS OF 6/30/03 (%) Share class A B C Z Inception 7/31/00 2/1/02 2/1/02 12/5/78 - ------------------------------------------------------------------------------------------------------------------- without with without with without with without sales sales sales sales sales sales sales charge charge charge charge charge charge charge - ------------------------------------------------------------------------------------------------------------------- 1-year 11.03 5.70 10.21 5.21 10.37 9.37 11.30 - ------------------------------------------------------------------------------------------------------------------- 5-year 7.11 6.06 6.88 6.57 6.92 6.92 7.28 - ------------------------------------------------------------------------------------------------------------------- 10-year 6.94 6.42 6.83 6.83 6.85 6.85 7.02 - -------------------------------------------------------------------------------------------------------------------
Past performance cannot predict future investment results. The principal value and investment returns will fluctuate, resulting in a gain or loss on sale. All results shown assume reinvestment of distributions. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The "with sales charge" returns include the maximum 4.75% charge for class A shares, the appropriate class B contingent deferred sales charge for the holding period after purchase as follows: through first year -- 5%, second year -- 4%, third year -- 3%, fourth year -- 3%, fifth year -- 2%, sixth year -- 1%, thereafter -- 0%, and the class C contingent deferred sales charge of 1% for the first year only. Performance for different share classes will vary based on differences in sales charges and fees associated with each class. Performance results reflect any voluntary waivers or reimbursement of fund expenses by the advisor or its affiliates. Absent these waivers or reimbursement arrangements, performance results would have been lower. Class A, B and C share (newer class shares) performance information includes returns of the fund's class Z shares (the oldest existing fund class) for periods prior to the inception of the newer class shares. These class Z share returns were not restated to reflect any expense differential (e.g., Rule 12b-1 fees) between class Z shares and the newer class shares. Had the expense differential been reflected, the returns for the periods prior to the inception of the newer class shares would have been lower. 1 SEC YIELDS AS OF 6/30/03 (%) CLASS A 3.30 CLASS B 2.71 CLASS C 2.87 CLASS Z 3.71 The 30-day SEC yields reflect the portfolio's earning power net of expenses, expressed as an annualized percentage of the public offering price per share. If the advisor or its affiliates had not waived certain fund expenses, the SEC yield would have been 3.20% and 2.72% for class A and class C, respectively. [BAR CHART DATA]: MATURITY BREAKDOWN AS OF 6/30/03 (%) 0-1 year 2.6 1-5 years 45.9 5-10 years 40.6 10-20 years 3.5 20+ years 7.4 Maturity breakdown is calculated as a percentage of total net assets, based on each security's effective maturity and other conditions that affect a bond's maturity. Because the fund is actively managed, there is no guarantee that the fund will continue to maintain this maturity breakdown in the future QUALITY BREAKDOWN AS OF 6/30/03 (%) AAA 27.0 AA 11.6 A 24.8 BBB 24.9 BB 10.0 B 1.7 Quality breakdown is calculated as a percentage of total net assets. Ratings shown in the quality breakdown represent the highest rating assigned to a particular bond by one of the following nationally-recognized rating agencies: Standard & Poor's Corporation, Moody's Investors Service, Inc.or Fitch Investors Service, Inc. Because the fund is actively managed, there is no guarantee that the fund will continue to maintain this quality breakdown in the future. PORTFOLIO MANAGERS' REPORT For the 12 months ended June 30, 2003, class A shares of Liberty Intermediate Bond Fund returned 11.03% without sales charge. The fund came out ahead of its benchmark, the Lehman Aggregate Bond Index, which posted a total return of 10.40% for the same period. The fund also beat its peer group, the Lipper Intermediate Investment Grade Bond Index, which had a total return of 9.99% for the year.1 Our decision to emphasize corporate securities, including high-yield issues, accounted for the fund's strong relative performance. A STRONG PERIOD FOR BONDS Expectations that low interest rates and large tax cuts would stimulate the economy triggered a stock market rally in October that also set the tone for corporate bonds. Money flowed from short-term commitments and government obligations into equities and corporate bonds. Corporate issues rose across a broad front through the end of the period, while Treasury issues failed to build on earlier gains. High-yield bonds were especially strong after years of declining prices, aided by lower default rates and less restrictive lending practices by banks. LOWER QUALITY ISSUES WERE BEST PERFORMERS With demand for high-yield issues handily outstripping supply early in the year, more aggressive strategies were rewarded. As a result, lower quality names performed better than higher-rated issues. CSC Holdings (0.7% of net assets),2 a cable and media company, saw its bonds rebound sharply following asset sales and increased financial flexibility. We also retained our position in iStar Financial (0.9% of net assets), a property developer, whose bonds suffered from pessimistic real estate forecasts that proved unfounded. UTILITIES REBOUNDED The utility sector recovered significantly after scandals at Enron (not held by the fund) had depressed the sector. We made a timely purchase of Northern States Power's bonds (0.5% of net assets). The bonds' price decline reflected problems at parent company Xcel Energy (0.2% of net assets). Because of their solid collateral, the bonds later rose. Bonds of Oncor Electric Delivery (0.5% of net assets) responded favorably when the company improved its balance sheet by reducing debt and selling selected assets. - -------------- 1 Lipper Inc., a widely respected data provider in the industry, calculates an average total return for mutual funds with similar investment objectives as those of the fund. 2 Holdings are disclosed as of June 30, 2003, and are subject to change. 2 HEALTHSOUTH AND AIRLINE BONDS HURT RESULTS We cut our losses and sold our investment in HealthSouth's bonds as news of multi-pronged investigations into the company's finances and governance surfaced. But we retained the equipment trust certificates of American Airlines, United Airlines and Delta Airlines (0.7%, 0.3% and 1.0% of net assets, respectively) after they fell. As investors recognized the value of the airlines that make up the bonds' collateral, all three issues began to recover. MANAGERS EXPECT ECONOMIC RECOVERY With interest rates at the lowest levels in decades and tax cuts working their way through the economy, we expect earnings to grow over the next 12 months. In addition, corporate America's focus on strengthening balance sheets should further enhance credit quality and bolster confidence in corporate bonds. For these reasons, we believe that corporate bonds have good potential despite recent gains. Price increases, however, may be harder to come by. Although any recovery would push up interest rates, corporate issues may hold up better than government obligations in an expanding economy because of their potential for higher income. Therefore, we expect to maintain overweight positions versus our benchmark in corporate bonds, with a focus primarily on investment-grade issues but also some high-yield bonds. /s/ Michael T. Kennedy Michael T. Kennedy, CFA /s/ Thomas A. LaPointe Thomas A. LaPointe, CFA Michael T. Kennedy, CFA and Thomas A. LaPointe, CFA are co-managers of Liberty Intermediate Bond Fund. They have co-managed the fund since March 2003. Mr. Kennedy joined Columbia Management in October 1988 and Mr. LaPointe in February 1999. - ----------- Investing in high-yield bonds involves greater credit and other risks not associated with investing in higher-quality bonds. Bond investing also involves interest rate risk, which means that bond prices may change as interest rates increase or decrease. Foreign investments involve market, political, accounting and currency risks not associated with other investments. The Lehman Aggregate Bond Index is an unmanaged group of bonds that vary in quality. Unlike the fund, an index is not an investment, does not incur fees or expenses and is not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. PORTFOLIO STRUCTURE as of 6/30/03 (%) Corporate Bonds 72.8 Government Agencies 9.5 Asset-Backed & Non-Agency Mortgage Backed Securities 7.0 US Treasuries 7.0 Cash & Equivalents 3.7 Portfolio structure is calculated as a percentage of net assets. Because the fund is actively managed, there is no guarantee the fund will continue to maintain this structure. 3 INVESTMENT PORTFOLIO June 30, 2003 CORPORATE FIXED-INCOME BONDS & NOTES - 72.8% PAR VALUE - ------------------------------------------------------- AGRICULTURE, FORESTRY & FISHING - 0.7% AGRICULTURAL SERVICES - 0.6% Monsanto Co., 7.375% 08/15/12 $ 5,000,000 $ 5,961,600 ----------- FORESTRY - 0.1% Tembec Industries, Inc., 8.500% 02/01/11 1,000,000 990,000 ----------- - ------------------------------------------------------- CONSTRUCTION - 0.2% BUILDING CONSTRUCTION - 0.2% D.R. Horton, Inc., 8.000% 02/01/09 2,000,000 2,220,000 ----------- - ------------------------------------------------------- FINANCE, INSURANCE & REAL ESTATE - 29.5% DEPOSITORY INSTITUTIONS - 10.1% Bank One Corp, 6.000% 08/01/08 (a) 11,888,000 13,571,341 Barclays Bank PLC, 7.375% 06/15/49 (b)(c) 5,000,000 5,989,750 First Massachusetts Bank, 7.625% 06/15/11 5,500,000 6,560,730 First Union National Bank, 7.125% 10/15/06 6,340,000 7,209,848 J.P. Morgan Chase & Co., 5.350% 03/01/07 10,000,000 10,977,500 Popular, Inc., 6.125% 10/15/06 8,250,000 9,042,825 Sovereign Bancorp, Inc., 10.500% 11/15/06 7,645,000 9,514,967 Wachovia Corp., 4.950% 11/01/06 9,500,000 10,346,545 Washington Mutual, Inc., 7.500% 08/15/06 8,025,000 9,275,536 Wells Fargo Financial, Inc., 4.875% 06/12/07 14,300,000 15,552,394 ----------- 98,041,436 ----------- FINANCIAL SERVICES - 6.5% Citicorp, 8.040% 12/15/19 (b) 10,750,000 12,976,862 Citigroup, Inc., 5.000% 03/06/07 5,000,000 5,427,650 General Electric Capital Corp., 5.375% 03/15/07 10,000,000 10,995,700 Goldman Sachs Group, Inc., 6.600% 01/15/12 3,250,000 3,779,100 Hartford Financial Services Group, 4.700% 09/01/07 4,000,000 4,243,680 International Lease Finance Corp., 6.375% 03/15/09 9,000,000 10,087,110 PAR VALUE - ------------------------------------------------------- John Deere Capital Corp., 7.000% 03/15/12 $ 9,000,000 $ 10,675,350 PF Export Receivables Master Trust: 3.748% 06/01/13 (b) 3,250,000 3,276,306 6.436% 06/01/15 (b) 1,500,000 1,507,500 ----------- 62,969,258 ----------- HOLDING & OTHER INVESTMENT OFFICES - 1.5% HSBC Holdings PLC, 9.547% 12/31/49 (b)(c) 10,500,000 13,863,612 ----------- INSURANCE CARRIERS - 2.8% Florida Windstorm Underwriting Association, 7.125% 02/25/19 (b) 4,425,000 5,304,646 Fund American Companies, Inc., 5.875% 05/15/13 4,250,000 4,442,185 Prudential Insurance Co. of America, 7.650% 07/01/07 (b) 10,105,000 11,734,835 Travelers Property Casualty Corp., 3.750% 03/15/08 4,750,000 4,899,388 ----------- 26,381,054 ----------- NON-DEPOSITORY CREDIT INSTITUTIONS - 3.5% Countrywide Home Loans, Inc., 6.850% 06/15/04 8,500,000 8,931,460 Ford Motor Credit Co., 7.375% 10/28/09 7,000,000 7,338,100 General Motors Acceptance Corp.: 4.500% 07/15/06 5,000,000 5,018,250 6.125% 01/22/08 3,500,000 3,622,990 Household Finance Corp., 5.875% 02/01/09 8,200,000 9,198,104 ----------- 34,108,904 ----------- REAL ESTATE - 2.4% EOP Operating L.P., 8.375% 03/15/06 11,000,000 12,670,350 iStar Financial, Inc., 8.750% 08/15/08 8,000,000 8,800,000 LNR Property Corp., 7.625% 07/15/13 (b) 2,000,000 2,010,000 ----------- 23,480,350 ----------- SECURITY BROKERS & DEALERS - 2.7% Credit Suisse First Boston USA, Inc.: 4.625% 01/15/08 5,000,000 5,349,300 5.875% 08/01/06 7,750,000 8,575,917 Jefferies Group, Inc., 7.750% 03/15/12 7,250,000 8,278,702 LaBranche & Co., Inc., 12.000% 03/02/07 3,300,000 3,762,000 ----------- 25,965,919 ----------- See notes to investment portfolio. 4 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR VALUE - ------------------------------------------------------- MANUFACTURING - 7.7% APPAREL - 1.0% Cintas Corp.: 5.125% 06/01/07 $ 5,315,000 $ 5,753,966 6.000% 06/01/12 3,250,000 3,673,183 ----------- 9,427,149 ----------- AUTO PARTS & ACCESSORIES - 0.5% Dana Corp.: 9.000% 08/15/11 3,200,000 3,464,000 10.125% 03/15/10 1,000,000 1,100,000 ----------- 4,564,000 ----------- CHEMICALS & ALLIED PRODUCTS - 1.8% Dow Chemical Co., 5.750% 11/15/09 6,000,000 6,524,460 Eastman Chemical Co., 3.250% 06/15/08 9,000,000 8,867,700 Rhodia SA, 8.875% 06/01/11 (b) 2,000,000 2,070,000 ----------- 17,462,160 ----------- ELECTRONIC & ELECTRICAL EQUIPMENT - 0.2% Thomas & Betts Corp., 7.250% 06/01/13 2,000,000 2,030,000 ----------- FOOD & KINDRED PRODUCTS - 0.2% Land O'Lakes, Inc., 8.750% 11/15/11 3,000,000 2,370,000 ----------- LUMBER & WOOD PRODUCTS - 0.6% Georgia-Pacific Corp., 7.500% 05/15/06 6,000,000 6,135,000 ----------- MACHINERY & COMPUTER EQUIPMENT - 1.0% Briggs & Stratton Corp., 8.875% 03/15/11 3,375,000 3,847,500 IBM Canada Credit Services Co., 3.750% 11/30/07 (b) 6,000,000 6,162,840 ----------- 10,010,340 ----------- MISCELLANEOUS MANUFACTURING - 1.3% American Greetings Corp., 6.100% 08/01/28 750,000 765,000 Hutchison Whampoa International Ltd., 6.500% 02/13/13 (b) 9,000,000 9,417,870 SPX Corp., 7.500% 01/01/13 2,000,000 2,150,000 ----------- 12,332,870 ----------- MOTOR VEHICLE TRANSPORTATION EQUIPMENT - 0.8% Cascades, Inc., 7.250% 02/15/13 (b) 6,000,000 6,330,000 Norampac, Inc., 6.750% 06/01/13 (b) 1,000,000 1,040,000 ----------- 7,370,000 ----------- PAR VALUE - ------------------------------------------------------- PRIMARY METAL - 0.1% United States Steel Corp., 10.750% 08/01/08 $ 1,000,000 $ 1,055,000 ----------- PRINTING & PUBLISHING - 0.2% Mail-Well, Inc., 9.625% 03/15/12 1,500,000 1,586,250 ----------- - ------------------------------------------------------- MINING & ENERGY - 3.9% METALS & MINING - 0.8% Alcoa, Inc., 6.000% 01/15/12 5,000,000 5,635,850 Freeport-McMoRan Copper & Gold, Inc., 10.125% 02/01/10 2,250,000 2,520,000 ----------- 8,155,850 ----------- OIL & GAS EXTRACTION - 2.1% Newfield Exploration Co., 7.450% 10/15/07 1,500,000 1,646,250 Nexen, Inc., 7.875% 03/15/32 5,250,000 6,491,415 Noble Drilling Corp., 7.500% 03/15/19 4,245,000 4,855,346 Pemex Project Funding Master Trust, 7.875% 02/01/09 6,000,000 6,840,000 ----------- 19,833,011 ----------- OIL & GAS FIELD SERVICES - 1.0% PDVSA Finance Ltd.: 7.400% 08/15/16 2,500,000 2,075,000 8.750% 02/15/04 679,000 676,454 Petrobas International Finance Co.: 9.125% 02/01/07 3,000,000 3,210,000 9.750% 07/06/11 3,500,000 3,850,000 ----------- 9,811,454 ----------- - ------------------------------------------------------- RETAIL TRADE - 2.6% AUTO DEALERS & GAS STATIONS - 0.9% DaimlerChrysler AG, 6.900% 09/01/04 8,706,000 9,168,637 ----------- DEPARTMENT STORES - 0.2% JC Penney Co., Inc., 8.000% 03/041/10 2,000,000 2,100,000 ----------- FOOD STORES - 0.5% Winn-Dixie Stores, Inc., 8.875% 04/01/08 4,250,000 4,547,500 ----------- RESTAURANTS - 1.0% Yum! Brands, Inc., 7.700% 07/01/12 8,250,000 9,363,750 ----------- - ------------------------------------------------------- See notes to investment portfolio. 5 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR VALUE - ------------------------------------------------------- SERVICES - 5.4% AMUSEMENT & RECREATION - 0.2% Steinway Musical Instruments, Inc., 8.750% 04/15/11 $ 2,000,000 $ 2,000,000 ----------- AUTO EQUIPMENT & RENTAL SERVICES - 0.4% Hertz Corp., 7.625% 06/01/12 4,250,000 4,350,003 ----------- BUSINESS SERVICES - 0.2% FedEx Corp., 7.530% 09/23/06 1,743,985 1,941,247 ----------- HEALTH SERVICES - 2.4% HCA, Inc., 7.125% 06/01/06 11,000,000 11,897,160 PacifiCare Health Systems, Inc., 10.750% 06/01/09 3,500,000 4,007,500 Tenet Healthcare Corp., 5.375% 11/15/06 7,250,000 7,032,500 ----------- 22,937,160 ----------- HOTELS, CAMPS & LODGING - 1.3% Hyatt Equities LLC, 6.875% 06/15/07 (b) 5,000,000 5,191,350 Starwood Hotels & Resorts Worldwide, Inc., 7.375% 05/01/07 7,000,000 7,385,000 ----------- 12,576,350 ----------- MOTION PICTURES - 0.9% Walt Disney Co., 5.375% 06/01/07 8,000,000 8,718,800 ----------- - ------------------------------------------------------- TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS & SANITARY SERVICES - 22.3% AEROSPACE - 1.7% Raytheon Co., 8.300% 03/01/10 7,000,000 8,665,020 Systems 2001 Asset Trust: 6.664% 09/15/13 (b) 2,615,046 2,943,969 7.156% 12/15/11 (b) 4,518,097 5,049,744 ----------- 16,658,733 ----------- AIR TRANSPORTATION - 3.6% Air 2 US, 8.027% 10/01/19 (b) 5,992,741 4,015,137 American Airlines, Inc., 7.024% 10/15/09 7,000,000 6,580,000 Continental Airlines, Inc.: 6.940% 10/15/13 1,209,155 1,112,423 7.461% 04/01/15 3,680,062 3,385,657 Delta Air Lines, Inc.: 7.570% 11/18/10 4,250,000 4,313,750 7.779% 11/18/05 6,250,000 5,125,000 PAR VALUE - ------------------------------------------------------- Southwest Airlines Co., 5.496% 11/01/06 $ 7,000,000 $ 7,586,390 United Airlines, Inc.: 7.783% 01/01/14 (d) 2,843,628 2,289,120 9.200% 03/22/08 (e) 2,399,897 527,977 ----------- 34,935,454 ----------- BROADCASTING - 0.8% Viacom, Inc., 7.700% 07/30/10 6,500,000 8,049,015 ----------- CABLE - 1.7% AT&T Broadband Corp., 8.375% 03/15/13 7,214,000 9,022,117 CSC Holdings, Inc.: 7.875% 02/15/18 4,250,000 4,313,750 8.125% 07/15/09 2,000,000 2,065,000 Rogers Cable, Inc., 6.250% 06/15/13 (b) 500,000 500,715 ----------- 15,901,582 ----------- ELECTRIC SERVICES - 9.8% Arizona Public Service Co., 4.650% 05/15/15 3,250,000 3,255,623 Black Hills Corp., 6.500% 05/15/13 2,525,000 2,528,409 Calpine Canada Energy Finance ULC, 8.500% 05/01/08 3,000,000 2,347,500 CenterPoint Energy Houston Electric LLC: 5.700% 03/15/13 (b) 3,250,000 3,521,635 6.950% 03/15/33 (b) 3,250,000 3,742,473 Duke Energy Corp., 3.750% 03/05/08 (b) 4,000,000 4,137,440 Edison Mission Energy, 9.875% 04/15/11 1,100,000 1,034,000 FirstEnergy Corp.: 5.500% 11/15/06 5,000,000 5,357,650 7.375% 11/15/31 2,750,000 3,092,293 FPL Energy American Wind LLC, 6.639% 06/20/23 (b) 4,670,000 4,779,838 Kansas City Power & Light, 6.000% 03/15/07 10,000,000 10,985,200 MidAmerican Energy Holdings Co.: 3.500% 05/15/08 (b) 5,000,000 5,027,400 4.625% 10/01/07 5,000,000 5,244,700 5.875% 10/01/12 7,000,000 7,621,250 MSW Energy Holdings LLC, 8.500% 09/01/10 (b) 2,000,000 2,060,000 See notes to investment portfolio. 