UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act File Number 811-4260
RIVERSOURCE GOVERNMENT INCOME SERIES, INC.
(Exact name of registrant as specified in charter)
50606 Ameriprise Financial Center, Minneapolis, Minnesota 55474
(Address of principal executive offices) (Zip code)
Scott R. Plummer - 5228 Ameriprise Financial Center, Minneapolis, MN 55474
(Name and address of agent for service)
Registrant's telephone number, including area code: (612) 671-1947
Date of fiscal year end: May 31
Date of reporting period: May 31, 2010
ITEM 1. REPORTS TO STOCKHOLDERS.
ANNUAL REPORT
Annual Report
and Prospectus
(COLUMBIA MANAGEMENT LOGO)
RIVERSOURCE
SHORT DURATION U.S. GOVERNMENT FUND
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ANNUAL REPORT FOR THE PERIOD ENDED
MAY 31, 2010
(Prospectus also enclosed)
RIVERSOURCE SHORT DURATION U. S. GOVERNMENT FUND SEEKS TO PROVIDE SHAREHOLDERS
WITH A HIGH LEVEL OF CURRENT INCOME AND SAFETY OF PRINCIPAL CONSISTENT WITH
INVESTMENT IN U.S. GOVERNMENT AND GOVERNMENT AGENCY SECURITIES.
This annual report includes a prospectus that describes in detail the Fund's
objective, investment strategy, risks, sales charges, fees and other matters of
interest. Please read the prospectus carefully before you invest or send money.
NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE
TABLE OF CONTENTS --------------------------------------------------------------
<Table>
Your Fund at a Glance.............. 3
Manager Commentary................. 6
The Fund's Long-term Performance... 14
Fund Expenses Example.............. 16
Portfolio of Investments........... 19
Statement of Assets and
Liabilities...................... 32
Statement of Operations............ 34
Statements of Changes in Net
Assets........................... 35
Financial Highlights............... 37
Notes to Financial Statements...... 42
Report of Independent Registered
Public Accounting Firm........... 61
Federal Income Tax Information..... 63
Board Members and Officers......... 64
Approval of Investment Management
Services Agreement............... 70
Proxy Voting....................... 73
</Table>
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2 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
YOUR FUND AT A GLANCE ----------------------------------------------------------
FUND SUMMARY
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> RiverSource Short Duration U.S. Government Fund (the Fund) Class A shares rose
5.11% (excluding sales charge) for the 12 months ended May 31, 2010.
> The Fund outperformed its benchmark, the Barclays Capital U.S. 1-3 Year
Government Index, which gained 2.21%.
> The Fund also outperformed the Lipper Short U.S. Government Funds Index,
representing the Fund's peer group, which advanced 3.41% during the same time
frame.
ANNUALIZED TOTAL RETURNS (for period ended May 31, 2010)
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<Table>
<Caption>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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RiverSource Short Duration U.S.
Government Fund Class A
(excluding sales charge) +5.11% +3.23% +3.15% +3.80%
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Barclays Capital U.S. 1-3 Year
Government Index (unmanaged) +2.21% +4.92% +4.31% +4.59%
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Lipper Short U.S. Government
Funds Index +3.41% +4.20% +3.80% +4.05%
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</Table>
(See "The Fund's Long-term Performance" for Index descriptions)
The performance information shown represents past performance and is not a
guarantee of future results. The investment return and principal value of your
investment will fluctuate so that your shares, when redeemed, may be worth more
or less than their original cost. Current performance may be lower or higher
than the performance information shown. You may obtain performance information
current to the most recent month-end by contacting your financial intermediary,
visiting riversource.com/funds or calling 800.221.2450.
The 3.00% sales charge applicable to Class A shares of the Fund is not reflected
in the table above. If reflected, returns would be lower than those shown. The
performance of other classes may vary from that shown because of differences in
fees and expenses. The Fund's returns reflect the effect of fee waivers/expense
reimbursements, if any. Without such waivers/reimbursements, the Fund's returns
would be lower. See the Average Annual Total Returns table for performance of
other share classes of the Fund.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes. It is not possible to invest directly in an index.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 3
YOUR FUND AT A GLANCE (continued) ----------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
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<Table>
<Caption>
AT MAY 31, 2010
SINCE
Without sales charge 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION*
Class A (inception
8/19/95) +5.11% +3.23% +3.15% +3.80% N/A
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Class B (inception
3/20/95) +4.31% +2.45% +2.38% +3.02% N/A
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Class C (inception
6/26/00) +4.31% +2.45% +2.38% N/A +2.92%
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Class I (inception
3/4/04) +5.28% +3.62% +3.57% N/A +3.05%
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Class R2 (inception
8/3/09) N/A N/A N/A N/A +3.47%**
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Class R4 (inception
3/20/95) +4.96% +3.41% +3.34% +3.98% N/A
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Class W (inception
12/1/06) +4.81% +3.16% N/A N/A +3.12%
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With sales charge
Class A (inception
8/19/95) +1.96% +2.19% +2.53% +3.48% N/A
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Class B (inception
3/20/95) -0.69% +1.48% +2.02% +3.02% N/A
- --------------------------------------------------------------------------
Class C (inception
6/26/00) +3.31% +2.45% +2.38% N/A +2.92%
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</Table>
Class A share performance reflects the maximum initial sales charge of 3.00%.
Class B share performance reflects a contingent deferred sales charge (CDSC)
applied as follows: first year 5%; second year 4%; third and fourth years 3%;
fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be
subject to a 1% CDSC if shares are sold within one year after purchase. Sales
charges do not apply to Class I, Class R2, Class R4, and Class W shares. Class
I, Class R2 and Class R4 are available to qualifying institutional investors
only. Class W shares are offered through qualifying discretionary managed
accounts.
*For classes with less than 10 years performance.
**Not annualized.
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4 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
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PORTFOLIO STATISTICS
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<Table>
Weighted average life(1) 2.3 years
- --------------------------------------
Effective duration(2) 1.3 years
- --------------------------------------
</Table>
(1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into
consideration the possibility that the issuer may call the bond before its
maturity date.
(2) EFFECTIVE DURATION measures the sensitivity of a security's price to
parallel shifts in the yield curve (the graphical depiction of the levels of
interest rates from two years out to 30 years). Positive duration means that
as rates rise, the price decreases, and negative duration means that as
rates rise, the price increases.
Shares of RiverSource Short Duration U.S. Government Fund are not insured or
guaranteed by the U.S. government.
There are risks associated with an investment in a bond fund, including the
impact of interest rates and credit. These and other risk considerations are
discussed in the Fund's prospectus. In general, bond prices rise when interest
rates fall and vice versa. This effect is usually more pronounced for longer-
term securities.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 5
MANAGER COMMENTARY -------------------------------------------------------------
Tom Heuer and Colin J. Lundgren replaced Todd White and joined Jason J. Callan
as Portfolio Managers of RiverSource Short Duration U.S. Government Fund
effective May 1, 2010.
Dear Shareholders,
RiverSource Short Duration U.S. Government Fund (the Fund) Class A shares rose
5.11% (excluding sales charge) for the 12 months ended May 31, 2010. The Fund
outperformed its benchmark, the Barclays Capital U.S. 1-3 Year Government Index
(Barclays Index), which gained 2.21%. The Fund also outperformed the Lipper
Short U.S. Government Funds Index, representing the Fund's peer group, which
advanced 3.41% during the same time frame.
SIGNIFICANT PERFORMANCE FACTORS
The broad fixed income market was dominated during the annual period ended May
31, 2010 first by the boost provided by various government purchase programs and
subsequently by the removal of that support and the gradual shift toward
normalized, self-supporting credit markets. The U.S. economy started to show
signs of stabilizing after experiencing the deepest recession since the Great
Depression. The first positive Gross Domestic Product (GDP) print occurred in
the third quarter of 2009 after four consecutive quarters of negative growth.
GDP numbers continued to show signs of improvement throughout the balance of the
annual period
PORTFOLIO BREAKDOWN(1) (at May 31, 2010)
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<Table>
<Caption>
Asset-Backed 7.8%
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Commercial Mortgage-Backed 1.5%
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FDIC -- Insured Debt(2) 9.0%
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Government Guaranteed(3) 0.2%
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Residential Mortgage-Backed(4) 45.5%
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U.S. Government Obligations & Agencies 25.7%
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Other(5) 10.3%
- ------------------------------------------------
</Table>
(1) Percentages indicated are based upon total investments (excluding
Investments of Cash Collateral Received for Securities on Loan). The Fund's
composition is subject to change.
(2) Debt guaranteed under the FDIC's Temporary Liquidity Guarantee Program
(TLGP).
(3) Debt guaranteed by the HM Treasury, United Kingdom.
(4) Of the 45.5%, 9.1% is due to forward commitment residential mortgage-backed
securities activity. Short-term securities are held as collateral for these
commitments.
(5) Cash & Cash Equivalents.
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6 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
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as business inventories began to stabilize and signs of job growth emerged.
During the first nine months of the annual period, U.S. Treasury rates rose on
long-term maturities while short-term rates, as measured by the Fed Funds Rate,
were anchored near zero. As a result, the yield curve steepened dramatically,
with the difference between 2-year Treasuries and 10-year Treasuries reaching as
much as 2.90%. This yield curve steepening led to relative outperformance in the
non-Treasury sectors of the market given the inverse relationship between yields
and bond prices.
Outside the Treasury market, fixed income sectors were supported by a
significant amount of government sponsorship put in place during the earlier
months of 2009. The mortgage market in particular was a significant benefactor
of this support with the Federal Reserve Board (the Fed) implementing a $1.25
trillion purchase program of agency-issued mortgage-backed securities. The
Treasury Department also had a purchase program for $200 billion of agency-
issued mortgage-backed securities. Primarily as a result of these programs,
spreads (yield differential between agency-issued mortgage-backed securities and
U.S. Treasuries) tightened by approximately 30 basis points (0.30%) during the
first nine
QUALITY BREAKDOWN OF FIXED INCOME SECURITIES(1)
(at May 31, 2010)
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<Table>
<Caption>
AAA bonds 90.1%
- ------------------------------------------------
AA bonds 2.5%
- ------------------------------------------------
A bonds 0.8%
- ------------------------------------------------
BBB bonds 2.8%
- ------------------------------------------------
Non-investment grade bonds 0.5%
- ------------------------------------------------
Non-rated bonds 3.3%
- ------------------------------------------------
</Table>
(1) Percentages indicated are based upon total fixed income securities
(excluding Investments of Cash Collateral Received for Securities on Loan
and Cash & Cash Equivalents).
Ratings apply to the underlying holdings of the Fund and not the Fund itself.
Whenever possible, the Standard and Poor's rating is used to determine the
credit quality of a security. Standard and Poor's rates the creditworthiness of
corporate bonds, with 15 categories, ranging from AAA (highest) to D (lowest).
Ratings from AA to CCC may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within the major rating categories. If
Standard and Poor's doesn't rate a security, then Moody's rating is used.
Columbia Management Investment Advisers, LLC (formerly RiverSource Investments,
LLC) (the Investment Manager) rates a security using an internal rating system
when Moody's doesn't provide a rating.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 7
MANAGER COMMENTARY (continued) -------------------------------------------------
months of the annual period. On the last day of March 2010, the Fed completed
its purchase program and allowed it to expire. From March 31, 2010 through the
end of the annual period on May 31, 2010, agency-issued mortgage-backed security
spreads widened by approximately 20 basis points (0.20%). Such widening was
driven largely by renewed global fiscal and liquidity concerns, which, in turn,
led to significant strength in U.S. Treasuries.
Despite this widening, agency mortgages outperformed U.S. Treasuries for the
annual period. Performance, however, was highly differentiated depending on the
coupon, or the interest rate, the holder of a mortgage-backed security was paid.
Higher coupon mortgage-backed securities produced the greatest returns during
the annual period, as these borrowers continued to prepay at a slow rate given
their lower credit characteristics and ongoing tight credit conditions. U.S.
government sponsored enterprises Federal National Mortgage Association (Fannie
Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) tightened their
underwriting standards during the annual period, as they continued to lose money
due to the unprecedented level of mortgage delinquencies. Tighter underwriting
slowed repayments due to lack of refinancing options for many borrowers. This in
turn drove pricing on those mortgage-backed securities higher as investors were
able to collect higher coupon payments for a longer period of time.
In the last weeks of the annual period, concerns regarding the sovereign
deficit-to-GDP ratios of what are known as the PIIGS (Portugal, Italy, Ireland,
Greece and Spain) dominated. As a result, there were significant investment
flows out of the euro and into the U.S. dollar. With the short-term end of the
yield curve anchored by the federal funds rate, this surge into the U.S.
currency led to a significant flattening of the Treasury yield curve overall,
whereby the differential between yields on long-term maturities and short-term
maturities narrowed. Treasury rates rallied across the yield curve, but
decreased more significantly on longer-term maturities. In turn, non-Treasury
sectors, including mortgages, weakened in May 2010.
The Fund's strong relative performance can be attributed primarily to its
positioning in agency-issued mortgage-backed securities and smaller allocations
to non-agency mortgage-backed securities and commercial
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8 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
mortgage-backed securities (CMBS). None of these three segments of the fixed
income market are components of the Barclays Index, and thus the Fund's
allocations to the solidly performing out-of-Index areas helped boost its
relative results.
Within agency-issued mortgage-backed securities, we had a significant allocation
through most of the annual period to higher coupon 30-year-pass through
securities and steered away from lower coupon pass-throughs. It had become
evident to us that borrowers with higher coupons were rather inefficient at
exercising their refinancing option as credit continued to tighten within Fannie
Mae and Freddie Mac, and we sought to take advantage of the substantially higher
yields the higher coupon securities provided. (Pass-through mortgages consist of
a pool of residential mortgage loans, where homeowners' monthly payments of
principal, interest and prepayments pass from the original bank through a
government agency or investment bank to investors.) Based on various technicals
within the market during the annual period, we decided to focus the Fund's
exposure in the mortgage-backed security to-be-announced (TBA) market. We also
added to the Fund's position in seasoned agency bonds with higher coupons that
provided superior convexity. (Convexity is a volatility measure for bonds used
in conjunction with modified duration in order to measure how the bond's price
will change as interest rates change. It is equal to the negative of the second
derivative of the bond's price relative to its yield, divided by its price. For
example, since a non-callable bond's duration usually increases as interest
rates decrease, its convexity is positive.)
The Fund's strong relative performance can be attributed primarily to its
positioning in agency-issued mortgage-backed securities and smaller
allocations to non-agency mortgage-backed securities and commercial mortgage-
backed securities (CMBS).
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 9
MANAGER COMMENTARY (continued) -------------------------------------------------
The Fund's allocations to and positioning within the non-agency mortgage-backed
securities and CMBS sectors were also strong contributors to results. One of the
primary drivers of strong price performance within the non-agency mortgage-
backed securities and CMBS sectors was the implementation of the PPIP (Public-
Private Investment Program) by the Treasury Department. In aggregate, PPIP
produced nearly $40 billion of demand for non-agency mortgage-backed securities
and CMBS, which in turn drove prices on these assets meaningfully higher.
Another major driver of demand was the creation of re-REMICS, which allowed
investment banks to restructure cash flows off poorly performing bonds to create
newer, highly enhanced bonds that were rated AAA. Insurance companies in
particular generated strong demand for these newly-created bonds. All told, re-
REMICS took over $20 billion of non-agency mortgage-backed securities and CMBS
out of the market during the annual period.
During the annual period, we repositioned the Fund's non-agency and CMBS
exposure into highly seasoned, shorter-maturity securities that provided
attractive relative returns. Our investment thesis was that loans originated in
2004 and 2005 were underwritten to better quality standards than those generated
in 2006 and 2007 and that the level of fundamental differentiation would prove
to be significantly different. Indeed, as the annual period progressed, there
was a meaningful delineation between the fundamental performances of those
vintages, as the distinguishing loan characteristics became apparent. Such
differentiation could be seen most readily in implied loan-to-value ratios,
documentation levels, and the amortizing loans instead of interest-only loans,
which became much more prevalent starting in 2006.
The only detractor from the Fund's results during the annual period was the
combined effect of its duration and yield curve positioning. The Fund was
positioned slightly shorter than the Barclays Index throughout the annual
period, which detracted modestly as interest rates declined. As the economy
continued to marginally improve, we were concerned the Fed might take a more
aggressive stance and begin to raise the targeted federal funds rate, but some
of those concerns dissipated as the European fiscal issues moved to the
forefront. Duration is a measure of the Fund's sensitivity to changes in
interest rates.
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10 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
CHANGES TO THE FUND'S PORTFOLIO
As spreads tightened during the first nine months of the annual period, we
gradually reduced the Fund's exposure to agency-issued mortgage-backed
securities overall. Elsewhere, as mentioned, we repositioned the Fund's
allocations to both non-agency mortgage-backed securities and CMBS into shorter-
maturity, seasoned collateral where we believed the underwriting to be of
greater quality than the loans produced in 2006 and 2007. The Fund's portfolio
turnover rate for the 12-month period was 329%.*
* A significant portion of the turnover was the result of rolling-maturity
mortgage securities, processing of prepayments and opportunistic changes we
made at the margin in response to valuations or market developments.
OUR FUTURE STRATEGY
In general, we expect our strategy ahead for the Fund to remain fairly
consistent with the views and positioning held at the end of the annual period.
The broader U.S. economy seems to have stabilized, with three consecutive
quarters of positive growth. However, much of that growth in GDP was a
reflection of inventory stabilization and not improvement in final sales.
Limited expansion of private payrolls and persistent slack in the labor force
should continue to suppress inflation fears over the near term. In turn, we
believe the Fed will likely remain on hold for the foreseeable future.
We will continue to closely monitor the housing market. Housing prices in the
U.S., as measured by the S&P/Case-Schiller Index, had stabilized during the
period, primarily driven by the multiple home buyer tax credit and the
simultaneous invoking of foreclosure moratoriums in the most troubled areas of
the nation. Meanwhile, borrowers continued to default on their mortgages at
historically elevated levels, thereby building a shadow inventory of eventual
foreclosures. This shadow inventory combined with the existing housing supply at
the end of May totaled nearly 20 months' supply of existing homes. New and
existing home sales had shown some improvement, but this largely reflected an
advance in demand among participants seeking to take advantage of the home buyer
tax credit, which officially ended April 30. Clearly, we will be watching to see
how new and existing home sales respond to the expiration of the government tax
credits. At the end of the annual period, our major concerns were the fact that
housing demand did not substantially pick up
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 11
MANAGER COMMENTARY (continued) -------------------------------------------------
based on low mortgage rates alone and the size of the shadow inventory that
continues to weigh on the housing market.
Given this backdrop, we intend to stay conservatively positioned in the Fund on
a relative basis. We intend to maintain the Fund's duration below that of the
Barclays Index, as we believe that yields will rise as the market digests record
Treasury supply and the recent flight to quality abates. We further intend to
maintain our focus on the purchase of mortgage-backed securities issued by U.S.
government agencies, with a focus on higher coupon agency 30-year mortgage-
backed securities. We continue to like CMBS, as we expect an improving economy
to bode well for that sector. As always, our strategy is to look to provide
added portfolio value with a moderate amount of risk. Quality issues and
security selection remain a priority as we continue to seek attractive
investment opportunities.
<Table>
Jason Callan Tom Heuer Colin Lundgren
Portfolio Manager Portfolio Manager Portfolio Manager
</Table>
Any specific securities mentioned are for illustrative purposes only and are not
a complete list of securities that have increased or decreased in value. The
views expressed in this statement reflect those of the portfolio manager(s) only
through the end of the period of the report as stated on the cover and do not
necessarily represent the views of Columbia Management Investment Advisers, LLC*
(the Investment Manager) or any subadviser to the Fund or any other person in
the Investment Manager or subadviser organizations. Any such views are subject
to change at any time based upon market or other conditions and the Investment
Manager disclaims any responsibility to update such views. These views may not
be relied on as investment advice and, because investment decisions for the Fund
are based on numerous factors, may not be relied on as an indication of trading
intent on behalf of the Fund.
* Effective May 1, 2010, RiverSource Investments, LLC became known as Columbia
Management Investment Advisers, LLC.
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12 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
THIS PAGE LEFT BLANK INTENTIONALLY
THE FUND'S LONG-TERM PERFORMANCE -----------------------------------------------
The chart on the facing page illustrates the total value of an assumed $10,000
investment in RiverSource Short Duration U.S. Government Fund Class A shares
(from 6/1/00 to 5/31/10) as compared to the performance of the Barclays Capital
U.S. 1-3 Year Government Index and the Lipper Short U.S. Government Funds Index.
In comparing the Fund's Class A shares to these indices, you should take into
account the fact that the Fund's performance reflects the maximum initial sales
charge of 3.00%, while such charges are not reflected in the performance of the
indices. Returns for the Fund include the reinvestment of any distributions paid
during each period.
The performance information shown represents past performance and is not a
guarantee of future results. The table below and the chart on the facing page do
not reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. The investment return and
principal value of your investment will fluctuate so that your shares, when
redeemed, may be worth more or less than their original cost. Current
performance may be lower or higher than the performance information shown. You
may obtain performance information current to the most recent month-end by
contacting your financial intermediary or visiting riversource.com/funds. Also
see "Past Performance" in the Fund's current prospectus.
COMPARATIVE RESULTS
- --------------------------------------------------------------------------------
<Table>
<Caption>
Results at May 31, 2010
1 YEAR 3 YEARS 5 YEARS 10 YEARS
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND
(INCLUDES SALES CHARGE)
Class A Cumulative value of $10,000 $10,196 $10,671 $11,330 $14,081
- ------------------------------------------------------------------------------------------
Average annual total return +1.96% +2.19% +2.53% +3.48%
- ------------------------------------------------------------------------------------------
BARCLAYS CAPITAL U.S. 1-3 YEAR GOVERNMENT INDEX(1)
Cumulative value of $10,000 $10,221 $11,550 $12,351 $15,670
- ------------------------------------------------------------------------------------------
Average annual total return +2.21% +4.92% +4.31% +4.59%
- ------------------------------------------------------------------------------------------
LIPPER SHORT U.S. GOVERNMENT FUNDS INDEX(2)
Cumulative value of $10,000 $10,341 $11,313 $12,053 $14,874
- ------------------------------------------------------------------------------------------
Average annual total return +3.41% +4.20% +3.80% +4.05%
- ------------------------------------------------------------------------------------------
</Table>
Results for other share classes can be found on page 4.
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14 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
(VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE SHORT DURATION U.S.
GOVERNMENT FUND LINE GRAPH)
<Table>
<Caption>
RIVERSOURCE SHORT
DURATION U.S.
GOVERNMENT FUND BARCLAYS CAPITAL
CLASS A U.S.1-3 YEAR LIPPER SHORT
(INCLUDES SALES U.S. GOVERNMENT U.S. GOVERNMENT
CHARGE) INDEX(1) FUNDS INDEX(2)
----------------- ------------------ ---------------
5/00 $ 9,700 $10,000 $10,000
8/00 10,018 10,251 10,244
11/00 10,279 10,488 10,486
2/01 10,585 10,827 10,815
5/01 10,689 11,005 10,979
8/01 10,912 11,245 11,148
11/01 11,123 11,515 11,364
2/02 11,207 11,607 11,452
5/02 11,306 11,709 11,555
8/02 11,550 12,005 11,788
11/02 11,630 12,098 11,851
2/03 11,798 12,272 12,012
5/03 11,859 12,372 12,086
8/03 11,749 12,316 12,005
11/03 11,813 12,387 12,065
2/04 11,963 12,556 12,195
5/04 11,830 12,454 12,094
8/04 11,954 12,596 12,215
11/04 11,932 12,567 12,214
2/05 11,939 12,566 12,236
5/05 12,057 12,688 12,341
8/05 12,112 12,757 12,404
11/05 12,083 12,763 12,402
2/06 12,195 12,851 12,495
5/06 12,177 12,926 12,557
8/06 12,425 13,144 12,754
11/06 12,617 13,337 12,944
2/07 12,726 13,477 13,077
5/07 12,801 13,570 13,147
8/07 12,972 13,867 13,338
11/07 13,250 14,244 13,613
2/08 13,405 14,669 13,926
5/08 13,346 14,554 13,834
8/08 13,213 14,706 13,908
11/08 13,039 15,081 13,963
2/09 13,158 15,207 14,177
5/09 13,424 15,331 14,383
8/09 13,707 15,400 14,547
11/09 13,968 15,564 14,743
2/10 13,976 15,600 14,781
5/10 14,081 15,670 14,874
</Table>
(1) The Barclays Capital U.S. 1-3 Year Government Index, an unmanaged index, is
made up of all publicly issued, non-convertible domestic debt of the U.S.
government, or agency thereof, or any quasi-federal corporation. The index
also includes corporate debt guaranteed by the U.S. government. Only notes
and bonds with a minimum maturity of one year up to a maximum maturity of
2.9 years are included. The index reflects reinvestment of all distributions
and changes in market prices.
(2) The Lipper Short U.S. Government Funds Index includes the 30 largest short
U.S. government funds tracked by Lipper Inc. The index's returns include net
reinvested dividends.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 15
FUND EXPENSES EXAMPLE ----------------------------------------------------------
(UNAUDITED)
As a shareholder of the Fund, you incur two types of costs: (i) transaction
costs, including sales charges (loads) on purchase payments; and (ii) ongoing
costs, which may include management fees; distribution and service (Rule 12b-1)
fees; and other Fund fees and expenses. This example is intended to help you
understand your ongoing costs (in dollars) of investing in the Fund and to
compare these costs with the ongoing costs of investing in other mutual funds.
In addition to the ongoing expenses which the Fund bears directly, the Fund's
shareholders indirectly bear the ongoing expenses of any funds in which the Fund
invests (also referred to as "acquired funds"), including affiliated and non-
affiliated pooled investment vehicles (including mutual funds and exchange
traded funds). The Fund's indirect expense from investing in the acquired funds
is based on the Fund's pro rata portion of the ongoing expenses charged by
acquired funds using the expense ratio of each of the acquired funds as of the
acquired fund's most recent shareholder report.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the six months ended May 31, 2010.
ACTUAL EXPENSES
The first line of the table provides information about actual account values and
actual expenses for each class. You may use the information in this line,
together with the amount you invested, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by the
number in the first line under the heading titled "Expenses paid during the
period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table provides information about hypothetical account
values and hypothetical expenses based on the actual expense ratio for each
class and an assumed rate of return of 5% per year before expenses, which is not
the actual return for the class. The hypothetical account values and expenses
may not be used to estimate the actual ending account balance or expenses you
paid for the period. You may use this information to compare the ongoing costs
of investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads). Therefore, the second line of the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
- --------------------------------------------------------------------------------
16 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
<Table>
<Caption>
BEGINNING ENDING EXPENSES
ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED
DEC. 1, 2009 MAY 31, 2010 THE PERIOD(a) EXPENSE RATIO
- ------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,010.20 $4.24(c) .86%
- ------------------------------------------------------------------------------------------
Hypothetical
(5% return before expenses) $1,000 $1,020.30 $4.26(c) .86%
- ------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,008.60 $7.98(c) 1.62%
- ------------------------------------------------------------------------------------------
Hypothetical
(5% return before expenses) $1,000 $1,016.58 $8.01(c) 1.62%
- ------------------------------------------------------------------------------------------
Class C
- ------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,006.40 $7.97(c) 1.62%
- ------------------------------------------------------------------------------------------
Hypothetical
(5% return before expenses) $1,000 $1,016.58 $8.01(c) 1.62%
- ------------------------------------------------------------------------------------------
Class I
- ------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,012.00 $2.37(c) .48%
- ------------------------------------------------------------------------------------------
Hypothetical
(5% return before expenses) $1,000 $1,022.17 $2.38(c) .48%
- ------------------------------------------------------------------------------------------
Class R2
- ------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,008.10 $6.30(c) 1.28%
- ------------------------------------------------------------------------------------------
Hypothetical
(5% return before expenses) $1,000 $1,018.24 $6.33(c) 1.28%
- ------------------------------------------------------------------------------------------
Class R4
- ------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,010.50 $3.85(c) .78%
- ------------------------------------------------------------------------------------------
Hypothetical
(5% return before expenses) $1,000 $1,020.70 $3.86(c) .78%
- ------------------------------------------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 17
FUND EXPENSES EXAMPLE (continued) ----------------------------------------------
<Table>
<Caption>
BEGINNING ENDING EXPENSES
ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED
DEC. 1, 2009 MAY 31, 2010 THE PERIOD(a) EXPENSE RATIO
- ------------------------------------------------------------------------------------------
Class W
- ------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,009.80 $4.53(c) .92%
- ------------------------------------------------------------------------------------------
Hypothetical
(5% return before expenses) $1,000 $1,020.01 $4.56(c) .92%
- ------------------------------------------------------------------------------------------
</Table>
(a) Expenses are equal to the annualized expense ratio for each class as
indicated above, multiplied by the average account value over the period,
multiplied by 179/365 (to reflect the one-half year period).
(b) Based on the actual return for the six months ended May 31, 2010: +1.02% for
Class A, +0.86% for Class B, +0.64% for Class C, +1.20% for Class I, +0.81%
for Class R2, +1.05% for Class R4 and +0.98% for Class W.
(c) Columbia Management Investment Advisers, LLC (formerly RiverSource
Investments, LLC) (the Investment Manager) and its affiliates have
contractually agreed to waive certain fees and to absorb certain expenses
until July 31, 2011, unless sooner terminated at the sole discretion of the
Fund's Board, such that net expenses (excluding fees and expenses of
acquired funds), will not exceed 0.84% for Class A, 1.60% for Class B, 1.60%
for Class C, 0.44% for Class I, 1.24% for Class R2, 0.74% for Class R4 and
0.89% for Class W. Any amounts waived will not be reimbursed by the Fund.
This change is effective Aug. 1, 2010. Had this change been in place for the
entire six month period ended May 31, 2010, the actual expenses paid would
have been $4.14 for Class A, $7.88 for Class B, $7.87 for Class C, $2.17 for
Class I, $6.11 for Class R2, $3.65 for Class R4 and $4.39 for Class W; the
hypothetical expenses paid would have been $4.16 for Class A, $7.91 for
Class B, $7.91 for Class C, $2.18 for Class I, $6.14 for Class R2, $3.67 for
Class R4 and $4.41 for Class W.
- --------------------------------------------------------------------------------
18 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
PORTFOLIO OF INVESTMENTS -------------------------------------------------------
MAY 31, 2010
(Percentages represent value of investments compared to net assets)
INVESTMENTS IN SECURITIES
<Table>
<Caption>
BONDS (89.0%)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
U.S. GOVERNMENT OBLIGATIONS & AGENCIES (28.4%)
Federal Farm Credit Bank
04-19-12 1.350% $3,425,000 $3,425,257
Federal Home Loan Banks
05-10-11 0.600 2,625,000 2,625,123
05-16-11 0.610 2,105,000 2,105,179
05-20-11 2.625 2,565,000(e) 2,615,336
05-27-11 0.625 1,715,000 1,715,225
12-28-11 1.000 14,550,000 14,599,629
09-28-12 0.663 4,325,000(i) 4,331,059
10-18-13 3.625 2,000,000 2,128,184
11-17-17 5.000 500,000(e) 560,100
Federal Home Loan Mortgage Corp.
06-15-11 6.000 500,000 528,208
03-23-12 2.125 3,105,000 3,176,691
05-18-12 0.625 2,665,000(i) 2,665,181
07-27-12 1.125 9,520,000 9,530,853
08-20-12 5.500 2,610,000(e) 2,859,837
08-24-12 2.250 6,705,000 6,731,961
07-15-14 5.000 900,000 1,009,353
12-10-15 4.200 14,000,000 14,012,334
06-13-18 4.875 5,405,000(e) 5,959,961
Federal National Mortgage Association
06-09-10 3.255 580,000 580,524
08-12-10 3.250 870,000 875,158
06-22-12 1.250 15,000,000(e) 15,064,694
07-19-12 1.000 8,865,000(i) 8,869,841
10-29-12 1.875 15,000,000 15,061,606
11-19-12 4.750 730,000 791,692
04-09-13 3.250 1,960,000 2,061,661
05-07-13 1.750 12,390,000(e) 12,478,353
07-17-13 4.375 5,020,000 5,446,098
03-13-14 2.750 7,500,000 7,739,145
02-23-15 1.000 1,320,000(i) 1,321,819
02-13-17 5.000 2,500,000(e) 2,802,393
Private Export Funding Corp.
U.S. Government Guaranty
10-15-14 3.050 5,675,000 5,849,722
U.S. Treasury
07-31-11 1.000 3,250,000 3,268,662
06-15-12 1.875 6,690,000(e) 6,840,525
02-15-13 1.375 9,785,000 9,835,454
04-30-15 2.500 2,080,000(e) 2,121,924
05-31-17 2.750 1,000,000(g) 999,531
02-15-20 3.625 1,000,000(e) 1,025,703
05-15-20 3.500 3,344,000(e) 3,399,377
---------------
Total 187,013,353
- -------------------------------------------------------------------------------------
ASSET-BACKED (8.7%)
Access Group, Inc.
Series 2005-1 Class A1
06-22-18 0.351 1,861,810(i) 1,858,243
Banc of America Funding Corp.
CMO Series 2009-R14A Class 1A1
09-26-37 1.445 4,384,400(d,i) 4,221,300
Bear Stearns Asset-Backed Securities Trust
Series 2006-HE9 Class 1A1
11-25-36 0.393 816,184(i) 782,912
Carrington Mortgage Loan Trust
Series 2006-RFC1 Class A2
05-25-36 0.443 3,143,430(i) 3,085,426
Chrysler Financial Lease Trust
Series 2010-A Class A2
06-15-11 1.780 4,750,000(d) 4,740,547
Citigroup Mortgage Loan Trust, Inc.
Series 2006-WFH4 Class A2
11-25-36 0.443 1,723,826(i) 1,680,313
Countrywide Asset-Backed Certificates
Series 2005-SD1 Class A1C
05-25-35 0.733 1,931,981(d,i) 1,852,134
Countrywide Asset-Backed Certificates
Series 2006-22 Class 2A1 (MGIC)
05-25-47 0.393 1,366,160(b,i) 1,324,706
Credit-Based Asset Servicing and Securitization LLC
Series 2006-CB6 Class A22
07-25-36 0.433 1,697,438(i) 1,662,994
</Table>
See accompanying Notes to Portfolio of Investments.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 19
PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
<Table>
<Caption>
BONDS (CONTINUED)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
ASSET-BACKED (CONT.)
First Franklin Mortgage Loan Asset-Backed
Certificates
Series 2005-FFH3 Class 2A3
09-25-35 0.753% $35,156(i) $34,963
Jefferies & Co., Inc.
CMO Series 2010-R1 Class 2A1
11-26-36 0.428 1,118,729(d,i) 1,062,793
Morgan Stanley ABS Capital I
Series 2005-WMC5 Class M2
06-25-35 0.823 3,368,411(i) 3,325,971
Morgan Stanley ABS Capital I
Series 2006-WMC1 Class A2B
12-25-35 0.543 1,731,047(i) 1,608,972
RAAC Series
Series 2006-SP4 Class A1
11-25-36 0.443 1,025,564(i) 1,009,790
RBSSP Resecuritization Trust
CMO Series 2009-10 Class 4A1
07-26-36 0.495 2,851,332(d,i) 2,731,831
RBSSP Resecuritization Trust
CMO Series 2009-10 Class 7A1
03-26-37 0.445 1,967,944(d,i) 1,932,718
RBSSP Resecuritization Trust
CMO Series 2009-11 Class 2A1
04-26-36 0.495 4,808,334(d,i) 4,437,644
RBSSP Resecuritization Trust
CMO Series 2009-12 Class 2A1
10-25-32 4.770 2,140,302(d) 2,154,825
RBSSP Resecuritization Trust
CMO Series 2009-13 Class 8A1
06-26-37 1.095 6,810,668(d,i) 6,508,803
Residential Asset Mortgage Products, Inc.
Series 2004-RS8 Class AI4
06-25-32 5.060 1,998,681 1,952,227
Residential Asset Mortgage Products, Inc.
