As filed with the Securities and Exchange Commission on June 6, 2005 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 811-21487 RMK Strategic Income Fund, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) Morgan Keegan Tower Fifty Front Street Memphis, Tennessee 38103 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (901) 524-4100 Allen B. Morgan, Jr. Morgan Keegan Tower Fifty Front Street Memphis, Tennessee 38103 ---------------------------------------------- (Name and address of agent for service) with copies to Arthur J. Brown, Esq. Kirkpatrick & Lockhart Nicholson Graham LLP 1800 Massachusetts Ave., N.W. Washington, D.C. 20036-1800 Date of fiscal year end: March 31, 2005 Date of reporting period: March 31, 2005 ITEM 1. REPORTS TO STOCKHOLDERS. The following is a copy of the report transmitted to stockholders pursuant to Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1): Annual Report March 31, 2005 [LOGO] RMK Advantage Income Fund, Inc. RMK High Income Fund, Inc. RMK Strategic Income Fund, Inc. TABLE OF CONTENTS Letter to Stockholders 1 RMK Advantage Income Fund, Inc. Portfolio Commentary 2 RMK Advantage Income Fund, Inc. Portfolio of Investments 6 RMK High Income Fund, Inc. Portfolio Commentary 16 RMK High Income Fund, Inc. Portfolio of Investments 20 RMK Strategic Income Fund, Inc. Portfolio Commentary 32 RMK Strategic Income Fund, Inc. Portfolio of Investments 36 Statements of Assets and Liabilities 47 Statements of Operations 48 Statements of Changes in Net Assets 50 Statements of Cash Flows 52 Notes to Financial Statements 53 Financial Highlights 61 Report of Independent Registered Public Accounting Firm 63 Board of Directors and Officers 64 Dividend Reinvestment Plan 69 Privacy Policy 71 Supplemental Information 72 Regions Morgan Keegan Fund Complex 76 THERE IS NO ASSURANCE THAT THE FUNDS WILL ACHIEVE THEIR INVESTMENT OBJECTIVES. THE FUNDS ARE SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT THE MARKET VALUES OF SECURITIES OWNED BY THE FUNDS WILL DECLINE AND, THEREFORE, THE VALUE OF THE FUNDS' SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THE FUNDS. - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE - -------------------------------------------------------------------------------- 1 LETTER TO STOCKHOLDERS Dear Fellow Stockholders: We are pleased to present the enclosed combined annual stockholder reports for RMK Advantage Income Fund, Inc., RMK High Income Fund, Inc., and RMK Strategic Income Fund, Inc. You will find information on each Fund's strategy and investments, as well as performance for the fiscal years and period ended March 31, 2005. Since all three Funds' fiscal years end on March 31, this annual report covers a full year of investment operations for RMK High Income Fund, Inc. and RMK Strategic Income Fund, Inc. and about five months of investment operations for RMK Advantage Income Fund, Inc. In early November 2004, the Regions Morgan Keegan Fund Complex successfully launched its third closed-end fund, RMK Advantage Income Fund, Inc., which trades on the New York Stock Exchange under the ticker symbol RMA. It is also managed by James C. Kelsoe, Jr., CFA and his team of experienced investment professionals. Our mission remains to offer the investment products to help our investors achieve their financial goals. As always, we appreciate your continued support of the Regions Morgan Keegan closed-end funds and the other Regions Morgan Keegan funds. We remain committed to helping you preserve and accumulate wealth through investments in our family of funds. You have our commitment to bring you the highest level of disciplined decision-making and personal service to meet your financial needs. Sincerely, /s/ Carter E. Anthony - --------------------- Carter E. Anthony, CFA President Morgan Asset Management, Inc. MAY 23, 2005 2 RMK Advantage Income Fund, Inc. Portfolio Commentary March 31, 2005 MANAGEMENT DISCUSSION OF FUND PERFORMANCE RMK Advantage Income Fund, Inc. (the "Fund") began trading on November 8, 2004 under the ticker symbol RMA after an initial public offering at $15 per share. The Fund had a total return of 7.30% for the period ended March 31, 2005, based on market price and reinvested dividends. The Fund had a total return of 3.53% for the period ended March 31, 2005, based on net asset value and reinvested dividends. From November 8, 2004 until March 31, 2005, the LEHMAN BROTHERS BA U.S. HIGH YIELD INDEX had a total return of -0.56%. The Fund's strong performance was primarily attributable to the Fund's relative yield advantage as evidenced by the monthly dividend distributions and the relative net asset value stability produced by the Fund's allocation in a wide variety of asset types. The Fund paid monthly dividends out of the net investment income of the Fund of $0.12, $0.12, and $0.13 per share for January, February and March, respectively. Additionally, the Fund paid a one-time special dividend distribution of $0.11 per share in December 2004 producing a total income distribution of $0.48 per share since the Fund commenced investment operations. Our high income strategy emphasizes very broad diversification utilizing asset categories beyond the well recognized below investment grade corporate and convertible bonds. This diversification allows us to find better risk/reward opportunities than would be possible if we were restricted to a single asset sector. Key drivers of performance in 2004 included commercial mortgage-backed securities, distressed credit card receivables, below investment grade corporate bonds and dividend-paying common stocks. Within the asset-backed securities, credit card receivables from issuers like Nextcard, First Consumers, and Metris provided a boost to the Fund's returns in late 2004. Elevated delinquencies and charge-offs caused these assets to suffer significant credit downgrades and to trade down as low as 30%-40% discounts of the original issue. A recovering economy mitigated delinquencies and the robust structure of those trusts caused these assets to recover virtually all of their value. The Fund employs leverage within the parameters allowed by its prospectus. Leverage increases (decreases) returns if the rate of return on the assets that were bought with the borrowed money was higher (lower) than the interest charged on the borrowed money. The Fund employs leverage on the whole portfolio rather than specific positions; therefore, because the Fund had a positive return for the period ended March 31, 2005, the leverage was beneficial to stockholders. Although increasing short-term interest rates will increase the cost of borrowed money, the Fund has invested an equivalent amount of assets in adjustable rate securities that will similarly benefit from increasing short-term rates. This allocation to floating rate assets should provide the Fund a level of protection from rising rates and allow the Fund to continue to benefit from the use of leverage. For 2005, we expect continued economic recovery and continued increases in short-term interest rates by the Federal Reserve. To position the Fund to take advantage of these conditions, we have increased our allocation of floating rate bonds. These bonds, which may be corporate or asset-backed, have coupon rates that will increase as short-term interest rates increase. This feature should allow the Fund to benefit from rising rates as well as maintain its net asset value. We also expect business conditions to continue to improve, which should produce a continual uptrend in corporate as well as household earnings. The Fund stands to benefit from this trend by increasing our investments in corporate debt and securitized home equity loans. /s/ James C. Kelsoe - ------------------------- James C. Kelsoe, Jr., CFA Portfolio Manager MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUNDS WILL ACHIEVE THEIR INVESTMENT OBJECTIVES. THE FUNDS ARE SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT THE MARKET VALUES OF SECURITIES OWNED BY THE FUNDS WILL DECLINE AND, THEREFORE, THE VALUE OF THE FUNDS' SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THE FUNDS. 3 PORTFOLIO STATISTICS AS OF 3/31/05 Portfolio Credit Rating BB- Portfolio Current Yield 9.97% Portfolio Yield to Maturity 10.19% Portfolio Duration 3.11 Years Percentage of Leveraged Assets 11.00% Number of Holdings 154 Ticker Symbol RMA CUSIP 74963L 103 ASSET ALLOCATION* AS OF 3/31/05 [Pie Chart Representation] Certificate-Backed Obligations 2.1% Mortgage-Backed Securities 1.8% Corporate Bonds 23.5% Home Equity Loans 16.9% Collateralized Equipment Leases 14.2% Manufactured Housing Loans 7.2% Common Stock 6.8% Commercial Loans 6.7% Franchise Loans 6.5% Collateralized Obligations 6.2% Cash Equivalents 5.7% Other 2.4% * Percentages are based on total investments, which may differ from total net assets used in computing the percentages in the Portfolio of Investments. Current holdings may not reflect the holdings as of the date of this report. CREDIT QUALITY DISTRIBUTION* AS OF 3/31/05 AAA 3.6% AA 2.0% A 4.7% BBB 4.4% BB 9.1% B 5.3% CCC 8.8% CC 1.3% D 2.7% NR 8.1% * Each rating category above includes all bonds within the broad rating category (i.e., BBB includes all bonds rated BBB+, BBB, and BBB-). Current holdings may not reflect the holdings as of the date of this report. 4 NAV & MARKET PRICE HISTORY(1) The graph below illustrates the net asset value and market price history of RMK Advantage Income Fund, Inc. (NYSE: RMA) from November 8, 2004 (commencement of investment operations) to March 31, 2005. [GRAPH REPRESENTATION] Date NAV Market Price History - ---- --- -------------------- 11/08/2004 $14.33 $15.00 11/09/2004 $14.20 $15.25 11/10/2004 $14.20 $15.29 11/11/2004 $14.34 $15.29 11/12/2004 $14.35 $15.35 11/13/2004 $14.35 $15.35 11/14/2004 $14.35 $15.35 11/15/2004 $14.35 $15.70 11/16/2004 $14.34 $15.68 11/17/2004 $14.35 $15.49 11/18/2004 $14.33 $15.45 11/19/2004 $14.32 $15.65 11/20/2004 $14.32 $15.65 11/21/2004 $14.32 $15.65 11/22/2004 $14.33 $15.70 11/23/2004 $14.33 $15.70 11/24/2004 $14.33 $15.70 11/25/2004 $14.33 $15.70 11/26/2004 $14.34 $15.90 11/27/2004 $14.34 $15.90 11/28/2004 $14.34 $15.90 11/29/2004 $14.33 $15.79 11/30/2004 $14.34 $15.90 12/01/2004 $14.36 $15.94 12/02/2004 $14.36 $15.87 12/03/2004 $14.38 $15.90 12/04/2004 $14.38 $15.90 12/05/2004 $14.38 $15.90 12/06/2004 $14.25 $15.82 12/07/2004 $14.24 $15.80 12/08/2004 $14.25 $15.70 12/09/2004 $14.26 $15.75 12/10/2004 $14.25 $15.85 12/11/2004 $14.25 $15.85 12/12/2004 $14.25 $15.85 12/13/2004 $14.27 $15.79 12/14/2004 $14.28 $15.75 12/15/2004 $14.30 $15.74 12/16/2004 $14.36 $15.81 12/17/2004 $14.34 $15.90 12/18/2004 $14.34 $15.90 12/19/2004 $14.34 $15.90 12/20/2004 $14.35 $15.72 12/21/2004 $14.38 $15.82 12/22/2004 $14.38 $15.90 12/23/2004 $14.40 $16.00 12/24/2004 $14.40 $16.00 12/25/2004 $14.40 $16.00 12/26/2004 $14.40 $16.00 12/27/2004 $14.39 $15.88 12/28/2004 $14.40 $16.00 12/29/2004 $14.41 $16.05 12/30/2004 $14.42 $16.06 12/31/2004 $14.43 $16.04 01/01/2005 $14.43 $16.04 01/02/2005 $14.43 $16.04 01/03/2005 $14.42 $16.00 01/04/2005 $14.41 $16.17 01/05/2005 $14.42 $16.14 01/06/2005 $14.43 $16.10 01/07/2005 $14.31 $16.10 01/08/2005 $14.31 $16.10 5 01/09/2005 $14.31 $16.10 01/10/2005 $14.31 $16.08 01/11/2005 $14.31 $15.81 01/12/2005 $14.31 $16.03 01/13/2005 $14.31 $16.10 01/14/2005 $14.33 $16.07 01/15/2005 $14.33 $16.07 01/16/2005 $14.33 $16.07 01/17/2005 $14.33 $16.07 01/18/2005 $14.35 $16.10 01/19/2005 $14.35 $16.02 01/20/2005 $14.32 $15.94 01/21/2005 $14.33 $15.95 01/22/2005 $14.33 $15.95 01/23/2005 $14.33 $15.95 01/24/2005 $14.32 $15.81 01/25/2005 $14.33 $15.95 01/26/2005 $14.36 $16.08 01/27/2005 $14.36 $16.10 01/28/2005 $14.38 $16.15 01/29/2005 $14.38 $16.15 01/30/2005 $14.38 $16.15 01/31/2005 $14.38 $16.21 02/01/2005 $14.40 $16.22 02/02/2005 $14.41 $16.18 02/03/2005 $14.41 $16.15 02/04/2005 $14.44 $16.23 02/05/2005 $14.44 $16.23 02/06/2005 $14.44 $16.23 02/07/2005 $14.45 $16.26 02/08/2005 $14.33 $16.07 02/09/2005 $14.33 $16.20 02/10/2005 $14.33 $16.05 02/11/2005 $14.35 $16.20 02/12/2005 $14.35 $16.20 02/13/2005 $14.35 $16.20 02/14/2005 $14.35 $16.05 02/15/2005 $14.36 $16.26 02/16/2005 $14.38 $16.20 02/17/2005 $14.38 $16.15 02/18/2005 $14.39 $16.14 02/19/2005 $14.39 $16.14 02/20/2005 $14.39 $16.14 02/21/2005 $14.39 $16.14 02/22/2005 $14.38 $16.05 02/23/2005 $14.39 $15.92 02/24/2005 $14.41 $16.03 02/25/2005 $14.42 $16.06 02/26/2005 $14.42 $16.06 02/27/2005 $14.42 $16.06 02/28/2005 14.42 16.06 03/01/2005 $14.42 $15.97 03/02/2005 $14.43 $16.13 03/03/2005 $14.46 $16.12 03/04/2005 $14.49 $16.05 03/05/2005 $14.49 $16.05 03/06/2005 $14.49 $16.05 03/07/2005 $14.51 $16.09 03/08/2005 $14.38 $16.02 03/09/2005 $14.36 $15.88 03/10/2005 $14.36 $15.76 03/11/2005 $14.39 $15.36 03/12/2005 $14.39 $15.36 6 03/13/2005 $14.39 $15.36 03/14/2005 $14.40 $15.51 03/15/2005 $14.39 $15.39 03/16/2005 $14.34 $15.14 03/17/2005 $14.35 $15.25 03/18/2005 $14.35 $15.40 03/19/2005 $14.35 $15.40 03/20/2005 $14.35 $15.40 03/21/2005 $14.32 $15.28 03/22/2005 $14.29 $15.24 03/23/2005 $14.31 $14.75 03/24/2005 $14.34 $14.92 03/25/2005 $14.34 $14.92 03/26/2005 $14.34 $14.92 03/27/2005 $14.34 $14.92 03/28/2005 14.36 15.15 03/29/2005 $14.32 $15.25 03/30/2005 $14.39 $15.47 03/31/2005 $14.37 $15.59 (1) Net asset value is calculated after the close of the exchanges each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding. The market price is the last reported price at which a security was sold on an exchange. FUND PERFORMANCE TOTAL RETURNS AS OF MARKET NET ASSET MARCH 31, 2005 VALUE VALUE Commencement of Investment Operations (11/8/04) 7.30% 3.53% Total returns assume an investment at the common share market price or net asset value at the beginning of the period, reinvestment of all dividends and distributions for the period in accordance with the Fund's dividend reinvestment plan, and sale of all shares at the closing market price (excluding any commissions) or net asset value at the end of the period. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FUND PERFORMANCE CHANGES OVER TIME AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR THE MOST RECENT PERFORMANCE, CALL 1-800-564-2188. 7 RMK Advantage Income Fund, Inc. Portfolio of Investments March 31, 2005 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) ASSET BACKED SECURITIES - INVESTMENT GRADE - 15.6% OF NET ASSETS COLLATERALIZED BOND OBLIGATION - 2.5% 2,000,000 2004-1A COM1, 2.00% 1/10/40 BBB $ 1,990,062 $ 1,990,000 4,200,000 Restructured Asset Backed 2003-3A A3, 2.56% 1/29/22 (a) AA- 3,356,057 3,344,250 5,000,000 Witherspoon 2004-1A COM1, 11.50% 9/15/39 BBB+ 5,000,000 5,000,000 ------------------ ------------------ $ 10,346,119 $ 10,334,250 ------------------ ------------------ COMMERCIAL LOANS - 0.4% 2,000,000 FFCA Secured Lending 1998-1 D1, 7.81% 1/18/17(a) BBB- 1,581,650 1,580,000 EQUIPMENT LEASES - 6.8% 8,586,169 AERCO 2A A3, 2.863% 7/15/25 BBB 6,408,440 6,343,033 11,750,000 Aircraft Finance Trust 1999-1A A1, 2.883% 5/15/24 BBB 8,208,671 8,136,875 3,000,000 Aviation Capital 2000-1A A1, 3.07% 11/15/25 (a) BBB 2,251,788 2,272,080 15,000,000 Lease Investment Flight Trust 1 A1, 2.49% 7/15/31 BBB 10,356,145 10,575,000 ------------------ ------------------ $ 27,225,044 $ 27,326,988 ------------------ ------------------ HOME EQUITY LOANS (NON-HIGH LOAN-TO-VALUE) - 4.9% 7,613,000 Ace Securities 2004-HE3 M11, 5.46% 11/25/34 BBB- 6,240,150 6,927,830 3,000,000 Ace Securities 2004-HE4 M11, 5.694% 12/25/34 BBB- 2,405,756 2,807,820 2,000,000 First Franklin 2004-FF5, 8.594% 8/25/34 (a) BBB 2,000,000 2,000,000 8,375,214 Long Beach Mortgage 2001-1 M2, 2.91% 4/21/31 A 8,132,764 8,097,827 ------------------ ------------------ $ 18,778,670 $ 19,833,477 ------------------ ------------------ MANUFACTURED HOUSING LOANS - 1.0% 4,500,000 Green Tree Financial 1996-9 M1, 7.63% 1/15/28 BBB 4,045,739 4,097,295 ------------------ ------------------ TOTAL ASSET BACKED SECURITIES - INVESTMENT GRADE $ 61,977,222 $ 63,172,010 ------------------ ------------------ ASSET BACKED SECURITIES - NON-INVESTMENT GRADE - 55.2% OF NET ASSETS CERTIFICATE-BACKED OBLIGATIONS - 2.4% 5,000,000 NCAPS Funding 2003-2A SIN, 10.00% 1/15/34 (a) Non-rated 4,851,929 4,850,000 8 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) 3,000,000 Preferred Term Securities XVII, 6/23/35 (a) (e) Non-rated $ 3,000,000 $ 3,000,000 2,000,000 US Capital Funding III, 14.00% 12/1/35 (a) Non-rated 2,000,000 2,000,000 ------------------ ------------------ $ 9,851,929 $ 9,850,000 ------------------ ------------------ COLLATERALIZED DEBT OBLIGATION - 4.6% 4,000,000 Hewett's Island 2004-1A COM, 12/15/16 (e) BB 4,000,000 4,000,000 2,000,000 Hewett's Island II, 12/15/16 (a) (e) Non-rated 1,980,079 1,980,000 3,900,000 MKP 4A CS, 2.00% 7/12/40 Non-rated 3,900,000 3,900,000 6,000,000 Prestl XVI Combination Notes, 10.00% 3/23/35 (a) Non-rated 6,000,000 6,119,160 2,500,000 Stanfield 2A D1, 8.76% 4/15/15 (a) CCC- 2,475,007 2,475,000 ------------------ ------------------ $ 18,355,086 $ 18,474,160 ------------------ ------------------ COMMERCIAL LOANS - 7.7% 1,171,422 Banc of America 2000-1 M, 6.00% 11/15/31 (a) B- 766,216 757,207 32,805,935 Enterprise Mortgage 2000-1 A2, 7.505% 1/15/27 (a) B- 18,630,691 18,371,324 10,000,000 GS Mortgage 1998-C1 H, 6.00% 10/15/30 (a) CCC 4,821,091 4,742,100 3,750,000 Lehman Brothers 2002-LLFA L, 3.50% 6/14/17 (a) BB+ 3,713,531 3,712,500 4,000,000 Merrill Lynch 204-WMC3 B4, 5.00% 1/25/35 (a) BB+ 3,324,641 3,342,760 ------------------ ------------------ $ 31,256,170 $ 30,925,891 ------------------ ------------------ CREDIT CARDS - 1.8% 10,000,000 Nextcard 2000-1 A C, 2.7443% 12/15/06 (a) CCC- 7,592,767 7,100,000 EQUIPMENT LEASES - 9.5% Airplanes Pass Through Trust 2001-1A A9, 3.14% 3/15/19 BB+ 3,767,107 3,736,250 7,000,000 8,832,885 Aviation Capital 2000-1A C1, 4.76% 11/15/25 (a) B 2,260,238 2,252,385 3,591,305 DVI Receivables 2002-1 A3A, 3.121% 6/11/10 CCC 2,542,428 2,540,848 9,000,000 Embarcadero Aircraft 2000-A A1, 3.07% 8/15/25 (a) BB 5,045,916 5,220,000 5,537,610 Pegasus Aviation 1999-1A A1, 6.30% 3/25/29 (a) CCC+ 2,768,805 2,767,587 9,000,000 Pegasus Aviation 1999-1A A2, 6.30% 3/25/29 (a) CCC+ 4,672,660 4,477,500 15,664,982 Pegasus Aviation 2000-1 A1, 3.275% 3/25/15 (a) B- $ 8,388,683 $ 8,282,859 18,000,000 Pegasus Aviation 2001-1A A2, 2.667% 5/10/31 (a) BB+ 9,297,734 9,225,000 ------------------ ------------------ $ 38,743,571 $ 38,502,429 ------------------ ------------------ FRANCHISE LOANS - 7.4% 5,000,000 ACLB Business Trust 1999-1 A3, 7.385% 8/15/20 (a) B+ 4,389,886 4,475,450 2,723,041 Captec Franchise 1999-1 A2, 7.278% 4/25/11 (a) BB 2,607,099 2,704,633 5,000,000 Captec Franchise 2000-1 A2, 8.155% 6/15/13 (a) BB- 4,432,205 4,331,200 1,617,000 Falcon Franchise 2001-1 F, 6.50% 1/5/23 B 1,204,639 1,066,137 12,927,024 FMAC Loan Trust 1996-B A1, 7.629% 11/15/18 (a) D 9,593,456 9,303,980 1,425,163 FMAC Loan Trust 1998-A A2, 6.50% 9/15/20 (a) C 934,177 932,655 10,289,956 FMAC Loan Trust 1998-BA A2, 6.74% 11/15/20 (a) C 7,414,985 7,080,550 ------------------ ------------------ $ 30,576,447 $ 29,894,605 ------------------ ------------------ HOME EQUITY LOANS (NON-HIGH LOAN-TO-VALUE) - 14.5% 9,950,000 Ace Securities 2004-HE3 B, 5.459% 11/25/34 (a) BB+ 7,535,031 8,557,000 2,000,000 Ace Securities 2004-HE4 B, 5.694% 12/25/34 (a) Non-rated 1,426,391 1,722,820 4,463,000 Ace Securities 2005-HE2 B1, 6.06% 4/25/35 (a) Non-rated 3,709,858 3,709,646 2,000,000 Equifirst Mortgage 2004-3 B1, 5.708% 12/25/34 (a) BB+ 1,651,725 1,800,000 9 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) 7,038,000 Equifirst Mortgage 2004-3 B2, 5.708% 12/25/34 (a) BB 5,502,491 6,123,060 1,000,000 Equifirst Mortgage 2005-1 B3, 6.08% 4/25/35 (a) BB- 827,626 827,500 1,757,000 Equifirst Mortgage 2005-1 B4, 6.08% 4/25/35 (a) Non-rated 1,453,041 1,452,828 6,778,000 First Franklin 2004-FF11 B1, 5.431% 1/25/35 (a) Non-rated 5,500,496 6,134,090 6,778,000 First Franklin 2004-FF11 B2, 5.431% 1/25/35 (a) Non-rated 5,302,262 5,947,695 2,000,000 GSAMP Trust 2004-AR1 B5, 5.00% 6/25/34 (a) Non-rated 1,552,348 1,550,000 4,097,781 Long Beach Mortgage 2001-4 M3, 4.683% 3/25/32 CCC+ 3,658,258 3,483,114 9,312,000 Merrill Lynch 2004-WMC1 B4, 5.181% 10/25/34 (a) BB+ $ 7,928,270 $ 7,915,200 2,000,000 Merrill Lynch 2005-SL1 B5, 6.27% 1/25/35 (a) BB 1,784,853 1,784,420 Terwin Mortgage 2005-3SL B6, 5.50% 3/25/35 interest-only strips Non-rated 7,553,646 7,547,550 ------------------ ------------------ $ 55,386,296 $ 58,554,923 ------------------ ------------------ MANUFACTURED HOUSING LOANS - 7.3% 14,191,856 Bombardier Capital 2000-A A2, 7.575% 6/15/30 CC 11,548,921 10,971,298 3,000,000 Green Tree Financial 1996-7 B1, 7.70% 10/15/27 10/15/27 CCC- 963,156 893,190 17,000,000 Green Tree Financial 1998-3 M1, 6.86% 3/1/30 B- 7,464,186 7,320,710 13,025,000 Green Tree Financial 1998-8 M1, 6.98% 9/1/30 B- 5,946,692 5,642,560 7,000,000 Green Tree Financial 1999-4 M1, 7.60% 5/1/31C CCC- 1,462,777 1,351,280 3,891,919 Oakwood Mortgage 2001-C A4, 7.405% 12/15/30 CCC- 2,965,719 2,923,376 1,300,000 Oakwood Mortgage 2002-C M1, 6.89% 11/15/32 CCC+ 377,731 378,781 ------------------ ------------------ $ 30,729,182 $ 29,481,195 ------------------ ------------------ TOTAL ASSET BACKED SECURITIES - NON-INVESTMENT GRADE $ 222,491,448 $ 222,783,203 ------------------ ------------------ CORPORATE BONDS - NON-INVESTMENT GRADE - 27.0% OF NET ASSETS BUSINESS SERVICES - 1.9% 2,000,000 Comforce Operating, 12.00% 12/1/07 Non-rated 2,000,000 2,000,000 Danka Business, 600,000 10.00% Bond 4/1/08 Non-rated 580,476 505,500 MSX International, 2,000,000 11.00% Bond 10/15/07 B- 2,007,251 2,000,000 MSX International, 4,000,000 11.375% Bond 1/15/08 CCC+ 3,325,716 3,160,000 ------------------ ------------------ $ 7,913,443 $ 7,665,500 ------------------ ------------------ CONSTRUCTION - 0.7% 1,600,000 Integrated Electrical Services, 9.375% Bond 2/1/09 CCC 1,473,248 1,528,000 1,350,000 Integrated Electrical Services, 9.375% Bond 2/1/09 CCC 1,251,603 1,296,000 ------------------ ------------------ $ 2,724,851 $ 2,824,000 ------------------ ------------------ ELECTRONICS - 1.8% 3,652,000 Knowles Electronics, 13.125% Bond 10/15/09 CCC $ 3,828,362 $ 3,761,560 3,750,000 Motors and Gears, 10.75% Bond 11/15/06 CCC 3,659,839 3,440,625 ------------------ ------------------ $ 7,488,201 $ 7,202,185 ------------------ ------------------ ENERGY - 1.7% Abraxas Petroleum, 2,400,000 9.72% Bond 