6 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR VALUE - ------------------------------------------------------- TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS & SANITARY SERVICES (CONTINUED) ELECTRIC SERVICES (CONTINUED) Niagara Mohawk Power Corp., 8.875% 05/15/07 $ 5,500,000 $ 6,536,805 Northern States Power Co., 8.000% 08/28/12 3,750,000 4,733,475 Oglethorpe Power Corp., 6.974% 06/30/11 3,011,000 3,336,640 Oncor Electric Delivery Co., 7.250% 01/15/33 (b) 4,500,000 5,311,935 South Point Energy Center LLC, 8.400% 05/30/12 (b) 1,981,848 1,981,848 Southern Power Co., 6.250% 07/15/12 5,000,000 5,631,600 Xcel Energy, Inc., 3.400% 07/01/08 (b) 1,900,000 1,880,487 ----------- 94,148,201 ----------- PIPELINES - 0.1% El Paso Corp., 6.750% 05/15/09 1,500,000 1,365,000 ----------- RAILROADS - 0.7% CSX Corp., 6.250% 10/15/08 4,000,000 4,562,120 Kansas City Southern Railway, 7.500% 06/15/09 2,000,000 2,070,000 ----------- 6,632,120 ----------- SANITARY SERVICES - 0.6% Allied Waste North America, Inc., 8.875% 04/01/08 5,500,000 5,981,250 ----------- TELECOMMUNICATIONS - 3.3% AT&T Corp., 7.000% 11/15/06 7,000,000 7,750,470 AT&T Wireless Services, Inc., 7.875% 03/01/11 1,675,000 1,980,520 Rogers Cantel, Inc., 9.750% 06/01/16 1,550,000 1,755,375 Sprint Corp.: 6.125% 11/15/08 3,800,000 4,133,450 8.750% 03/15/32 1,500,000 1,791,570 TPSA Finance BV, 7.750% 12/10/08 (b) 6,000,000 6,319,080 Verizon Wireless, Inc., 5.375% 12/15/06 5,000,000 5,493,300 WorldCom, Inc., 8.250% 05/15/31 (e) 7,850,000 2,335,375 ----------- 31,559,140 ----------- - ------------------------------------------------------- PAR VALUE - ------------------------------------------------------- WHOLESALE TRADE - 0.5% NON-DURABLE GOODS - 0.5% Lilly Del Mar, Inc., 7.717% 08/01/29 (b)(c) $ 4,155,000 $ 4,369,543 ----------- TOTAL CORPORATE-FIXED INCOME BONDS & NOTES (cost of $662,958,614) 703,428,702 ----------- GOVERNMENT AGENCIES & OBLIGATIONS - 16.5% - ------------------------------------------------------- FOREIGN GOVERNMENT BOND - 0.7% State of Qatar, 9.750% 06/15/30 (b) 5,000,000 6,900,000 ----------- U.S. GOVERNMENT AGENCIES & OBLIGATIONS - 15.8% Federal Home Loan Mortgage Corporation, 12.000% 07/01/20 540,915 622,942 ----------- Federal National Mortgage Association: 5.000% 07/25/15 - 05/01/18 48,255,752 50,094,594 5.500% 12/01/18 14,759,232 15,331,985 6.000% 04/01/09 - 03/01/24 6,303,447 6,599,711 6.500% 10/01/28 - 12/01/31 9,910,842 10,339,427 8.500% 09/01/03 - 11/01/03 1,909 1,934 9.250% 03/25/18 467,433 511,166 ----------- 82,878,817 ----------- Government National Mortgage Association: 5.750% 07/20/25 300,704 307,124 8.000% 01/15/08 - 07/15/08 734,288 792,791 9.000% 06/15/16 - 10/15/16 53,810 59,966 ----------- 1,159,881 ----------- U.S. Treasury Bonds and Notes: 2.625% 05/15/08 13,675,000 13,798,896 3.625% 05/15/13 18,255,000 18,397,572 5.375% 02/15/31 31,470,000 35,436,950 ----------- 67,633,418 ----------- TOTAL GOVERNMENT AGENCIES & OBLIGATIONS (cost of $156,408,723) 159,195,058 ----------- - ------------------------------------------------------- See notes to investment portfolio. 7 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 ASSET-BACKED & NON-AGENCY MORTGAGE-BACKED SECURITIES -- 7.0% PAR VALUE - ------------------------------------------------------- American Mortgage Trust, 7.432% 09/27/22 $ 118,791 $ 106,912 California Infrastructure, 6.420% 12/26/09 10,000,000 11,416,300 Cigna CBO Ltd., 6.460% 11/15/08 (b) 4,158,762 4,328,362 Diversified REIT Trust, 6.780% 03/18/11 (b)(c) 5,000,000 5,446,875 First Union National Bank: 5.585% 02/12/34 6,052,069 6,622,603 6.141% 02/12/34 8,000,000 9,175,228 GS Mortgage Securities Corp., 7.750% 09/19/27 (b) 2,824,898 2,927,382 LB-UBS Commercial Mortgage Trust, 6.510% 12/15/26 5,000,000 5,857,982 Merrill Lynch Mortgage Investors, Inc., 7.127% 12/26/25 (c) 964,913 1,000,894 Nomura Asset Securities Corp., 7.120% 04/13/39 6,255,000 7,008,813 PNC Mortgage Securities Corp., 7.500% 06/25/26 1,448,003 1,551,130 Structured Asset Securities Corp., 1.869% 02/25/28 (c) 11,111,828 589,415 Wachovia Bank Commercial Mortgage Trust, 3.989% 06/15/35 (f) 11,930,000 11,988,768 ----------- TOTAL ASSET-BACKED & NON-AGENCY MORTGAGE-BACKED SECURITIES (cost of $64,252,022) 68,020,664 ----------- SHORT-TERM OBLIGATION -- 5.6% - ------------------------------------------------------- Repurchase agreement with State Street Bank & Trust Co., dated 06/30/03, due 07/01/03 at 1.000%, collateralized a U.S. Treasury Note maturing 11/30/04, market value $55,535,625 (repurchase proceeds $54,446,512) (cost of $54,445,000) 54,445,000 54,445,000 ----------- TOTAL INVESTMENTS - 101.9% (cost of $938,064,359) (g) 985,089,424 ----------- OTHER ASSETS & LIABILITIES, NET -- (1.9%) (18,617,274) - ------------------------------------------------------- NET ASSETS - 100.0% $966,472,150 ------------ NOTES TO INVESTMENT PORTFOLIO: - -------------------------------------------------------------------------------- (a) This security, or a portion thereof, with a market value of $2,051,455, is being used to collateralize open futures contracts. (b) This security is exempt from registration under Rule 144A of the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At June 30, 2003, the value of these securities amounted to $162,119,434 which represents 16.8% of net assets. (c) Interest rates on variable rate securities change periodically. The rate listed is as of June 30, 2003. (d) As of June 30, 2003, the Fund held securities of certain issuers that have filed for bankruptcy protection under Chapter 11 representing 0.2% of net assets. These issuers are in default of certain debt covenants. Income is being accrued. (e) As of June 30, 2003, the Fund held securities of certain issuers that have filed for bankruptcy protection under Chapter 11 representing 0.3% of net assets. These issuers are in default of certain debt covenants. Income is not being accrued. (f) Security purchased on a delayed delivery basis. (g) Cost for federal income tax purposes is $940,070,085. Short futures contracts open at June 30, 2003: PAR VALUE UNREALIZED COVERED BY EXPIRATION APPRECIATION TYPE CONTRACTS MONTH AT 6/30/03 - -------------------------------------------------------- 5 Year U.S. Treasury Note $21,000,000 Sept-2003 $ 183,994 10 Year U.S. Treasury Note 18,700,000 Sept-2003 293,865 30 Year U.S. Treasury Bond 47,500,000 Sept-2003 1,343,921 ---------- $1,821,780 ========== See notes to financial statements. 8 STATEMENT OF ASSETS AND LIABILITIES June 30, 2003 ASSETS: Investments, at cost $ 938,064,359 -------------- Investments, at value $ 985,089,424 Receivable for: Investments sold 28,191,013 Fund shares sold 3,588,392 Interest 12,316,325 Deferred Trustees' compensation plan 6,562 -------------- Total Assets 1,029,191,716 -------------- LIABILITIES: Payable to custodian bank 1,169,024 Payable for: Investments purchased 45,884,159 Investments purchased on a delayed delivery basis 11,998,021 Fund shares repurchased 1,775,674 Futures variation margin 452,469 Distributions 554,076 Management fee 272,448 Administration fee 117,890 Transfer agent fee 348,336 Pricing and bookkeeping fees 39,235 Distribution and services fees 26,439 Deferred Trustees' fees 6,562 Other liabilities 75,233 -------------- Total Liabilities 62,719,566 -------------- NET ASSETS $ 966,472,150 ============== COMPOSITION OF NET ASSETS: Paid-in capital $ 939,370,894 Overdistributed net investment income (2,007,917) Accumulated net realized loss (19,737,672) Net unrealized appreciation on: Investments 47,025,065 Futures contracts 1,821,780 -------------- NET ASSETS $ 966,472,150 ============== CLASS A: Net assets $ 92,993,087 Shares outstanding 10,127,119 -------------- Net asset value per share $ 9.18(a) ============== Maximum offering price per share ($9.18/0.9525) $ 9.64(b) ============== CLASS B: Net assets $ 103,880,249 Shares outstanding 11,313,010 -------------- Net asset value and offering price per share $ 9.18(a) ============== CLASS C: Net assets $ 51,676,026 Shares outstanding 5,627,605 -------------- Net asset value and offering price per share $ 9.18(a) ============== CLASS Z: Net assets $ 717,922,788 Shares outstanding 78,183,200 -------------- Net asset value, offering and redemption price per share $ 9.18 ============== (a)Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. (b)On sales of $50,000 or more the offering price is reduced. STATEMENT OF OPERATIONS For the Year Ended June 30, 2003 INVESTMENT INCOME: Interest $ 55,777,640 ------------- EXPENSES: Expenses allocated from Portfolio 619,612 Management fee 2,515,761 Administration fee 1,331,433 Distribution fee: Class A 64,939 Class B 561,827 Class C 246,000 Service fee: Class A 161,861 Class B 187,275 Class C 81,617 Transfer agent fee 1,997,159 Pricing and bookkeeping fees 331,790 Trustees' fees 25,889 Custody fee 28,890 Other expenses 268,316 ------------- Total Operating Expenses 8,422,369 Fees waived by Distributor: Class A (64,939) Class C (50,123) Custody earnings credit (2,583) ------------- Net Operating Expenses 8,304,724 Interest expense 1,830 ------------- Net Expenses 8,306,554 ------------- Net Investment Income 47,471,086 ------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS: Net realized gain (loss) on: Investments 16,149,207 Futures contracts (17,991,728) ------------- Net realized loss (1,842,521) ------------- Net change in unrealized appreciation/depreciation on: Investments 47,404,056 Futures contracts 2,989,426 ------------- Net change in unrealized appreciation/depreciation 50,393,482 ------------- Net Gain 48,550,961 ------------- Net Increase in Net Assets from Operations $ 96,022,047 ============= See notes to financial statements. 9 STATEMENT OF CHANGES IN NET ASSETS YEAR ENDED JUNE 30, INCREASE (DECREASE) ------------------- IN NET ASSETS: 2003 (a) 2002 (b) - ------------------------------------------------------- OPERATIONS: Net investment income $ 47,471,086 $ 40,582,815 Net realized loss on investments and futures contracts (1,842,521) (3,112,703) Net change in unrealized appreciation/depreciation on investments and futures contracts 50,393,482 (6,652,968) ------------ ------------ Net Increase from Operations 96,022,047 30,817,144 ------------ ------------ DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (3,487,025) (980,531) Class B (3,467,410) (221,915) Class C (1,549,430) (79,287) Class Z (40,839,542) (40,976,904) Return of capital: Class A -- (4,063) Class B -- (919) Class C -- (329) Class Z -- (169,791) ------------ ------------ Total Distributions Declared to Shareholders (49,343,407) (42,433,739) ------------ ------------ SHARE TRANSACTIONS: Class A: Subscriptions 93,406,890 26,788,516 Distributions reinvested 2,883,981 925,567 Redemptions (40,046,836) (7,089,601) ------------ ------------ Net Increase 56,244,035 20,624,482 ------------ ------------ Class B: Subscriptions 83,003,613 29,577,438 Distributions reinvested 2,442,195 157,274 Redemptions (15,335,796) (668,496) ------------ ------------ Net Increase 70,110,012 29,066,216 ------------ ------------ Class C: Subscriptions 48,689,817 12,356,180 Distributions reinvested 974,767 59,464 Redemptions (11,862,809) (636,168) ------------ ------------ Net Increase 37,801,775 11,779,476 ------------ ------------ (a) Effective July 29, 2002, Stein Roe Intermediate Bond Fund Class S shares were renamed Liberty Intermediate Bond Fund Class Z shares. (b) Class B and Class C shares were initially offered on February 1, 2002, at which time Stein Roe Intermediate Bond Fund was renamed Liberty Intermediate Bond Fund with Class S shares renamed as Stein Roe Intermediated Bond Fund, Class S. YEAR ENDED JUNE 30, INCREASE (DECREASE) ------------------- IN NET ASSETS: 2003 (a) 2002 (b) - -------------------------------------------------------- Class Z: Subscriptions $ 269,095,613 $ 486,288,652 Distributions reinvested 35,988,674 36,918,397 Redemptions (351,929,592) (296,924,898) ------------ ------------ Net Increase (Decrease) (46,845,305) 226,282,151 ------------ ------------ Net Increase from Share Transactions 117,310,517 287,752,325 -------------------------- Total Increase in Net Assets 163,989,157 276,135,730 NET ASSETS: Beginning of period 802,482,993 526,347,263 ------------ ------------ End of period (overdistributed net investment income of $(2,007,917) and $(1,514,400), respectively) $966,472,150 $802,482,993 ============ ============ CHANGES IN SHARES: Class A: Subscriptions 10,637,329 3,030,795 Issued for distributions reinvested 325,300 104,218 Redemptions (4,558,154) (800,927) ------------ ------------ Net Increase 6,404,475 2,334,086 ------------ ------------ Class B: Subscriptions 9,478,046 3,352,832 Issued for distributions reinvested 275,656 17,903 Redemptions (1,735,505) (75,922) ------------ ------------ Net Increase 8,018,197 3,294,813 ------------ ------------ Class C: Subscriptions 5,533,514 1,400,267 Issued for distributions reinvested 109,962 6,772 Redemptions (1,350,773) (72,137) ------------ ------------ Net Increase 4,292,703 1,334,902 ------------ ------------ Class Z: Subscriptions 30,633,958 54,642,619 Issued for distributions reinvested 4,081,323 4,156,784 Redemptions (40,109,913) (33,398,899) ------------ ------------ Net Increase (Decrease) (5,394,632) 25,400,504 ------------ ------------ See notes to financial statements. 10 NOTES TO FINANCIAL STATEMENTS June 30, 2003 NOTE 1. ACCOUNTING POLICIES ORGANIZATION: Liberty Intermediate Bond Fund (the "Fund") (formerly, Stein Roe Intermediate Bond Fund), a series of Liberty-Stein Roe Funds Income Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek total return by pursuing current income and opportunities for capital appreciation. The Fund may issue an unlimited number of shares. The Fund offers four classes of shares: Class A, Class B, Class C and Class Z. Class A shares are sold with a front-end sales charge. A 1.00% contingent deferred sales charge ("CDSC") is assessed on redemptions made within eighteen months on an original purchase of $1 million to $25 million. Class B shares are subject to a CDSC. Class B shares will convert to Class A shares in three, four or eight years after purchase, depending on the program under which shares were purchased. Class C shares are subject to a CDSC on redemptions made within one year after purchase. Effective July 29, 2002, Stein Roe Intermediate Bond Fund's Class S shares were renamed Liberty Intermediate Bond Fund Class Z shares. Class Z shares are offered continuously at net asset value. There are certain restrictions on the purchase of Class Z shares, as described in the Fund's prospectus. Prior to September 13, 2002, the Fund invested substantially all of its assets in the SR&F Intermediate Bond Portfolio (the "Portfolio") as part of a master/feeder structure. As of the close of business on September 12, 2002, the Portfolio distributed all of its net assets to the Fund in exchange for the Fund's interest in the Portfolio in complete liquidation of the Portfolio. The Portfolio allocated income, expenses, realized and unrealized gains (losses) to its investors on a daily basis, based on methods approved by the Internal Revenue Service. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATIONS AND TRANSACTIONS: Debt securities generally are valued by a pricing service based upon market transactions for normal, institutional-size trading units of similar securities. Such services may use various pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data, as well as broker quotes. When management deems it appropriate, an over-the-counter or exchange bid quotation is used. Investments for which market quotations are not readily available, or quotations which management believes are not appropriate, are valued at fair value under procedures approved by the Board of Trustees. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. Short-term obligations with a maturity of 60 day or less are valued at amortized cost. Security transactions are accounted for on the date the securities are purchased, sold or mature. Cost is determined and gains (losses) are based upon the specific identification method for both financial statement and federal income tax purposes. The Fund may trade securities on other than normal settlement terms. This may increase the risk if the other party to the transaction fails to deliver and causes the Fund to subsequently invest at less advantageous prices. The Fund maintains U.S. Government securities or other liquid high grade debt obligations as collateral with respect to securities traded on other than normal settlement terms. DETERMINATION OF CLASS NET ASSET VALUES: All income, expenses (other than Class A, Class B and Class C service fees and Class A, Class B and Class C distribution fees), and realized and unrealized gains (losses) are allocated to each class proportionately on a daily basis for purposes of determining the net asset value of each class. 11 NOTES TO FINANCIAL STATEMENTS (CONTINUED) INVESTMENT INCOME, DEBT DISCOUNT AND PREMIUM: Interest income is recorded on the accrual basis. Premium and discount are being amortized and accreted, respectively, for all debt securities. DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared daily and paid monthly. Capital gains distributions, if any, are distributed annually. FEDERAL INCOME TAXES: Consistent with the Fund's policy to qualify as a regulated investment company and to distribute all of its taxable income, no federal income tax has been accrued. FUTURES CONTRACTS: The Fund may enter into futures contracts to either hedge against expected declines of their portfolio securities or as a temporary substitute for the purchase of individual bonds. Risks of entering into futures contracts include the possibility that there may be an illiquid market at the time a fund seeks to close out a contract, and changes in the value of the futures contract may not correlate with changes in the value of the portfolio securities being hedged. Upon entering into a futures contract, the Fund deposits cash or securities with its custodian in an amount sufficient to meet the initial margin requirements. Subsequent payments are made or received by the Fund equal to the daily change in the contract value and are recorded as variation margin payable or receivable and offset in unrealized gains or losses. The Fund recognizes a realized gain or loss when the contract is closed or expires. Refer to the Fund's Investment Portfolio for a summary of open futures contracts at June 30, 2003. OTHER: The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatments for deferral of losses from wash sales, premium amortization on debt securities, straddle deferrals, mark-to-market on futures contracts, current year distribution payable, capital loss carryforwards and non-deductible expenses. Reclassifications are made to the Fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations. For the year ended June 30, 2003, permanent items identified and reclassified among the components of net assets are as follows: OVERDISTRIBUTED ACCUMULATED NET INVESTMENT NET REALIZED PAID-IN INCOME LOSS CAPITAL ------ ---- ------- $1,378,804 $(1,378,804) $-- Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. The tax character of distributions paid for the years ended June 30, 2003 and 2002 was as follows: 2003 2002 ---- ---- Distributions paid from: Ordinary income $49,343,407 $42,258,637 Tax return of capital -- 175,102 As of June 30, 2003, the components of distributable earnings on a tax basis were as follows: UNDISTRIBUTED ORDINARY UNREALIZED INCOME APPRECIATION ------ ------------ $190,961 $45,019,339 The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code: YEAR OF EXPIRATION CAPITAL LOSS CARRYFORWARD - ------------------ ------------------------- 2004 $1,241,013 2005 1,289,388 2008 1,558,676 2009 3,689,913 ---------- Total $7,778,990 ========== 12 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Expired capital loss carryforwards, if any, are treated as a reduction of paid-in-capital. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES On April 1, 2003, Stein Roe & Farnham Incorporated ("Stein Roe"), the investment advisor and administrator to the Fund, merged into Columbia Management Advisors, Inc. ("Columbia"), formerly known as Columbia Management Co., an indirect, wholly-owned subsidiary of FleetBoston Financial Corporation. At the time of the merger, Columbia assumed the obligations of Stein Roe with respect to the Fund. The merger did not change the way the Fund is managed, the investment personnel assigned to manage the Fund or the fees paid by the Fund. MANAGEMENT FEE: Columbia is the investment advisor of the Fund and receives a monthly fee equal to 0.35% annually of the Fund's average daily net assets. Prior to September 13, 2002, the management fee was paid by the Portfolio at the same rate. ADMINISTRATION FEE: Columbia also provides accounting and other services for a monthly fee equal to 0.15% annually of the Fund's average daily net assets. PRICING AND BOOKKEEPING FEES: Columbia is responsible for providing pricing and bookkeeping services to the Fund under Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Columbia has delegated those functions to State Street Bank and Trust Company ("State Street"). Columbia pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Columbia receives from the Fund an annual flat fee of $10,000, paid monthly, and in any month that the Fund's average daily net assets are more than $50 million, a monthly fee equal to the average daily net assets of the Fund for that month multiplied by a fee rate that is calculated by taking into account the fees payable to State Street under the Outsourcing Agreement. For the year ended June 30, 2003, the annualized net asset based fee rate was 0.034%. The Fund also pays out-of-pocket costs for pricing services. Prior to September 13, 2002, Columbia received from the Fund an annual flat fee of $5,000. TRANSFER AGENT FEES: Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of Columbia, provides shareholder services for a monthly fee equal to 0.06% annually of the Fund's average daily net assets plus charges based on the number of shareholder accounts and transactions. The Transfer Agent also receives reimbursement for certain out-of-pocket expenses. UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES: Liberty Funds Distributor, Inc. (the "Distributor"), an affiliate of Columbia, is the Fund's principal underwriter. For the year ended June 30, 2003, the Fund has been advised that the Distributor retained net underwriting discounts of $16,209 on sales of the Fund's Class A shares and received CDSC of $1,635, $226,760 and $19,450 on Class A, Class B and Class C share redemptions, respectively. The Fund has adopted a 12b-1 (the "Plan") which requires the payment of a monthly service fee to the Distributor equal to 0.25% annually of the average daily net assets attributable to Class A, Class B and Class C shares. The Plan also requires the payment of a monthly distribution fee to the Distributor equal to 0.10%, 0.75% and 0.75% annually of the average daily net assets attributable to Class A, Class B and Class C shares, respectively. The Distributor has voluntarily agreed to waive the Class A distribution fee and a portion of the Class C share distribution fee so that it does not exceed 0.60% annually. The CDSC and the fees received from the Plan are used principally as repayment to the Distributor for amounts paid by the Distributor to dealers who sold such shares. OTHER: The Fund pays no compensation to its officers, all of whom are employees of Columbia or its affiliates. The Fund's Independent Trustees may participate in a deferred compensation plan which may be terminated at any time. Obligations of the plan will be paid solely out of the Fund's assets. The Fund has an agreement with its custodian bank under which $2,583 of custody fees were reduced by balance credits for the year ended June 30, 2003. The Fund could have invested a portion of the assets 13 NOTES TO FINANCIAL STATEMENTS (CONTINUED) utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. Expenses allocated from the Portfolio on the Statement of Operations include $605,543 paid to affiliates, prior to the liquidation of the Portfolio. These affiliated fees include: management, pricing and bookkeeping, transfer agent and trustees' fees. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY: For the year ended June 30, 2003, purchases and sales of investments, other than short-term obligations, were $1,011,570,437 and $966,885,399, respectively, of which $326,250,935 and $192,061,918 respectively, were U.S. Government securities. Unrealized appreciation/depreciation at June 30, 2003, based on cost of investments for federal income tax purposes was: Gross unrealized appreciation $ 60,624,150 Gross unrealized depreciation (15,604,811) ------------ Net unrealized appreciation $ 45,019,339 ------------ OTHER: Investing in high-yield securities offers the potential for high current income and attractive total return, but involves greater credit and other risks not associated with investing in higher-quality bonds. Bond investing also involves interest rate risk, which means that bond prices may change as interest rates increase or decrease. The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. NOTE 5. LINE OF CREDIT The Fund and other affiliated funds participate in a $350,000,000 credit facility which is used for temporary or emergency purposes to facilitate portfolio liquidity. Interest is charged to the Fund based on its borrowings. In addition, the Fund has agreed to pay commitment fees on its pro-rata portion of the line of credit. The commitment fee is included in "Other expenses" on the Statement of Operations. Prior to April 26, 2003, the Fund participated in a separate credit agreement with similar terms to its existing agreement. For the year ended June 30, 2003, the average daily loan balance outstanding on days where borrowings existed was $2,224,399 at a dollar weighted average interest rate of 2.28%. 14 FINANCIAL HIGHLIGHTS Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD JUNE 30, ENDED ---------------------------- JUNE 30, CLASS A SHARES 2003 2002 2001 (a) ========================================================================================================================== NET ASSET VALUE, BEGINNING OF PERIOD $ 8.73 $ 8.84 $ 8.46 ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b)(c) 0.45 0.53(d) 0.56 Net realized and unrealized gain (loss) on investments and futures contracts 0.48 (0.08)(d) 0.36 ------- ------- ------- Total from Investment Operations 0.93 0.45 0.92 ------- ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.48) (0.56) (0.54) Return of capital -- --(e) -- ------- ------- ------- Total Distributions Declared to Shareholders (0.48) (0.56) (0.54) ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.18 $ 8.73 $ 8.84 ======= ======= ======= Total return (f) 11.03%(g) 5.10%(g) 11.19%(h) ======= ======= ======= RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Operating expenses (b)(i) 1.05% 1.04% 0.96%(j) Interest expense --%(k) -- -- Expenses (b)(i) 1.05% 1.04% 0.96%(j) Net investment income (b)(i) 5.13% 5.94%(d) 6.90%(j) Waiver/reimbursement 0.10% 0.10% -- Portfolio turnover 114% 179%(l) 254%(l) Net assets, end of period (000's) $ 92,993 $ 32,493 $ 12,279
(a)Class A shares were initially offered on July 31, 2000. Per share data and total return reflect activity from that date. (b)Per share data and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of income and expenses of the SR&F Intermediate Bond Portfolio, prior to the merger. (c)Per share data was calculated using average shares outstanding during the period. (d)Effective July 1, 2001, the Portfolio adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and accreting discount on all debt securities. The effect of this change for the year ended June 30, 2002, was to decrease net investment income per share by $0.01, decrease net realized and unrealized loss per share by $0.01 and decrease the ratio of net investment income to average net assets from 6.10% to 5.94%. Per share data and ratios for period prior to June 30, 2002 have not been restated to reflect this change in presentation. (e)Rounds to less than $0.01 per share. (f)Total return at net asset value assuming all distributions reinvested and no initial sales charge or contingent deferred sales charge. (g)Had the Distributor not waived a portion of expenses, total return would have been reduced. (h)Not annualized. (i)The benefits derived from custody credits and directed brokerage arrangement, if applicable, had an impact of less than 0.01%. (j)Annualized. (k)Rounds to less than 0.01%. (l)Portfolio turnover disclosed is for the SR&F Intermediate Bond Portfolio. 15 FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout each period is as follows:
YEAR PERIOD ENDED ENDED JUNE 30, JUNE 30, CLASS B SHARES 2003 2002 (a) ========================================================================================================================== NET ASSET VALUE, BEGINNING OF PERIOD $ 8.73 $ 8.89 ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b)(c) 0.39 0.18(d) Net realized and unrealized gain (loss) on investments and futures contracts 0.47 (0.13)(d) ------- ------- Total from Investment Operations 0.86 0.05 ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.41) (0.21) Return of capital -- --(e) ------- ------- Total Distributions Declared to Shareholders (0.41) (0.21) ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.18 $ 8.73 ======= ======= Total return (f) 10.21% 0.51%(g) ======= ======= RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Operating expenses (b)(h) 1.80% 1.83%(i) Interest expense --%(j) -- Expenses (b)(h) 1.80% 1.83%(i) Net investment income (b)(h) 4.38% 5.04%(d)(i) Portfolio turnover 114% 179%(k) Net assets, end of period (000's) $103,880 $ 28,758
(a)Class B shares were initially offered on February 1, 2002. Per share data and total return reflect activity from that date. (b)Per share data and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of income and expenses of the SR&F Intermediate Bond Portfolio, prior to the merger. (c)Per share data was calculated using average shares outstanding during the period. (d)Effective July 1, 2001, the Portfolio adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and accreting discount on all debt securities. The effect of this change for the year ended June 30, 2002, was to decrease net investment income per share by $0.01, decrease net realized and unrealized loss per share by $0.01 and decrease the ratio of net investment income to average net assets from 5.19% to 5.04%. (e)Rounds to less than $0.01 per share. (f)Total return at net asset value assuming all distributions reinvested and no contingent deferred sales charge. (g)Not annualized. (h)The benefits derived from custody credits and directed brokerage arrangement, if applicable, had an impact of less than 0.01%. (i)Annualized. (j)Rounds to less than 0.01%. (k)Portfolio turnover disclosed is for the SR&F Intermediate Bond Portfolio. 16 FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout each period is as follows:
YEAR PERIOD ENDED ENDED JUNE 30, JUNE 30, CLASS C SHARES 2003 2002 (a) ========================================================================================================================== NET ASSET VALUE, BEGINNING OF PERIOD $ 8.73 $ 8.89 ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b)(c) 0.40 0.19(d) Net realized and unrealized gain (loss) on investments and futures contracts 0.48 (0.14)(d) ------- ------- Total from Investment Operations 0.88 0.05 ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.43) (0.21) Return of capital -- --(e) ------- ------- Total Distributions Declared to Shareholders (0.43) (0.21) ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.18 $ 8.73 ======= ======= Total return (f)(g) 10.37% 0.58%(h) ======= ======= RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Operating expenses (b)(i) 1.65% 1.68%(j) Interest expense --%(k) -- Expenses (b)(i) 1.65% 1.68%(j) Net investment income (b)(i) 4.50% 5.19%(d)(j) Waiver/reimbursement 0.15% 0.15%(j) Portfolio turnover 114% 179%(l) Net assets, end of period (000's) $ 51,676 $ 11,651
(a)Class C shares were initially offered on February 1, 2002. Per share data and total return reflect activity from that date. (b)Per share data and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of income and expenses of the SR&F Intermediate Bond Portfolio, prior to the merger. (c)Per share data was calculated using average shares outstanding during the period. (d)Effective July 1, 2001, the Portfolio adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and accreting discount on all debt securities. The effect of this change for the year ended June 30, 2002, was to decrease net investment income per share by $0.01, increase net realized and unrealized gain per share by $0.01 and decrease the ratio of net investment income to average net assets from 5.34% to 5.19%. (e)Rounds to less than $0.01 per share. (f)Total return at net asset value assuming all distributions reinvested and no contingent deferred sales charge. (g)Had the Adviser not reimbursed a portion of expenses, total return would have been reduced. (h)Not annualized. (i)The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (j)Annualized. (k)Rounds to less than 0.01%. (l)Portfolio turnover disclosed is for the SR&F Intermediate Bond Portfolio. 17 FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED JUNE 30, ----------------------------------------------------------------------------- CLASS Z SHARES 2003 (a) 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 8.73 $ 8.84 $ 8.41 $ 8.63 $ 8.97 ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b)(c) 0.49 0.55(d) 0.62 0.60 0.56 Net realized and unrealized gain (loss) on investments and futures contracts 0.46 (0.08)(d) 0.43 (0.22) (0.33) ------- ------- ------- ------- ------- Total from Investment Operations 0.95 0.47 1.05 0.38 0.23 ------- ------- ------- ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.50) (0.58) (0.62) (0.60) (0.57) Return of capital -- --(e) -- -- -- ------- ------- ------- ------- ------- Total Distributions Declared to Shareholders (0.50) (0.58) (0.62) (0.60) (0.57) ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.18 $ 8.73 $ 8.84 $ 8.41 $ 8.63 ======= ======= ======= ======= ======= Total return (f) 11.30% 5.36% 12.86% 4.62% 2.60% ======= ======= ======= ======= ======= RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Operating expenses (b)(g) 0.80% 0.79% 0.72% 0.72% 0.72% Interest --%(h) -- -- -- -- Expenses (b)(g) 0.80% 0.79% 0.72% 0.72% 0.72% Net investment income (b)(g) 5.51% 6.22%(d) 7.14% 7.16% 6.31% Portfolio turnover rate 114% 179%(i) 254%(i) 356%(i) 253%(i) Net assets, end of period (000's) $717,923 $729,580 $514,068 $406,216 $431,123
(a)Effective July 29, 2002, the Stein Roe Intermediate Bond Fund's Class S shares were renamed Liberty Intermediate Bond Fund Class Z shares. (b)Per share data and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of income and expenses of the SR&F Intermediate Bond Portfolio, prior to the merger. (c)Per share data was calculated using average shares outstanding during the period. (d)Effective July 1, 2001, the Portfolio adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and accreting discount on all debt securities. The effect of this change for the year ended June 30, 2002, was to decrease net investment income per share by $0.02, decrease net realized and unrealized loss per share by $0.02 and decrease the ratio of net investment income to average net assets from 6.38% to 6.22%. Per share data and ratios for periods prior to June 30, 2002 have not been restated to reflect this change in presentation. (e)Rounds to less than $0.01 per share. (f)Total return at net asset value assuming all distributions reinvested. (g)The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (h)Rounds to less than 0.01%. (i)Portfolio turnover disclosed is for the SR&F Intermediate Bond Portfolio. 18 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF LIBERTY-STEIN ROE FUNDS INCOME TRUST LIBERTY INTERMEDIATE BOND FUND We have audited the accompanying statement of assets and liabilities, including the investment portfolio, of Liberty Intermediate Bond Fund (formerly, Stein Roe Intermediate Bond Fund) (the "Fund") (a series of Liberty-Stein Roe Funds Income Trust) as of June 30, 2003, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of June 30, 2003, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Liberty Intermediate Bond Fund (a series of Liberty-Stein Roe Funds Income Trust) at June 30, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Boston, Massachusetts August 19, 2003 19 TRUSTEES AND OFFICERS The Trustees serve terms of indefinite duration. The names, addresses and ages of the Trustees and officers of the Liberty Funds, the year each was first elected or appointed to office, their principal business occupations during at least the last five years, the number of portfolios overseen by each Trustee and other directorships they hold are shown below. Each officer listed below serves as an officer of each of the Liberty Funds. The Statement of Additional Information (SAI) contains additional information about the Trustees and is available without charge upon request by calling the fund's distributor at 800-345-6611.