Series 2006-RS4 Class A2
07-25-36 0.453 150,900 150,267
Small Business Administration
Series 2002-P10B Class 1
08-10-12 5.199 208,706 219,023
Soundview Home Equity Loan Trust
Series 2005-B Class M1
05-25-35 6.135 278,104(i) 277,656
Specialty Underwriting & Residential Finance
Series 2005-BC3 Class M1
06-25-36 0.793 4,500,000(i) 4,138,380
Structured Asset Investment Loan Trust
Series 2005-9 Class A5
11-25-35 0.573 1,907,394(i) 1,844,489
Structured Asset Securities Corp.
CMO Series 2006-NC1 Class A6
05-25-36 0.393 1,047,842(i) 1,004,394
Structured Asset Securities Corp.
Series 2007-WF2 Class A2
08-25-37 1.043 1,298,559(i) 1,279,666
---------------
Total 56,882,987
- -------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED (1.6%)(f)
Bear Stearns Commercial Mortgage Securities
Series 2004-PWR6 Class A4
11-11-41 4.521 1,575,000 1,607,987
Federal Home Loan Mortgage Corp.
Multifamily Structured Pass-Through Certificates
Series K001 Class A2
04-25-16 5.651 4,570,479 5,075,842
JP Morgan Chase Commercial Mortgage Securities Corp.
Series 2004-CBX Class A3
01-12-37 4.184 3,999,981 3,998,961
---------------
Total 10,682,790
- -------------------------------------------------------------------------------------
RESIDENTIAL MORTGAGE-BACKED (50.3%)(f,l)
Banc of America Funding Corp.
CMO Series 2010-R4 Class 4A1
06-26-37 0.555 1,105,793(d,i) 1,056,032
BCAP LLC Trust
CMO Series 2010-RR6 Class 6A1
07-26-37 4.000 6,572,000(d) 6,569,946
Citigroup Mortgage Loan Trust, Inc.
CMO Series 2006-AR9 Class 1A1
11-25-36 0.413 204,199(i) 192,876
Citigroup Mortgage Loan Trust, Inc.
CMO Series 2009-7 Class 4A2
09-25-35 2.848 5,600,980(d,i) 1,568,274
</Table>
See accompanying Notes to Portfolio of Investments.
- --------------------------------------------------------------------------------
20 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
<Table>
<Caption>
BONDS (CONTINUED)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
RESIDENTIAL MORTGAGE-BACKED (CONT.)
Countrywide Alternative Loan Trust
CMO Series 2006-OA11 Class A3B1
09-25-46 0.523% $1,244,821(i) $1,158,510
Countrywide Alternative Loan Trust
CMO Series 2007-OH3 Class A3
09-25-47 0.843 3,409,582(i) 416,593
Countrywide Home Loan Mortgage Pass-Through Trust
CMO Series 2005-R2 Class 2A1
06-25-35 7.000 3,315,868(d) 3,066,241
Credit Suisse First Boston Mortgage Securities Corp.
CMO Series 2003-1 Class 1A1
02-25-33 7.000 934,399 968,402
Credit Suisse Mortgage Capital Certificates
CMO Series 2009-12R Class 14A1
11-27-35 5.500 7,039,984(d) 7,142,996
Credit Suisse Mortgage Capital Certificates
CMO Series 2009-12R Class 30A1
12-27-36 5.300 805,425(d) 776,295
Federal Home Loan Mortgage Corp.
06-01-25 4.500 3,000,000(g) 3,137,814
Federal Home Loan Mortgage Corp. #1G2547
12-01-36 6.119 848,318(i) 911,223
Federal Home Loan Mortgage Corp. #1G2598
01-01-37 5.984 1,187,091(i) 1,261,893
Federal Home Loan Mortgage Corp. #1J0614
09-01-37 5.666 2,039,783(i) 2,158,397
Federal Home Loan Mortgage Corp. #1Q0140
08-01-36 6.105 396,118(i) 419,369
Federal Home Loan Mortgage Corp. #A18107
01-01-34 5.500 2,144,624 2,296,925
Federal Home Loan Mortgage Corp. #B10459
10-01-18 5.500 695,874 753,508
Federal Home Loan Mortgage Corp. #C00351
07-01-24 8.000 181,152 207,199
Federal Home Loan Mortgage Corp. #C00385
01-01-25 9.000 310,004 350,900
Federal Home Loan Mortgage Corp. #C80329
08-01-25 8.000 56,425 64,561
Federal Home Loan Mortgage Corp. #E00398
10-01-10 7.000 25,601 25,923
Federal Home Loan Mortgage Corp. #E81240
06-01-15 7.500 1,832,457 1,975,223
Federal Home Loan Mortgage Corp. #E90650
07-01-12 5.500 38,679 39,874
Federal Home Loan Mortgage Corp. #E92454
11-01-17 5.000 1,704,394 1,830,377
Federal Home Loan Mortgage Corp. #E96624
05-01-18 5.000 849,151 911,917
Federal Home Loan Mortgage Corp. #G00363
06-01-25 8.000 227,441 260,235
Federal Home Loan Mortgage Corp. #G00501
05-01-26 9.000 411,179 477,167
Federal Home Loan Mortgage Corp. #G04710
09-01-38 6.000 1,351,944 1,459,495
Federal Home Loan Mortgage Corp. #G10669
03-01-12 7.500 388,715 410,037
Federal Home Loan Mortgage Corp. #G11243
04-01-17 6.500 7,734,203 8,386,781
Federal Home Loan Mortgage Corp. #G12100
11-01-13 5.000 1,424,515 1,479,934
Federal Home Loan Mortgage Corp.
CMO I.O. Series 11 Class B
01-01-20 9.415 5,693(j) 1,421
Federal Home Loan Mortgage Corp.
CMO I.O. Series 2471 Class SI
03-15-32 29.180 929,449(j) 128,661
Federal Home Loan Mortgage Corp.
CMO I.O. Series 3430 Class IA
07-15-12 120.228 3,919,974(j) 22,539
Federal Home Loan Mortgage Corp.
CMO I.O. Series 3447 Class AI
03-15-12 27.238 2,106,185(j) 28,270
Federal Home Loan Mortgage Corp.
CMO I.O. Series 3455 Class AI
12-15-13 16.810 15,351,751(j) 376,416
Federal Home Loan Mortgage Corp.
CMO I.O. Series 3517 Class JI
12-15-12 42.430 1,608,947(j) 20,388
Federal Home Loan Mortgage Corp.
CMO I.O. Series 3578
04-15-12 47.734 22,478,310(j) 386,957
Federal Home Loan Mortgage Corp.
CMO I.O. Series 3600 Class DI
01-15-13 6.466 25,123,265(j) 687,644
</Table>
See accompanying Notes to Portfolio of Investments.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 21
PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
<Table>
<Caption>
BONDS (CONTINUED)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
RESIDENTIAL MORTGAGE-BACKED (CONT.)
Federal Home Loan Mortgage Corp.
CMO I.O. Series 3630 Class AI
03-15-17 0.000% $10,649,844(j) $532,492
Federal Home Loan Mortgage Corp.
CMO Series 2617 Class HD
06-15-16 7.000 2,527,488 2,637,469
Federal Home Loan Mortgage Corp.
Multifamily Structured Pass-Through Certificates
Series K003 Class A1
07-25-13 2.225 4,626,781 4,683,161
Federal National Mortgage Association
06-01-25 5.000 19,000,000(g) 20,175,626
06-01-25 5.500 7,500,000(g) 8,053,125
06-01-40 4.500 7,000,000(g) 7,142,184
06-01-40 6.000 10,000,000(g) 10,770,310
06-01-40 6.500 15,500,000(g) 16,861,087
Federal National Mortgage Association #125032
11-01-21 8.000 83,109(o) 95,070
Federal National Mortgage Association #190129
11-01-23 6.000 641,048 693,276
Federal National Mortgage Association #190988
06-01-24 9.000 143,035 156,652
Federal National Mortgage Association #254384
06-01-17 7.000 192,634 210,926
Federal National Mortgage Association #254454
08-01-17 7.000 370,675 405,873
Federal National Mortgage Association #254723
05-01-23 5.500 5,435,159 5,868,166
Federal National Mortgage Association #255501
09-01-14 6.000 320,153 336,842
Federal National Mortgage Association #256901
09-01-37 6.500 960,064 1,038,482
Federal National Mortgage Association #303885
05-01-26 7.500 281,353 316,341
Federal National Mortgage Association #313007
07-01-11 7.500 24,175 24,565
Federal National Mortgage Association #336512
02-01-26 6.000 38,740 42,098
Federal National Mortgage Association #357485
02-01-34 5.500 8,340,849(o) 8,942,912
Federal National Mortgage Association #407327
01-01-14 5.500 158,943 170,940
Federal National Mortgage Association #456374
12-01-13 5.500 301,208 323,943
Federal National Mortgage Association #508402
08-01-14 6.500 157,845 170,422
Federal National Mortgage Association #545818
07-01-17 6.000 7,804,232 8,489,080
Federal National Mortgage Association #545864
08-01-17 5.500 6,625,243 7,197,984
Federal National Mortgage Association #545910
08-01-17 6.000 1,201,438 1,306,665
Federal National Mortgage Association #555063
11-01-17 5.500 5,038,545 5,469,658
Federal National Mortgage Association #555367
03-01-33 6.000 6,221,790 6,827,928
Federal National Mortgage Association #579485
04-01-31 6.500 1,471,591 1,646,317
Federal National Mortgage Association #593829
12-01-28 7.000 1,130,499 1,263,604
Federal National Mortgage Association #601416
11-01-31 6.500 523,063 585,170
Federal National Mortgage Association #630993
09-01-31 7.500 1,572,636 1,771,486
Federal National Mortgage Association #648040
06-01-32 6.500 1,621,246 1,798,254
Federal National Mortgage Association #648349
06-01-17 6.000 4,429,300 4,816,474
Federal National Mortgage Association #651284
07-01-17 6.000 825,427 892,579
Federal National Mortgage Association #662866
11-01-17 6.000 897,806 975,741
Federal National Mortgage Association #665752
09-01-32 6.500 729,447 809,088
Federal National Mortgage Association #678940
02-01-18 5.500 1,420,376 1,544,927
Federal National Mortgage Association #686227
02-01-18 5.500 1,823,103 1,982,670
Federal National Mortgage Association #696837
04-01-18 5.500 2,087,425 2,271,743
Federal National Mortgage Association #704610
06-01-33 5.500 8,058,047(o) 8,639,697
Federal National Mortgage Association #722325
07-01-33 4.946 3,998,685(i) 4,203,441
</Table>
See accompanying Notes to Portfolio of Investments.
- --------------------------------------------------------------------------------
22 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
<Table>
<Caption>
BONDS (CONTINUED)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
RESIDENTIAL MORTGAGE-BACKED (CONT.)
Federal National Mortgage Association #725431
08-01-15 5.500% $3,539,283 $3,806,425
Federal National Mortgage Association #739243
09-01-33 6.000 2,292,010 2,553,778
Federal National Mortgage Association #739331
09-01-33 6.000 1,062,864 1,165,082
Federal National Mortgage Association #745392
12-01-20 4.500 711,657 754,616
Federal National Mortgage Association #791447
10-01-34 6.000 3,589,871 3,917,166
Federal National Mortgage Association #797046
07-01-34 5.500 2,380,450 2,568,030
Federal National Mortgage Association #799843
11-01-34 2.622 797,810(i) 823,059
Federal National Mortgage Association #829597
08-01-35 4.730 979,788(i) 1,014,806
Federal National Mortgage Association #832641
09-01-35 6.000 3,732,078 4,042,016
Federal National Mortgage Association #881886
04-01-36 5.352 572,681(i) 607,312
Federal National Mortgage Association #883267
07-01-36 6.500 2,990,451 3,270,432
Federal National Mortgage Association #886764
08-01-36 5.985 435,279(i) 463,612
Federal National Mortgage Association #887403
07-01-36 7.000 1,917,827 2,125,318
Federal National Mortgage Association #888989
06-01-37 5.738 2,632,067(i) 2,789,767
Federal National Mortgage Association #895834
04-01-36 5.965 723,299(i) 764,677
Federal National Mortgage Association #946609
09-01-37 5.711 647,207(i) 687,787
Federal National Mortgage Association
CMO I.O. Series 163 Class 2
07-25-22 20.000 357,862(j) 59,483
Federal National Mortgage Association
CMO I.O. Series 2002-18 Class SE
02-25-32 32.600 1,859,034(j) 242,462
Federal National Mortgage Association
CMO I.O. Series 2003-26 Class MI
03-25-23 15.700 967,151(j) 105,754
Federal National Mortgage Association
CMO I.O. Series 2003-63 Class IP
07-25-33 0.000 2,577,577(j) 535,774
Federal National Mortgage Association
CMO I.O. Series 2003-71 Class IM
12-25-31 5.340 1,451,931(j) 176,261
Federal National Mortgage Association
CMO I.O. Series 2008-40 Class AI
08-25-12 11.956 7,579,498(j) 128,625
Federal National Mortgage Association
CMO I.O. Series 36 Class 2
08-01-18 12.100 3,099(j) 631
08-01-18 16.956 87(j) 18
Federal National Mortgage Association
CMO I.O. Series 379 Class 2
05-01-37 0.000 51,235(j) 8,782
Federal National Mortgage Association
CMO I.O. Series 396 Class 2
06-01-39 6.625 12,028(j) 2,924
Federal National Mortgage Association
CMO I.O. Series 70 Class 2
01-15-20 20.000 139,845(j) 32,520
Federal National Mortgage Association
CMO P.O. Series G-15 Class A
06-25-21 2.490 18,384(k) 16,963
Federal National Mortgage Association
CMO Series 2003-W11 Class A1
06-25-33 3.354 87,510(i) 88,412
Federal National Mortgage Association
CMO Series 2004-60 Class PA
04-25-34 5.500 2,345,025 2,517,307
First Horizon Asset Securities, Inc.
CMO Series 2003-5 Class 1A2
06-25-30 5.250 1,557,160 1,559,145
Government National Mortgage Association #615740
08-15-13 6.000 352,052 380,847
Government National Mortgage Association #648339
10-15-35 5.500 1,087,376 1,173,527
Government National Mortgage Association #716007
08-15-39 6.000 3,302,592 3,578,572
Government National Mortgage Association #781507
09-15-14 6.000 1,595,707 1,688,361
</Table>
See accompanying Notes to Portfolio of Investments.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 23
PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
<Table>
<Caption>
BONDS (CONTINUED)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
RESIDENTIAL MORTGAGE-BACKED (CONT.)
Government National Mortgage Association
CMO Series 2009-105 Class A
12-16-50 3.456% $7,101,884 $7,267,997
Government National Mortgage Association
CMO Series 2009-114 Class A
12-16-38 3.103 7,395,358 7,517,233
Government National Mortgage Association
CMO Series 2009-63 Class A
01-16-38 3.400 4,741,970 4,855,823
Government National Mortgage Association
CMO Series 2009-71 Class A
04-16-38 3.304 7,048,386 7,203,098
Government National Mortgage Association
CMO Series 2009-90 Class AC
01-16-33 3.137 5,400,000 5,488,548
Government National Mortgage Association
CMO Series 2010-13 Class A
08-16-22 2.461 4,778,844 4,821,747
Government National Mortgage Association
CMO Series 2010-18 Class A
12-16-50 3.100 4,830,201 4,866,097
Government National Mortgage Association
CMO Series 2010-22 Class AC
12-16-30 2.229 3,824,071 3,834,057
Government National Mortgage Association
CMO Series 2010-49 Class A
03-16-51 2.870 1,498,052 1,498,516
Government National Mortgage Association
CMO Series 2010-65 Class A
11-16-28 2.017 3,700,000 3,682,356
Government National Mortgage Association
12-16-28 2.100 4,500,000(g) 4,500,000
GSR Mortgage Loan Trust
CMO Series 2005-5F Class 2A3
06-25-35 5.500 3,022,682 3,065,928
Harborview Mortgage Loan Trust
CMO Series 2004-4 Class 3A
06-19-34 1.464 233,933(i) 150,917
JP Morgan Mortgage Trust
CMO Series 2004-S2 Class 1A4
11-25-19 4.750 2,203,605 2,196,977
Lehman XS Trust
Series 2006-16N Class A1B
11-25-46 0.463 244,081(i) 241,440
LVII Resecuritization Trust
CMO Series 2009-3 Class A1
11-27-37 5.780 1,162,864(d,i) 1,194,843
Residential Asset Securitization Trust
CMO Series 2004-A7 Class A1
10-25-34 5.500 3,460,216 3,460,074
Thornburg Mortgage Securities Trust
CMO I.O. Series 2006-5 Class AX
10-25-46 24.576 23,561,671(j) 1,081,106
Wells Fargo Mortgage-Backed Securities Trust
CMO Series 2003-O Class 1A11
01-25-34 4.670 1,914,251(i) 1,930,127
Wells Fargo Mortgage-Backed Securities Trust
CMO Series 2004-Q Class 1A2
09-25-34 4.870 3,719,489(i) 3,710,574
Wells Fargo Mortgage-Backed Securities Trust
CMO Series 2005-14 Class 2A1
12-25-35 5.500 2,722,168 2,551,195
Wells Fargo Mortgage-Backed Securities Trust
CMO Series 2005-AR16 Class 4A6
10-25-35 4.034 3,516,393(i) 3,462,750
Wells Fargo Mortgage-Backed Securities Trust
CMO Series 2006-12 Class A1
10-25-36 6.000 3,323,319 3,274,681
---------------
Total 331,038,016
- -------------------------------------------------------------------------------------
TOTAL BONDS
(Cost: $575,322,025) $585,617,146
- -------------------------------------------------------------------------------------
<Caption>
FDIC-INSURED DEBT (10.0%)(m)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
U.S. AGENCIES
Bank of America Corp.
FDIC Government Guaranty
04-30-12 2.100% $4,175,000 $4,262,462
06-15-12 3.125 3,810,000 3,966,492
Citigroup Funding, Inc.
FDIC Government Guaranty
07-12-12 2.125 15,000,000 15,319,203
</Table>
See accompanying Notes to Portfolio of Investments.
- --------------------------------------------------------------------------------
24 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
<Table>
<Caption>
FDIC-INSURED DEBT (CONTINUED)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
U.S. AGENCIES (CONT.)
11-15-12 1.875% $3,055,000 $3,095,021
General Electric Capital Corp.
FDIC Government Guaranty
12-09-11 3.000 11,525,000 11,888,879
12-28-12 2.625 7,580,000 7,823,048
JPMorgan Chase & Co.
FDIC Government Guaranty
02-23-11 1.650 2,940,000 2,966,688
Morgan Stanley
FDIC Government Guaranty
02-10-12 0.654 8,300,000 8,350,389
The Goldman Sachs Group, Inc.
FDIC Government Guaranty
07-15-11 1.625 7,750,000 7,829,724
- -------------------------------------------------------------------------------------
TOTAL FDIC-INSURED DEBT
(Cost: $64,491,427) $65,501,906
- -------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
GOVERNMENT GUARANTEED (0.2%)(n)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
FOREIGN AGENCIES (0.1%)
Barclays Bank PLC
Government Liquid Guaranteed
03-05-12 2.700% $780,000(c,d) $799,214
- -------------------------------------------------------------------------------------
BANKING (0.1%)
The Royal Bank of Scotland PLC
Government Liquid Guaranteed
04-23-12 2.650 400,000(c) 409,490
- -------------------------------------------------------------------------------------
TOTAL GOVERNMENT GUARANTEED
(Cost: $1,187,124) $1,208,704
- -------------------------------------------------------------------------------------
<Caption>
U.S. GOVERNMENT AGENCIES (9.3%)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
U.S. GOVERNMENT AGENCIES
Federal Home Loan Bank Discount Notes
06-01-10 0.060% $6,000,000 $5,999,960
06-11-10 0.160 25,000,000 24,998,444
Federal Home Loan Mortgage Corp. Discount Notes
06-07-10 0.160 20,000,000 19,999,111
Federal National Mortgage Association Discount Notes
06-24-10 0.170 10,000,000(e) 9,998,725
- -------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES
(Cost: $60,996,498) $60,996,240
- -------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
MONEY MARKET FUND (2.1%)
SHARES VALUE(a)
RiverSource Short-Term
Cash Fund, 0.218% 13,949,734(p) $13,949,734
- -------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost: $13,949,734) $13,949,734
- -------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
INVESTMENTS OF CASH COLLATERAL RECEIVED
FOR SECURITIES ON LOAN (2.6%)
AMOUNT
EFFECTIVE PAYABLE AT
ISSUER YIELD MATURITY VALUE(a)
REPURCHASE AGREEMENTS(H)
BNP Paribas Securities
dated 05-28-10, matures 06-01-10,
repurchase price
$5,103,719 0.210% $5,103,600 $5,103,600
Goldman Sachs
dated 05-28-10, matures 06-01-10,
repurchase price
$5,000,150 0.270 5,000,000 5,000,000
Mizuho Securities USA
dated 05-28-10, matures 06-01-10,
repurchase price
$7,000,179 0.230 7,000,000 7,000,000
- -------------------------------------------------------------------------------------
TOTAL INVESTMENTS OF CASH COLLATERAL RECEIVED FOR SECURITIES ON LOAN
(Cost: $17,103,600) $17,103,600
- -------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(Cost: $733,050,408)(q) $744,377,330
=====================================================================================
</Table>
See accompanying Notes to Portfolio of Investments.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 25
PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
INVESTMENTS IN DERIVATIVES
FUTURES CONTRACTS OUTSTANDING AT MAY 31, 2010
<Table>
<Caption>
NUMBER OF UNREALIZED
CONTRACTS NOTIONAL EXPIRATION APPRECIATION
CONTRACT DESCRIPTION LONG (SHORT) MARKET VALUE DATE (DEPRECIATION)
- ------------------------------------------------------------------------------------
U.S. Treasury Note, 2-
year 679 $148,117,484 Oct. 2010 $82,113
U.S. Treasury Note, 5-
year (221) (25,953,687) July 2010 (120,185)
U.S. Treasury Note, 5-
year (368) (42,935,250) Oct. 2010 (35,802)
U.S. Treasury Note, 10-
year (55) (6,636,953) June 2010 (110,082)
U.S. Treasury Note, 10-
year (169) (20,258,875) Sept. 2010 (85,347)
- ------------------------------------------------------------------------------------
Total $(269,303)
- ------------------------------------------------------------------------------------
</Table>
NOTES TO PORTFOLIO OF INVESTMENTS
<Table>
CMO -- Collateralized Mortgage Obligation
I.O. -- Interest Only
P.O. -- Principal Only
</Table>
(a) Securities are valued by using policies described in Note 2 to the
financial statements.
(b) The following abbreviation is used in the portfolio security description to
identify the insurer of the issue:
<Table>
MGIC -- Mortgage Guaranty Insurance Corporation
</Table>
(c) Foreign security values are stated in U.S. dollars. At May 31, 2010, the
value of foreign securities, excluding short-term securities, represented
0.18% of net assets.
(d) Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended. This security
may be determined to be liquid under guidelines established by the Fund's
Board of Directors. This security may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At May 31, 2010,
the value of these securities amounted to $51,816,436 or 7.88% of net
assets.
(e) At May 31, 2010, security was partially or fully on loan. See Note 7 to the
financial statements.
(f) Mortgage-backed securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real
property, and include single- and multi-class pass-through securities and
collateralized mortgage obligations. These securities may be issued or
guaranteed by U.S. government agencies or instrumentalities, or by private
issuers, generally originators and investors in mortgage loans, including
savings associations, mortgage bankers, commercial banks, investment
bankers and special purpose entities. The maturity dates shown represent
the original maturity of the underlying obligation. Actual maturity may
vary based upon prepayment activity on these obligations. Unless otherwise
noted, the coupon rates presented are fixed rates.
(g) At May 31, 2010, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$71,321,105. See Note 2 to the financial statements.
- --------------------------------------------------------------------------------
26 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED)
(h) The table below represents securities received as collateral for repurchase
agreements. This collateral, which is generally high quality short-term
obligations, is deposited with the Fund's custodian and, pursuant to the
terms of the repurchase agreement, must have an aggregate market value
greater than or equal to the repurchase price plus accrued interest at all
times. The market value of securities held as collateral for repurchase
agreements is monitored on a daily basis to ensure the existence of the
proper level of collateral.
<Table>
<Caption>
BNP PARIBAS SECURITIES (0.210%)
SECURITY DESCRIPTION VALUE(a)
- -----------------------------------------------------------
Fannie Mae Pool $3,711,455
Freddie Mac Gold Pool 1,494,217
- -----------------------------------------------------------
Total market value of collateral securities $5,205,672
- -----------------------------------------------------------
<Caption>
GOLDMAN SACHS (0.270%)
SECURITY DESCRIPTION VALUE(a)
- -----------------------------------------------------------
Allied Irish Banks PLC/New York NY $2,300,000
Natixis/New York NY 2,732,215
Standard Chartered Banking 217,785
- -----------------------------------------------------------
Total market value of collateral securities $5,250,000
- -----------------------------------------------------------
<Caption>
MIZUHO SECURITIES USA (0.230%)
SECURITY DESCRIPTION VALUE(a)
- -----------------------------------------------------------
Fannie Mae Grantor Trust $4,975
Fannie Mae Pool 502,654
Fannie Mae REMICS 3,812,064
Fannie Mae Whole Loan 14,163
FHLMC Structured Pass Through Securities 9,427
Freddie Mac Non Gold Pool 132,341
Freddie Mac REMICS 1,893,105
Government National Mortgage Association 771,271
- -----------------------------------------------------------
Total market value of collateral securities $7,140,000
- -----------------------------------------------------------
</Table>
(i) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on May 31,
2010.
(j) Interest only represents securities that entitle holders to receive only
interest payments on the underlying mortgages. The yield to maturity of an
interest only security is extremely sensitive to the rate of principal
payments on the underlying mortgage assets. A rapid (slow) rate of
principal repayments may have an adverse (positive) effect on yield to
maturity. The principal amount shown is the notional amount of the
underlying mortgages. The interest rate disclosed represents yield based
upon the estimated timing and amount of future cash flows at May 31, 2010.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 27
PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED)
(k) Principal only represents securities that entitle holders to receive only
principal payments on the underlying mortgages. The yield to maturity of a
principal only security is sensitive to the rate of principal payments on
the underlying mortgage assets. A slow (rapid) rate of principal repayments
may have an adverse (positive) effect on yield to maturity. Interest rate
disclosed represents yield based upon the estimated timing of future cash
flows at May 31, 2010.
(l) Represents comparable securities held to satisfy future delivery
requirements of the following open forward sale commitments at May 31,
2010:
<Table>
<Caption>
PRINCIPAL SETTLEMENT PROCEEDS
SECURITY AMOUNT DATE RECEIVABLE VALUE
----------------------------------------------------------------------------
Federal National Mortgage Association
06-01-40 5.50% $11,350,000 06-14-10 $11,928,141 $12,107,261
</Table>
(m) This debt is guaranteed under the FDIC's Temporary Liquidity Guarantee
Program (TLGP) and is backed by the full faith and credit of the United
States.
(n) This debt is guaranteed by the HM Treasury, United Kingdom.
(o) At May 31, 2010, investments in securities included securities valued at
$731,599 that were partially pledged as collateral to cover initial margin
deposits on open interest rate futures contracts.
(p) Affiliated Money Market Fund -- See Note 9 to the financial statements. The
rate shown is the seven-day current annualized yield at May 31, 2010.
(q) At May 31, 2010, the cost of securities for federal income tax purposes was
$738,115,619 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
<Table>
Unrealized appreciation $11,301,039
Unrealized depreciation (5,039,328)
-----------------------------------------------------------
Net unrealized appreciation $6,261,711
-----------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
28 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
FAIR VALUE MEASUREMENTS
Generally accepted accounting principles (GAAP) require disclosure regarding the
inputs and valuation techniques used to measure fair value and any changes in
valuation inputs or techniques. In addition, investments shall be disclosed by
major category.
The Fund categorizes its fair value measurements according to a three-level
hierarchy that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by prioritizing that the most observable input be used when
available. Observable inputs are those that market participants would use in
pricing an investment based on market data obtained from sources independent of
the reporting entity. Unobservable inputs are those that reflect the Fund's
assumptions about the information market participants would use in pricing an
investment. An investment's level within the fair value hierarchy is based on
the lowest level of any input that is deemed significant to the asset or
liability's fair value measurement. The input levels are not necessarily an
indication of the risk or liquidity associated with investments at that level.
For example, certain U.S. government securities are generally high quality and
liquid, however, they are reflected as Level 2 because the inputs used to
determine fair value may not always be quoted prices in an active market.
Fair value inputs are summarized in the three broad levels listed below:
- Level 1 -- Valuations based on quoted prices for investments in active
markets that the Fund has the ability to access at the measurement date.
Valuation adjustments are not applied to Level 1 investments.
- Level 2 -- Valuations based on other significant observable inputs
(including quoted prices for similar securities, interest rates,
prepayment speeds, credit risks, etc.).
- Level 3 -- Valuations based on significant unobservable inputs (including
the Fund's own assumptions and judgment in determining the fair value of
investments).
Inputs that are used in determining fair value of an investment may include
price information, credit data, volatility statistics, and other factors. These
inputs can be either observable or unobservable. The availability of observable
inputs can vary between investments, and is affected by various factors such as
the type of investment, and the volume and level of activity for that investment
or similar investments in the marketplace. The inputs will be considered by the
Fund Administrator, along with any other relevant factors in the calculation of
an investment's fair value. The Fund uses prices and inputs that are current as
of the measurement date, which may include periods of market dislocations.
During these periods, the availability of prices and inputs may be reduced for
many investments. This condition could cause an investment to be reclassified
between the various levels within the hierarchy.
Short-term securities are valued using amortized cost, as permitted under Rule
2a-7 of the Investment Company Act of 1940, as amended. Generally, amortized
cost approximates the current fair value of these securities, but because the
value is not obtained from a quoted price in an active market, such securities
are reflected as Level 2.
Investments falling into the Level 3 category are primarily supported by quoted
prices from brokers and dealers participating in the market for those
investments. However, these may be classified as
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 29
PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
FAIR VALUE MEASUREMENTS (CONTINUED)
Level 3 investments due to lack of market transparency and corroboration to
support these quoted prices. Additionally, valuation models may be used as the
pricing source for any remaining investments classified as Level 3. These models
rely on one or more significant unobservable inputs and/or significant
assumptions by the Fund Administrator. Inputs used in a valuation model may
include, but are not limited to, financial statement analysis, discount rates
and estimated cash flows, and comparable company data.
The following table is a summary of the inputs used to value the Fund's
investments as of May 31, 2010:
<Table>
<Caption>
FAIR VALUE AT MAY 31, 2010
----------------------------------------------------------------
LEVEL 1 LEVEL 2
QUOTED PRICES OTHER LEVEL 3
IN ACTIVE SIGNIFICANT SIGNIFICANT
MARKETS FOR OBSERVABLE UNOBSERVABLE
DESCRIPTION(A) IDENTICAL ASSETS INPUTS INPUTS TOTAL
- ---------------------------------------------------------------------------------------------
Bonds
U.S. Government
Obligations &
Agencies $27,491,176 $159,522,177 $-- $187,013,353
Asset-Backed Securities -- 51,598,894 5,284,093 56,882,987
Commercial Mortgage-
Backed Securities -- 10,682,790 -- 10,682,790
Residential Mortgage-
Backed Securities -- 315,616,429 15,421,587 331,038,016
- ---------------------------------------------------------------------------------------------
Total Bonds 27,491,176 537,420,290 20,705,680 585,617,146
- ---------------------------------------------------------------------------------------------
Short-Term Securities
U.S. Government
Agencies -- 60,996,240 -- 60,996,240
- ---------------------------------------------------------------------------------------------
Total Short-Term
Securities -- 60,996,240 -- 60,996,240
- ---------------------------------------------------------------------------------------------
Other
FDIC-Insured Debt
Securities -- 65,501,906 -- 65,501,906
Government Guaranteed -- 1,208,704 -- 1,208,704
Affiliated Money Market
Fund(b) 13,949,734 -- -- 13,949,734
Investments of Cash
Collateral Received
for Securities on
Loan -- 17,103,600 -- 17,103,600
- ---------------------------------------------------------------------------------------------
Total Other 13,949,734 83,814,210 -- 97,763,944
- ---------------------------------------------------------------------------------------------
Investments in Securities 41,440,910 682,230,740 20,705,680 744,377,330
Other Financial
Instruments(c) (269,303) -- -- (269,303)
- ---------------------------------------------------------------------------------------------
Total $41,171,607 $682,230,740 $20,705,680 $744,108,027
- ---------------------------------------------------------------------------------------------
</Table>
(a) See the Portfolio of Investments for all investment classifications not
indicated in the table.
(b) Money market fund that is a sweep investment for cash balances in the Fund
at May 31, 2010.
- --------------------------------------------------------------------------------
30 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
FAIR VALUE MEASUREMENTS (CONTINUED)
(c) Other Financial Instruments are derivative instruments, which are valued at
the unrealized appreciation (depreciation) on the instrument. Derivative
descriptions are located in the Investments in Derivatives section of the
Portfolio of Investments.
The following table is a reconciliation of Level 3 assets for which significant
unobservable inputs were used to determine fair value.
<Table>
<Caption>
RESIDENTIAL
ASSET-BACKED MORTGAGE-BACKED
SECURITIES SECURITIES TOTAL
- ------------------------------------------------------------------------------------
Balance as of May 31, 2009 $3,336,800 $2,972,070 $6,308,870
Accrued discounts/premiums 92,632 (33,864) 58,768
Realized gain (loss) 235,010 (671,606) (436,596)
Change in unrealized
appreciation (depreciation)* 22,512 1,925,738 1,948,250
Net purchases (sales) 1,597,139 12,387,760 13,984,899
Transfers in and/or out of Level
3 -- (1,158,511) (1,158,511)
- ------------------------------------------------------------------------------------
Balance as of May 31, 2010 $5,284,093 $15,421,587 $20,705,680
- ------------------------------------------------------------------------------------
</Table>
* Change in unrealized appreciation (depreciation) relating to securities
held at May 31, 2010 was $763,381, which is comprised of Asset-Back
Securities of $22,415 and Residential Mortgage-Backed Securities of
$740,966.
HOW TO FIND INFORMATION ABOUT THE FUND'S QUARTERLY PORTFOLIO HOLDINGS
(i) The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission (Commission) for the first and third
quarters of each fiscal year on Form N-Q;
(ii) The Fund's Forms N-Q are available on the Commission's website at
http://www.sec.gov;
(iii)The Fund's Forms N-Q may be reviewed and copied at the Commission's Public
Reference Room in Washington, DC (information on the operations of the
Public Reference Room may be obtained by calling 800.SEC.0330); and
(iv) The Fund's complete schedule of portfolio holdings, as filed on Form N-Q,
can be obtained without charge, upon request, by calling 800.221.2450.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 31
STATEMENT OF ASSETS AND LIABILITIES --------------------------------------------
MAY 31, 2010
<Table>
<Caption>
ASSETS
Investments in securities, at value
Unaffiliated issuers* (identified cost $701,997,074) $ 713,323,996
Affiliated money market fund (identified cost $13,949,734) 13,949,734
Investments of cash collateral received for securities on loan
(identified cost $17,103,600) 17,103,600
- --------------------------------------------------------------------------------
Total investments in securities (identified cost $733,050,408) 744,377,330
Capital shares receivable 840,554
Dividends and accrued interest receivable 3,083,074
Receivable for investment securities sold 12,393,455
- --------------------------------------------------------------------------------
Total assets 760,694,314
- --------------------------------------------------------------------------------
LIABILITIES
Forward sale commitments, at value (proceeds receivable
$11,928,141) 12,107,261
Disbursements in excess of cash 53,165
Dividends payable to shareholders 259,374
Capital shares payable 995,647
Payable for investment securities purchased 71,401,514
Payable upon return of securities loaned 17,103,600
Variation margin payable on futures contracts 39,413
Accrued investment management services fees 8,644
Accrued distribution fees 118,844
Accrued transfer agency fees 3,129
Accrued administrative services fees 1,239
Accrued plan administration services fees 1,533
Other accrued expenses 623,334
- --------------------------------------------------------------------------------
Total liabilities 102,716,697
- --------------------------------------------------------------------------------
Net assets applicable to outstanding capital stock $ 657,977,617
- --------------------------------------------------------------------------------
REPRESENTED BY
Capital stock -- $.01 par value $ 1,385,727
Additional paid-in capital 746,435,560
Excess of distributions over net investment income (200,707)
Accumulated net realized gain (loss) (100,521,462)
Unrealized appreciation (depreciation) on investments 10,878,499
- --------------------------------------------------------------------------------
Total -- representing net assets applicable to outstanding
capital stock $ 657,977,617
- --------------------------------------------------------------------------------
*Value of securities on loan $ 56,803,338
- --------------------------------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
32 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
<Table>
<Caption>
NET ASSET VALUE PER SHARE
NET ASSETS SHARES OUTSTANDING NET ASSET VALUE PER SHARE
Class A $488,090,547 102,802,359 $4.75(1)
Class B $ 66,777,148 14,065,529 $4.75
Class C $ 27,832,188 5,862,287 $4.75
Class I $ 67,563,272 14,218,020 $4.75
Class R2 $ 2,999,953 631,892 $4.75
Class R4 $ 4,709,513 991,519 $4.75
Class W $ 4,996 1,053 $4.74
- ------------------------------------------------------------------------------
</Table>
(1) The maximum offering price per share for Class A is $4.90. The offering
price is calculated by dividing the net asset value by 1.0 minus the maximum
sales charge of 3.00%.