12/1/09 (a) Non-rated 2,390,122 2,352,000 1,750,000 Calpine, 8.75% Bond 7/15/13 (a) B 1,440,696 1,321,250 3,000,000 Calpine, 9.875% Bond 12/1/11 (a) B 2,561,011 2,370,000 1,000,000 United Refining, 10.50% 8/15/12 (a) B- 1,031,951 1,005,000 ------------------ ------------------ $ 7,423,780 $ 7,048,250 ------------------ ------------------ FINANCE - 1.8% 3,850,000 Advanta Capital Trust, 8.99% 12/17/26 CCC 3,786,128 3,744,125 3,250,000 Labranche, 11.00% Bond 5/15/12 B 3,485,391 3,445,000 ------------------ ------------------ $ 7,271,519 $ 7,189,125 ------------------ ------------------ FOOD - 1.1% Ameriqual Group, B+ 1,100,000 1,100,000 11 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) 1,100,000 9.00% Bond 4/1/12 (a) Land O Lakes, 5,000,000 7.45% Bond 3/15/28 (a) CCC 3,330,357 3,475,000 ------------------ ------------------ $ 4,430,357 $ 4,575,000 ------------------ ------------------ HEALTH CARE - 0.8% 3,250,000 Hanger Orthopedic Group, 10.375% Bond 2/15/06 CCC+ 3,230,434 3,225,625 MANUFACTURING - 4.8% 2,000,000 Consolidated Container, 10.125% Bond 7/15/09 CCC 1,948,464 1,860,000 2,800,000 Dura Operating, 9.00% Bond 5/1/09 2,639,485 2,212,000 1,000,000 Elgin National, 11.00% Bond 11/1/07 CCC- 950,944 947,960 4,000,000 Foamex L.P., 10.75% Bond 4/1/09 B- 3,804,022 3,520,000 3,997,000 GSI Group, 10.25% Bond 11/1/07 Non-rated 3,970,264 3,997,000 2,200,000 Intermet, Zero Coupon Bond 6/15/09 in default (c) Non-rated 1,420,808 1,232,000 2,600,000 US Can, 12.375% Bond 10/1/10 CCC+ 2,381,889 2,444,000 3,250,000 VITRO S.A., 11.75% Bond 11/1/13 (a) CCC+ 3,185,212 3,087,500 ------------------ ------------------ $ 20,301,088 $ 19,300,460 ------------------ ------------------ PHARMACEUTICALS - 0.4% 2,000,000 Curative Health, 10.75% Bond 5/1/11 B- $ 1,809,611 $ 1,645,000 PRINTING - 0.2% 1,100,000 American Color Graphics, 10.00% Bond 6/15/10 CCC 802,870 715,000 RETAIL - 1.3% CCC+ 2,693,487 2,486,250 2,925,000 General Nutrition Center, 8.50% Bond 12/1/10 CCC+ 1,270,613 1,275,000 1,250,000 New World Restaurant, 13.00% Bond 7/1/08 CCC- 1,632,076 1,618,750 1,750,000 Star Gas Partner, ------------------ ------------------ $ 5,596,176 $ 5,380,000 ------------------ ------------------ SPECIAL PURPOSE ENTITY - 4.0% 7,000,000 Dow Jones CDX HY T1, 7.75% Bond 12/29/09 (a) B- 7,188,887 6,833,750 10,000,000 Dow Jones CDX HY T4, 10.50% Bond 12/29/09 (a) Non-rated 10,000,000 9,512,500 ------------------ ------------------ $ 17,188,887 $ 16,346,250 ------------------ ------------------ TELECOMMUNICATIONS - 4.7% 962,000 American Cellular, 10.00% Bond 8/1/11 B- 823,117 885,040 3,400,000 BARAK I.T.C., Zero Coupon Bond 11/15/07 in default (c)(d) Non-rated 2,044,521 1,836,000 900,000 Call-Net Enterprises, 10.625% Bond 12/31/08 (d) B- 881,226 945,000 3,375,000 Charter Communication, Zero Coupon Bond 5/15/11 CCC- 2,500,175 2,328,750 2,000,000 Charter, 10.00% Bond 5/15/11 CCC- 1,595,081 1,535,000 3,500,000 Level 3 Financing, 10.75% Bond 10/15/11 (a) CC 3,130,235 3,071,250 2,750,000 Primus Telecommunications, 8.00% Bond 1/15/14 CCC 2,319,759 1,980,000 1,240,000 Primus Telecommunications, 12.75% Bond 10/15/09 CCC 1,196,411 1,140,800 1,650,000 Rural Cellular, 9.75% Bond 1/15/10 CCC 1,499,949 1,509,750 3,000,000 Time Warner, 10.125% Bond 2/1/11 CCC+ 2,919,079 2,895,000 700,000 Transtel S.A., 12.50% Bond 12/31/08 (a) Non-rated 656,754 658,000 ------------------ ------------------ $ 19,566,307 $ 18,784,590 ------------------ ------------------ 12 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) TOBACCO - 0.9% 4,715,000 North Atlantic Trading, 9.25% Bond 3/1/12 CCC $ 4,533,054 $ 3,536,250 TRANSPORTATION - 0.4% Greyhound Lines, 1,630,000 11.50% Bond 4/15/07 CCC- 1,630,549 1,638,150 TRAVEL - 0.5% 2,000,000 Worldspan Financial, 9.024% Bond 2/15/11 (a) CCC+ 1,990,124 1,940,000 TOTAL CORPORATE BONDS - NON-INVESTMENT GRADE $ 113,901,251 $ 109,015,385 ------------------ ------------------ MORTGAGE BACKED SECURITIES - 1.9% OF NET ASSETS COLLATERALIZED MORTGAGE OBLIGATION - 1.9% Harborview Mortgage 2004-8 X, 1.446% 11/19/34 interest-only strips AAA 5,662,626 5,637,941 2,310,000 Sasco Net Interest 2004-6XS B, 5.00% 3/28/34(a) BB+ 2,110,401 2,107,875 ------------------ ------------------ TOTAL MORTGAGE BACKED SECURITIES $ 7,773,027 $ 7,745,816 ------------------ ------------------ MUNICIPAL SECURITIES - 0.2% OF NET ASSETS 1,250,000 Pima County Arizona IDA Health Care, 8.50% 11/15/32 Non-rated 781,291 774,825 COMMON STOCKS - 7.9% OF NET ASSETS 48,400 American Capital Strategies, Ltd. 1,552,413 1,520,244 61,710 Andrx Corporation (c) 1,246,878 1,398,966 54,600 Anthracite Capital, Inc. 605,776 608,244 6,100 Bank of America Corporation 276,281 269,010 7,000 Best Buy Co., Inc. 371,416 378,070 17,300 Cimarex Energy Co. (c) 663,081 674,700 51,800 Cisco Systems, Inc. (c) 929,234 926,702 4,600 Cooper Cameron Corporation (c) 256,469 263,166 14,000 Cree, Inc. (c) 300,495 304,500 15,300 Exxon Mobil Corporation 818,697 911,880 7,400 First Data Corporation 296,338 290,894 13,800 Frontline Ltd. 668,511 676,200 34,900 Intersil Corporation 526,478 604,468 44,000 iShares Russell 3000 Value Index Fund 3,668,540 3,766,840 14,600 Kerr-McGee Corporation 909,871 1,143,618 10,100 Kinder Morgan Energy Partners, L.P. 448,617 454,500 47,800 Limited Brands, Inc. 1,133,666 1,161,540 13 Principal Amount/ Market Shares Description Cost Value (b) 20,200 Lincoln Electric Holdings, Inc. $ 615,321 $ 607,616 7,300 Magyar Tavkozlesi Rt. 150,115 171,915 126,300 MCG Capital Corporation 2,134,208 1,943,125 31,500 Microsoft Corporation 803,911 761,355 46,400 New Century Financial Corporation 2,363,240 2,172,448 8,600 Newfield Exploration Company (c) 601,526 638,636 12,400 Oceaneering International, Inc. (c) 444,650 465,000 79,000 OmniVision Technologies, Inc. 1,357,716 1,196,850 10,500 Petroleo Brasileiro S.A. 383,440 463,890 20,400 Polycom, Inc. (c) 330,369 345,780 6,300 Range Resources Corporation 134,086 147,168 34,400 Regal Entertainment Group 697,476 723,432 22,190 Ship Finance International Limited 445,445 450,457 76,770 Technology Investment Capital Corporation (c) 1,116,814 1,147,711 10,150 Teva Pharmaceutical Industries Limited 300,440 314,549 25,700 The Home Depot, Inc. 1,063,962 982,768 12,500 Tidewater, Inc. 404,860 485,750 18,200 TOP Tankers Inc. 328,144 337,610 43,150 Trustreet Properties Inc. 702,792 664,079 19,200 Tsakos Energy Navigation Limited 771,846 845,376 10,900 Unit Corporation (c) 434,247 492,353 63,900 UTStarcom, Inc. (c) 1,077,415 699,705 6,100 Wal-Mart Stores, Inc. 314,141 305,671 ------------------ ------------------ TOTAL COMMON STOCKS $ 31,648,925 $ 31,716,786 ------------------ ------------------ CORPORATE LOANS - 0.4% OF NET ASSETS Xspedius, 9.22% 3/1/10 1,500,000 1,500,000 REPURCHASE AGREEMENTS - 3.7% OF NET ASSETS Repurchase agreement with G.X. Clarke & Co, 2.50%, dated March 31,2005 to be repurchased at $15,001,042 15,000,000 15,000,000 on April 1, 2005, collaterized by two U.S. Treasury Obligations; one with maturity of May 15, 2005, collateral market value of $10,697,323.90, and another with maturity of December 15, 2008, collateral market value of $4,934,297.73. 14 Principal Amount/ Market Shares Description Cost Value (b) EURODOLLAR TIME DEPOSITS - 2.9% OF NET ASSETS State Street Bank & Trust Company Eurodollar time deposits dated March 31, 2005 1.75% maturing at $11,616,042 on April 1, 2005. $ 11,615,000 $ 11,615,000 ------------------ ------------------ TOTAL INVESTMENTS - 114.8% of Net Assets $ 466,688,164 $ 463,323,025 ------------------ ------------------ OTHER ASSETS AND LIABILITIES, NET - (14.8%) OF NET ASSETS (59,659,883) ================== NET ASSETS $ 403,663,142 ================== (a) Securities sold within the terms of a private placement memorandum, exempt from registration under Rule 144A under the Securities Act of 1933, as amended, and may be resold in transactions exempt from registration, normally to qualified institutional buyers. Pursuant to guidelines adopted by the Board of Directors, these issues have been determined to be liquid by Morgan Asset Management, Inc., the Fund's investment adviser. (b) See Note 2 of accompanying Notes to Financial Statements regarding valuation of securities. (c) These securities are non-income producing. (d) These securities are classified as Yankee Bonds, which are U.S. dollar denominated bonds issued in the United States by a foreign entity. (e) Trust preferred security with no stated interest rate. NRSRO--Nationally Recognized Statistical Rating Organization. 15 [THIS PAGE INTENTIONALLY LEFT BLANK] RMK HIGH INCOME FUND, INC. Portfolio Commentary March 31, 2005 MANAGEMENT DISCUSSION OF FUND PERFORMANCE For the six months and the year ended March 31, 2005, RMK High Income Fund, Inc. (the "Fund") had a total return of 6.45% and 16.49%, respectively, based on market price and reinvested dividends. For the six months and the year ended March 31, 2005, the Fund had a total return of 6.71% and 15.46%, respectively, based on net asset value and reinvested dividends. For the six months and the year ended March 31, 2005, the Lehman Brothers Ba U.S. High Yield Index had a total return of 1.17% and 4.28%, respectively. The Fund's strong performance was primarily attributable to the Fund's relative yield advantage as evidenced by the monthly dividend distributions and the relative net asset value stability produced by the Fund's allocation in a wide variety of asset types. During the fiscal year ended March 31, 2005, the Fund paid a total income distribution of $2.68 per share, which is composed of total regular monthly dividends for the year of $1.73 per share and total special dividend distributions in December 2004 of $0.95 per share. For the last seven months of the Fund's fiscal year, the Fund paid monthly dividends of $0.15 per share. Our high income strategy emphasizes very broad diversification utilizing asset categories beyond the well recognized below investment grade corporate and convertible bonds. This diversification allows us to find better risk/reward opportunities than would be possible if we were restricted to a single asset sector. Key drivers of performance in 2004 included commercial mortgage-backed securities, distressed credit card receivables, below investment grade corporate bonds and dividend-paying common stocks. Valuations of commercial real estate, including office, retail, and industrial properties became significantly depressed in the months after the terrorist attacks on September 11, 2001. The Fund accumulated these assets in 2003 and realized significant profits from these assets as the economy strengthened and market demand for these assets bid up prices significantly during 2004. Within the asset-backed securities, credit card receivables from issuers like Nextcard, First Consumers, and Metris provided a boost to the Fund's returns in late 2004. Elevated delinquencies and charge-offs caused these assets to suffer significant credit downgrades and to trade down as low as 30%-40% discounts of the original issue. Again a recovering economy mitigated delinquencies and the robust structure of those trusts caused these assets to recover virtually all of their value. The Fund employs leverage within the parameters allowed by its prospectus. Leverage increases (decreases) returns if the rate of return on the assets that were bought with the borrowed money was higher (lower) than the interest charged on the borrowed money. The Fund employs leverage on the whole portfolio rather than specific positions; therefore, because the Fund had a positive return for the period ended March 31, 2005, the leverage was beneficial to stockholders. Although increasing short-term interest rates will increase the cost of borrowed money, the Fund has invested an equivalent amount of assets in adjustable rate securities that will similarly benefit from increasing short-term rates. This allocation to floating rate assets should provide the Fund a level of protection from rising rates and allow the Fund to continue to benefit from the use of leverage. For 2005, we expect continued economic recovery and continued increases in short-term interest rates by the Federal Reserve. To position the Fund to take advantage of these conditions, we have increased our allocation of floating rate bonds. These bonds, which may be corporate or asset-backed, have coupon rates that will increase as short-term interest rates increase. This feature should allow the Fund to benefit from rising rates as well as maintain its net asset value. We also expect business conditions to continue to improve, which should produce a continual uptrend in corporate as well as household earnings. The Fund stands to benefit from this trend by increasing our investments in corporate debt and securitized home equity loans. /s/ James C. Kelsoe - ------------------- James C. Kelsoe, Jr., CFA Portfolio Manager MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUNDS WILL ACHIEVE THEIR INVESTMENT OBJECTIVES. THE FUNDS ARE SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT THE MARKET VALUES OF SECURITIES OWNED BY THE FUNDS WILL DECLINE AND, THEREFORE, THE VALUE OF THE FUNDS' SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THE FUNDS. 17 PORTFOLIO STATISTICS AS OF 3/31/05 Portfolio Credit Rating BB Portfolio Current Yield 10.71% Portfolio Yield to Maturity 10.81% Portfolio Duration 3.56 Years Percentage of Leveraged Assets 27.00% Number of Holdings 213 Ticker Symbol RMH CUSIP 74963B 10 5 ASSET ALLOCATION* AS OF 3/31/05 [PIE CHART REPRESENTATION] Government Agency Securities 1.5% Cash 1.1% Corporate Bonds 20.9% Home Equity Loans 13.6% Commercial Loans 12.1% Franchise Loans 11.6% Equipment Leases 8.7% Manufactured Housing 7.6% Common Stock 7.4% Collateralized Debt Obligations 6.6% Certificate-Backed Obligations 5.2% Collateralized Mortgage Obligations 2.0% Other 1.7% * Percentages are based on total investments, which may differ from total net assets used in computing the percentages in the Portfolio of Investments. Current holdings may not reflect the holdings as of the date of this report. CREDIT QUALITY DISTRIBUTION* AS OF 3/31/05 AAA 8.5% AA 2.8% A 5.5% BBB 16.7% BB 17.7% B 17.3% CCC 17.0% CC 2.1% C 0.2% D 3.2% NR 9.0% * Each rating category above includes all bonds within the broad rating category (i.e., BBB includes all bonds rated BBB+, BBB, and BBB-). Current holdings may not reflect the holdings as of the date of this report. 18 NAV & MARKET PRICE HISTORY(1) The graph below illustrates the net asset value and market price history of RMK High Income Fund, Inc. (NYSE: RMH) from June 24, 2003 (commencement of investment operations) to March 31, 2005. [GRAPH REPRESENTATION] NAV Market Price History --- -------------------- 06/24/2003 $14.30 $15.00 06/25/2003 $14.30 $15.10 06/26/03 $14.30 $15.10 06/27/03 $14.30 $15.22 06/28/03 $14.30 $15.22 06/29/03 $14.30 $15.22 06/30/03 $14.30 $15.18 07/01/03 $14.30 $15.10 07/02/03 $14.30 $15.05 07/03/03 $14.30 $15.01 07/04/03 $14.30 $15.01 07/05/03 $14.30 $15.01 07/06/03 $14.30 $15.01 07/07/03 $14.30 $15.01 07/08/03 $14.30 $15.10 07/09/03 $14.29 $15.03 07/10/03 $14.30 $15.00 07/11/03 $14.29 $15.05 07/12/03 $14.29 $15.05 07/13/03 $14.29 $15.05 07/14/03 $14.27 $15.01 07/15/03 $14.25 $15.03 07/16/03 $14.26 $15.11 07/17/03 $14.26 $15.10 07/18/03 $14.27 $15.10 07/19/03 $14.27 $15.10 07/20/03 $14.27 $15.10 07/21/03 $14.22 $15.08 07/22/03 $14.24 $15.30 07/23/03 $14.25 $15.35 07/24/03 $14.25 $15.17 07/25/03 $14.27 $15.16 07/26/03 $14.27 $15.16 07/27/03 $14.27 $15.16 07/28/03 $14.23 $15.01 07/29/03 $14.22 $14.99 07/30/03 $14.24 $14.90 07/31/03 $14.23 $14.90 08/01/03 $14.21 $14.95 08/02/03 $14.21 $14.95 08/03/03 $14.21 $14.95 08/04/03 $14.21 $14.95 08/05/03 $14.19 $14.85 08/06/03 $14.22 $14.84 08/07/03 $14.22 $14.83 08/08/03 $14.22 $14.90 08/09/03 $14.22 $14.90 08/10/03 $14.22 $14.90 08/11/03 $14.21 $14.85 08/12/03 $14.20 $14.98 08/13/03 $14.16 $14.98 08/14/03 $14.15 $14.95 08/15/03 $14.15 $14.95 08/16/03 $14.15 $14.95 08/17/03 $14.15 $14.95 08/18/03 $14.17 $14.95 08/19/03 $14.20 $14.91 08/20/03 $14.19 $14.82 08/21/03 $14.19 $14.82 08/22/03 $14.22 $14.86 08/23/03 $14.22 $14.86 08/24/03 $14.22 $14.86 08/25/03 $14.21 $14.80 08/26/03 $14.24 $14.92 08/27/03 $14.23 $15.00 08/28/03 $14.27 $15.00 08/29/03 $14.27 $14.91 08/30/03 $14.27 $14.91 08/31/03 $14.27 $14.91 09/02/03 $14.25 $15.05 09/03/03 $14.27 $15.04 09/04/03 $14.31 $15.00 09/05/03 $14.37 $15.10 09/06/03 $14.37 $15.10 09/07/03 $14.37 $15.10 09/08/03 $14.34 $15.10 09/09/03 $14.34 $15.08 09/10/03 $14.38 $15.14 09/11/03 $14.37 $15.25 09/12/03 $14.40 $15.29 09/13/03 $14.40 $15.29 09/14/03 $14.40 $15.29 09/15/03 $14.39 $15.29 09/16/03 $14.39 $15.20 09/17/03 $14.41 $15.15 09/18/03 $14.43 $15.15 09/19/03 $14.45 $15.30 09/20/03 $14.45 $15.30 09/21/03 $14.45 $15.30 09/22/03 $14.43 $15.15 09/23/03 $14.43 $15.13 09/24/03 $14.45 $15.10 09/25/03 $14.47 $15.05 09/26/03 $14.46 $15.02 09/27/03 $14.46 $15.02 09/28/03 $14.46 $15.02 09/29/03 $14.47 $15.05 09/30/03 $14.49 $15.15 10/01/03 $14.52 $15.15 10/02/03 $14.52 $15.30 10/03/03 $14.46 $15.35 10/04/03 $14.46 $15.35 10/05/03 $14.46 $15.35 10/06/03 $14.47 $15.25 10/07/03 $14.45 $15.25 10/08/03 $14.47 $15.31 10/09/03 $14.46 $15.34 10/10/03 $14.49 $15.35 10/11/03 $14.49 $15.35 10/12/03 $14.49 $15.35 10/13/03 $14.49 $15.35 10/14/03 $14.48 $15.35 10/15/03 $14.46 $15.30 10/16/03 $14.45 $15.35 10/17/03 $14.46 $15.12 10/18/03 $14.46 $15.12 10/19/03 $14.46 $15.12 10/20/03 $14.46 $15.15 10/21/03 $14.48 $15.25 10/22/03 $14.49 $15.30 10/23/03 $14.47 $15.30 10/24/03 $14.51 $15.35 10/25/03 $14.51 $15.35 10/24/03 $14.51 $15.35 10/27/03 $14.47 $15.21 10/28/03 $14.47 $15.41 10/29/03 $14.48 $15.59 10/30/03 $14.50 $15.47 10/31/03 $14.53 $15.53 11/01/03 $14.53 $15.53 11/02/03 $14.53 $15.53 11/03/03 $14.52 $15.59 11/04/03 $14.53 $15.61 11/05/03 $14.53 $15.56 11/06/03 $14.53 $15.35 11/07/03 $14.52 $15.45 11/08/03 $14.52 $15.45 11/09/03 $14.52 $15.45 11/10/03 $14.53 $15.50 11/11/03 $14.53 $15.55 11/12/03 $14.58 $15.50 11/13/03 $14.64 $15.50 11/14/03 $14.67 $15.52 11/15/03 $14.67 $15.52 11/16/03 $14.67 $15.52 11/17/03 $14.68 $15.60 11/18/03 $14.69 $15.81 11/19/03 $14.67 $15.81 11/20/03 $14.72 $15.80 11/21/03 $14.74 $15.80 11/22/03 $14.74 $15.80 11/23/03 $14.74 $15.80 11/24/03 $14.73 $15.71 11/25/03 $14.76 $15.70 11/26/03 $14.75 $16.00 11/28/03 $14.73 $16.05 11/29/03 $14.73 $16.05 11/30/03 $14.73 $16.05 12/01/03 $14.73 $16.20 12/02/03 $14.74 $16.16 12/03/03 $14.75 $16.24 12/04/03 $14.78 $16.05 12/05/03 $14.85 $16.21 12/06/03 $14.85 $16.21 12/07/03 $14.85 $16.21 12/08/03 $14.85 $16.33 12/09/03 $14.82 $16.38 12/10/03 $14.82 $16.15 12/11/03 $14.89 $16.15 12/12/03 $14.92 $16.09 12/13/03 $14.92 $16.09 12/14/03 $14.92 $16.09 12/15/03 $14.91 $16.14 12/16/03 $14.92 $16.20 12/17/03 $14.96 $16.20 12/18/03 $14.97 $16.38 12/19/03 $14.97 $16.75 19 12/20/03 $14.97 $16.75 12/21/03 $14.97 $16.75 12/22/03 $14.97 $16.25 12/23/03 $14.78 $16.15 12/24/03 $14.81 $16.25 12/26/03 $14.83 $16.14 12/27/03 $14.83 $16.14 12/28/03 $14.83 $16.14 12/29/03 $14.82 $16.14 12/30/03 $14.82 $16.03 12/31/03 $14.82 $16.00 01/02/04 $14.79 $16.07 01/03/04 $14.79 $16.07 01/04/04 $14.79 $16.07 01/05/04 $14.81 $16.10 01/06/04 $14.86 $16.24 01/07/04 $14.89 $16.45 01/08/04 $14.90 $16.45 01/09/04 $14.96 $16.45 01/10/04 $14.96 $16.45 01/11/04 $14.96 $16.45 01/12/04 $14.97 $16.76 01/13/04 $14.98 $16.75 01/14/04 $14.99 $16.87 01/15/04 $14.99 $16.66 01/16/04 $14.94 $16.90 01/17/04 $14.94 $16.90 01/18/04 $14.94 $16.90 01/20/04 $14.94 $16.73 01/21/04 $14.95 $16.63 01/22/04 $14.98 $16.50 01/23/04 $14.95 $16.50 01/24/04 $14.95 $16.50 01/25/04 $14.95 $16.50 01/26/04 $14.94 $16.55 01/27/04 $14.96 $16.50 01/28/04 $14.94 $16.54 01/29/04 $14.96 $16.31 01/30/04 $14.97 $16.40 01/31/04 $14.97 $16.40 02/01/04 $14.97 $16.40 02/02/04 $14.97 $16.45 02/03/04 $14.98 $16.44 02/04/04 $14.95 $16.45 02/05/04 $14.94 $16.30 02/06/04 $14.99 $16.26 02/07/04 $14.99 $16.26 02/08/04 $14.99 $16.26 02/09/04 $15.00 $16.24 02/10/04 $15.01 $16.39 02/11/04 $15.07 $16.30 02/12/04 $15.06 $16.23 02/13/04 $15.06 $16.48 02/14/04 $15.06 $16.48 02/15/04 $15.06 $16.48 02/16/04 $15.06 $16.48 02/17/04 $15.10 $16.51 02/18/04 $15.09 $16.36 02/19/04 $15.09 $16.25 02/20/04 $15.10 $16.35 02/21/04 $15.10 $16.35 02/22/04 $15.10 $16.35 02/23/04 $15.10 $16.31 02/24/04 $15.10 $16.02 02/25/04 $15.11 $16.05 02/26/04 $15.11 $16.10 02/27/04 $15.13 $16.19 02/28/04 $15.13 $16.19 02/29/04 $15.13 $16.19 03/01/04 $15.14 $16.20 03/02/04 $15.10 $16.14 03/03/04 $15.08 $16.05 03/04/04 $15.10 $16.02 03/05/04 $15.19 $16.15 03/06/04 $15.19 $16.15 03/07/04 $15.19 $16.15 03/08/04 $15.22 $16.15 03/09/04 $15.26 $16.21 03/10/04 $15.23 $16.47 03/11/04 $15.21 $16.30 03/12/04 $15.25 $16.32 03/13/04 $15.25 $16.32 03/14/04 $15.25 $16.32 03/15/04 $15.22 $16.32 03/16/04 $15.24 $16.33 03/17/04 $15.27 $16.35 03/18/04 $15.24 $16.49 03/19/04 $15.22 $16.52 03/20/04 $15.22 $16.52 20 03/21/04 $15.22 $16.52 03/22/04 $15.22 $16.50 03/23/04 $15.23 $16.35 03/24/04 $15.24 $16.50 03/25/04 $15.24 $16.55 03/26/04 $15.23 $16.40 03/27/04 $15.23 $16.40 03/28/04 $15.23 $16.40 03/29/04 $15.20 $16.51 03/30/04 $15.21 $16.59 03/31/04 $15.27 $16.67 04/01/04 $15.27 $16.72 04/02/04 $15.18 $16.56 04/03/04 $15.18 $16.56 04/04/04 $15.18 $16.56 04/05/04 $15.14 $16.50 04/06/04 $15.17 $16.40 04/07/04 $15.18 $16.40 04/08/04 $15.16 $16.45 04/09/04 $15.16 $16.45 04/10/04 $15.16 $16.45 04/11/04 $15.16 $16.45 04/12/04 $15.15 $16.52 04/13/04 $15.08 $16.26 04/14/04 $15.08 $15.75 04/15/04 $15.07 $15.64 04/16/04 $15.11 $15.99 04/17/04 $15.11 $15.99 04/18/04 $15.11 $15.99 04/19/04 $15.10 $16.00 04/20/04 $15.07 $15.89 04/21/04 $15.09 $15.45 04/22/04 $15.15 $15.65 04/23/04 $15.13 $15.60 04/24/04 $15.13 $15.60 04/25/04 $15.13 $15.60 04/26/04 $15.11 $15.21 04/27/04 $15.14 $15.41 04/28/04 $15.10 $15.45 04/29/04 $15.05 $15.55 04/30/04 $15.08 $15.70 05/01/04 $15.08 $15.70 05/02/04 $15.08 $15.70 05/03/04 $15.08 $15.90 05/04/04 $15.07 $15.85 05/05/04 $15.08 $15.85 05/06/04 $15.06 $15.50 05/07/04 $14.96 $15.23 05/08/04 $14.96 $15.23 05/09/04 $14.96 $15.23 05/10/04 $14.94 $14.95 05/11/04 $14.95 $15.02 05/12/04 $14.94 $15.07 05/13/04 $14.95 $15.40 05/14/04 $14.98 $15.50 05/15/04 $14.98 $15.50 05/16/04 $14.98 $15.50 05/17/04 $15.02 $15.41 05/18/04 $15.04 $15.60 05/19/04 $15.04 $15.70 05/20/04 $15.05 $15.72 05/21/04 $15.05 $15.76 05/22/04 $15.05 $15.76 05/23/04 $15.05 $15.76 05/24/04 $15.09 $15.58 05/25/04 $15.12 $15.60 05/26/04 $15.17 $15.64 05/27/04 $15.20 $15.80 