Number of Year First Portfolios in Elected or Liberty Funds Other Position with Appointed Principal Occupation(s) Complex Overseen Directorships Name, Address and Age Liberty Funds to Office1 During Past Five Years by Trustee Held - ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED TRUSTEES Douglas A. Hacker (Age 47) Trustee 1996 Executive Vice President - Strategy of United 85 None P.O. Box 66100 Airlines (airline) since December, 2002 (formerly Chicago, IL 60666 President of UAL Loyalty Services (airline) from September, 2001 to December, 2002; Executive Vice President and Chief Financial Officer of United Airlines from March, 1993 to September, 2001; Senior Vice President and Chief Financial Officer of UAL, Inc. prior thereto). Janet Langford Kelly (Age 45) Trustee 1996 Executive Vice President-Corporate Development 85 None One Kellogg Square and Administration, General Counsel and Secretary, Battle Creek, MI 49016 Kellogg Company (food manufacturer), since September, 1999; Senior Vice President, Secretary and General Counsel, Sara Lee Corporation (branded, packaged, consumer-products manufacturer) from January, 1995 to September, 1999. Richard W. Lowry (Age 67) Trustee 1995 Private Investor since August, 1987 (formerly 87(4) None 10701 Charleston Drive Chairman and Chief Executive Officer, U.S. Plywood Vero Beach, FL 32963 Corporation (building products manufacturer)). Charles R. Nelson (Age 60) Trustee 1981 Professor of Economics, University of Washington, 120(2) None Department of Economics since January, 1976; Ford and Louisa Van Voorhis University of Washington Professor of Political Economy, University of Seattle, WA 98195 Washington, since September, 1993; Director, Institute for Economic Research, University of Washington, since September, 2001; Adjunct Professor of Statistics, University of Washington, since September, 1980; Associate Editor, Journal of Money Credit and Banking, since September, 1993; consultant on econometric and statistical matters. John J. Neuhauser (Age 60) Trustee 1985 Academic Vice President and Dean of Faculties since 88(4,5) Saucony, Inc. 84 College Road August, 1999, Boston College (formerly Dean, Boston (athletic Chestnut Hill, MA 02467-3838 College School of Management from September, 1977 footwear); to September, 1999. SkillSoft Corp. (E-Learning) Thomas E. Stitzel (Age 67) Trustee 1998 Business Consultant since 1999 (formerly Professor of 85 None 2208 Tawny Woods Place Finance from 1975 to 1999 and Dean from 1977 to 1991, Boise, ID 83706 College of Business, Boise State University); Chartered Financial Analyst.
20 TRUSTEES AND OFFICERS (CONTINUED)
Number of Year First Portfolios in Elected or Liberty Funds Other Position with Appointed Principal Occupation(s) Complex Overseen Directorships Name, Address and Age Liberty Funds to Office1 During Past Five Years by Trustee Held - ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED TRUSTEES Thomas C. Theobald (Age 66) Trustee 1996 Managing Director, William Blair Capital Partners 85 Anixter 27 West Monroe Street, Suite 3500 (private equity investing) since September, 1994 International Chicago, IL 60606 (formerly Chief Executive Officer and Chairman (network support of the Board of Directors, Continental Bank equipment Corporation prior thereto). distributor), Jones Lang LaSalle (real estate management services) and MONY Group (life insurance). Anne-Lee Verville (Age 58) Trustee 1998 Author and speaker on educational systems needs 86(5) Chairman of 359 Stickney Hill Road (formerly General Manager, Global Education the Board of Hopkinton, NH 03229 Industry from 1994 to 1997, and President, Directors, Applications Solutions Division from 1991 to 1994, Enesco Group, IBM Corporation (global education and Inc. (designer, global applications)). importer and distributor of giftware and collectibles). INTERESTED TRUSTEES William E. Mayer3 (Age 63) Trustee 1994 Managing Partner, Park Avenue Equity Partners 87(4) Lee Enterprises 399 Park Avenue (private equity) since February, 1999 (formerly (print media), Suite 3204 Founding Partner, Development Capital LLC WR Hambrecht + Co. New York, NY 10022 from November 1996 to February, 1999; Dean and (financial service Professor, College of Business and Management, provider) and University of Maryland from October, 1992 to First Health November, 1996). (healthcare). Joseph R. Palombo3 (Age 50) Trustee, 2000 Executive Vice President and Chief Operating Officer 86(6) None One Financial Center Chairman of of Columbia Management Group, Inc. (Columbia Boston, MA 02111 the Board and Management) since December, 2001 and Director, President Executive Vice President and Chief Operating Officer of the Advisor since April, 2003 (formerly Chief Operations Officer of Mutual Funds, Liberty Financial Companies, Inc. from August, 2000 to November, 2001; Executive Vice President of Stein Roe & Farnham Incorporated (Stein Roe) from April, 1999 to April, 2003; Director of Colonial Management Associates, Inc. (Colonial) from April, 1999 to April, 2003; Director of Stein Roe from September, 2000 to April, 2003) President of Liberty Funds and Galaxy Funds since February, 2003 (formerly Vice President from September 2002 to February 2003); Manager of Stein Roe Floating Rate Limited Liability Company since October, 2000; (formerly Vice President of the Liberty Funds from April, 1999 to August, 2000; Chief Operating Officer and Chief Compliance Officer, Putnam Mutual Funds from December, 1993 to March, 1999).
1 In December, 2000, the boards of each of the Liberty Funds and former Stein Roe funds were combined into one board of trustees with common membership. The date shown is the earliest date on which a trustee was elected to either the Liberty Funds board or the former Stein Roe funds board. 2 In addition to serving as a disinterested Trustee of the Liberty Funds, Mr. Nelson serves as a disinterested Director or Trustee of the Columbia Funds and CMG Funds, currently consisting of 15 funds and 20 funds, respectively, which are advised by the Advisor. 3 Mr. Mayer is an "interested person" (as defined in the Investment Company Act of 1940 (1940 Act)) by reason of his affiliation with WR Hambrecht + Co. Mr. Palombo is an interested person as an employee of the Advisor. 4 In addition to serving as trustees of Liberty Funds, Messrs. Lowry, Neuhauser and Mayer each serve as a director/trustee of the Liberty All-Star Funds, currently consisting of 2 funds, which are advised by an affiliate of the Advisor. 5 In addition to serving as disinterested trustees of the Liberty Funds, Mr. Neuhauser and Ms. Verville serve as disinterested directors of Columbia Management Multi-Strategy Hedge Fund, LLC, which is advised by the Advisor. 6 In addition to serving as an interested trustee of the Liberty Funds, Mr. Palombo serves as an interested director of Columbia Management Multi-Strategy Hedge Fund, LLC, which is advised by the Advisor. 21 [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK]
OFFICERS AND TRANSFER AGENT Year First Elected or Position with Appointed Name, Address and Age Liberty Funds to Office Principal Occupation(s) During Past Five Years - ------------------------------------------------------------------------------------------------------------------------------------ OFFICERS Vicki L. Benjamin (Age 41) Chief 2001 Controller of the Liberty Funds and of the Liberty All-Star Funds since May, One Financial Center Accounting 2002; Chief Accounting Officer of the Liberty Funds and Liberty All-Star Boston, MA 02111 Officer and Funds since June, 2001; Controller and Chief Accounting Officer of the Controller Galaxy Funds since September, 2002 (formerly Vice President, Corporate Audit, State Street Bank and Trust Company from May, 1998 to April, 2001; Audit Manager from July, 1994 to June, 1997; Senior Audit Manager from July, 1997 to May, 1998, Coopers & Lybrand, LLP). J. Kevin Connaughton (Age 39) Treasurer 2000 Treasurer of the Liberty Funds and of the Liberty All-Star Funds since One Financial Center December, 2000; Vice President of the Advisor since April, 2003 (formerly Boston, MA 02111 Controller of the Liberty Funds and of the Liberty All-Star Funds from February, 1998 to October, 2000); Treasurer of the Galaxy Funds since September, 2002; Treasurer, Columbia Management Multi-Strategy Hedge Fund, LLC since December, 2002 (formerly Vice President of Colonial from February, 1998 to October, 2000 and Senior Tax Manager, Coopers & Lybrand, LLP from April, 1996 to January, 1998).
IMPORTANT INFORMATION ABOUT THIS REPORT The Transfer Agent for Liberty Intermediate Bond Fund is: Liberty Funds Services, Inc. P.O. Box 8081 Boston, MA 02266-8081 The fund mails one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at 800-345-6611 and additional reports will be sent to you. This report has been prepared for shareholders of Liberty Intermediate Bond Fund. This report may also be used as sales literature when preceded or accompanied by the current prospectus which provides details of sales charges, investment objectives and operating policies of the fund and with the most recent copy of the Liberty Funds Performance Update. Annual Report: Liberty Intermediate Bond Fund Liberty Intermediate Bond Fund ANNUAL REPORT, JUNE 30, 2003 [eagle head logo] LibertyFunds A Member of Columbia Management Group (C)2003 Liberty Funds Distributor, Inc. A Member of Columbia Management Group One Financial Center, Boston, MA 02111-2621 PRSRT STD U.S. POSTAGE PAID HOLLISTON, MA PERMIT NO. 20 713-02/620O-0603 (08/03) 03/2216 LIBERTY INCOME FUND Annual Report June 30, 2003 [photo of man and boy at beach] ELIMINATE CLUTTER IN TWO EASY STEPS. POINT. CLICK. LIBERTY eDELIVERY. For more information about receiving your shareholder reports electronically, call us at 800-345-6611. To sign up for eDelivery, visit us online at www.libertyfunds.com. LIBERTY INCOME FUND Annual Report June 30, 2003 [photo of man and boy at beach] ELIMINATE CLUTTER IN TWO EASY STEPS. POINT. CLICK. LIBERTY eDELIVERY. To sign up for eDelivery, go to www.icsdelivery.com. PRESIDENT'S MESSAGE [photo of Joseph R. Palombo] Dear Shareholder: Despite the uncertainty that hung over the markets and the economy as the nation prepared to go to war in Iraq, the twelve-month period ended on a high note. Virtually all major segments of the stock and bond markets posted positive returns for the period. The economy, though still struggling, has made progress toward recovery. And, a new tax law is intended to boost consumer spending power and make investing more attractive. The Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerates income tax rate cuts for virtually all Americans and slashes the tax rates on dividends and long-term capital gains. The government is counting on Americans to turn their good fortune into higher spending. And the financial media has been full of advice on how to take advantage of the new rate structure. As you debate what you will do if the lower tax rate turns into a modest personal windfall, consider strategies that could have a long-term impact on your portfolio. If your take-home pay increases as a result of the tax break and any rebate check you are entitled to receive--and if it's not eaten up by higher state taxesinvesting at least one third of it. Consider adding it to your retirement account, using it to start an education account for your child or setting it aside for an emergency. But make a commitment and stick to it. Think of it as found money, because that is what it is. You didn't have it before. But now that you've found it, you can put it to work for a long-term goal. And before you take advice from a television pundit or a magazine cover story about how to take advantage of the recent tax changes, talk to your financial advisor. There may be tax-related strategies that make sense for you. But there are no one-size-fits-all solutions. Keep in mind that tax rates change, and many of the provisions of this law are set to expire in just a few short years. CONSOLIDATION AND A NEW NAME: COLUMBIA On a separate note, I am pleased to announce that, effective April 1, 2003, six of the asset management firms brought together when Columbia Management Group, Inc. was formed were consolidated and renamed Columbia Management Advisors, Inc. (Columbia Management). This consolidation does not affect the management or investment objectives of your fund and is the next step in our efforts to create a consistent identity and to streamline our organization. By consolidating these firms, we are able to create a more efficient organizational structure and strengthen certain key functions, such as research. Although the name of the asset manager familiar to you has changed, what hasn't changed is the commitment of our specialized investment teams to a multi-disciplined approach to investing, focused on our goal of offering shareholders the best products and services. The following report will provide you with more detailed information about fund performance and the strategies used by the fund's managers--Michael Kennedy, Kevin Cronk, Thomas LaPointe and June Giroux. As always, we thank you for investing in Liberty funds and for giving us the opportunity to help you build a strong financial future. Sincerely, /s/ Joseph R. Palombo Joseph R. Palombo President - -------------------------------------------------------------------------------- MEET THE NEW PRESIDENT Joseph R. Palombo, president and chairman of the Board of Trustees for Liberty Funds, is also chief operating officer and executive vice president of Columbia Management. Mr. Palombo has over 19 years of experience in the financial services industry. Prior to joining Columbia Management, he was chief operating officer and chief compliance officer for Putnam Mutual Funds. Prior to that, he was a partner at Coopers & Lybrand. Mr. Palombo received his degree in economics/accounting from the College of the Holy Cross, where he was a member of Phi Beta Kappa. He earned his master's degree in taxation from Bentley College and participated in the Executive Program at the Amos B. Tuck School at Dartmouth College. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE as of 6/30/03 ($) Class A 10.10 Class B 10.10 Class C 10.10 Class Z 10.10 DISTRIBUTIONS DECLARED PER SHARE 7/1/02 - 6/30/03 ($) Class A 0.54 Class B 0.45 Class C 0.47 Class Z 0.58 - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE The examples provided should be viewed as illustrations. They do not constitute tax or legal advice. Neither Columbia Management Advisors, Inc., nor its affiliates, including Liberty Funds Distributor, Inc., provide tax or legal advice. A tax advisor or attorney can provide you with answers to specific questions about taxes and other legal issues. Economic and market conditions change frequently. There is no assurance that the trends described in this report will continue or commence. PERFORMANCE INFORMATION Value of a $10,000 investment 6/30/93 -- 6/30/03 PERFORMANCE OF A $10,000 INVESTMENT 6/30/93 - 6/30/03 ($) without with sales sales charge charge - -------------------------------------- Class A 20,015 19,071 - -------------------------------------- Class B 19,866 19,866 - -------------------------------------- Class C 19,894 19,894 - -------------------------------------- Class Z 20,200 n/a - -------------------------------------- [mountain chart data]: Lehman Bros. Class A shares Class A shares Intermediate Credit without sales charge with sales charge Bond Index 6/1993 $10,000 $ 9,525 $10,000 10,040 9,563 10,040 10,270 9,782 10,235 10,326 9,836 10,280 10,413 9,919 10,319 10,289 9,800 10,238 10,388 9,895 10,302 10,549 10,048 10,466 10,351 9,859 10,267 10,057 9,579 10,020 9,949 9,477 9,939 9,946 9,474 9,944 9,930 9,459 9,943 10,080 9,601 10,137 10,135 9,653 10,179 10,014 9,538 10,046 10,002 9,527 10,031 9,945 9,473 9,982 9,989 9,514 10,030 10,155 9,672 10,223 10,427 9,931 10,468 10,516 10,017 10,565 10,683 10,175 10,728 11,101 10,574 11,138 11,202 10,670 11,228 11,206 10,673 11,215 11,336 10,797 11,354 11,460 10,916 11,459 11,600 11,049 11,594 11,786 11,226 11,788 11,964 11,395 11,938 12,083 11,509 12,049 11,898 11,333 11,856 11,790 11,230 11,771 11,728 11,171 11,704 11,715 11,158 11,685 11,847 11,284 11,829 11,872 11,308 11,858 11,886 11,322 11,852 12,107 11,532 12,058 12,370 11,783 12,325 12,630 12,030 12,534 12,544 11,948 12,412 12,608 12,009 12,462 12,704 12,100 12,497 12,537 11,942 12,361 12,679 12,077 12,526 12,876 12,264 12,652 13,070 12,449 12,791 13,478 12,838 13,130 13,317 12,685 13,015 13,512 12,870 13,197 13,550 12,906 13,320 13,612 12,965 13,350 13,747 13,094 13,452 13,899 13,239 13,631 13,933 13,271 13,632 14,014 13,348 13,680 14,091 13,421 13,758 14,172 13,499 13,876 14,209 13,534 13,952 14,265 13,587 13,989 13,959 13,296 14,088 14,254 13,577 14,509 13,959 13,296 14,393 14,211 13,536 14,505 14,295 13,616 14,568 14,415 13,731 14,684 14,198 13,523 14,435 14,358 13,676 14,569 14,486 13,798 14,626 14,335 13,654 14,463 14,282 13,604 14,450 14,237 13,560 14,404 14,207 13,532 14,394 14,350 13,669 14,552 14,390 13,707 14,608 14,477 13,789 14,643 14,472 13,785 14,591 14,507 13,818 14,529 14,667 13,970 14,648 14,832 14,128 14,772 14,672 13,975 14,687 14,602 13,908 14,679 14,989 14,277 14,985 15,187 14,465 15,122 15,419 14,687 15,316 15,481 14,745 15,465 15,409 14,677 15,479 15,553 14,814 15,663 15,887 15,132 15,970 16,254 15,482 16,307 16,477 15,694 16,466 16,553 15,766 16,603 16,538 15,752 16,572 16,718 15,924 16,698 16,766 15,970 16,771 17,132 16,318 17,163 17,341 16,517 17,359 17,022 16,213 17,467 17,291 16,469 17,778 17,310 16,488 17,641 17,216 16,399 17,528 17,349 16,525 17,638 17,410 16,583 17,772 17,323 16,500 17,499 17,674 16,835 17,742 17,782 16,937 17,983 17,695 16,854 18,053 17,589 16,753 18,113 17,842 16,994 18,462 18,040 17,183 18,810 17,668 16,829 18,659 18,050 17,193 18,814 18,453 17,576 19,305 18,567 17,685 19,359 18,890 17,993 19,700 18,899 18,002 19,741 19,374 18,454 20,012 19,889 18,944 20,522 6/2003 20,015 19,071 20,526 The Lehman Brothers Intermediate Credit Bond Index is an unmanaged group of fixed income securities that may differ from the composition of the fund. Unlike mutual funds, indexes are not investments and do not incur fees or expenses. It is not possible to invest in an index.