The accompanying Notes to Financial Statements are an integral part of this
statement.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 33
STATEMENT OF OPERATIONS --------------------------------------------------------
YEAR ENDED MAY 31, 2010
<Table>
<Caption>
INVESTMENT INCOME
Income:
Interest 21,831,297
Income distributions from affiliated money market fund 20,899
Income from securities lending -- net 131,932
- ------------------------------------------------------------------------------
Total income 21,984,128
- ------------------------------------------------------------------------------
Expenses:
Investment management services fees 3,287,540
Distribution fees
Class A 1,289,353
Class B 810,418
Class C 242,435
Class R2 11,521
Class W 12
Transfer agency fees
Class A 1,007,346
Class B 167,917
Class C 49,741
Class R2 1,152
Class R4 2,098
Class W 10
Administrative services fees 470,119
Plan administration services fees
Class R2 5,760
Class R4 10,493
Compensation of board members 21,109
Custodian fees 26,505
Printing and postage 124,853
Registration fees 72,270
Professional fees 35,147
Other 43,989
- ------------------------------------------------------------------------------
Total expenses 7,679,788
Expenses waived/reimbursed by the Investment Manager and its
affiliates (1,201,170)
- ------------------------------------------------------------------------------
Total net expenses 6,478,618
- ------------------------------------------------------------------------------
Investment income (loss) -- net 15,505,510
- ------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) -- NET
Net realized gain (loss) on:
Security transactions 3,427,974
Futures contracts 722,882
Options contracts written 50,491
- ------------------------------------------------------------------------------
Net realized gain (loss) on investments 4,201,347
Net change in unrealized appreciation (depreciation) on
investments 12,661,886
- ------------------------------------------------------------------------------
Net gain (loss) on investments 16,863,233
- ------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $32,368,743
- ------------------------------------------------------------------------------
</Table>
The accompanying Notes to Financial Statements are an integral part of this
statement.
- --------------------------------------------------------------------------------
34 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
STATEMENTS OF CHANGES IN NET ASSETS --------------------------------------------
<Table>
<Caption>
YEAR ENDED MAY 31, 2010 2009
OPERATIONS AND DISTRIBUTIONS
Investment income (loss) -- net $ 15,505,510 $ 22,192,236
Net realized gain (loss) on investments 4,201,347 (24,011,105)
Net change in unrealized appreciation (depreciation) on
investments 12,661,886 4,441,905
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 32,368,743 2,623,036
- -----------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (12,668,025) (16,331,022)
Class B (1,425,001) (2,826,872)
Class C (407,301) (237,025)
Class I (1,538,428) (2,172,593)
Class R2 (47,161) N/A
Class R4 (104,118) (134,786)
Class W (116) (139)
- -----------------------------------------------------------------------------------------------
Total distributions (16,190,150) (21,702,437)
- -----------------------------------------------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 35
STATEMENTS OF CHANGES IN NET ASSETS (continued) --------------------------------
<Table>
<Caption>
YEAR ENDED MAY 31, 2010 2009
CAPITAL SHARE TRANSACTIONS
Proceeds from sales
Class A shares $ 88,786,015 $ 226,294,351
Class B shares 7,530,462 33,777,836
Class C shares 7,364,078 7,040,083
Class I shares 31,799,700 13,901,496
Class R2 shares 952,078 N/A
Class R4 shares 2,462,644 2,274,007
Fund merger (Note 12)
Class A shares 33,719,721 N/A
Class B shares 4,922,961 N/A
Class C shares 16,708,376 N/A
Class R2 shares 3,419,969 N/A
Reinvestment of distributions at net asset value
Class A shares 11,449,031 14,899,763
Class B shares 1,328,133 2,659,409
Class C shares 301,069 215,459
Class I shares 1,516,948 2,176,497
Class R2 shares 8,199 N/A
Class R4 shares 103,225 134,521
Conversions from Class B to Class A
Class A shares 26,046,599 20,630,333
Class B shares (26,046,599) (20,630,333)
Payments for redemptions
Class A shares (213,595,187) (258,638,948)
Class B shares (36,237,124) (57,874,364)
Class C shares (9,903,018) (3,812,662)
Class I shares (8,886,058) (64,443,360)
Class R2 shares (1,415,514) N/A
Class R4 shares (2,288,821) (2,725,737)
- -----------------------------------------------------------------------------------------------
Increase (decrease) in net assets from capital share transactions (59,953,113) (84,121,649)
- -----------------------------------------------------------------------------------------------
Proceeds from regulatory settlement (Note 11) 112,925 --
- -----------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (43,661,595) (103,201,050)
Net assets at beginning of year 701,639,212 804,840,262
- -----------------------------------------------------------------------------------------------
Net assets at end of year $ 657,977,617 $ 701,639,212
- -----------------------------------------------------------------------------------------------
Undistributed (excess of distributions over) net investment
income $ (200,707) $ 430,828
- -----------------------------------------------------------------------------------------------
</Table>
Certain line items from prior year have been renamed to conform to the current
year presentation.
The accompanying Notes to Financial Statements are an integral part of this
statement.
- --------------------------------------------------------------------------------
36 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
FINANCIAL HIGHLIGHTS -----------------------------------------------------------
The following tables are intended to help you understand the Fund's financial
performance. Certain information reflects financial results for a single share
of a class held for the periods shown. For the periods 2008 and after, per share
net investment income (loss) amounts are calculated based on average shares
outstanding during the period. Total returns assume reinvestment of all
dividends and distributions. Total returns do not reflect payment of sales
charges, if any, and are not annualized for periods of less than one year.
<Table>
<Caption>
YEAR ENDED MAY 31,
CLASS A -------------------------------------------------
PER SHARE DATA 2010 2009 2008 2007 2006
Net asset value, beginning of period $4.63 $4.74 $4.73 $4.68 $4.79
- ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .11 .14 .19 .19 .15
Net gains (losses) (both realized and
unrealized) .12 (.11) .01 .05 (.10)
- ----------------------------------------------------------------------------------------------------
Total from investment operations .23 .03 .20 .24 .05
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.11) (.14) (.19) (.19) (.16)
- ----------------------------------------------------------------------------------------------------
Proceeds from regulatory settlement .00(a) -- -- -- --
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $4.75 $4.63 $4.74 $4.73 $4.68
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN 5.11%(b) .59% 4.27% 5.12% 1.00%
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(c)
Gross expenses prior to expense
waiver/reimbursement 1.04% 1.02% 1.04% 1.03% 1.06%
- ----------------------------------------------------------------------------------------------------
Net expenses after expense
waiver/reimbursement(d) .86% .89% .89%(e) .89% .89%
- ----------------------------------------------------------------------------------------------------
Net investment income (loss) 2.35% 3.00% 3.93% 3.99% 3.27%
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (in millions) $488 $529 $539 $514 $641
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate(f) 329% 271% 209% 168% 194%
- ----------------------------------------------------------------------------------------------------
</Table>
See accompanying Notes to Financial Highlights.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 37
FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
<Table>
<Caption>
YEAR ENDED MAY 31,
CLASS B -------------------------------------------------
PER SHARE DATA 2010 2009 2008 2007 2006
Net asset value, beginning of period $4.63 $4.74 $4.73 $4.68 $4.79
- ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .08 .10 .15 .15 .12
Net gains (losses) (both realized and
unrealized) .12 (.11) .01 .05 (.11)
- ----------------------------------------------------------------------------------------------------
Total from investment operations .20 (.01) .16 .20 .01
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.08) (.10) (.15) (.15) (.12)
- ----------------------------------------------------------------------------------------------------
Proceeds from regulatory settlement .00(a) -- -- -- --
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $4.75 $4.63 $4.74 $4.73 $4.68
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN 4.31%(b) (.18%) 3.48% 4.34% .26%
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(c)
Gross expenses prior to expense
waiver/reimbursement 1.80% 1.78% 1.80% 1.79% 1.82%
- ----------------------------------------------------------------------------------------------------
Net expenses after expense
waiver/reimbursement(d) 1.62% 1.65% 1.65%(e) 1.64% 1.64%
- ----------------------------------------------------------------------------------------------------
Net investment income (loss) 1.64% 2.26% 3.18% 3.23% 2.50%
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (in millions) $67 $113 $159 $216 $338
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate(f) 329% 271% 209% 168% 194%
- ----------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED MAY 31,
CLASS C -------------------------------------------------
PER SHARE DATA 2010 2009 2008 2007 2006
Net asset value, beginning of period $4.63 $4.74 $4.73 $4.68 $4.79
- ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .07 .10 .15 .15 .12
Net gains (losses) (both realized and
unrealized) .13 (.11) .02 .05 (.11)
- ----------------------------------------------------------------------------------------------------
Total from investment operations .20 (.01) .17 .20 .01
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.08) (.10) (.16) (.15) (.12)
- ----------------------------------------------------------------------------------------------------
Proceeds from regulatory settlement .00(a) -- -- -- --
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $4.75 $4.63 $4.74 $4.73 $4.68
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN 4.31%(b) (.17%) 3.49% 4.34% .26%
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(C)
Gross expenses prior to expense
waiver/reimbursement 1.80% 1.78% 1.80% 1.80% 1.83%
- ----------------------------------------------------------------------------------------------------
Net expenses after expense
waiver/reimbursement(d) 1.62% 1.65% 1.65%(e) 1.64% 1.64%
- ----------------------------------------------------------------------------------------------------
Net investment income (loss) 1.51% 2.21% 3.18% 3.24% 2.51%
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (in millions) $28 $13 $10 $10 $15
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate(f) 329% 271% 209% 168% 194%
- ----------------------------------------------------------------------------------------------------
</Table>
See accompanying Notes to Financial Highlights.
- --------------------------------------------------------------------------------
38 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED MAY 31,
CLASS I -------------------------------------------------
PER SHARE DATA 2010 2009 2008 2007 2006
Net asset value, beginning of period $4.64 $4.74 $4.74 $4.69 $4.79
- ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .13 .16 .20 .20 .17
Net gains (losses) (both realized and
unrealized) .11 (.11) .01 .05 (.10)
- ----------------------------------------------------------------------------------------------------
Total from investment operations .24 .05 .21 .25 .07
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.13) (.15) (.21) (.20) (.17)
- ----------------------------------------------------------------------------------------------------
Proceeds from regulatory settlement .00(a) -- -- -- --
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $4.75 $4.64 $4.74 $4.74 $4.69
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN 5.28%(b) 1.18% 4.45% 5.50% 1.56%
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(c)
Gross expenses prior to expense
waiver/reimbursement .60% .60% .60% .59% .62%
- ----------------------------------------------------------------------------------------------------
Net expenses after expense
waiver/reimbursement(d) .48% .51% .51%(e) .54% .58%
- ----------------------------------------------------------------------------------------------------
Net investment income (loss) 2.67% 3.49% 4.23% 4.37% 3.66%
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (in millions) $68 $42 $93 $55 $62
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate(f) 329% 271% 209% 168% 194%
- ----------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
CLASS R2 PERIOD ENDED
PER SHARE DATA MAY 31, 2010(g)
Net asset value, beginning of period $4.66
- ------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .07
Net gains (losses) (both realized and
unrealized) .09
- ------------------------------------------------------------------
Total from investment operations .16
- ------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.07)
- ------------------------------------------------------------------
Proceeds from regulatory settlement .00(a)
- ------------------------------------------------------------------
Net asset value, end of period $4.75
- ------------------------------------------------------------------
TOTAL RETURN 3.47%(b)
- ------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(c)
Gross expenses prior to expense
waiver/reimbursement 1.40%(h)
- ------------------------------------------------------------------
Net expenses after expense
waiver/reimbursement(d) 1.28%(h)
- ------------------------------------------------------------------
Net investment income (loss) 1.76%(h)
- ------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (in millions) $3
- ------------------------------------------------------------------
Portfolio turnover rate(f) 329%
- ------------------------------------------------------------------
</Table>
See accompanying Notes to Financial Highlights.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 39
FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
<Table>
<Caption>
YEAR ENDED MAY 31,
CLASS R4 -------------------------------------------------
PER SHARE DATA 2010 2009 2008 2007 2006
Net asset value, beginning of period $4.64 $4.74 $4.73 $4.68 $4.79
- ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .11 .15 .19 .19 .16
Net gains (losses) (both realized and
unrealized) .12 (.11) .02 .05 (.11)
- ----------------------------------------------------------------------------------------------------
Total from investment operations .23 .04 .21 .24 .05
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.12) (.14) (.20) (.19) (.16)
- ----------------------------------------------------------------------------------------------------
Proceeds from regulatory settlement .00(a) -- -- -- --
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $4.75 $4.64 $4.74 $4.73 $4.68
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN 4.96%(b) .93% 4.41% 5.31% 1.19%
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(c)
Gross expenses prior to expense
waiver/reimbursement .90% .90% .90% .86% .88%
- ----------------------------------------------------------------------------------------------------
Net expenses after expense
waiver/reimbursement(d) .78% .76% .76%(e) .72% .72%
- ----------------------------------------------------------------------------------------------------
Net investment income (loss) 2.43% 3.15% 4.06% 4.09% 3.27%
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (in millions) $5 $4 $5 $4 $19
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate(f) 329% 271% 209% 168% 194%
- ----------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED MAY 31,
CLASS W ----------------------------------------
PER SHARE DATA 2010 2009 2008 2007(i)
Net asset value, beginning of period $4.63 $4.74 $4.73 $4.75
- -------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .11 .14 .18 .08
Net gains (losses) (both realized and
unrealized) .11 (.12) .02 (.02)
- -------------------------------------------------------------------------------------------
Total from investment operations .22 .02 .20 .06
- -------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.11) (.13) (.19) (.08)
- -------------------------------------------------------------------------------------------
Proceeds from regulatory settlement .00(a) -- -- --
- -------------------------------------------------------------------------------------------
Net asset value, end of period $4.74 $4.63 $4.74 $4.73
- -------------------------------------------------------------------------------------------
TOTAL RETURN 4.81%(b) .52% 4.21% 1.42%
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(c)
Gross expenses prior to expense
waiver/reimbursement 1.04% 1.04% 1.06% 1.00%(h)
- -------------------------------------------------------------------------------------------
Net expenses after expense
waiver/reimbursement(d) .92% .96% .95% .95%(h)
- -------------------------------------------------------------------------------------------
Net investment income (loss) 2.29% 2.95% 3.87% 4.02%(h)
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (in millions) $-- $-- $-- $--
- -------------------------------------------------------------------------------------------
Portfolio turnover rate(f) 329% 271% 209% 168%
- -------------------------------------------------------------------------------------------
</Table>
See accompanying Notes to Financial Highlights.
- --------------------------------------------------------------------------------
40 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS
(a) Rounds less than $0.01 per share.
(b) During the year ended May 31, 2010, the Fund received proceeds from a
regulatory settlement. Had the Fund not received these proceeds, the total
return would have been lower by 0.02%.
(c) In addition to the fees and expenses which the Fund bears directly, the Fund
indirectly bears a pro rata share of the fees and expenses of the acquired
funds in which it invests. Such indirect expenses are not included in the
reported expense ratios.
(d) The Investment Manager and its affiliates agreed to waive/reimburse certain
fees and expenses (excluding fees and expenses of acquired funds).
(e) For the year ended May 31, 2008, the ratio of net expenses after reduction
for waiver/reimbursement, if any, and after reduction for earnings and bank
fee credits was 0.88% for Class A, 1.64% for Class B, 1.64% for Class C,
0.50% for Class I and 0.75% for Class R4.
(f) Includes mortgage dollar rolls. If mortgage dollar roll transactions were
excluded, the portfolio turnover would have been 286% and 199% for the years
ended May 31, 2010 and 2009, respectively.
(g) For the period from Aug. 3, 2009 (when shares became publicly available) to
May 31, 2010.
(h) Annualized.
(i) For the period from Dec. 1, 2006 (when shares became publicly available) to
May 31, 2007.
The accompanying Notes to Financial Statements are an integral part of this
statement.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 41
NOTES TO FINANCIAL STATEMENTS --------------------------------------------------
1. ORGANIZATION
RiverSource Short Duration U.S. Government Fund (the Fund) is a series of
RiverSource Government Income Series, Inc. (the Corporation) and is registered
under the Investment Company Act of 1940, as amended (the 1940 Act), as a
diversified, open-end management investment company. The Corporation has 10
billion authorized shares of capital stock that can be allocated among the
separate series as designated by the Corporation's Board of Directors (the
Board). The Fund invests in direct obligations of the U.S. government, such as
Treasury bonds, bills and notes, and of its agencies and instrumentalities. The
Fund may invest to a substantial degree in securities issued by various entities
sponsored by the U.S. government. The Fund may also invest in debt securities
that are not issued by the U.S. government, its agencies or instrumentalities,
as well as securities that are denominated in currencies other than U.S. dollar.
The Fund offers Class A, Class B, Class C, Class I, Class R2, Class R4 and Class
W shares.
- - Class A shares are offered with a front-end sales charge, which may be waived
under certain circumstances.
- - Class B shares may be subject to a contingent deferred sales charge (CDSC)
and automatically convert to Class A shares one month after the completion of
the eighth year of ownership if originally purchased in a RiverSource fund on
or after May 21, 2005 or originally purchased in a Seligman fund on or after
June 13, 2009. Class B shares originally purchased in a RiverSource fund
prior to May 21, 2005 will convert to Class A shares in the ninth calendar
year of ownership. Class B shares originally purchased in a Seligman fund
prior to June 13, 2009 will convert to Class A shares in the month prior to
the ninth year of ownership.
- - Class C shares may be subject to a CDSC.
- - Class I, Class R2 and Class R4 shares are offered without a front-end sales
charge or CDSC to qualifying institutional investors. Class R2 shares became
available effective Aug. 3, 2009.
- - Class W shares are offered without a front-end sales charge or CDSC and are
offered through qualifying discretionary accounts.
At May 31, 2010, Columbia Management Investment Advisers, LLC (formerly
RiverSource Investments, LLC) (the Investment Manager) and affiliated funds-of-
funds owned 100% of Class I shares, and the Investment Manager owned 100% of
Class W shares.
All classes of shares have identical voting, dividend and liquidation rights.
Class specific expenses (e.g., distribution and service fees, transfer agency
fees, plan
- --------------------------------------------------------------------------------
42 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
administration services fees) differ among classes. Income, expenses (other than
class specific expenses) and realized and unrealized gains or losses on
investments are allocated to each class of shares based upon its relative net
assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ADOPTION OF NEW ACCOUNTING STANDARD
In June 2009, the Financial Accounting Standards Board (FASB) established the
FASB Accounting Standards Codification(TM )(Codification) as the single source
of authoritative accounting principles recognized by the FASB in the preparation
of financial statements in conformity with U.S. generally accepted accounting
principles (GAAP). The Codification supersedes existing non-grandfathered, non-
SEC accounting and reporting standards. The Codification did not change GAAP
but, rather, organized it into a hierarchy where all guidance within the
Codification carries an equal level of authority. The Codification became
effective for financial statements issued for interim and annual periods ending
after Sept. 15, 2009. The Codification did not have an effect on the Fund's
financial statements.
USE OF ESTIMATES
Preparing financial statements that conform to U.S. generally accepted
accounting principles requires management to make estimates (e.g., on assets,
liabilities and contingent assets and liabilities) that could differ from actual
results.
VALUATION OF SECURITIES
All securities are valued at the close of business of the New York Stock
Exchange (NYSE). Securities traded on national securities exchanges or included
in national market systems are valued at the last quoted sales price from the
primary exchange. Debt securities are generally traded in the over-the-counter
market and are valued by an independent pricing service using an evaluated bid.
When market quotes are not readily available, the pricing service, in
determining fair values of debt securities, takes into consideration such
factors as current quotations by broker/dealers, coupon, maturity, quality, type
of issue, trading characteristics, and other yield and risk factors it deems
relevant in determining valuations. The procedures adopted by the Board
generally contemplate the use of fair valuation in the event that price
quotations or valuations are not readily available, price quotations or
valuations from other sources are not reflective of market value and thus deemed
unreliable, or a significant event has occurred in relation to a security or
class of securities that is not reflected in price quotations or valuations from
other sources. A fair value price is a good faith estimate of the value of a
security at a given point in time.
Short-term securities maturing in more than 60 days from the valuation date are
valued at the market price or approximate market value based on current interest
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 43
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
rates. Typically, those maturing in 60 days or less that originally had
maturities of more than 60 days at acquisition date are valued at amortized cost
using the market value on the 61st day before maturity. Short-term securities
maturing in 60 days or less at acquisition date are valued at amortized cost.
Amortized cost is an approximation of market value. Investments in money market
funds are valued at net asset value.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. Generally, securities received as
collateral subject to repurchase agreements are deposited with the Fund's
custodian and, pursuant to the terms of the repurchase agreement, must have an
aggregate market value greater than or equal to the repurchase price plus
accrued interest at all times. The market value of securities held as collateral
for repurchase agreements is monitored on a daily basis to ensure the existence
of the proper level of collateral.
SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS
Delivery and payment for securities that have been purchased by the Fund on a
forward-commitment basis, including when-issued securities and other forward-
commitments, can take place one month or more after the transaction date. During
this period, such securities are subject to market fluctuations, and they may
affect the Fund's net assets the same as owned securities. The Fund designates
cash or liquid securities at least equal to the amount of its forward-
commitments. At May 31, 2010, the Fund has outstanding when-issued securities of
$71,321,105.
The Fund also enters into transactions to sell purchase commitments to third
parties at current market values and concurrently acquires other purchase
commitments for similar securities at later dates. As an inducement for the Fund
to "roll over" its purchase commitments, the Fund receives negotiated amounts in
the form of reductions of the purchase price of the commitment. The Fund records
the incremental difference between the forward purchase and sale of each forward
roll as realized gain or loss. Losses may arise due to changes in the value of
the securities or if a counterparty does not perform under the terms of the
agreement. If a counterparty files for bankruptcy or becomes insolvent, the
Fund's right to repurchase or sell securities may be limited.
FORWARD SALE COMMITMENTS
The Fund may enter into forward sale commitments to hedge its portfolio
positions or to sell mortgage-backed securities it owns under delayed delivery
arrangements. Proceeds of forward sale commitments are not received until the
contractual settlement date. During the time a forward sale commitment is
outstanding, equivalent deliverable securities, or an offsetting forward
purchase commitment deliverable on or before the sale commitment date, are used
to satisfy the commitment.
- --------------------------------------------------------------------------------
44 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
Unsettled forward sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Valuation of securities" above. The forward sale commitment is "marked-to-
market" daily and the change in market value is recorded by the Fund as an
unrealized gain or loss. If the forward sale commitment is closed through the
acquisition of an offsetting purchase commitment, the Fund realizes a gain or
loss. If the Fund delivers securities under the commitment, the Fund realizes a
gain or a loss from the sale of the securities based upon the market price
established at the date the commitment was entered into. Forward sale
commitments outstanding at period end are listed in the Notes to Portfolio of
Investments.
GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liabilities arising out of the performance of their
duties to the Fund. In addition, certain of the Fund's contracts with its
service providers contain general indemnification clauses. The Fund's maximum
exposure under these arrangements is unknown since the amount of any future
claims that may be made against the Fund cannot be determined and the Fund has
no historical basis for predicting the likelihood of any such claims.
FEDERAL TAXES
The Fund's policy is to comply with Subchapter M of the Internal Revenue Code
that applies to regulated investment companies and to distribute substantially
all of its taxable income (which includes net short-term capital gains) to
shareholders. No provision for income or excise taxes is thus required.
Management of the Fund has concluded that there are no significant uncertain tax
positions that would require recognition in the financial statements. Generally,
the tax authorities can examine all tax returns filed for the last three years.
RECENT ACCOUNTING PRONOUNCEMENT
On Jan. 21, 2010, the FASB issued an Accounting Standards Update (the
amendment), Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements, which provides guidance on how
investment assets and liabilities are to be valued and disclosed. Specifically,
the amendment requires reporting entities to disclose the input and valuation
techniques used to measure fair value for both recurring and non-recurring fair
value measurements for Level 2 and Level 3 positions. The amendment also
requires that transfers between all levels (including Level 1 and Level 2) be
disclosed on a gross basis (i.e., transfers out must be disclosed separately
from transfers in), and the reason(s) for the transfer. Additionally purchases,
sales, issuances and settlements must be disclosed on a gross basis in the Level
3
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 45
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
rollforward. The effective date of the amendment is for interim and annual
periods beginning after Dec. 15, 2009, however, the requirement to provide the
Level 3 activity for purchases, sales, issuances and settlements on a gross
basis will be effective for interim and annual periods beginning after Dec. 15,
2010. At this time the Fund is evaluating the implications of the amendment and
the impact to the financial statements.
DIVIDENDS TO SHAREHOLDERS
Dividends from net investment income, declared daily and payable monthly, when
available, are reinvested in additional shares of the Fund at net asset value or
payable in cash. Capital gains, when available, are distributed along with the
last income dividend of the calendar year.
OTHER
Security transactions are accounted for on the date securities are purchased or
sold. Dividend income, if any, is recognized on the ex-dividend date and
interest income, including amortization of premium, market discount and original
issue discount using the effective interest method, is accrued daily.
3. INVESTMENTS IN DERIVATIVES
The Fund may invest in certain derivative instruments, which are transactions
whose values depend on or are derived from (in whole or in part) the value of
one or more other assets, such as securities, currencies, commodities or
indices. Such derivative instruments may be used to maintain cash reserves while
maintaining exposure to certain other assets, to offset anticipated declines in
values of investments, to facilitate trading, to reduce transaction costs, and
to pursue higher investment returns. The Fund may also use derivative
instruments to mitigate certain investment risks, such as foreign currency
exchange rate risk, interest rate risk, and credit risk. Investments in
derivative instruments may expose the Fund to certain additional risks,
including those detailed below.
FUTURES TRANSACTIONS
The Fund may buy and sell financial futures contracts traded on any U.S. or
foreign exchange to produce incremental earnings, hedge existing positions or
protect against market changes in the value of equities, interest rates or
foreign currencies. The Fund may also buy and write put and call options on
these futures contracts. A futures contract represents a commitment for the
future purchase or sale of an asset at a specified price on a specified date.
Futures and options on futures are valued daily based upon the last sale price
at the close of the market on the principal exchange on which they are traded.
Upon entering into a futures contract, the Fund is required to deposit either
cash or securities in an amount (initial margin) equal to a certain percentage
of the
- --------------------------------------------------------------------------------
46 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
contract value. Subsequent payments (variation margin) are made or received by
the Fund each day. The variation margin payments are equal to the daily changes
in the contract value and are recorded as unrealized gains and losses. The Fund
recognizes a realized gain or loss when the contract is closed or expires.
Upon entering into futures contracts, the Fund bears the risk of interest rates,
exchange rates or securities prices moving unexpectedly, in which case, the Fund
may not achieve the anticipated benefits of the futures contracts and may
realize a loss. Additional risks include counterparty credit risk, the
possibility of an illiquid market, and that a change in the value of the
contract or option may not correlate with changes in the value of the underlying
securities.
OPTIONS TRANSACTIONS
The Fund may buy and write options traded on any U.S. or foreign exchange, or in
the over-the-counter (OTC) market to produce incremental earnings, protect
gains, and facilitate buying and selling of securities for investments. The Fund
may also buy and sell put and call options and write covered call options on
portfolio securities. This may include purchasing mortgage-backed security (MBS)
put spread options and writing covered MBS call spread options. MBS spread
options are based upon the changes in the price spread between a specified
mortgage-backed security and a like-duration Treasury security. Options are
contracts which entitle the holder to purchase or sell securities or other
financial instruments at a specified price, or in the case of index options, to
receive or pay the difference between the index value and the strike price of
the index option. Completion of transactions for options traded in the OTC
market depends upon the performance of the other party. Cash collateral may be
collected or posted by the Fund to secure certain OTC options trades. Cash
collateral held or posted by the Fund for such option trades must be returned to
the counterparty or the Fund upon closure, exercise or expiration of the
contract.
Option contracts purchased are recorded as investments and options contracts
written are recorded as liabilities of the Fund. Option contracts are valued
daily at the closing prices on their primary exchanges and unrealized
appreciation or depreciation is recorded. Option contracts, including OTC option
contracts, with no readily available market value are valued using quotations
obtained from independent brokers as of the close of the NYSE. The Fund will
realize a gain or loss when the option transaction expires or is exercised. When
options on debt securities or futures are exercised, the Fund will realize a
gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
The risk in buying an option is that the Fund pays a premium whether or not the
option is exercised. The Fund also has the additional risk of being unable to
enter
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 47
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
into a closing transaction if a liquid secondary market does not exist. The risk
in writing a call option is that the Fund gives up the opportunity for profit if
the market price of the security increases. The risk in writing a put option is
that the Fund may incur a loss if the market price of the security decreases and
the option is exercised. The Fund's maximum payout in the case of written put
option contracts represents the maximum potential amount of future payments
(undiscounted) that the Fund could be required to make as a guarantor for
written put options. The maximum payout amount may be offset by the subsequent
sale, if any, of assets obtained upon the exercise of the put options by holders
of the option contracts or proceeds received upon entering into the contracts.
For OTC options contracts, the transaction is also subject to counterparty
credit risk.
EFFECTS OF DERIVATIVE TRANSACTIONS ON THE FINANCIAL STATEMENTS
The following tables are intended to provide additional information about the
effect of derivatives on the financial statements of the Fund including: the
fair value of derivatives by risk category and the location of those fair values
in the Statement of Assets and Liabilities; the impact of derivative
transactions on the Fund's operations over the period including realized gains
or losses and unrealized gains or losses. The derivative schedules following the
Portfolio of Investments present additional information regarding derivative
instruments outstanding at the end of the period, if any.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AT MAY 31, 2010
<Table>
<Caption>
ASSET DERIVATIVES LIABILITY DERIVATIVES
------------------------------- -------------------------------
STATEMENT OF ASSETS STATEMENT OF ASSETS
RISK EXPOSURE AND LIABILITIES AND LIABILITIES
CATEGORY LOCATION FAIR VALUE LOCATION FAIR VALUE
- -------------------------------------------------------------------------------------------
Net
assets --unrealized
Interest rate depreciation on
contracts N/A N/A investments $269,303*
- -------------------------------------------------------------------------------------------
</Table>
* Includes cumulative appreciation (depreciation) of futures contracts as
reported in the Futures Contracts Outstanding table following the Portfolio
of Investments. Only the current day's variation margin is reported in
receivables or payables in the Statement of Assets and Liabilities.
EFFECT OF DERIVATIVE INSTRUMENTS IN THE STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 2010
<Table>
<Caption>
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED IN INCOME
- ------------------------------------------------------------------------
RISK EXPOSURE CATEGORY FUTURES OPTIONS TOTAL
- ------------------------------------------------------------------------
Interest rate contracts $722,882 $50,491 $773,373
- ------------------------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
48 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
<Table>
<Caption>
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
IN INCOME
- ----------------------------------------------------------------------------
RISK EXPOSURE CATEGORY FUTURES OPTIONS TOTAL
- ----------------------------------------------------------------------------
Interest rate contracts $(1,172,732) $-- $(1,172,732)
- ----------------------------------------------------------------------------
</Table>
VOLUME OF DERIVATIVE ACTIVITY
FUTURES
The gross notional amount of long and short contracts outstanding was
approximately $148.1 million and $95.8 million, respectively, at May 31, 2010.
The monthly average gross notional amounts for long and short contracts was
$102.4 million and $52.8 million, respectively, for the year ended May 31, 2010.
The fair value of such contracts at May 31, 2010 is set forth in the table
above.
OPTIONS
At May 31, 2010, the Fund had no outstanding options contracts. During the year
ended May 31, 2010, the Fund entered into, and subsequently closed, 270 options
contracts, of which, the average gross notional amount was approximately
$118,241.
4. EXPENSES AND SALES CHARGES
INVESTMENT MANAGEMENT SERVICES FEES
Under an Investment Management Services Agreement, the Investment Manager
determines which securities will be purchased, held or sold. The management fee
is an annual fee that is equal to a percentage of the Fund's average daily net
assets that declines from 0.48% to 0.25% as the Fund's net assets increase. The
management fee for the year ended May 31, 2010 was 0.48% of the Fund's average
daily net assets.
ADMINISTRATIVE SERVICES FEES
Under an Administrative Services Agreement, the Fund pays Ameriprise Financial
an annual fee for administration and accounting services equal to a percentage
of the Fund's average daily net assets that declines from 0.07% to 0.04% as the
Fund's net assets increase. The fee for the year ended May 31, 2010 was 0.07% of
the Fund's average daily net assets.
OTHER FEES
Other expenses are for, among other things, certain expenses of the Fund or the
Board including: Fund boardroom and office expense, employee compensation,
employee health and retirement benefits, and certain other expenses. Payment of
these Fund and Board expenses is facilitated by a company providing limited
administrative services to the Fund and the Board. For the year ended May 31,
2010, there were no expenses incurred for these particular items.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 49
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
COMPENSATION OF BOARD MEMBERS
Under a Deferred Compensation Plan (the Plan), the board members who are not
"interested persons" of the Fund under the 1940 Act may defer receipt of their
compensation. Deferred amounts are treated as though equivalent dollar amounts
had been invested in shares of the Fund or other RiverSource, Seligman and
Threadneedle funds. The Fund's liability for these amounts is adjusted for
market value changes and remains in the funds until distributed in accordance
with the Plan.
TRANSFER AGENCY FEES
Under a Transfer Agency Agreement, Columbia Management Investment Services Corp.
(formerly RiverSource Service Corporation) (the Transfer Agent) maintains Fund
shareholder accounts and records and provides Fund shareholder services. The
Fund pays the Transfer Agent an annual account-based fee at a rate equal to
$20.50 for Class A, $21.50 for Class B and $21.00 for Class C for this service.
The Transfer Agent also charges an annual fee of $3 per account serviced
directly by the Fund or its designated agent for Class A, Class B and Class C
shares. The Fund also pays the Transfer Agent an annual asset-based fee at a
rate of 0.05% of the Fund's average daily net assets attributable to Class R2
and Class R4 shares and an annual asset-based fee at a rate of 0.20% of the
Fund's average daily net assets attributable to Class W shares. The Transfer
Agent charges an annual fee of $5 per inactive account, charged on a pro rata
basis for the 12 month period from the date the account becomes inactive. These
fees are included in the transfer agency fees in the Statement of Operations.
The Fund and certain other associated investment companies (together, the
Guarantors), have severally, but not jointly, guaranteed the performance and
observance of all the terms and conditions of a lease entered into by Seligman
Data Corp. (SDC), the former transfer agent of Seligman U.S. Government Fund,
which was acquired by the Fund on Aug. 28, 2009 (See Note 12), including the
payment of rent by SDC (the Guaranty). The lease and the Guaranty expire in
January 2019. At May 31, 2010, the Fund's total potential future obligation over
the life of the Guaranty is $93,960. The liability remaining at May 31, 2010 for
Non-Recurring Charges amounted to $47,906 and is included within other accrued
expenses in the Statement of Assets and Liabilities.