05/28/04 $15.22 $15.84 05/29/04 $15.22 $15.84 05/30/04 $15.22 $15.84 05/31/04 $15.22 $15.84 06/01/04 $15.21 $15.84 06/02/04 $15.21 $15.96 06/03/04 $15.21 $15.95 06/04/04 $15.23 $16.08 06/05/04 $15.23 $16.08 06/06/04 $15.23 $16.08 06/07/04 $15.12 $15.86 06/08/04 $15.13 $15.81 06/09/04 $15.11 $15.89 06/10/04 $15.12 $15.95 06/11/04 $15.12 $15.95 06/12/04 $15.12 $15.95 06/13/04 $15.12 $15.95 06/14/04 $15.09 $16.05 06/15/04 $15.15 $16.16 06/16/04 $15.16 $16.08 06/17/04 $15.17 $16.15 21 06/18/04 $15.18 $16.18 06/19/04 $15.18 $16.18 06/20/04 $15.18 $16.18 06/21/04 $15.18 $16.10 06/22/04 $15.18 $16.24 06/23/04 $15.23 $16.23 06/24/04 $15.24 $16.28 06/25/04 $15.29 $16.21 06/26/04 $15.29 $16.21 06/27/04 $15.29 $16.21 06/28/04 $15.24 $16.09 06/29/04 $15.26 $16.17 06/30/04 $15.30 $16.20 07/01/04 $15.29 $16.27 07/02/04 $15.33 $16.21 07/03/04 $15.33 $16.21 07/04/04 $15.33 $16.21 07/05/04 $15.33 $16.21 07/06/04 $15.34 $16.35 07/07/04 $15.31 $16.40 07/08/04 $15.29 $16.45 07/09/04 $15.31 $16.50 07/10/04 $15.31 $16.50 07/11/04 $15.31 $16.50 07/12/04 $15.31 $16.42 07/13/04 $15.18 $16.55 07/14/04 $15.21 $16.59 07/15/04 $15.20 $16.50 07/16/04 $15.26 $16.40 07/17/04 $15.26 $16.40 07/18/04 $15.26 $16.40 07/19/04 $15.27 $16.58 07/20/04 $15.27 $16.34 07/21/04 $15.23 $16.45 07/22/04 $15.24 $16.40 07/23/04 $15.24 $16.49 07/24/04 $15.24 $16.49 07/25/04 $15.24 $16.49 07/26/04 $15.22 $16.45 07/27/04 $15.23 $16.47 07/28/04 $15.21 $16.41 07/29/04 $15.23 $16.66 07/30/04 $15.27 $16.75 07/31/04 $15.27 $16.75 08/01/04 $15.27 $16.75 08/02/04 $15.28 $16.83 08/03/04 $15.29 $16.75 08/04/04 $15.30 $16.72 08/05/04 $15.29 $16.68 08/06/04 $15.18 $16.68 08/07/04 $15.18 $16.68 08/08/04 $15.18 $16.68 08/09/04 $15.20 $16.72 08/10/04 $15.23 $16.75 08/11/04 $15.22 $16.80 08/12/04 $15.23 $16.66 08/13/04 $15.27 $16.56 08/14/04 $15.27 $16.56 08/15/04 $15.27 $16.56 08/16/04 $15.28 $16.60 08/17/04 $15.33 $16.55 08/18/04 $15.37 $16.57 08/19/04 $15.37 $16.63 08/20/04 $15.39 $16.55 08/21/04 $15.39 $16.55 08/22/04 $15.39 $16.55 08/23/04 $15.37 $16.63 08/24/04 $15.35 $16.98 08/25/04 $15.39 $16.94 08/26/04 $15.42 $16.85 08/27/04 $15.46 $17.00 08/28/04 $15.46 $17.00 08/29/04 $15.46 $17.00 08/30/04 $15.50 $17.00 08/31/04 $15.54 $17.00 09/01/04 $15.57 $17.13 09/02/04 $15.57 $17.08 09/03/04 $15.54 $17.20 09/04/04 $15.54 $17.20 09/05/04 $15.54 $17.20 09/06/04 $15.54 $17.20 09/07/04 $15.56 $17.20 09/08/04 $15.43 $16.99 09/09/04 $15.46 $16.99 09/10/04 $15.50 $16.97 09/11/04 $15.50 $16.97 09/12/04 $15.50 $16.97 09/13/04 $15.65 $17.05 09/14/04 $15.66 $17.26 22 09/15/04 $15.66 $17.42 09/16/04 $15.70 $17.43 09/17/04 $15.72 $17.45 09/18/04 $15.72 $17.45 09/19/04 $15.72 $17.45 09/20/04 $15.73 $17.26 09/21/04 $15.70 $17.60 09/22/04 $15.71 $17.43 09/23/04 $15.74 $17.41 09/24/04 $15.75 $17.25 09/25/04 $15.75 $17.25 09/26/04 $15.75 $17.25 09/27/04 $15.76 $17.32 09/28/04 $15.76 $17.11 09/29/04 $15.74 $17.12 09/30/04 $15.72 $17.30 10/01/04 $15.75 $17.28 10/02/04 $15.75 $17.28 10/03/04 $15.75 $17.28 10/04/04 $15.78 $17.35 10/05/04 $15.72 $17.39 10/06/04 $15.74 $17.48 10/07/04 $15.58 $17.43 10/08/04 $15.62 $17.54 10/09/04 $15.62 $17.54 10/10/04 $15.62 $17.54 10/11/04 $15.62 $17.51 10/12/04 $15.63 $17.50 10/13/04 $15.63 $17.45 10/14/04 $15.60 $17.44 10/15/04 $15.60 $17.43 10/16/04 $15.60 $17.43 10/17/04 $15.60 $17.43 10/18/04 $15.61 $17.52 10/19/04 $15.61 $17.48 10/20/04 $15.65 $17.55 10/21/04 $15.66 $17.52 10/22/04 $15.66 $17.35 10/23/04 $15.66 $17.35 10/24/04 $15.66 $17.35 10/25/04 $15.64 $17.49 10/26/04 $15.67 $17.49 10/27/04 $15.70 $17.52 10/28/04 $15.71 $17.56 10/29/04 $15.74 $17.60 10/30/04 $15.74 $17.60 10/31/04 $15.74 $17.60 11/01/04 $15.73 $17.59 11/02/04 $15.75 $17.66 11/03/04 $15.79 $17.92 11/04/04 $15.81 $17.83 11/05/04 $15.80 $17.66 11/06/04 $15.80 $17.66 11/07/04 $15.80 $17.66 11/08/04 $15.67 $17.49 11/09/04 $15.68 $17.35 11/10/04 $15.67 $17.33 11/11/04 $15.70 $17.34 11/12/04 $15.70 $17.36 11/13/04 $15.70 $17.36 11/14/04 $15.70 $17.36 11/15/04 $15.75 $17.40 11/16/04 $15.75 $17.49 11/17/04 $15.78 $17.47 11/18/04 $15.77 $17.40 11/19/04 $15.75 $17.99 11/20/04 $15.75 $17.99 11/21/04 $15.75 $17.99 11/22/04 $15.77 $18.17 11/23/04 $15.77 $18.20 11/24/04 $15.77 $18.20 11/25/04 $15.77 $18.20 11/26/04 $15.85 $18.24 11/27/04 $15.85 $18.24 11/28/04 $15.85 $18.24 11/29/04 $15.83 $18.26 11/30/04 $15.84 $18.21 12/01/04 $15.89 $18.43 12/02/04 $15.86 $18.40 12/03/04 $15.91 $18.60 12/04/04 $15.91 $18.60 12/05/04 $15.91 $18.60 12/06/04 $15.37 $18.20 12/07/04 $15.36 $18.18 12/08/04 $15.23 $17.70 12/09/04 $15.24 $17.49 12/10/04 $15.26 $17.61 12/11/04 $15.26 $17.61 12/12/04 $15.26 $17.61 23 12/13/04 $15.28 $17.52 12/14/04 $15.28 $17.55 12/15/04 $15.32 $17.53 12/16/04 $15.39 $18.10 12/17/04 $15.39 $18.26 12/18/04 $15.39 $18.26 12/19/04 $15.39 $18.26 12/20/04 $15.40 $18.32 12/21/04 $15.43 $18.22 12/22/04 $15.09 $17.85 12/23/04 $15.11 $17.86 12/24/04 $15.11 $17.86 12/25/04 $15.11 $17.86 12/26/04 $15.11 $17.86 12/27/04 $15.09 $17.80 12/28/04 $15.11 $17.80 12/29/04 $15.06 $17.97 12/30/04 $15.07 $18.02 12/31/04 $15.07 $18.11 01/01/05 $15.07 $18.11 01/02/05 $15.07 $18.11 01/03/05 $15.08 $18.02 01/04/05 $15.05 $17.97 01/05/05 $15.05 $17.66 01/06/05 $15.07 $17.74 01/07/05 $14.95 $17.57 01/08/05 $14.95 $17.57 01/09/05 $14.95 $17.57 01/10/05 $14.96 $17.33 01/11/05 $14.96 $17.23 01/12/05 $14.97 $17.13 01/13/05 $15.00 $17.13 01/14/05 $15.02 $17.26 01/15/05 $15.02 $17.26 01/16/05 $15.02 $17.26 01/17/05 $15.02 $17.26 01/18/05 $15.10 $17.50 01/19/05 $15.11 $17.60 01/20/05 $15.13 $17.63 01/21/05 $15.13 $17.59 01/22/05 $15.13 $17.59 01/23/05 $15.13 $17.59 01/24/05 $15.11 $17.65 01/25/05 $15.12 $17.55 01/26/05 $15.14 $17.68 01/27/05 $15.14 $17.49 01/28/05 $15.18 $17.53 01/29/05 $15.18 $17.53 01/30/05 $15.18 $17.53 01/31/05 $15.18 $17.65 02/01/05 $15.19 $17.71 02/02/05 $15.20 $17.86 02/03/05 $15.20 $17.99 02/04/05 $15.26 $17.92 02/05/05 $15.26 $17.92 02/06/05 $15.26 $17.92 02/07/05 $15.27 $17.95 02/08/05 $15.13 $17.60 02/09/05 $15.12 $17.75 02/10/05 $15.11 $17.48 02/11/05 $15.12 $17.60 02/12/05 $15.12 $17.60 02/13/05 $15.12 $17.60 02/14/05 $15.12 $17.61 02/15/05 $15.14 $17.67 02/16/05 $15.15 $17.61 02/17/05 $15.14 $17.52 02/18/05 $15.14 $17.41 02/19/05 $15.14 $17.41 02/20/05 $15.14 $17.41 02/21/05 $15.14 $17.41 02/22/05 $15.14 $17.37 02/23/05 $15.15 $17.18 02/24/05 $15.17 $17.33 02/25/05 $15.21 $17.34 02/26/05 $15.21 $17.34 02/27/05 $15.21 $17.34 02/28/05 15.20 17.27 03/01/05 15.20 17.24 03/02/05 15.21 17.21 03/03/05 15.23 17.16 03/04/05 15.28 17.17 03/05/05 15.28 17.17 03/06/05 15.28 17.17 03/07/05 15.30 17.21 03/08/05 15.31 17.28 03/09/05 15.13 17.07 03/10/05 15.13 16.80 03/11/05 15.13 16.65 24 03/12/05 15.13 16.65 03/13/05 15.13 16.65 03/14/05 15.15 16.30 03/15/05 15.13 16.21 03/16/05 15.10 15.95 03/17/05 15.10 16.10 03/18/05 15.10 16.11 03/19/05 15.10 16.11 03/20/05 15.10 16.11 03/21/05 15.08 15.91 03/22/05 15.05 15.91 03/23/05 15.05 15.85 03/24/05 15.07 15.76 03/25/05 15.07 15.76 03/26/05 15.07 15.76 03/27/05 15.07 15.76 03/28/05 15.08 16.20 03/29/05 $15.04 $16.24 03/30/05 $15.02 $16.44 03/31/05 $15.03 $16.50 (1) Net asset value is calculated after the close of the exchanges each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding. The market price is the last reported price at which a security was sold on an exchange. FUND PERFORMANCE TOTAL RETURNS AS OF MARKET NET ASSET MARCH 31, 2005 VALUE VALUE Six Months 6.45% 6.71% One Year 16.49% 15.46% Commencement of Investment Operations (6/24/03)(1) 20.83% 17.63% (1) Average Annual Total Returns. Total returns assume an investment at the common share market price or net asset value at the beginning of the period, reinvestment of all dividends and distributions for the period in accordance with the Fund's dividend reinvestment plan, and sale of all shares at the closing market price (excluding any commissions) or net asset value at the end of the period. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FUND PERFORMANCE CHANGES OVER TIME AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR THE MOST RECENT PERFORMANCE, CALL 1-800-564-2188. 25 RMK HIGH INCOME FUND, INC. Portfolio of Investments March 31, 2005 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) ASSET BACKED SECURITIES - INVESTMENT GRADE - 27.5% OF NET ASSETS CERTIFICATE-BACKED OBLIGATIONS - 1.2% 5,000,000 Commodore 1A C, 5.131% 2/28/37 (a) BBB $ 3,618,545 $ 3,612,500 Collateralized Debt Obligation - 6.1% 7,654,069 Diversified Asset Securitization 1A A1, 7.875% 9/15/35 AAA 7,897,916 8,017,637 3,440,000 E-Trade 2003-1A PSC, 11.50% 8/7/33 (a) BBB- 3,440,000 3,715,200 2,000,000 E-Trade 2004-1A COM1, 2.0% 1/10/40 BBB 1,990,062 1,990,000 5,000,000 Silver Leaf IA D1FX, 11.54% 5/15/13 (a) BBB 4,999,809 5,350,000 ------------------ ------------------ $ 18,327,787 $ 19,072,837 ------------------ ------------------ COMMERCIAL LOANS - 1.2% 1,000,000 FFCA Secured Lending 1998-1 D1, 7.81% 1/18/17 (a) BBB- 790,825 790,000 3,000,000 GMAC Commercial Mortgage 1998-C1 F, 7.096% 5/15/30 BBB- 2,969,340 3,048,630 ------------------ ------------------ $ 3,760,165 $ 3,838,630 ------------------ ------------------ EQUIPMENT LEASES - 5.6% 7,632,150 Aerco Limited 2A A3, 2.863% 7/15/25 BBB 5,696,392 5,638,251 8,000,000 Aircraft Finance Trust 1999-1A A1, 2.88% 5/15/24 BBB 5,584,730 5,540,000 3,000,000 Aviation Capital Group Trust BBB 2,257,900 2,272,080 ACAP 2000-1A A1, 2.883% 11/15/25 (a) 6,000,000 Lease Investment Flight Trust 1 A1, 2.87% 7/15/31 BBB 4,191,199 4,230,000 ------------------ ------------------ $ 17,730,221 $ 17,680,331 ------------------ ------------------ FRANCHISE LOANS - 7.9% 8,421,149 Atherton Franchisee 1999-A A2, 7.23% 4/15/12 (a) A+ 8,277,862 8,551,282 Atherton Franchisee 1999-A AX, 1.254% 12/22/07 interest-only strips (a) A+ 869,711 751,333 CNL Funding 1998-1, 1.935% 7/10/08 interest-only strips (a) AAA 2,822,426 2,621,691 2,444,388 FMAC Loan Trust 1997-C A, 6.75% 12/15/19 (a) BBB 2,272,690 2,443,269 4,729,525 FMAC Loan Trust 1998-CA A2, 6.66% 1/15/12 (a) A 3,552,891 4,321,605 26 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) FMAC Loan Trust 1998-CA AX, 1.796% 7/28/07 interest-only strips (a) AA $ 3,415,610 $ 4,072,044 United Capital Markets, Inc. 2003-A NOTE, 1.90% 11/8/27 interest only strips (a) AAA 1,689,946 1,896,385 ------------------ ------------------ $ 22,901,136 $ 24,657,609 ------------------ ------------------ HOME EQUITY LOANS (NON-HIGH LOAN-TO-VALUE) - 3.9% 2,000,000 Ameriquest Mortgage 2003-8 MV6, 4.87% 10/25/33 BBB- 1,689,142 1,907,746 1,099,059 Amresco Residential Securities 1999-1 B, 5.09% 11/25/29 BBB 1,042,292 1,039,985 4,000,000 Long Beach Mortgage 2004-4 M10, 4.615% 10/25/34 (a) BBB+ 3,685,961 4,040,000 Merrill Lynch Mortgage Investors 2005-SL1 B5, 6.27% 1/25/35 (a) BBB- 1,784,853 1,784,420 1,417,882 Sail Net 2004-5A B, 6.75% 6/25/34 (a) BBB 1,383,705 1,382,846 2,167,000 Structured Asset 2003-BC1 B2, 9.00% 5/25/32 BBB- 2,116,012 2,234,706 ------------------ ------------------ $ 11,701,965 $ 12,389,703 ------------------ ------------------ MANUFACTURED HOUSING LOANS - 1.0% 3,500,000 Green Tree Financial 1996-9 M1, 7.63% 1/15/28 BBB+ 3,085,366 3,186,785 SMALL BUSINESS LOANS - 0.6% 2,000,000 ACLC Business Trust 1998-2 A3, 6.686% 4/15/20 (a) AA 1,847,158 1,978,056 ------------------ ------------------ TOTAL ASSET BACKED SECURITIES - INVESTMENT GRADE $ 82,972,343 $ 86,416,451 ------------------ ------------------ ASSET BACKED SECURITIES - NON-INVESTMENT GRADE - 62.8% OF NET ASSETS AUTO LOANS - 0.8% 2,865,000 Union Acceptance Corp 2001-A C, 10.00% 4/8/09 (a) Non-rated 2,543,793 2,578,500 CERTIFICATE-BACKED OBLIGATIONS - 5.9% 3,000,000 INCAPS Funding II 2003-2A SIN, 10.00% 1/15/34 (a) Non-rated 2,913,931 2,910,000 2,000,000 MM Community Funding II, 10.00% 11/5/33 Non-rated 1,902,231 1,923,000 1,500,000 MM Community Funding, 13.00% 6/24/34 Non-rated 1,500,000 1,564,950 1,000,000 Preferred Term Securities III, 3.50% 12/15/31 Non-rated 938,903 937,500 27 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) 2,500,000 Preferred Term Securities IV, 10.00% 1/15/34 Non-rated $ 2,368,239 $ 2,425,000 2,000,000 Preferred Term Securities IV, 6.98% 6/24/34 (a) BB 2,029,967 2,030,000 735,981 Preferred Term Securities X, 12.00% 7/3/33 (a) Non-rated 725,835 732,301 1,000,000 Preferred Term Securities XV, 9/26/34 (f) Non-rated 1,000,000 1,055,900 1,316,750 TPREF Funding III, 11.00% 1/15/33 (a) Non-rated 1,286,218 1,290,415 1,700,000 US Capital Funding I, 10.00% 5/1/34 Non-rated 1,700,000 1,700,000 1,000,000 US Capital Funding II B-1, 6.90% 8/1/34 (a) Non-rated 1,000,000 1,000,000 1,000,000 US Capital Funding III, 12/1/35 (a) (f) Non-rated 1,000,000 1,000,000 ------------------ ------------------ $ 18,365,324 $ 18,569,066 ------------------ ------------------ COLLATERALIZED DEBT OBLIGATION - 2.8% 3,000,000 Hewett's Island 2004-1A COM, 12/15/16 (a) (f) BB 3,000,000 3,000,000 1,000,000 Hewett's Island II, 12/15/16 (a) (f) Non-rated 990,040 990,000 2,000,000 Inner Harbor 2001-1A B2, 11.19% 6/15/13 (a) BB 2,008,789 2,030,000 1,000,000 MCPA2 1998-PA B2, 7.32% 6/23/10 (a) B+ 863,947 840,000 1,950,000 MKP 4A CS, 2.00% 7/12/40 Non-rated 1,950,000 1,950,000 ------------------ ------------------ $ 8,812,776 $ 8,810,000 ------------------ ------------------ COMMERCIAL LOANS - 15.2% 1,317,738 CS First Boston Mortgage 1995-WF1 G, 8.488% 12/21/27 (a) Non-rated 1,317,738 1,308,830 4,000,000 CS First Boston Mortgage 1998-C2 H, 6.75% 11/11/30 (a) B 2,663,249 2,670,040 3,889,999 Enterprise Mortgage 1998-1 A2, 6.38% 1/15/25 (a) B 3,585,511 3,737,340 12,000,000 Enterprise Mortgage 1998-1 A3, 6.63% 1/15/25 (a) B 6,735,403 6,900,000 Enterprise Mortgage 1998-1, 1.454% 4/10/08 interest-only strips (a) B 1,853,292 1,950,082 4,487,826 Enterprise Mortgage 1999-1 A2, 6.90% 10/15/25 (a) CCC 1,550,950 1,346,348 11,264,991 Enterprise Mortgage 2000-1 A1, 7.569% 1/15/27 (a) B 6,972,956 6,308,395 28 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) 14,787,912 Enterprise Mortgage 2000-1 A2, 7.505% 1/15/27 (a) B $ 8,221,219 $ 8,281,231 5,000,000 GMAC Commercial Mortgage 1997-C2 F, 6.75% 4/15/29 B 3,377,560 3,913,750 3,000,000 GMAC Commercial Mortgage 2000-C1 H, 7.00% 3/15/33 (a) BB 2,700,483 2,866,050 5,846,000 GS Mortgage 1998-C1 H, 6.00% 10/18/30 (a) CCC 2,818,410 2,772,232 2,000,000 Merrill Lynch Mortgage 1998-C1 F, 6.25% 11/15/26 CCC 1,186,591 1,161,760 5,000,000 Salomon Brothers Mortgage 2000-C2 H, 6.308% 7/18/33 (a) BB+ 4,139,854 4,440,550 ------------------ ------------------ $ 47,123,216 $ 47,656,608 ------------------ ------------------ EQUIPMENT LEASES - 6.1% 5,000,000 Airplanes 2001-1A A9, 3.14% 3/15/19 BB+ 2,689,013 2,668,750 1,539,131 DVI Receivables 2002-1 A3A, 3.121% 6/11/10 Non-rated 1,089,567 1,088,935 4,000,000 Embarcadero Aircraft 2000-A A1, 3.07% 8/15/25 (a) BB 2,275,064 2,320,000 2,000,000 Ocean Star 2004-A E, 8.606% 11/12/18 (a) BB- 2,002,417 2,015,000 5,000,000 Pegasus Aviation 1999-1A A2, 6.30% 3/25/29 (a) B 2,595,923 2,487,500 9,639,989 Pegasus Aviation 2000-1 A1, 3.275% 3/25/15 (a) B 5,181,915 5,097,144 3,000,000 Pegasus Aviation Lease 2000-1 A2, 8.37% 3/25/30 (a) B 1,842,846 1,992,693 3,517,584 Pegasus Aviation Lease 2001-1A B1, 4.09% 5/10/31 (a) CCC 851,211 844,220 1,758,792 Pegasus Aviation Lease 2001-1A B2, 7.27% 5/10/31 (a) CCC 883,252 587,567 ------------------ ------------------ $ 19,411,208 $ 19,101,809 ------------------ ------------------ FRANCHISE LOANS - 7.9% 1,500,000 Falcon Franchise Loan 1999-1 E, 6.50% 1/5/14 BB 1,206,261 1,209,930 2,000,000 Falcon Franchise Loan 2000-1 E, 6.50% 4/5/16 (a) BB 1,488,452 1,425,300 1,000,000 Falcon Franchise Loan 2001-1 F, 6.50% 1/5/23 B 678,833 659,330 3,548,000 Falcon Franchise Loan 2003-1 D, 7.836% 1/5/25 (a) BB- 3,274,777 3,074,732 4,502,999 FMAC Loan Trust 1996-B A1, 7.629% 11/15/18 (a) DDD 3,203,854 3,240,948 29 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) 5,078,824 FMAC Loan Trust 1996-B A2, 2.10% 11/15/18 (a) DDD $ 3,247,841 $ 3,225,053 4,239,330 FMAC Loan Trust 1997-B A, 6.85% 9/15/19 (a) B 3,387,577 4,027,363 3,337,513 FMAC Loan Trust 1998-A A3, 6.69% 9/15/20 (a) BB 2,468,488 2,486,447 7,606,569 FMAC Loan Trust 1998-BA A2, 6.74% 11/15/20 (a) B 5,557,046 5,234,103 ------------------ ------------------ $ 24,513,129 $ 24,583,206 ------------------ ------------------ HOME EQUITY LOANS (NON-HIGH LOAN-TO-VALUE) - 14.5% 2,500,000 Ace Securities 2004-FM1 B1A, 4.59% 9/25/33 BB 1,997,851 2,300,000 6,000,000 Ace Securities 2004-OP1 B, 4.60% 4/25/34 BB 4,927,910 5,520,000 1,026,662 Conseco Finance 2001-A IB2, 10.30% 3/15/32 BB+ 946,481 950,939 2,186,554 Delta Funding Home Equity 1997-2 B3, 7.80% 6/25/27 BB 1,584,112 1,800,234 1,344,359 Delta Funding Home Equity 1999-3 B, 7.60% 1/15/30 CCC 1,138,883 1,164,067 3,000,000 Delta Funding Home Equity 2000-1 B, 8.09% 5/15/30 B 2,654,608 2,803,800 2,000,000 Equifirst Mortgage 2004-2 B1, 4.74% 7/25/34 (a) BB+ 1,642,270 1,780,000 1,000,000 Equifirst Mortgage 2005-1 B3, 6.08% 4/25/35 (a) Non-rated 827,626 827,500 1,000,000 Equifirst Mortgage 2005-1 B4, 6.08% 4/25/35 (a) Non-rated 827,001 826,880 2,500,000 First Franklin Mortgage 2004-FFH2 B2, 5.10% 9/15/34 (a) BB+ 2,073,474 2,325,000 3,000,000 First Franklin Mortgage 2004-FFH3 B1, 4.50% 6/25/34 (a) BB 2,429,741 2,670,000 2,568,000 GSAMP Trust 2004-AR1 B5, 5.00% 6/25/34 (a) Non-rated 1,993,215 1,990,200 1,720,534 IMC Home Equity 1997-3 B, 7.87% 8/20/28 D 892,660 963,499 3,475,462 IMC Home Equity 1997-5 B, 7.59% 11/20/28 D 2,117,085 2,406,254 1,639,113 Long Beach Mortgage 2001-4 M3, 4.93% 3/25/32 B+ 1,452,155 1,393,246 4,190,000 Long Beach Mortgage 2004-2 B, 4.50% 6/25/34 (a) BB+ 3,375,663 3,771,000 3,000,000 Meritage Mortgage 2004-2 B1, 4.829% 1/25/35 (a) Non-rated 2,428,120 2,580,000 2,000,000 Meritage Mortgage 2004-2 B2, 4.829% 1/25/35 (a) Non-rated 1,569,483 1,670,000 30 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) 968,400 Morgan Stanley 1999-WF1 M, 5.91% 11/15/31 (a) BB- 483,015 $ 467,514 2,972,000 Morgan Stanley 2004-NC5 B4, 6.28% 5/25/34 (a) BB+ 2,635,767 2,633,935 1,830,000 Terwin Mortgage 2004-16SL B3, 6.34% 9/25/34 (a) BB 1,505,462 1,573,800 Terwin Mortgage 2005-3SL B6, 5.50% 3/25/35 interest-only strips BB 3,021,458 3,019,020 ------------------ ------------------ $ 42,524,040 $ 45,436,888 ------------------ ------------------ MANUFACTURED HOUSING LOANS - 9.3% 5,000,000 Conseco Finance 2000-6 M1, 7.72% 9/1/32 CCC- 2,733,523 2,550,000 4,000,000 Conseco Finance 2001-1 M1, 7.535% 7/1/32 C 1,779,687 925,000 3,576,357 Green Tree Financial 1996-4 M1, 7.75% 6/15/27 (d) B+ 2,896,815 2,854,935 2,000,000 Green Tree Financial 1997-3 M1, 7.53% 3/15/28 B- 1,314,105 1,360,000 3,000,000 Green Tree Financial 1997-8 M1, 7.02% 10/15/27 B+ 1,987,038 2,069,172 6,000,000 Green Tree Financial 1999-4 M1, 7.60% 5/1/31 CCC- 1,652,256 1,158,240 18,000,000 Green Tree Financial 1999-5 M1, 8.05% 3/1/30 CCC- 5,177,244 4,020,480 1,626,822 Green Tree Financial 1994-1 B2, Zero Coupon Bond 4/15/19 C 990,235 1,057,434 8,000,000 Greenpoint Manufactured Housing 1999-5 M2, 9.23% 12/15/29 BB- 5,828,372 4,959,528 21,505,000 Madison Avenue Manufactured Housing 2002-A B2, 4.35% 3/25/32 BB- 7,814,521 7,096,650 2,000,000 Merit Securities 12-1 1M2, 8.35% 7/28/33 B 1,550,026 1,203,220 ------------------ ------------------ $ 33,723,822 $ 29,254,659 ------------------ ------------------ RECREATIONAL EQUIPMENT - 0.3% 1,038,899 Green Tree Recreational Equipment 1996-B CTFS, 7.70% 7/15/18 CCC- 907,994 898,647 ------------------ ------------------ TOTAL ASSET BACKED SECURITIES - NON-INVESTMENT GRADE $ 197,925,302 $ 196,889,383 ------------------ ------------------ 31 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) CORPORATE BONDS - NON-INVESTMENT GRADE - 28.3% OF NET ASSETS BUSINESS SERVICES - 2.0% 2,000,000 Comforce Operation, 12.00% Bond 12/1/07 Non-rated $ 2,000,000 $ 2,000,000 500,000 Danka Business, 10.00% Bond 4/1/08 Non-rated 485,491 421,250 2,300,000 MSX International, 11.375% Bond 1/15/08 CCC+ 1,918,102 1,817,000 2,000,000 MSX International, 11.00% Bond 10/15/07 B- 2,029,791 2,000,000 ------------------ ------------------ $ 6,433,384 $ 6,238,250 ------------------ ------------------ CONSTRUCTION - 0.8% 600,000 Integrated Electrical Services, 9.375% Bond 2/1/09 CCC 551,551 573,000 2,000,000 Integrated Electrical Services, 9.375% Bond 2/1/09 CCC 1,863,139 1,920,000 ------------------ ------------------ $ 2,414,690 $ 2,493,000 ------------------ ------------------ ELECTRONICS - 2.3% 3,500,000 Knowles Electronics, 13.125% Bond 10/15/09 CCC 3,481,327 3,605,000 4,000,000 Motors and Gears, 10.75% Bond 11/15/06 CCC 3,929,822 3,670,000 ------------------ ------------------ $ 7,411,149 $ 7,275,000 ------------------ ------------------ ENERGY - 2.4% 1,700,000 Abraxas Petroleum, Zero Coupon Bond 12/1/09 (a) N 1,700,000 1,666,000 2,250,000 Calpine, 8.75% Bond 7/15/13 (a) B 1,866,928 1,698,750 925,000 Calpine, 9.875% Bond 12/1/11 (a) B 789,330 730,750 993,374 Tiverton/Rumford Power, 9.00% Bond 7/15/18 (a) B 776,264 774,832 2,500,000 United Refining, 10.50% Bond 8/15/12 (a) B- 2,468,588 2,559,375 ------------------ ------------------ $ 7,601,110 $ 7,429,707 ------------------ ------------------ FINANCE - 1.9% 1,602,000 Advanta Capital Trust, 8.99% Bond 12/17/26 CCC 1,577,085 1,557,945 1,000,000 Labranche, 9.50% Bond 5/15/09 B 1,002,253 1,005,000 3,375,000 Labranche, 11.00% Bond 5/15/12 B 3,619,457 3,577,500 ------------------ ------------------ $ 6,198,795 $ 6,140,445 ------------------ ------------------ 32 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) FOOD - 1.7% 700,000 Ameriqual Group, 9.00% Bond 4/1/12 (a) B+ $ 700,000 $ 700,000 6,600,000 Land O Lakes, 7.45% Bond 3/15/28 (a) CCC 4,130,203 4,587,000 ------------------ ------------------ $ 4,830,203 $ 5,287,000 ------------------ ------------------ HEALTH CARE - 1.1% 2,950,000 Curative Health, 10.75% Bond 5/1/11 B- 2,662,498 2,426,375 1,000,000 Hanger Orthopedic Group, 10.375% Bond 2/15/09 CCC+ 985,432 992,500 ------------------ ------------------ $ 3,647,930 $ 3,418,875 ------------------ ------------------ MANUFACTURING - 6.5% 3,000,000 Consolidated Container, 10.125% Bond 7/15/09 CCC 2,836,805 2,790,000 2,650,000 Dura Operating, 9.00% Bond 5/1/09 CCC+ 2,551,646 2,093,500 1,000,000 Elgin National Industry, 11.0% Bond 11/1/07 CCC- 950,944 947,960 250,000 Foamex, 9.875% Bond 6/15/07 CCC+ 215,589 135,000 2,000,000 Foamex, 10.75% Bond 4/1/09 B- 1,918,953 1,760,000 2,550,000 GSI Group Inc, 10.25% Bond 11/1/07 CCC+ 2,554,347 2,550,000 1,800,000 Intermet, Zero