Average annual total return as of 6/30/03 (%) Share class A B C Z Inception 7/31/00 7/15/02 7/15/02 3/5/86 - ------------------------------------------------------------------------------------------------------------------- without with without with without with without sales sales sales sales sales sales sales charge charge charge charge charge charge charge - ------------------------------------------------------------------------------------------------------------------- 1-year 13.18 7.81 12.34 7.34 12.50 11.50 13.61 - ------------------------------------------------------------------------------------------------------------------- 5-year 7.10 6.06 6.94 6.63 6.97 6.97 7.30 - ------------------------------------------------------------------------------------------------------------------- 10-year 7.19 6.67 7.11 7.11 7.12 7.12 7.28 - -------------------------------------------------------------------------------------------------------------------
MUTUAL FUND PERFORMANCE CHANGES OVER TIME. PLEASE VISIT WWW.LIBERTYFUNDS.COM FOR DAILY PERFORMANCE UPDATES. Past performance cannot predict future investment results. Returns and value of an investment will vary, resulting in a gain or loss on sale. All results shown assume reinvestment of distributions. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The "with sales charge" returns include the maximum 4.75% charge for class A shares, the appropriate class B contingent deferred sales charge for the holding period after purchase as follows: through first year -- 5%, second year -- 4%, third year -- 3%, fourth year -- 3%, fifth year - -- 2%, sixth year -- 1%, thereafter -- 0%, and the class C contingent deferred sales charge of 1% for the first year only. Performance for different share classes will vary based on differences in sales charges and fees associated with each class. Performance results reflect any voluntary waivers or reimbursement of fund expenses by the advisor or its affiliates. Absent these waivers or reimbursement arrangements, performance results would have been lower. Class A, B and C share (newer class shares) performance information includes returns of the fund's class Z shares (the oldest existing fund class) for periods prior to the inception of the newer class shares. These class Z share returns were not restated to reflect any expense differential (e.g., Rule 12b-1 fees) between class Z shares and the newer class shares. Had the expense differential been reflected, the returns for the periods prior to the inception of the newer class shares would have been lower. 1 SEC YIELDS AS OF 6/30/03 (%) CLASS A 3.89 CLASS B 3.39 CLASS C 3.54 CLASS Z 4.48 The 30-day SEC yields reflect the portfolio's earning power net of expenses, expressed as an annualized percentage of the public offering price at the end of the period. If the advisor or its affiliates had not waived certain fund expenses, the SEC yield would have been 3.84%, 3.28% and 3.31% for Class A, Class B and Class C, respectively. Past performance cannot predict future results. PORTFOLIO HOLDINGS AS OF 6/30/03 (%) US TREASURY BOND, 5.375% 2/15/31 2.4 BANK ONE, 6.500% 2/1/06 1.6 CITIGROUP, 4.125% 6/30/05 1.6 SPIEKER PROPERTIES, 6.875% 2/1/05 1.3 MIDAMERICAN ENERGY, 5.875% 10/1/12 1.3 HCA, 7.125% 6/1/06 1.2 Portfolio holding breakdowns are calculated as a percentage of net assets. There can be no guarantee the fund will continue to maintain these holdings in the future since it is actively managed. [BAR CHART DATA]: MATURITY BREAKDOWN AS OF 6/30/03 (%) 0-1 year 5.5 1-5 years 32.2 5-10 years 45.5 10-20 years 5.8 Over 20 years 11.0 Maturity breakdown is calculated as a percentage of net assets. Maturity breakdown is based on each security's effective maturity, which reflects pre-refundings, mandatory puts and other conditions that affect a bond's maturity. PORTFOLIO MANAGERS' REPORT For the 12-month period ended June 30, 2003, Liberty Income Fund's class A shares returned 13.18% without sales charge. The fund performed in line with its benchmark, the Lehman Intermediate Government/Credit Bond Index, which returned 13.73% for the same period. The fund's peer group, the Lipper Corporate BBB Rated Debt Fund Category, averaged 12.89% for the 12-month period.1 An emphasis on high-yield issues accounted for much of the fund's strong performance. CORPORATE BONDS RALLIED STRONGLY Economic uncertainty continued to weigh on the financial markets as the period began, and accounting scandals were still in the news. As a result, investors continued to prefer US government securities and avoided corporate issues. But in October, amid expectations that a recovering economy would boost corporate earnings, the stock market turned higher, leading the way for other financial markets. Although there were no clear signs of economic recovery, earnings trends turned more favorable and investors became less risk-averse. Cash flowed out of short-term assets into equities and longer-term bonds, including lower-rated high-yield sectors where our expertise is strongest. HIGH-YIELD ISSUES AND UTILITIES WERE KEY TO RESULTS After several years of declines, high-yield issues produced exceptionally strong returns during the last nine months. The default rate, a key indicator of credit quality, fell sharply, further encouraging investors. Among the portfolio's better performers were credit card issuer Capital One Financial (0.5% of net assets), which benefited from an improving economic outlook, and iStar Financial (0.9% of net assets), a property developer whose bonds recovered as concerns over the real estate market proved exaggerated.2 We began adding to utility holdings late last year as the industry worked to shake off its negative post-Enron (not held by the fund) image. Bonds of Oncor Electric Delivery (0.6% of net assets) rose after the company restructured its balance sheet by selling selected assets and paying down debt. Our decision to maintain holdings in troubled utility Calpine (0.2% of net assets) also aided results when the bonds recovered this year. - ---------- 1 Lipper Inc., a widely respected data provider in the industry, calculates an average total return for mutual funds with similar investment objectives as those of the fund. 2 Holdings are disclosed as of June 30, 2003, and are subject to change. 2 TREASURY SECURITIES AND COMPANY-SPECIFIC PROBLEMS LIMITED PERFORMANCE Our decision to retain a small stake in Treasury bonds hampered performance. Government bonds had already risen significantly, leaving little room for further gains. When investors switched to corporate issues, Treasury issues were left behind. In addition, the fund suffered from its investment in HealthSouth bonds, which we sold as a series of scandals produced multiple investigations into the company's finances and governances. The portfolio's relatively low sensitivity to interest rate changes hurt performance as rates continued to fall and bond prices rose. MANAGERS SEE RECOVERY AHEAD We expect fairly strong growth in corporate earnings over the next year as lower taxes and extremely low interest rates eventually stimulate the sputtering economy. Corporate credit quality also continues to improve, thanks to greater financial discipline on the part of company managements. For these reasons, we have maintained a substantial exposure to high-yield and higher-quality corporate bonds where we see potential for income and some appreciation. Although a recovery may push interest rates higher, we believe corporate issues will hold up better than government obligations in an expanding economy. /s/ Michael T. Kennedy /s/ Kevin L. Cronk Michael T. Kennedy, CFA Kevin L. Cronk, CFA /s/ Thomas A. LaPointe /s/ June M. Giroux Thomas A. LaPointe, CFA June M. Giroux, CFA Michael T. Kennedy, CFA, Kevin L. Cronk, CFA, Thomas A. LaPointe, CFA, and June M. Giroux, CFA are members of the firm's income portfolio management team and have co-managed the fund since March 2003. Mr. Kennedy joined Columbia Management in October 1988, Mr. Cronk in August 1999, Mr. LaPointe in February 1999 and Ms. Giroux in September 2000. - ---------------- Investing in high yield bonds involves greater credit and other risks not associated with investing in higher-quality bonds. Bond investing also involves interest rate risk, which means that bond prices may change as interest rates increase or decrease. Foreign investments involve market, political, accounting and currency risks not associated with other investments. The Lehman Intermediate/Credit Bond Index is an unmanaged group of bonds that vary in quality. Unlike the fund, an index is not an investment, does not incur fees or expenses, and is not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. QUALITY BREAKDOWN AS OF 6/30/03 (%) [bar chart data]: AAA 9.0 AA 7.5 A 19.4 BBB 29.1 BB 22.6 B 9.0 Non-rated 3.4 Quality breakdowns are calculated as a percentage of net assets. Ratings shown in the quality breakdown represent the lowest rating assigned to a particular bond by one of the following respected rating agencies: Standard & Poor's, Moody's or Fitch. Because the fund is actively managed, there can be no guarantee the fund will continue to maintain these breakdowns and structure in the future. TOP 5 SECTORS AS OF 6/30/03 (%) [bar chart data]: Finance, Insurance & Real Estate 24.4 Transportation, Communications, Electric, Gas & Sanitary Services 23.5 Manufacturing 15.8 Services 13.7 Mining & Energy 8.7 Sector breakdowns are calculated as a percentage of net assets. Since the fund is actively managed, there is no guarantee the fund will continue to maintain the portfolio holdings and sector breakdown in the future. 3 INVESTMENT PORTFOLIO June 30, 2003 CORPORATE FIXED-INCOME BONDS & NOTES -- 90.7% PAR VALUE - ------------------------------------------------------- AGRICULTURE, FORESTRY & FISHING - 1.2% AGRICULTURAL SERVICES - 0.9% Monsanto Co., 7.375% 08/15/12 $ 4,350,000 $ 5,186,592 ----------- FORESTRY - 0.3% Potlatch Corp., 10.000% 07/15/11 500,000 555,000 Tembec Industries, Inc., 8.500% 02/01/11 1,000,000 990,000 ----------- 1,545,000 ----------- - ------------------------------------------------------- CONSTRUCTION - 1.6% BUILDING CONSTRUCTION - 1.6% D.R. Horton, Inc.: 9.750% 09/15/10 500,000 580,000 10.500% 04/01/05 2,000,000 2,205,000 KB Home, 8.625% 12/15/08 1,000,000 1,130,000 MCD Holdings, Inc., 7.000% 12/01/12 4,500,000 5,067,900 ----------- 8,982,900 ----------- - ------------------------------------------------------- FINANCE, INSURANCE & REAL ESTATE - 24.4% DEPOSITORY INSTITUTIONS - 6.8% Bank One Corp., 6.500% 02/01/06 8,060,000 8,943,134 Barclays Bank PLC, 7.375% 06/15/49 (a)(b) 2,500,000 2,994,875 Credit Suisse First Boston USA, Inc.: 7.125% 07/15/32 2,500,000 3,004,400 7.900% 05/29/49 (a)(b) 3,500,000 3,976,402 Export-Import Bank of Korea, 6.375% 02/15/06 2,000,000 2,173,060 North Fork Bancorporation, Inc., 5.875% 08/15/12 4,000,000 4,464,320 Popular, Inc., 6.125% 10/15/06 3,000,000 3,288,300 RBS Capital Trust I, 4.709% 12/29/49 (b) 5,500,000 5,538,555 Sovereign Bancorp, Inc., 10.500% 11/15/06 2,500,000 3,111,500 ----------- 37,494,546 ----------- FINANCIAL SERVICES - 3.4% Capital One Financial Corp., 8.750% 02/01/07 2,500,000 2,729,450 Citigroup, Inc., 4.125% 06/30/05 8,500,000 8,930,185 International Lease Finance Corp., 6.375% 03/15/09 5,000,000 5,603,950 PAR VALUE - ------------------------------------------------------- PF Exempt Receivables Master Trust, 3.748% 06/01/13 (a) $ 1,750,000 $ 1,764,165 ----------- 19,027,750 ----------- HOLDING & OTHER INVESTMENT OFFICES - 1.1% HSBC Holdings PLC, 9.547% 12/31/49 (a)(b) 4,500,000 5,941,548 ----------- INSURANCE CARRIERS - 1.9% Florida Windstorm Underwriting Association, 7.125% 02/25/19 (a) 2,000,000 2,397,580 Fund American Companies, Inc., 5.875% 05/15/13 2,500,000 2,613,050 Prudential Insurance Co. of America, 7.650% 07/01/07 (a) 3,000,000 3,483,870 Travelers Property Casualty Corp., 3.750% 03/15/08 2,250,000 2,320,763 ----------- 10,815,263 ----------- NON-DEPOSITORY CREDIT INSTITUTIONS - 3.7% Countrywide Home Loans, Inc., 5.250% 06/15/04 6,000,000 6,214,320 Ford Motor Credit Co., 6.875% 02/01/06 4,000,000 4,217,000 General Motors Acceptance Corp.: 6.125% 01/22/08 2,500,000 2,587,850 7.250% 03/02/11 2,000,000 2,043,220 Household Finance Corp., 5.750% 01/30/07 5,000,000 5,522,300 ----------- 20,584,690 ----------- REAL ESTATE - 5.1% Host Marriott L.P., 9.500% 01/15/07 1,000,000 1,082,500 iStar Financial, Inc., 8.750% 08/15/08 4,680,000 5,148,000 Property Trust of America, 6.875% 02/15/08 1,250,000 1,379,625 Prudential Property Separate Account: 6.625% 04/01/09 (a) 3,000,000 3,248,310 7.125% 07/01/07 (a) 4,000,000 4,460,920 Regency Centers L.P., 6.750% 01/15/12 1,200,000 1,392,300 Spieker Properties L.P., 6.875% 02/01/05 6,750,000 7,210,957 Thornburg Mortgage, Inc., 8.000% 05/15/13 (a) 2,000,000 2,040,000 Ventas Realty L.P., 9.000% 05/01/12 2,000,000 2,190,000 ----------- 28,152,612 ----------- See notes to investment portfolio. 4 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR VALUE - ------------------------------------------------------- FINANCE, INSURANCE & REAL ESTATE (CONTINUED) SECURITY BROKERS & DEALERS - 2.4% Arch Western Finance, 6.750% 07/01/13 (a) $ 500,000 $ 511,250 Jefferies Group, Inc., 7.750% 03/15/12 2,750,000 3,140,198 LaBranche & Co., Inc., 12.000% 03/02/07 2,000,000 2,280,000 Morgan Stanley, Dean Witter, & Co., 6.600% 04/01/12 2,500,000 2,917,150 Spear Leeds & Kellogg L.P., 8.250% 08/15/05 (a) 4,000,000 4,532,400 ----------- 13,380,998 ----------- - ------------------------------------------------------- MANUFACTURING - 15.8% APPAREL - 0.2% Levi Strauss & Co., 12.250% 12/15/12 1,500,000 1,248,750 ----------- AUTO PARTS & ACCESSORIES - 0.5% Dana Corp.: 9.000% 08/15/11 1,100,000 1,190,750 10.125% 03/15/10 1,500,000 1,650,000 ----------- 2,840,750 ----------- CHEMICALS & ALLIED PRODUCTS - 5.3% Biovail Corp., 7.875% 04/01/10 3,000,000 3,210,000 Dow Chemical Co., 5.750% 11/15/09 4,500,000 4,893,345 Eastman Chemical Co., 3.250% 06/15/08 5,550,000 5,468,415 EquiStar Chemical, 10.125% 09/01/08 2,000,000 2,055,000 Express Scripts, Inc., 9.625% 06/15/09 5,000,000 5,462,500 Lyondell Chemical Co., 9.750% 09/04/03 (a) 2,000,000 1,880,000 MacDermid, Inc., 9.125% 07/15/11 1,000,000 1,120,000 Methanex Corp., 7.750% 08/15/05 3,000,000 3,120,000 Rhodia SA, 8.875% 06/01/11 (a) 2,000,000 2,070,000 ----------- 29,279,260 ----------- ELECTRONIC & ELECTRICAL EQUIPMENT - 0.6% AMETEK, Inc., 7.200% 07/15/08 1,000,000 1,088,640 Thomas & Betts Corp., 7.250% 06/01/13 2,000,000 2,030,000 ----------- 3,118,640 ----------- PAR VALUE - ------------------------------------------------------- FOOD & KINDRED PRODUCTS - 1.4% Constellation Brands, Inc., 8.125% 01/15/12 $ 1,000,000 $ 1,080,000 Dole Food Co., Inc., 8.625% 05/01/09 (b) 2,000,000 2,120,000 Panamerican Beverages, Inc., 7.250% 07/01/09 2,000,000 2,116,060 Pepsi-Gemex SA, 9.750% 03/30/04 1,500,000 1,590,000 Smithfield Foods, Inc.: 8.000% 10/15/09 500,000 538,750 8.000% 10/15/09 (a) 500,000 538,750 ----------- 7,983,560 ----------- HOME FURNISHING & EQUIPMENT - 0.1% Simmons Co., 10.250% 03/15/09 750,000 802,500 ----------- LUMBER & WOOD PRODUCTS - 0.4% Georgia-Pacific Corp., 8.875% 05/15/31 2,400,000 2,352,000 ----------- MACHINERY & COMPUTER EQUIPMENT - 1.8% Briggs & Stratton Corp., 8.875% 03/15/11 3,400,000 3,876,000 Cincinnati Milacron, Inc., 8.375% 03/15/04 2,000,000 1,950,000 IBM Canada Credit Services Co., 3.750% 11/30/07 (a) 4,000,000 4,108,560 ----------- 9,934,560 ----------- MISCELLANEOUS MANUFACTURING - 2.5% American Greetings Corp., 6.100% 08/01/28 750,000 765,000 Hutchison Whampoa International Ltd., 6.500% 02/13/13 (a) 6,250,000 6,540,188 Lear Corp., 8.110% 05/15/09 400,000 461,000 SPX Corp., 7.500% 01/01/13 2,000,000 2,150,000 Tyco International Group SA, 7.000% 06/15/28 4,250,000 4,335,000 ----------- 14,251,188 ----------- PAPER PRODUCTS - 0.7% Cascades, Inc., 7.250% 02/15/13 (a) 3,500,000 3,692,500 ----------- PETROLEUM REFINING - 0.5% Phillips Petroleum Co., 9.375% 02/15/11 2,000,000 2,637,840 ----------- PRIMARY METAL - 0.2% United States Steel Corp., 10.750% 08/01/08 1,000,000 1,055,000 ----------- See notes to investment portfolio. 5 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR VALUE - ------------------------------------------------------- MANUFACTURING (CONTINUED) STONE, CLAY, GLASS & CONCRETE - 0.6% Owens-Brockway Glass Container, Inc., 8.875% 02/15/09 $3,000,000 $ 3,255,000 ----------- TOBACCO PRODUCTS - 1.0% UST, Inc.: 6.625% 07/15/12 2,000,000 2,307,720 8.800% 03/15/05 3,000,000 3,339,270 ----------- 5,646,990 ----------- - ------------------------------------------------------- MINING & ENERGY - 8.7% METALS & MINING - 0.7% Freeport-McMoRan Copper & Gold, Inc., 10.125% 02/01/10 2,250,000 2,520,000 Newmont Mining Corp., 8.625% 05/15/11 1,000,000 1,210,080 ----------- 3,730,080 ----------- OIL & GAS EXTRACTION - 5.5% Chesapeake Energy Corp., 8.125% 04/01/11 1,000,000 1,077,500 Derlan Manufacturing, Inc., 10.000% 01/15/07 1,019,000 1,019,000 Husky Oil Ltd., 8.900% 08/15/28 (b) 3,000,000 3,465,000 Murphy Oil Corp., 6.375% 05/01/12 2,250,000 2,593,305 Newfield Exploration Co., 7.450% 10/15/07 1,500,000 1,646,250 Nexen, Inc., 7.875% 03/15/32 3,500,000 4,327,610 Noble Drilling Corp., 7.500% 03/15/19 3,500,000 4,003,230 Pemex Project Funding Master Trust: 7.875% 02/01/09 2,000,000 2,280,000 9.125% 10/13/10 750,000 907,500 Pioneer Natural Resources Co., 9.625% 04/01/10 1,000,000 1,225,000 Pogo Producing Co., 8.250% 04/15/11 1,000,000 1,110,000 Transocean, Inc., 9.500% 12/15/08 2,000,000 2,599,980 Western Oil Sands, Inc., 8.375% 05/01/12 4,000,000 4,440,000 ----------- 30,694,375 ----------- OIL & GAS FIELD SERVICES - 2.5% Devon Financing Corp., 7.875% 09/30/31 2,600,000 3,311,906 PAR VALUE - ------------------------------------------------------- PDVSA Finance Ltd., 7.400% 08/15/16 $ 2,500,000 $ 2,075,000 Petrobas International Finance Co., 9.750% 07/06/11 1,500,000 1,650,000 Premcor Refining Group, 7.500% 06/15/15 (a) 4,000,000 4,000,000 SESI LLC, 8.875% 05/15/11 1,750,000 1,881,250 XTO Energy, Inc., 7.500% 04/15/12 1,000,000 1,145,000 ----------- 14,063,156 ----------- - ------------------------------------------------------- RETAIL TRADE - 1.4% DEPARTMENT STORES - 0.4% JC Penney Co., Inc, 8.000% 03/01/10 2,000,000 2,100,000 ----------- FOOD STORES - 0.6% Winn-Dixie Stores, Inc., 8.875% 04/01/08 3,000,000 3,210,000 ----------- RESTAURANTS - 0.4% Yum! Brands, Inc., 7.700% 07/01/12 2,000,000 2,270,000 ----------- - ------------------------------------------------------- SERVICES - 13.7% AMUSEMENT & RECREATION - 3.6% Argosy Gaming Co., 10.750% 06/01/09 3,000,000 3,277,500 Harrah's Operating Co., Inc.: 7.125% 06/01/07 3,750,000 4,212,600 7.875% 12/15/05 500,000 542,500 International Game Technology, 8.375% 05/15/09 1,000,000 1,220,000 Mohegan Tribal Gaming Authority, 8.125% 01/01/06 2,000,000 2,170,000 Park Place Entertainment Corp., 9.375% 02/15/07 2,500,000 2,762,500 Six Flags, Inc., 9.500% 02/01/09 2,000,000 1,970,000 Speedway Motorsports, Inc., 6.750% 06/01/13 (a) 1,750,000 1,802,500 Steinway Musical Instruments, Inc., 8.750% 04/15/11 2,000,000 2,000,000 ----------- 19,957,600 ----------- AUTO EQUIPMENT & RENTAL SERVICES - 2.5% Dura Operating Corp., 9.000% 05/01/09 2,000,000 1,840,000 See notes to investment portfolio. 