PLAN ADMINISTRATION SERVICES FEES
Under a Plan Administration Services Agreement with the Transfer Agent, the Fund
pays an annual fee at a rate of 0.25% of the Fund's average daily net assets
attributable to Class R2 and Class R4 shares for the provision of various
administrative, recordkeeping, communication and educational services.
- --------------------------------------------------------------------------------
50 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
DISTRIBUTION FEES
The Fund has an agreement with Columbia Management Investment Distributors, Inc.
(formerly RiverSource Fund Distributors, Inc.) (the Distributor) for
distribution and shareholder services. Under a Plan and Agreement of
Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate of up
to 0.25% of the Fund's average daily net assets attributable to Class A and
Class W shares, a fee at an annual rate of up to 0.50% of the Fund's average
daily net assets attributable to Class R2 shares and a fee at an annual rate of
up to 1.00% of the Fund's average daily net assets attributable to Class B and
Class C shares. For Class B and Class C shares, of the 1.00% fee, up to 0.75% is
reimbursed for distribution expenses.
The amount of distribution expenses incurred by the Distributor and not yet
reimbursed (unreimbursed expense) was approximately $3,602,000 and $145,000 for
Class B and Class C shares, respectively. These amounts are based on the most
recent information available as of Jan. 31, 2010, and may be recovered from
future payments under the distribution plan or CDSC. To the extent the
unreimbursed expense has been fully recovered, the distribution fee is reduced.
SALES CHARGES
Sales charges, including front-end and CDSCs, received by the Distributor for
distributing Fund shares were $358,649 for Class A, $29,709 for Class B and
$3,881 for Class C for the year ended May 31, 2010.
EXPENSES WAIVED/REIMBURSED BY THE INVESTMENT MANAGER AND ITS AFFILIATES
For the year ended May 31, 2010, the Investment Manager and its affiliates
waived/reimbursed certain fees and expenses such that net expenses (excluding
fees and expenses of acquired funds*) were as follows:
<Table>
Class A.............................................. 0.86%
Class B.............................................. 1.62
Class C.............................................. 1.62
Class I.............................................. 0.48
Class R2............................................. 1.28
Class R4............................................. 0.78
Class W.............................................. 0.92
</Table>
The waived/reimbursed fees and expenses for the transfer agency fees at the
class level were as follows:
<Table>
Class A........................................... $336,882
Class B........................................... 54,459
Class C........................................... 15,836
</Table>
The management fees waived/reimbursed at the Fund level were $793,993.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 51
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
Under an agreement which is effective until July 31, 2010, the Investment
Manager and its affiliates have contractually agreed to waive certain fees and
reimburse certain expenses such that net expenses (excluding fees and expenses
of acquired funds*), will not exceed the following percentage of the class'
average daily net assets:
<Table>
Class A.............................................. 0.86%
Class B.............................................. 1.62
Class C.............................................. 1.62
Class I.............................................. 0.48
Class R2............................................. 1.28
Class R4............................................. 0.78
Class W.............................................. 0.93
</Table>
Effective Aug. 1, 2010, the Investment Manager and its affiliates have
contractually agreed to waive certain fees and expenses until July 31, 2011,
unless sooner terminated at the sole discretion of the Board, such that net
expenses (excluding fees and expenses of acquired funds*), will not exceed the
following percentage of the class' average daily net assets:
<Table>
Class A.............................................. 0.84%
Class B.............................................. 1.60
Class C.............................................. 1.60
Class I.............................................. 0.44
Class R2............................................. 1.24
Class R4............................................. 0.74
Class W.............................................. 0.89
</Table>
* In addition to the fees and expenses which the Fund bears directly, the Fund
indirectly bears a pro rata share of the fees and expenses of the funds in
which it invests (also referred to as "acquired funds"), including
affiliated and non-affiliated pooled investment vehicles (including mutual
funds and exchange traded funds). Because the acquired funds have varied
expense and fee levels and the Fund may own different proportions of
acquired funds at different times, the amount of fees and expenses incurred
indirectly by the Fund will vary.
5. SECURITIES TRANSACTIONS
Cost of purchases of securities (other than short-term obligations, but
including mortgage dollar rolls) aggregated $2,266,757,959 for the year ended
May 31, 2010 (including $68,506,478* from Seligman U.S. Government Securities
Fund that was acquired in the fund merger as described in Note 12). Proceeds
from sales of securities (other than short-term obligations, but including
mortgage dollar rolls) aggregated $2,360,931,834 for the year ended May 31,
2010, including $2,166,264* of sales to realign the Fund's portfolio following
the fund merger. Realized gains and losses are determined on an identified cost
basis.
* This purchase amount is excluded for purposes of calculating the Fund's
portfolio turnover rate.
- --------------------------------------------------------------------------------
52 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
6. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED MAY 31, 2010 2009*
- -------------------------------------------------------------------
CLASS A
Sold 18,853,705 48,901,406
Fund merger 7,186,369 N/A
Converted from Class B** 5,576,336 4,370,833
Reinvested distributions 2,438,534 3,226,458
Redeemed (45,489,263) (56,089,954)
- -------------------------------------------------------------------
Net increase (decrease) (11,434,319) 408,743
- -------------------------------------------------------------------
CLASS B
Sold 1,600,644 7,298,534
Fund merger 1,049,408 N/A
Reinvested distributions 283,399 575,044
Converted to Class A** (5,576,350) (4,370,833)
Redeemed (7,723,130) (12,533,807)
- -------------------------------------------------------------------
Net increase (decrease) (10,366,029) (9,031,062)
- -------------------------------------------------------------------
CLASS C
Sold 1,563,844 1,525,411
Fund merger 3,561,144 N/A
Reinvested distributions 64,062 46,643
Redeemed (2,103,348) (827,332)
- -------------------------------------------------------------------
Net increase (decrease) 3,085,702 744,722
- -------------------------------------------------------------------
CLASS I
Sold 6,758,907 2,986,449
Reinvested distributions 322,307 469,925
Redeemed (1,885,792) (13,974,458)
- -------------------------------------------------------------------
Net increase (decrease) 5,195,422 (10,518,084)
- -------------------------------------------------------------------
CLASS R2
Sold 201,664 N/A
Fund merger 728,900 N/A
Reinvested distributions 1,739 N/A
Redeemed (300,411) N/A
- -------------------------------------------------------------------
Net increase (decrease) 631,892 N/A
- -------------------------------------------------------------------
CLASS R4
Sold 522,899 491,850
Reinvested distributions 21,965 29,090
Redeemed (487,406) (590,144)
- -------------------------------------------------------------------
Net increase (decrease) 57,458 (69,204)
- -------------------------------------------------------------------
</Table>
* Certain line items from the prior year have been renamed to conform to the
current year presentation.
** Automatic conversion of Class B shares to Class A shares based on the
original purchase date.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 53
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
7. LENDING OF PORTFOLIO SECURITIES
The Fund has entered into a Master Securities Lending Agreement (the Agreement)
with JPMorgan Chase Bank, National Association (JPMorgan). The Agreement
authorizes JPMorgan as lending agent to lend securities to authorized borrowers
in order to generate additional income on behalf of the Fund. Pursuant to the
Agreement, the securities loaned are secured by cash or U.S. government
securities equal to at least 100% of the market value of the loaned securities.
Any additional collateral required to maintain those levels due to market
fluctuations of the loaned securities is delivered the following business day.
Cash collateral received is invested by the lending agent on behalf of the Fund
into authorized investments pursuant to the Agreement. The investments made with
the cash collateral are listed in the Portfolio of Investments. The values of
such investments and any uninvested cash collateral are disclosed in the
Statement of Assets and Liabilities along with the related obligation to return
the collateral upon the return of the securities loaned. At May 31, 2010,
securities valued at $56,803,338 were on loan, secured by U.S. government
securities valued at $40,813,959 and by cash collateral of $17,103,600 invested
in short-term securities or in cash equivalents.
Risks of delay in recovery of securities or even loss of rights in the
securities may occur should the borrower of the securities fail financially.
Risks may also arise to the extent that the value of the securities loaned
increases above the value of the collateral received. JPMorgan will indemnify
the Fund from losses resulting from a borrower's failure to return a loaned
security when due. Such indemnification does not extend to losses associated
with declines in the value of cash collateral investments. Loans are subject to
termination by the Fund or the borrower at any time, and are, therefore, not
considered to be illiquid investments.
Pursuant to the Agreement, the Fund receives income for lending its securities
either in the form of fees or by earning interest on invested cash collateral,
net of negotiated rebates paid to borrowers and fees paid to the lending agent
for services provided and any other securities lending expenses. Net income of
$131,932 earned from securities lending for the year ended May 31, 2010 is
included in the Statement of Operations. The Fund also continues to earn
interest and dividends on the securities loaned.
- --------------------------------------------------------------------------------
54 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
8. OPTIONS CONTRACTS WRITTEN
Contracts and premiums associated with options contracts written during the year
ended May 31, 2010, are as follows:
<Table>
<Caption>
CALLS PUTS
------------------- -------------------
CONTRACTS PREMIUMS CONTRACTS PREMIUMS
- --------------------------------------------------------------------------
Balance May 31, 2009............ -- $ -- -- $ --
Opened.......................... 100 32,579 170 56,217
Closed.......................... (100) (32,579) (170) (56,217)
Balance May 31, 2010............ -- $ -- -- $ --
</Table>
9. AFFILIATED MONEY MARKET FUND
The Fund may invest its daily cash balance in RiverSource Short-Term Cash Fund,
a money market fund established for the exclusive use of RiverSource, Seligman
and Threadneedle funds and other institutional clients of the Investment
Manager. The cost of the Fund's purchases and proceeds from sales of shares of
RiverSource Short-Term Cash Fund aggregated $84,381,710 and $95,861,197,
respectively, for the year ended May 31, 2010. The income distributions received
with respect to the Fund's investment in RiverSource Short-Term Cash Fund can be
found in the Statement of Operations and the Fund's invested balance in
RiverSource Short-Term Cash Fund at May 31, 2010, can be found in the Portfolio
of Investments.
10. BANK BORROWINGS
The Fund has entered into a revolving credit facility with a syndicate of banks
led by JPMorgan Chase Bank, N.A. (the Administrative Agent), whereby the Fund
may borrow for the temporary funding of shareholder redemptions or for other
temporary or emergency purposes. The credit facility became effective on Oct.
15, 2009, replacing a prior credit facility. The credit facility agreement,
which is a collective agreement between the Fund and certain other RiverSource,
Seligman and Threadneedle funds, severally and not jointly, permits collective
borrowings up to $300 million. The borrowers shall have the right, upon written
notice to the Administrative Agent to request an increase of up to $200 million
in the aggregate amount of the credit facility from new or existing lenders,
provided that the aggregate amount of the credit facility shall at no time
exceed $500 million. Participation in such increase by any existing lender shall
be at such lender's sole discretion. Interest is charged to each Fund based on
its borrowings at a rate equal to the sum of the federal funds rate plus (i)
1.25% per annum plus (ii) if one-month LIBOR exceeds the federal funds rate, the
amount of such excess. Each borrowing under the credit facility matures no later
than 60 days after the date of borrowing. The Fund also pays a commitment fee
equal to its pro rata share of the amount of the credit facility at a rate of
0.10% per
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 55
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
annum, in addition to an upfront fee equal to its pro rata share of 0.04% of the
amount of the credit facility. Prior to Oct. 15, 2009, the credit facility
agreement, which was a collective agreement between the Fund and certain other
RiverSource, Seligman and Threadneedle funds, severally and not jointly,
permitted collective borrowings up to $475 million. Interest was charged to each
Fund based on its borrowings at a rate equal to the federal funds rate plus
0.75%. The Fund also paid a commitment fee equal to its pro rata share of the
amount of the credit facility at a rate of 0.06% per annum, in addition to an
upfront fee equal to its pro rata share of 0.02% of the amount of the credit
facility. The Fund had no borrowings during the year ended May 31, 2010.
11. PROCEEDS FROM REGULATORY SETTLEMENT
During the year ended May 31, 2010, as a result of a settlement of an
administrative proceeding brought by the Securities and Exchange Commission
against an unaffiliated third party relating to market timing and/or late
trading of mutual funds, the Fund received $112,925, which represented the
Fund's portion of the proceeds from the settlement (the Fund was not a party to
the proceeding). The proceeds received by the Fund were recorded as an increase
to additional paid-in capital.
12. FUND MERGER
At the close of business on Aug. 28, 2009, RiverSource Short Duration U.S.
Government Fund acquired the assets and assumed the identified liabilities of
Seligman U.S. Government Securities Fund. The reorganization was completed after
shareholders approved the plan on June 29, 2009.
The aggregate net assets of RiverSource Short Duration U.S. Government Fund
immediately before the acquisition were $655,221,348 and the combined net assets
immediately after the acquisition were $713,992,375.
The merger was accomplished by a tax-free exchange of 8,071,788 shares of
Seligman U.S. Government Securities Fund valued at $58,771,027.
In exchange for Seligman U.S. Government Securities Fund shares and net assets,
RiverSource Short Duration U.S. Government Fund issued the following number of
shares:
<Table>
<Caption>
SHARES
- -------------------------------------------------------------
Class A........................................... 7,186,369
Class B........................................... 1,049,408
Class C........................................... 3,561,144
Class R2.......................................... 728,900
</Table>
- --------------------------------------------------------------------------------
56 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
For financial reporting purposes, net assets received and shares issued by
RiverSource Short Duration U.S. Government Fund were recorded at fair value;
however, Seligman U.S. Government Securities Fund's cost of investments was
carried forward to align ongoing reporting of RiverSource Short Duration U.S.
Government Fund's realized and unrealized gains and losses with amounts
distributable to shareholders for tax purposes.
The components of Seligman U.S. Government Securities Fund's net assets after
adjustments for any permanent book-to-tax differences at the merger date were as
follows:
<Table>
Total net assets................................. $58,771,027
Capital stock.................................... $62,591,453
Excess of distributions over net investment
income......................................... $ (59,434)
Accumulated net realized loss.................... $(5,240,048)
Unrealized appreciation.......................... $ 1,479,056
</Table>
The financial statements reflect the operations of RiverSource Short Duration
U.S. Government Fund for the period prior to the merger and the combined fund
for the period subsequent to the merger. Because the combined investment
portfolios have been managed as a single integrated portfolio since the merger
was completed, it is not practicable to separate the amounts of revenue and
earnings of Seligman U.S. Government Securities Fund that have been included in
the combined Fund's Statement of Operations since the merger was completed.
Assuming the merger had been completed on June 1, 2009, RiverSource Short
Duration U.S. Government Fund's pro-forma net investment income, net gain on
investments, and net increase in net assets from operations for the year ended
May 31, 2010 would have been $15.4 million, $4.5 million, and $32.6 million,
respectively.
13. FEDERAL TAX INFORMATION
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of futures and options
contracts, recognition of unrealized appreciation (depreciation) for certain
derivative investments and losses deferred due to wash sales. The character of
distributions made during the year from net investment income or net realized
gains may differ from their ultimate characterization for federal income tax
purposes. Also, due to the timing of dividend distributions, the fiscal year in
which amounts are distributed may differ from the year that the income or
realized gains were recorded by the Fund.
In the Statement of Assets and Liabilities, as a result of permanent book-to-tax
differences, excess of distributions over net investment income has been
decreased by $112,539 and accumulated net realized loss has been decreased by
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 57
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
$386 resulting in a net reclassification adjustment to decrease paid-in capital
by $112,925.
The tax character of distributions paid for the years indicated is as follows:
<Table>
<Caption>
YEAR ENDED MAY 31, 2010 2009
- ------------------------------------------------------------------
Ordinary income......................... $16,190,150 $21,702,437
Long-term capital gain.................. -- --
</Table>
At May 31, 2010, the components of distributable earnings on a tax basis are as
follows:
<Table>
Undistributed ordinary income................... $ 357,382
Undistributed accumulated long-term gain........ $ --
Accumulated realized loss....................... $(93,995,687)
Unrealized appreciation (depreciation).......... $ 4,054,009
</Table>
For federal income tax purposes, the Fund had a capital loss carry-over of
$93,995,687 at May 31, 2010, that if not offset by capital gains will expire as
follows:
<Table>
<Caption>
2012 2013 2014 2015 2017 2018
$1,261,719 $38,180,597 $22,499,962 $9,579,187 $3,846,817 $18,627,405
</Table>
It is unlikely the Board will authorize a distribution of any net realized
capital gains until the available capital loss carry-over has been offset or
expires. There is no assurance that the Fund will be able to utilize all of its
capital loss carry-over before it expires.
14. SUBSEQUENT EVENTS
Management has evaluated Fund related events and transactions that occurred
during the period from the date of the Statement of Assets and Liabilities
through the date of issuance of the Fund's financial statements. There were no
events or transactions that occurred during the period that materially impacted
the amounts or disclosures in the Fund's financial statements.
15. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS
In June 2004, an action captioned John E. Gallus et al. v. American Express
Financial Corp. and American Express Financial Advisors Inc. was filed in the
United States District Court for the District of Arizona. The plaintiffs allege
that they are investors in several American Express Company (now known as
RiverSource) mutual funds and they purport to bring the action derivatively on
behalf of those funds under the Investment Company Act of 1940. The plaintiffs
allege that fees allegedly paid to the defendants by the funds for investment
- --------------------------------------------------------------------------------
58 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
advisory and administrative services are excessive. The plaintiffs seek remedies
including restitution and rescission of investment advisory and distribution
agreements. The plaintiffs voluntarily agreed to transfer this case to the
United States District Court for the District of Minnesota (the District Court).
In response to defendants' motion to dismiss the complaint, the District Court
dismissed one of plaintiffs' four claims and granted plaintiffs limited
discovery. Defendants moved for summary judgment in April 2007. Summary judgment
was granted in the defendants' favor on July 9, 2007. The plaintiffs filed a
notice of appeal with the Eighth Circuit Court of Appeals (the Eighth Circuit)
on August 8, 2007. On April 8, 2009, the Eighth Circuit reversed summary
judgment and remanded to the District Court for further proceedings. On August
6, 2009, defendants filed a writ of certiorari with the U.S. Supreme Court (the
Supreme Court), asking the Supreme Court to stay the District Court proceedings
while the Supreme Court considers and rules in a case captioned Jones v. Harris
Associates, which involves issues of law similar to those presented in the
Gallus case. On March 30, 2010, the Supreme Court issued its ruling in Jones v.
Harris Associates, and on April 5, 2010, the Supreme Court vacated the Eighth
Circuit's decision in the Gallus case and remanded the case to the Eighth
Circuit for further consideration in light of the Supreme Court's decision in
Jones v. Harris Associates. On June 4, 2010, the Eighth Circuit remanded the
Gallus case to the District Court for further consideration in light of the
Supreme Court's decision in Jones v. Harris Associates.
In December 2005, without admitting or denying the allegations, American Express
Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc.
(Ameriprise Financial)), entered into settlement agreements with the Securities
and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC)
related to market timing activities. As a result, AEFC was censured and ordered
to cease and desist from committing or causing any violations of certain
provisions of the Investment Advisers Act of 1940, the Investment Company Act of
1940, and various Minnesota laws. AEFC agreed to pay disgorgement of $10 million
and civil money penalties of $7 million. AEFC also agreed to retain an
independent distribution consultant to assist in developing a plan for
distribution of all disgorgement and civil penalties ordered by the SEC in
accordance with various undertakings detailed at
http://www.sec.gov/litigation/admin/ia-2451.pdf. Ameriprise Financial and its
affiliates have cooperated with the SEC and the MDOC in these legal proceedings,
and have made regular reports to the RiverSource, Seligman and Threadneedle
funds' Boards of Directors/Trustees.
Ameriprise Financial and certain of its affiliates have historically been
involved in a number of legal, arbitration and regulatory proceedings, including
routine litigation, class actions, and governmental actions, concerning matters
arising in
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 59
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
connection with the conduct of their business activities. Ameriprise Financial
believes that the Funds are not currently the subject of, and that neither
Ameriprise Financial nor any of its affiliates are the subject of, any pending
legal, arbitration or regulatory proceedings that are likely to have a material
adverse effect on the Funds or the ability of Ameriprise Financial or its
affiliates to perform under their contracts with the Funds. Ameriprise Financial
is required to make 10-Q, 10-K and, as necessary, 8-K filings with the
Securities and Exchange Commission on legal and regulatory matters that relate
to Ameriprise Financial and its affiliates. Copies of these filings may be
obtained by accessing the SEC website at www.sec.gov.
There can be no assurance that these matters, or the adverse publicity
associated with them, will not result in increased fund redemptions, reduced
sale of fund shares or other adverse consequences to the Funds. Further,
although we believe proceedings are not likely to have a material adverse effect
on the Funds or the ability of Ameriprise Financial or its affiliates to perform
under their contracts with the Funds, these proceedings are subject to
uncertainties and, as such, we are unable to estimate the possible loss or range
of loss that may result. An adverse outcome in one or more of these proceedings
could result in adverse judgments, settlements, fines, penalties or other relief
that could have a material adverse effect on the consolidated financial
condition or results of operations of Ameriprise Financial.
- --------------------------------------------------------------------------------
60 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of RiverSource Short Duration U.S. Government Fund
(the Fund) (one of the portfolios constituting the RiverSource Government Income
Series, Inc.) as of May 31, 2010, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
three years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights of the Fund for the periods
presented through May 31, 2007, were audited by other auditors whose report
dated July 20, 2007, expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of May 31, 2010, by correspondence with the custodian and
brokers, or by other appropriate auditing procedures where replies from brokers
were not received. We believe that our audits provide a reasonable basis for our
opinion.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (continued) ------------
In our opinion, the financial statements and financial highlights audited by us
as referred to above present fairly, in all material respects, the financial
position of RiverSource Short Duration U.S. Government Fund of the RiverSource
Government Income Series, Inc. at May 31, 2010, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the three
years in the period then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
July 21, 2010
- --------------------------------------------------------------------------------
62 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
FEDERAL INCOME TAX INFORMATION -------------------------------------------------
(UNAUDITED)
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its fiscal
year. The dividends listed below are reported to you on Form 1099-DIV, Dividends
and Distributions. Shareholders should consult a tax advisor on how to report
distributions for state and local tax purposes.
Fiscal year ended May 31, 2010
<Table>
<Caption>
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for
distributions:
Qualified Dividend Income for individuals.................... 0.00%
Dividends Received Deduction for corporations................ 0.00%
U.S. Government Obligations.................................. 18.53%
</Table>
The Fund designates as distributions of long-term gains, to the extent necessary
to fully distribute such capital gains, earnings and profits distributed to
shareholders on the redemption of shares.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 63
BOARD MEMBERS AND OFFICERS -----------------------------------------------------
Shareholders elect a Board that oversees the Fund's operations. The Board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the Board. The following is a list of the Fund's Board members.
Each Board member oversees 152 RiverSource, Seligman and Threadneedle funds.
Under current Board policy, members generally serve until the next regular
shareholders' meeting, until he or she reaches the mandatory retirement age
established by the Board, or the fifteenth anniversary of the first Board
meeting they attended as members of the Board.
INDEPENDENT BOARD MEMBERS*
<Table>
<Caption>
OTHER PRESENT OR
NAME, POSITION HELD PAST DIRECTORSHIPS
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION (WITHIN PAST 5
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS YEARS)
- ------------------------------------------------------------------------------------------------------------------------------
Kathleen Blatz Board member since Chief Justice, Minnesota Supreme Court, 1998-2006; None
901 S. Marquette Ave. 1/11/06 Attorney
Minneapolis, MN 55402
Age 55
- ------------------------------------------------------------------------------------------------------------------------------
Arne H. Carlson Board member since Chair, RiverSource and Threadneedle Funds, 1999-2006; None
901 S. Marquette Ave. 1/5/99 former Governor of Minnesota
Minneapolis, MN 55402
Age 75
- ------------------------------------------------------------------------------------------------------------------------------
Pamela G. Carlton Board member since President, Springboard -- Partners in Cross Cultural None
901 S. Marquette Ave. 11/11/07 Leadership (consulting company)
Minneapolis, MN 55402
Age 55
- ------------------------------------------------------------------------------------------------------------------------------
Patricia M. Flynn Board member since Trustee Professor of Economics and Management, Bentley None
901 S. Marquette Ave. 11/1/04 University; former Dean, McCallum Graduate School of
Minneapolis, MN 55402 Business, Bentley University
Age 59
- ------------------------------------------------------------------------------------------------------------------------------
Anne P. Jones Board member since Attorney and Consultant None
901 S. Marquette Ave. 3/1/85
Minneapolis, MN 55402
Age 75
- ------------------------------------------------------------------------------------------------------------------------------
Jeffrey Laikind, CFA Board member since Former Managing Director, Shikiar Asset Management American Progressive
901 S. Marquette Ave. 11/1/05 Insurance; Hapoalim
Minneapolis, MN 55402 Securities USA, Inc.
Age 74
- ------------------------------------------------------------------------------------------------------------------------------
Stephen R. Lewis, Jr. Chair of the Board President Emeritus and Professor of Economics, Carleton Valmont Industries,
901 S. Marquette Ave. since 1/1/07, College Inc. (manufactures
Minneapolis, MN 55402 Board member irrigation systems)
Age 71 since 1/1/02
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
64 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
INDEPENDENT BOARD MEMBERS (CONTINUED)
<Table>
<Caption>
OTHER PRESENT OR
NAME, POSITION HELD PAST DIRECTORSHIPS
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION (WITHIN PAST 5
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS YEARS)
- ------------------------------------------------------------------------------------------------------------------------------
John F. Maher Board member Retired President and Chief Executive Officer and None
901 S. Marquette Ave. since 11/7/08 former Director, Great Western Financial Corporation
Minneapolis, MN 55402 (financial services), 1986-1997
Age 67
- ------------------------------------------------------------------------------------------------------------------------------
Catherine James Paglia Board member since Director, Enterprise Asset Management, Inc. (private None
901 S. Marquette Ave. 11/1/04 real estate and asset management company)
Minneapolis, MN 55402
Age 57
- ------------------------------------------------------------------------------------------------------------------------------
Leroy C. Richie Board member Counsel, Lewis & Munday, P.C. since 1987; Vice Digital Ally, Inc.
901 S. Marquette Ave. since 11/7/08 President and General Counsel, Automotive Legal (digital imaging);
Minneapolis, MN 55402 Affairs, Chrysler Corporation, 1990-1997 Infinity, Inc. (oil
Age 68 and gas exploration
and production); OGE
Energy Corp. (energy
and energy services)
- ------------------------------------------------------------------------------------------------------------------------------
Alison Taunton-Rigby Board member since Chief Executive Officer and Director, RiboNovix, Inc. Idera
901 S. Marquette Ave. 11/13/02 since 2003 (biotechnology); former President, Aquila Pharmaceuticals,
Minneapolis, MN 55402 Biopharmaceuticals Inc.
Age 66 (biotechnology);
Healthways, Inc.
(health management
programs)
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
* Mr. Laikind may be deemed, as a technical matter, an interested person of
RiverSource International Managers Series, Inc. and RiverSource Variable
Series Trust because he serves as an independent director of a broker-dealer
that has executed transactions for subadvisers to certain of the funds.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 65
BOARD MEMBERS AND OFFICERS (continued) -----------------------------------------
BOARD MEMBER AFFILIATED WITH THE INVESTMENT MANAGER*
<Table>
<Caption>
OTHER PRESENT OR
NAME, POSITION HELD PAST DIRECTORSHIPS
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION (WITHIN PAST 5
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS YEARS)
- ------------------------------------------------------------------------------------------------------------------------------
William F. Truscott Board member Chairman of the Board, Columbia Management Investment None
53600 Ameriprise since 11/7/01, Advisers, LLC (formerly RiverSource Investments, LLC)
Financial Center Vice President since since May 2010 (previously President, Chairman of the
Minneapolis, MN 55474 2002 Board and Chief Investment Officer, 2001-April 2010);
Age 49 Senior Vice President, Atlantic Funds, Columbia Funds
and Nations Funds since May 2010; Chief Executive
Officer, U.S. Asset Management &
President -- Annuities, Ameriprise Financial, Inc.
since May 2010 (previously President -- U.S. Asset
Management and Chief Investment Officer, 2005-April
2010 and Senior Vice President -- Chief Investment
Officer, 2001-2005); Director, President and Chief
Executive Officer, Ameriprise Certificate Company since
2006; Director, Columbia Management Investment
Distributors, Inc. (formerly RiverSource Fund
Distributors, Inc.) since May 2010 (previously Chairman
of the Board and Chief Executive Officer, 2008-April
2010); Chairman of the Board and Chief Executive
Officer, RiverSource Distributors, Inc. since 2006;
former Chief Investment Officer and Managing Director,
Zurich Scudder Investments
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
* Interested person (as defined under the 1940 Act) by reason of being an
officer, director, security holder and/or employee of the investment manager
or Ameriprise Financial.
The SAI has additional information about the Fund's Board members and is
available, without charge, upon request by calling 800.221.2450; contacting your
financial intermediary; or visiting riversource.com/funds.
- --------------------------------------------------------------------------------
66 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
The Board has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. The officers serve at the
pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the
Fund's other officers are:
FUND OFFICERS
<Table>
<Caption>
NAME, POSITION HELD
ADDRESS, WITH FUNDS AND PRINCIPAL OCCUPATION
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------------
J. Kevin Connaughton President since Senior Vice President and General Manager -- Mutual
One Financial Center 5/1/10 Fund Products, Columbia Management Investment Advisers,
Boston, MA 02111 LLC since May 2010; President, Columbia Funds since
Age 46 2009 (previously Senior Vice President and Chief
Financial Officer, June 2008 -- January 2009);
President, Atlantic Funds and Nations Funds since 2009;
Managing Director of Columbia Management Advisors, LLC,
December 2004 -- April 2010; Treasurer, Columbia Funds,
October 2003 -- May 2008; Treasurer, the Liberty Funds,
Stein Roe Funds and Liberty All-Star Funds, December
2000 -- December 2006; Senior Vice
President -- Columbia Management Advisors, LLC, April
2003 -- December 2004; President, Columbia Funds,
Liberty Funds and Stein Roe Funds, February
2004 -- October 2004
- --------------------------------------------------------------------------------------------------------
Amy K. Johnson Vice President since Senior Vice President and Chief Operating Officer,
5228 Ameriprise Financial 12/5/06 Columbia Management Investment Advisers, LLC (formerly
Center Minneapolis, MN RiverSource Investments, LLC) since May 2010
55474 (previously Chief Administrative Officer, 2009 -- April
Age 44 2010 and Vice President -- Asset Management and Trust
Company Services, 2006-2009 and Vice
President -- Operations and Compliance, 2004-2006);
Senior Vice President, Atlantic Funds, Columbia Funds
and Nations Funds since May 2010; Director of Product
Development -- Mutual Funds, Ameriprise Financial,
Inc., 2001-2004
- --------------------------------------------------------------------------------------------------------
Jeffrey P. Fox Treasurer since Chief Financial Officer, Columbia Management Investment
105 Ameriprise 7/10/02 Distributors, Inc. (formerly RiverSource Fund
Financial Center Distributors, Inc.) and of Seligman Data Corp. since
Minneapolis, MN 55474 2008; Vice President -- Investment Accounting,
Age 54 Ameriprise Financial, Inc. since 2002; Chief Financial
Officer, RiverSource Distributors, Inc. since 2006
- --------------------------------------------------------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 67
BOARD MEMBERS AND OFFICERS (continued) -----------------------------------------
FUND OFFICERS (CONTINUED)
<Table>
<Caption>
NAME, POSITION HELD
ADDRESS, WITH FUNDS AND PRINCIPAL OCCUPATION
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------------
Scott R. Plummer Vice President, Chief Legal Officer and Assistant Secretary, Columbia
5228 Ameriprise Financial General Counsel and Management Investment Advisers, LLC (formerly
Center Secretary since RiverSource Investments, LLC) since June 2005; Vice
Minneapolis, MN 55474 12/5/06 President and Lead Chief Counsel -- Asset Management,
Age 50 Ameriprise Financial, Inc. since May 2010 (previously
Vice President and Chief Counsel -- Asset Management,
2005-April 2010 and Vice President -- Asset Management
Compliance, 2004-2005); Senior Vice President,
Secretary and Chief Legal Officer, Atlantic Funds,
Columbia Funds and Nations Funds since May 2010; Vice
President, Chief Counsel and Assistant Secretary,
Columbia Management Investment Distributors, Inc.
(formerly RiverSource Fund Distributors, Inc.) since
2008; Vice President, General Counsel and Secretary,
Ameriprise Certificate Company since 2005; Chief
Counsel, RiverSource Distributors, Inc. since 2006;
Senior Vice President and Chief Compliance Officer,
USBancorp Asset Management, 2002-2004
- --------------------------------------------------------------------------------------------------------
Michael A. Jones Vice President since Director and President, Columbia Management Investment
100 Federal Street 5/1/10 Advisers, LLC since May 2010; President and Director,
Boston, MA 02110 Columbia Management Investment Distributors, Inc. since
Age 51 May 2010; Senior Vice President, Atlantic Funds,
Columbia Funds and Nations Funds since May 2010;
Manager, Chairman, Chief Executive Officer and
President, Columbia Management Advisors, LLC,
2007 -- April 2010; Chief Executive Officer, President
and Director, Columbia Management Distributors, Inc.,
2006 -- April 2010; former Co-President and Senior
Managing Director, Robeco Investment Management
- --------------------------------------------------------------------------------------------------------
Colin Moore Vice President since Chief Investment Officer, Columbia Management
One Financial Center 5/1/10 Investment Advisers, LLC since May 2010; Senior Vice
Boston, MA 02111 President, Atlantic Funds, Columbia Funds and Nations
Age 52 Funds since May 2010; Manager, Managing Director and
Chief Investment Officer, Columbia Management Advisors,
LLC, 2007- April 2010; Head of Equities, Columbia
Management Advisors, LLC, 2002-Sept. 2007
- --------------------------------------------------------------------------------------------------------
Linda Wondrack Chief Compliance Vice President and Chief Compliance Officer, Columbia
One Financial Center Officer since 5/1/10 Management Investment Advisers, LLC since May 2010;
Boston, MA 02111 Chief Compliance Officer, Columbia Funds since 2007;
Age 46 Senior Vice President and Chief Compliance Officer,
Atlantic Funds and Nations Funds since 2007; Director
(Columbia Management Group, LLC and Investment Product
Group Compliance), Bank of America, June 2005 -- April
2010; Director of Corporate Compliance and Conflicts
Officer, MFS Investment Management (investment
management), August 2004 -- May 2005
- --------------------------------------------------------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
68 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
FUND OFFICERS (CONTINUED)
<Table>
<Caption>
NAME, POSITION HELD
ADDRESS, WITH FUNDS AND PRINCIPAL OCCUPATION
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------------
Neysa M. Alecu Money Laundering Vice President -- Compliance, Ameriprise Financial,
2934 Ameriprise Financial Prevention Officer Inc. since 2008; Anti-Money Laundering Officer and
Center since 11/9/05 and Identity Theft Prevention Officer, Columbia Management
Minneapolis, MN 55474 Identity Theft Investment Distributors, Inc. (formerly RiverSource
Age 46 Prevention Officer Fund Distributors, Inc.) since 2008; Anti-Money
since 2008 Laundering Officer, Ameriprise Financial, Inc. since
2005; Compliance Director, Ameriprise Financial, Inc.,
2004-2008
- --------------------------------------------------------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 69
APPROVAL OF INVESTMENT MANAGEMENT SERVICES
AGREEMENT ----------------------------------------------------------------------
Columbia Management Investment Advisers, LLC ("Columbia Management" or the
"investment manager"), formerly known as RiverSource Investments, LLC, a wholly-
owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), serves
as the investment manager to the Fund. Under an investment management services
agreement (the "IMS Agreement"), Columbia Management provides investment advice
and other services to the Fund and all RiverSource funds (collectively, the
"Funds").
