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