Coupon Bond 6/15/09 in default (d) Non-rated 1,153,137 1,008,000 3,000,000 MMI Products, 11.25% Bond 4/15/07 CCC 3,001,184 2,985,000 3,200,000 US Can, 12.375% Bond 10/1/10 CCC+ 2,930,380 3,008,000 3,500,000 VITRO SA, 11.75% Bond 11/1/13 (a) (e) B- 3,470,571 3,325,000 ------------------ ------------------ $ 21,583,556 $ 20,602,460 ------------------ ------------------ PRINTING - 0.2% 1,100,000 American Color Graph, 10.00% Bond 6/15/10 CCC 801,346 715,000 RETAIL - 1.7% 4,200,000 General Nutrition Center, 8.50% Bond 12/1/10 CCC+ 3,916,859 3,570,000 1,000,000 New World Restaurant, 13.00% Bond 7/1/08 CCC+ 1,005,266 1,020,000 750,000 Star Gas Partner, 10.25% Bond 2/15/13 CCC- 699,576 693,750 ------------------ ------------------ $ 5,621,701 $ 5,283,750 ------------------ ------------------ 33 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) TELECOMMUNICATIONS - 5.7% 350,000 American Cellular, 10.00% Bond 8/1/11 B- $ 305,100 $ 322,000 2,400,000 BARAK I.T.C., Zero Coupon Bond 11/15/07 in default (d)(e) Non-rated 1,905,961 1,296,000 600,000 Call-Net Enterprises, 10.625% Bond 12/31/08 (e) B- 587,533 630,000 3,375,000 Charter Communication, Zero Coupon Bond 5/15/11 CCC- 2,500,156 2,328,750 1,000,000 Charter, 10.00% Bond 5/15/11 CCC- 861,979 767,500 500,000 Eschelon Operating, 8.375% Bond 3/15/10 CCC+ 431,002 427,500 4,600,000 Level 3 Financing, 10.75% Bond 10/15/11 (a) CC 3,998,360 4,036,500 2,025,000 Primus Telecommunications, 12.75% Bond 10/15/09 CCC 1,954,013 1,863,000 2,000,000 Primus Telecommunications, 8.00% Bond 1/15/14 CCC 1,692,218 1,440,000 2,350,000 Rural Cellular, 9.75% Bond 1/15/10 CCC 2,109,409 2,150,250 2,305,000 Time Warner, 10.125% Bond 2/1/11 CCC+ 2,159,640 2,224,325 400,000 Transtel SA, 12.50% Bond 12/31/08 (a) Non-rated 375,288 376,000 ------------------ ------------------ $ 18,880,659 $ 17,861,825 ------------------ ------------------ TOBACCO - 0.7% 2,800,000 North Atlantic Trading, 9.25% Bond 3/1/12 B 2,610,804 2,100,000 TRANSPORTATION - 1.0% 3,000,000 Greyhound Lines, 11.50% Bond 4/15/07 CCC- 2,968,763 3,015,000 TRAVEL - 0.3% 1,000,000 Worldspan Financial, 9.024% Bond 2/15/11 (a) CCC+ 997,620 970,000 ------------------ ------------------ TOTAL CORPORATE BONDS - NON-INVESTMENT GRADE $ 92,001,710 $ 88,830,312 ------------------ ------------------ MORTGAGE BACKED SECURITIES - 2.7% OF NET ASSETS COLLATERALIZED MORTGAGE OBLIGATION - 2.7% Harborview Mortgage 2003-2 1X, 1.58% 10/19/33 interest-only strips AAA 1,841,646 1,761,371 Harborview Mortgage 2004-8 x, 0.65% Bond 11/19/34 interest-only strips AAA 2,863,632 2,818,971 34 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) Mellon Residential 2002-TBC2 X, 1.101% 8/15/32 interest-only strips AAA $ 1,803,488 $ 2,115,916 1,714,343 Structured Asset 2003-S A, 7.50% 12/28/33 (a) BBB 1,697,925 1,697,199 ------------------ ------------------ TOTAL MORTGAGE BACKED SECURITIES $ 8,206,691 $ 8,393,457 ------------------ ------------------ GOVERNMENT AGENCY SECURITIES - 2.1% OF NET ASSETS GNMA 2003-59 XA, 0.304% 6/16/34 interest-only strips (c) Non-rated 3,824,369 3,647,112 GNMA 2003-64 XA, 0.517% 8/16/43 interest-only strips (c) Non-rated 5,467,593 2,860,186 ------------------ ------------------ TOTAL GOVERNMENT AGENCY SECURITIES $ 9,291,962 $ 6,507,298 ------------------ ------------------ MUNICIPAL SECURITIES - 0.2% OF NET ASSETS 1,000,000 Pima County AZ IDA Health Care, 8.50% 11/15/32 Non-rated 625,032 619,860 COMMON STOCKS - 10.0% OF NET ASSETS 50,800 American Capital Strategies, Ltd. 1,390,327 1,595,628 58,300 Andrx Corporation (d) 1,125,863 1,321,661 57,700 Anthracite Capital, Inc. 628,946 642,778 5,800 Bank of America Corporation 231,303 255,780 7,100 Best Buy Co., Inc. 376,294 383,471 1,600 BP Prudhoe Bay Royalty Trust 62,940 111,680 17,900 Cimarex Energy Co. (d) 686,375 698,100 53,600 Cisco Systems, Inc. (d) 958,986 958,904 4,700 Coooper Cameron Corporation (d) 261,949 268,887 15,100 Cree, Inc. (d) 324,105 328,425 7,200 Devon Energy Corporation 259,380 343,800 16,300 Exxon Mobil Corporation 875,942 971,480 7,800 First Data Corporation 312,355 306,618 13,800 Frontline Ltd. 667,171 676,200 9,700 Harley-Davidson, Inc. 447,604 560,272 33,200 Intersil Corporation 500,504 575,024 14,700 Kerr-McGee Corporation 851,794 1,151,451 10,550 Kinder Morgan Energy Partners, L.P. 471,603 474,750 12,700 L-3 Communications Holdings, Inc. 583,195 901,954 44,800 Limited Brands, Inc. 779,012 1,088,640 21,400 Lincoln Electric Holdings, Inc. 651,534 643,712 4,800 Magellan Midstream Partners, L.P. 260,110 293,040 6,800 Magyar Tavkozlesi Rt. 135,769 160,140 122,150 MCG Capital Corporation 2,040,549 1,879,278 31,000 Microsoft Corporation 799,552 749,270 48,800 New Century Financial Corporation 2,473,358 2,284,816 9,100 Newfield Exploration Company (d) 636,819 675,766 12,300 Oceaneering International, Inc. (d) 449,276 461,250 79,300 OmniVision Technologies, Inc. 1,188,825 1,201,395 9,800 Petroleo Brasileiro S.A. 352,436 432,964 20,700 Polycom, Inc. (d) 335,258 350,865 35 Principal Amount/ Market Shares Description Cost Value (b) 6,300 Range Resources Corporation $ 134,548 $ 147,168 34,200 Regal Entertainment Group 662,116 719,226 20,890 Ship Finance International Limited 451,484 424,067 11,000 Storage Technology Corporation 263,611 338,800 79,133 Technology Investment Capital Corporation 1,177,008 1,183,038 10,050 Teva Pharmaceutical Industries Limited 297,480 311,449 27,200 The Home Depot, Inc. 986,795 1,040,128 11,400 Tidewater, Inc. 347,746 443,004 19,100 TOP Tankers Inc. 344,379 354,305 45,200 Trustreet Properties Inc. 735,570 695,628 18,100 Tsakos Energy Navigation Limited 651,369 796,943 10,900 Unit Corporation (d) 436,280 492,353 62,650 UTStarcom, Inc. (d) 1,185,665 686,018 700 Valero L.P. 38,700 42,175 7,100 Wal-Mart Stores, Inc. 367,255 355,781 10,600 XL Capital Ltd. 818,100 767,122 ------------------ ------------------ Total Common Stocks $ 30,017,240 $ 31,545,204 ------------------ ------------------ EURODOLLAR TIME DEPOSITS - 1.5% OF NET ASSETS State Street Bank & Trust Company Eurodollar time deposits dated March 31, 2005, 0.85%, maturing at $ 4,540,107 on April 1, 2005. 4,540,000 4,540,000 CORPORATE LOANS - 0.4% OF NET ASSETS Xspedius, 9.22% 3/1/10 $ 1,250,000 $ 1,250,000 ------------------ ------------------ TOTAL INVESTMENTS - 135.5% OF NET ASSETS $ 426,830,280 $ 424,991,965 ------------------ ------------------ OTHER ASSETS AND LIABILITIES, NET - (35.5%) OF NET ASSETS (111,261,019) =================== NET ASSETS $ 313,730,946 =================== (a) These securities are sold within the terms of a private placement memorandum, exempt from registration under Rule 144A under the Securities Act of 1933, as amended, and may be resold in transactions exempt from registration, normally to qualified institutional buyers. Pursuant to guidelines adopted by the Board of Directors, these issues have been determined to be liquid by Morgan Asset Management, Inc., the Fund's investment adviser. (b) See Note 2 of accompanying Notes to Financial Statements regarding valuation of securities. (c) The issuer is a publicly-traded company that operates under a congressional charter; its securities are neither issued nor guaranteed by the U. S. government. (d) These securities are non-income producing. (e) These securities are classified as Yankee Bonds, which are U.S. dollar denominated bonds issued in the United States by a foreign entity. (f) Trust preferred security with no stated interest rate. NRSRO--Nationally Recognized Statistical Rating Organization. 36 [THIS PAGE INTENTIONALLY LEFT BLANK] RMK STRATEGIC INCOME FUND, INC. Portfolio Commentary March 31, 2005 MANAGEMENT DISCUSSION OF FUND PERFORMANCE For the six months and the fiscal year ended March 31, 2005, RMK Strategic Income Fund, Inc. (the "Fund") had a total return of 6.37% and 9.68%, respectively, based on market price and reinvested dividends. For the six months and the year ended March 31, 2005, the Fund had a total return of 6.00% and 10.87%, respectively, based on net asset value and reinvested dividends. For the six months and the year ended March 31, 2005, the Lehman Brothers Ba U.S. High Yield Index had a total return of 1.17% and 4.28%, respectively. The Fund's strong performance was primarily attributable to the Fund's relative yield advantage as evidenced by the monthly dividend distributions and the relative net asset value stability produced by the Fund's allocation in a wide variety of asset types. During the fiscal year ended March 31, 2005, the Fund paid total income distributions of $1.68 per share, which is composed of total regular monthly dividends for the year of $1.38 per share and total special dividend distributions in December 2004 of $0.30 per share. For the last four months of the Fund's fiscal year, the Fund paid monthly dividends of $0.15 per share. Our high income strategy emphasizes very broad diversification utilizing asset categories beyond the well recognized below investment grade corporate and convertible bonds. This diversification allows us to find better risk/reward opportunities than would be possible if we were restricted to a single asset sector. Key drivers of performance in 2004 included commercial mortgage-backed securities, distressed credit card receivables, below investment grade corporate bonds and dividend-paying common stocks. Within the asset-backed securities, credit card receivables from issuers like Nextcard, First Consumers, and Metris provided a boost to the Fund's returns in late 2004. Elevated delinquencies and charge-offs caused these assets to suffer significant credit downgrades and to trade down as low as 30%-40% discounts of the original issue. Again a recovering economy mitigated delinquencies and the robust structure of those trusts caused these assets to recover virtually all of their value. The Fund employs leverage within the parameters allowed by its prospectus. Leverage increases (decreases) returns if the rate of return on the assets that were bought with the borrowed money was higher (lower) than the interest charged on the borrowed money. The Fund employs leverage on the whole portfolio rather than specific positions; therefore, because the Fund had a positive return for the period ended March 31, 2005, the leverage was beneficial to stockholders. Although increasing short-term interest rates will increase the cost of borrowed money, the Fund has invested an equivalent amount of assets in adjustable rate securities that will similarly benefit from increasing short-term rates. This allocation to floating rate assets should provide the Fund a level of protection from rising rates and allow the Fund to continue to benefit from the use of leverage. 37 For 2005, we expect continued economic recovery and continued increases in short-term interest rates by the Federal Reserve. To position the Fund to take advantage of these conditions, we have increased our allocation of floating rate bonds. These bonds, which may be corporate or asset-backed, have coupon rates that will increase as short-term interest rates increase. This feature should allow the Fund to benefit from rising rates as well as maintain its net asset value. We also expect business conditions to continue to improve, which should produce a continual uptrend in corporate as well as household earnings. The Fund stands to benefit from this trend by increasing our investments in corporate debt and securitized home equity loans. /s/ James C. Kelsoe James C. Kelsoe, Jr., CFA Portfolio Manager MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUNDS WILL ACHIEVE THEIR INVESTMENT OBJECTIVES. THE FUNDS ARE SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT THE MARKET VALUES OF SECURITIES OWNED BY THE FUNDS WILL DECLINE AND, THEREFORE, THE VALUE OF THE FUNDS' SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THE FUNDS. 38 PORTFOLIO STATISTICS AS OF 3/31/05 Portfolio Credit Rating BB Portfolio Current Yield 11.42% Portfolio Yield to Maturity 11.03% Portfolio Duration 3.71 Years Percentage of Leveraged Assets 26.00% Number of Holdings 204 ASSET ALLOCATION* AS OF 3/31/05 [PIE CHART REPRESENTATION] Certificate-Backed Obligations 2.5% Government Agency Securities 1.5% Cash 1.4% Other 1.0% Corporate Bonds 19.3% Home Equity Loans 18.3% Commercial Loans 14.3% Common Stock 9.7% Manufactured Housing Loans 9.6% Equipment Leases 7.6% Collateralized Debt Obligations 6.8% Franchise Loans 5.5% Collateralized Mortgage Obligations 2.5% * Percentages are based on total investments, which may differ from total net assets used in computing the percentages in the Portfolio of Investments. Current holdings may not reflect the holdings as of the date of this report. CREDIT QUALITY DISTRIBUTION* AS OF 3/31/05 AAA 3.6% AA 3.2% A 5.5% BBB 23.3% BB 15.0% B 21.1% CCC 17.2% CC 1.5% C 0.2% D 1.7% NR 7.7% * Each rating category above includes all bonds within the broad rating category (i.e., BBB includes all bonds rated BBB+, BBB, and BBB-). Current holdings may not reflect the holdings as of the date of this report. 39 NAV & MARKET PRICE HISTORY(1) The graph below illustrates the net asset value and market price history of RMK Strategic Income Fund, Inc. (NYSE: RSF) from March 18, 2004 (commencement of investment operations) to March 31, 2005. [GRAPH REPRESENTATION] RSF NAV Market Price History - --- --- -------------------- 03/18/2004 $14.30 $15.00 03/19/2004 $14.29 $15.75 03/20/2004 $14.29 $15.75 03/21/2004 $14.29 $15.75 03/22/2004 $14.29 $15.51 03/23/2004 $14.28 $15.51 03/24/2004 $14.28 $15.56 03/25/2004 $14.28 $15.55 03/26/2004 $14.28 $15.44 03/27/2004 $14.28 $15.44 03/28/2004 $14.28 $15.44 03/29/2004 $14.26 $15.70 03/30/2004 $14.27 $15.85 03/31/2004 $14.29 $16.00 04/01/2004 $14.29 $16.00 04/02/2004 $14.24 $15.55 04/03/2004 $14.24 $15.55 04/04/2004 $14.24 $15.55 04/05/2004 $14.24 $15.65 04/06/2004 $14.24 $15.45 04/07/2004 $14.24 $15.40 04/08/2004 $14.23 $15.40 04/09/2004 $14.23 $15.40 04/10/2004 $14.23 $15.40 04/11/2004 $14.23 $15.40 04/12/2004 $14.24 $15.34 04/13/2004 $14.18 $15.00 04/14/2004 $14.18 $15.00 04/15/2004 $14.16 $15.02 04/16/2004 $14.18 $15.05 04/17/2004 $14.18 $15.05 04/18/2004 $14.18 $15.05 04/19/2004 $14.19 $15.11 04/20/2004 $14.17 $15.09 04/21/2004 $14.18 $15.00 04/22/2004 $14.22 $14.96 04/23/2004 $14.19 $14.81 04/24/2004 $14.19 $14.81 04/25/2004 $14.19 $14.81 04/26/2004 $14.17 $14.80 04/27/2004 $14.17 $14.62 04/28/2004 $14.14 $14.47 04/29/2004 $14.12 $14.31 04/30/2004 $14.13 $14.65 05/01/2004 $14.13 $14.65 05/02/2004 $14.13 $14.65 05/03/2004 $14.14 $14.70 05/04/2004 $14.13 $14.68 05/05/2004 $14.14 $14.78 05/06/2004 $14.28 $14.70 05/07/2004 $14.19 $14.30 05/08/2004 $14.19 $14.30 05/09/2004 $14.19 $14.30 05/10/2004 $14.16 $14.25 05/11/2004 $14.20 $14.35 05/12/2004 $14.17 $14.49 05/13/2004 $14.18 $14.74 05/14/2004 $14.19 $14.73 05/15/2004 $14.19 $14.73 05/16/2004 $14.19 $14.73 05/17/2004 $14.20 $14.75 05/18/2004 $14.22 $14.77 05/19/2004 $14.21 $14.75 05/20/2004 $14.22 $14.92 05/21/2004 $14.21 $14.83 05/22/2004 $14.21 $14.83 05/23/2004 $14.21 $14.83 05/24/2004 $14.24 $14.80 05/25/2004 $14.26 $14.95 05/26/2004 $14.29 $14.94 05/27/2004 $14.29 $14.85 05/28/2004 $14.31 $14.80 05/29/2004 $14.31 $14.80 05/30/2004 $14.31 $14.80 05/31/2004 $14.31 $14.80 06/01/2004 $14.31 $14.95 06/02/2004 $14.30 $14.95 06/03/2004 $14.28 $14.95 40 06/04/2004 $14.30 $14.95 06/05/2004 $14.30 $14.95 06/06/2004 $14.30 $14.95 06/07/2004 $14.20 $14.95 06/08/2004 $14.20 $14.80 06/09/2004 $14.18 $14.85 06/10/2004 $14.19 $14.80 06/11/2004 $14.19 $14.80 06/12/2004 $14.19 $14.80 06/13/2004 $14.19 $14.80 06/14/2004 $14.16 $14.85 06/15/2004 $14.21 $15.00 06/16/2004 $14.20 $14.95 06/17/2004 $14.21 $14.99 06/18/2004 $14.23 $14.94 06/19/2004 $14.23 $14.94 06/20/2004 $14.23 $14.94 06/21/2004 $14.22 $14.95 06/22/2004 $14.22 $14.98 06/23/2004 $14.25 $14.90 06/24/2004 $14.25 $14.88 06/25/2004 $14.29 $14.80 06/26/2004 $14.29 $14.80 06/27/2004 $14.29 $14.80 06/28/2004 $14.27 $14.69 06/29/2004 $14.28 $14.94 06/30/2004 $14.31 $14.90 07/01/2004 $14.29 $14.99 07/02/2004 $14.28 $14.95 07/03/2004 $14.28 $14.95 07/04/2004 $14.28 $14.95 07/05/2004 $14.28 $14.95 07/06/2004 $14.26 $14.95 07/07/2004 $14.24 $14.99 07/08/2004 $14.21 $14.91 07/09/2004 $14.22 $15.03 07/10/2004 $14.22 $15.03 07/11/2004 $14.22 $15.03 07/12/2004 $14.23 $14.94 07/13/2004 $14.11 $15.05 07/14/2004 $14.13 $15.15 07/15/2004 $14.10 $15.23 07/16/2004 $14.14 $15.24 07/17/2004 $14.14 $15.24 07/18/2004 $14.14 $15.24 07/19/2004 $14.16 $15.26 07/20/2004 $14.16 $15.35 07/21/2004 $14.14 $15.34 07/22/2004 $14.16 $15.26 07/23/2004 $14.16 $15.39 07/24/2004 $14.16 $15.39 07/25/2004 $14.16 $15.39 07/26/2004 $14.16 $15.32 07/27/2004 $14.17 $15.20 07/28/2004 $14.16 $15.20 07/29/2004 $14.18 $15.23 07/30/2004 $14.20 $15.25 07/31/2004 $14.20 $15.25 08/01/2004 $14.20 $15.25 08/02/2004 $14.21 $15.34 08/03/2004 $14.21 $15.40 08/04/2004 $14.22 $15.45 08/05/2004 $14.18 $15.53 08/06/2004 $14.05 $15.42 08/07/2004 $14.05 $15.42 08/08/2004 $14.05 $15.42 08/09/2004 $14.05 $15.50 08/10/2004 $14.07 $15.42 08/11/2004 $14.05 $15.50 08/12/2004 $14.05 $15.55 08/13/2004 $14.08 $15.53 08/14/2004 $14.08 $15.53 08/15/2004 $14.08 $15.53 08/16/2004 $14.10 $15.65 08/17/2004 $14.13 $15.57 08/18/2004 $14.18 $15.55 08/19/2004 $14.18 $15.50 08/20/2004 $14.19 $15.65 08/21/2004 $14.19 $15.65 41 08/22/2004 $14.19 $15.65 08/23/2004 $14.18 $15.55 08/24/2004 $14.18 $15.83 08/25/2004 $14.23 $15.99 08/26/2004 $14.27 $15.77 08/27/2004 $14.31 $15.77 08/28/2004 $14.31 $15.77 08/29/2004 $14.31 $15.77 08/30/2004 $14.35 $15.76 08/31/2004 $14.38 $16.00 09/01/2004 $14.40 $16.20 09/02/2004 $14.42 $16.05 09/03/2004 $14.39 $16.00 09/04/2004 $14.39 $16.00 09/05/2004 $14.39 $16.00 09/06/2004 $14.39 $16.00 09/07/2004 $14.41 $16.25 09/08/2004 $14.28 $16.05 09/09/2004 $14.32 $15.92 09/10/2004 $14.36 $16.10 09/11/2004 $14.36 $16.10 09/12/2004 $14.36 $16.10 09/13/2004 $14.48 $16.12 09/14/2004 $14.48 $16.15 09/15/2004 $14.46 $16.02 09/16/2004 $14.50 $16.00 09/17/2004 $14.52 $16.10 09/18/2004 $14.52 $16.10 09/19/2004 $14.52 $16.10 09/20/2004 $14.52 $16.00 09/21/2004 $14.51 $16.10 09/22/2004 $14.51 $16.00 09/23/2004 $14.58 $15.92 09/24/2004 $14.59 $16.00 09/25/2004 $14.59 $16.00 09/26/2004 $14.59 $16.00 09/27/2004 $14.60 $16.05 09/28/2004 $14.62 $15.85 09/29/2004 $14.57 $15.99 09/30/2004 $14.47 $15.95 10/01/2004 $14.51 $15.95 10/02/2004 $14.51 $15.95 10/03/2004 $14.51 $15.95 10/04/2004 $14.53 $15.95 10/05/2004 $14.49 $16.00 10/06/2004 $14.49 $15.92 10/07/2004 $14.99 $15.96 10/08/2004 $14.35 $16.10 10/09/2004 $14.35 $16.10 10/10/2004 $14.35 $16.10 10/11/2004 $14.35 $16.05 10/12/2004 $14.35 $16.00 10/13/2004 $14.36 $16.10 10/14/2004 $14.35 $16.15 10/15/2004 $14.35 $16.15 10/16/2004 $14.35 $16.15 10/17/2004 $14.35 $16.15 10/18/2004 $14.36 $16.12 10/19/2004 $14.36 $16.10 10/20/2004 $14.40 $15.90 10/21/2004 $14.41 $15.89 10/22/2004 $14.41 $15.71 10/23/2004 $14.41 $15.71 10/24/2004 $14.41 $15.71 10/25/2004 $14.41 $15.76 10/26/2004 $14.44 $15.85 10/27/2004 $14.46 $15.80 10/28/2004 $14.47 $15.75 10/29/2004 $14.51 $15.82 10/30/2004 $14.51 $15.82 10/31/2004 $14.51 $15.82 11/01/2004 $14.50 $16.10 11/02/2004 $14.47 $16.09 11/03/2004 $14.52 $15.99 11/04/2004 $14.54 $16.07 11/05/2004 $14.55 $15.86 11/06/2004 $14.55 $15.86 11/07/2004 $14.55 $15.86 11/08/2004 $14.41 $15.95 42 11/09/2004 $14.42 $15.85 11/10/2004 $14.39 $16.00 11/11/2004 $14.43 $15.95 11/12/2004 $14.43 $15.87 11/13/2004 $14.43 $15.87 11/14/2004 $14.43 $15.87 11/15/2004 $14.49 $16.03 11/16/2004 $14.48 $15.99 11/17/2004 $14.51 $16.05 11/18/2004 $14.49 $16.05 11/19/2004 $14.47 $16.60 11/20/2004 $14.47 $16.60 11/21/2004 $14.47 $16.60 11/22/2004 $14.49 $16.60 11/23/2004 $14.47 $16.91 11/24/2004 $14.48 $16.97 11/25/2004 $14.48 $16.97 11/26/2004 $14.49 $17.20 11/27/2004 $14.49 $17.20 11/28/2004 $14.49 $17.20 11/29/2004 $14.48 $17.05 11/30/2004 $14.47 $17.04 12/01/2004 $14.50 $16.95 12/02/2004 $14.48 $16.99 12/03/2004 $14.53 $16.97 12/04/2004 $14.53 $16.97 12/05/2004 $14.53 $16.97 12/06/2004 $14.29 $16.60 12/07/2004 $14.27 $16.72 12/08/2004 $14.14 $16.51 12/09/2004 $14.14 $16.70 12/10/2004 $14.17 $16.98 12/11/2004 $14.17 $16.98 12/12/2004 $14.17 $16.98 12/13/2004 $14.19 $16.94 12/14/2004 $14.20 $16.90 12/15/2004 $14.23 $16.95 12/16/2004 $14.32 $17.00 12/17/2004 $14.31 $17.08 12/18/2004 $14.31 $17.08 12/19/2004 $14.31 $17.08 12/20/2004 $14.32 $17.09 12/21/2004 $14.37 $17.05 12/22/2004 $14.37 $16.95 12/23/2004 $14.40 $17.09 12/24/2004 $14.40 $17.09 12/25/2004 $14.40 $17.09 12/26/2004 $14.40 $17.09 12/27/2004 $14.38 $17.05 12/28/2004 $14.39 $17.02 12/29/2004 $14.30 $17.05 12/30/2004 $14.30 $17.09 12/31/2004 $14.29 $17.40 01/01/2005 $14.29 $17.40 01/02/2005 $14.29 $17.40 01/03/2005 $14.27 $17.28 01/04/2005 $14.25 $17.20 01/05/2005 $14.25 $17.15 01/06/2005 $14.27 $17.20 01/07/2005 $14.11 $17.03 01/08/2005 $14.11 $17.03 01/09/2005 $14.11 $17.03 01/10/2005 $14.11 $16.94 01/11/2005 $14.11 $16.95 01/12/2005 $14.12 $16.87 01/13/2005 $14.13 $16.75 01/14/2005 $14.16 $16.68 01/15/2005 $14.16 $16.68 01/16/2005 $14.16 $16.68 01/17/2005 $14.16 $16.68 01/18/2005 $14.24 $16.76 01/19/2005 $14.24 $16.70 01/20/2005 $14.24 $16.75 01/21/2005 $14.23 $16.74 01/22/2005 $14.23 $16.74 01/23/2005 $14.23 $16.74 01/24/2005 $14.21 $16.62 01/25/2005 $14.22 $16.59 01/26/2005 $14.25 $16.45 43 01/27/2005 $14.24 $16.50 01/28/2005 $14.29 $16.48 01/29/2005 $14.29 $16.48 01/30/2005 $14.29 $16.48 01/31/2005 $14.31 $16.70 02/01/2005 $14.33 $16.79 02/02/2005 $14.33 $16.84 02/03/2005 $14.34 $16.83 02/04/2005 $14.40 $16.82 02/05/2005 $14.40 $16.82 02/06/2005 $14.40 $16.82 02/07/2005 $14.41 $16.95 02/08/2005 $14.27 $16.84 02/09/2005 $14.27 $16.74 02/10/2005 $14.26 $16.81 02/11/2005 $14.28 $16.80 02/12/2005 $14.28 $16.80 02/13/2005 $14.28 $16.80 02/14/2005 $14.28 $16.75 02/15/2005 $14.29 $16.72 02/16/2005 $14.31 $16.84 02/17/2005 $14.30 $16.70 02/18/2005 $14.31 $16.76 02/19/2005 $14.31 $16.76 02/20/2005 $14.31 $16.76 02/21/2005 $14.31 $16.76 02/22/2005 $14.30 $16.58 02/23/2005 $14.32 $16.39 02/24/2005 $14.34 $16.63 02/25/2005 $14.35 $16.55 02/26/2005 $14.35 $16.55 02/27/2005 $14.35 $16.55 02/28/2005 $14.34 $16.48 03/01/2005 $14.33 $16.50 03/02/2005 $14.34 $16.55 03/03/2005 $14.35 $16.55 03/04/2005 $14.40 $16.59 03/05/2005 $14.40 $16.59 03/06/2005 $14.40 $16.59 03/07/2005 $14.43 $16.69 03/08/2005 14.44 16.60 03/09/2005 14.41 16.55 03/10/2005 14.25 16.27 03/11/2005 14.26 16.11 03/12/2005 14.26 16.11 03/13/2005 14.26 16.11 03/14/2005 14.29 15.81 03/15/2005 14.27 15.71 03/16/2005 14.23 15.60 03/17/2005 14.24 15.50 03/18/2005 14.23 15.72 03/19/2005 14.23 15.72 03/20/2005 14.23 15.72 03/21/2005 14.20 15.20 03/22/2005 14.16 15.06 03/23/2005 14.19 15.00 03/24/2005 14.21 14.99 03/25/2005 14.21 14.99 03/26/2005 14.21 14.99 03/27/2005 14.21 14.99 03/28/2005 14.23 15.32 03/29/2005 $14.17 $15.49 03/30/2005 $14.20 $15.73 03/31/2005 $14.23 $15.74 (1) Net asset value is calculated after the close of the exchanges each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding. The market price is the last reported price at which a security was sold on an exchange. FUND PERFORMANCE TOTAL RETURNS AS OF MARKET NET ASSET MARCH 31, 2005 VALUE VALUE Six Months 6.37% 6.00% One Year 9.68% 10.87% Commencement of Investment Operations (3/18/04)(1) 16.32% 10.30% (1) Average annual total returns. Total returns assume an investment at the common share market price or net asset value at the beginning of the period, reinvestment of all dividends and distributions for the period in accordance with the Fund's dividend reinvestment plan, and sale of all shares at the closing market price (excluding any commissions) or net asset value at the end of the period. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FUND PERFORMANCE CHANGES OVER TIME AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR THE MOST RECENT PERFORMANCE, CALL 1-800-564-2188. 44 RMK STRATEGIC INCOME FUND, INC. Portfolio of Investments March 31, 2005 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) ASSET BACKED SECURITIES - INVESTMENT GRADE - 26.2% OF NET ASSETS COLLATERIZED DEBT OBLIGATION - 5.0% 11,398,932 Diversified Asset Securitization 1A A1, 7.873% 9/15/35 AA $ 11,762,181 $ 11,940,381 4,000,000 E-Trade 2004-1A COM1, 2.00% 1/10/40 BBB 3,980,105 3,980,000 2,400,000 Restructured Asset Backed 2003-3A A3, 2.56% 1/29/22 (a) AA- 1,917,747 1,911,000 ------------------ ------------------ $ 17,660,033 $ 17,831,381 ------------------ ------------------ COMMERCIAL LOANS - 4.3% 11,483,386 Atherton Franchisee 1999-A A2, 7.23% 4/15/12 (a) A+ 11,633,639 11,660,839 1,000,000 FFCA Secured Lending 1998-1 D1, 7.81% 1/15/17 (a) BBB- 790,825 790,000 3,000,000 GMAC Commercial Mortgage 1998-C1 F, 7.096% 5/15/30 BBB- 2,949,149 3,048,630 ------------------ ------------------ $ 15,373,613 $ 15,499,469 ------------------ ------------------ EQUIPMENT LEASES - 4.9% 8,586,169 AERCO 2A A3, 2.86% 7/15/25 BBB 6,408,440 6,343,033 6,000,000 Aircraft Finance Trust 1999-1A A1, 2.883% 5/15/24 BBB 4,193,875 4,155,000 3,000,000 Aviation Capital Group 2000-1A A1, 3.07% 11/15/25 (a) BBB 2,251,788 2,272,080 7,000,000 Lease Investment Flight Trust 1 A1, 2.87% 7/15/31 BBB 4,900,605 4,935,000 ------------------ ------------------ $ 17,754,708 $ 17,705,113 ------------------ ------------------ FRANCHISE LOANS - 1.5% FMAC Loan Trust 1997-C AX, 2.355% 12/15/19 interest-only strips (a) BBB 2,778,749 2,719,888 3,000,000 Franchise Loan Trust 1998-I A3, 6.74% 7/15/20 (a) BBB 2,716,093 2,776,320 ------------------ ------------------ $ 5,494,842 $ 5,496,208 ------------------ ------------------ HOME EQUITY LOANS (NON-HIGH LOAN-TO-VALUE) - 9.2% 1,336,869 Aames Mortgage Trust 2001-3 B, 7.13% 11/25/31 BBB 1,229,177 1,296,763 3,450,000 Ace Securities 2004-HE2 B1, 5.311% 10/25/34 BBB 2,761,803 3,346,500 2,000,000 Ace Securities 2004-HE4 M11, 5.694% 12/25/34 BBB- 1,603,838 1,871,880 45 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) 1,487,000 Ace Securities 2004-HS1 M6, 4.59% 2/25/34 BBB- $ 1,446,598 $ 1,486,976 2,057,073 Amresco Residential Securities 1999-1 B, 5.09% 11/25/29 BBB 1,950,824 1,946,505 2,700,000 First Franklin Mortgage 2004-FF2 N3, 8.835% 4/25/34 (a) BBB 2,700,000 2,713,500 2,750,000 First Franklin Mortgage 2004-FF5 M9, 4.47% 8/25/34 BBB- 2,446,713 2,557,500 5,000,000 Long Beach Mortgage 2004-4 M10, 4.615% 10/25/34 BBB+ 4,607,452 5,050,000 1,700,000 NovaStar Home Equity 2004-3 B4, 5.238% 12/25/34 BBB 1,562,857 1,627,750 10,500,000 Option One Mortgage 2004-2 M7, 4.65% 5/25/34 BBB 8,910,197 9,975,000 1,417,882 Sail Net 2004-5A B, 6.75% 6/27/34 (a) BBB 1,383,703 1,382,846 ------------------ ------------------ $ 30,603,162 $ 33,255,220 ------------------ ------------------ MANUFACTURED HOUSING LOANS - 1.3% 4,995,000 Green Tree Financial 1996-9 M1, 7.63% 1/15/28 BBB 4,403,379 4,547,997 ------------------ ------------------ TOTAL ASSET BACKED SECURITIES - INVESTMENT GRADE $ 91,289,737 $ 94,335,388 ------------------ ------------------ ASSET BACKED SECURITIES - NON-INVESTMENT GRADE - 61.1% OF NET ASSETS CERTIFICATE-BACKED OBLIGATIONS - 3.3% 1,000,000 MM Community Funding II, 3.50% 12/15/31 (a) Non-rated 938,903 937,500 2,000,000 MM community Funding IX, 10.00% 5/1/33 (a) Non-rated 1,941,063 1,940,000 2,000,000 Preferred Term Securities IV, 6.98% 6/24/34 (a) BB 2,029,762 2,030,000 1,000,000 Preferred Term Securities XV, 9/26/34 (a) (f) Non-rated 1,000,000 1,055,900 4,000,000 Preferred Term Securities XVI, 3/23/35 (a) (f) Non-rated 4,000,000 4,079,440 1,000,000 US Capital Funding II, 6.90% 8/1/34 Non-rated 1,000,000 1,000,000 1,000,000 US Capital Funding III, 14.00% 12/1/35 Non-rated 1,000,000 1,000,000 ------------------ ------------------ $ 11,909,728 $ 12,042,840 ------------------ ------------------ COLLATERIZED DEBT OBLIGATION - 4.1% 2,000,000 Crest 2000-1A D, 10.00% 8/31/36 BB 1,400,295 1,405,000 3,000,000 Hewett's Island 2004-1A COM, 12/15/16 (f) BB 3,000,000 3,000,000 46 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) 1,000,000 Hewett's Island II, 12/15/16 (a) (f) Non-rated $ 990,040 $ 990,000 9,000,000 MCPA2 1998-PA B2, 7.32% 6/23/10 B+ 7,803,180 7,560,000 1,950,000 MKP 4A CS, 2.00% 7/12/40 Non-rated 1,950,000 1,950,000 ------------------ ------------------ $ 15,143,515 $ 14,905,000 ------------------ ------------------ COMMERCIAL LOANS - 14.9% 6,000,000 CS First Boston 1998-C2 H, 6.75% 11/11/30 (a) B 4,075,779 4,005,060 1,763,536 CS First Boston Mortgage 1995-WF1 G, 8.488% 12/21/27 Non-rated 1,763,536 1,751,614 2,601,437 Enterprise Mortgage 1998-1 A2, 6.38% 1/15/25 (a) B 2,462,297 2,499,346 12,170,000 Enterprise Mortgage 1998-1 A3, 6.63% 1/15/25 (a) B 6,952,973 6,997,750 8,975,651 Enterprise Mortgage 1999-1 A2, 6.90% 10/15/25 (a) CCC 3,075,793 2,692,695 19,699,781 Enterprise Mortgage 2000-1 A1, 7.575% 1/15/27 (a) B- 11,912,253 11,031,877 17,664,734 Enterprise Mortgage 2000-1 A2, 7.505% 1/15/27 (a) B- 9,904,053 9,892,251 5,000,000 FFCA Secured Lending 1999-2 B1, 8.27% 5/18/26 (a) CCC 3,071,239 2,582,950 4,000,000 GMAC Commercial Mortgage 1997-C2 F, 6.75% 4/15/29 B 2,775,676 3,131,000 3,000,000 GMAC Commercial Mortgage 2000-C1 H, 7.00% 3/15/33 (a) B+ 2,700,483 2,866,050 6,000,000 GS Mortgage 1998-C1 H, 6.00% 10/18/30 (a) CCC 2,892,654 2,845,260 3,000,000 Merrill Lynch Mortgage 1998-C1 F, 6.25% 11/15/26 CCC 1,779,887 1,742,640 1,970,000 Salomon Brothers Mortgage 2000-C2 J, 6.308% 7/18/33 BB 1,715,984 1,550,489 ------------------ ------------------ $ 55,082,607 $ 53,588,982 ------------------ ------------------ EQUIPMENT LEASES - 5.3% 4,000,000 Airplanes Pass Through Trust 2001-1A A9, 3.14% 3/15/19 BB+ 2,150,237 2,135,000 1,539,131 DVI Receivables 2002-1 A3A, 3.121% 6/11/10 CCC+ 1,089,567 1,088,935 4,000,000 Embarcadero Aircraft 2000-A A1, 3.07% 8/15/25 (a) BB 2,275,331 2,320,000 2,000,000 Ocean Star 2004-A E, 8.606% 11/12/18 (a) BB- 2,002,417 2,015,000 6,000,000 Pegasus Aviation Lease 1999-1A A2, 6.30% 3/25/29 (a) CCC+ 3,115,107 2,985,000 47 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) 9,639,989 Pegasus Aviation Lease 2000-1 A1, 3.275% 3/25/15(a) B- $ 5,165,474 $ 5,097,144 5,000,000 Pegasus Aviation Lease 2000-1 A2, 8.37% 3/25/30(a) B- 3,230,376 3,321,155 ------------------ ------------------ $ 19,028,509 $18,962,234 ------------------ ------------------ FRANCHISE LOANS - 5.9% 1,000,000 Falcon Franchise Loan 1999-1 E, 6.50% 1/5/14 BB 828,921 806,620 1,000,000 Falcon Franchise Loan 2001-1 F, 6.50% 1/5/23 CCC+ 678,833 659,330 2,585,405 FMAC Loan Trust 1996-B A1, 7.629% 11/15/18 (a) D 1,906,001 1,860,796 6,825,046 FMAC Loan Trust 1996-B A2, 2.60% 11/15/18 (a) D 4,436,622 4,333,904 1,401,041 FMAC Loan Trust 1997-B A, 6.85% 9/15/19 (a) B 1,217,838 1,330,989 7,135,064 FMAC Loan Trust 1998-A A3, 6.69% 9/15/20 (a) C 5,428,374 5,315,623 4,364,860 FMAC Loan Trust 1998-BA A2, 6.74% 11/15/20 (a) 3,258,648 3,003,473 FMAC Loan Trust 1998-BA AX, 1.34% 11/15/20 C 610,237 574,426 interest-only strips (a) 6,000,000 FMAC Loan Trust 1998-CA A3, 6.99% 6/15/12 (a) CCC+ 3,582,589 3,366,960 ------------------ ------------------ $ 21,948,063 $21,252,121 ------------------ ------------------ HOME EQUITY LOANS (NON-HIGH LOAN-TO-VALUE) - 15.4% 8,892,000 Ace Securities 2004-HE1 B, 4.60% 2/25/34 BB 7,590,644 8,091,720 10,855,000 Ace Securities 2004-OP1 B, 4.60% 4/25/34 BB 8,915,409 9,986,600 4,114,000 Ace Securities 2004-RM1 B2, 1.436% 7/25/34 (a) Non-rated 3,329,187 3,743,740 2,057,000 Ace Securities 2004-RM1 B3, 1.436% 7/25/34 (a) Non-rated 1,545,452 1,789,590 1,177,332 Delta Funding Home Equity 2000-4 B, 7.15% 2/15/31 D 463,339 435,613 2,100,000 Equifirst Mortgage 2004-2 B1, 4.74% 7/25/34 (a) BB+ 1,724,383 1,869,000 2,732,000 Equifirst Mortgage 2004-2 B2, 4.74% 7/25/34 (a) BB 2,163,288 2,267,560 1,000,000 Equifirst Mortgage 2005-1 B3, 6.08% 4/25/35 (a) BB- 827,626 827,500 1,000,000 Equifirst Mortgage 2005-1 B4, 6.08% 4/25/35 (a) Non-rated 827,001 826,880 48 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) First Franklin Mortgage 2004-FF5 B, 4.47% Non-rated $ 2,212,318 $ 2,475,000 2,750,000 8/25/34 (a) First Franklin Mortgage 2004-FFH2 B2, 4.25% BB 2,429,741 2,670,000 3,000,000 6/25/34 (a) First Franklin Mortgage 2004-FFH3 B1, 5.10% BB+ 2,073,450 2,325,000 2,500,000 10/25/34 (a) 2,000,000 GSAMP Trust 2004-AR1 B5, 5.00% 6/25/34 (a) Non-rated 1,552,348 1,550,000 2,458,669 Long Beach Mortgage 2001-4 M3, 4.93% 3/25/32 CCC+ 2,178,233 2,089,869 3,000,000 Long Beach Mortgage 2004-2 B, 5.50% 6/25/34 (a) BB+ 2,416,943 2,700,000 3,000,000 Meritage Mortgage 2004-2 B1, 4.829% 1/25/35 (a) Non-rated 2,428,120 2,580,000 2,000,000 Meritage Mortgage 2004-2 B2, 4.829% 1/25/35 (a) Non-rated 1,569,483 1,670,000 Merrill Lynch Mortgage 2005-SL1 B5, 6.27% 2,000,000 1/25/35 (a) BB 1,784,852 1,784,420 1,830,000 Terwin Mortgage 2004-16SL B3, 6.34% 10/25/34 BB 1,505,447 1,573,800 Terwin Mortgage 2005-3SL B6, 11.50% 3/25/35 Non-rated 4,028,611 4,025,360 interest-only strips ------------------ ------------------ $ 51,565,875 $ 55,281,652 ------------------ ------------------ MANUFACTURED HOUSING LOANS - 11.6 2,300,000 BankAmerica Manufactured Housing 1997-1 B1, Zero CC 632,746 599,771 Coupon Bond 6/10/21 (d) 5,524,350 Bombardier Capital Mortgage 1999-B M1, 8.12% CC 564,981 276,218 12/15/29 4,693,541 Conseco Finance 2000-5 M2, 9.03% 2/1/32 CCC- 555,181 398,951 2,000,000 Conseco Finance 2001-1 M1, 7.535% 7/1/32 CCC- 720,482 462,500 3,576,357 Green Tree Financial 1996-4 M1, 7.75% 6/15/27 B+ 2,897,139 2,854,935 1,479,336 Green Tree Financial 1996-5 B1, 8.10% 7/15/27 CCC- 355,708 340,247 8,000,000 Green Tree Financial 1997-8 M1, 7.02% 10/15/27 B+ 5,389,409 5,517,792 7,000,000 Green Tree Financial 1999-4 M1, 7.60% 5/1/31 CCC 1,927,632 1,351,280 18,000,000 Green Tree Financial 1999-5 M1, 8.05% 3/1/30 CCC 5,137,388 4,020,480 14,545,000 Greenpoint Manufactured Housing 1999-5 M2, 9.23% CC 10,590,407 9,017,042 12/15/29 49 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) 7,500,000 Greenpoint Manufactured Housing 2000-1 M2, CC $ 838,157 $ 656,250 8.78% 3/20/30 10,000,000 Greenpoint Manufactured Housing 2000-3 IM1, B- 4,682,138 2,919,970 9.01% 6/20/31 10,000,000 Madison Avenue Manufactured Housing 2002-A B ,785,222 3,300,000 B2, 4.34% 3/25/32 5,389,000 Merit Securities 12-1 1M2, 7.35% 7/28/33 CC 4,040,926 3,242,076 5,886,000 Merit Securities 13 M2, 7.88% 12/28/33 CC 3,184,837 2,376,649 1,500,000 Oakwood Mortgage 2002-A M1, 7.76% 3/15/32 CCC 511,694 472,350 10,000,000 Oakwood Mortgage 2002-B M1, 7.62% 6/15/32 B 3,751,543 3,599,300 UCFC Manufactured Housing 1997-2 B1, Zero 5,000,000 Coupon Bond 2/15/18 CC 844,012 400,000 ------------------ ------------------ $ 50,409,602 $ 41,805,811 ------------------ ------------------ RECREATIONAL EQUIPMENT - 0.6% 2,525,502 Green Tree Recreational Equipment 1996-B CTFS, 7.70% 7/15/18 CCC- 2,207,280 2,184,560 ------------------ ------------------ $ 227,295,179 $ 220,023,200 ------------------ ------------------ TOTAL ASSET BACKED SECURITIES - NON-INVESTMENT GRADE CORPORATE BONDS - NON-INVESTMENT GRADE - 25.9% OF NET ASSETS BUSINESS SERVICES - 1.1% 500,000 Danka Business Systems, 10.00% Bond 4/1/08 Non-rated 485,491 421,250 2,000,000 MSX International, 11.375% Bond 1/15/08 CCC+ 1,662,858 1,580,000 B- 2,029,791 2,000,000 2,000,000 MSX International, 11.00% Bond 10/15/07 ------------------ ------------------ $ 4,178,140 $ 4,001,250 ------------------ ------------------ CONSTRUCTION - 0.9% 1,300,000 Integrated Electrical Services, 9.375% Bond CCC 1,188,922 1,241,500 2/1/09 2,000,000 Integrated Electrical Services, 9.375% Bond CCC 1,856,037 1,920,000 2/1/09 ------------------ ------------------ $ 3,044,959 $ 3,161,500 ------------------ ------------------ 50 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) ELECTRONICS - 2.2% 4,000,000 Knowles Electronics, 13.125% Bond 10/15/09 CCC $ 4,192,200 $ 4,120,000 4,000,000 Motors and Gears, 10.75% Bond 11/15/06 CCC 3,929,822 3,670,000 ------------------ ------------------ $ 8,122,022 $ 7,790,000 ------------------ ------------------ ENERGY - 1.7% 2,500,000 Abraxas Petroleum, Zero Coupon Bond 12/1/09 Non-rated 2,500,000 2,450,000 750,000 Calpine, 8.75% Bond 7/15/13 (a) B 617,441 566,250 925,000 Calpine, 9.875% Bond 12/1/11 (a) B 789,330 730,750 2,500,000 United Refining, 10.50% Bond 8/15/12 (a) B- 2,468,534 2,559,375 ------------------ ------------------ $ 6,375,305 $ 6,306,375 ------------------ ------------------ FINANCE - 1.5% 1,000,000 Advanta Capital Trust I, 8.99% 12/17/26 CCC 986,321 972,500 3,000,000 Labranche, 9.50% Bond 5/15/09 B 3,020,769 3,015,000 1,250,000 Labranche, 11.00% Bond 5/15/10 B 1,340,127 1,325,000 ------------------ ------------------ $ 5,347,217 $ 5,312,500 ------------------ ------------------ FOOD - 1.4% 700,000 Ameriqual Group, 9.00% Bond 4/1/12 (a) B+ 700,000 700,000 6,000,000 Land O Lakes, 7.45% Bond 3/15/28 (a) CCC 3,706,460 4,170,000 ----------------- ------------------ $ 4,406,460 $ 4,870,000 ----------------- ------------------ HEALTH CARE - 0.9% 2,700,000 Curative Health, 10.75% Bond 5/1/11 B- 2,433,232 2,220,750 1,000,000 Hanger Orthopedic Group, 10.375% Bond 2/15/09 CCC+ 985,432 992,500 ----------------- ------------------ $ 3,418,664 $ 3,213,250 ----------------- ------------------ MANUFACTURING - 6.5% 4,000,000 Consolidated Container, 10.125% Bond 7/15/09 CCC 3,790,914 3,720,000 2,650,000 Dura Operating, 9.00% Bond 5/1/09 CCC+ 2,558,440 2,093,500 1,000,000 Elgin National, 11.00% Bond 11/1/07 CCC- 950,944 947,960 4,000,000 Foamex, 10.75% Bond 4/1/09 B- 3,889,157 3,520,000 2,000,000 GSI Group, 10.25% Bond 11/1/07 CCC+ 2,005,259 2,000,000 Intermet, Zero Coupon Bond 1,800,000 6/15/09 in default (d) Non-rated 1,155,844 1,008,000 3,000,000 MMI Products, 11.25% Bond 4/15/07 CCC 3,001,184 2,985,000 51 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) 3,450,000 US Can, 12.375% Bond 10/1/10 CCC+ $ 3,266,944 $ 3,243,000 4,000,000 VITRO S.A., 11.75% Bond 1/1/13 (a) (e) B- 3,848,183 3,800,000 ----------------- ------------------ $ 24,466,869 $ 23,317,460 ----------------- ------------------ PRINTING - 0.2% 1,100,000 American Color Graphics, 10.00% Bond 6/15/10 CCC 801,346 715,000 RETAIL - 1.5% 3,975,000 General Nutrition, 8.50% 12/1/10 CCC+ 3,642,306 3,378,750 1,000,000 New World Restaurant, 13.00% Bond 7/1/08 CCC+ 1,005,266 1,020,000 1,250,000 Star Gas Partner, 10.25% Bond 2/15/13 CCC- 1,165,826 1,156,250 ----------------- ------------------ $ 5,813,398 $ 5,555,000 ----------------- ------------------ TOBACCO - 0.7% 3,300,000 North Atlantic Trading, 9.25% Bond 3/1/12 CCC 3,179,008 2,475,000 TELECOMMUNICATIONS - 6.0% 250,000 American Cellular, 10.00% Bond 8/1/11 B- 217,929 230,000 4,050,000 BARAK I.T.C., Zero Coupon Bond 11/15/07 in default (d)(e) Non-rated 3,221,935 2,187,000 600,000 Call-Net Enterprises, 10.625% Bond 12/31/08 (e) B 587,533 630,000 3,374,000 Charter Communication, Zero Coupon Bond 5/15/11 CCC- 2,672,192 2,328,060 2,000,000 Charter, 10.00% Bond 5/15/11 CCC- 1,681,935 1,535,000 3,400,000 Level 3 Financing, 10.75% Bond 10/15/11 (a) CC 2,963,528 2,983,500 1,020,000 Primus Telecommunications, 12.75% Bond 1/26/05 CCC 976,892 938,400 2,500,000 Primus Telecommunications, 8.00% Bond 1/15/14 CCC 2,123,032 1,800,000 3,350,000 Rural Cellular, 9.75% Bond 1/15/10 CCC 3,090,299 3,065,250 5,750,000 Time Warner, 10.125% Bond 2/1/11 CCC+ 5,565,830 5,548,750 400,000 Transtel SA, 12.50% Bond 12/31/08 (a) Non-rated 375,288 376,000 ----------------- ------------------ $ 23,476,393 $ 21,621,960 ----------------- ------------------ TRANSPORTATION - 1.0% 3,750,000 Greyhound Lines, 11.50% Bond 4/15/07 CCC- 3,679,576 3,768,750 52 Principal NRSRO Amount/ Rating Market Shares Description (Unaudited) Cost Value (b) TRAVEL - 0.3% 1,000,000 Worldspan Financial, 9.024% Bond 2/15/11 (a) CCC+ $ 997,620 $ 970,000 ----------------- ------------------ TOTAL CORPORATE BONDS - NON-INVESTMENT GRADE $ 97,306,977 $ 93,078,045 ----------------- ------------------ MORTGAGE BACKED SECURITIES - INVESTMENT GRADE - 3.3% OF NET ASSETS COLLATERALIZED MORTGAGE OBLIGATION - 3.3% Harborview Mortgage 2004-1 X, 1.90% 4/19/34 interest-only strips AAA 2,736,980 1,841,475 Harborview Mortgage 2004-8 X, 0.50% 11/19/34 interest-only strips AAA 2,864,456 2,818,971 Mellon Residential 2004-TBC1 X, 0.716% 2/26/34 interest-only strips (a) AAA 1,384,555 1,222,989 2,960,648 Structured Asset Securities 1999-SP1, 9.00% 5/25/29 BBB 3,003,256 2,962,919 3,651,000 Structured Asset Securities 2004-8 B2, 5.00% 9/25/34 BBB- 3,105,982 3,075,164 ----------------- ------------------ TOTAL MORTGAGE BACKED SECURITIES - INVESTMENT GRADE $ 13,095,229 $ 11,921,518 ----------------- ------------------ GOVERNMENT AGENCY SECURITIES - 2.1% OF NET ASSETS Fannie Mae 1998-M7 N, 1.057% 5/25/36 interest-only strips (c) Non-rated 3,707,404 2,553,225 GNMA 2003-64 XA, 1.20% 8/16/43 interest-only strips(c) Non-rated 9,699,772 4,873,072 ----------------- ------------------ TOTAL GOVERNMENT AGENCY SECURITIES $ 13,407,176 $ 7,426,297 ----------------- ------------------ MUNICIPAL SECURITIES - 0.2% OF NET ASSETS 1,000,000 Pima County Arizona IDA Health Care, 8.50% 11/15/32 Non-rated 625,032 619,860 COMMON STOCKS - 13.1% OF NET ASSETS 75,562 American Capital Strategies, Ltd. 2,284,869 2,373,402 87,000 Andrx Corporation (d) 1,729,944 1,972,290 85,800 Anthracite Capital, Inc. 974,214 955,812 8,800 Bank of America Corporation 350,245 388,080 10,800 Best Buy Co., Inc. 572,234 583,308 2,400 BP Prudhoe Bay Royalty Trust 94,360 167,520 27,000 Cimarex Energy Co. (d) 1,035,565 1,053,000 79,900 Cisco Systems, Inc. (d) 1,429,540 1,429,411 53 Principal Amount/ Market Shares Description Cost Value (b) 6,900 Cooper Cameron Corporation (d) 384,521 394,749 21,800 Cree, Inc. (d) 467,913 474,150 10,800 Devon Energy Corporation 389,070 515,700 24,200 Exxon Mobil Corporation 1,299,447 1,442,320 11,500 First Data Corporation $ 460,523 $ 452,065 20,500 Frontline Ltd. 990,701 1,004,500 49,700 Intersil Corporation 749,060 860,804 21,850 Kerr-McGee Corporation 1,277,026 1,711,511 15,550 Kinder Morgan Energy Partners, L.P. 695,486 699,750 18,200 L-3 Communications Holdings, Inc. 1,087,079 1,292,564 76,500 Limited Brands, Inc. 1,530,338 1,858,950 31,800 Lincoln Electric Holdings, Inc. 968,165 956,544 7,200 Magellan Midstream Partners, L.P. 390,140 439,560 10,100 Magyar Tavkozlesi Rt. 201,495 237,855 182,250 MCG Capital Corporation 3,272,176 2,803,916 48,500 Microsoft Corporation 1,187,059 1,172,245 72,550 New Century Financial Corporation 3,679,242 3,396,791 13,500 Newfield Exploration Company (d) 944,715 1,002,510 18,400 Oceaneering International, Inc. (d) 672,111 690,000 117,500 OmniVision Technologies, Inc. 1,762,500 1,780,125 14,700 Petroleo Brasileiro S.A. 528,735 649,446 30,000 Polycom, Inc. (d) 485,989 508,500 9,400 Range Resources Corporation 200,458 219,584 50,400 Regal Entertainment Group 975,636 1,059,912 31,310 Ship Finance International Limited 676,515 635,593 16,400 Storage Technology Corporation 393,086 505,120 117,647 Technology Investment Capital Corporation 1,699,169 1,758,823 15,000 Teva Pharmaceutical Industries Limited 444,000 464,850 40,400 The Home Depot, Inc. 1,476,803 1,544,896 18,300 Tidewater, Inc. 559,125 711,138 28,300 TOP Tankers Inc. 510,257 524,965 67,150 Trustreet Properties Inc. 1,092,870 1,033,438 27,100 Tsakos Energy Navigation Limited 975,117 1,193,213 16,300 Unit Corporation (d) 652,706 736,271 93,500 UTStarcom, Inc. (d) 1,755,990 1,023,825 900 Valero L.P. 49,762 54,225 10,300 Wal-Mart Stores, Inc. 532,840 516,133 24,800 XL Capital Ltd. 1,858,760 1,794,776 ----------------- ------------------ TOTAL COMMON STOCKS $ 45,747,556 $ 47,044,140 ----------------- ------------------ CORPORATE LOANS - 0.3% OF NET ASSETS Xspedius, 9.22% 3/1/10 1,250,000 1,250,000 54 Principal Amount/ Market Shares Description Cost Value (b) EURODOLLAR TIME DEPOSITS - 1.9% OF NET ASSETS State Street Bank & Trust Company Eurodollar time deposits dated March, 31 2005, 1.75% maturing at $6,820,332 on April 1, 2005. $ 6,820,000 $ 6,820,000 ----------------- ------------------ TOTAL INVESTMENTS - 134.1% OF NET ASSETS $ 496,836,886 $ 482,518,448 ----------------- ------------------ OTHER ASSETS AND LIABILITIES, NET - (34.1%) OF NET ASSETS (122,736,952) ------------------ ------------------ NET ASSETS $ 359,781,496 ------------------ ------------------ (a) Securities sold within the terms of a private placement memorandum, exempt from registration under Rule 144A under the Securities Act of 1933, as amended, and may be resold in transactions exempt from registration, normally to qualified institutional buyers. Pursuant to guidelines adopted by the Board of Directors, these issues have been determined to be liquid by Morgan Asset Management, Inc., the Fund's investment adviser. (b) See Note 2 of accompanying Notes to Financial Statements regarding valuation of securities. (c) The issuer is a publicly-traded company that operates under a congressional charter; its securities are neither issued nor guaranteed by the U. S. government. (d) These securities are non-income producing. (e) These securities are classified as Yankee Bonds, which are U.S. dollar denominated bonds issued in the United States by a foreign entity. (f) Trust preferred security with no stated interest rate. NRSRO--Nationally Recognized Statistical Rating Organization. 