On an annual basis, the Fund's Board of Directors (the "Board"), including the
independent Board members (the "Independent Directors"), considers renewal of
the IMS Agreement. Columbia Management prepared detailed reports for the Board
and its Contracts Committee in March and April 2010, including reports based on
data provided by independent organizations and a comprehensive response to each
item of information requested by independent legal counsel to the Independent
Directors ("Independent Legal Counsel") in a letter to the investment manager,
to assist the Board in making this determination. All of the materials presented
in March and April 2010 were first supplied in draft form to designated
representatives of the Independent Directors, i.e., Independent Legal Counsel,
the Chair of the Board and the Chair of the Contracts Committee (including
materials relating to the Fund's new expense cap), and the final materials were
revised to reflect comments provided by these Board representatives. In
addition, throughout the year, the Board (or its committees) reviews information
prepared by Columbia Management addressing the services Columbia Management
provides and Fund performance. The Board accords particular weight to the work,
deliberations and conclusions of the Contracts Committee, the Investment Review
Committee and the Compliance Committee in determining whether to continue the
IMS Agreement. At the April 6-8, 2010 in-person Board meeting, Independent Legal
Counsel reviewed with the Independent Directors various factors relevant to the
Board's consideration of advisory agreements and the Board's legal
responsibilities related to such consideration. Following an analysis and
discussion of the factors identified below, the Board, including all of the
Independent Directors, approved renewal of the IMS Agreement.
Nature, Extent and Quality of Services Provided by Columbia Management: The
Board analyzed various reports and presentations it had received detailing the
services performed by Columbia Management, as well as its expertise, resources
and capabilities. The Board specifically considered many developments during the
past year concerning the services provided by Columbia Management, including, in
particular, the continued investment in, and resources dedicated to, the Fund's
operations, most notably, management's announcement of the massive
- --------------------------------------------------------------------------------
70 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
investment made in the acquisition of the long-term asset management business of
Columbia Management Group, LLC (the "Columbia Transaction") and the completed
integration of J. & W. Seligman & Co. Incorporated, acquisitions which should
continue to enhance investment capabilities and provide access to a greater
depth of experienced portfolio managers in key categories. The Board noted, in
particular, that upon the close of the Columbia Transaction, the investment
manager will have grown to 10 investment offices (compared to 6 in 2009). In
addition, the Board reviewed information concerning the investment manager's new
Chief Investment Officer upon the close of the Columbia Transaction, including
the application of his particular investment philosophy, which is intended to
enhance the risk and portfolio management oversight of the entire fund family.
Moreover, in connection with the Board's evaluation of the overall package of
services provided by Columbia Management, the Board considered the quality of
the administrative and transfer agency services provided by Columbia
Management's affiliates to the Fund. The Board also reviewed the financial
condition of Columbia Management and its affiliates, and each entity's ability
to carry out its responsibilities under the IMS Agreement. Further, the Board
considered Columbia Management's ability to retain key personnel in certain
targeted areas and its expectations in this regard. The Board also discussed the
acceptability of the terms of the IMS Agreement (including the relatively broad
scope of services required to be performed by Columbia Management). The Board
concluded that the services being performed under the IMS Agreement were of a
reasonably high quality.
Based on the foregoing, and based on other information received (both oral and
written, including the information on investment performance referenced below)
and other considerations, the Board concluded that Columbia Management and its
affiliates were in a position to continue to provide a high quality and level of
services to the Fund.
Investment Performance: For purposes of evaluating the nature, extent and
quality of services provided under the IMS Agreement, the Board carefully
reviewed the investment performance of the Fund. In this regard, the Board
considered detailed reports containing data prepared by an independent
organization showing, for various periods, the performance of the Fund, the
performance of a benchmark index, the percentage ranking of the Fund among its
comparison group and the net assets of the Fund. The Board observed that the
Fund's investment performance met expectations.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 71
APPROVAL OF INVESTMENT MANAGEMENT SERVICES
AGREEMENT (continued) ----------------------------------------------------------
Comparative Fees, Costs of Services Provided and the Profits Realized By
Columbia Management and its Affiliates from their Relationships with the
Fund: The Board reviewed comparative fees and the costs of services to be
provided under the IMS Agreement. The Board members considered detailed
comparative information set forth in an annual report on fees and expenses,
including, among other things, data (prepared by an independent organization)
showing a comparison of the Fund's expenses with median expenses paid by funds
in its peer group, as well as data showing the Fund's contribution to Columbia
Management's profitability. They also reviewed information in the report showing
the fees charged by Columbia Management to other client accounts (with similar
investment strategies to those of the Fund).
The Board accorded particular weight to the notion that the level of fees should
reflect a rational pricing model applied consistently across the various product
lines in the Funds' family, while assuring that the overall fees for each fund
(with few defined exceptions) are generally in line with the "pricing
philosophy" (i.e., that the total expense ratio of each fund, with few
exceptions, is at or below the median expense ratio of funds in the same
comparison group). The Board took into account that the Fund's total expense
ratio (after considering proposed expense caps/waivers) approximated the peer
group's median expense ratio. Based on its review, the Board concluded that the
Fund's management fee was fair and reasonable in light of the extent and quality
of services that the Fund receives.
The Board also considered various preliminary integration plans in connection
with the Columbia Transaction which, if implemented, would impact the fee
structures of various RiverSource Funds. The Board was satisfied with the
principles underlying these plans, which, at their preliminary stage, are
designed to achieve a rational, consistent pricing model across the combined
fund families, as well as preserve the "pricing philosophy" of the Funds.
The Board also considered the expected profitability of Columbia Management and
its affiliates in connection with Columbia Management providing investment
management services to the Fund. In this regard, the Board referred to a
detailed profitability report, discussing the profitability to Columbia
Management and Ameriprise Financial from managing and operating the Fund,
including data showing comparative profitability over the past two years. In
this regard, the Board observed slightly reduced profitability in 2009 vs. 2008.
The Board also considered the services acquired by the investment manager
through the use of commission dollars paid by the Funds on portfolio
transactions. The Board noted that the fees paid by the Fund should permit the
investment manager to offer
- --------------------------------------------------------------------------------
72 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
competitive compensation to its personnel, make necessary investments in its
business and earn an appropriate profit. The Board concluded that profitability
levels were reasonable.
Economies of Scale to be Realized: The Board also considered the economies of
scale that might be realized by Columbia Management as the Fund grows and took
note of the extent to which Fund shareholders might also benefit from such
growth. The Board considered that the IMS Agreement provides for lower fees as
assets increase at pre-established breakpoints and concluded that the IMS
Agreement satisfactorily provided for sharing these economies of scale. Based on
the foregoing, the Board, including all of the Independent Directors, concluded
that the investment management service fees were fair and reasonable in light of
the extent and quality of services provided. In reaching this conclusion, no
single factor was determinative. On April 8, 2010, the Board, including all of
the Independent Directors, approved the renewal of the IMS Agreement for an
additional annual period.
PROXY VOTING -------------------------------------------------------------------
The policy of the Board is to vote the proxies of the companies in which the
Fund holds investments consistent with the procedures as stated in the Statement
of Additional Information (SAI). You may obtain a copy of the SAI without charge
by calling 800.221.2450; contacting your financial intermediary; visiting
riversource.com/funds; or searching the website of the Securities and Exchange
Commission (SEC) at http://www.sec.gov. Information regarding how the Fund voted
proxies relating to portfolio securities is filed with the SEC by August 31 for
the most recent 12-month period ending June 30 of that year, and is available
without charge by visiting riversource.com/funds; or searching the website of
the SEC at www.sec.gov.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 73
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND
734 Ameriprise Financial Center
Minneapolis, MN 55474
RIVERSOURCE.COM/FUNDS
<Table>
This report must be accompanied or preceded by the Fund's
current prospectus. RiverSource(R) mutual funds are
distributed by Columbia Management Investment Distributors,
Inc. (formerly known as RiverSource Fund Distributors,
Inc.), member FINRA, and managed by Columbia Management
Investment Advisers, LLC (formerly known as RiverSource
Investments, LLC).
(C)2010 Columbia Management Investment Advisers, LLC. All
(COLUMBIA MANAGEMENT LOGO) rights reserved. S-6042 AG (7/10)
</Table>
Annual Report
and Prospectus
(COLUMBIA MANAGEMENT LOGO)
RIVERSOURCE
U.S. GOVERNMENT MORTGAGE FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR THE PERIOD ENDED
MAY 31, 2010
(Prospectus also enclosed)
RIVERSOURCE U. S. GOVERNMENT MORTGAGE FUND SEEKS TO PROVIDE SHAREHOLDERS WITH
CURRENT INCOME AS ITS PRIMARY OBJECTIVE AND, AS ITS SECONDARY OBJECTIVE,
PRESERVATION OF CAPITAL.
This annual report includes a prospectus that describes in detail the Fund's
objective, investment strategy, risks, sales charges, fees and other matters of
interest. Please read the prospectus carefully before you invest or send money.
NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE
TABLE OF CONTENTS --------------------------------------------------------------
<Table>
Your Fund at a Glance.............. 3
Manager Commentary................. 5
The Fund's Long-term Performance... 12
Fund Expenses Example.............. 14
Portfolio of Investments........... 16
Statement of Assets and
Liabilities...................... 27
Statement of Operations............ 28
Statements of Changes in Net
Assets........................... 29
Financial Highlights............... 31
Notes to Financial Statements...... 36
Report of Independent Registered
Public Accounting Firm........... 51
Federal Income Tax Information..... 53
Board Members and Officers......... 54
Approval of Investment Management
Services Agreement............... 60
Proxy Voting....................... 63
</Table>
- --------------------------------------------------------------------------------
2 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
YOUR FUND AT A GLANCE ----------------------------------------------------------
FUND SUMMARY
- --------------------------------------------------------------------------------
> RiverSource U.S. Government Mortgage Fund (the Fund) Class A shares rose
13.32% (excluding sales charge) for the 12 months ended May 31, 2010.
> The Fund outperformed the Barclays Capital U.S. Mortgage-Backed Securities
Index, which gained 6.41% during the same period.
> The Fund also outperformed the Lipper U.S. Mortgage Funds Index, representing
the Fund's peer group, which advanced 9.27% during the same time frame.
ANNUALIZED TOTAL RETURNS (for period ended May 31, 2010)
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
INCEPTION
1 YEAR 3 YEARS 5 YEARS 2/14/02
- ----------------------------------------------------------------------
RiverSource U.S. Government
Mortgage Fund Class A
(excluding sales charge) +13.32% +6.08% +4.90% +4.85%
- ----------------------------------------------------------------------
Barclays Capital U.S. Mortgage-
Backed Securities Index
(unmanaged) +6.41% +7.67% +6.09% +5.68%
- ----------------------------------------------------------------------
Lipper U.S. Mortgage Funds Index +9.27% +6.26% +5.03% +4.78%
- ----------------------------------------------------------------------
</Table>
(See "The Fund's Long-term Performance" for Index descriptions)
The performance information shown represents past performance and is not a
guarantee of future results. The investment return and principal value of your
investment will fluctuate so that your shares, when redeemed, may be worth more
or less than their original cost. Current performance may be lower or higher
than the performance information shown. You may obtain performance information
current to the most recent month-end by contacting your financial intermediary,
visiting riversource.com/funds or calling 800.221.2450.
The 4.75% sales charge applicable to Class A shares of the Fund is not reflected
in the table above. If reflected, returns would be lower than those shown. The
performance of other classes may vary from that shown because of differences in
fees and expenses. The Fund's returns reflect the effect of fee waivers/expense
reimbursements, if any. Without such waivers/reimbursements, the Fund's returns
would be lower. See the Average Annual Total Returns table for performance of
other share classes of the Fund.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes. It is not possible to invest directly in an index.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 3
YOUR FUND AT A GLANCE (continued) ----------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
<Table>
<Caption>
AT MAY 31, 2010
SINCE
Without sales charge 1 YEAR 3 YEARS 5 YEARS INCEPTION
Class A (inception 2/14/02) +13.32% +6.08% +4.90% +4.85%
- ----------------------------------------------------------------------
Class B (inception 2/14/02) +12.46% +5.28% +4.12% +4.07%
- ----------------------------------------------------------------------
Class C (inception 2/14/02) +12.47% +5.28% +4.12% +4.07%
- ----------------------------------------------------------------------
Class I (inception 3/4/04) +13.58% +6.52% +5.34% +4.99%
- ----------------------------------------------------------------------
Class R4 (inception 2/14/02) +13.25% +6.82% +5.46% +5.23%
- ----------------------------------------------------------------------
With sales charge
Class A (inception 2/14/02) +7.94% +4.38% +3.89% +4.23%
- ----------------------------------------------------------------------
Class B (inception 2/14/02) +7.46% +4.37% +3.77% +4.07%
- ----------------------------------------------------------------------
Class C (inception 2/14/02) +11.47% +5.28% +4.12% +4.07%
- ----------------------------------------------------------------------
</Table>
Class A share performance reflects the maximum initial sales charge of 4.75%.
Class B share performance reflects a contingent deferred sales charge (CDSC)
applied as follows: first year 5%; second year 4%; third and fourth years 3%;
fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be
subject to a 1% CDSC if shares are sold within one year after purchase. Sales
charges do not apply to Class I and Class R4 shares. Class I and Class R4 shares
are available to qualifying institutional investors only.
PORTFOLIO STATISTICS
- --------------------------------------------------------------------------------
<Table>
Weighted average life(1) 4.0 years
- --------------------------------------
Effective duration(2) 1.6 years
- --------------------------------------
</Table>
(1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into
consideration the possibility that the issuer may call the bond before its
maturity date.
(2) EFFECTIVE DURATION measures the sensitivity of a security's price to
parallel shifts in the yield curve (the graphical depiction of the levels of
interest rates from two years out to 30 years). Positive duration means that
as rates rise, the price decreases, and negative duration means that as
rates rise, the price increases.
Shares of RiverSource U.S. Government Mortgage Fund are not insured or
guaranteed by the U.S. government.
There are risks associated with an investment in a bond fund, including the
impact of interest rates and credit. These and other risk considerations are
discussed in the Fund's prospectus. In general, bond prices rise when interest
rates fall and vice versa. This effect is usually more pronounced for longer-
term securities.
- --------------------------------------------------------------------------------
4 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
MANAGER COMMENTARY -------------------------------------------------------------
At May 31, 2010, approximately 56% of the Fund's shares were owned in the
aggregate by affiliated funds-of-funds managed by Columbia Management Investment
Advisers, LLC (formerly known as RiverSource Investments, LLC) (the Investment
Manager). As a result of asset allocation decisions by the Investment Manager,
it is possible that RiverSource U.S. Government Mortgage Fund may experience
relatively large purchases or redemptions from affiliated funds-of-funds (see
page 46, Class I capital share transactions for related activity during the most
recent fiscal period). While the Investment Manager seeks to minimize the impact
of these transactions by structuring them over a reasonable period of time,
RiverSource U.S. Government Mortgage Fund may experience increased expenses as
it buys and sells securities as a result of purchases or redemptions by
affiliated funds-of-funds. For more information on the Fund's expenses, see the
discussions beginning on pages 14 and 43.
Tom Heuer and Colin J. Lundgren replaced Todd White and joined Jason J. Callan
as portfolio managers of RiverSource U.S. Government Mortgage Fund effective May
1, 2010.
Dear Shareholders,
RiverSource U.S. Government Mortgage Fund (the Fund) Class A shares rose 13.32%
(excluding sales charge) for the 12 months ended May 31, 2010. The Fund
outperformed the Barclays Capital U.S. Mortgage-Backed Securities Index
(Barclays Index), which gained 6.41%. The Fund also outperformed the Lipper U.S.
Mortgage Funds Index, representing the Fund's peer group, which advanced 9.27%
during the same time frame.
SECTOR BREAKDOWN(1) (at May 31, 2010)
- ---------------------------------------------------------------------
<Table>
<Caption>
Asset-Backed 4.4%
- ------------------------------------------------
Commercial Mortgage-Backed 4.4%
- ------------------------------------------------
Residential Mortgage-Backed(2) 87.3%
- ------------------------------------------------
Other(3) 3.9%
- ------------------------------------------------
</Table>
(1) Percentages indicated are based upon total investments. The Fund's
composition is subject to change.
(2) Of the 87.3%, 22.4% is due to forward commitment residential mortgage-backed
securities activity. Short-term securities are held as collateral for these
commitments.
(3) Cash & Cash Equivalents.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 5
MANAGER COMMENTARY (continued) -------------------------------------------------
SIGNIFICANT PERFORMANCE FACTORS
The mortgage market overall rallied strongly during the annual period ended May
31, 2010, supported by several factors. Perhaps the most dominant supporting
factor was the significant amount of government sponsorship of agency mortgages
that was put in place during the earlier months of 2009 in an effort to
stabilize and support the non-Treasury sectors of the fixed income market in
general and the mortgage market in particular. The Federal Reserve Board (the
Fed) had implemented a program whereby it bought $1.25 trillion of agency-issued
mortgage-backed securities. In addition, the Treasury Department implemented a
purchase program for $200 billion of agency-issued mortgage backed securities.
As a result of these programs, spreads (the yield differential between agency-
issued mortgage-backed securities and U.S. Treasuries) tightened by
approximately 30 basis points (0.30%) from the start of the annual period on
June 1, 2009 through March 31, 2010 allowing for significant price return across
the sector. On the last day of March, the Fed completed its purchase program and
allowed it to expire. From that point on through the end of the annual period on
May 31, 2010, agency-issued mortgage-backed security spreads widened by
approximately 20 basis points (0.20%). Such widening was driven largely by
renewed
QUALITY BREAKDOWN OF FIXED INCOME SECURITIES(1)
(at May 31, 2010)
- ---------------------------------------------------------------------
<Table>
<Caption>
AAA bonds 93.8%
- ------------------------------------------------
AA bonds 0.2%
- ------------------------------------------------
A bonds 0.8%
- ------------------------------------------------
BBB bonds 3.0%
- ------------------------------------------------
Non-investment grade bonds 1.1%
- ------------------------------------------------
Non-rated bonds 1.1%
- ------------------------------------------------
</Table>
(1) Percentages indicated are based upon total fixed income securities
(excluding Cash & Cash Equivalents).
Ratings apply to the underlying holdings of the Fund and not the Fund itself.
Whenever possible, the Standard and Poor's rating is used to determine the
credit quality of a security. Standard and Poor's rates the creditworthiness of
corporate bonds, with 15 categories, ranging from AAA (highest) to D (lowest).
Ratings from AA to CCC may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within the major rating categories. If
Standard and Poor's doesn't rate a security, then Moody's rating is used.
Columbia Management Investment Advisers, LLC (formerly RiverSource Investments,
LLC) (the Investment Manager) rates a security using an internal rating system
when Moody's doesn't provide a rating.
- --------------------------------------------------------------------------------
6 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
global fiscal and liquidity concerns, which in turn led to a flight to quality
away from all risk assets. Without that government support still in place, the
mortgage market took a step back.
While agency mortgage-backed securities (MBS) outperformed U.S. Treasuries for
the annual period overall, performance was highly differentiated depending on
the coupon -- the interest rate the holder of a mortgage-backed security was
paid. Higher coupon MBS produced the greatest returns during the annual period,
as these borrowers continued to prepay at a slow rate given their lower credit
characteristics and ongoing tight credit conditions. U.S. government sponsored
enterprises FNMA (Fannie Mae) and FHLMC (Freddie Mac) tightened their
underwriting standards during the annual period due to the unprecedented level
of mortgage delinquencies. Tighter underwriting slowed repayments due to lack of
refinancing options for many borrowers, which in turn drove pricing on those
higher coupon securities higher.
In the last weeks of the annual period, concerns regarding the sovereign
deficit-to-Gross Domestic Product (GDP) ratios of the PIIGS (Portugal, Italy,
Ireland, Greece and Spain) dominated. As a result, there were significant
investment flows out of the euro and into the U.S. dollar. With the short-term
end of the yield curve anchored by the federal funds rate, this surge into the
U.S. currency led to a significant flattening of the Treasury yield curve
overall, whereby the differential between yields on long-term maturities and
short-term maturities narrowed. In turn, non-Treasury sectors, including
mortgages, weakened in May 2010.
The Fund's strong relative performance can be attributed to its positioning
within agency-issued mortgage-backed securities and to its smaller allocations
to non-agency mortgage-backed securities and commercial mortgage-backed
securities (CMBS). Within agency-issued mortgage-backed securities, we
established an increasingly significant allocation to higher coupon 30-year
pass-through securities and steered away from lower coupon pass-throughs. (Pass-
through mortgages consist of a pool of residential mortgage loans, where
homeowners' monthly payments of principal, interest and prepayments pass from
the original bank through a government agency or investment bank to investors.)
It had become evident to us that borrowers with higher coupons were rather
inefficient at exercising their refinancing option as credit continued to
tighten within
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 7
MANAGER COMMENTARY (continued) -------------------------------------------------
Fannie Mae and Freddie Mac, as discussed above, and we sought to take advantage
of the substantially higher yields the higher coupon securities provided. Based
on various technical factors within the market during the annual period, we
decided to focus the Fund's exposure in the mortgage-backed security to-be-
announced (TBA) market. We also added to the Fund's position in seasoned agency
bonds with higher coupons that provided superior convexity. (Convexity is a
volatility measure for bonds used in conjunction with modified duration in order
to measure how a bond's price will change as interest rates change. For example,
since a non-callable bond's duration usually increases as interest rates
decrease, its convexity is positive.)
The Fund's allocations to and positioning within the non-agency mortgage-backed
securities and CMBS sectors were also incremental to results. Neither non-agency
mortgage-backed securities nor CMBS are components of the Barclays Index, and
thus the Fund's allocations to the solidly performing out-of-Index sectors
helped its relative results. One of the primary drivers of strong price
performance within the non-agency mortgage-backed securities and CMBS sectors
was the implementation of the PPIP (Public-Private Investment Program) by the
Treasury Department. In aggregate, PPIP produced nearly $40 billion of demand
for non-agency mortgage-backed securities and CMBS, which in turn drove prices
on these assets meaningfully higher. Another major driver of demand was the
creation of re-REMICS, which allowed investment banks to restructure cash flows
off poorly performing bonds to create newer, highly enhanced bonds that were
rated AAA. Insurance companies in particular generated strong demand for these
newly-created bonds. All told, re-REMICS took over $20 billion of non-agency
mortgage-backed securities and CMBS out of the market during the annual period.
During the annual period, we repositioned the Fund's non-agency and CMBS
exposure into highly seasoned, shorter-maturity securities that provided
attractive relative returns. Our investment thesis was that loans originated in
2004 and 2005 were underwritten to better quality standards than those generated
in 2006 and 2007 and that the level of fundamental differentiation would prove
to be significantly different. Indeed, as the annual period progressed, there
was a meaningful delineation between the fundamental performances of those
vintages, as the distinguishing loan
- --------------------------------------------------------------------------------
8 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
characteristics became apparent. Such differentiation could be seen most readily
in implied loan-to-value ratios, documentation levels, and the amortizing loans
instead of interest-only loans, which became much more prevalent starting in
2006.
The only real detractor from the Fund's results during the annual period was the
combined effect of its duration and yield curve positioning. Duration is a
measure of the Fund's sensitivity to changes in interest rates. The Fund was
positioned slightly shorter than the Barclays Index throughout the annual
period, which detracted modestly as interest rates declined. As the economy
continued to marginally improve, we were concerned the Fed might take a more
aggressive stance and begin to raise the targeted federal funds rate, but some
of those concerns dissipated as the European fiscal issues moved to the
forefront.
CHANGES TO THE FUND'S PORTFOLIO
As mentioned earlier, within the agency-issued mortgage-backed securities
sector, we increased the Fund's positions in higher-coupon 30-year pass-through
mortgage-backed securities and reduced its exposure to lower-coupon securities.
Elsewhere, we repositioned the Fund's allocations to both non-agency mortgage-
backed securities and CMBS into shorter-maturity, seasoned collateral where we
believed the underwriting to be of greater quality than the loans produced in
2006 and 2007.
The Fund's portfolio turnover rate for the 12-month period was 519%.*
* A significant portion of the turnover was the result of rolling-maturity
mortgage securities, processing of prepayments and opportunistic changes we
made at the margin in response to valuations or market developments
The Fund's strong relative performance can be attributed to its positioning
within agency-issued mortgage-backed securities and to its allocations to non-
agency mortgage-backed securities and commercial mortgage-backed securities
(CMBS)
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 9
MANAGER COMMENTARY (continued) -------------------------------------------------
OUR FUTURE STRATEGY
In general, our go forward strategy remains fairly consistent with the views and
positioning held at the end of the annual period. The broader U.S. economy seems
to have stabilized, with three consecutive quarters of positive growth. However,
much of that growth in GDP was a reflection of inventory stabilization and not
improvement in final sales. Limited expansion of private payrolls and persistent
slack in the labor force should continue to suppress inflation fears over the
near term. In turn, we believe the Fed will likely remain on hold for the
foreseeable future.
We will continue to closely monitor the housing market. Housing prices in the
U.S., as measured by the S&P/Case-Schiller Index, had stabilized during the
period, primarily driven by the multiple home buyer tax credit and the
simultaneous invoking of foreclosure moratoriums in the most troubled areas of
the nation. Meanwhile, borrowers continued to default on their mortgages at
historically elevated levels, thereby building a shadow inventory of eventual
foreclosures. This shadow inventory combined with the existing housing supply at
the end of May totaled nearly 20 months' supply of existing homes. New and
existing home sales had shown some improvement, but this largely reflected an
advance in demand among participants seeking to take advantage of the home buyer
tax credit, which officially ended April 30. Clearly, we will be watching to see
how new and existing home sales respond to the expiration of the government tax
credits. At the end of the annual period, our major concerns were the fact that
housing demand did not substantially pick up based on low mortgage rates alone
and the size of the shadow inventory that continues to weigh on the housing
market.
Given this backdrop, we intend to stay conservatively positioned in the Fund on
a relative basis. We currently intend to maintain the Fund's duration below that
of its benchmark index, as we believe that yields will rise as the market
digests record Treasury supply and the recent flight to quality abates. We
further intend to maintain our focus on the purchase of mortgage-backed
securities issued by U.S. government agencies, with a focus on higher coupon
agency 30-year mortgage-backed securities. We continue to like CMBS, as we
expect an improving economy to bode well
- --------------------------------------------------------------------------------
10 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
for that sector. Quality issues and security selection remain a priority as we
continue to seek attractive investment opportunities.
<Table>
Jason Callan Tom Heuer Colin Lundgren
Portfolio Manager Portfolio Manager Portfolio Manager
</Table>
Any specific securities mentioned are for illustrative purposes only and are not
a complete list of securities that have increased or decreased in value. The
views expressed in this statement reflect those of the portfolio manager(s) only
through the end of the period of the report as stated on the cover and do not
necessarily represent the views of Columbia Management Investment Advisers, LLC*
(the Investment Manager) or any subadviser to the Fund or any other person in
the Investment Manager or subadviser organizations. Any such views are subject
to change at any time based upon market or other conditions and the Investment
Manager disclaims any responsibility to update such views. These views may not
be relied on as investment advice and, because investment decisions for the Fund
are based on numerous factors, may not be relied on as an indication of trading
intent on behalf of the Fund.
* Effective May 1, 2010, RiverSource Investments, LLC became known as Columbia
Management Investment Advisers, LLC.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 11
THE FUND'S LONG-TERM PERFORMANCE -----------------------------------------------
The chart on the facing page illustrates the total value of an assumed $10,000
investment in RiverSource U.S. Government Mortgage Fund Class A shares (from
2/14/02 to 5/31/10) as compared to the performance of the Barclays Capital U.S.
Mortgage-Backed Securities Index and the Lipper U.S. Mortgage Funds Index. In
comparing the Fund's Class A shares to these indices, you should take into
account the fact that the Fund's performance reflects the maximum initial sales
charge of 4.75%, while such charges are not reflected in the performance of the
indices. Returns for the Fund include the reinvestment of any distributions paid
during each period.
The performance information shown represents past performance and is not a
guarantee of future results. The table below and the chart on the facing page do
not reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. The investment return and
principal value of your investment will fluctuate so that your shares, when
redeemed, may be worth more or less than their original cost. Current
performance may be lower or higher than the performance information shown. You
may obtain performance information current to the most recent month-end by
contacting your financial intermediary or visiting riversource.com/funds. Also
see "Past Performance" in the Fund's current prospectus.
COMPARATIVE RESULTS
- --------------------------------------------------------------------------------
<Table>
<Caption>
Results at May 31, 2010
SINCE
INCEPTION
1 YEAR 3 YEARS 5 YEARS 2/14/2002
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND
(INCLUDES SALES CHARGE)
Class A Cumulative value of $10,000 $10,794 $11,371 $12,102 $14,106
- -------------------------------------------------------------------------------------------
Average annual total return +7.94% +4.38% +3.89% +4.23%
- -------------------------------------------------------------------------------------------
BARCLAYS CAPITAL U.S. MORTGAGE-BACKED SECURITIES INDEX(1)
Cumulative value of $10,000 $10,641 $12,483 $13,439 $15,811
- -------------------------------------------------------------------------------------------
Average annual total return +6.41% +7.67% +6.09% +5.68%
- -------------------------------------------------------------------------------------------
LIPPER U.S. MORTGAGE FUNDS INDEX(2)
Cumulative value of $10,000 $10,927 $11,998 $12,783 $14,728
- -------------------------------------------------------------------------------------------
Average annual total return +9.27% +6.26% +5.03% +4.78%
- -------------------------------------------------------------------------------------------
</Table>
Results for other share classes can be found on page 4.
- --------------------------------------------------------------------------------
12 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
(VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE U.S. GOVERNMENT
MORTGAGE FUND LINE GRAPH)
<Table>
<Caption>
RIVERSOURCE U.S.
GOVERNMENT MORTGAGE
FUND CLASS BARCLAYS CAPITAL LIPPER U.S.
A (INCLUDES U.S. MORTGAGE-BACKED MORTGAGE FUNDS
SALES CHARGE) SECURITIES INDEX(1) INDEX(2)
------------------- -------------------- ---------------
2/14/02 $ 9,525 $10,000 $10,000
2/02 9,574 10,056 10,054
5/02 9,692 10,212 10,183
8/02 9,961 10,496 10,475
11/02 10,080 10,603 10,553
2/03 10,282 10,812 10,755
5/03 10,364 10,867 10,802
8/03 10,239 10,757 10,718
11/03 10,406 10,925 10,860
2/04 10,667 11,205 11,101
5/04 10,496 11,029 10,945
8/04 10,813 11,399 11,229
11/04 10,869 11,480 11,280
2/05 10,933 11,569 11,341
5/05 11,103 11,766 11,523
8/05 11,170 11,853 11,607
11/05 11,075 11,747 11,506
2/06 11,242 11,956 11,646
5/06 11,116 11,833 11,548
8/06 11,434 12,201 11,871
11/06 11,682 12,517 12,175
2/07 11,785 12,644 12,279
5/07 11,817 12,667 12,277
8/07 11,931 12,848 12,391
11/07 12,219 13,306 12,727
2/08 12,351 13,592 12,916
5/08 12,326 13,608 12,813
8/08 12,091 13,751 12,789
11/08 11,831 14,217 12,785
2/09 12,013 14,565 13,096
5/09 12,425 14,857 13,479
8/09 12,980 15,097 13,900
11/09 13,503 15,525 14,354
2/10 13,630 15,537 14,449
5/10 14,106 15,811 14,728
</Table>
(1) The Barclays Capital U.S. Mortgage-Backed Securities Index, an unmanaged
index, includes 15- and 30-year fixed-rate securities backed by mortgage
pools of the Government National Mortgage Association (GNMA), Federal Home
Loan Mortgage Corporation (FHLMC), and Federal National Mortgage Association
(FNMA). The index reflects reinvestment of all distributions and changes in
market prices.
(2) The Lipper U.S. Mortgage Funds Index includes the 10 largest U.S. mortgage
funds tracked by Lipper Inc. The index's returns include net reinvested
dividends.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 13
FUND EXPENSES EXAMPLE ----------------------------------------------------------
(UNAUDITED)
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments; and (2) ongoing
costs, which may include management fees; distribution and service (Rule 12b-1)
fees; and other Fund fees and expenses. This example is intended to help you
understand your ongoing costs (in dollars) of investing in the Fund and to
compare these costs with the ongoing costs of investing in other mutual funds.
In addition to the ongoing expenses which the Fund bears directly, the Fund's
shareholders indirectly bear the ongoing expenses of any funds in which the Fund
invests (also referred to as "acquired funds"), including affiliated and non-
affiliated pooled investment vehicles (including mutual funds and exchange
traded funds). The Fund's indirect expense from investing in the acquired funds
is based on the Fund's pro rata portion of the ongoing expenses charged by
acquired funds using the expense ratio of each of the acquired funds as of the
acquired fund's most recent shareholder report.
The example is based on an investment of $1,000 invested at the beginning of the
period indicated and held until May 31, 2010.
ACTUAL EXPENSES
The first line of the table provides information about actual account values and
actual expenses for each class. You may use the information in this line,
together with the amount you invested, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by the
number in the first line under the heading titled "Expenses paid during the
period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table provides information about hypothetical account
values and hypothetical expenses based on the actual expense ratio for each
class and an assumed rate of return of 5% per year before expenses, which is not
the actual return for the class. The hypothetical account values and expenses
may not be used to estimate the actual ending account balance or expenses you
paid for the period. You may use this information to compare the ongoing costs
of investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads). Therefore, the second line of the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
- --------------------------------------------------------------------------------
14 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
<Table>
<Caption>
BEGINNING ENDING EXPENSES
ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED
DEC. 1, 2009 MAY 31, 2010 THE PERIOD(a) EXPENSE RATIO
- ------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,042.70 $4.46 .89%
- ------------------------------------------------------------------------------------------
Hypothetical
(5% return before expenses) $1,000 $1,020.16 $4.41 .89%
- ------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,038.70 $8.25 1.65%
- ------------------------------------------------------------------------------------------
Hypothetical
(5% return before expenses) $1,000 $1,016.43 $8.16 1.65%
- ------------------------------------------------------------------------------------------
Class C
- ------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,038.80 $8.20 1.64%
- ------------------------------------------------------------------------------------------
Hypothetical
(5% return before expenses) $1,000 $1,016.48 $8.11 1.64%
- ------------------------------------------------------------------------------------------
Class I
- ------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,042.80 $2.35(c) .47%
- ------------------------------------------------------------------------------------------
Hypothetical
(5% return before expenses) $1,000 $1,022.22 $2.33(c) .47%
- ------------------------------------------------------------------------------------------
Class R4
- ------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,041.30 $3.85(c) .77%
- ------------------------------------------------------------------------------------------
Hypothetical
(5% return before expenses) $1,000 $1,020.74 $3.82(c) .77%
- ------------------------------------------------------------------------------------------
</Table>
(a) Expenses are equal to the annualized expense ratio for each class as
indicated above, multiplied by the average account value over the period,
multiplied by 179/365 (to reflect the one-half year period).
(b) Based on the actual return for the six months ended May 31, 2010: +4.27% for
Class A, +3.87% for Class B, +3.88% for Class C, +4.28% for Class I and
+4.13% for Class R4.
(c) Columbia Management Investment Advisers, LLC (formerly RiverSource
Investments, LLC) (the Investment Manager) and its affiliates have
contractually agreed to waive certain fees and to absorb certain expenses
until July 31, 2011, unless sooner terminated at the sole discretion of the
Fund's Board, such that net expenses (excluding fees and expenses of
acquired funds), will not exceed 0.48% for Class I and 0.78% for Class R4.
Any amounts waived will not be reimbursed by the Fund. This change is
effective Aug. 1, 2010. Had this change been in place for the entire six
month period ended May 31, 2010, the actual expenses paid would have been
$2.40 for Class I and $3.90 for Class R4; the hypothetical expenses paid
would have been $2.38 for Class I and $3.86 for Class R4. The actual and
hypothetical expenses paid for Class A, Class B and Class C would have been
the same as those expenses presented in the table above.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 15
PORTFOLIO OF INVESTMENTS -------------------------------------------------------
MAY 31, 2010
(Percentages represent value of investments compared to net assets)
INVESTMENTS IN SECURITIES
<Table>
<Caption>
BONDS (123.8%)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
ASSET-BACKED (5.7%)
Bear Stearns Asset-Backed Securities Trust
Series 2006-HE9 Class 1A1
11-25-36 0.393% $354,167(h) $339,729
Carrington Mortgage Loan Trust
Series 2006-RFC1 Class A2
05-25-36 0.443 1,047,810(h) 1,028,475
Chrysler Financial Lease Trust
Series 2010-A Class C
09-16-13 4.490 1,000,000(d) 997,286
Citigroup Mortgage Loan Trust, Inc.