6 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR VALUE - ------------------------------------------------------- SERVICES (CONTINUED) AUTO EQUIPMENT & RENTAL SERVICES (CONTINUED) ERAC USA Finance Co.: 8.000% 01/15/11 (a) $ 3,000,000 $ 3,636,720 9.125% 12/15/04 (a) 2,000,000 2,194,280 Hertz Corp., 7.625% 06/01/12 2,750,000 2,814,708 United Rentals, Inc., 10.750% 04/15/08 3,000,000 3,277,500 ----------- 13,763,208 ----------- BUSINESS SERVICES - 0.8% World Color Press, Inc., 8.375% 11/15/08 4,000,000 4,301,040 ----------- HEALTH SERVICES - 3.3% Caremark RX, Inc., 7.375% 10/01/06 5,000,000 5,362,500 Coventry Health Care, Inc., 8.125% 02/15/12 1,000,000 1,090,000 HCA, Inc., 7.125% 06/01/06 6,250,000 6,759,750 PerkinElmer, Inc., 8.875% 01/15/13 2,000,000 2,205,000 Tenet Healthcare Corp.: 5.375% 11/15/06 2,000,000 1,940,000 7.375% 02/01/13 1,000,000 980,000 ----------- 18,337,250 ----------- HOTELS, CAMPS & LODGING - 2.2% Hyatt Equities LLC, 6.875% 06/15/07 (a) 2,000,000 2,076,540 Marriott International, Inc., 6.875% 11/15/05 5,000,000 5,508,200 Meditrust Companies, 7.620% 09/13/05 2,200,000 2,222,000 Starwood Hotels & Resorts Worldwide, Inc.: 7.375% 05/01/07 2,000,000 2,110,000 7.875% 05/01/12 500,000 547,500 ----------- 12,464,240 ----------- MOTION PICTURES - 1.0% Walt Disney Co., 5.375% 06/01/07 5,000,000 5,449,250 ----------- RENTAL & LEASING SERVICES - 0.3% Rent-A-Center, Inc., 7.500% 05/01/10 (a) 1,500,000 1,575,000 ----------- - ------------------------------------------------------- PAR VALUE - ------------------------------------------------------- TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS & SANITARY SERVICES - 23.5% AEROSPACE - 1.9% Raytheon Co., 5.500% 11/15/12 $ 6,000,000 $ 6,416,160 Systems 2001 Asset Trust: 6.664% 09/15/13 (a) 1,408,102 1,585,214 7.156% 12/15/11 (a) 2,140,151 2,391,984 ----------- 10,393,358 ----------- AIR TRANSPORTATION - 2.8% Air 2 US, 8.027% 10/01/19 (a) 2,288,894 1,533,559 American Airlines, Inc.: 7.024% 10/15/09 3,029,000 2,847,260 9.710% 01/02/07 1,739,422 956,682 Continental Airlines, Inc., 7.461% 04/01/15 3,091,085 2,843,798 Delta Air Lines, Inc., 7.779% 11/18/05 3,750,000 3,075,000 Federal Express Corp., 9.650% 06/15/12 1,000,000 1,351,200 Southwest Airlines Co., 5.496% 11/01/06 3,000,000 3,251,310 ----------- 15,858,809 ----------- BROADCASTING - 1.0% Sinclair Broadcast Group, Inc., 8.750% 12/15/11 2,000,000 2,200,000 TV Azteca SA de CV, 10.500% 02/15/07 2,000,000 2,000,000 Vivendi Universal SA, 9.250% 04/15/10 (a) 1,080,000 1,252,800 ----------- 5,452,800 ----------- CABLE - 1.2% Comcast Corp.: 5.850% 01/15/10 2,500,000 2,745,250 6.500% 01/15/15 2,000,000 2,262,320 Continental Cablevision, Inc., 8.875% 09/15/05 1,200,000 1,351,440 Rogers Cable, Inc., 6.250% 06/15/13 (a) 500,000 500,715 ----------- 6,859,725 ----------- ELECTRIC SERVICES - 10.5% AEP Texas North Co., 5.500% 03/01/13 (a) 1,500,000 1,595,775 AES Corp., 8.750% 06/15/08 986,000 971,210 Arizona Public Service Co., 4.650% 05/15/15 1,750,000 1,753,027 See notes to investment portfolio. 7 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR VALUE - ------------------------------------------------------- TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS & SANITARY SERVICES (CONTINUED) ELECTRIC SERVICES (CONTINUED) Black Hills Corp., 6.500% 05/15/13 $ 1,475,000 $ 1,476,991 Calpine Canada Energy Finance ULC, 8.500% 05/01/08 1,500,000 1,173,750 Calpine Corp., 8.500% 02/15/11 1,500,000 1,125,000 CenterPoint Energy Houston Electric LLC: 5.700% 03/15/13 (a) 1,750,000 1,896,265 6.950% 03/15/33 (a) 1,750,000 2,015,177 CMS Energy Corp., 8.375% 07/01/03 (b) 5,000,000 5,000,000 Columbus Southern Power Co., 6.600% 03/01/33 (a) 1,000,000 1,109,946 Constellation Energy Group, Inc., 6.125% 09/01/09 2,500,000 2,832,975 Dominion Resources, Inc., 8.125% 06/15/10 2,000,000 2,467,480 Duke Energy Corp.: 3.750% 03/05/08 (a) 2,000,000 2,068,720 4.500% 04/01/10 1,000,000 1,038,730 Edison Mission Energy, 9.875% 04/15/11 500,000 470,000 FirstEnergy Corp.: 5.500% 11/15/06 2,000,000 2,143,060 7.375% 11/15/31 1,000,000 1,124,470 FPL Energy American Wind LLC, 6.639% 06/20/23 (a) 2,550,000 2,609,976 GulfTerra Energy Partners L.P., 8.500% 06/01/10 (a) 2,000,000 2,145,000 MidAmerican Energy Holdings Co., 5.875% 10/01/12 6,500,000 7,076,875 Northern States Power Co., 8.000% 08/28/12 1,750,000 2,208,955 Oncor Electric Delivery Co., 7.250% 01/15/33 (a) 3,000,000 3,541,290 Orion Power Holdings, Inc., 12.000% 05/01/10 1,000,000 1,155,000 Pinnacle Partners, 8.830% 08/15/04 (a) 2,750,000 2,832,500 PSEG Power LLC, 7.750% 04/15/11 2,000,000 2,374,900 PAR VALUE - ------------------------------------------------------- South Point Energy Center LLC, 8.400% 05/30/12 (a) $ 792,739 $ 792,739 Southern Power Co., 6.250% 07/15/12 2,000,000 2,252,640 Xcel Energy, Inc., 3.400% 07/01/08 (a) 1,100,000 1,088,702 ----------- 58,341,153 ----------- RAILROAD - 0.8% Burlington Northern Railroad Co., 9.250% 10/01/06 2,000,000 2,375,980 Kansas City Southern Railway, 7.500% 06/15/09 2,000,000 2,070,000 ----------- 4,445,980 ----------- SANITARY SERVICES - 0.7% Allied Waste North America, Inc.: 7.625% 01/01/06 500,000 518,750 8.500% 12/01/08 500,000 538,750 8.875% 04/01/08 500,000 543,750 Waste Management, Inc.: 7.375% 08/01/10 1,250,000 1,493,900 7.750% 05/15/32 500,000 625,345 ----------- 3,720,495 ----------- TELECOMMUNICATIONS - 4.6% ALLTEL Corp., 7.875% 07/01/32 3,000,000 3,938,220 AT&T Corp., 7.000% 11/15/06 4,000,000 4,428,840 AT&T Wireless Services, Inc., 7.875% 03/01/11 1,100,000 1,300,640 Comtel Brasileira Ltd., 10.750% 09/26/04 (a) 2,000,000 2,120,000 Insight Midwest L.P., 9.750% 10/01/09 (a) 4,000,000 4,240,000 News America Holdings, Inc., 9.250% 02/01/13 2,000,000 2,653,120 Nextel Communications, Inc., 9.375% 11/15/09 2,000,000 2,160,000 Rogers Cantel, Inc., 9.750% 06/01/16 1,545,000 1,749,713 Sprint Corp., 6.125% 11/15/08 2,500,000 2,719,375 ----------- 25,309,908 ----------- - ------------------------------------------------------- WHOLESALE TRADE - 0.4% NON-DURABLE GOODS - 0.4% Lilly Del Mar, Inc., 7.717% 08/01/29 (a)(b) 2,250,000 2,366,179 ----------- TOTAL CORPORATE FIXED-INCOME BONDS & NOTES (cost of $472,438,488) 503,874,043 ----------- See notes to investment portfolio. 8 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 GOVERNMENT AGENCIES & OBLIGATIONS - 5.2% PAR VALUE - ------------------------------------------------------- FOREIGN GOVERNMENT BOND - 0.7% State of Qatar, 9.750% 06/15/30 (a) $ 2,750,000 $ 3,795,000 ----------- - ------------------------------------------------------- U.S. GOVERNMENT AGENCIES & OBLIGATIONS - 4.5% Federal National Mortgage Association, 9.000% 07/01/19-06/01/20 111,825 123,341 ----------- Government National Mortgage Association: 10.000% 10/15/17-01/15/19 6,379 7,341 10.500% 01/15/16-05/15/20 97,534 113,110 11.500% 05/15/13 11,991 14,012 12.500% 11/15/10-01/15/14 46,450 54,759 13.000% 04/15/11 4,543 5,380 14.000% 08/15/11 2,949 3,541 ----------- 198,143 ----------- U.S. Treasury Bonds and Notes: 2.625% 05/15/08 3,980,000 4,016,059 3.625% 05/15/13 1,590,000 1,602,418 3.875% 02/15/13 5,780,000 5,947,753 5.375% 02/15/31 11,820,000 13,309,970 ----------- 24,876,200 ----------- TOTAL GOVERNMENT AGENCIES & OBLIGATIONS (cost of $27,555,824) 28,992,684 ----------- ASSET-BACKED SECURITY - 0.3% - ------------------------------------------------------- PF Exempt Receivables Master Trust, 6.436% 06/01/15 (a) (cost of $1,500,000) 1,500,000 1,507,500 ----------- SHORT-TERM OBLIGATION - 2.2% - ------------------------------------------------------- Repurchase agreement with State Street Bank & Trust Co., dated 06/30/03, due 07/01/03 at 1.000%, collateralized by a U.S. Treasury Bond maturing 02/15/20, market value $12,766,163 (repurchase proceeds $12,511,348) (cost of $12,511,000) 12,511,000 12,511,000 ----------- TOTAL INVESTMENTS - 98.4% (cost of $514,005,312) (c) 546,885,227 ----------- OTHER ASSETS & LIABILITIES, NET - 1.6% 8,765,939 - ------------------------------------------------------- NET ASSETS - 100.0% $555,651,166 ============ NOTES TO INVESTMENT PORTFOLIO: - -------------------------------------------------------------------------------- (a) This security is exempt from registration under Rule 144A of the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At June 30, 2003, the value of these securities amounted to $112,455,399, which represents 20.2% of net assets. (b) Interest rates on variable rate securities change periodically. The rate listed is as of June 30, 2003. (c) Cost for federal income tax purposes is $515,697,162. See notes to financial statements. 9 STATEMENT OF ASSETS AND LIABILITIES June 30, 2003 ASSETS: Investments, at cost $514,005,312 ------------ Investments, at value $546,885,227 Receivable for: Investments sold 8,037,475 Fund shares sold 1,756,053 Interest 9,220,817 Expense reimbursement due from Advisor 2,828 Deferred Trustees' compensation plan 8,962 ------------ Total Assets 565,911,362 ------------ LIABILITIES: Payable to custodian bank 631,702 Payable for: Investments purchased 8,194,759 Fund shares repurchased 597,962 Distributions 293,857 Management fee 218,940 Administration fee 59,148 Transfer agent fee 164,735 Pricing and bookkeeping fees 29,259 Trustees' fees 1,141 Distribution and services fees 1,124 Deferred Trustees' fees 8,962 Other liabilities 58,607 ------------ Total Liabilities 10,260,196 ------------ NET ASSETS $555,651,166 ============ COMPOSITION OF NET ASSETS: Paid-in capital $555,691,560 Overdistributed net investment income (1,216,871) Accumulated net realized loss (31,703,438) Net unrealized appreciation on investments 32,879,915 ------------ NET ASSETS $555,651,166 ============ CLASS A: Net assets $ 89,739,779 Shares outstanding 8,887,159 ------------ Net asset value per share $ 10.10(a) ============ Maximum offering price per share ($10.10/0.9525) $ 10.60(b) ============ CLASS B: Net assets $ 32,430,028 Shares outstanding 3,210,167 ------------ Net asset value and offering price per share $ 10.10(a) ============ CLASS C: Net assets $ 5,522,124 Shares outstanding 546,625 ------------ Net asset value and offering price per share $ 10.10(a) ============ CLASS Z: Net assets $427,959,235 Shares outstanding 42,361,253 ------------ Net asset value, offering and redemption price per share $ 10.10 ============ (a)Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. (b)On sales of $50,000 or more the offering price is reduced. STATEMENT OF OPERATIONS For the Year Ended June 30, 2003 INVESTMENT INCOME: Interest $ 30,799,067 ------------ EXPENSES: Expenses allocated from Portfolio 66,898 Management fee 2,263,883 Administration fee 631,184 Distribution fee: Class B 234,129 Class C 32,871 Service fee: Class A 213,879 Class B 78,797 Class C 10,936 Transfer agent fee: Class A 279,968 Class B 122,841 Class C 16,165 Class Z 510,392 Pricing and bookkeeping fees 185,586 Trustees' fees 19,492 Custody fee 19,270 Other expenses 202,679 ------------ Total Operating Expenses 4,888,970 Fees and expenses waived or reimbursed by Advisor (77,965) Fees waived by Distributor - Class C (6,411) Custody earnings credit (1,040) ------------ Net Expenses 4,803,554 ------------ Net Investment Income 25,995,513 ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain on: Investments 3,417,955 Foreign currency transactions 9,655 ------------ Net realized gain 3,427,610 ------------ Net change in unrealized appreciation/depreciation on investments 33,226,182 ------------ Net Gain 36,653,792 ------------ Net Increase in Net Assets from Operations $ 62,649,305 ============ See notes to financial statements. 10 STATEMENT OF CHANGES IN NET ASSETS YEAR ENDED JUNE 30, INCREASE (DECREASE) --------------------------- IN NET ASSETS: 2003 (a) 2002 - ------------------------------------------------------- OPERATIONS: Net investment income $ 25,995,513 $ 18,767,145 Net realized gain (loss) on investments and foreign currency transactions 3,427,610 (2,281,856) Net change in unrealized appreciation/depreciation on investments 33,226,182 (1,393,561) ------------ ----------- Net Increase from Operations 62,649,305 15,091,728 ------------ ----------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (4,851,795) (336) Class B (1,525,173) -- Class C (220,682) -- Class Z (21,848,537) (19,104,757) Return of capital: Class A -- (1) Class Z -- (35,938) ------------ ----------- Total Distributions Declared to Shareholders (28,446,187) (19,141,032) ------------ ----------- SHARE TRANSACTIONS: Class A: Subscriptions 13,307,884 408,267 Proceeds received in connection with merger 92,697,100 -- Distributions reinvested 2,836,832 168 Redemptions (24,933,740) (204,204) ------------ ----------- Net Increase 83,908,076 204,231 ------------ ----------- Class B: Subscriptions 7,355,762 -- Proceeds received in connection with merger 32,521,573 -- Distributions reinvested 951,704 -- Redemptions (10,486,433) -- ------------ ----------- Net Increase 30,342,606 -- ------------ ----------- Class C: Subscriptions 2,990,400 -- Proceeds received in connection with merger 3,795,846 -- Distributions reinvested 132,549 -- Redemptions (1,717,380) -- ------------ ----------- Net Increase 5,201,415 -- ------------ ----------- (a) Class B and Class C shares commenced operations on July 15, 2002. YEAR ENDED JUNE 30, INCREASE (DECREASE) --------------------------- IN NET ASSETS: 2003 (a) 2002 - ------------------------------------------------------- Class Z: Subscriptions $140,602,354 $129,053,213 Distributions reinvested 20,689,189 17,598,485 Redemptions (86,620,640) (81,573,998) ------------ ------------ Net Increase 74,670,903 65,077,700 ------------ ------------ Net Increase from Share Transactions 194,123,000 65,281,931 ------------ ------------ Total Increase in Net Assets 228,326,118 61,232,627 NET ASSETS: Beginning of period 327,325,048 266,092,421 ------------ ------------ End of period (overdistributed net investment income of $(1,216,871) and $(420,053), respectively) $555,651,166 $327,325,048 ============ ============ CHANGES IN SHARES: Class A: Subscriptions 1,404,563 42,979 Issued in connection with merger 9,788,501 -- Issued for distributions reinvested 295,360 18 Redemptions (2,622,883) (21,498) ------------ ------------ Net Increase 8,865,541 21,499 ------------ ------------ Class B: Subscriptions 772,472 -- Issued in connection with merger 3,434,168 -- Issued for distributions reinvested 99,099 -- Redemptions (1,095,572) -- ------------ ------------ Net Increase 3,210,167 -- ------------ ------------ Class C: Subscriptions 311,006 -- Issued in connection with merger 400,829 -- Issued for distributions reinvested 13,770 -- Redemptions (178,980) -- ------------ ------------ Net Increase 546,625 -- ------------ ------------ Class Z: Subscriptions 14,613,670 13,516,624 Issued for distributions reinvested 2,140,928 1,844,361 Redemptions (9,059,989) (8,576,296) ------------ ------------ Net Increase 7,694,609 6,784,689 ------------ ------------ See notes to financial statements. 11 NOTES TO FINANCIAL STATEMENTS June 30, 2003 NOTE 1. ACCOUNTING POLICIES ORGANIZATION: Liberty Income Fund (the "Fund") (formerly, Stein Roe Income Fund), a series of Liberty-Stein Roe Funds Income Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek total return by investing for a high level of current income and opportunities for capital appreciation. The Fund may issue an unlimited number of shares. The Fund offers four classes of shares: Class A, Class B, Class C and Class Z. Class A shares are sold with a front-end sales charge. A 1.00% contingent deferred sales charge ("CDSC") is assessed on redemptions made within eighteen months on an original purchase of $1 million to $25 million. Class B shares are subject to a CDSC. Class B shares will convert to Class A shares in three, four or eight years after purchase, depending on the program under which shares were purchased. Class C shares are subject to a CDSC on redemptions made within one year after purchase. Class Z shares are offered continuously at net asset value. There are certain restrictions on the purchase of Class Z shares, as described in the Fund's prospectus. As of the end of business on July 12, 2002, the Stein Roe Income Fund acquired all the net assets of Liberty Income Fund pursuant to a plan of reorganization approved by Liberty Income Fund shareholders on June 28, 2002. All assets of Liberty Income Fund were transferred to Stein Roe Income Fund in a tax-free exchange and shareholders of Liberty Income Fund received shares of the Stein Roe Income Fund in exchange for their shares as follows: LIBERTY STEIN ROE INCOME FUND INCOME FUND NET ASSETS UNREALIZED SHARES ISSUED RECEIVED DEPRECIATION1 ------------- ----------- -------------- 13,623,498 $129,014,519 $(883,393) 1 Unrealized depreciation is included in the Net Assets Received amount shown above. NET ASSETS NET ASSETS NET ASSETS OF LIBERTY OF STEIN ROE OF STEIN ROE INCOME FUND INCOME FUND INCOME FUND IMMEDIATELY IMMEDIATELY PRIOR TO PRIOR TO AFTER COMBINATION COMBINATION COMBINATION ------------- ------------- ------------- $327,547,213 $129,014,519 $456,561,732 Prior to July 13, 2002, the Fund invested substantially all of its assets in the SR&F Income Fund Portfolio (the "Portfolio"), as part of a master/feeder structure. The Portfolio allocated income, expenses, realized and unrealized gains (losses) to its investors on a daily basis, based on methods in compliance with the Internal Revenue Service. Prior to reorganization described above, the Fund's pro-rata share of the Portfolio were distributed to the Fund based on allocation methods in compliance with the Internal Revenue Service. Effective July 15, 2002, Stein Roe Income Fund was renamed Liberty Income Fund and began offering Class B and Class C shares. The Class S shares were subsequently redesignated as Class Z shares. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATIONS AND TRANSACTIONS: Debt securities generally are valued by a pricing service based upon market transactions for normal, institutional-size trading units of similar securities. Such services may use various pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data, as well as broker quotes. When management deems it appropriate, an over-the-counter or exchange bid quotation is used. Investments for which market quotations are not readily available, or quotations which management believes are not appropriate, are valued at fair value under procedures approved by the Board of Trustees. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. Security transactions are accounted for on the date the securities are purchased, sold or mature. Cost is determined and gains (losses) are based upon the specific identification method for both financial statement and federal income tax purposes. The Fund may trade securities on other than normal settlement terms. This may increase the risk if the other party to the transaction fails to deliver and causes the Fund to subsequently invest at less advantageous prices. 12 NOTES TO FINANCIAL STATEMENTS (CONTINUED) DETERMINATION OF CLASS NET ASSET VALUES: All income, expenses (other than class specific fees), and realized and unrealized gains (losses) are allocated to each class proportionately on a daily basis for purposes of determining the net asset value of each class. INVESTMENT INCOME, DEBT DISCOUNT AND PREMIUM: Interest income is recorded on the accrual basis. Premium and discount are being amortized and accreted, respectively, for all debt securities. DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared daily and paid monthly. Capital gains distributions, if any, are distributed annually. FEDERAL INCOME TAXES: Consistent with the Fund's policy to qualify as a regulated investment company and to distribute all of its taxable income, no federal income tax has been accrued. FUTURES CONTRACTS: The Fund may enter into futures contracts to either hedge against expected declines of their portfolio securities or as a temporary substitute for the purchase of individual bonds. Risks of entering into futures contracts include the possibility that there may be an illiquid market at the time a fund seeks to close out a contract, and changes in the value of the futures contract may not correlate with changes in the value of the portfolio securities being hedged. Upon entering into a futures contract, the Fund deposits cash or securities with its custodian in an amount sufficient to meet the initial margin requirements. Subsequent payments are made or received by the Fund equal to the daily change in the contract value and are recorded as variation margin payable or receivable and offset in unrealized gains or losses. The Fund recognizes a realized gain or loss when the contract is closed or expires. As of June 30, 2003, the Fund did not have any open futures contracts. FOREIGN CURRENCY TRANSACTIONS: Net realized and unrealized gains (losses) on foreign currency transactions includes gains (losses) arising from the fluctuations in exchange rates between trade and settlement dates on securities transactions, gains (losses) arising from the disposition of foreign currency and currency gains (losses) between the accrual and payment dates on dividends and interest income and foreign withholding taxes. The Fund does not distinguish that portion of gains (losses) on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such fluctuations are included with the net realized and unrealized gains (losses) on investments. OTHER: The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatments for deferral of losses from wash sales, premium amortization on debt securities, current year distribution payable, capital loss carryforwards and non-deductible expenses. Reclassifications are made to the Fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations. For the year ended June 30, 2003, permanent items identified and reclassified among the components of net assets are as follows: OVERDISTRIBUTED ACCUMULATED NET INVESTMENT NET REALIZED PAID-IN INCOME LOSS CAPITAL ------------- ------------- ------------- $1,653,856 $(14,416,468) $12,762,612 Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. Included in the reclassification are book to tax timing differences totaling $12,762,588 which were aquired as part of the merger. These timing differences are mostly comprised of capital loss carryforwards and premium amortization on debt securities. The tax character of distributions paid for the years ended June 30, 2003 and 2002 was as follows: 2003 2002 ---- ---- Distributions paid from: Ordinary income $28,446,187 $19,105,093 Tax return of capital -- 35,939 13 NOTES TO FINANCIAL STATEMENTS (CONTINUED) As of June 30, 2003, the components of distributable earnings on a tax basis were as follows: UNDISTRIBUTED ORDINARY UNREALIZED INCOME APPRECIATION ------------- -------------- $562,345 $31,188,065 The following capital loss carryforwards, determined as of June 30, 2003, are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code: YEAR OF EXPIRATION CAPITAL LOSS CARRYFORWARD - ------------------ ------------------------- 2007 $ 7,930,476 2008 10,554,632 2009 8,620,038 2010 1,393,345 2011 2,985,140 ----------- $31,483,631 ----------- Of the capital loss carryforwards, $11,993,495 ($1,857,128 expiring June 30, 2007, $4,887,690 expiring June 30, 2008, $3,855,332 expiring June 30, 2009 and $1,393,345 expiring June 30, 2010) was obtained in the merger with Liberty Income Fund (See Note 1). Utilization of Liberty Income Fund's capital loss carry- forwards could be subject to merger limitations imposed by the Internal Revenue Code. Expired capital loss carryforwards, if any, are treated as a reduction of paid-in-capital. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES On April 1, 2003, Stein Roe & Farnham Incorporated ("Stein Roe"), the investment advisor and administrator to the Fund, merged into Columbia Management Advisors Inc. ("Columbia"), an indirect, wholly-owned subsidiary of FleetBoston Financial Corporation. At the time of the merger, Columbia assumed the obligations of Stein Roe with respect to the Fund. The merger did not change the way the Fund is managed, the investment personnel assigned to manage the Fund or the fees paid by the Fund. MANAGEMENT FEE: Columbia is the investment advisor of the Fund and receives a monthly fee as follows: AVERAGE DAILY ANNUAL NET ASSETS FEE RATE ------------ --------- First $100 million 0.500% Over $100 million 0.475% Prior to July 12, 2002, the management fee was paid by the Portfolio at the same rates. ADMINISTRATION FEE: Columbia also provides accounting and other services for a monthly fee to the Fund as follows: AVERAGE DAILY ANNUAL NET ASSETS FEE RATE ------------ --------- First $100 million 0.150% Over $100 million 0.125% PRICING AND BOOKKEEPING FEES: Columbia is responsible for providing pricing and bookkeeping services to the Fund under Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Columbia has delegated those functions to State Street Bank and Trust Company ("State Street"). Columbia pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Columbia receives from the Fund an annual flat fee of $10,000, paid monthly, and in any month that the Fund's average daily net assets are more than $50 million, a monthly fee equal to the average daily net assets of the Fund for that month multiplied by a fee rate that is calculated by taking into account the fees payable to State Street under the Outsourcing Agreement. For the year ended June 30, 2003, the annualized net asset based fee rate was 0.035%. The Fund also pays out-of-pocket costs for pricing services. Prior to July 12, 2002, Columbia received from the Fund an annual flat fee of $5,000. TRANSFER AGENT FEES: Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of Columbia, provides shareholder services for a monthly fee equal to 0.06% annually of the Fund's average daily net assets plus charges based on the number of shareholder accounts and transactions. The Transfer Agent also receives reimbursement for certain out-of-pocket expenses. UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES: Liberty Funds Distributor, Inc. (the "Distributor"), an affiliate of Columbia, is the Fund's principal underwriter. For the year ended June 30, 2003, the Fund has been advised that the Distributor retained net underwriting discounts of $1,040 on sales of the Fund's Class A shares and received CDSC of $29,457, $91,600 and $902 on Class A, Class B and Class C share redemptions, respectively. 14 NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Fund has adopted a 12b-1 (the "Plan"), which requires the payment of a monthly service fee to the Distributor equal to 0.25% annually of the average daily net assets attributable to Class A, Class B and Class C shares. The Plan also requires the payment of a monthly distribution fee to the Distributor equal to 0.75% annually of the average daily net assets attributable to Class B and Class C shares only. The Distributor has voluntarily agreed to waive a portion of the Class C share distribution fee so that it does not exceed 0.60% annually. The CDSC and the fees received from the Plan are used principally as repayment to the Distributor for amounts paid by the Distributor to dealers who sold such shares. EXPENSE LIMIT: Effective July 15, 2002, Columbia has voluntarily agreed, until further notice, to reimburse a portion of the Class A, Class B and Class C transfer agent fees so that the Class A, Class B and Class C transfer agent expense will not exceed 0.23% annually of the Class A, Class B and Class C average daily net assets. OTHER: The Fund pays no compensation to its officers, all of whom are employees of Columbia or its affiliates. The Fund's Independent Trustees may participate in a deferred compensation plan which may be terminated at any time. Obligations of the plan will be paid solely out of the Fund's assets. The Fund has an agreement with its custodian bank under which $1,040 of custody fees were reduced by balance credits for the year ended June 30, 2003. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. Expenses allocated from the Portfolio on the Statement of Operations include $61,944 paid to affiliates, prior to the liquidation of the Portfolio. These affiliated fees include: management, pricing and bookkeeping, transfer agent and trustees' fees. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY: For the year ended June 30, 2003, purchases and sales of investments, other than short-term obligations, were $529,023,135 and $447,187,986, respectively, of which $93,290,207 and $107,342,321, respectively, were U.S. Government securities. Unrealized appreciation/depreciation at June 30, 2003 based on cost of investments, for federal income tax purposes was: Gross unrealized appreciation $36,640,072 Gross unrealized depreciation (5,452,007) ----------- Net unrealized appreciation $31,188,065 =========== OTHER: Investing in high-yield securities offers the potential for high current income and attractive total return, but involves greater credit and other risks not associated with investing in higher-quality bonds. Bond investing also involves interest rate risk, which means that bond prices may change as interest rates increase or decrease. There are certain additional risks involved when investing in foreign securities that are not inherent with investments in domestic securities. These risks may involve foreign currency exchange rate fluctuations, adverse political and economic developments and the possible prevention of foreign currency exchange or the imposition of other foreign governmental laws or restrictions. The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. NOTE 5. LINE OF CREDIT The Fund and other affiliated funds participate in a $350,000,000 credit facility which is used for temporary or emergency purposes to facilitate portfolio liquidity. Interest is charged to the Fund based on its borrowings. In addition, the Fund has agreed to pay commitment fees on its pro-rata portion of the line of credit. The commitment fee is included in "Other expenses" on the Statement of Operations. Prior to April 26, 2003, the Fund participated in a separate credit agreement with similar terms to its existing agreement. For the year ended June 30, 2003, there were no borrowings under this agreement. 15 FINANCIAL HIGHLIGHTS Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD JUNE 30, ENDED -------------------------- JUNE 30, CLASS A SHARES 2003 2002 2001 (a) ======================================================================================================================= NET ASSET VALUE, BEGINNING OF PERIOD $ 9.44 $ 9.54 $ 9.21 ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b)(c) 0.45 0.60(d) 0.61 Net realized and unrealized gain (loss) on investments and foreign currency 0.75 (0.08)(d) 0.32 ------- ------- ------- Total from Investment Operations 1.20 0.52 0.93 ------- ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.54) (0.62) (0.60) Return of capital -- --(e) -- ------- ------- ------- Total Distributions Declared to Shareholders (0.54) (0.62) (0.60) ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 10.10 $ 9.44 $ 9.54 ======= ======= ======= Total return (f) 13.18%(g) 5.53% 10.41%(h) ======= ======= ======= RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (b)(i) 1.23% 1.10% 1.12%(j) Net investment income (b)(i) 5.12% 6.32%(d) 7.08%(j) Waiver/reimbursement 0.05% -- -- Portfolio turnover rate 96% 136%(k) 128%(k) Net assets, end of period (000's) $89,740 $ 204 $ 1
(a)Class A shares were initially offered on July 31, 2000. Per share data and total return reflect activity from that date. (b)Per share data and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of income and expenses of the SR&F Income Fund Portfolio, prior to the merger. (c)Per share data was calculated using average shares outstanding during the period. (d)Effective July 1, 2001, the Portfolio adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and accreting discount on all debt securities. The effect of this change for the year ended June 30, 2002, was to decrease net investment income per share by $0.01, decrease net realized and unrealized loss per share by $0.01 and decrease the ratio of net investment income to average net assets from 6.40% to 6.32%. Per share data and ratios for periods prior to June 30, 2002 have not been restated to reflect this change in presentation. (e)Rounds to less than $0.01 per share. (f)Total return at net asset value assuming all distributions reinvested and no initial sales charge or contingent deferred sales charge. (g)Had the Advisor not reimbursed a portion of expenses, total return would have been reduced. (h)Not annualized. (i)The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (j)Annualized. (k)Portfolio turnover disclosed is for the SR&F Income Portfolio. 16 FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout the period is as follows:
PERIOD ENDED JUNE 30, CLASS B SHARES 2003 (a) ============================================================================================ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.47 ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b)(c) 0.40 Net realized and unrealized gain on investments and foreign currency 0.68 ------- Total from Investment Operations 1.08 ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.45) ------- NET ASSET VALUE, END OF PERIOD $ 10.10 ======= Total return (d)(e)(f) 11.78% ======= RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (b)(g)(h) 1.99% Net investment income (b)(g)(h) 4.39% Waiver/reimbursement (h) 0.11% Portfolio turnover rate 96% Net assets, end of period (000's) $32,430
(a)Class B shares were initially offered on July 15, 2002. Per share data and total return reflect activity from that date. (b)Per share data and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of income and expenses of the SR&F Income Fund Portfolio, prior to the merger. (c)Per share data was calculated using average shares outstanding during the period. (d)Total return at net asset value assuming all distributions reinvested and no contingent deferred sales charge. (e)Had the Advisor not reimbursed a portion of expenses, total return would have been reduced. (f)Not annualized. (g)The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (h)Annualized. 17 FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout the period is as follows:
PERIOD ENDED JUNE 30, CLASS C SHARES 2003 (a) ===================================================================================== NET ASSET VALUE, BEGINNING OF PERIOD $ 9.47 ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b)(c) 0.42 Net realized and unrealized gain on investments and foreign currency 0.68 ------- Total from Investment Operations 1.10 ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.47) ------- NET ASSET VALUE, END OF PERIOD $ 10.10 ======= Total return (d)(e)(f) 11.94% ======= RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (b)(g)(h) 1.84% Net investment income (b)(g)(h) 4.51% Waiver/reimbursement (h) 0.23% Portfolio turnover rate 96% Net assets, end of period (000's) $ 5,522