55 STATEMENTS OF ASSETS AND LIABILITIES March 31, 2005 RMK ADVANTAGE RMK HIGH RMK STRATEGIC ASSETS INCOME FUND INCOME FUND INCOME FUND Investments, in securities as detailed in the accompanying schedules at market (cost $466,688,164, $426,830,280, and $496,836,886, respectively) $ 463,323,025 $ 424,991,965 $ 482,518,448 Cash on deposit with custodian 11,651 10,890 - Dividends and interest receivable 5,551,084 6,886,246 7,000,063 Receivable for securities sold 2,608,186 2,656,225 3,617,490 Other assets - 13,524 - Debt issue costs 96,986 79,872 87,461 --------------------- ------------------ -------------------- TOTAL ASSETS 471,590,932 434,638,722 493,223,462 LIABILITIES Demand loan payable to bank (Note 6) 50,000,000 115,000,000 125,000,000 Interest payable 32,035 350,037 506,263 Accrued expenses 43,948 55,105 61,599 Due to affiliates 282,838 292,227 329,430 Payable for securities purchased 17,568,969 5,210,407 7,544,674 --------------------- ------------------ -------------------- TOTAL LIABILITIES 67,927,790 120,907,776 133,441,966 --------------------- ------------------ -------------------- NET ASSETS $ 403,663,142 $ 313,730,946 $ 359,781,496 ===================== ================== ==================== NET ASSETS CONSIST OF: Net unrealized depreciation of investments (3,365,139) (1,838,315) (14,318,438) Common stock, $.0001 par value (1,000,000,000 shares authorized for each fund) 2,809 2,087 2,529 Paid-in capital 402,226,134 301,523,119 362,969,114 Undistributed net investment income 104,784 291,458 1,597,435 Accumulated net realized gain on investments 4,694,554 13,752,597 9,530,856 --------------------- ------------------ -------------------- NET ASSETS $ 403,663,142 $ 313,730,946 $ 359,781,496 ===================== ================== ==================== SHARES OUTSTANDING AND NET ASSET VALUE PER SHARE: Common shares outstanding 28,086,820 20,871,995 25,288,664 Net asset value per share $14.37 $15.03 $14.23 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 56 STATEMENTS OF OPERATIONS March 31, 2005 For the year ended March 31, 2005 RMK ADVANTAGE RMK HIGH RMK STRATEGIC INVESTMENT INCOME: INCOME FUND(a) INCOME FUND INCOME FUND Interest $ 16,854,401 $ 48,956,157 $ 47,902,469 Dividends 337,345 1,048,562 1,584,156 --------------------- ------------------ -------------------- TOTAL INVESTMENT INCOME 17,191,746 50,004,719 49,486,625 EXPENSES: Management fees 979,749 2,650,664 2,758,232 Accounting and administrative fees 226,096 611,692 636,515 Interest expense 32,035 2,701,516 2,110,286 Debt issue expense 3,014 230,772 144,241 Legal fees 13,948 97,553 83,218 Audit fees 41,000 56,600 33,804 Transfer agent fees 19,796 37,019 42,047 Custodian fees 5,771 18,230 15,126 Registration fees 41,693 54,805 39,066 Directors fees 20,250 44,875 42,875 Other 21,041 46,793 37,531 --------------------- ------------------ -------------------- TOTAL EXPENSES 1,404,393 6,550,519 5,942,941 NET INVESTMENT INCOME 15,787,353 43,454,200 43,543,684 Realized and Unrealized Gains (Losses) on Investments: Change in unrealized depreciation (3,365,139) (11,718,935) (13,962,527) Net realized gain on securities 2,351,807 14,869,629 8,604,501 --------------------- ------------------ -------------------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 14,774,021 $ 46,604,894 $ 38,185,658 ===================== ================== ==================== (a) Reflects operations for the period from November 8, 2004 (commencement of investment operations) to March 31, 2005. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 57 [This Page Intentionally Left Blank] STATEMENTS OF CHANGES IN NET ASSETS RMK ADVANTAGE INCOME FUND Period Ended March 31, 2005(a) ------------------------- INCREASE IN NET ASSETS FROM OPERATIONS: Net investment income $ 15,787,353 Unrealized appreciation (depreciation), net (3,365,139) Net realized gain from investment transactions 2,351,807 -------------------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 14,774,021 -------------------- Distributions to shareholders from net investment income (13,339,822) Distributions to shareholders in excess of net investment income - Distributions to shareholders from net realized gain on investments - -------------------- TOTAL DISTRIBUTION TO SHAREHOLDERS (13,339,822) -------------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold (27,600,000 shares) 394,930,648 Proceeds from shares sold (18,933,400 shares) - Proceeds from shares sold (3,150,000 and 21,000,000 shares) - Proceeds from sales of shares as a result of reinvested dividends (479,839 shares) 7,198,292 Proceeds from sales of shares as a result of reinvested dividends (1,308,189 and 623,425 shares) - Proceeds from sales of shares as a result of reinvested dividends (1,131,683 shares) - -------------------- INCREASE IN NET ASSETS FROM SHARE TRANSACTIONS 402,128,940 -------------------- TOTAL INCREASE IN NET ASSETS 403,563,139 NET ASSETS Beginning of Period 100,003 -------------------- End of Period $ 403,663,142 ==================== 58 STATEMENTS OF CHANGES IN NET ASSETS RMK HIGH INCOME FUND Year Ended Period Ended March 31, 2005 March 31, 2004(b) -------------- ----------------- INCREASE IN NET ASSETS FROM OPERATIONS: Net investment income $ 43,454,200 $ 21,389,038 Unrealized appreciation (depreciation), net (11,718,935) 9,880,620 Net realized gain from investment transactions 14,869,629 11,000,226 --------------- ---------------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 46,604,894 42,269,884 --------------- ---------------- Distributions to shareholders from net investment income (41,663,366) (19,406,371) Distributions to shareholders in excess of net investment income - - Distributions to shareholders from net realized gain on investments (12,333,973) (3,265,328) --------------- ---------------- TOTAL DISTRIBUTION TO SHAREHOLDERS (53,997,339) (22,671,699) --------------- ---------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold (27,600,000 shares) - - Proceeds from shares sold (18,933,400 shares) - 270,609,979 Proceeds from shares sold (3,150,000 and 21,000,000 shares) - - Proceeds from sales of shares as a result of reinvested dividends (479,839 shares) - - Proceeds from sales of shares as a result of reinvested dividends (1,308,189 and 623,425 shares) 21,351,697 9,463,527 Proceeds from sales of shares as a result of reinvested dividends (1,131,683 shares) - - --------------- ---------------- INCREASE IN NET ASSETS FROM SHARE TRANSACTIONS 21,351,697 280,073,506 --------------- ---------------- TOTAL INCREASE IN NET ASSETS 13,959,252 299,671,691 NET ASSETS Beginning of Period 299,771,694 100,003 --------------- ---------------- End of Period $ 313,730,946 $ 299,771,694 =============== ================ RMK STRATEGIC INCOME FUND Year Ended Period Ended March 31, 2005 March 31, 2004(c) -------------- ----------------- INCREASE IN NET ASSETS FROM OPERATIONS: Net investment income $ 43,543,684 $ 414,724 Unrealized appreciation (depreciation), net (13,962,527) (355,911) Net realized gain from investment transactions 8,604,501 3,256 --------------- --------------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 38,185,658 62,069 --------------- --------------- Distributions to shareholders from net investment income (41,437,874) - Distributions to shareholders in excess of net investment income - - Distributions to shareholders from net realized gain on investments - - --------------- --------------- TOTAL DISTRIBUTION TO SHAREHOLDERS (41,437,874) - --------------- --------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold (27,600,000 shares) - - Proceeds from shares sold (18,933,400 shares) - - Proceeds from shares sold (3,150,000 and 21,000,000 shares) 45,123,750 300,385,664 Proceeds from sales of shares as a result of reinvested dividends (479,839 shares) - - Proceeds from sales of shares as a result of reinvested dividends (1,308,189 and 623,425 shares) - - Proceeds from sales of shares as a result of reinvested dividends (1,131,683 shares) 17,362,226 - --------------- --------------- INCREASE IN NET ASSETS FROM SHARE TRANSACTIONS 62,485,976 300,385,664 --------------- --------------- TOTAL INCREASE IN NET ASSETS 59,233,760 300,447,733 NET ASSETS Beginning of Period 300,547,736 100,003 --------------- --------------- End of Period $ 359,781,496 $ 300,547,736 =============== =============== (a) For the period from November 8, 2004 (commencement of investment operations) to March 31, 2005. (b) For the period from June 24, 2003 (commencement of investment operations) to March 31, 2004. (c) For the period from March 18, 2004 (commencement of investment operations) to March 31, 2004. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 59 STATEMENTS OF CASH FLOWS RMK ADVANTAGE RMK HIGH RMK STRATEGIC INCOME FUND INCOME FUND INCOME FUND Period Ended Year Ended Year Ended March 31, 2005(a) March 31, 2005 March 31, 2005 ------------------ --------------- ----------------- INCREASE (DECREASE) IN CASH - CASH FLOWS FROM OPERATING ACTIVITIES NET INCREASE IN NET ASSETS FROM OPERATIONS $ 14,774,021 $ 46,604,894 $ 38,185,658 ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS FROM OPERATIONS TO NET CASH USED IN OPERATING ACTIVITIES Purchase of investment securities (516,640,770) (334,419,364) (513,186,550) Proceeds from disposition of investment securities 68,050,884 260,200,967 256,760,994 Purchase of short-term investment securities, net (26,565,243) 1,321,636 74,425,779 Proceeds from principal payments 15,348,135 28,884,569 27,540,054 Change in unrealized appreciation on securities 3,365,139 11,718,935 13,962,527 Amortization/accretion of premiums/discount on securities (2,186,833) (2,985,204) (6,161,781) Net realized gain on investments (2,351,807) (14,869,629) (8,604,501) Net realized gain on principal payments (2,342,530) (2,501,041) (920,284) Amortization of debt issue costs 3,014 230,772 144,241 Increase (decrease) in dividends and interest receivable (5,551,084) (1,257,640) (3,498,771) Increase (decrease) in receivables for securities sold (2,608,186) 286,704 (3,578,867) Increase (decrease) in payables for securities purchased 17,568,969 (683,257) (21,699,640) Increase in interest payable 32,035 164,360 506,263 Increase in accrued expenses 43,948 7,474 28,524 Increase in due to affiliates 282,838 49,669 270,194 ------------------ --------------- ----------------- Net cash used in operating activities (438,777,470) (7,246,155) (145,826,160) ------------------ --------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in loan payable 50,000,000 40,000,000 125,000,000 Cash paid for debt issue costs (100,000) (108,375) (231,702) Proceeds from shares sold 394,930,648 - 45,123,750 Cash distributions paid (6,141,530) (32,645,642) (24,075,648) ------------------ --------------- ----------------- Net cash provided by financing activities 438,689,118 7,245,983 145,816,400 ------------------ --------------- ----------------- NET DECREASE IN CASH (88,352) (172) (9,760) CASH Beginning balance 100,003 11,062 9,760 ------------------ --------------- ----------------- Ending balance $ 11,651 $ 10,890 $ - ================== =============== ================= Supplemental disclosure of cash flow information: Noncash financing activities not included herein consist of reinvestment of dividends and distributions of $7,198,292, $21,351,697, and $17,362,226 respectively. Total cash paid for interest was $0, $2,537,156, and $1,604,023 respectively. (a) For the period from November 8, 2004 (commencement of investment operations) to March 31, 2005. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 60 NOTE 1: ORGANIZATION RMK Advantage Income Fund, Inc., RMK High Income Fund, Inc. and RMK Strategic Income Fund, Inc. (individually referred to as the "Fund," or collectively as the "Funds") are registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as diversified, closed-end management investment companies. The Funds' primary investment objectives and principal investment strategies are as follows: o RMK ADVANTAGE INCOME FUND seeks a high level of income by investing in below investment grade bonds (commonly referred to as "junk bonds"). The ability of the issuers of the securities held by the Fund to meet their obligations might be affected by economic developments in a specific industry, state, or region. The Fund seeks capital growth as a secondary objective when consistent with the Fund's primary objective. Under normal circumstances, the Fund invests a majority of its total assets in below investment-grade bonds that Morgan Asset Management, Inc. (the "Adviser") believes offer attractive yield and capital appreciation potential. The Fund commenced investment operations on November 8, 2004. o RMK HIGH INCOME FUND seeks a high level of income by investing in below investment grade bonds (commonly referred to as "junk bonds"). The ability of the issuers of the securities held by the Fund to meet their obligations might be affected by economic developments in a specific industry, state, or region. The Fund seeks capital growth as a secondary objective when consistent with the Fund's primary objective. Under normal circumstances, the Fund invests a majority of its total assets in below investment-grade bonds that the Adviser believes offer attractive yield and capital appreciation potential. The Fund commenced investment operations on June 24, 2003. o RMK STRATEGIC INCOME FUND seeks a high level of income by investing in a diversified portfolio of securities that offers attractive yield and capital appreciation potential and consists primarily of debt securities and secondarily of equity securities. The ability of the issuers of the securities held by the Fund to meet their obligations might be affected by economic developments in their specific industry, state, or region. The Fund seeks capital growth as a secondary objective when consistent with the Fund's primary objective. The Adviser continually analyzes the markets for income-producing securities and periodically reallocates the Fund's investments among various fixed-income and equity asset classes and between investment grade and below-investment grade securities to pursue its investment objectives. The Fund commenced investment operations on March 18, 2004. 61 Capitalization for each Fund was provided by the Adviser as follows: RMK ADVANTAGE RMK HIGH RMK STRATEGIC INCOME FUND INCOME FUND INCOME FUND Organization date Sept. 7, 2004 Apr. 16, 2003 Jan. 16, 2004 Initial Capitalization date Oct. 29, 2004 Jun. 11, 2003 Mar. 11, 2004 Amount of initial Capitalization $100,003 $100,003 $100,003 Shares issued at Capitalization 6,981 6,981 6,981 Shares authorized 1,000,000,000 1,000,000,000 1,000,000,000 Public offering date Nov. 8, 2004 Jun. 24, 2003 Mar. 18, 2004 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of their financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America. INVESTMENT VALUATIONS--Investments in securities that trade on national securities exchanges are stated at the last reported sales price on the day of valuation. Securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are stated at the last quoted bid price. The Funds normally obtain market values for their securities from an independent pricing service or from the use of an internal matrix system that derives value based on comparable securities. Debt securities with remaining maturities of 60 days or less are valued at amortized cost, or original cost plus accrued interest, both of which approximate market. When a Fund believes that a market quote does not reflect a security's true value, the Fund may substitute for the market value a fair value estimate made according to methods approved by the Board of Directors. The values assigned to fair value investments are based on available information and do not necessarily represent amounts that might ultimately be realized, since such amounts depend on future developments inherent in long-term investments. Further, because of the inherent uncertainty of valuation, such estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material. OPTION WRITING--When a Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from investments. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Fund has realized a gain or loss. If a put option is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund as writer of an option bears the market risk of an unfavorable change in the price of the security underlying the written option. 62 Transactions in options written during the period ended March 31, 2005 were as follows: RMK ADVANTAGE RMK HIGH RMK STRATEGIC INCOME FUND INCOME FUND INCOME FUND Number of Premiums Number of Premiums Number of Premiums Contracts Received Contracts Received Contracts Received --------- -------- --------- -------- --------- -------- Options outstanding at March 31, 2004 - $ - - $ - - $ - Options written - - 828 59,156 1,117 84,638 Options expired - - (357) (5,774) (420) (6,380) Options exercised - - (471) (53,382) (697) (78,258) Options outstanding at March 31, 2005 - $ - - $ - - $ - REPURCHASE AGREEMENTS--The Funds may engage in repurchase agreement transactions. Under the terms of a typical repurchase agreement, a Fund takes possession of an underlying debt obligation subject to an obligation of the seller to repurchase, and a Fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during a Fund's holding period. The value of the collateral is at all times at least equal to the total amount of the repurchase obligation, including interest. In the event of counterparty default, a Fund has the right to use the collateral to satisfy the terms of the repurchase agreement. However, there could be potential loss to the Fund in the event the Fund is delayed or prevented from exercising its right to dispose of the collateral securities, including the risk of possible decline in the value of the collateral securities during the period while the Fund seeks to assert its rights. The Adviser reviews the creditworthiness of those banks and dealers with which the Fund enters into repurchase agreements to evaluate potential risks. INVESTMENT INCOME, GAINS AND LOSSES, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued daily. Dividend income and distributions to shareholders are recognized on the ex-dividend date. Investment transactions are accounted for on a trade date basis. Realized gains and losses on investment transactions are recorded on an identified cost basis. Debt issue costs are amortized using the straight-line method over the life of the debt and are shown net of accumulated amortization. 63 PREMIUM AND DISCOUNT AMORTIZATION/PAYDOWN GAINS AND LOSSES--All premiums and discounts on debt securities are amortized for financial reporting purposes. Gains and losses realized on principal payments of mortgage- and asset-backed securities (paydown gains and losses) are classified as part of interest income. USE OF ESTIMATES--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 increase (decrease) in net assets from operations during the period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS--All highly liquid investments with maturities of three months or less when purchased are considered to be cash equivalents. NOTE 3: INVESTMENT SECURITIES During the period, the cost of purchases and proceeds from sales of investments, excluding short-term investments, were as follows: RMK ADVANTAGE RMK HIGH RMK STRATEGIC INCOME FUND INCOME FUND INCOME FUND Cost of Investments $ 516,640,770 $ 334,419,364 $ 513,186,550 Proceeds from Sales 83,399,019 289,085,536 284,301,048 NOTE 4: PAYMENTS TO RELATED PARTIES INVESTMENT ADVISER--Morgan Asset Management, Inc., which is a subsidiary of MK Holding, Inc., which is a wholly owned subsidiary of Regions Financial Corporation, serves as the Funds' investment adviser, and receives for its services, an annual management fee of 0.65% based on a percentage of each Fund's average daily total assets minus the sum of accrued liabilities other than debt entered into for purposes of leverage. The Adviser may voluntarily choose to waive any portion of its fee. The Adviser can modify or terminate this voluntary waiver at any time at its sole discretion. ACCOUNTING AND ADMINISTRATIVE SERVICES--Morgan Keegan & Company, Inc. ("Morgan Keegan"), a wholly owned subsidiary of Regions Financial Corporation, provides accounting and administrative services to the Funds, and receives for its services, an annual fee of 0.15% based on a percentage of each Fund's average daily total assets minus the sum of accrued liabilities other than debt entered into for purposes of leverage. Morgan Keegan may voluntarily choose to waive any portion of its fee. Morgan Keegan can modify or terminate this voluntary waiver at any time at its sole discretion. 64 OTHER AFFILIATED PARTIES AND TRANSACTIONS--For the period ended March 31, 2005, Morgan Keegan earned no underwriting discounts, direct commissions, or dealer incentives on the sales and purchases of investment securities held by the Funds. DIRECTORS AND OFFICERS--Directors and officers of the Funds who are "interested persons" as defined in the 1940 Act receive no salary or fees from the Funds. Independent Directors receive an annual retainer of $4,000 and a fee of $1,000 per quarterly meeting with reimbursement for related expenses for each meeting of the Board attended from each Fund. Each chairperson of the Independent Directors Committee and Audit Committee receives annual compensation of $500 from each Fund. An additional $1,500 is paid to the Independent Directors for attending special meetings in person, and an additional $500 is paid for attending special meetings by telephone. No Director is entitled to receive pension or retirement benefits from the Funds. The table below sets forth the compensation paid to the Directors by the Funds during the period covered by this report. AGGREGATE COMPENSATION FROM THE FUNDS DURING THE FISCAL YEAR ENDED MARCH 31, 2005 RMK ADVANTAGE RMK HIGH RMK STRATEGIC NAME INCOME FUND INCOME FUND INCOME FUND INDEPENDENT DIRECTORS William Jefferies Mann $ 5,750(2) $ 9,125 $ 9,125 James Stillman R. McFadden $ 5,500(2) $ 8,375 $ 8,375 W. Randall Pittman $ 5,500(2) $ 8,125 $ 8,125 Mary S. Stone $ 5,500(2) $ 8,125 $ 8,125 Archie W. Willis III $ 5,500(2) $ 8,125 $ 8,125 James D. Witherington, Jr.