Series 2006-WFH4 Class A2
11-25-36 0.443 484,417(h) 472,189
Countrywide Asset-Backed Certificates
Series 2005-3 Class AF3
08-25-35 4.823 109,816 108,669
Countrywide Asset-Backed Certificates
Series 2005-SD1 Class A1C
05-25-35 0.733 892,650(d,h) 855,758
Credit-Based Asset Servicing and Securitization LLC
Series 2006-CB5 Class A2
06-25-36 0.453 87,296(h) 86,501
First Franklin Mortgage Loan Asset-Backed
Certificates
Series 2005-FFH3 Class 2A3
09-25-35 0.753 16,299(h) 16,210
Jefferies & Co., Inc.
CMO Series 2010-R1 Class 2A1
11-26-36 0.428 1,076,519(d,h) 1,022,693
Mastr Asset-Backed Securities Trust
Series 2005-FRE1 Class A4
10-25-35 0.593 380,881(h) 363,283
RAAC Series
Series 2006-SP4 Class A1
11-25-36 0.443 404,487(h) 398,265
RBSSP Resecuritization Trust
CMO Series 2009-9 Class 10A1
10-26-36 0.445 1,578,451(d,h) 1,562,657
Renaissance Home Equity Loan Trust
Series 2005-2 Class AF3
08-25-35 4.499 1,701,789(h) 1,626,153
Renaissance Home Equity Loan Trust
Series 2006-4 Class AF1
01-25-37 5.545 78,860 77,771
Renaissance Home Equity Loan Trust
Series 2007-2 Class M4
06-25-37 6.313 195,000(g) 7,091
Renaissance Home Equity Loan Trust
Series 2007-2 Class M5
06-25-37 6.660 130,000(g) 3,289
Renaissance Home Equity Loan Trust
Series 2007-2 Class M6
06-25-37 7.006 190,000(g) 2,761
Residential Asset Mortgage Products, Inc.
Series 2006-RS4 Class A2
07-25-36 0.453 70,664 70,368
Soundview Home Equity Loan Trust
Series 2006-OPT3 Class 2A3
06-25-36 0.513 1,000,000(h) 760,508
Structured Asset Investment Loan Trust
Series 2005-9 Class A5
11-25-35 0.573 884,506(h) 855,336
Structured Asset Securities Corp.
CMO Series 2006-NC1 Class A6
05-25-36 0.393 221,211(h) 212,039
Structured Asset Securities Corp.
Series 2007-BC1 Class A2
02-25-37 0.393 1,259,672(h) 1,188,420
Structured Asset Securities Corp.
Series 2007-WF2 Class A2
08-25-37 1.043 1,333,829(h) 1,314,423
---------------
Total 13,369,874
- -------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED (5.6%)(e)
Bear Stearns Commercial Mortgage Securities
Series 2004-PWR6 Class A4
11-11-41 4.521 3,100,000 3,164,927
</Table>
See accompanying Notes to Portfolio of Investments.
- --------------------------------------------------------------------------------
16 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
<Table>
<Caption>
BONDS (CONTINUED)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
COMMERCIAL MORTGAGE-BACKED (CONT.)
Federal Home Loan Mortgage Corp.
Multifamily Structured Pass-Through Certificates
Series K001 Class A2
04-25-16 5.651% $1,536,459 $1,706,347
GS Mortgage Securities Corp. H
Series 2007-EOP Class J
03-06-20 1.135 1,000,000(d,h) 845,668
GS Mortgage Securities Corp. H
Series 2007-GG10 Class A4
08-10-45 5.805 6,000,000 5,582,255
JP Morgan Chase Commercial Mortgage Securities Corp.
Series 2007-CB20 Class A4
02-12-51 5.794 1,000,000 990,893
Morgan Stanley Reremic Trust
Series 2009-GG10 Class A4A
08-12-45 5.805 1,000,000(d) 1,002,432
---------------
Total 13,292,522
- -------------------------------------------------------------------------------------
RESIDENTIAL MORTGAGE-BACKED (112.5%)(e)
Banc of America Funding Corp.
CMO Series 2009-R7A Class 4A2
08-26-35 5.368 1,033,717(b,d,h) 310,115
08-26-35 5.368 4,377,258(d,h) 1,313,178
Banc of America Mortgage Securities, Inc.
CMO Series 2005-E Class 2A5
06-25-35 3.861 439,343(h) 437,280
ChaseFlex Trust
CMO Series 2005-2 Class 2A2
06-25-35 6.500 475,414 398,308
Citigroup Mortgage Loan Trust, Inc.
CMO Series 2009-9 Class 1A3
04-25-34 4.902 2,489,441(d,h) 634,807
Countrywide Alternative Loan Trust
CMO I.O. Series 2007-8CB Class A13
05-25-37 32.110 1,341,252(f) 150,243
Countrywide Alternative Loan Trust
CMO Series 2007-OH3 Class A3
09-25-47 0.843 1,653,750(h) 202,060
Countrywide Home Loan Mortgage Pass-Through Trust
CMO Series 2003-18 Class A3
07-25-33 5.250 99,323 99,409
Countrywide Home Loan Mortgage Pass-Through Trust
CMO Series 2005-R2 Class 2A1
06-25-35 7.000 347,182(d) 321,045
Credit Suisse Mortgage Capital Certificates
CMO Series 2009-12R Class 14A1
11-27-35 5.500 1,988,297(d) 2,017,391
Credit Suisse Mortgage Capital Certificates
CMO Series 2009-12R Class 30A1
12-27-36 5.300 227,273(d) 219,053
Credit Suisse Mortgage Capital Certificates
CMO Series 2009-2R Class 1A16
09-26-34 3.084 17,500,000(d,h) 5,586,843
Federal Home Loan Mortgage Corp.
06-01-40 5.000 1,050,000(b) 1,099,219
06-01-40 5.500 3,700,000(b) 3,940,500
06-01-40 6.000 4,200,000(b) 4,526,810
06-01-40 6.500 800,000(b) 871,375
Federal Home Loan Mortgage Corp. #555300
10-01-17 8.000 135,512 142,981
Federal Home Loan Mortgage Corp. #A10892
07-01-33 6.000 361,204 396,626
Federal Home Loan Mortgage Corp. #A15111
10-01-33 6.000 610,181 666,289
Federal Home Loan Mortgage Corp. #A21059
04-01-34 6.500 429,748 472,975
Federal Home Loan Mortgage Corp. #A25174
08-01-34 6.500 233,222 256,681
Federal Home Loan Mortgage Corp. #A90176
12-01-39 5.000 4,892,369 5,138,369
Federal Home Loan Mortgage Corp. #C53098
06-01-31 8.000 203,966 233,459
Federal Home Loan Mortgage Corp. #C53878
12-01-30 5.500 677,118 726,111
Federal Home Loan Mortgage Corp. #C69665
08-01-32 6.500 1,445,691 1,598,336
Federal Home Loan Mortgage Corp. #C79930
06-01-33 5.500 891,403 955,542
Federal Home Loan Mortgage Corp. #D95232
03-01-22 6.500 208,687 230,010
Federal Home Loan Mortgage Corp. #D95371
04-01-22 6.500 243,518 269,074
Federal Home Loan Mortgage Corp. #E81240
06-01-15 7.500 362,836 391,105
</Table>
See accompanying Notes to Portfolio of Investments.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 17
PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
<Table>
<Caption>
BONDS (CONTINUED)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
RESIDENTIAL MORTGAGE-BACKED (CONT.)
Federal Home Loan Mortgage Corp. #E88036
02-01-17 6.500% $621,272 $674,183
Federal Home Loan Mortgage Corp. #E88468
12-01-16 6.500 172,451 189,160
Federal Home Loan Mortgage Corp. #E89232
04-01-17 7.000 291,572 317,079
Federal Home Loan Mortgage Corp. #E92454
11-01-17 5.000 864,041 927,908
Federal Home Loan Mortgage Corp. #E99684
10-01-18 5.000 242,990 261,723
Federal Home Loan Mortgage Corp. #G01169
01-01-30 5.500 891,868 956,519
Federal Home Loan Mortgage Corp. #G01535
04-01-33 6.000 1,420,087 1,574,913
Federal Home Loan Mortgage Corp. #G02757
06-01-36 5.000 5,931,315 6,238,306
Federal Home Loan Mortgage Corp. #G03419
07-01-37 6.000 3,357,223 3,626,063
Federal Home Loan Mortgage Corp. #G12101
11-01-18 5.000 486,040 521,966
Federal Home Loan Mortgage Corp.
CMO I.O. Series 2136 Class S
03-15-29 18.890 3,323,747(f) 495,304
Federal Home Loan Mortgage Corp.
CMO I.O. Series 2471 Class SI
03-15-32 29.180 178,731(f) 24,741
Federal Home Loan Mortgage Corp.
CMO I.O. Series 2639 Class UI
03-15-22 10.090 700,137(f) 75,259
Federal Home Loan Mortgage Corp.
CMO I.O. Series 2795 Class IY
07-15-17 99.990 139,735(f) 3,007
Federal Home Loan Mortgage Corp.
CMO I.O. Series 2817 Class SA
06-15-32 20.000 475,704(f) 34,133
Federal Home Loan Mortgage Corp.
CMO I.O. Series 2824 Class EI
09-15-20 0.000 764,020(f) 15,425
Federal Home Loan Mortgage Corp.
CMO I.O. Series 3155 Class PS
05-15-36 16.470 1,329,782(f) 178,443
Federal Home Loan Mortgage Corp.
CMO I.O. Series 3588 Class WI
10-15-12 21.127 12,170,128(f) 1,014,908
Federal Home Loan Mortgage Corp.
CMO I.O. Series 3600 Class DI
01-15-13 6.466 9,501,347(f) 260,059
Federal Home Loan Mortgage Corp.
CMO I.O. Series 3630 Class AI
03-15-17 0.000 3,013,373(f) 150,669
Federal National Mortgage Association
06-01-25 4.500 7,000,000(b) 7,322,658
06-01-25 5.000 390,000(b) 414,131
06-01-25 5.500 12,000,000(b) 12,885,001
06-01-40 4.500 7,500,000(b) 7,652,340
06-01-40 5.000 7,500,000(b) 7,850,394
06-01-40 5.500 7,000,000(b) 7,467,033
06-01-40 6.000 6,000,000(b) 6,462,186
06-01-40 6.500 5,100,000(b) 5,547,841
Federal National Mortgage Association #190353
08-01-34 5.000 1,156,333 1,216,852
Federal National Mortgage Association #252409
03-01-29 6.500 927,753 1,031,012
Federal National Mortgage Association #254793
07-01-33 5.000 1,498,117 1,578,397
Federal National Mortgage Association #254916
09-01-23 5.500 1,201,756 1,297,497
Federal National Mortgage Association #313470
08-01-10 7.500 1,812 1,826
Federal National Mortgage Association #323362
11-01-28 6.000 1,614,866 1,777,235
Federal National Mortgage Association #323715
05-01-29 6.000 293,129 322,602
Federal National Mortgage Association #344909
04-01-25 8.000 434,766 487,655
Federal National Mortgage Association #357514
03-01-34 5.500 1,659,640 1,779,437
Federal National Mortgage Association #483691
12-01-28 7.000 936,112 1,062,904
Federal National Mortgage Association #487757
09-01-28 7.500 544,308 611,293
Federal National Mortgage Association #514704
01-01-29 6.000 192,171 211,493
</Table>
See accompanying Notes to Portfolio of Investments.
- --------------------------------------------------------------------------------
18 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
<Table>
<Caption>
BONDS (CONTINUED)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
RESIDENTIAL MORTGAGE-BACKED (CONT.)
Federal National Mortgage Association #545008
06-01-31 7.000% $1,113,490 $1,260,271
Federal National Mortgage Association #545339
11-01-31 6.500 158,455 177,269
Federal National Mortgage Association #545818
07-01-17 6.000 1,402,400 1,525,466
Federal National Mortgage Association #555458
05-01-33 5.500 1,284,455 1,373,969
Federal National Mortgage Association #555528
04-01-33 6.000 1,254,891 1,377,145
Federal National Mortgage Association #555734
07-01-23 5.000 514,478 547,312
Federal National Mortgage Association #581418
06-01-31 7.000 644,355 723,146
Federal National Mortgage Association #583088
06-01-29 6.000 2,151,133 2,363,130
Federal National Mortgage Association #592270
01-01-32 6.500 448,083 504,796
Federal National Mortgage Association #596505
08-01-16 6.500 83,432 88,513
Federal National Mortgage Association #601416
11-01-31 6.500 194,489 217,582
Federal National Mortgage Association #624979
01-01-32 6.000 446,806 495,793
Federal National Mortgage Association #626670
03-01-32 7.000 453,665 516,780
Federal National Mortgage Association #627426
03-01-17 6.500 316,330 344,310
Federal National Mortgage Association #630992
09-01-31 7.000 1,383,721 1,573,060
Federal National Mortgage Association #630993
09-01-31 7.500 1,220,915 1,375,292
Federal National Mortgage Association #631388
05-01-32 6.500 1,105,938 1,245,936
Federal National Mortgage Association #632856
03-01-17 6.000 301,834 327,721
Federal National Mortgage Association #633674
06-01-32 6.500 783,114 881,792
Federal National Mortgage Association #635231
04-01-32 7.000 71,767 81,035
Federal National Mortgage Association #635908
04-01-32 6.500 774,944 873,037
Federal National Mortgage Association #636812
04-01-32 7.000 89,673 101,884
Federal National Mortgage Association #640200
10-01-31 9.500 99,286 114,522
Federal National Mortgage Association #640207
03-01-17 7.000 31,754 33,362
Federal National Mortgage Association #640208
04-01-17 7.500 35,595 36,958
Federal National Mortgage Association #644805
05-01-32 7.000 806,553 916,185
Federal National Mortgage Association #645053
05-01-32 7.000 346,393 388,564
Federal National Mortgage Association #646189
05-01-32 6.500 333,820(i) 370,267
Federal National Mortgage Association #654071
09-01-22 6.500 412,758 459,556
Federal National Mortgage Association #654685
11-01-22 6.000 456,852 503,270
Federal National Mortgage Association #655635
08-01-32 6.500 518,373 583,994
Federal National Mortgage Association #656514
09-01-17 6.500 712,291 775,403
Federal National Mortgage Association #660186
11-01-32 6.000 1,780,233 1,984,784
Federal National Mortgage Association #665752
09-01-32 6.500 683,008 757,579
Federal National Mortgage Association #667011
11-01-17 5.000 702,525(b) 754,014
Federal National Mortgage Association #667302
01-01-33 7.000 478,107 543,325
Federal National Mortgage Association #670382
09-01-32 6.000 742,785 815,149
Federal National Mortgage Association #676683
12-01-32 6.000 702,184 770,592
Federal National Mortgage Association #677089
01-01-33 5.500 361,567(i) 387,666
Federal National Mortgage Association #677294
01-01-33 6.000 876,243(i) 961,608
Federal National Mortgage Association #681080
02-01-18 5.000 483,149 518,560
Federal National Mortgage Association #684585
02-01-33 5.500 1,035,202 1,117,695
</Table>
See accompanying Notes to Portfolio of Investments.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 19
PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
<Table>
<Caption>
BONDS (CONTINUED)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
RESIDENTIAL MORTGAGE-BACKED (CONT.)
Federal National Mortgage Association #684853
03-01-33 6.500% $206,953 $230,579
Federal National Mortgage Association #688002
03-01-33 5.500 1,020,366 1,104,856
Federal National Mortgage Association #689026
05-01-33 5.500 290,588 313,909
Federal National Mortgage Association #689093
07-01-28 5.500 613,480 660,639
Federal National Mortgage Association #694628
04-01-33 5.500 1,549,122 1,681,155
Federal National Mortgage Association #694795
04-01-33 5.500 1,817,305 1,967,103
Federal National Mortgage Association #697145
03-01-23 5.500 605,158 648,379
Federal National Mortgage Association #699424
04-01-33 5.500 1,208,414 1,311,420
Federal National Mortgage Association #701101
04-01-33 6.000 1,344,575 1,473,885
Federal National Mortgage Association #704610
06-01-33 5.500 1,556,086 1,668,408
Federal National Mortgage Association #705655
05-01-33 5.000 529,228 557,588
Federal National Mortgage Association #708503
05-01-33 6.000 252,702 280,267
Federal National Mortgage Association #708504
05-01-33 6.000 382,876 424,859
Federal National Mortgage Association #710780
05-01-33 6.000 164,665 180,501
Federal National Mortgage Association #711206
05-01-33 5.500 790,923 848,014
Federal National Mortgage Association #711239
07-01-33 5.500 435,286 466,706
Federal National Mortgage Association #711501
05-01-33 5.500 579,488 628,578
Federal National Mortgage Association #723771
08-01-28 5.500 677,376 729,445
Federal National Mortgage Association #725017
12-01-33 5.500 2,153,209 2,338,178
Federal National Mortgage Association #725232
03-01-34 5.000 1,217,454 1,282,694
Federal National Mortgage Association #725424
04-01-34 5.500 3,026,879 3,245,367
Federal National Mortgage Association #725684
05-01-18 6.000 439,818 477,105
Federal National Mortgage Association #726940
08-01-23 5.500 938,999 1,011,583
Federal National Mortgage Association #730153
08-01-33 5.500 464,125 497,627
Federal National Mortgage Association #733367
08-01-23 5.500 709,978 765,289
Federal National Mortgage Association #735212
12-01-34 5.000 6,511,123 6,851,899
Federal National Mortgage Association #743524
11-01-33 5.000 1,493,687 1,573,730
Federal National Mortgage Association #743579
11-01-33 5.500 1,009,050 1,081,886
Federal National Mortgage Association #747339
10-01-23 5.500 859,052 925,830
Federal National Mortgage Association #753507
12-01-18 5.000 624,036 673,339
Federal National Mortgage Association #759342
01-01-34 6.500 285,058 315,783
Federal National Mortgage Association #770403
04-01-34 5.000 1,163,436 1,224,327
Federal National Mortgage Association #776962
04-01-29 5.000 1,010,306 1,067,540
Federal National Mortgage Association #779676
06-01-34 5.000 1,776,238 1,869,202
Federal National Mortgage Association #793622
09-01-34 5.500 4,980,431 5,335,262
Federal National Mortgage Association #797232
09-01-34 5.500 3,273,472 3,506,690
Federal National Mortgage Association #845109
05-01-36 6.000 3,999,614 4,324,270
Federal National Mortgage Association #886020
07-01-36 6.500 698,640 763,651
Federal National Mortgage Association #886291
07-01-36 7.000 503,464 558,094
Federal National Mortgage Association #888414
11-01-35 5.000 2,902,461 3,048,926
Federal National Mortgage Association #889620
08-01-37 5.500 2,767,691 2,959,686
Federal National Mortgage Association #928870
11-01-37 8.500 113,891 127,698
</Table>
See accompanying Notes to Portfolio of Investments.
- --------------------------------------------------------------------------------
20 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
<Table>
<Caption>
BONDS (CONTINUED)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
RESIDENTIAL MORTGAGE-BACKED (CONT.)
Federal National Mortgage Association #932624
03-01-40 4.500% $10,795,897 $11,036,275
Federal National Mortgage Association #933966
07-01-23 6.000 1,815,662 1,959,134
Federal National Mortgage Association #941285
06-01-37 6.000 3,514,925 3,855,936
Federal National Mortgage Association #960606
10-01-36 5.500 2,957,044 3,190,050
Federal National Mortgage Association #986196
07-01-23 5.000 5,301,815 5,638,204
Federal National Mortgage Association #AD4319
04-01-40 4.500 7,482,879 7,647,152
Federal National Mortgage Association
CMO I.O. Series 2003-119 Class GI
12-25-33 5.440 636,624(f) 127,882
Federal National Mortgage Association
CMO I.O. Series 2003-63 Class IP
07-25-33 0.000 1,330,214(f) 276,498
Federal National Mortgage Association
CMO I.O. Series 2003-71 Class IM
12-25-31 5.340 322,651(f) 39,169
Federal National Mortgage Association
CMO I.O. Series 2004-31 Class SM
05-25-34 15.179 3,507,276(f) 518,381
Federal National Mortgage Association
CMO I.O. Series 2004-84 Class GI
12-25-22 20.000 110,123(f) 7,362
Federal National Mortgage Association
CMO I.O. Series 2005-70 Class YJ
08-25-35 0.000 1,341,645(f) 121,736
Federal National Mortgage Association
CMO I.O. Series 2007-22 Class JS
03-25-37 21.830 1,022,423(f) 131,183
Government National Mortgage Association
06-01-40 5.000 2,000,000(b) 2,107,812
Government National Mortgage Association #518371
02-15-30 7.000 114,590 129,776
Government National Mortgage Association #528344
03-15-30 7.000 110,567 125,221
Government National Mortgage Association #556293
12-15-31 6.500 267,266 297,605
Government National Mortgage Association #583182
02-15-32 6.500 457,776 507,166
Government National Mortgage Association #595256
12-15-32 6.000 253,959 278,990
Government National Mortgage Association #619613
09-15-33 5.000 920,756 979,364
Government National Mortgage Association #727847
03-15-40 5.000 3,112,494 3,289,213
Government National Mortgage Association #743790
05-15-40 5.000 1,057,925 1,117,991
Government National Mortgage Association #743793
05-15-40 5.000 1,001,141 1,057,983
GSR Mortgage Loan Trust
CMO Series 2005-5F Class 2A3
06-25-35 5.500 856,659 868,915
Indymac Index Mortgage Loan Trust
CMO I.O. Series 2005-AR8 Class AX1
04-25-35 0.000 4,902,377(c,f) --
Indymac Index Mortgage Loan Trust
CMO I.O. Series 2006-AR25 Class 3A3
09-25-36 20.000 8,856,057(f) 95,112
Jefferies & Co., Inc.
CMO Series 2009-R6 Class 4A2
04-26-35 4.869 5,125,699(d) 1,262,203
JP Morgan Mortgage Trust
CMO Series 2004-S2 Class 4A5
11-25-34 6.000 771,808 667,343
JP Morgan Reremic
CMO Series 2009-3 Class 1A2
02-26-35 2.867 1,449,242(d,h) 534,987
MASTR Alternative Loans Trust
CMO Series 2004-7 Class 8A1
08-25-19 5.000 243,895 231,916
MASTR Alternative Loans Trust
CMO Series 2004-8 Class 7A1
09-25-19 5.000 367,460 349,259
Prime Mortgage Trust
CMO Series 2005-1 Class 2A1
09-25-34 5.000 406,209(d) 412,261
Structured Asset Mortgage Investments, Inc.
CMO Series 2006-AR7 Class A8
08-25-36 0.413 423,483(h) 422,412
Thornburg Mortgage Securities Trust
CMO I.O. Series 2006-5 Class AX
10-25-46 24.576 7,266,910(f) 333,436
</Table>
See accompanying Notes to Portfolio of Investments.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 21
PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
<Table>
<Caption>
BONDS (CONTINUED)
COUPON PRINCIPAL
ISSUER RATE AMOUNT VALUE(a)
RESIDENTIAL MORTGAGE-BACKED (CONT.)
WaMu Mortgage Pass-Through Certificates
CMO Series 2004-AR9 Class A6
08-25-34 2.950% $322,096(h) $320,185
Wells Fargo Mortgage-Backed Securities Trust
CMO Series 2003-O Class 1A11
01-25-34 4.670 545,260(h) 549,782
Wells Fargo Mortgage-Backed Securities Trust
CMO Series 2004-F Class A3
06-25-34 4.719 617,998(h) 620,396
Wells Fargo Mortgage-Backed Securities Trust
CMO Series 2004-Q Class 1A2
09-25-34 4.870 1,308,062(h) 1,304,927
Wells Fargo Mortgage-Backed Securities Trust
CMO Series 2005-14 Class 2A1
12-25-35 5.500 432,428 405,268
Wells Fargo Mortgage-Backed Securities Trust
CMO Series 2005-AR16 Class 4A6
10-25-35 4.034 1,230,077(h) 1,211,313
Wells Fargo Mortgage-Backed Securities Trust
CMO Series 2007-8 Class 2A7
07-25-37 6.000 1,406,766 1,368,443
---------------
Total 265,296,770
- -------------------------------------------------------------------------------------
TOTAL BONDS
(Cost: $278,833,916) $291,955,625
- -------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
MONEY MARKET FUND (5.0%)
SHARES VALUE(a)
RiverSource Short-Term Cash Fund, 0.218% 11,866,911(j) $11,866,911
- -------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost: $11,866,911) $11,866,911
- -------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(Cost: $290,700,827)(k) $303,822,536
=====================================================================================
</Table>
INVESTMENTS IN DERIVATIVES
FUTURES CONTRACTS OUTSTANDING AT MAY 31, 2010
<Table>
<Caption>
NUMBER OF UNREALIZED
CONTRACTS NOTIONAL EXPIRATION APPRECIATION
CONTRACT DESCRIPTION LONG (SHORT) MARKET VALUE DATE (DEPRECIATION)
- ------------------------------------------------------------------------------------
U.S. Treasury Note, 2-
year 5 $1,090,703 Oct. 2010 $305
U.S. Treasury Note, 5-
year (107) (12,565,812) July 2010 (162,161)
U.S. Treasury Note, 5-
year (163) (19,017,516) Oct. 2010 (38,447)
U.S. Treasury Note, 10-
year 87 10,429,125 Sept. 2010 (22,560)
- ------------------------------------------------------------------------------------
Total $(222,863)
- ------------------------------------------------------------------------------------
</Table>
NOTES TO PORTFOLIO OF INVESTMENTS
<Table>
CMO -- Collateralized Mortgage Obligation
I.O -- Interest Only
</Table>
(a) Securities are valued by using policies described in Note 2 to the
financial statements.
(b) At May 31, 2010, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$69,507,935. See Note 2 to the financial statements.
(c) Negligible market value.
- --------------------------------------------------------------------------------
22 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED)
(d) Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended. This security
may be determined to be liquid under guidelines established by the Fund's
Board of Directors. This security may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At May 31, 2010,
the value of these securities amounted to $18,898,377 or 8.02% of net
assets.
(e) Mortgage-backed securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real
property, and include single- and multi-class pass-through securities and
collateralized mortgage obligations. These securities may be issued or
guaranteed by U.S. government agencies or instrumentalities, or by private
issuers, generally originators and investors in mortgage loans, including
savings associations, mortgage bankers, commercial banks, investment
bankers and special purpose entities. The maturity dates shown represent
the original maturity of the underlying obligation. Actual maturity may
vary based upon prepayment activity on these obligations. Unless otherwise
noted, the coupon rates presented are fixed rates.
(f) Interest only represents securities that entitle holders to receive only
interest payments on the underlying mortgages. The yield to maturity of an
interest only security is extremely sensitive to the rate of principal
payments on the underlying mortgage assets. A rapid (slow) rate of
principal repayments may have an adverse (positive) effect on yield to
maturity. The principal amount shown is the notional amount of the
underlying mortgages. The interest rate disclosed represents yield based
upon the estimated timing and amount of future cash flows at May 31, 2010.
(g) This position is in bankruptcy.
(h) Interest rate varies either based on a predetermined schedule or to reflect
current market conditions; rate shown is the effective rate on May 31,
2010.
(i) At May 31, 2010, investments in securities included securities valued at
$150,839 that were partially pledged as collateral to cover initial margin
deposits on open interest rate futures contracts.
(j) Affiliated Money Market Fund -- See Note 8 to the financial statements. The
rate shown is the seven-day current annualized yield at May 31, 2010.
(k) At May 31, 2010, the cost of securities for federal income tax purposes was
$295,897,102 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
<Table>
Unrealized appreciation $11,222,232
Unrealized depreciation (3,296,798)
-----------------------------------------------------------
Net unrealized appreciation $7,925,434
-----------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 23
PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
FAIR VALUE MEASUREMENTS
Generally accepted accounting principles (GAAP) require disclosure regarding the
inputs and valuation techniques used to measure fair value and any changes in
valuation inputs or techniques. In addition, investments shall be disclosed by
major category.
The Fund categorizes its fair value measurements according to a three-level
hierarchy that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by prioritizing that the most observable input be used when
available. Observable inputs are those that market participants would use in
pricing an investment based on market data obtained from sources independent of
the reporting entity. Unobservable inputs are those that reflect the Fund's
assumptions about the information market participants would use in pricing an
investment. An investment's level within the fair value hierarchy is based on
the lowest level of any input that is deemed significant to the asset or
liability's fair value measurement. The input levels are not necessarily an
indication of the risk or liquidity associated with investments at that level.
For example, certain U.S. government securities are generally high quality and
liquid, however, they are reflected as Level 2 because the inputs used to
determine fair value may not always be quoted prices in an active market.
Fair value inputs are summarized in the three broad levels listed below:
- Level 1 -- Valuations based on quoted prices for investments in active
markets that the Fund has the ability to access at the measurement date.
Valuation adjustments are not applied to Level 1 investments.
- Level 2 -- Valuations based on other significant observable inputs
(including quoted prices for similar securities, interest rates,
prepayment speeds, credit risks, etc.).
- Level 3 -- Valuations based on significant unobservable inputs (including
the Fund's own assumptions and judgment in determining the fair value of
investments).
Inputs that are used in determining fair value of an investment may include
price information, credit data, volatility statistics, and other factors. These
inputs can be either observable or unobservable. The availability of observable
inputs can vary between investments, and is affected by various factors such as
the type of investment, and the volume and level of activity for that investment
or similar investments in the marketplace. The inputs will be considered by the
Fund Administrator, along with any other relevant factors in the calculation of
an investment's fair value. The Fund uses prices and inputs that are current as
of the measurement date, which may include periods of market dislocations.
During these periods, the availability of prices and inputs may be reduced for
many investments. This condition could cause an investment to be reclassified
between the various levels within the hierarchy.
Investments falling into the Level 3 category are primarily supported by quoted
prices from brokers and dealers participating in the market for those
investments. However, these may be classified as Level 3 investments due to lack
of market transparency and corroboration to support these quoted prices.
Additionally, valuation models may be used as the pricing source for any
remaining investments classified as Level 3. These models rely on one or more
significant unobservable inputs and/or significant assumptions by the Fund
Administrator. Inputs used in a valuation model
- --------------------------------------------------------------------------------
24 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
FAIR VALUE MEASUREMENTS (CONTINUED)
may include, but are not limited to, financial statement analysis, discount
rates and estimated cash flows, and comparable company data.
The following table is a summary of the inputs used to value the Fund's
investments as of May 31, 2010:
<Table>
<Caption>
FAIR VALUE AT MAY 31, 2010
----------------------------------------------------------------
LEVEL 1 LEVEL 2
QUOTED PRICES OTHER LEVEL 3
IN ACTIVE SIGNIFICANT SIGNIFICANT
MARKETS FOR OBSERVABLE UNOBSERVABLE
DESCRIPTION(A) IDENTICAL ASSETS INPUTS INPUTS TOTAL
- ---------------------------------------------------------------------------------------------
Bonds
Asset-Backed Securities $-- $12,347,181 $1,022,693 $13,369,874
Commercial Mortgage-
Backed Securities -- 13,292,522 -- 13,292,522
Residential Mortgage-
Backed Securities -- 261,527,145 3,766,084 265,293,229
- ---------------------------------------------------------------------------------------------
Total Bonds -- 287,166,848 4,788,777 291,955,625
- ---------------------------------------------------------------------------------------------
Other
Affiliated Money Market
Fund(b) 11,866,911 -- -- 11,866,911
- ---------------------------------------------------------------------------------------------
Total Other 11,866,911 -- -- 11,866,911
- ---------------------------------------------------------------------------------------------
Investments in Securities 11,866,911 287,166,848 4,788,777 303,822,536
Other Financial
Instruments(c) (222,863) -- -- (222,863)
- ---------------------------------------------------------------------------------------------
Total $11,644,048 $287,166,848 $4,788,777 $303,599,673
- ---------------------------------------------------------------------------------------------
</Table>
(a) See the Portfolio of Investments for all investment classifications not
indicated in the table.
(b) Money market fund that is a sweep investment for cash balances in the Fund
at May 31, 2010.
(c) Other Financial Instruments are derivative instruments, which are valued at
the unrealized appreciation (depreciation) on the instrument. Derivative
descriptions are located in the Investments in Derivatives section of the
Portfolio of Investments.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 25
PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
FAIR VALUE MEASUREMENTS (CONTINUED)
The following table is a reconciliation of Level 3 assets for which significant
unobservable inputs were used to determine fair value.
<Table>
<Caption>
RESIDENTIAL
ASSET-BACKED MORTGAGE-BACKED
SECURITIES SECURITIES TOTAL
- ---------------------------------------------------------------------------------
Balance as of May 31, 2009 $- $8,941,664 $8,941,664
Accrued discounts/premiums 7,317 50,063 57,380
Realized gain (loss) - (1,776,927) (1,776,927)
Change in unrealized
appreciation (depreciation)* 4,482 4,231,911 4,236,393
Net purchases (sales) 1,010,894 (3,475,084) (2,464,190)
Transfers in and/or out of
Level 3 - (4,205,543) (4,205,543)
- ---------------------------------------------------------------------------------
Balance as of May 31, 2010 $1,022,693 $3,766,084 $4,788,777
- ---------------------------------------------------------------------------------
</Table>
* Change in unrealized appreciation (depreciation) relating to securities held
at May 31, 2010 was $865,064, which is comprised of Asset-Backed Securities
of $4,482 and Residential Mortgage-Backed Securities of $860,582.
HOW TO FIND INFORMATION ABOUT THE FUND'S QUARTERLY PORTFOLIO HOLDINGS
(i) The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission (Commission) for the first and third
quarters of each fiscal year on Form N-Q;
(ii) The Fund's Forms N-Q are available on the Commission's website at
http://www.sec.gov;
(iii)The Fund's Forms N-Q may be reviewed and copied at the Commission's Public
Reference Room in Washington, DC (information on the operations of the
Public Reference Room may be obtained by calling 800.SEC.0330); and
(iv) The Fund's complete schedule of portfolio holdings, as filed on Form N-Q,
can be obtained without charge, upon request, by calling 800.221.2450.
- --------------------------------------------------------------------------------
26 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
STATEMENT OF ASSETS AND LIABILITIES --------------------------------------------
MAY 31, 2010
<Table>
<Caption>
ASSETS
Investments in securities, at value
Unaffiliated issuers (identified cost $278,833,916) $291,955,625
Affiliated money market fund (identified cost $11,866,911) 11,866,911
- -------------------------------------------------------------------------------
Total investments in securities (identified cost $290,700,827) 303,822,536
Cash 790,416
Capital shares receivable 213,752
Dividends and accrued interest receivable 1,232,177
Receivable for investment securities sold 17,971,160
- -------------------------------------------------------------------------------
Total assets 324,030,041
- -------------------------------------------------------------------------------
LIABILITIES
Dividends payable to shareholders 215,794
Capital shares payable 366,456
Payable for investment securities purchased 17,957,238
Payable for securities purchased on a forward-commitment basis 69,507,935
Variation margin payable on futures contracts 76,265
Accrued investment management services fees 3,099
Accrued distribution fees 20,482
Accrued transfer agency fees 574
Accrued administrative services fees 452
Accrued plan administration services fees 17
Other accrued expenses 94,289
- -------------------------------------------------------------------------------
Total liabilities 88,242,601
- -------------------------------------------------------------------------------
Net assets applicable to outstanding capital stock $235,787,440
- -------------------------------------------------------------------------------
REPRESENTED BY
Capital stock -- $.01 par value $ 457,564
Additional paid-in capital 238,947,995
Undistributed net investment income 772,657
Accumulated net realized gain (loss) (17,289,622)
Unrealized appreciation (depreciation) on investments 12,898,846
- -------------------------------------------------------------------------------
Total -- representing net assets applicable to outstanding
capital stock $235,787,440
- -------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
NET ASSET VALUE PER SHARE
NET ASSETS SHARES OUTSTANDING NET ASSET VALUE PER SHARE
Class A $ 80,371,258 15,588,925 $5.16(1)
Class B $ 17,619,412 3,416,007 $5.16
Class C $ 5,217,051 1,011,314 $5.16
Class I $132,494,594 25,723,583 $5.15
Class R4 $ 85,125 16,536 $5.15
- ------------------------------------------------------------------------------
</Table>
(1) The maximum offering price per share for Class A is $5.42. The offering
price is calculated by dividing the net asset value by 1.0 minus the maximum
sales charge of 4.75%.