(a)Class C shares were initially offered on July 15, 2002. Per share data and total return reflect activity from that date. (b)Per share data and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of income and expenses of the SR&F Income Fund Portfolio, prior to the merger. (c)Per share data was calculated using average shares outstanding during the period. (d)Total return at net asset value assuming all distributions reinvested and no contingent deferred sales charge. (e)Had the Advisor/Distributor not reimbursed a portion of expenses, total return would have been reduced. (f)Not annualized. (g)The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (h)Annualized. 18 FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED JUNE 30, --------------------------------------------------------------- CLASS Z SHARES 2003 2002 2001 2000 1999 ======================================================================================================================= NET ASSET VALUE, BEGINNING OF PERIOD $ 9.44 $ 9.54 $ 9.15 $ 9.41 $ 10.03 ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (a)(b) 0.53 0.63(c) 0.69 0.70 0.67 Net realized and unrealized gain (loss) on investments and foreign currency 0.71 (0.09)(c) 0.39 (0.26) (0.62) ------- ------- ------- ------- ------- Total from Investment Operations 1.24 0.54 1.08 0.44 0.05 ------- ------- ------- ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.58) (0.64) (0.69) (0.70) (0.67) Return of capital -- --(d) -- -- -- ------- ------- ------- ------- ------- Total Distributions Declared to Shareholders (0.58) (0.64) (0.69) (0.70) (0.67) ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 10.10 $ 9.44 $ 9.54 $ 9.15 $ 9.41 ======= ======= ======= ======= ======= Total return (e) 13.61% 5.80% 12.20% 4.92% 0.52% ======= ======= ======= ======= ======= RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (b)(f) 0.84% 0.85% 0.86% 0.86% 0.84% Net investment income (b)(f) 5.51% 6.57%(c) 7.32% 7.58% 6.91% Portfolio turnover rate 96% 136%(g) 128%(g) 205%(g) 203%(g) Net assets, end of period (000's) $427,959 $327,121 $266,091 $227,090 $294,640
(a)Per share data was calculated using average shares outstanding during the period. (b)Per share data and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of income and expenses of the SR&F Income Fund Portfolio, prior to the merger. (c)Effective July 1, 2001, the Portfolio adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and accreting discount on all debt securities. The effect of this change for the year ended June 30, 2002, was to decrease net investment income per share by $0.01, decrease net realized and unrealized loss per share by $0.01 and decrease the ratio of net investment income to average net assets from 6.65% to 6.57%. Per share data and ratios for periods prior to June 30, 2002 have not been restated to reflect this change in presentation. (d)Rounds to less than $0.01 per share. (e)Total return at net asset value assuming all distributions reinvested. (f)The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (g)Portfolio turnover disclosed is for the SR&F Income Portfolio. 19 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF LIBERTY-STEIN ROE FUNDS INCOME TRUST LIBERTY INCOME FUND We have audited the accompanying statement of assets and liabilities, including the investment portfolio, of Liberty Income Fund (formerly, Stein Roe Income Fund) (the "Fund") (a series of Liberty-Stein Roe Funds Income Trust) as of June 30, 2003, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of June 30, 2003, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Liberty Income Fund (a series of Liberty-Stein Roe Funds Income Trust) at June 30, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Boston, Massachusetts August 19, 2003 20 TRUSTEES AND OFFICERS The Trustees serve terms of indefinite duration. The names, addresses and ages of the Trustees and officers of the Liberty Funds, the year each was first elected or appointed to office, their principal business occupations during at least the last five years, the number of portfolios overseen by each Trustee and other directorships they hold are shown below. Each officer listed below serves as an officer of each of the Liberty Funds. The Statement of Additional Information (SAI) contains additional information about the Trustees and is available without charge upon request by calling the fund's distributor at 800-345-6611.
Number of Year First Portfolios in Elected or Liberty Funds Other Position with Appointed Principal Occupation(s) Complex Overseen Directorships Name, Address and Age Liberty Funds to Office1 During Past Five Years by Trustee Held - ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED TRUSTEES Douglas A. Hacker (Age 47) Trustee 1996 Executive Vice President - Strategy of United 85 None P.O. Box 66100 Airlines (airline) since December, 2002 (formerly Chicago, IL 60666 President of UAL Loyalty Services (airline) from September, 2001 to December, 2002; Executive Vice President and Chief Financial Officer of United Airlines from March, 1993 to September, 2001; Senior Vice President and Chief Financial Officer of UAL, Inc. prior thereto). Janet Langford Kelly (Age 45) Trustee 1996 Executive Vice President-Corporate Development 85 None One Kellogg Square and Administration, General Counsel and Secretary, Battle Creek, MI 49016 Kellogg Company (food manufacturer), since September, 1999; Senior Vice President, Secretary and General Counsel, Sara Lee Corporation (branded, packaged, consumer-products manufacturer) from January, 1995 to September, 1999. Richard W. Lowry (Age 67) Trustee 1995 Private Investor since August, 1987 (formerly 87(4) None 10701 Charleston Drive Chairman and Chief Executive Officer, U.S. Plywood Vero Beach, FL 32963 Corporation (building products manufacturer)). Charles R. Nelson (Age 60) Trustee 1981 Professor of Economics, University of Washington, 120(2) None Department of Economics since January, 1976; Ford and Louisa Van Voorhis University of Washington Professor of Political Economy, University of Seattle, WA 98195 Washington, since September, 1993; Director, Institute for Economic Research, University of Washington, since September, 2001; Adjunct Professor of Statistics, University of Washington, since September, 1980; Associate Editor, Journal of Money Credit and Banking, since September, 1993; consultant on econometric and statistical matters. John J. Neuhauser (Age 60) Trustee 1985 Academic Vice President and Dean of Faculties since 88(4,5) Saucony, Inc. 84 College Road August, 1999, Boston College (formerly Dean, Boston (athletic Chestnut Hill, MA 02467-3838 College School of Management from September, 1977 footwear); to September, 1999. SkillSoft Corp. (E-Learning) Thomas E. Stitzel (Age 67) Trustee 1998 Business Consultant since 1999 (formerly Professor of 85 None 2208 Tawny Woods Place Finance from 1975 to 1999 and Dean from 1977 to 1991, Boise, ID 83706 College of Business, Boise State University); Chartered Financial Analyst.
21 TRUSTEES AND OFFICERS (CONTINUED)
Number of Year First Portfolios in Elected or Liberty Funds Other Position with Appointed Principal Occupation(s) Complex Overseen Directorships Name, Address and Age Liberty Funds to Office1 During Past Five Years by Trustee Held - ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED TRUSTEES Thomas C. Theobald (Age 66) Trustee 1996 Managing Director, William Blair Capital Partners 85 Anixter 27 West Monroe Street, Suite 3500 (private equity investing) since September, 1994 International Chicago, IL 60606 (formerly Chief Executive Officer and Chairman (network support of the Board of Directors, Continental Bank equipment Corporation prior thereto). distributor), Jones Lang LaSalle (real estate management services) and MONY Group (life insurance). Anne-Lee Verville (Age 58) Trustee 1998 Author and speaker on educational systems needs 86(5) Chairman of 359 Stickney Hill Road (formerly General Manager, Global Education the Board of Hopkinton, NH 03229 Industry from 1994 to 1997, and President, Directors, Applications Solutions Division from 1991 to 1994, Enesco Group, IBM Corporation (global education and Inc. (designer, global applications)). importer and distributor of giftware and collectibles). INTERESTED TRUSTEES William E. Mayer3 (Age 63) Trustee 1994 Managing Partner, Park Avenue Equity Partners 87(4) Lee Enterprises 399 Park Avenue (private equity) since February, 1999 (formerly (print media), Suite 3204 Founding Partner, Development Capital LLC WR Hambrecht + Co. New York, NY 10022 from November 1996 to February, 1999; Dean and (financial service Professor, College of Business and Management, provider) and University of Maryland from October, 1992 to First Health November, 1996). (healthcare). Joseph R. Palombo3 (Age 50) Trustee, 2000 Executive Vice President and Chief Operating Officer 86(6) None One Financial Center Chairman of of Columbia Management Group, Inc. (Columbia Boston, MA 02111 the Board and Management) since December, 2001 and Director, President Executive Vice President and Chief Operating Officer of the Advisor since April, 2003 (formerly Chief Operations Officer of Mutual Funds, Liberty Financial Companies, Inc. from August, 2000 to November, 2001; Executive Vice President of Stein Roe & Farnham Incorporated (Stein Roe) from April, 1999 to April, 2003; Director of Colonial Management Associates, Inc. (Colonial) from April, 1999 to April, 2003; Director of Stein Roe from September, 2000 to April, 2003) President of Liberty Funds and Galaxy Funds since February, 2003 (formerly Vice President from September 2002 to February 2003); Manager of Stein Roe Floating Rate Limited Liability Company since October, 2000; (formerly Vice President of the Liberty Funds from April, 1999 to August, 2000; Chief Operating Officer and Chief Compliance Officer, Putnam Mutual Funds from December, 1993 to March, 1999).
1 In December, 2000, the boards of each of the Liberty Funds and former Stein Roe funds were combined into one board of trustees with common membership. The date shown is the earliest date on which a trustee was elected to either the Liberty Funds board or the former Stein Roe funds board. 2 In addition to serving as a disinterested Trustee of the Liberty Funds, Mr. Nelson serves as a disinterested Director or Trustee of the Columbia Funds and CMG Funds, currently consisting of 15 funds and 20 funds, respectively, which are advised by the Advisor. 3 Mr. Mayer is an "interested person" (as defined in the Investment Company Act of 1940 (1940 Act)) by reason of his affiliation with WR Hambrecht + Co. Mr. Palombo is an interested person as an employee of the Advisor. 4 In addition to serving as trustees of Liberty Funds, Messrs. Lowry, Neuhauser and Mayer each serve as a director/trustee of the Liberty All-Star Funds, currently consisting of 2 funds, which are advised by an affiliate of the Advisor. 5 In addition to serving as disinterested trustees of the Liberty Funds, Mr. Neuhauser and Ms. Verville serve as disinterested directors of Columbia Management Multi-Strategy Hedge Fund, LLC, which is advised by the Advisor. 6 In addition to serving as an interested trustee of the Liberty Funds, Mr. Palombo serves as an interested director of Columbia Management Multi-Strategy Hedge Fund, LLC, which is advised by the Advisor. 22 [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK]
OFFICERS AND TRANSFER AGENT Year First Elected or Position with Appointed Name, Address and Age Liberty Funds to Office Principal Occupation(s) During Past Five Years - ------------------------------------------------------------------------------------------------------------------------------------ OFFICERS Vicki L. Benjamin (Age 41) Chief 2001 Controller of the Liberty Funds and of the Liberty All-Star Funds since May, One Financial Center Accounting 2002; Chief Accounting Officer of the Liberty Funds and Liberty All-Star Boston, MA 02111 Officer and Funds since June, 2001; Controller and Chief Accounting Officer of the Controller Galaxy Funds since September, 2002 (formerly Vice President, Corporate Audit, State Street Bank and Trust Company from May, 1998 to April, 2001; Audit Manager from July, 1994 to June, 1997; Senior Audit Manager from July, 1997 to May, 1998, Coopers & Lybrand, LLP). J. Kevin Connaughton (Age 39) Treasurer 2000 Treasurer of the Liberty Funds and of the Liberty All-Star Funds since One Financial Center December, 2000; Vice President of the Advisor since April, 2003 (formerly Boston, MA 02111 Controller of the Liberty Funds and of the Liberty All-Star Funds from February, 1998 to October, 2000); Treasurer of the Galaxy Funds since September, 2002; Treasurer, Columbia Management Multi-Strategy Hedge Fund, LLC since December, 2002 (formerly Vice President of Colonial from February, 1998 to October, 2000 and Senior Tax Manager, Coopers & Lybrand, LLP from April, 1996 to January, 1998).
IMPORTANT INFORMATION ABOUT THIS REPORT The Transfer Agent for Liberty Income Fund is: Liberty Funds Services, Inc. P.O. Box 8081 Boston, MA 02266-8081 The fund mails one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at 800-345-6611 and additional reports will be sent to you. This report has been prepared for shareholders of Liberty Income Fund. This report may also be used as sales literature when preceded or accompanied by the current prospectus which provides details of sales charges, investment objectives and operating policies of the fund and with the most recent copy of the Liberty Funds Performance Update. ANNUAL REPORT: Liberty Income Fund Liberty Income Fund ANNUAL REPORT, JUNE 30, 2003 [eagle head logo] LibertyFunds A Member of Columbia Management Group (C)2003 Liberty Funds Distributor, Inc. A Member of Columbia Management Group One Financial Center, Boston, MA 02111-2621 PRSRT STD U.S. POSTAGE PAID HOLLISTON, MA PERMIT NO. 20 751-02/615O-0603 (08/03) 03/2215 ITEM 2. CODE OF ETHICS. Not applicable at this time. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable at this time. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES Not applicable at this time. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS Not applicable at this time. ITEM 6. [RESERVED] ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES Not applicable at this time. ITEM 8. [RESERVED] ITEM 9. CONTROLS AND PROCEDURES. (a) The Registrant's Chief Executive Officer and Chief Financial Officer, based on their evaluation of the Registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report, have concluded that such controls and procedures are adequately designed to ensure that information required to be disclosed by the Registrant in its reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Registrant's management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. (b) There was no change in the registrant's internal control over financial reporting that occurred over the registrant's last fiscal half-year that has affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 10. EXHIBITS. (a) File the exhibits listed below as part of this Form. Letter or number the exhibits in the sequence indicated. (a)(1) Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit: Not applicable at this time. (a)(2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940 (17270.30a-2(a)). Attached hereto as Exhibit 99.CERT. (b) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(b) under the Investment Company Act of 1940 (17270.30a-2(b)). Attached hereto as Exhibit 99.906CERT. 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) Liberty-Stein Roe Funds Income Trust ----------------------------------------------------------- By (Signature and Title) /s/ Joseph R. Palombo ---------------------------------------------- Joseph R. Palombo, President Date September 5, 2003 ------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title) /s/ Joseph R. Palombo ---------------------------------------------- Joseph R. Palombo, President Date September 5, 2003 ------------------------------------------------------------------- By (Signature and Title) /s/ J. Kevin Connaughton ---------------------------------------------- J. Kevin Connaughton, Treasurer Date September 5, 2003 ------------------------------------------------------------------- EX-99.CERT 3 file002.txt CERTIFICATIONS I, Joseph R. Palombo, certify that: 1. I have reviewed this report on Form N-CSR of Liberty-Stein Roe Funds Income Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 5, 2003 /s/ Joseph R. Palombo ---------------------------------------- Joseph R. Palombo, President I, J. Kevin Connaughton, certify that: 1. I have reviewed this report on Form N-CSR of Liberty-Stein Roe Funds Income Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 5, 2003 /s/ J. Kevin Connaughton ------------------------------- J. Kevin Connaughton, Treasurer EX-99.906CERT 4 file003.txt CERTIFICATIONS CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Certified Shareholder Report of Liberty-Stein Roe Funds Income Trust (the "Trust") on Form N-CSR for the period ending June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof ("the Report"), the undersigned hereby certifies that, to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust. Date: September 5, 2003 /s/ Joseph R. Palombo ---------------------------------------- Joseph R. Palombo, President A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission (the "Commission") or its staff upon request. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. ss.1350 and is not being filed as part of the Form N-CSR with the Commission. CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Certified Shareholder Report of Liberty-Stein Roe Funds Income Trust (the "Trust") on Form N-CSR for the period ending June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof ("the Report"), the undersigned hereby certifies that, to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust. Date: September 5, 2003 /s/ J. Kevin Connaughton ------------------------------- J. Kevin Connaughton, Treasurer A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission (the "Commission") or its staff upon request. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. ss.1350 and is not being filed as part of the Form N-CSR with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----