(1) None $ 2,000 $ 2,000 DIRECTORS WHO ARE "INTERESTED PERSONS" J. Kenneth Alderman None None None None None Allen B. Morgan, Jr. None None None (1) Effective July 1, 2004, James D. Witherington, Jr. resigned from the Board of Directors. (2) The Adviser paid the Directors' fees in the amount of $1,500 per Director for the initial board meeting of RMK Advantage Income Fund, Inc. which was held on November 3, 2004 prior to the Fund commencing investment operations on November 8, 2004. NOTE 5: FEDERAL TAX INFORMATION It is the Funds' policy to comply with the Subchapter M provision of the Internal Revenue Code and to distribute to stockholders each year substantially all of their taxable income and capital gains. Accordingly, no provision for federal income taxes is necessary. 65 Because federal income tax regulations differ from accounting principles generally accepted in the United States of America, income and capital gain distributions determined in accordance with tax regulations differ from net investment income and realized gains recognized for financial reporting purposes. Accordingly, the character of income and capital gain distributions and composition of net assets for tax purposes differ from those reflected in the accompanying financial statements. These differences are primarily due to differing treatments for gains/losses on principal payments of mortgage- and asset-backed securities, REIT adjustments, and distribution reclasses. For the period ended March 31, 2005, permanent differences identified and reclassified among the components of net assets were as follows: RMK ADVANTAGE RMK HIGH RMK STRATEGIC INCOME FUND INCOME FUND INCOME FUND Undistributed Net Investment Income $ (2,342,747) $ (2,515,493) $ (923,099) Accumulated Net Realized Gain (Loss) on Investments 2,342,747 2,515,493 923,099 The tax character of distributions as reported on the Statements of Changes in Net Assets for the period ended March 31, 2005 was as follows: RMK ADVANTAGE RMK HIGH RMK STRATEGIC INCOME FUND INCOME FUND INCOME FUND Ordinary income(1) $ 13,339,822 $ 50,976,881 $ 41,437,874 Long-term capital gains -- 3,020,458 -- -------------- -------------- --------------- $ 13,339,822 $ 53,997,339 $ 41,437,874 ============== ============== =============== (1) For tax purposes, short-term capital gain distributions are considered ordinary income distributions. For the period ended March 31, 2005, the tax basis components of net assets were as follows: RMK ADVANTAGE RMK HIGH RMK STRATEGIC INCOME FUND INCOME FUND INCOME FUND Gross Unrealized appreciation $ 7,036,697 $ 13,993,888 $ 12,578,206 Gross Unrealized (Depreciation) (10,396,612) (16,192,052) (27,071,382) -------------- -------------- --------------- Net Unrealized Appreciation/(Depreciation) (3,359,915) (2,198,164) (14,493,176) Undistributed ordinary income 4,793,897 6,913,182 11,073,907 Undistributed long-term capital gains 217 7,551,866 229,122 Other -- (61,144) -- -------------- -------------- --------------- Distributable earnings 1,434,199 12,205,740 (3,190,147) Paid-in capital 402,228,943 301,525,206 362,971,643 -------------- -------------- --------------- Net Assets $ 403,663,142 $ 313,730,946 $ 359,781,496 ============== ============== =============== 66 Pursuant to federal income tax regulations applicable to regulated investment companies, the Funds have elected to treat net capital losses realized between November 1 and March 31 of each year as occurring on the first day of the following tax year. For the period ended March 31, 2005, there were no realized losses of the Funds reflected in the accompanying financial statements which will not be recognized for federal income tax purposes until next year. At March 31, 2005, the Funds' cost of investments for federal tax purposes was as follows: RMK ADVANTAGE RMK HIGH RMK STRATEGIC INCOME FUND INCOME FUND INCOME FUND Cost of Investments $ 466,682,940 $ 427,190,128 $ 497,011,625 NOTE 6: BANK LOANS The Funds are permitted to borrow up to one-third of the value of their net assets, before such borrowings, for investment purposes. Such borrowing is referred to as leveraging and the Funds have collateralized bank lines of credit for this purpose. As of March 31, 2005, the Funds' borrowing arrangements were as follows: o RMK ADVANTAGE INCOME FUND has a collateralized $160,000,000 bank line of credit, which matures in March of 2006. All of the Fund's investment securities, except for common stocks, are pledged as collateral under the borrowing arrangement and the collateral may be sold. As of March 31, 2005, the outstanding balance on the line of credit was $50,000,000. Borrowings under this agreement bear interest at a variable rate determined by the bank's conduit program, which has historically been slightly below LIBOR. Fees of 0.13% per annum are paid on the total line of credit, regardless of usage, and of 0.23% per annum on the outstanding amount of borrowings. The average balance during the period ended March 31, 2005 was $3,846,154 or $0.37 per share, based on average shares outstanding of 10,432,524. The average interest rate during the period ended March 31, 2005 was 2.753%. The maximum amount of borrowings outstanding at any month-end during the period was $50,000,000. o RMK HIGH INCOME FUND has a collateralized $125,000,000 bank line of credit, which matures in December of 2005. All of the Fund's investment securities are pledged as collateral under the borrowing arrangement and the collateral may be sold. As of March 31, 2005, the outstanding balance on the line of credit was $115,000,000. Borrowings under this agreement bear interest at a fixed rate on the date of borrowing at LIBOR plus 0.75% per annum. Fees of 0.10% per annum are paid on the total line of credit, regardless of usage. The average balance during the period ended March 31, 2005 was $99,230,769 or $4.93 per share, based on average shares outstanding of 20,117,261. The average interest rate during the period ended March 31, 2005 was 2.696%. The maximum amount of borrowings outstanding at any month-end during the period was $115,000,000. 67 o RMK STRATEGIC INCOME FUND has a collateralized $125,000,000 bank line of credit, which matures in June of 2005. All of the Fund's investment securities are pledged as collateral under the borrowing arrangement and the collateral may be sold. As of March 31, 2005, the outstanding balance on the line of credit was $125,000,000. Borrowings under this agreement bear interest at a fixed rate on the date of borrowing at LIBOR plus 0.60% per annum. Fees of 0.10% per annum are paid on the total line of credit, regardless of usage. The average balance during the period ended March 31, 2005 was $73,076,923 or $3.00 per share, based on average shares outstanding of 24,365,234. The average interest rate during the period ended March 31, 2005 was 2.746%. The maximum amount of borrowings outstanding at any month-end during the period was $125,000,000. 68 NET NET ASSET GAINS ON TOTAL DIVIDENDS DISTRIBUTIONS VALUE NET SECURITIES FROM FROM NET FROM BEGINNING INVESTMENT REALIZED AND INVESTMENT INVESTMENT CAPITAL RETURN OF OF PERIOD INCOME UNREALIZED OPERATIONS INCOME GAINS CAPITAL RMK ADVANTAGE INCOME FUND Period ended March 31, 2005(a) $ 14.33(d) $ 0.57 $ (0.03) $ 0.54 $ (0.48) - - RMK HIGH INCOME FUND Year ended March 31, 2005 15.32 2.15 0.24 2.39 (2.07) (0.61) - Period ended March 31, 2004(b) 14.33(d) 1.11 1.09 2.20 (1.01) (0.17) - RMK STRATEGIC INCOME FUND Year ended March 31, 2005 14.31 1.76 (0.16) 1.60 (1.68) - - Period ended March 31, 2004(c) 14.33(d) 0.02 (0.02) - - - - - -------------- (a) For the period from November 8, 2004 (commencement of investment operations) to March 31, 2005. (b) For the period from June 24, 2003 (commencement of investment operations) to March 31, 2004. (c) For the period from March 18, 2004 (commencement of investment operations) to March 31, 2004. (d) Net of sales load of $0.675 on initial shares issued. (e) Total investment return is calculated assuming a purchase of common shares on the opening of the first day and a sale on the closing of the last day of each period reported. Dividends and distributions are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund's dividend reinvestment plan. Total investment return is not annualized for periods of less than one year. Brokerage commissions are not reflected. (f) Ratio annualized for the periods less than one year. 69 OFFERING NET TOTAL COMMON RATIO OF RATIO OF COSTS ASSET RETURN, SHARE TOTAL NET ASSETS EXPENSES NET INCOME CHARGED VALUE NET PRICE, RETURN, END OF TO AVERAGE TO AVERAGE PORTFOLIO TOTAL TO PAID-IN END ASSET END OF MARKET PERIOD NET NET TURNOVER DISTRIBUTIONS CAPITAL OF PERIOD VALUE(e) PERIOD VALUE (e) (000'S) ASSETS(f) ASSETS(f) RATE $ (0.48) $ (0.02) $ 14.37 3.53% $ 15.59 7.30% $ 403,663 0.94% 10.52% 57% (2.68) - 15.03 15.46% 16.50 16.49% 313,731 2.12% 14.08% 73% (1.18) (0.03) 15.32 15.50% 16.67 20.06% 299,772 1.11% 10.15% 76% (1.68) - 14.23 10.87% 15.74 9.68% 359,781 1.70% 12.47% 69% - (0.02) 14.31 (0.14)% 16.00 6.67% 300,547 0.87% 3.87% 0% 70 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of RMK Advantage Income Fund, Inc., RMK High Income Fund, Inc., and RMK Strategic Income Fund, Inc.: In our opinion, the accompanying statements of assets and liabilities, including the portfolios of investments, and the related statements of operations, cash flows, and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of RMK Advantage Income Fund, Inc., RMK High Income Fund, Inc., and RMK Strategic Income Fund, Inc. (hereafter referred to as the "Funds") at March 31, 2005, and the results of each of their operations and the changes in each of their net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Memphis, Tennessee May 23, 2005 71 BOARD OF DIRECTORS AND OFFICERS The following tables set forth information concerning the Directors and Officers of the Funds. All persons named as Directors and Officers also serve in similar capacities for the other registered investment companies in the Regions Morgan Keegan Fund complex overseeing a total of twenty-three portfolios. The Regions Morgan Keegan Fund complex includes Morgan Keegan Select Fund, Inc., Regions Morgan Keegan Select Funds, RMK Advantage Income Fund, Inc., RMK High Income Fund, Inc. and RMK Strategic Income Fund, Inc. An asterisk (*) indicates Directors and/or Officers who are interested persons of the Funds as defined by the Investment Company Act of 1940. The Statement of Additional Information for the Funds includes additional information about the Fund's Directors and is available upon request, without charge, by calling Morgan Keegan at 800-564-2188. Information about the Funds' Directors NAME, AGE, POSITION, LENGTH OF SERVICE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- Allen B. Morgan, Jr.*, Mr. Morgan has served as a Director and Age 62, Director, Vice-Chairman of Regions Financial Corporation Since 2003 / 2004(1) since 2001 and 2003, respectively. He has also served as a Director of Morgan Asset Management, Inc. since 1993. He has been Chairman of Morgan Keegan & Company, Inc. since 1969 and Executive Managing Director of Morgan Keegan & Company, Inc. since 1969. J. Kenneth Alderman*, Mr. Alderman has been President of Regions Age 52, Director, Morgan Keegan Trust Company and Chief Executive Since 2003 / 2004(1) Officer of Morgan Asset Management, Inc. since 2002. He has been Executive Vice President of Regions Financial Corporation since 2000. He served Regions as Senior Vice President and Capital Management Group Director and investment adviser to the Regions Financial Corporation proprietary fund family from 1995 to 2000. He is a Certified Public Accountant and a Chartered Financial Analyst. 72 NAME, AGE, POSITION, LENGTH OF SERVICE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- William Jefferies Mann, Mr. Mann has been Chairman and President of Age 72, Director, Mann Investments, Inc. (real estate Since 2003 / 2004(1) investments/private investing) since 1985. James Stillman R. McFadden, Mr. McFadden has been Chief Manager of McFadden Age 47, Director, Communications, LLC (commercial printing) since Since 2003 / 2004(1) 2002 and President and Director of 1703, Inc. (restaurant management) since 1998. He also has served as a Director for several private companies since 1997. W. Randall Pittman, Mr. Pittman has been Chief Financial Officer of Age 51, Director, Emageon Inc. (healthcare information systems) Since 2003 / 2004(1) since 2002. From 1999 to 2002, he was Chief Financial Officer of BioCryst Pharmaceuticals, Inc. (biotechnology). From 1998 to 1999, he was Chief Financial Officer of ScandiPharm, Inc. (pharmaceuticals). From 1995 to 1998, he served as Senior Vice President - Finance of CaremarkRx (pharmacy benefit management). From 1983 to 1995, he held various positions with AmSouth Bancorporation (bank holding company), including Executive Vice President and Controller. He is a Certified Public Accountant, and was with the accounting firm of Ernst & Young, LLP from 1976 to 1983. Mary S. Stone, Ms. Stone has held the Hugh Culverhouse Endowed Age 54, Director, Chair of Accountancy at the University of Since 2003 / 2004(1) Alabama, Culverhouse School of Accountancy since 1981. She is also a member of Financial Accounting Standards Advisory Council, AICPA, Accounting Standards Executive Committee and AACSB International Accounting Accreditation Committee. 73 BOARD OF DIRECTORS AND OFFICERS NAME, AGE, POSITION, LENGTH OF SERVICE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- Archie W. Willis III, Mr. Willis has been President of Community Age 47, Director, Capital (financial advisory and real estate Since 2003 / 2004(1) development consulting) since 1999 and Vice President of Community Realty Company (real estate brokerage) since 1999. He was a First Vice President of Morgan Keegan & Company, Inc. from 1991 to 1999. He also has served as a Director of Memphis Telecom, LLC since 2001. (1) RMK HIGH INCOME FUND, RMK STRATEGIC INCOME FUND AND RMK ADVANTAGE INCOME FUND COMMENCED INVESTMENT OPERATIONS ON JUNE 24, 2003, MARCH 18, 2004 AND NOVEMBER 8, 2004, RESPECTIVELY. The address of each Director is c/o the Fund, Fifty North Front Street, 21st Floor, Memphis, TN 38103. 74 Information about the Funds' Officers NAME, AGE, POSITION, LENGTH OF SERVICE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- Carter E. Anthony*, From 2002 to present, Mr. Anthony has served as Age 60, President, President and Chief Investment Officer of Since 2003 / 2004(1) Morgan Asset Management, Inc. From 2000 to 2002, he served as Executive Vice President and Director of Capital Management Group, Regions Financial Corporation. From 1989 to 2000, Mr. Anthony was Vice President-Trust Investments, National Bank of Commerce. Thomas R. Gamble*, Mr. Gamble has been an executive at Regions Age 62, Vice-President, Financial Corporation since 1981. He was a Since 2003 / 2004(1) Corporate IRA Manager from 2000 to 2001 and a Senior Vice President and Manager of Employee Benefits at the Birmingham Trust Department of Regions Bank from 1981 to 2000. Joseph C. Weller*, Mr. Weller has been Executive Vice President Age 66, Treasurer, and Chief Financial Officer of Morgan Keegan & Since 2003 / 2004(1) Company, Inc. since 1969, Treasurer and Secretary of Morgan Keegan & Company, Inc. since 1969 and Executive Managing Director of Morgan Keegan & Company, Inc. since 1969. He also has served as a Director of Morgan Asset Management, Inc. since 1993. Charles D. Maxwell*, Mr. Maxwell has been a Managing Director of Age 51, Secretary and Morgan Keegan & Company, Inc. since 1998 and Assistant Treasurer, Assistant Treasurer and Assistant Secretary of Since 2003 / 2004(1) Morgan Keegan & Company, Inc. since 1994. He has been Secretary and Treasurer of Morgan Asset Management, Inc. since 1993. He was Senior Vice President of Morgan Keegan & Company, Inc. from 1995 to 1997. Mr. Maxwell was also with the accounting firm of Ernst & Young, LLP from 1976 to 1986 and served as a Senior Manager from 1984 to 1986. 75 NAME, AGE, POSITION, LENGTH OF SERVICE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- J. Thompson Weller*, Mr. Weller has been a Managing Director and Age 40, Assistant Secretary, Controller of Morgan Keegan & Company, Inc. Since 2003 / 2004(1) since October 2001. He was Senior Vice President and Controller of Morgan Keegan & Company, Inc. from October 1998 to October 2001, Controller and First Vice President from February 1997 to October 1998, Controller and Vice President from 1995 to February 1997 and Assistant Controller from 1992 to 1995. David M. George*, Mr. George has been the Chief Compliance Age 52, Chief Officer of Morgan Asset Management, Inc. and a Compliance Officer, Senior Vice President of Morgan Keegan & Since 2004 Company, Inc. since August 2004. He was an Assistant Director of Compliance and Senior Vice President of Morgan Keegan & Company, Inc. from April 2002 to August 2004. He was a Branch Manager and First Vice President of Morgan Keegan & Company, Inc. from April 2001 to April 2002. He was a Branch Administrative Officer of the Private Client Group and First Vice President of Morgan Keegan & Company, Inc. from July 1999 to April 2001. He was a Compliance Administrator and Vice President of Morgan Keegan & Company, Inc. from August 1995 to July 1999. (1) RMK HIGH INCOME FUND, RMK STRATEGIC INCOME FUND AND RMK ADVANTAGE INCOME FUND COMMENCED INVESTMENT OPERATIONS ON JUNE 24, 2003, MARCH 18, 2004 AND NOVEMBER 8, 2004, RESPECTIVELY. OFFICERS OF THE FUNDS ARE ELECTED AND APPOINTED BY THE BOARD OF DIRECTORS AND HOLD OFFICE UNTIL THEY RESIGN, ARE REMOVED, OR ARE OTHERWISE DISQUALIFIED TO SERVE. JOSEPH C. WELLER IS THE FATHER OF J. THOMPSON WELLER. THE ADDRESS OF MESSRS. MAXWELL, WELLER, WELLER, AND GEORGE IS FIFTY NORTH FRONT STREET, MEMPHIS, TENNESSEE 38103. THE ADDRESS OF MESSRS. ANTHONY AND GAMBLE IS 417 NORTH 20TH STREET, 15TH FLOOR, BIRMINGHAM, ALABAMA 35203. 76 DIVIDEND REINVESTMENT PLAN The Funds offer a dividend reinvestment plan (the "Plan") pursuant to which shareholders, unless they elect otherwise, automatically have dividends and capital gains distributions reinvested in common shares of the fund by EquiServe Trust Company, N.A. and EquiServe, Inc. (together, the "Plan Agent"). Shareholders who elect not to participate in the Plan receive all distributions in cash paid by wire or check mailed directly to the recordholder by the Plan Agent. HOW THE PLAN WORKS After the funds declare a dividend or determine to make a capital gain distribution, the Plan Agent will acquire shares for the participants' accounts, depending upon the circumstances described below, either (i) through receipt of newly-issued shares of the fund or (ii) by open-market purchases as follows: o If, on the payment date, the NAV is equal to or less than the market price per share plus estimated brokerage commissions, the Plan Agent will invest the distribution amount in newly-issued shares on behalf of the participants. The number of newly-issued shares to be credited to each participant's account will be determined by dividing the dollar amount of the distribution by the NAV on the date the shares are issued. However, if the NAV is less than 95% of the market price on the payment date, the dollar amount of the distribution will be divided by 95% of the market price on the payment date. Because common shares may be issued at less than their market price, Plan participants may get a benefit that non-participants do not. o If, on the payment date, the NAV is greater than the market value per share plus estimated brokerage commissions, the Plan Agent will invest the distribution amount in shares acquired on behalf of the participants in open-market purchases, which may be made on the NYSE, in the over-the-counter market or in negotiated transactions and may be on such terms as to price, delivery and otherwise as the Plan Agent shall determine. It is possible that the market price for the shares may increase before the Plan Agent has completed its purchases. Therefore, the average purchase price per share the Plan Agent pays may exceed the market price thereof on the payment date. If the market price per share increases so that it equals or exceeds the NAV per share (minus estimated brokerage commissions), the Plan Agent will cease its purchases. Otherwise, the Plan Agent will use all distributions received in cash to purchase shares in the open market on or shortly after the payment date, but in no event more than thirty (30) days after the payment date, except where temporary curtailment or suspension of purchase is necessary to comply with applicable provisions of the federal securities laws. If the Plan Agent is unable to invest the full amount through open-market purchases during the purchase period, the Plan Agent will request that, with respect to the uninvested portion of such amount, the fund issue new shares at the close of business on the earlier of the last day of the purchase period or the first day during the purchase period on which the NAV per share (minus estimated brokerage commissions) equals or is less than the market price per share. 77 COSTS OF THE PLAN The Plan Agent's fees for the handling of the reinvestment of dividends and other distributions will be paid by the fund. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open-market purchases in connection with the reinvestment of dividends and other distributions. If a participant elects to have the Plan Agent sell part or all of his or her shares and remit the proceeds, the participant will be subject to a $15.00 service fee and a $0.12 per share sold processing fee (which includes applicable brokerage commissions the Plan Agent is required to pay). The participant will not be charged any other fees for this service. However, the fund reserves the right to amend the Plan to include a service fee payable by the participant. TAX IMPLICATIONS The automatic reinvestment of dividends or distributions does not relieve participants of any taxes which may be payable on such dividends or distributions. Participants will receive tax information annually for their personal records and to help them prepare their federal income tax return. For further information as to the tax consequences of participation in the Plan, participants should consult with their own tax advisors. RIGHT TO WITHDRAW Participants may withdraw from the Plan by calling the Plan Agent at 800-426-5523, writing to the Plan Agent at P.O. Box 43010, Providence, Rhode Island 02940-3010 or completing and returning the transaction form attached to each Plan statement. The withdrawal will be effective immediately if the participant's notice is received by the Plan Agent not less than ten days prior to any dividend or distribution record date. Otherwise, the withdrawal will be effective the first trading day after the payment date for the dividend or distribution with respect to any subsequent dividend or distribution. 78 PRIVACY POLICY The Regions family of companies(1) is committed to safeguarding the personal financial information you entrust to us. The information we collect is limited to what we believe is necessary or useful to conduct our business; to administer your records, accounts and funds; to comply with laws and regulations; to help us design or improve products and services; and to understand your financial needs so that we can provide you with quality products and superior service. We collect this information from you on applications or other forms and from the transactions you conduct with us, our affiliates, or others. We do not disclose any nonpublic personal information about you or any of our former customers to anyone, except as permitted by applicable law. For instance, we may share information with Regions companies providing financial and related services, such as our securities broker-dealers, our insurance companies and agencies, our banks and our mortgage companies as well as Regions companies providing non-financial services, such as our operations and servicing companies. In addition, to conduct company business and to offer products or services that may complement your relationship with us, we may also share information we collect about you with companies that perform services for us or on our behalf, such as vendors we hire to prepare account statements or to provide support for one or more of our products and services. These companies act on our behalf, and are contractually obligated to keep the information we provide to them confidential and to use the information only for the purposes authorized. To protect your nonpublic personal information internally, we permit access to it only by authorized employees and maintain physical, electronic, and procedural safeguards to guard your information. If you have any questions about our privacy policy, please call us at 800-366-7426. (1) The Regions family of companies includes Regions Bank, Regions Mortgage, EquiFirst Corp., Morgan Keegan & Company, Inc., Morgan Asset Management, Inc., Regions Morgan Keegan Select Funds, Morgan Keegan Select Fund, Inc., RMK Advantage Income Fund, Inc., RMK High Income Fund, Inc., RMK Strategic Income Fund, Inc., Regions Morgan Keegan Trust, Rebsamen Insurance, and other Regions affiliates. 79 SUPPLEMENTAL INFORMATION BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT At an organizational meeting for RMK Advantage Income Fund, Inc. in November 2004, the Board, and separately the Independent Directors, approved the investment advisory agreement ("Agreement") between the Fund and Morgan Asset Management, Inc. (the "Adviser"). In voting to approve the Agreement, the Board considered the overall fairness of the Agreement and a variety of specific factors, such as: (1) the nature, scope and quality of the services to be provided to the Fund under the Agreement; (2) the investment personnel of the Adviser and its performance in connection with advising similar accounts; (3) the level of the fee and the overall projected expenses of the Fund and how those compared to other similar funds; and (4) the likely costs of the Adviser and its affiliates in performing the services required under the Agreement and related agreements. The Board did not identify any single factor or information as all-important or controlling. In examining the nature, scope and quality of the services to be provided by the Adviser to the Fund, the Board noted the extensive responsibilities that the Adviser would have as investment adviser to the Fund, including the responsibility (1) to make investment decisions on behalf of the Fund; (2) to place all orders for the purchase and sale of investments for the Fund's portfolio with brokers or dealers selected by the Adviser; and (3) to perform certain related administrative functions in connection therewith. The Board examined the background of the Adviser's portfolio manager with responsibility for the Fund and concluded that the Fund would benefit from the quality and experience of that portfolio manager, the Adviser's investment and research tools and the team's expanded resources. With respect to fund performance, the Board considered, in the absence of the Fund having any history of its own, the Adviser's historic performance in connection with similar accounts and funds managed by the Adviser relative to peer groups and appropriate indices/benchmarks. The Board also considered the terms and fee structure of the Agreement. The Board reviewed information about the advisory fee rate and overall projected expense ratio of the Fund and comparable fee rates and expense ratios of a peer group of other closed-end funds. The Board also compared the Fund's advisory fee to the advisory fees charged by the Adviser to its other accounts. In that connection, the Board considered the differences in the level of services provided and the differences in responsibility of the Adviser for the Fund and the other accounts. 80 The Board also considered that, because the Fund is a closed-end investment company, the maximum number of shares of which were capped, it was unlikely to grow in the near term to a size where material economies of scale by the Adviser would be realized. With regard to profitability, the Board considered all compensation flowing to the Adviser and its affiliates, directly or indirectly. The Board also considered whether the levels of compensation and expected profitability under the Agreement and other service agreements were reasonable and justified in light of the quality of all services proposed to be rendered to the Fund by the Adviser and its affiliates. In this connection, the Board evaluated the Adviser's projected costs in serving as investment adviser to the Fund, including the costs associated with the personnel, systems and equipment necessary to perform its functions. The Board especially noted the risk of the Fund not achieving significant asset levels in its public offering. It also noted the costs undertaken by the Adviser at that stage of the Fund's offering that might never be recovered. Based on these considerations and the overall high quality of the personnel, operations, financial condition, investment management capabilities, methodologies and performance of the Adviser, the Board approved the Agreement as in the best interests of the Fund. PROXY VOTING RESULTS FROM ANNUAL MEETING OF STOCKHOLDERS The Annual Meeting of Stockholders of RMK High Income Fund, Inc. (NYSE: RMH) was held on Friday, July 16, 2004. The matters considered at the meeting together with the actual vote tabulations relating to such matters are as follows: Proposal 1: To elect three Class I Directors to serve until the next annual meeting of stockholders in 2007, or until their successors are elected and qualified. NOMINEES: FOR WITHHELD - ------------------------------------------- ------------------- -------------- J. Kenneth Alderman 18,935,688.1673 113,051.0000 William Jefferies Mann 18,923,126.1673 125,613.0000 James Stillman R. McFadden 18,929,801.1673 118,938.0000 81 PROXY VOTING POLICIES AND PROCEDURES AND RECORD OF VOTING ACTIVITY The Funds vote proxies related to their portfolios' securities according to a set of policies and procedures approved by the Funds' board. A description of the policies and procedures may be obtained, without charge, by calling 800-564-2188 or by visiting the SEC's website at www.sec.gov. You may also view the proxy voting activity for each Fund during the most recent twelve month period ended June 30 by visiting the Funds' website at www.rmkfunds.com. QUARTERLY REPORTS ON PORTFOLIO HOLDINGS The Funds file a Form N-Q with the SEC no more than sixty days after the close of the Fund's first and third quarters of their fiscal year. Form N-Q includes a schedule of each Fund's portfolio holdings as of the end of those fiscal quarters. The Funds' Form N-Q filings may be found on the SEC's website at www.sec.gov. The Funds' N-Q filings may also be reviewed and copies at the SEC's Public Reference Room in Washington, D.C. Call 800-SEC-0330 for information on the operation of the Public Reference Room. FEDERAL TAX INFORMATION (UNAUDITED) Of the ordinary income distributions paid during the calendar year ended December 31, 2004, 0.9%, 0% and 0% was attributable to Federal tax obligations for RMK Advantage Income Fund, RMK High Income Fund and RMK Strategic Income Fund, respectively. In calculating the percentages, Fund expenses were allocated on a pro rata basis. The law varies in each state as to whether and what percentage of dividend income attributable to Federal obligations is exempt from state income tax. Please consult your tax adviser to determine if any portion of the dividends you received is exempt from state income tax. 82 INVESTMENT ADVISER ADMINISTRATOR Morgan Asset Management, Inc. Morgan Keegan & Company, Inc. 417 North 20th Street, 15th Floor Morgan Keegan Tower Birmingham, AL 35203 50 North Front Street Memphis, TN 38103 CUSTODIAN LEGAL COUNSEL State Street Bank & Trust Company Kirkpatrick & Lockhart Nicholson Graham 108 Myrtle Street LLP Quincy, MA 02171 1800 Massachusetts Avenue, N.W. Washington, D.C. 20036 TRANSFER AGENT EquiServe INDEPENDENT REGISTERED PUBLIC ACCOUNTING P. O. Box 43010 FIRM Providence, RI 02940-3011 PricewaterhouseCoopers LLP Morgan Keegan Tower 50 North Front Street, Suite 1000 Memphis, TN 38103 This report is for shareholder information. This is not a prospectus intended for use in the purchase or sale of Fund shares. Statements and other information contained in this report are as dated and are subject to change. 83 REGIONS MORGAN KEEGAN FUND COMPLEX The Regions Morgan Keegan Fund complex offers mutual funds with a broad variety of investment objectives to meet the financial needs of all types of investors. With more than $5.9 billion in assets, the Fund complex includes six equity funds, two balanced funds, six bond funds, two tax-exempt bond funds, four money market funds and three closed end funds. You may see an overview of each Fund by visiting the Funds' website at www.rmkfunds.com. You may also download each Fund's most recent marketing flyer, prospectus, and annual and semi-annual reports to shareholders. REGIONS MORGAN KEEGAN SELECT FAMILY OF FUNDS o Equity Funds Regions Morgan Keegan Select Mid Cap Growth Fund Regions Morgan Keegan Select Growth Fund Regions Morgan Keegan Select LEADER Growth Equity Fund Regions Morgan Keegan Select LEADER Growth & Income Fund Regions Morgan Keegan Select Mid Cap Value Fund Regions Morgan Keegan Select Value Fund o Balanced Funds Regions Morgan Keegan Select Balanced Fund Regions Morgan Keegan Select LEADER Balance Fund o Bond Funds Regions Morgan Keegan Select High Income Fund* Regions Morgan Keegan Select Intermediate Bond Fund* Regions Morgan Keegan Select Fixed Income Fund Regions Morgan Keegan Select LEADER Intermediate Bond Fund Regions Morgan Keegan Select Limited Maturity Government Fund Regions Morgan Keegan Select LEADER Short Term Bond Fund* o Tax-Exempt Bond Funds Regions Morgan Keegan Select Intermediate Tax Exempt Bond Fund Regions Morgan Keegan Select LEADER Tax-Exempt Bond Fund o Money Market Funds Regions Morgan Keegan Select Treasury Money Market Fund Regions Morgan Keegan Select Government Money Market Fund Regions Morgan Keegan Select LEADER Money Market Fund Regions Morgan Keegan Select LEADER Tax-Exempt Money Market Fund REGIONS MORGAN KEEGAN CLOSED-END FUNDS o RMK Advantage Income Fund, Inc. (NYSE: RMA)* o RMK High Income Fund, Inc. (NYSE: RMH)* o RMK Strategic Income Fund, Inc. (NYSE: RSF)* * Bond funds managed by James C. Kelsoe, Jr., CFA 84 ITEM 2. CODE OF ETHICS. RMK Strategic Income Fund, Inc. (the "Fund") has adopted a code of ethics that applies to the Fund's principal executive officer and principal financial officer. The Fund has not made any substantive amendments to its code of ethics during the covered period. The Fund also has not granted any waivers from any provisions of the code of ethics during the covered period. A copy of the Fund's code of ethics is filed as an exhibit to this Form N-CSR. The Fund undertakes to provide to any person without charge, upon request, a copy of its code of ethics by mail when he or she calls the Fund at 1-800-366-7426. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. The Fund's Board of Directors has determined that James Stillman R. McFadden, W. Randall Pittman and Mary S. Stone are audit committee financial experts, as defined in Item 3 of Form N-CSR, serving on its audit committee. Messrs. McFadden and Pittman and Ms. Stone are independent for purposes of Item 3 of Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Audit and Non-Audit Fees - ------------------------ The SEC's auditor independence rules require the Audit Committee of the Fund to pre-approve (a) all audit and permissible non-audit services provided by the Fund's independent registered public accountants directly to the Fund and (b) those permissible non-audit services provided by the Fund's independent registered public accountants to the Fund's investment adviser and any entity controlling, controlled by or under common control with the Fund's investment adviser that provides ongoing services to the Fund (the "Affiliated Service Providers"), if the services relate directly to the operations and financial reporting of the Fund. The first table below sets forth for the Fund, for its fiscal year ended March 31, 2005 and the fiscal period ended March 31, 2004, the fees billed by its independent registered public accountants for all audit and non-audit services provided directly to the Fund. The Fund's independent registered public accountants did not provide any non-audit services to the Fund's Affiliated Service Providers. The Fund commenced operations on March 18, 2004. Fees for audit and non-audit services provided directly to the Fund: Audit Fees Audit-Related Fees($) Tax Fees All Other Fees ---------- --------------------- -------- -------------- 2005 2005 2005 2005 ---- ---- ---- ---- $33,000 None $2,000 None Audit Fees Audit-Related Fees($) Tax Fees All Other Fees ---------- --------------------- -------- -------------- 2004 2004 2004 2004 ---- ---- ---- ---- $42,600 None None None Fees for non-audit services provided to the Fund's Affiliated Service Providers for which pre-approval by the Audit Committee was required: Audit Fees Audit-Related Fees($) Tax Fees All Other Fees ---------- --------------------- -------- -------------- 2005 2005 2005 2005 ---- ---- ---- ---- None None None None Audit Fees Audit-Related Fees($) Tax Fees All Other Fees ---------- --------------------- -------- -------------- 2004 2004 2004 2004 ---- ---- ---- ---- None None None None Aggregate non-audit fees for services provided to the Fund and its Affiliated Service Providers, regardless of whether pre-approval was required. Aggregate Non-Audit Fees($) --------------------------- 2005 ---- None Aggregate Non-Audit Fees($) --------------------------- 2004 ---- None Pre-Approval of Audit and Non-Audit Services - -------------------------------------------- Audit, audit-related and tax compliance services provided to the Fund on an annual basis require pre-approval by the Fund's Audit Committee. The Audit Committee pre-approves these services on a case-by-case basis. As noted above, the Audit Committee also must approve other non-audit services provided to the Fund and those non-audit services provided to the Fund's Affiliated Service Providers that relate directly to the operations and financial reporting of the Fund. Any individual project that does not exceed $15,000 may be pre-approved by the chair of the Audit Committee. Any proposed services exceeding that cost level requires specific pre-approval by the Audit Committee. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. The Fund has a separately-designated standing audit committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 consisting of William Jefferies Mann, James Stillman R. McFadden, W. Randall Pittman, Mary S. Stone and Archie W. Willis III. ITEM 6. SCHEDULE OF INVESTMENTS. This schedule is included as part of the Report to Shareholders filed under Item 1 of this form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. The Fund's Board of Directors has delegated to the Fund's investment adviser, Morgan Asset Management, Inc. (the "Adviser), the responsibility to vote proxies related to the securities held in the fund's portfolios. Under this authority, the Adviser is required to vote proxies related to portfolio securities in the best interests of each fund and its stockholders. The Board permits the Adviser to contract with a third party to obtain proxy voting and related services, including research of current issues. The Adviser has implemented written Proxy Voting Policies and Procedures ("Proxy Voting Policy") that are designed to reasonably ensure that the Adviser votes proxies prudently and in the best interest of its clients for whom the Adviser has voting authority, including the fund. The Proxy Voting Policy also describes how the Adviser addresses any conflicts that may arise between its interests and those of its clients with respect to proxy voting. The Adviser's Proxy Committee is responsible for developing, authorizing, implementing and updating the Proxy Voting Policy, overseeing the proxy voting process and engaging and overseeing any independent third-party vendors as voting delegate to review, monitor and/or vote proxies. In order to apply the Proxy Voting Policy noted above in a timely and consistent manner, the Adviser utilizes Institutional Shareholder Services Inc. ("ISS") to vote proxies in accordance with the Adviser's voting guidelines. The Adviser's guidelines adopt the voting recommendations of ISS. The Adviser retains final authority and fiduciary responsibility for proxy voting. The Adviser believes that this process is reasonably designed to addressmaterial conflicts of interest that may arise between the Adviser and a client as to how proxies are voted. In the event that an investment professional at the Adviser believes that it is in the best interests of a client or clients to vote proxies in a manner inconsistent with the Adviser's proxy voting guidelines or in a manner inconsistent with ISS recommendations, the Proxy Committee will review information submitted by the investment professional to determine that there is no material conflict of interest between the Adviser and the client with respect to the voting of the proxy in that manner. If the Proxy Committee determines that the voting of a proxy as recommended by the investment professional presents a material conflict of interest between the Adviser and the client or clients with respect to the voting of the proxy, the Proxy Committee shall: (i) take no further action, in which case ISS shall vote such proxy in accordance with the proxy voting guidelines or as ISS recommends; (ii) disclose such conflict to the client or clients and obtain written direction from the client as to how to vote the proxy; (iii) suggest that the client or clients engage another party to determine how to vote the proxy; or (iv) engage another independent third party to determine how to vote the proxy. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES Form N-CSR disclosure requirement not yet effective with respect to the Fund. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. There were no reportable purchases for the period covered by this report ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which stockholders may recommend nominees to the Fund's Board of Directors since the Fund last provided disclosure in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A or this Item 10. ITEM 11. CONTROLS AND PROCEDURES. (a)Based on an evaluation of the disclosure controls and procedures (as defined in rule 30a-2(c) under the Act), the President and Treasurer of the Fund have concluded that such disclosure controls and procedures are effectively designed to ensure that information required to be disclosed by the Fund is accumulated and communicated to the Fund's management to allow timely decisions regarding required disclosure. (b)There has been no change in the Fund's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by this report that has that has materially affected, or is reasonably likely to materially affect, the Fund's internal control over financial reporting. ITEM 12. EXHIBITS. (a) Code of Ethics pursuant to Item 2 of Form N-CSR is filed and attached hereto. (b)The certifications required by Rule 30a-2 under the Investment Company Act of 1940, as amended, and Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are filed herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Fund has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Fund) RMK Strategic Income Fund, Inc. ----------------------------------------------- By (Signature and Title) /s/ Carter E. Anthony --------------------- Carter E. Anthony, President Date: May 27, 2005 --------------- 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 Fund and in the capacities and on the dates indicated. By (Signature and Title) /s/ Carter E. Anthony --------------------- Carter E. Anthony, President and Principal Executive Officer Date: May 27, 2005 -------------- By (Signature and Title) /s/ Joseph C. Weller -------------------- Joseph C. Weller, Treasurer and Principal Financial Officer Date: May 27, 2005 --------------