The accompanying Notes to Financial Statements are an integral part of this
statement.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 27
STATEMENT OF OPERATIONS --------------------------------------------------------
YEAR ENDED MAY 31, 2010
<Table>
<Caption>
INVESTMENT INCOME
Income:
Interest $15,112,142
Income distributions from affiliated money market fund 20,680
- ------------------------------------------------------------------------------
Total income 15,132,822
- ------------------------------------------------------------------------------
Expenses:
Investment management services fees 1,247,010
Distribution fees
Class A 195,150
Class B 198,412
Class C 44,904
Transfer agency fees
Class A 168,939
Class B 45,633
Class C 9,941
Class R4 37
Administrative services fees 181,856
Plan administration services fees -- Class R4 184
Compensation of board members 7,851
Custodian fees 25,560
Printing and postage 44,519
Registration fees 52,660
Professional fees 34,875
Other 16,458
- ------------------------------------------------------------------------------
Total expenses 2,273,989
Expenses waived/reimbursed by the Investment Manager and its
affiliates (438,001)
- ------------------------------------------------------------------------------
Total net expenses 1,835,988
- ------------------------------------------------------------------------------
Investment income (loss) -- net 13,296,834
- ------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) -- NET
Net realized gain (loss) on:
Security transactions 6,151,500
Futures contracts (550,868)
Options contracts written 9,872
- ------------------------------------------------------------------------------
Net realized gain (loss) on investments 5,610,504
Net change in unrealized appreciation (depreciation) on
investments 15,111,335
- ------------------------------------------------------------------------------
Net gain (loss) on investments 20,721,839
- ------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $34,018,673
- ------------------------------------------------------------------------------
</Table>
The accompanying Notes to Financial Statements are an integral part of this
statement.
- --------------------------------------------------------------------------------
28 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
STATEMENTS OF CHANGES IN NET ASSETS --------------------------------------------
<Table>
<Caption>
YEAR ENDED MAY 31, 2010 2009
OPERATIONS AND DISTRIBUTIONS
Investment income (loss) -- net $ 13,296,834 $ 17,054,737
Net realized gain (loss) on investments 5,610,504 (18,382,125)
Net change in unrealized appreciation (depreciation) on
investments 15,111,335 2,926,890
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 34,018,673 1,599,502
- ----------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (3,655,773) (3,899,777)
Class B (774,677) (1,013,132)
Class C (176,588) (152,824)
Class I (7,949,684) (11,827,943)
Class R4 (3,511) (290,189)
Net realized gain
Class A -- (635,778)
Class B -- (193,543)
Class C -- (29,317)
Class I -- (1,808,398)
Class R4 -- (451)
- ----------------------------------------------------------------------------------------------
Total distributions (12,560,233) (19,851,352)
- ----------------------------------------------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 29
STATEMENTS OF CHANGES IN NET ASSETS (continued) --------------------------------
<Table>
<Caption>
YEAR ENDED MAY 31, 2010 2009
CAPITAL SHARE TRANSACTIONS
Proceeds from sales
Class A shares $ 21,150,672 $ 16,869,316
Class B shares 2,177,805 7,170,065
Class C shares 1,884,834 1,148,620
Class I shares 47,538,482 73,431,416
Class R4 shares 79,055 75,985
Reinvestment of distributions at net asset value
Class A shares 3,233,010 4,107,536
Class B shares 701,020 1,103,090
Class C shares 159,138 167,436
Class I shares 7,904,537 13,610,360
Class R4 shares 2,968 161,216
Conversions from Class B to Class A
Class A shares 2,163,974 3,005,081
Class B shares (2,163,974) (3,005,081)
Payments for redemptions
Class A shares (31,160,763) (36,083,563)
Class B shares (8,833,451) (13,405,861)
Class C shares (1,262,692) (1,228,211)
Class I shares (158,033,789) (75,837,805)
Class R4 shares (66,388) (41,377,098)
- ----------------------------------------------------------------------------------------------
Increase (decrease) in net assets from capital share transactions (114,525,562) (50,087,498)
- ----------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (93,067,122) (68,339,348)
Net assets at beginning of year 328,854,562 397,193,910
- ----------------------------------------------------------------------------------------------
Net assets at end of year $ 235,787,440 $328,854,562
- ----------------------------------------------------------------------------------------------
Undistributed net investment income $ 772,657 $ 36,056
- ----------------------------------------------------------------------------------------------
</Table>
Certain line items from the prior year have been renamed to conform to the
current year presentation.
The accompanying Notes to Financial Statements are an integral part of this
statement.
- --------------------------------------------------------------------------------
30 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
FINANCIAL HIGHLIGHTS -----------------------------------------------------------
The following tables are intended to help you understand the Fund's financial
performance. Certain information reflects financial results for a single share
of a class held for the periods shown. For periods ended 2008 and after, per
share net investment income (loss) amounts are calculated based on average
shares outstanding during the period. Total returns assume reinvestment of all
dividends and distributions. Total returns do not reflect payment of sales
charges, if any, and are not annualized for periods of less than one year.
<Table>
<Caption>
YEAR ENDED MAY 31,
CLASS A --------------------------------------------------
PER SHARE DATA 2010 2009 2008 2007 2006
Net asset value, beginning of period $4.77 $4.99 $5.00 $4.92 $5.12
- -----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .25 .21 .23 .22 .21
Net gains (losses) (both realized and
unrealized) .37 (.18) (.02) .09 (.20)
- -----------------------------------------------------------------------------------------------------
Total from investment operations .62 .03 .21 .31 .01
- -----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.23) (.21) (.22) (.23) (.20)
Distributions from realized gains -- (.04) -- -- (.01)
- -----------------------------------------------------------------------------------------------------
Total distributions (.23) (.25) (.22) (.23) (.21)
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $5.16 $4.77 $4.99 $5.00 $4.92
- -----------------------------------------------------------------------------------------------------
TOTAL RETURN 13.32% .79% 4.31% 6.30% .12%
- -----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(a)
Gross expenses prior to expense
waiver/reimbursement 1.09% 1.08% 1.09% 1.17% 1.19%
- -----------------------------------------------------------------------------------------------------
Net expenses after expense
waiver/reimbursement(b) .89% .89% .89% .89% .89%
- -----------------------------------------------------------------------------------------------------
Net investment income (loss) 4.98% 4.51% 4.56% 4.45% 4.08%
- -----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (in millions) $80 $79 $95 $111 $126
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 519% 431% 354% 306% 178%
- -----------------------------------------------------------------------------------------------------
</Table>
See accompanying Notes to Financial Highlights.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 31
FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
<Table>
<Caption>
YEAR ENDED MAY 31,
CLASS B --------------------------------------------------
PER SHARE DATA 2010 2009 2008 2007 2006
Net asset value, beginning of period $4.77 $4.99 $5.00 $4.93 $5.12
- -----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .21 .18 .19 .19 .17
Net gains (losses) (both realized and
unrealized) .37 (.18) (.01) .07 (.19)
- -----------------------------------------------------------------------------------------------------
Total from investment operations .58 -- .18 .26 (.02)
- -----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.19) (.18) (.19) (.19) (.16)
Distributions from realized gains -- (.04) -- -- (.01)
- -----------------------------------------------------------------------------------------------------
Total distributions (.19) (.22) (.19) (.19) (.17)
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $5.16 $4.77 $4.99 $5.00 $4.93
- -----------------------------------------------------------------------------------------------------
TOTAL RETURN 12.46% .03% 3.53% 5.30% (.42%)
- -----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(a)
Gross expenses prior to expense
waiver/reimbursement 1.85% 1.84% 1.86% 1.94% 1.95%
- -----------------------------------------------------------------------------------------------------
Net expenses after expense
waiver/reimbursement(b) 1.65% 1.65% 1.65% 1.64% 1.64%
- -----------------------------------------------------------------------------------------------------
Net investment income (loss) 4.18% 3.75% 3.79% 3.70% 3.31%
- -----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (in millions) $18 $24 $34 $44 $64
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 519% 431% 354% 306% 178%
- -----------------------------------------------------------------------------------------------------
</Table>
See accompanying Notes to Financial Highlights.
- --------------------------------------------------------------------------------
32 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED MAY 31,
CLASS C --------------------------------------------------
PER SHARE DATA 2010 2009 2008 2007 2006
Net asset value, beginning of period $4.77 $4.99 $5.00 $4.93 $5.12
- -----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .21 .18 .19 .19 .17
Net gains (losses) (both realized and
unrealized) .37 (.18) (.01) .07 (.19)
- -----------------------------------------------------------------------------------------------------
Total from investment operations .58 -- .18 .26 (.02)
- -----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.19) (.18) (.19) (.19) (.16)
Distributions from realized gains -- (.04) -- -- (.01)
- -----------------------------------------------------------------------------------------------------
Total distributions (.19) (.22) (.19) (.19) (.17)
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $5.16 $4.77 $4.99 $5.00 $4.93
- -----------------------------------------------------------------------------------------------------
TOTAL RETURN 12.47% .03% 3.53% 5.30% (.43%)
- -----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(a)
Gross expenses prior to expense
waiver/reimbursement 1.85% 1.83% 1.85% 1.94% 1.95%
- -----------------------------------------------------------------------------------------------------
Net expenses after expense
waiver/reimbursement(b) 1.65% 1.65% 1.65% 1.64% 1.64%
- -----------------------------------------------------------------------------------------------------
Net investment income (loss) 4.27% 3.76% 3.80% 3.70% 3.31%
- -----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (in millions) $5 $4 $4 $5 $7
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 519% 431% 354% 306% 178%
- -----------------------------------------------------------------------------------------------------
</Table>
See accompanying Notes to Financial Highlights.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 33
FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
<Table>
<Caption>
YEAR ENDED MAY 31,
CLASS I --------------------------------------------------
PER SHARE DATA 2010 2009 2008 2007 2006
Net asset value, beginning of period $4.77 $4.99 $5.00 $4.92 $5.11
- -----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .26 .23 .25 .24 .22
Net gains (losses) (both realized and
unrealized) .37 (.18) (.02) .08 (.19)
- -----------------------------------------------------------------------------------------------------
Total from investment operations .63 .05 .23 .32 .03
- -----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.25) (.23) (.24) (.24) (.21)
Distributions from realized gains -- (.04) -- -- (.01)
- -----------------------------------------------------------------------------------------------------
Total distributions (.25) (.27) (.24) (.24) (.22)
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $5.15 $4.77 $4.99 $5.00 $4.92
- -----------------------------------------------------------------------------------------------------
TOTAL RETURN 13.58% 1.21% 4.74% 6.68% .59%
- -----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(a)
Gross expenses prior to expense
waiver/reimbursement .62% .61% .63% .63% .73%
- -----------------------------------------------------------------------------------------------------
Net expenses after expense
waiver/reimbursement(b) .47% .48% .48% .54% .54%
- -----------------------------------------------------------------------------------------------------
Net investment income (loss) 5.33% 4.93% 4.97% 4.90% 4.99%
- -----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (in millions) $132 $222 $222 $207 $6
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 519% 431% 354% 306% 178%
- -----------------------------------------------------------------------------------------------------
</Table>
See accompanying Notes to Financial Highlights.
- --------------------------------------------------------------------------------
34 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED MAY 31,
CLASS R4 --------------------------------------------------
PER SHARE DATA 2010 2009 2008 2007 2006
Net asset value, beginning of period $4.77 $4.99 $5.00 $4.92 $5.11
- -----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .25 .23 .23 .23 .21
Net gains (losses) (both realized and
unrealized) .37 (.10) (.01) .08 (.19)
- -----------------------------------------------------------------------------------------------------
Total from investment operations .62 .13 .22 .31 .02
- -----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.24) (.31) (.23) (.23) (.20)
Distributions from realized gains -- (.04) -- -- (.01)
- -----------------------------------------------------------------------------------------------------
Total distributions (.24) (.35) (.23) (.23) (.21)
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $5.15 $4.77 $4.99 $5.00 $4.92
- -----------------------------------------------------------------------------------------------------
TOTAL RETURN 13.25% 2.82% 4.46% 6.51% .49%
- -----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS(a)
Gross expenses prior to expense
waiver/reimbursement .93% .89% .93% .99% 1.04%
- -----------------------------------------------------------------------------------------------------
Net expenses after expense
waiver/reimbursement(b) .77% .70% .75% .71% .71%
- -----------------------------------------------------------------------------------------------------
Net investment income (loss) 5.09% 4.38% 4.69% 4.63% 4.40%
- -----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (in millions) $-- $-- $42 $40 $35
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 519% 431% 354% 306% 178%
- -----------------------------------------------------------------------------------------------------
</Table>
NOTES TO FINANCIAL HIGHLIGHTS
(a) In addition to the fees and expenses which the Fund bears directly, the Fund
indirectly bears a pro rata share of the fees and expenses of the acquired
funds in which it invests. Such indirect expenses are not included in the
reported expense ratios.
(b) The Investment Manager and its affiliates agreed to waive/reimburse certain
fees and expenses (excluding fees and expenses of acquired funds).
(c) Includes mortgage dollar rolls. If mortgage dollar roll transactions were
excluded, the portfolio turnover would have been 246% and 162% for the years
ended May 31, 2010 and 2009, respectively.
The accompanying Notes to Financial Statements are an integral part of this
statement.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 35
NOTES TO FINANCIAL STATEMENTS --------------------------------------------------
1. ORGANIZATION
RiverSource U.S. Government Mortgage Fund (the Fund) is a series of RiverSource
Government Income Series, Inc. (the Corporation) and is registered under the
Investment Company Act of 1940, as amended (the 1940 Act), as a diversified,
open-end management investment company. The Corporation has 10 billion
authorized shares of capital stock that can be allocated among the separate
series as designated by the Corporation's Board of Directors (the Board). The
Fund invests primarily in mortgage-backed securities that either are issued or
guaranteed as to principal and interest by the U.S. government, its agencies,
authorities or instrumentalities.
The Fund offers Class A, Class B, Class C, Class I and Class R4 shares.
- - Class A shares are offered with a front-end sales charge, which may be waived
under certain circumstances.
- - Class B shares may be subject to a contingent deferred sales charge (CDSC)
and automatically convert to Class A shares one month after the completion of
the eighth year of ownership if originally purchased in a RiverSource fund on
or after May 21, 2005 or originally purchased in a Seligman fund on or after
June 13, 2009. Class B shares originally purchased in a RiverSource fund
prior to May 21, 2005 will convert to Class A shares in the ninth calendar
year of ownership. Class B shares originally purchased in a Seligman fund
prior to June 13, 2009 will convert to Class A shares in the month prior to
the ninth year of ownership.
- - Class C shares may be subject to a CDSC.
- - Class I and Class R4 shares are offered without a front-end sales charge or
CDSC to qualifying institutional investors.
At May 31, 2010, Columbia Management Investment Advisers, LLC (formerly
RiverSource Investments, LLC) (the Investment Manager) and affiliated funds-of-
funds owned 100% of Class I shares. At May 31, 2010, the Investment Manager,
RiverSource Life Insurance Company and affiliated funds-of-funds owned
approximately 56% of the total outstanding Fund shares.
All classes of shares have identical voting, dividend and liquidation rights.
Class specific expenses (e.g., distribution and service fees, transfer agency
fees, plan administration services fees) differ among classes. Income, expenses
(other than class specific expenses) and realized and unrealized gains or losses
on investments are allocated to each class of shares based upon its relative net
assets.
- --------------------------------------------------------------------------------
36 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ADOPTION OF NEW ACCOUNTING STANDARD
In June 2009, the Financial Accounting Standards Board (FASB) established the
FASB Accounting Standards Codification(TM) (Codification) as the single source
of authoritative accounting principles recognized by the FASB in the preparation
of financial statements in conformity with U.S. generally accepted accounting
principles (GAAP). The Codification supersedes existing non-grandfathered, non-
SEC accounting and reporting standards. The Codification did not change GAAP
but, rather, organized it into a hierarchy where all guidance within the
Codification carries an equal level of authority. The Codification became
effective for financial statements issued for interim and annual periods ending
after Sept. 15, 2009. The Codification did not have an effect on the Fund's
financial statements.
USE OF ESTIMATES
Preparing financial statements that conform to U.S. generally accepted
accounting principles requires management to make estimates (e.g., on assets,
liabilities and contingent assets and liabilities) that could differ from actual
results.
VALUATION OF SECURITIES
All securities are valued at the close of business of the New York Stock
Exchange (NYSE). Securities traded on national securities exchanges or included
in national market systems are valued at the last quoted sales price from the
primary exchange. Debt securities are generally traded in the over-the-counter
market and are valued by an independent pricing service using an evaluated bid.
When market quotes are not readily available, the pricing service, in
determining fair values of debt securities, takes into consideration such
factors as current quotations by broker/dealers, coupon, maturity, quality, type
of issue, trading characteristics, and other yield and risk factors it deems
relevant in determining valuations. The procedures adopted by the Board
generally contemplate the use of fair valuation in the event that price
quotations or valuations are not readily available, price quotations or
valuations from other sources are not reflective of market value and thus deemed
unreliable, or a significant event has occurred in relation to a security or
class of securities that is not reflected in price quotations or valuations from
other sources. A fair value price is a good faith estimate of the value of a
security at a given point in time.
Short-term securities maturing in more than 60 days from the valuation date are
valued at the market price or approximate market value based on current interest
rates. Typically, those maturing in 60 days or less that originally had
maturities of more than 60 days at acquisition date are valued at amortized cost
using the market value on the 61st day before maturity. Short-term securities
maturing in
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 37
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
60 days or less at acquisition date are valued at amortized cost. Amortized cost
is an approximation of market value. Investments in money market funds are
valued at net asset value.
SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS
Delivery and payment for securities that have been purchased by the Fund on a
forward-commitment basis, including when-issued securities and other forward-
commitments, can take place one month or more after the transaction date. During
this period, such securities are subject to market fluctuations, and they may
affect the Fund's net assets the same as owned securities. The Fund designates
cash or liquid securities at least equal to the amount of its forward-
commitments. At May 31, 2010, the Fund has outstanding when-issued securities of
$67,722,492 and other forward-commitments of $1,785,443.
The Fund also enters into transactions to sell purchase commitments to third
parties at current market values and concurrently acquires other purchase
commitments for similar securities at later dates. As an inducement for the Fund
to "roll over" its purchase commitments, the Fund receives negotiated amounts in
the form of reductions of the purchase price of the commitment. The Fund records
the incremental difference between the forward purchase and sale of each forward
roll as realized gain or loss. Losses may arise due to changes in the value of
the securities or if a counterparty does not perform under the terms of the
agreement. If a counterparty files for bankruptcy or becomes insolvent, the
Fund's right to repurchase or sell securities may be limited.
FORWARD SALE COMMITMENTS
The Fund may enter into forward sale commitments to hedge its portfolio
positions or to sell mortgage-backed securities it owns under delayed delivery
arrangements. Proceeds of forward sale commitments are not received until the
contractual settlement date. During the time a forward sale commitment is
outstanding, equivalent deliverable securities, or an offsetting forward
purchase commitment deliverable on or before the sale commitment date, are used
to satisfy the commitment.
Unsettled forward sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Valuation of securities" above. The forward sale commitment is "marked-to-
market" daily and the change in market value is recorded by the Fund as an
unrealized gain or loss. If the forward sale commitment is closed through the
acquisition of an offsetting purchase commitment, the Fund realizes a gain or
loss. If the Fund delivers securities under the commitment, the Fund realizes a
gain or a loss from the sale of the securities based upon the market price
established at the date the commitment was entered into. At May 31, 2010, the
Fund had no outstanding forward sale commitments.
- --------------------------------------------------------------------------------
38 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liabilities arising out of the performance of their
duties to the Fund. In addition, certain of the Fund's contracts with its
service providers contain general indemnification clauses. The Fund's maximum
exposure under these arrangements is unknown since the amount of any future
claims that may be made against the Fund cannot be determined and the Fund has
no historical basis for predicting the likelihood of any such claims.
FEDERAL TAXES
The Fund's policy is to comply with Subchapter M of the Internal Revenue Code
that applies to regulated investment companies and to distribute substantially
all of its taxable income (which includes net short-term capital gains) to
shareholders. No provision for income or excise taxes is thus required.
Management of the Fund has concluded that there are no significant uncertain tax
positions that would require recognition in the financial statements. Generally,
the tax authorities can examine all tax returns filed for the last three years.
RECENT ACCOUNTING PRONOUNCEMENT
On Jan. 21, 2010, the FASB issued an Accounting Standards Update (the
amendment), Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements, which provides guidance on how
investment assets and liabilities are to be valued and disclosed. Specifically,
the amendment requires reporting entities to disclose the input and valuation
techniques used to measure fair value for both recurring and non-recurring fair
value measurements for Level 2 and Level 3 positions. The amendment also
requires that transfers between all levels (including Level 1 and Level 2) be
disclosed on a gross basis (i.e., transfers out must be disclosed separately
from transfers in), and the reason(s) for the transfer. Additionally purchases,
sales, issuances and settlements must be disclosed on a gross basis in the Level
3 rollforward. The effective date of the amendment is for interim and annual
periods beginning after Dec. 15, 2009, however, the requirement to provide the
Level 3 activity for purchases, sales, issuances and settlements on a gross
basis will be effective for interim and annual periods beginning after Dec. 15,
2010. At this time the Fund is evaluating the implications of the amendment and
the impact to the financial statements.
DIVIDENDS TO SHAREHOLDERS
Dividends from net investment income, declared daily and payable monthly, when
available, are reinvested in additional shares of the Fund at net asset value or
payable in cash. Capital gains, when available, are distributed along with the
last income dividend of the calendar year.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 39
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
OTHER
Security transactions are accounted for on the date securities are purchased or
sold. Dividend income, if any, is recognized on the ex-dividend date and
interest income, including amortization of premium, market discount and original
issue discount using the effective interest method, is accrued daily.
3. INVESTMENTS IN DERIVATIVES
The Fund may invest in certain derivative instruments, which are transactions
whose values depend on or are derived from (in whole or in part) the value of
one or more other assets, such as securities, currencies, commodities or
indices. Such derivative instruments may be used to maintain cash reserves while
maintaining exposure to certain other assets, to offset anticipated declines in
values of investments, to facilitate trading, to reduce transaction costs, and
to pursue higher investment returns. The Fund may also use derivative
instruments to mitigate certain investment risks, such as foreign currency
exchange rate risk, interest rate risk, and credit risk. Investments in
derivative instruments may expose the Fund to certain additional risks,
including those detailed below.
FUTURES TRANSACTIONS
The Fund may buy and sell financial futures contracts traded on any U.S. or
foreign exchange to produce incremental earnings, hedge existing positions or
protect against market changes in the value of equities, interest rates or
foreign currencies. The Fund may also buy and write put and call options on
these futures contracts. A futures contract represents a commitment for the
future purchase or sale of an asset at a specified price on a specified date.
Futures and options on futures are valued daily based upon the last sale price
at the close of the market on the principal exchange on which they are traded.
Upon entering into a futures contract, the Fund is required to deposit either
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (variation margin) are made or
received by the Fund each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Fund recognizes a realized gain or loss when the contract is closed
or expires.
Upon entering into futures contracts, the Fund bears the risk of interest rates,
exchange rates or securities prices moving unexpectedly, in which case, the Fund
may not achieve the anticipated benefits of the futures contracts and may
realize a loss. Additional risks include counterparty credit risk, the
possibility of an illiquid market, and that a change in the value of the
contract or option may not correlate with changes in the value of the underlying
securities.
- --------------------------------------------------------------------------------
40 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
OPTION TRANSACTIONS
The Fund may buy and write options traded on any U.S. or foreign exchange, or in
the over-the-counter (OTC) market to produce incremental earnings, protect
gains, and facilitate buying and selling of securities for investments. The Fund
may also buy and sell put and call options and write covered call options on
portfolio securities. Options are contracts which entitle the holder to purchase
or sell securities or other financial instruments at a specified price, or in
the case of index options, to receive or pay the difference between the index
value and the strike price of the index option. Completion of transactions for
options traded in the OTC market depends upon the performance of the other
party. Cash collateral may be collected or posted by the Fund to secure certain
OTC options trades. Cash collateral held or posted by the Fund for such option
trades must be returned to the counterparty or the Fund upon closure, exercise
or expiration of the contract.
Option contracts purchased are recorded as investments and options contracts
written are recorded as liabilities of the Fund. Option contracts are valued
daily at the closing prices on their primary exchanges and unrealized
appreciation or depreciation is recorded. Option contracts, including OTC option
contracts, with no readily available market value are valued using quotations
obtained from independent brokers as of the close of the NYSE. The Fund will
realize a gain or loss when the option transaction expires or is exercised. When
options on debt securities or futures are exercised, the Fund will realize a
gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
The risk in buying an option is that the Fund pays a premium whether or not the
option is exercised. The Fund also has the additional risk of being unable to
enter into a closing transaction if a liquid secondary market does not exist.
The risk in writing a call option is that the Fund gives up the opportunity for
profit if the market price of the security increases. The risk in writing a put
option is that the Fund may incur a loss if the market price of the security
decreases and the option is exercised. The Fund's maximum payout in the case of
written put option contracts represents the maximum potential amount of future
payments (undiscounted) that the Fund could be required to make as a guarantor
for written put options. The maximum payout amount may be offset by the
subsequent sale, if any, of assets obtained upon the exercise of the put options
by holders of the option contracts or proceeds received upon entering into the
contracts. For OTC options contracts, the transaction is also subject to
counterparty credit risk.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 41
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
EFFECTS OF DERIVATIVE TRANSACTIONS ON THE FINANCIAL STATEMENTS
The following tables are intended to provide additional information about the
effect of derivatives on the financial statements of the Fund including: the
fair value of derivatives by risk category and the location of those fair values
in the Statement of Assets and Liabilities; the impact of derivative
transactions on the Fund's operations over the period including realized gains
or losses and unrealized gains or losses. The derivative schedules following the
Portfolio of Investments present additional information regarding derivative
instruments outstanding at the end of the period, if any.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AT MAY 31, 2010
<Table>
<Caption>
ASSET DERIVATIVES LIABILITY DERIVATIVES
------------------------------- -------------------------------
STATEMENT OF ASSETS STATEMENT OF ASSETS
RISK EXPOSURE AND LIABILITIES AND LIABILITIES
CATEGORY LOCATION FAIR VALUE LOCATION FAIR VALUE
- -------------------------------------------------------------------------------------------
Net
assets -- unrealiz-
Interest rate ed depreciation on
contracts N/A N/A investments $222,863*
- -------------------------------------------------------------------------------------------
</Table>
* Includes cumulative appreciation (depreciation) of futures contracts as
reported in the Futures Contracts Outstanding table following the Portfolio
of Investments. Only the current day's variation margin is reported in
receivables or payables in the Statement of Assets and Liabilities.
EFFECT OF DERIVATIVE INSTRUMENTS IN THE STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 2010
<Table>
<Caption>
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED IN INCOME
- --------------------------------------------------------------------------
RISK EXPOSURE CATEGORY FUTURES OPTIONS TOTAL
- --------------------------------------------------------------------------
Interest rate contracts $(550,868) $9,872 $(540,996)
- --------------------------------------------------------------------------
</Table>
<Table>
<Caption>
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
IN INCOME
- --------------------------------------------------------------------------
RISK EXPOSURE CATEGORY FUTURES OPTIONS TOTAL
- --------------------------------------------------------------------------
Interest rate contracts $(386,427) $-- $(386,427)
- --------------------------------------------------------------------------
</Table>
VOLUME OF DERIVATIVE ACTIVITY
FUTURES
The gross notional amount of long and short contracts outstanding was $11.5
million and $31.6 million, respectively, at May 31, 2010. The monthly average
gross notional amount for long and short contracts was $7.1 million and $28.7
million, respectively, for the year ended May 31, 2010. The fair value of such
contracts on May 31, 2010 is set forth in the table above.
- --------------------------------------------------------------------------------
42 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
OPTIONS
At May 31, 2010, the Fund had no outstanding options contracts. During the year
ended May 31, 2010, the Fund entered into, and subsequently closed, 199 options
contracts, of which, the average gross notional amount was $117,500.
4. EXPENSES AND SALES CHARGES
INVESTMENT MANAGEMENT SERVICES FEES
Under an Investment Management Services Agreement, the Investment Manager
determines which securities will be purchased, held or sold. The management fee
is an annual fee that is equal to a percentage of the Fund's average daily net
assets that declines from 0.48% to 0.29% as the Fund's net assets increase. The
management fee for the year ended May 31, 2010 was 0.48% of the Fund's average
daily net assets.
ADMINISTRATIVE SERVICES FEES
Under an Administrative Services Agreement, the Fund pays Ameriprise Financial,
Inc., the parent company of the Investment Manager, an annual fee for
administration and accounting services equal to a percentage of the Fund's
average daily net assets that declines from 0.07% to 0.04% as the Fund's net
assets increase. The fee for the year ended May 31, 2010 was 0.07% of the Fund's
average daily net assets.
OTHER FEES
Other expenses are for, among other things, certain expenses of the Fund or the
Board including: Fund boardroom and office expense, employee compensation,
employee health and retirement benefits, and certain other expenses. Payment of
these Fund and Board expenses is facilitated by a company providing limited
administrative services to the Fund and the Board. For the year ended May 31,
2010, other expenses paid to this company were $1,322.
COMPENSATION OF BOARD MEMBERS
Under a Deferred Compensation Plan (the Plan), the board members who are not
"interested persons" of the Fund under the 1940 Act may defer receipt of their
compensation. Deferred amounts are treated as though equivalent dollar amounts
had been invested in shares of the Fund or other RiverSource, Seligman and
Threadneedle funds. The Fund's liability for these amounts is adjusted for
market value changes and remains in the funds until distributed in accordance
with the Plan.
TRANSFER AGENCY FEES
Under a Transfer Agency Agreement, Columbia Management Investment Services Corp.
(formerly RiverSource Service Corporation) (the Transfer Agent) maintains Fund
shareholder accounts and records and provides Fund shareholder
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 43
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
services. The Fund pays the Transfer Agent an annual account-based fee at a rate
equal to $20.50 for Class A, $21.50 for Class B and $21.00 for Class C for this
service. The Transfer Agent also charges an annual fee of $3 per account
serviced directly by the Fund or its designated agent for Class A, Class B and
Class C shares. The Fund also pays the Transfer Agent an annual asset-based fee
at a rate of 0.05% of the Fund's average daily net assets attributable to Class
R4 shares. The Transfer Agent charges an annual fee of $5 per inactive account,
charged on a pro rata basis for the 12 month period from the date the account
becomes inactive. These fees are included in the transfer agency fees in the
Statement of Operations.
PLAN ADMINISTRATION SERVICES FEES
Under a Plan Administration Services Agreement with the Transfer Agent, the Fund
pays an annual fee at a rate of 0.25% of the Fund's average daily net assets
attributable to Class R4 shares for the provision of various administrative,
recordkeeping, communication and educational services.
DISTRIBUTION FEES
The Fund has an agreement with Columbia Management Investment Distributors, Inc.
(formerly RiverSource Fund Distributors, Inc.) (the Distributor) for
distribution and shareholder services. Under a Plan and Agreement of
Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate of up
to 0.25% of the Fund's average daily net assets attributable to Class A shares
and a fee at an annual rate of up to 1.00% of the Fund's average daily net
assets attributable to Class B and Class C shares. For Class B and Class C
shares, of the 1.00% fee, up to 0.75% is reimbursed for distribution expenses.
The amount of distribution expenses incurred by the Distributor and not yet
reimbursed (unreimbursed expense) was approximately $909,000 and $46,000 for
Class B and Class C shares, respectively. These amounts are based on the most
recent information available as of Jan. 31, 2010, and may be recovered from
future payments under the distribution plan or CDSC. To the extent the
unreimbursed expense has been fully recovered, the distribution fee is reduced.
SALES CHARGES
Sales charges, including front-end and CDSCs, received by the Distributor for
distributing Fund shares were $104,356 for Class A, $4,978 for Class B and $349
for Class C for the year ended May 31, 2010.
- --------------------------------------------------------------------------------
44 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
EXPENSES WAIVED/REIMBURSED BY THE INVESTMENT MANAGER AND ITS AFFILIATES
For the year ended May 31, 2010, the Investment Manager and its affiliates
waived/reimbursed certain fees and expenses such that net expenses (excluding
fees and expenses of acquired funds*) were as follows:
<Table>
Class A.............................................. 0.89%
Class B.............................................. 1.65
Class C.............................................. 1.65
Class I.............................................. 0.47
Class R4............................................. 0.77
</Table>
The waived/reimbursed fees and expenses for the transfer agency fees at the
class level were as follows:
<Table>
Class A............................................ $36,237
Class B............................................ 9,919
Class C............................................ 2,085
</Table>
The management fees waived/reimbursed at the Fund level were $389,760.
The Investment Manager and its affiliates have contractually agreed to waive
certain fees and expenses until July 31, 2010, unless sooner terminated at the
sole discretion of the Board, such that net expenses (excluding fees and
expenses of acquired funds*), will not exceed the following percentage of the
class' average daily net assets:
<Table>
Class A.............................................. 0.89%
Class B.............................................. 1.65
Class C.............................................. 1.65
Class I.............................................. 0.47
Class R4............................................. 0.77
</Table>
Effective Aug. 1, 2010, the Investment Manager and its affiliates have
contractually agreed to waive certain fees and expenses until July 31, 2011,
unless sooner terminated at the sole discretion of the Board, such that net
expenses (excluding fees and expenses of acquired funds*), will not exceed the
following percentage of the class' average daily net assets:
<Table>
Class A.............................................. 0.89%
Class B.............................................. 1.65
Class C.............................................. 1.64
Class I.............................................. 0.48
Class R4............................................. 0.78
</Table>
* In addition to the fees and expenses which the Fund bears directly, the Fund
indirectly bears a pro rata share of the fees and expenses of the funds in
which it invests (also referred to as "acquired funds"), including
affiliated and non-affiliated pooled investment vehicles (including mutual
funds and exchange traded funds). Because the acquired funds have varied
expense and fee levels and the Fund may own
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 45
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
different proportions of acquired funds at different times, the amount of
fees and expenses incurred indirectly by the Fund will vary.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations, but including mortgage-dollar rolls) aggregated $1,674,006,897 and
$1,788,692,264, respectively, for the year ended May 31, 2010. Realized gains
and losses are determined on an identified cost basis.
6. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods indicated are as
follows:
<Table>
<Caption>
YEAR ENDED MAY 31, 2010 2009*
- -------------------------------------------------------------------
CLASS A
Sold 4,220,355 3,541,015
Converted from Class B** 445,069 607,087
Reinvested distributions 646,902 866,721
Redeemed (6,266,469) (7,573,975)
- -------------------------------------------------------------------
Net increase (decrease) (954,143) (2,559,152)
- -------------------------------------------------------------------
CLASS B
Sold 438,011 1,504,114
Reinvested distributions 140,388 232,629
Converted to Class A** (445,069) (607,087)
Redeemed (1,782,051) (2,806,248)
- -------------------------------------------------------------------
Net increase (decrease) (1,648,721) (1,676,592)
- -------------------------------------------------------------------
CLASS C
Sold 376,318 240,131
Reinvested distributions 31,772 35,345
Redeemed (253,514) (256,741)
- -------------------------------------------------------------------
Net increase (decrease) 154,576 18,735
- -------------------------------------------------------------------
CLASS I
Sold 9,430,678 15,087,681
Reinvested distributions 1,590,429 2,874,393
Redeemed (31,772,779) (15,906,305)
- -------------------------------------------------------------------
Net increase (decrease) (20,751,672) 2,055,769
- -------------------------------------------------------------------
CLASS R4
Sold 15,627 22,129
Reinvested distributions 593 32,732
Redeemed (13,111) (8,546,518)
- -------------------------------------------------------------------
Net increase (decrease) 3,109 (8,491,657)
- -------------------------------------------------------------------
</Table>
* Certain line items from the prior year have been renamed to conform to the
current year presentation.
- --------------------------------------------------------------------------------
46 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
** Automatic conversion of Class B shares to Class A shares based on the
original purchase date.
7. OPTIONS CONTRACTS WRITTEN
Contracts and premiums associated with options contracts written during the year
ended May 31, 2010, are as follows:
<Table>
<Caption>
PUTS
CONTRACTS PREMIUMS
- -----------------------------------------------------------------
Balance May 31, 2009 -- $ --
Opened 199 50,773
Expired (199) (50,773)
- -----------------------------------------------------------------
Balance May 31, 2010 -- $ --
- -----------------------------------------------------------------
</Table>
8. AFFILIATED MONEY MARKET FUND
The Fund may invest its daily cash balance in RiverSource Short-Term Cash Fund,
a money market fund established for the exclusive use of RiverSource, Seligman
and Threadneedle funds and other institutional clients of the Investment
Manager. The cost of the Fund's purchases and proceeds from sales of shares of
RiverSource Short-Term Cash Fund aggregated $256,488,758 and $253,242,308,
respectively, for the year ended May 31, 2010. The income distributions received
with respect to the Fund's investment in RiverSource Short-Term Cash Fund can be
found in the Statement of Operations and the Fund's invested balance in
RiverSource Short-Term Cash Fund at May 31, 2010, can be found in the Portfolio
of Investments.
9. BANK BORROWINGS
The Fund has entered into a revolving credit facility with a syndicate of banks
led by JPMorgan Chase Bank, N.A. (the Administrative Agent), whereby the Fund
may borrow for the temporary funding of shareholder redemptions or for other
temporary or emergency purposes. The credit facility became effective on Oct.
15, 2009, replacing a prior credit facility. The credit facility agreement,
which is a collective agreement between the Fund and certain other RiverSource,
Seligman and Threadneedle funds, severally and not jointly, permits collective
borrowings up to $300 million. The borrowers shall have the right, upon written
notice to the Administrative Agent to request an increase of up to $200 million
in the aggregate amount of the credit facility from new or existing lenders,
provided that the aggregate amount of the credit facility shall at no time
exceed $500 million. Participation in such increase by any existing lender shall
be at such lender's sole discretion. Interest is charged to each Fund based on
its borrowings at a rate equal to the sum of the federal funds rate plus (i)
1.25% per annum plus (ii) if one-month LIBOR exceeds the federal funds rate, the
amount
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 47
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
of such excess. Each borrowing under the credit facility matures no later than
60 days after the date of borrowing. The Fund also pays a commitment fee equal
to its pro rata share of the amount of the credit facility at a rate of 0.10%
per annum, in addition to an upfront fee equal to its pro rata share of 0.04% of
the amount of the credit facility. Prior to Oct. 15, 2009, the credit facility
agreement, which was a collective agreement between the Fund and certain other
RiverSource, Seligman and Threadneedle funds, severally and not jointly,
permitted collective borrowings up to $475 million. Interest was charged to each
Fund based on its borrowings at a rate equal to the federal funds rate plus
0.75%. The Fund also paid a commitment fee equal to its pro rata share of the
amount of the credit facility at a rate of 0.06% per annum, in addition to an
upfront fee equal to its pro rata share of 0.02% of the amount of the credit
facility. The Fund had no borrowings during the year ended May 31, 2010.
10. FEDERAL TAX INFORMATION
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of futures and options
contracts and losses deferred due to wash sales. The character of distributions
made during the year from net investment income or net realized gains may differ
from their ultimate characterization for federal income tax purposes. Also, due
to the timing of dividend distributions, the fiscal year in which amounts are
distributed may differ from the year that the income or realized gains (losses)
were recorded by the Fund.
The tax character of distributions paid for the years indicated is as follows:
<Table>
<Caption>
YEAR ENDED MAY 31, 2010 2010 2009
- ------------------------------------------------------------------
Ordinary income $12,560,233 $17,183,865
Long-term capital gain -- 2,667,487
</Table>
At May 31, 2010, the components of distributable earnings on a tax basis are as
follows:
<Table>
Undistributed ordinary income................... $ 1,340,032
Undistributed accumulated long-term gain........ $ --
Accumulated realized loss....................... $(12,077,144)
Unrealized appreciation (depreciation).......... $ 7,334,787
</Table>
For federal income tax purposes, the Fund had a capital loss carry-over of
$12,077,144 at May 31, 2010, that if not offset by capital gains will expire as
follows:
<Table>
<Caption>
2017 2018
$410,120 $11,667,024
</Table>
- --------------------------------------------------------------------------------
48 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
It is unlikely the Board will authorize a distribution of any net realized
capital gains until the available capital loss carry-over has been offset or
expires. There is no assurance that the Fund will be able to utilize all of its
capital loss carry-over before it expires.
11. SUBSEQUENT EVENTS
Management has evaluated Fund related events and transactions that occurred
during the period from the date of the Statement of Assets and Liabilities
through the date of issuance of the Fund's financial statements. There were no
events or transactions that occurred during the period that materially impacted
the amounts or disclosures in the Fund's financial statements.
12. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS
In June 2004, an action captioned John E. Gallus et al. v. American Express
Financial Corp. and American Express Financial Advisors Inc. was filed in the
United States District Court for the District of Arizona. The plaintiffs allege
that they are investors in several American Express Company (now known as
RiverSource) mutual funds and they purport to bring the action derivatively on
behalf of those funds under the Investment Company Act of 1940. The plaintiffs
allege that fees allegedly paid to the defendants by the funds for investment
advisory and administrative services are excessive. The plaintiffs seek remedies
including restitution and rescission of investment advisory and distribution
agreements. The plaintiffs voluntarily agreed to transfer this case to the
United States District Court for the District of Minnesota (the District Court).
In response to defendants' motion to dismiss the complaint, the District Court
dismissed one of plaintiffs' four claims and granted plaintiffs limited
discovery. Defendants moved for summary judgment in April 2007. Summary judgment
was granted in the defendants' favor on July 9, 2007. The plaintiffs filed a
notice of appeal with the Eighth Circuit Court of Appeals (the Eighth Circuit)
on August 8, 2007. On April 8, 2009, the Eighth Circuit reversed summary
judgment and remanded to the District Court for further proceedings. On August
6, 2009, defendants filed a writ of certiorari with the U.S. Supreme Court (the
Supreme Court), asking the Supreme Court to stay the District Court proceedings
while the Supreme Court considers and rules in a case captioned Jones v. Harris
Associates, which involves issues of law similar to those presented in the
Gallus case. On March 30, 2010, the Supreme Court issued its ruling in Jones v.
Harris Associates, and on April 5, 2010, the Supreme Court vacated the Eighth
Circuit's decision in the Gallus case and remanded the case to the Eighth
Circuit for further consideration in light of the Supreme Court's decision in
Jones v. Harris Associates. On June 4, 2010, the Eighth Circuit
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 49
NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
remanded the Gallus case to the District Court for further consideration in
light of the Supreme Court's decision in Jones v. Harris Associates.
In December 2005, without admitting or denying the allegations, American Express
Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc.
(Ameriprise Financial)), entered into settlement agreements with the Securities
and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC)
related to market timing activities. As a result, AEFC was censured and ordered
to cease and desist from committing or causing any violations of certain
provisions of the Investment Advisers Act of 1940, the Investment Company Act of
1940, and various Minnesota laws. AEFC agreed to pay disgorgement of $10 million
and civil money penalties of $7 million. AEFC also agreed to retain an
independent distribution consultant to assist in developing a plan for
distribution of all disgorgement and civil penalties ordered by the SEC in
accordance with various undertakings detailed at
http://www.sec.gov/litigation/admin/ia-2451.pdf. Ameriprise Financial and its
affiliates have cooperated with the SEC and the MDOC in these legal proceedings,
and have made regular reports to the RiverSource, Seligman and Threadneedle
funds' Boards of Directors/Trustees.
Ameriprise Financial and certain of its affiliates have historically been
involved in a number of legal, arbitration and regulatory proceedings, including
routine litigation, class actions, and governmental actions, concerning matters
arising in connection with the conduct of their business activities. Ameriprise
Financial believes that the Funds are not currently the subject of, and that
neither Ameriprise Financial nor any of its affiliates are the subject of, any
pending legal, arbitration or regulatory proceedings that are likely to have a
material adverse effect on the Funds or the ability of Ameriprise Financial or
its affiliates to perform under their contracts with the Funds. Ameriprise
Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the
Securities and Exchange Commission on legal and regulatory matters that relate
to Ameriprise Financial and its affiliates. Copies of these filings may be
obtained by accessing the SEC website at www.sec.gov.
There can be no assurance that these matters, or the adverse publicity
associated with them, will not result in increased fund redemptions, reduced
sale of fund shares or other adverse consequences to the Funds. Further,
although we believe proceedings are not likely to have a material adverse effect
on the Funds or the ability of Ameriprise Financial or its affiliates to perform
under their contracts with the Funds, these proceedings are subject to
uncertainties and, as such, we are unable to estimate the possible loss or range
of loss that may result. An adverse outcome in one or more of these proceedings
could result in adverse judgments, settlements, fines, penalties or other relief
that could have a material adverse effect on the consolidated financial
condition or results of operations of Ameriprise Financial.
- --------------------------------------------------------------------------------
50 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of RiverSource U.S. Government Mortgage Fund (the
Fund) (one of the portfolios constituting the RiverSource Government Income
Series, Inc.) as of May 31, 2010, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
three years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights of the Fund for the periods
presented through May 31, 2007, were audited by other auditors whose report
dated July 20, 2007, expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of May 31, 2010, by correspondence with the custodian and
brokers, or by other appropriate auditing procedures where replies from brokers
were not received. We believe that our audits provide a reasonable basis for our
opinion.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (continued) ------------
In our opinion, the financial statements and financial highlights audited by us
as referred to above present fairly, in all material respects, the financial
position of RiverSource U.S. Government Mortgage Fund of the RiverSource
Government Income Series, Inc. at May 31, 2010, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the three
years in the period then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
July 21, 2010
- --------------------------------------------------------------------------------
52 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
FEDERAL INCOME TAX INFORMATION -------------------------------------------------
(UNAUDITED)
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its fiscal
year. The dividends listed below are reported to you on Form 1099-DIV, Dividends
and Distributions. Shareholders should consult a tax advisor on how to report
distributions for state and local tax purposes.
Fiscal year ended May 31, 2010
<Table>
<Caption>
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for
distributions:
Qualified Dividend Income for individuals.................... 0.00%
Dividends Received Deduction for corporations................ 0.00%
U.S. Government Obligations.................................. 0.02%
</Table>
The Fund designates as distributions of long-term gains, to the extent necessary
to fully distribute such capital gains, earnings and profits distributed to
shareholders on the redemption of shares.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 53
BOARD MEMBERS AND OFFICERS -----------------------------------------------------
Shareholders elect a Board that oversees the Fund's operations. The Board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the Board. The following is a list of the Fund's Board members.
Each Board member oversees 152 RiverSource, Seligman and Threadneedle funds.
Under current Board policy, members generally serve until the next regular
shareholders' meeting, until he or she reaches the mandatory retirement age
established by the Board, or the fifteenth anniversary of the first Board
meeting they attended as members of the Board.
INDEPENDENT BOARD MEMBERS*
<Table>
<Caption>
OTHER PRESENT OR
NAME, POSITION HELD PAST DIRECTORSHIPS
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION (WITHIN PAST 5
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS YEARS)
- ------------------------------------------------------------------------------------------------------------------------------
Kathleen Blatz Board member since Chief Justice, Minnesota Supreme Court, 1998-2006; None
901 S. Marquette Ave. 1/11/06 Attorney
Minneapolis, MN 55402
Age 55
- ------------------------------------------------------------------------------------------------------------------------------
Arne H. Carlson Board member since Chair, RiverSource and Threadneedle Funds, 1999-2006; None
901 S. Marquette Ave. 1/5/99 former Governor of Minnesota
Minneapolis, MN 55402
Age 75
- ------------------------------------------------------------------------------------------------------------------------------
Pamela G. Carlton Board member since President, Springboard -- Partners in Cross Cultural None
901 S. Marquette Ave. 11/11/07 Leadership (consulting company)
Minneapolis, MN 55402
Age 55
- ------------------------------------------------------------------------------------------------------------------------------
Patricia M. Flynn Board member since Trustee Professor of Economics and Management, Bentley None
901 S. Marquette Ave. 11/1/04 University; former Dean, McCallum Graduate School of
Minneapolis, MN 55402 Business, Bentley University
Age 59
- ------------------------------------------------------------------------------------------------------------------------------
Anne P. Jones Board member since Attorney and Consultant None
901 S. Marquette Ave. 3/1/85
Minneapolis, MN 55402
Age 75
- ------------------------------------------------------------------------------------------------------------------------------
Jeffrey Laikind, CFA Board member since Former Managing Director, Shikiar Asset Management American Progressive
901 S. Marquette Ave. 11/1/05 Insurance; Hapoalim
Minneapolis, MN 55402 Securities USA, Inc.
Age 74
- ------------------------------------------------------------------------------------------------------------------------------
Stephen R. Lewis, Jr. Chair of the Board President Emeritus and Professor of Economics, Carleton Valmont Industries,
901 S. Marquette Ave. since 1/1/07, College Inc. (manufactures
Minneapolis, MN 55402 Board member irrigation systems)
Age 71 since 1/1/02
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
54 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
INDEPENDENT BOARD MEMBERS (CONTINUED)
<Table>
<Caption>
OTHER PRESENT OR
NAME, POSITION HELD PAST DIRECTORSHIPS
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION (WITHIN PAST 5
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS YEARS)
- ------------------------------------------------------------------------------------------------------------------------------
John F. Maher Board member Retired President and Chief Executive Officer and None
901 S. Marquette Ave. since 11/7/08 former Director, Great Western Financial Corporation
Minneapolis, MN 55402 (financial services), 1986-1997
Age 67
- ------------------------------------------------------------------------------------------------------------------------------
Catherine James Paglia Board member since Director, Enterprise Asset Management, Inc. (private None
901 S. Marquette Ave. 11/1/04 real estate and asset management company)
Minneapolis, MN 55402
Age 57
- ------------------------------------------------------------------------------------------------------------------------------
Leroy C. Richie Board member Counsel, Lewis & Munday, P.C. since 1987; Vice Digital Ally, Inc.
901 S. Marquette Ave. since 11/7/08 President and General Counsel, Automotive Legal (digital imaging);
Minneapolis, MN 55402 Affairs, Chrysler Corporation, 1990-1997 Infinity, Inc. (oil
Age 68 and gas exploration
and production); OGE
Energy Corp. (energy
and energy services)
- ------------------------------------------------------------------------------------------------------------------------------
Alison Taunton-Rigby Board member since Chief Executive Officer and Director, RiboNovix, Inc. Idera
901 S. Marquette Ave. 11/13/02 since 2003 (biotechnology); former President, Aquila Pharmaceuticals,
Minneapolis, MN 55402 Biopharmaceuticals Inc.
Age 66 (biotechnology);
Healthways, Inc.
(health management
programs)
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
* Mr. Laikind may be deemed, as a technical matter, an interested person of
RiverSource International Managers Series, Inc. and RiverSource Variable
Series Trust because he serves as an independent director of a broker-dealer
that has executed transactions for subadvisers to certain of the funds.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 55
BOARD MEMBERS AND OFFICERS (continued) -----------------------------------------
BOARD MEMBER AFFILIATED WITH THE INVESTMENT MANAGER*
<Table>
<Caption>
OTHER PRESENT OR
NAME, POSITION HELD PAST DIRECTORSHIPS
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION (WITHIN PAST 5
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS YEARS)
- ------------------------------------------------------------------------------------------------------------------------------
William F. Truscott Board member Chairman of the Board, Columbia Management Investment None
53600 Ameriprise since 11/7/01, Advisers, LLC (formerly RiverSource Investments, LLC)
Financial Center Vice President since since May 2010 (previously President, Chairman of the
Minneapolis, MN 55474 2002 Board and Chief Investment Officer, 2001-April 2010);
Age 49 Senior Vice President, Atlantic Funds, Columbia Funds
and Nations Funds since May 2010; Chief Executive
Officer, U.S. Asset Management &
President -- Annuities, Ameriprise Financial, Inc.
since May 2010 (previously President -- U.S. Asset
Management and Chief Investment Officer, 2005-April
2010 and Senior Vice President -- Chief Investment
Officer, 2001-2005); Director, President and Chief
Executive Officer, Ameriprise Certificate Company since
2006; Director, Columbia Management Investment
Distributors, Inc. (formerly RiverSource Fund
Distributors, Inc.) since May 2010 (previously Chairman
of the Board and Chief Executive Officer, 2008-April
2010); Chairman of the Board and Chief Executive
Officer, RiverSource Distributors, Inc. since 2006;
former Chief Investment Officer and Managing Director,
Zurich Scudder Investments
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
* Interested person (as defined under the 1940 Act) by reason of being an
officer, director, security holder and/or employee of the investment manager
or Ameriprise Financial.
The SAI has additional information about the Fund's Board members and is
available, without charge, upon request by calling 800.221.2450; contacting your
financial intermediary; or visiting riversource.com/funds.
- --------------------------------------------------------------------------------
56 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
The Board has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. The officers serve at the
pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the
Fund's other officers are:
FUND OFFICERS
<Table>
<Caption>
NAME, POSITION HELD
ADDRESS, WITH FUNDS AND PRINCIPAL OCCUPATION
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------------
J. Kevin Connaughton President since Senior Vice President and General Manager -- Mutual
One Financial Center 5/1/10 Fund Products, Columbia Management Investment Advisers,
Boston, MA 02111 LLC since May 2010; President, Columbia Funds since
Age 46 2009 (previously Senior Vice President and Chief
Financial Officer, June 2008 -- January 2009);
President, Atlantic Funds and Nations Funds since 2009;
Managing Director of Columbia Management Advisors, LLC,
December 2004 -- April 2010; Treasurer, Columbia Funds,
October 2003 -- May 2008; Treasurer, the Liberty Funds,
Stein Roe Funds and Liberty All-Star Funds, December
2000 -- December 2006; Senior Vice
President -- Columbia Management Advisors, LLC, April
2003 -- December 2004; President, Columbia Funds,
Liberty Funds and Stein Roe Funds, February
2004 -- October 2004
- --------------------------------------------------------------------------------------------------------
Amy K. Johnson Vice President since Senior Vice President and Chief Operating Officer,
5228 Ameriprise Financial 12/5/06 Columbia Management Investment Advisers, LLC (formerly
Center Minneapolis, MN RiverSource Investments, LLC) since May 2010
55474 (previously Chief Administrative Officer, 2009 -- April
Age 44 2010 and Vice President -- Asset Management and Trust
Company Services, 2006-2009 and Vice
President -- Operations and Compliance, 2004-2006);
Senior Vice President, Atlantic Funds, Columbia Funds
and Nations Funds since May 2010; Director of Product
Development -- Mutual Funds, Ameriprise Financial,
Inc., 2001-2004
- --------------------------------------------------------------------------------------------------------
Jeffrey P. Fox Treasurer since Chief Financial Officer, Columbia Management Investment
105 Ameriprise 7/10/02 Distributors, Inc. (formerly RiverSource Fund
Financial Center Distributors, Inc.) and of Seligman Data Corp. since
Minneapolis, MN 55474 2008; Vice President -- Investment Accounting,
Age 54 Ameriprise Financial, Inc. since 2002; Chief Financial
Officer, RiverSource Distributors, Inc. since 2006
- --------------------------------------------------------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 57
BOARD MEMBERS AND OFFICERS (continued) -----------------------------------------
FUND OFFICERS (CONTINUED)
<Table>
<Caption>
NAME, POSITION HELD
ADDRESS, WITH FUNDS AND PRINCIPAL OCCUPATION
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------------
Scott R. Plummer Vice President, Chief Legal Officer and Assistant Secretary, Columbia
5228 Ameriprise Financial General Counsel and Management Investment Advisers, LLC (formerly
Center Secretary since RiverSource Investments, LLC) since June 2005; Vice
Minneapolis, MN 55474 12/5/06 President and Lead Chief Counsel -- Asset Management,
Age 50 Ameriprise Financial, Inc. since May 2010 (previously
Vice President and Chief Counsel -- Asset Management,
2005-April 2010 and Vice President -- Asset Management
Compliance, 2004-2005); Senior Vice President,
Secretary and Chief Legal Officer, Atlantic Funds,
Columbia Funds and Nations Funds since May 2010; Vice
President, Chief Counsel and Assistant Secretary,
Columbia Management Investment Distributors, Inc.
(formerly RiverSource Fund Distributors, Inc.) since
2008; Vice President, General Counsel and Secretary,
Ameriprise Certificate Company since 2005; Chief
Counsel, RiverSource Distributors, Inc. since 2006;
Senior Vice President and Chief Compliance Officer,
USBancorp Asset Management, 2002-2004
- --------------------------------------------------------------------------------------------------------
Michael A. Jones Vice President since Director and President, Columbia Management Investment
100 Federal Street 5/1/10 Advisers, LLC since May 2010; President and Director,
Boston, MA 02110 Columbia Management Investment Distributors, Inc. since
Age 51 May 2010; Senior Vice President, Atlantic Funds,
Columbia Funds and Nations Funds since May 2010;
Manager, Chairman, Chief Executive Officer and
President, Columbia Management Advisors, LLC,
2007 -- April 2010; Chief Executive Officer, President
and Director, Columbia Management Distributors, Inc.,
2006 -- April 2010; former Co-President and Senior
Managing Director, Robeco Investment Management
- --------------------------------------------------------------------------------------------------------
Colin Moore Vice President since Chief Investment Officer, Columbia Management
One Financial Center 5/1/10 Investment Advisers, LLC since May 2010; Senior Vice
Boston, MA 02111 President, Atlantic Funds, Columbia Funds and Nations
Age 52 Funds since May 2010; Manager, Managing Director and
Chief Investment Officer, Columbia Management Advisors,
LLC, 2007- April 2010; Head of Equities, Columbia
Management Advisors, LLC, 2002-Sept. 2007
- --------------------------------------------------------------------------------------------------------
Linda Wondrack Chief Compliance Vice President and Chief Compliance Officer, Columbia
One Financial Center Officer since 5/1/10 Management Investment Advisers, LLC since May 2010;
Boston, MA 02111 Chief Compliance Officer, Columbia Funds since 2007;
Age 46 Senior Vice President and Chief Compliance Officer,
Atlantic Funds and Nations Funds since 2007; Director
(Columbia Management Group, LLC and Investment Product
Group Compliance), Bank of America, June 2005 -- April
2010; Director of Corporate Compliance and Conflicts
Officer, MFS Investment Management (investment
management), August 2004 -- May 2005
- --------------------------------------------------------------------------------------------------------
</Table>
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58 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
FUND OFFICERS (CONTINUED)
<Table>
<Caption>
NAME, POSITION HELD
ADDRESS, WITH FUNDS AND PRINCIPAL OCCUPATION
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------------
Neysa M. Alecu Money Laundering Vice President -- Compliance, Ameriprise Financial,
2934 Ameriprise Financial Prevention Officer Inc. since 2008; Anti-Money Laundering Officer and
Center since 11/9/05 and Identity Theft Prevention Officer, Columbia Management
Minneapolis, MN 55474 Identity Theft Investment Distributors, Inc. (formerly RiverSource
Age 46 Prevention Officer Fund Distributors, Inc.) since 2008; Anti-Money
since 2008 Laundering Officer, Ameriprise Financial, Inc. since
2005; Compliance Director, Ameriprise Financial, Inc.,
2004-2008;
- --------------------------------------------------------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 59
APPROVAL OF INVESTMENT MANAGEMENT SERVICES
AGREEMENT ----------------------------------------------------------------------
Columbia Management Investment Advisers, LLC ("Columbia Management" or the
"investment manager"), formerly known as RiverSource Investments, LLC, a wholly-
owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), serves
as the investment manager to the Fund. Under an investment management services
agreement (the "IMS Agreement"), Columbia Management provides investment advice
and other services to the Fund and all RiverSource funds (collectively, the
"Funds").
On an annual basis, the Fund's Board of Directors (the "Board"), including the
independent Board members (the "Independent Directors"), considers renewal of
the IMS Agreement. Columbia Management prepared detailed reports for the Board
and its Contracts Committee in March and April 2010, including reports based on
data provided by independent organizations and a comprehensive response to each
item of information requested by independent legal counsel to the Independent
Directors ("Independent Legal Counsel") in a letter to the investment manager,
to assist the Board in making this determination. All of the materials presented
in March and April 2010 were first supplied in draft form to designated
representatives of the Independent Directors, i.e., Independent Legal Counsel,
the Chair of the Board and the Chair of the Contracts Committee (including
materials relating to the Fund's new expense cap), and the final materials were
revised to reflect comments provided by these Board representatives. In
addition, throughout the year, the Board (or its committees) reviews information
prepared by Columbia Management addressing the services Columbia Management
provides and Fund performance. The Board accords particular weight to the work,
deliberations and conclusions of the Contracts Committee, the Investment Review
Committee and the Compliance Committee in determining whether to continue the
IMS Agreement. At the April 6-8, 2010 in-person Board meeting, Independent Legal
Counsel reviewed with the Independent Directors various factors relevant to the
Board's consideration of advisory agreements and the Board's legal
responsibilities related to such consideration. Following an analysis and
discussion of the factors identified below, the Board, including all of the
Independent Directors, approved renewal of the IMS Agreement.
Nature, Extent and Quality of Services Provided by Columbia Management: The
Board analyzed various reports and presentations it had received detailing the
services performed by Columbia Management, as well as its expertise, resources
and capabilities. The Board specifically considered many developments during the
past year concerning the services provided by Columbia Management, including, in
particular, the continued investment in, and resources dedicated to,
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60 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
the Fund's operations, most notably, management's announcement of the massive
investment made in the acquisition of the long-term asset management business of
Columbia Management Group, LLC (the "Columbia Transaction") and the completed
integration of J. & W. Seligman & Co. Incorporated, acquisitions which should
continue to enhance investment capabilities and provide access to a greater
depth of experienced portfolio managers in key categories. The Board noted, in
particular, that upon the close of the Columbia Transaction, the investment
manager will have grown to 10 investment offices (compared to 6 in 2009). In
addition, the Board reviewed information concerning the investment manager's new
Chief Investment Officer upon the close of the Columbia Transaction, including
the application of his particular investment philosophy, which is intended to
enhance the risk and portfolio management oversight of the entire fund family.
Moreover, in connection with the Board's evaluation of the overall package of
services provided by Columbia Management, the Board considered the quality of
the administrative and transfer agency services provided by Columbia
Management's affiliates to the Fund. The Board also reviewed the financial
condition of Columbia Management and its affiliates, and each entity's ability
to carry out its responsibilities under the IMS Agreement. Further, the Board
considered Columbia Management's ability to retain key personnel in certain
targeted areas and its expectations in this regard. The Board also discussed the
acceptability of the terms of the IMS Agreement (including the relatively broad
scope of services required to be performed by Columbia Management). The Board
concluded that the services being performed under the IMS Agreement were of a
reasonably high quality.
Based on the foregoing, and based on other information received (both oral and
written, including the information on investment performance referenced below)
and other considerations, the Board concluded that Columbia Management and its
affiliates were in a position to continue to provide a high quality and level of
services to the Fund.
Investment Performance: For purposes of evaluating the nature, extent and
quality of services provided under the IMS Agreement, the Board carefully
reviewed the investment performance of the Fund. In this regard, the Board
considered detailed reports containing data prepared by an independent
organization showing, for various periods, the performance of the Fund, the
performance of a benchmark index, the percentage ranking of the Fund among its
comparison group and the net assets of the Fund. The Board observed that the
Fund's investment performance met expectations.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 61
APPROVAL OF INVESTMENT MANAGEMENT SERVICES
AGREEMENT (continued) ----------------------------------------------------------
Comparative Fees, Costs of Services Provided and the Profits Realized By
Columbia Management and its Affiliates from their Relationships with the Fund:
The Board reviewed comparative fees and the costs of services to be provided
under the IMS Agreement. The Board members considered detailed comparative
information set forth in an annual report on fees and expenses, including, among
other things, data (prepared by an independent organization) showing a
comparison of the Fund's expenses with median expenses paid by funds in its peer
group, as well as data showing the Fund's contribution to Columbia Management's
profitability. They also reviewed information in the report showing the fees
charged by Columbia Management to other client accounts (with similar investment
strategies to those of the Fund).
The Board accorded particular weight to the notion that the level of fees should
reflect a rational pricing model applied consistently across the various product
lines in the Funds' family, while assuring that the overall fees for each fund
(with few defined exceptions) are generally in line with the "pricing
philosophy" (i.e., that the total expense ratio of each fund, with few
exceptions, is at or below the median expense ratio of funds in the same
comparison group). The Board took into account that the Fund's total expense
ratio (after considering proposed expense caps/waivers) was slightly below the
peer group's median expense ratio shown in the reports. Based on its review, the
Board concluded that the Fund's management fee was fair and reasonable in light
of the extent and quality of services that the Fund receives.
The Board also considered various preliminary integration plans in connection
with the Columbia Transaction which, if implemented, would impact the fee
structures of various RiverSource Funds. The Board was satisfied with the
principles underlying these plans, which, at their preliminary stage, are
designed to achieve a rational, consistent pricing model across the combined
fund families, as well as preserve the "pricing philosophy" of the Funds.
The Board also considered the expected profitability of Columbia Management and
its affiliates in connection with Columbia Management providing investment
management services to the Fund. In this regard, the Board referred to a
detailed profitability report, discussing the profitability to Columbia
Management and Ameriprise Financial from managing and operating the Fund,
including data showing comparative profitability over the past two years. In
this regard, the Board observed slightly reduced profitability in 2009 vs. 2008.
The Board also considered the services acquired by the investment manager
through the use of commission dollars paid by the Funds on portfolio
transactions. The Board noted that the fees paid by the Fund should permit the
investment manager to offer
- --------------------------------------------------------------------------------
62 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT
- --------------------------------------------------------------------------------
competitive compensation to its personnel, make necessary investments in its
business and earn an appropriate profit. The Board concluded that profitability
levels were reasonable.
Economies of Scale to be Realized: The Board also considered the economies of
scale that might be realized by Columbia Management as the Fund grows and took
note of the extent to which Fund shareholders might also benefit from such
growth. The Board considered that the IMS Agreement provides for lower fees as
assets increase at pre-established breakpoints and concluded that the IMS
Agreement satisfactorily provided for sharing these economies of scale.
Based on the foregoing, the Board, including all of the Independent Directors,
concluded that the investment management service fees were fair and reasonable
in light of the extent and quality of services provided. In reaching this
conclusion, no single factor was determinative. On April 8, 2010, the Board,
including all of the Independent Directors, approved the renewal of the IMS
Agreement for an additional annual period.
PROXY VOTING ------------------------------------------------------------------
The policy of the Board is to vote the proxies of the companies in which the
Fund holds investments consistent with the procedures as stated in the Statement
of Additional Information (SAI). You may obtain a copy of the SAI without charge
by calling 800.221.2450; contacting your financial intermediary; visiting
riversource.com/funds; or searching the website of the Securities and Exchange
Commission (SEC) at http://www.sec.gov. Information regarding how the Fund voted
proxies relating to portfolio securities is filed with the SEC by August 31 for
the most recent 12-month period ending June 30 of that year, and is available
without charge by visiting riversource.com/funds; or searching the website of
the SEC at www.sec.gov.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 63
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND
734 Ameriprise Financial Center
Minneapolis, MN 55474
RIVERSOURCE.COM/FUNDS
<Table>
This report must be accompanied or preceded by the Fund's
current prospectus. RiverSource(R) mutual funds are
distributed by Columbia Management Investment Distributors,
Inc. (formerly known as RiverSource Fund Distributors,
Inc.), member FINRA, and managed by Columbia Management
Investment Advisers, LLC (formerly known as RiverSource
Investments, LLC).
(C)2010 Columbia Management Investment Advisers, LLC. All
(COLUMBIA MANAGEMENT LOGO) rights reserved. S-6245 M (7/10)
</Table>
Item 2. Code of Ethics.
(a) The Registrant has adopted a code of ethics that applies to the
Registrant's principal executive officer and principal financial
officer.
(b) During the period covered by this report, there were not any
amendments to a provision of the code of ethics adopted in 2(a) above.
(c) During the period covered by this report, there were no waivers,
including any implicit waivers, from a provision of the code of ethics
described in 2(a) above that relates to one or more of the items set forth
in paragraph (b) of this item's instructions.
Item 3. Audit Committee Financial Expert.
The Registrant's board of directors has determined that independent
directors Pamela G. Carlton, Jeffrey Laikind, John F. Maher and Anne
P. Jones, each qualify as audit committee financial experts.
Item 4. Principal Accountant Fees and Services
(a) Audit Fees. The fees for the year ended May 31, to Ernst & Young LLP for
professional services rendered for the audit of the annual financial
statements for RiverSource Government Income Series, Inc. were as follows:
2010 - $52,346 2009 - $52,766
(b) Audit-Related Fees. The fees for the year ended May 31, to Ernst & Young
LLP for additional professional services rendered related to the semiannual
financial statement review, the 2010 transfer agent 17Ad-13 review and the
registrant's 2009 security count pursuant to Rule 17f-2 for RiverSource
Government Income Series, Inc. were as follows:
2010 - $1,378 2009 - $2,833
(c) Tax Fees. The fees for the year ended May 31, to Ernst & Young LLP for tax
compliance related services rendered for RiverSource Government Income
Series, Inc. were as follows:
2010 - $6,996 2009 - $8,514
(d) All Other Fees. The fees for the year ended May 31, to Ernst & Young LLP
for additional professional services rendered for RiverSource Government
Income Series, Inc. were as follows:
2010 - $0 2009 - $0
(e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley
pre-approval requirements, all services to be performed by Ernst & Young
LLP for the registrant and to the registrant's investment adviser and any
entity controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant must be
pre-approved by the audit committee.
(e) (2) 100% of the services performed for items (b) through (d) above during
2010 and 2009 were pre-approved by the audit committee.
(f) Not applicable.
(g) Non-Audit Fees. The fees for the year ended May 31, to Ernst & Young LLP by
the registrant for non-audit fees and by the registrant's investment
adviser, and any entity controlling, controlled by, or under common control
with the adviser that provides ongoing services to the registrant were as
follows:
2010 - $2,107,149 2009 - $587,353
(h) 100% of the services performed in item (g) above during 2010 and 2009 were
pre-approved by the Ameriprise Financial Audit Committee and/or the
RiverSource Mutual Funds Audit Committee.
Item 5. Audit Committee of Listed Registrants. Not applicable.
Item 6. Investments.
(a) The registrant's "Schedule 1 - Investments in securities of unaffiliated
issuers" (as set forth in 17 CFR 210.12-12) is included in Item 1 of this
Form N-CSR.
(b) Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not
applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There were no material changes to the procedures by which shareholders may
recommend nominees to the registrant's board of directors.
Item 11. Controls and Procedures.
(a) The registrant's principal executive officer and principal financial
officer, based on their evaluation of the registrant's disclosure controls
and procedures as of a date within 90 days of the filing of this report,
have concluded that such controls and procedures are adequately designed to
ensure that material information required to be disclosed by the registrant
in Form N-CSR is accumulated and communicated to the registrant's
management, including the principal executive officer and principal
financial officer, or persons performing similar functions, as appropriate
to allow timely decisions regarding required disclosure.
(b) There was no change in the registrant's internal control over financial
reporting that occurred (the registrant's second fiscal quarter of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
Item 12. Exhibits.
(a)(1) Code of ethics required to be disclosed under Item 2 of Form N-CSR,
is attached as Exhibit 99.CODE ETH.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the Investment
Company Act of 1940 (17 CFR 270.30a-2(a)) attached hereto as Exhibit
99.CERT.
(a)(3) Not applicable.
(b) Certification pursuant to Rule 30a-2(b) under the Investment Company
Act of 1940 (17 CFR 270.30a-2(b)) attached hereto as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) RiverSource Government Income Series, Inc.
By /s/ J. Kevin Connaughton
-----------------------------------------
J. Kevin Connaughton
President and Principal Executive Officer
Date August 4, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By /s/ J. Kevin Connaughton
-----------------------------------------
J. Kevin Connaughton
President and Principal Executive Officer
Date August 4, 2010
By /s/ Jeffrey P. Fox
-----------------------------------------
Jeffrey P. Fox
Treasurer and Principal Financial Officer
Date August 4, 2010